**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**




Washington,
      D.C. 20549







**Form
      10-KSB/A**




**Amendment
      No. 3**




(Mark
                One)[X]
            ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934For
                  the fiscal year ended December 31, 2005[
                  ]
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934For
                the transition period from __________ to __________Commission
                file number 000-49635.




**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 1300




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




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes [X ] No [ ]





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





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





State
      issuer’s revenues for its most recent fiscal year. $51,710,000





The
      aggregate market value of the Registrant’s voting and non-voting common equity
      held by non-affiliates, computed by reference to the closing price of the common
      equity, as of March 29, 2006 was $17,313,400. Solely for the purposes of this
      calculation, all persons who are executive officers or directors of the
      Registrant and all persons known to the Registrant to hold more than 5% of
      the
      Registrant’s outstanding common stock have been deemed to be affiliates.




The
      total
      number of shares of common stock of the Registrant that were outstanding on
      March 29, 2006 was 75,916,174.




Transitional
      Small Business Disclosure Format (Check one): Yes [ ] No [ X ]








**EXPLANATORY
      NOTE**





**RESTATEMENT
      OF FINANCIAL STATEMENTS**





This
      Amendment No. 3 on Form 10-KSB/A amends and restates the items identified below
      with respect to the annual report on Form 10-KSB filed by Puda Coal, Inc. (“we”
or “the Company”) with the Securities and Exchange Commission (the “SEC”) on
      March 30, 2006 (the “Original Filing”) and the Amendment No. 1 on Form 10-KSB/A
      filed with the SEC on May 17, 2006 (the “Amendment No. 1”) and the Amendment
      No.2 on Form 10-KSB/A filed with the SEC on November 21, 2006 (the “Amendment
      No. 2”) for the fiscal year ended December 31, 2005.





**Restatements**





As
      described in the current report on Form 8-K filed by the Company with the SEC
      on
      January 12, 2007, the Company announced it would restate its financial
      statements for the year ended December 31, 2005. As disclosed in the Form 8-K
      on
      January 12, 2007, the Company announced that:





(a)(1)
      On
      January 8, 2007, the Company determined to further amend its quarterly reports
      on Forms 10-QSB for the quarterly periods ended June 30, 2005, September 30,
      2005, March 31, 2006, June 30, 2006 and September 30, 2006 and its annual report
      on Form 10-KSB for the fiscal year ended December 31, 2005, as amended and
      restated, because its previously issued financial statements for the fiscal
      periods covered by these reports should no longer be relied upon.  No prior
      period financial statements will be restated because the quarterly period ended
      June 30, 2005 is the first reporting period impacted by the restatements. Ming
      Zhao, Chief Executive Officer, Xia Jin, Chief Financial Officer and Wenwei
      Tian,
      Chief Operating Officer of the Company made such determination.





(a)(2)
      In
      connection with the review of Amendment No. 4 to the Company’s Registration
      Statement on Form SB-2, the Securities and Exchange Commission (the “SEC”) asked
      the Company to explain the basis for its accounting treatment of an option
      to
      purchase Shanxi Puda Coal Group Co., Ltd. (formerly Shanxi Puda
      Resources Co., Ltd.) (“Shanxi Coal”) under an Exclusive Option Agreement
      dated June 24, 2005 among Taiyuan Putai Business Consulting Co. Ltd., Shanxi
      Coal, and the two shareholders of Shanxi Coal, Ming Zhao and Yao Zhao, who
      are
      also the two principal shareholders of the Company (the “Option”). The Company
      determined that the accounting treatment for the Option as reflected in its
      financial statements for the above mentioned periods, as amended and restated,
      should be revised. As a result of its analysis of EITF Topic D-98, the Company
      determined that due to the cross-ownership of the Company and Shanxi Coal the
      exercise of the Option can be deemed outside of the control of the Company
      and,
      consequently, the accounting for the Option price, approximately $2,717,000
      (RMB22,500,000, the amount of registered capital of Shanxi Coal), which was
      originally recorded as paid-in capital under stockholders' equity, should be
      reclassified as temporary equity of the Company under a caption “Option to
      buy-out Shanxi Coal.” As the exercise of the Option is analogous to a preferred
      dividend, the amount of $2,717,000 was deducted from net income in calculating
      the pro forma earnings per share. The restatement has the effect of decreasing
      shareholders' equity by $2,717,000 and increasing “Option to buy-out Shanxi
      Coal” by the same amount for each period referenced above.





(a)(3)
      Moore Stephens ("MS"), the Company's independent accountant, discussed with
      the
      Company's officers the above-referenced matters.





(b)(1)
      On
      January 8, 2007, MS advised the Company that the financial statements in its
      quarterly reports on Forms 10-QSB for the quarterly periods ended June 30,
      2005,
      September 30, 2005, March 31, 2006, June 30, 2006 and September 30, 2006 and
      its
      annual report on Form 10-KSB for the fiscal year ended December 31, 2005, as
      amended and restated, needed to be further amended.





(b)(2)
      Specifically, MS advised that the accounting for the Option price should be
      reclassified from permanent to temporary equity under the caption of “Option to
      buy-out Shanxi Coal”;





(b)(3)
      MS
      has discussed with the Company's officers the above-referenced
      matters.








The
      restatements reflect the Company’s determination that the option purchase price,
      which equals to the registered capital of Shanxi Coal under the Exclusive Option
      Agreement dated June 24, 2005, should be reclassified from permanent equity
      to
      temporary equity in accordance with EITF Topic No. D-98, paragraph 4, as the
      exercise of the option can be deemed outside of the control of the Company
      due
      to the cross-ownership of the Company and Shanxi Coal. The restatement was
      made
      in accordance with the provisions of SFAS 154 for correction of errors.
      Consolidated balance sheets as of quarterly periods ended June 30, 2005 and
      September 30, 2005 have been restated. There was no tax effect as a result
      of
      the restatement.





The
      above
      reclassification has the effect of increasing temporary equity by $2,717,000
      and
      decreasing stockholders' equity (permanent equity) by the same amount as of
      December 31, 2005. The restatement has no impact on the Company’s statements of
      operations except for the addition of pro forma earnings per share for the
      year
      ended December 31, 2005 and the Company’s statement of cash flows for the year
      ended December 31, 2005.





The
      Company is voluntarily subject to the filing requirements under Section 13
      or
      15(d) of the Exchange Act.





**Changes
      Reflected in this Form 10-KSB/A**





This
      Form
      10-KSB/A only amends and restates certain information in the following items
      related to the fiscal year ended December 31, 2005:





Cover
      page


Part
      II


Item
                6 -
            Management’s
                Discussion and Analysis or Plan of OperationsRestatement
                of Financial StatementsItem
                7 -
            Financial
                StatementsReport
                of Independent Registered Public Accounting FirmAudited
                Consolidated Financial StatementsNote
                1    The
                CompanyNote
                21  OptionsNote
                27  Condensed Financial Information of RegistrantNote
                28  RestatementsItem
                8A -
            Controls
                and Procedures





The
      application of the foregoing has resulted in certain significant amendments
      to
      the Original Filing, the Amendment No. 1 and the Amendment No. 2. Primarily
      these amendments are to reflect the reclassification from stockholders’ equity
      to temporary equity as discussed above. Other non-material revisions were also
      made in order to clarify certain disclosure in the Original Filling, the
      Amendment No.1 and the Amendment No.2 and to enhance the presentation. The
      consolidated balance sheets for the quarterly periods ended June 30, 2005 and
      September 30, 2005 and the audited consolidated annual balance sheet as of
      December 31, 2005, and the consolidated balance sheets for the quarterly periods
      ended March 31, 2006, June 30, 2006 and September 30, 2006 will also be
      restated. The application of the foregoing has resulted in certain significant
      amendments to the Original Filing as amended and restated
      subsequently.





Except
      for the amended and restated information, this Form 10-KSB/A continues to
      describe conditions as of the date of the Original Filing, and the disclosures
      contained herein have not been updated to reflect events, results or
      developments that have occurred after the Original Filing, or to modify or
      update those disclosures affected by subsequent events. Among other things,
      forward-looking statements made in the Original Filing have not been revised
      to
      reflect events, results or developments that have occurred or facts that have
      become known to us after the date of the Original Filing (other than this
      restatement), and such forward-looking statements should be read in their
      historical context. This Form 10-KSB/A should be read in conjunction with the
      Company’s filings made with the SEC subsequent to the Original Filing, including
      any amendments to those filings.





**TABLE
      OF CONTENTS**





PagePART
                IItem
                1. Description of Business
            1-23Item
                2. Description of Property
            23Item
                3. Legal Proceedings
            23Item
                4. Submission of Matters to a Vote of Security Holders
            24PART
                IIItem
                5.Market
                for Common Equity and Related Stockholder Matters and Small Business
                Issuers
              Purchase of Equity Securities
            24-25Item
                6.Management’s
                Discussion and Analysis or Plan of Operation
            26Item
                7.Financial
                Statements
            F1-F39Item
                8.Changes
                In and Disagreements With Accountants on Accounting and Financial
                Disclosure
            32Item
                8A.Controls
                and Procedures
            32PART
                IIIItem
                9.Directors,
                Executive Officers, Promoters and Control Persons;Compliance
                with Section 16(a) of the Exchange Act
            33Item
                10.Executive
                Compensation
            34Item
                11.Security
                Ownership of Certain Beneficial Owners and Managementand
                Related Stockholder Matters
            35Item
                12.Certain
                Relationships and Related Transactions
            36-37Item
                13.Exhibits
            38-40Item
                14.Principal
                Accountant Fees and Services
            41Signatures
            42Certifications














**PART
      I**




**Item
      1. Description of Business**




**General
      Business Overview**


**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 affiliate in China which we control through contractual
      arrangement.





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
      are in the process of significantly expanding our capacity to 2.7 million MT
      per
      year through the acquisition in 2005 of two new cleaning facilities. One of
      our
      new facilities became operational in late 2005 and the other, which is in
      testing, expects to become operational in April of 2006. As such a large volume
      supplier, we will 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 will also 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 rail lines which are 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 500,000 MT. Liulin
      County is located approximately 120 miles southwest of Shanxi Coal’s executive
      offices in Taiyuan City. Shanxi Coal acquired approximately 2.3 million MT
      of
      annual clean coal capacity in late 2006 as the result of the acquisition of
      a
      new coal processing plant in Liulin County (the “New Shanxi Liulin Plant”) and
      acquisition of a new coal processing plant in Zhong Yang County, Shanxi Province
      (the “New Zhong Yang Plant”). The New Shanxi Liulin Plant is now fully
      operational and the New Zhong Yang Plant is in the testing stages and is
      expected to be fully operational in April of 2006.





Shanxi
      Coal purchased this new capacity from Resources Group, a related party, at
      its
      cost with a $13,000,000 secured loan amortized over 10 years and paid from
      Shanxi Coal’s revenues.




1




We
      believe we are well positioned to participate in the early stages of China’s
      modernization of the coal, coking and steel making industries. The Shanxi
      provincial authorities are not approving new mines that produce less than
      300,000 MT output per year, are closing mines that produce less than 90,000
      MT
      per year and are consolidating existing mines into larger mines with outputs
      between 300,000 and 900,000, in an effort to stream line its 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 will make us leader of Shanxi Province’s future coal sector. With the
      additional cleaning capacity and the increased annual production of high quality
      coking coal from Shanxi Liulin Jucai Coal Industry Co., Limited (“Jucai Coal”),
      we hope to achieve significant 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) 2281300 and its facsimile
      number is +86 (351) 7034401.





**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, an International Business Company incorporated
      in
      the British Virgin Islands (“BVI”); BVI owns Taiyuan Putai Business Consulting
      Co., Ltd., a wholly foreign-owned enterprise established under the laws of
      the
      PRC (“Putai”). Our operations are conducted exclusively through Shanxi Puda Coal
      Group Co., Ltd., a PRC limited liability company (“Shanxi Coal”) wholly owned by
      our chief executive officer, Zhao Ming (80%) and our chief operations officer,
      Zhao Yao (20%), both of whom are PRC citizens. Puda Coal does not have a direct
      equity interest in Shanxi Coal, however, through a series of operating
      agreements among Putai, Shanxi Coal, Zhao Ming and Zhao Yao (“Operating
      Agreements”), we manage and control the operations of Shanxi Coal and receive
      the economic benefits and incur the risks derived from Shanxi Coal’s operations.
      Zhao Ming and Zhao Yao are brothers and significant shareholders of Puda Coal.
      Zhao Ming owns 70.2% and Zhao Yao owns 17.5% of Puda Coal and after the
      conversion will own 41.5% and 10.3% of our stock, respectively.





2


The
      following chart depicts our organizational structure:










3


Although
      we do not own Shanxi Coal, under accounting principles generally accepted in
      the
      United States of America, or U.S. GAAP, Shanxi Coal is included in our
      consolidated financial statements because our contractual arrangements with
      that
      entity provide us with the risks and rewards associated with equity ownership
      and grant us control over it. Each of the individual owners of Shanxi Coal
      have
      authorized Putai to vote at any meeting or action of the owners of Shanxi Coal
      and to act as the representative for such owners in all matters respecting
      Shanxi Coal.





Through
      our Operating Agreements, which consist of the Exclusive Consulting Agreement,
      the Operating Agreement, the Technology License Agreement, and the Exclusive
      Option Agreements, each dated June 24, 2005, Putai has 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, as such term is defined in the Operating Agreements. A
      copy
      of each of the Operating Agreements was filed as an exhibit to our Current
      Report on Form 8-K dated July 15, 2005 as filed with the SEC on July 18, 2005.
      Putai is a wholly foreign owned enterprise (“WFOE”) under Chinese laws. Putai’s
      capital stock is owned 100% by BVI, an International Business Company
      incorporated in the British Virgin Islands. BVI is a wholly-owned subsidiary
      of
      Puda Coal.





The
      Operating Agreements provide us, through our subsidiaries, with effective voting
      and management control over Shanxi Coal. Zhao Ming and Zhao Yao, the
      stockholders of Shanxi Coal, have granted Putai the exclusive right and option
      to acquire all of their capital stock of Shanxi Coal and have further authorized
      Putai to vote at any meeting or action of the stockholders of Shanxi Coal and
      to
      act as the representative for such holders in all matters respecting Shanxi
      Coal’s capital stock.





Our
      company has been 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. Structured in this way, our Company
      can accumulate funds prior to exercising our option to purchase Shanxi Coal,
      if
      we elect to do so. We established Putai as a WFOE. There are no restrictions
      on
      paying dividends from China to a WFOE.





**History
      and Background of the Company**





We
      were
      formerly known as Purezza Group, Inc., and originally formed to market a product
      called 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., our wholly owned subsidiary.
      Concurrently with the asset transfer to Purezza Marketing, we distributed on
      a
      pro rata basis all of our stock ownership in Purezza Marketing to the holders
      of
      our Common Stock. As a result of this transfer and the distribution of our
      stock, Purezza Marketing operated independently from us and as a successor
      to
      our business and operations. As a result of the asset transfer and the
      Distribution, we no longer had any meaningful business assets, operations or
      sources of revenue.





On
      April
      23, 2004, Keating Reverse Merger Fund, LLC, pursuant to a Stock Purchase
      Agreement, acquired from International Equities Group, Inc. 37,185,000 shares
      of
      our Common Stock. In order to fund our working capital needs, we sold to Keating
      Reverse Merger Fund 10,000,000 shares of our Common Stock at a purchase price
      of
      $0.01 per share, for an aggregate consideration of $100,000.





**Reverse
      Merger Transaction**





Effective
      July 15, 2005, we closed an Exchange Agreement with Putai, Shanxi Coal, BVI,
      and
      each of the members of BVI. At the closing, pursuant to the terms of the
      Exchange Agreement, we acquired all of the outstanding capital stock and
      ownership interests of BVI from the BVI Members, and the BVI Members contributed
      all of their interests in BVI to Puda Coal. In exchange, we issued to the BVI
      Members 1,000,000 shares of our Series A Convertible Preferred Stock, par value
      $0.01 per share, which were convertible into 678,500,000 shares of our Common
      Stock. At the closing, BVI became our wholly-owned subsidiary. BVI, in turn,
      owns all of the registered capital of Putai, a wholly foreign owned enterprise
      registered under the laws of the PRC, sometimes referred to as a WFOE.




4


Each
      Preferred Share was convertible into 678.5 shares of our Common Stock. The
      Preferred Shares immediately and automatically converted into shares of our
      Common Stock upon the effective date of the 1-for-10 reverse stock split of
      our
      outstanding Common Stock.





**Post-Reverse
      Merger Events**





Effective
      August 2, 2005, stockholders holding the majority of the shares of our
      outstanding stock entitled to vote thereon executed a written consent which:
      (i)
      approved a change in the name of Purezza Group, Inc. to Puda Coal, Inc.; (ii)
      approved an increase in the authorized number of shares of Common Stock from
      100,000,000 shares to 150,000,000 shares of Common Stock, $.001 par value;
      (iii)
      changed the purpose of Puda Coal to reflect a change of business to crushing,
      washing and processing of coal; (iv) authorized the Board of Directors to fix
      the number of persons constituting the Board of Directors; (v) authorized
      meetings of the Board of Directors to be held by written consent signed by
      all
      members of the Board of Directors; and (vi) authorized a 1-for-10 reverse stock
      split of our outstanding Common Stock. The Reverse Split was consummated
      effective September 8, 2005, and the 1,000,000 shares of our Series A
      Convertible Preferred Stock were automatically converted into 67,850,000 shares
      of our Common Stock after giving effect to the Reverse Split.





In
      connection with the Reverse Split, our trading symbol on the OTC BB was changed
      to “PUDC” effective September 8, 2005.





**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
      (CO 2 )
      and
      sulfur dioxide (SO 2 ).
      High
      quality, cleaned coking coal provides increased commercial value, reduced ash
      content, reduced SO 2 and
      CO 2 emissions, and reduced transportation requirement 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
      provides 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 have direct access to an
      abundance 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 abundance and 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.





5


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. These washing
      technologies are licensed from Putai. 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. China’s coal production was 1.9
      billion MT in 2004, a 12% increase over 2003, and in 2005 production reached
      2.19 billion MT, a 14% increase over 2004.





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. China
      was
      the largest steel producer in the world producing 349 million MT in 2004,
      representing 31% of the world’s total steel production in 2005. The next two
      largest steel producers in the world - Japan and the United States - produced
      a
      combined 206.4 million MT, or 28% of global production.





Steel
      is
      a key component of the rail systems, bridges, ports, airports, construction
      projects and car production spearheading China’s economic growth. China’s steel
      consumption totaled 289.6 million MT in 2004, or 27% 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.





China’s
      growing appetite for steel production is not expected to 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. The Shanxi provincial authorities are not
      approving new mines that produce less than 300,000 MT output per year, are
      closing mines that produce less than 90,000 MT per year and are consolidating
      existing mines into larger mines with outputs between 300,000 and 900,000,
      in an
      effort to stream line its 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 supply a significant portion of cleaned
      coking coal 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
      2.7
      million MT of annual cleaned coal, which we expect to have by April of 2006
      once
      our second new facility becomes fully operational, we believe that we are well
      positioned to participate in the early stages of China’s modernization of the
      coal, coking and steel making industries.





6


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 - both
      of
      which are not 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 famed 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 ideally situated in Liulin County,
      Shanxi Province, where high quality coking coal reserves exist. 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 form 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 as 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.





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 Zhao Yao, our Chief Operating
      Officer and a 17.5% (10.3% after the Conversion) stockholder of Puda Coal.
      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, even as we increases our cleaned
      coking coal washing capacity. Jucai Coal sold us 40,035 MT and 135,273 MT in
      2004 and 2005, respectively.





We
      have a
      preferred supply arrangement with Jucai Coal and it is giving 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 paid by is 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%.




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:





7


·
            **Liujiazhuang
                Coal Mine**-
                Shanxi Coal purchased about 47,049 MT and 60,572 MT from this mine
                in 2004
                and 2005.




·
            **Liulin
                Dadongzhuang Coal Mine**-
                Shanxi Coal purchased about 47,220 MT and 107,010 MT from this mine
                in
                2004 and 2005.




In
      addition, we have access to quality raw coking coal through Resources Group,
      which is also controlled by Zhao Ming (80%) and by Zhao Yao (20%). Zhao Ming
      and
      Zhao Yao are executive officers of Shanxi Coal and Puda Coal and are brothers.
      They are also significant shareholders of Puda Coal, owning 70.2% and 17.5%
      of
      our common stock, respectively (41.5% and 10.35%, respectively after the
      Conversion). Resources Group has raw coking coal available from their 50%-owned
      Miao Wan Coal Mine in Liulin County and their 100%-owned Zhong Yang Coal Mine
      in
      Zhong Yang 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 Zhong Yang Coal Mine each have current annual
      production of 400,000 MT, while Zhong Yang Coal Mine is expected to increase
      its
      output due to upgrades and additions to their mining machinery. We have not
      yet
      purchased coal from either of these mines and have no immediate plans to do
      so,
      but it remains an available option if we require it.





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.





Shanxi
      Coal’s raw coal suppliers in 2005 and 2004 were as follows:





**2005****Suppliers**
            **Volume**
            **%
                of****(MTs)**
            **Total**Jucai
                Coal Mine
            135,273
            13.9%Liulin
                Jijiata Dadongzhuang
            107,030
            11.0%Yumenzhen
                Coal Mine
            100,332
            10.3%Liulin
                Nanpo Coal Mine
            96,826
            10.0%Renjiasan
                Coal Mine
            87,223
            9.0%Jijiata
                Coal Mine
            77,842
            8.0%Pangpangta
                Coal Mine
            73,421
            7.6%Jijiata
                Dongzhuang
            65,709
            6.8%Liujiazhuang
                Coal Mine
            60,572
            6.2%Liulin
                Nanyu Coal Mine
            55,805
            5.8%Liulin
                Nianyan Coal Mine
            42,976
            4.4%Shipogou
                Coal Mine
            35,583
            3.7%Liujiawan
                Coal Mine
            31,501
            3.2%Total
            970,092
            100%







8





**2004****Suppliers**
            **Volume**
            **%
                of****(MTs)**
            **Total**Liujiazhuang
                Coal Mine
            47,049
            15%Liulin
                Dadongzhuang Coal Mine
            47,220
            15%Liulin
                Jijiata Coal Mine
            43,983
            14%Jucai
                Coal Mine
            40,035
            12%Liulin
                Pangpangta Coal Mine
            40,212
            13%Liulin
                Yumenzhen Coal Mine
            38,350
            12%Liulin
                Dongzhuang Coal Mine
            35,322
            11%Liulin
                Renjiashan Coal Mine
            28,972
            9%Total
            321,143
            100%





Prices
      for raw coking coal are generally negotiated by the parties. However, the local
      Price Administration Bureau (“PAB”) issues quarterly price range guidance for
      raw coking coal based on different quality levels (i.e., ash content). Raw
      coal
      suppliers are generally allowed to sell at any price as long the do not exceed
      the guided price range set by the PAB. The circular on the price range of raw
      coal in Liulin County issued by PAB on February 20, 2005 provides:





·
            Grade
                I: ash 9% - 12%, Su < 0.6, Price
                RMB450/ton





·
            Grade
                II: ash 13% - 23%, Su < 1.2, Price
                RMB350/ton





·
            Grade
                III: ash > 23%, Su > 1.2, Price
                RMB250/ton





The
      price
      range of the above coal is RMB30.





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 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.
      We
      have not yet purchased coal from either of these mines and have no immediate
      plans to do so, but it remains an available option if we require it.





In
      addition to Jucai Coal, there are two coal mines in Liulin County that are
      major
      suppliers of high quality raw coking coal comparable to Jucai Coal. These
      are:





·
            **Shipogou
                Coal Mine**-
                Annual production of 400,000 MT in 2004 and estimated 600,000 MT
                in 2005.





·
            **Houshanyuan
                Coal Mine**-
                Annual production of 300,000 MT in 2004 and
                2005.





Although
      each of these mines is located in Liulin County, they are not as close to our
      cleaning plants as our other raw coal suppliers. As such, we have never
      purchased raw coal from these mines. These coal mines sell their raw coking
      coal
      output to major coking companies. Since we have a strong relationship with
      Jucai
      Coal, these mines may look at Shanxi Coal as a market competitor as
      well.





**Operations**





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





9


·
            Shanxi
                Liulin Jucai Plant - This facility, which we ceased operating on
                December
                31, 2005, has an annual clean coal washing capacity of 100,000 MT.
                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 400,000 MT. 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 mile from the cleaned coal
                storage facility used by Shanxi Coal.





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 the lowest 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 .70 MT
      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 it is required to use a greater volume of lower quality
      raw coal input and still produce the clean coal specification required by its
      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.





**Expansion**





We
      have
      significantly expanded our coal cleaning capacity through the acquisition of
      a
      new facility near its Shanxi Liulin Jucai Plant (the “New Shanxi Liulin Jucai
      Plant”), as well as through our acquisition of a new facility and related land
      use rights in Zhong Yang County, Shanxi Province (the “New Zhong Yang Plant”).
      Both facilities were acquired in 2005.





·
            **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 late 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, $900,000 is for the plant and $3,900,000 is for the equipment.
                Resources Group financed the new facility under a
                loan.





·
            **New
                Zhong Yang Plant**-
                This facility, which is located in Zhong Yang County approximately
                15
                miles from Jucai Coal and about 3 miles from Resources Group’s Zhong Yang
                Coal Mine, will have an annual cleaning capacity of 1.2 million MT.
                This
                facility is still in the testing phase, but is expected to be fully
                operational by April 2006. The new facility will have a large storage
                facility and rail dock. We purchased New Zhong Yang Plant from Resources
                Group at cost, for approximately $7,200,000 of which $2,100,000 is
                for the
                50-year land use rights, $1,200,000 is for the plant and $4,300,000
                is for
                the equipment. Resources Group financed the new facility under a
                loan.





We
      have a
      total annual cleaned coking coal capacity of approximately 1.5 million MT and
      are in the process of expanding our capacity to 2.7 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.





10


The
      New
      Shanxi Liulin Jucai Plant and the New Zhong Yang 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 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 Zhao’s, provides 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
      are
      well positioned to participate in the early stages of China’s modernization of
      the coal, coking and steel making industries. The Shanxi provincial authorities
      are not approving new mines that produce less than 300,000 MT output per year,
      are closing mines that produce less than 90,000 MT per year and are
      consolidating existing mines with outputs between 300,000 and 900,000 into
      larger mines, in an effort to stream line its 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 ideally fits the industry’s development path and will
      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.
      During 2004, we sold approximately 315,000 MT of cleaned coking coal to 11
      different customers, with no customer accounting for more than 15.2% of total
      tonnage sales. 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. The represents an increase of over 115% from 2004, due primarily to
      continued strong demand from existing customers, new capacity coming on line
      in
      the fourth quarter, and new customer sales





Sales
      to
      our customers in 2004 and 2005 were as follows:





**2005****Customers**
            **Volume**
            **%
                of****(MTs)**
            **Total**Baotou
                Steel Group
            103,708
            15.3%Liulin
                Coal Cleaning Plant
            87,702
            12.9%Liulin
                Jinmei Coal
            65,571
            9.7%Jiangsu
                Yueda
            63,332
            9.3%Xiaoyi
                Jinyan Electricity
            58,120
            8.6%Shizhou
                Coal Gas
            54,937
            8.1%Lvliang
                Longteng Coke
            51,658
            7.6%Liulin
                Dongjiagou Coal Mine
            49,947
            7.4%Liulin
                Luojiapo Coal Mine
            44,481
            6.6%Zhongyang
                Rongxin
            42,058
            6.2%Liulin
                Huatai Coke
            30,241
            4.5%Liulin
                Changzhong Coke
            25,900
            3.8%Total
            677,654
            100%




11




**2004****Customers**
            **Volume**
            **%
                of****(MTs)**
            **Total**Liudian
                Burning Materials
            47,684
            15.2%Liulin
                Coalmine Washing Plant
            42,625
            13.5%Qianyi
                Jinyan Corp.
            32,929
            10.5%Xishan
                Coal & Electricity Company
            30,127
            9.6%Jiansu
                Yancheng Clean Coal Co., Ltd.
            30,028
            9.5%Shizhou
                Gas Company
            27,866
            8.9%Baotou
                Steel Resources Company
            25,822
            8.2%Zhonglu
                Company
            25,037
            8.0%


Zhongyang
                Rongxin
            21,060
            6.7%


Liuliang
                Longteng Coking Corporation
            18,573
            5.9%Taiyuan
                Gas Company
            12,910
            4.1%Jucai
                Coal Industry
            0
            0.0%Total
            314,661
            100%





Our
      customers include Taiyuan Iron & Steel (Group) Co., Ltd., a producer of
      steel plate and stainless steel; and Baotou Iron and Steel (Group) Co.,
      Ltd.





With
      rail
      line access to Shanxi Province, Inner Mongolia Province, 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





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, specification grade coking coal at competitive
      prices.





We
      have
      already signed sales contracts with 4 major steel makers for a combined 1.6
      million MT of annual cleaned coking coal. These agreements are not based on
      ‘take-or-pay’ volume commitments but rather on expected volume requirements of
      the steel makers which may increase or decrease based on the steel makers’
actual requirements. The duration of the agreements are for one year each and
      payment terms are the 30 th day of
      each month after receipt of the value-added tax related invoice. Although
      pricing is set in the contract, prices are generally adjustable based on market
      movements subject to the negotiation of the parties. If the parties cannot
      agree
      to new pricing, there are no commitments for the continued supply. Management
      believes that most of this new business is being taken way from other suppliers
      who are not able to supply coking coal at the same quality as we
      are.





·
            **Taiyuan
                Steel & Iron**-
                a steel maker located in Shanxi Province with projected annual sales
                of
                600,000 MT in 2006.





·
            **Handan
                Steel & Iron**-
                a steel maker located in Hebei Province with projected annual sales
                of
                400,000 MT in 2006.





·
            **Tangshan
                Steel & Iron**-
                a steel maker located in Hebei Province with projected annual sales
                of
                300,000 MT in 2006.




12





·
            **Beijing
                Capital Iron & Steel**-
                a steel maker located in Beijing with projected annual sales of 300,000
                MT
                in 2006.





Two
      more
      potential customers have signed non-binding letters of intent:





·
            **Shanxi
                Coal Import and Export Group Corporation**-
                Import-export company with projected annual sales of 600,000 MT in
                2006.
                This sales volume is based on a portion of the expressed intent in
                the
                non-binding letter to purchase 1,320,000 MT in 2006 from
                us.





·
            **Sinochem
                Corporation**-
                2005 Fortune Global 500 company. Chemical and diversified manufacturer
                with projected annual sales of 600,000 MT in 2006. This sales volume
                is
                based on a portion of the expressed intent in the non-binding letter
                to
                purchase 2,400,000 MT in 2006 from
                us.





If
      we are
      able to secure the expected additional new sales volume in 2006, we should
      be
      competitively positioned in the market and may be able to command greater
      bargaining power with its quality-dependent large customers. 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
      another developing sales channel for us in the next few years.





**Employees**





We
      currently have approximately 236 employees, all of whom are full-time. The
      following table shows the breakdown of the number of employees by functional
      departments.








**Department**
            **Job
                Title / Responsibility**
            **#
                of Employees**Corporate
            President,
                Vice Presidents, Managers
            11Finance
            Finance
                and Accounting
            9Purchasing
            Purchase
                raw coal and maintain relationship with suppliers
            20Marketing
                and Sales
            Sell
                cleaned coal, maintain relationship with customers, and acquire new
                customers
            32Transportation
            Short-range
                truck drivers (within plant)
            16Production
            Produce
                cleaned coal
            134Quality
                Control
            Quality
                check on input (raw coal) and output (cleaned coal)
            14Total
            
            236





We
      hired
      65 employees during the fourth quarter of 2005. Approximately 85% of these
      employees were in the areas of production, quality control and transportation,
      while 15% were in the areas of corporate, finance, purchasing and marketing
      and
      sales. Our employees are not subject to any labor agreements.




**Distribution**





The
      Company sells its clean coking coal through a direct sales force of
      approximately 32 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.





13




**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. These washing
      technologies are licensed from Putai. We have no patents, trademarks, other
      licenses, franchises, concessions or royalty agreements.




**Governmental
      Approvals**





We
      are
      not required to obtain any governmental approvals for our product.





**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 subsidiaries do not own
      the
      coal washing operations of Shanxi Coal.***





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 no equity interest. Through a series of Operating Agreements among Putai,
      Shanxi Coal, Zhao Ming and Zhao Yao, we manage and control the operations of
      Shanxi Coal and receive the economic benefits and incur the risks derived from
      Shanxi Coal’s operations. If there is a breach of the Operating Agreements by
      any party, or if the agreements are found to be illegal or not enforceable,
      we
      may no longer receive any of the benefits of Shanxi Coal’s operations. The
      operations of Shanxi Coal are our sole source of revenue.





***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 2004, 39.2% of our sales
      in
      MTs were to our top three major customers, Liudian Burning Materials (15.2%),
      Liulin Coalmine Washing Plant (13.5%) and Qianyi Jinyan Corp. (10.5%). Our
      ability to conclude favorable terms of sale with our major customers may be
      substantially impaired by our reliance on these three major customers. Given
      the
      large percentage of revenues derived from the sale of cleaned coking coal to
      these three customers, any adverse developments in their respective operations
      could have an adverse impact on our results of operations. In addition, during
      the same period, 57% of total cleaned coking coal revenues were from sales
      to
      our five largest customers. 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, our financial condition and
      results of operations could suffer materially.





14


***Our
      future operating results may be affected by fluctuations in raw material prices.
      We may not be able to pass on 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 customers under
      these provisions, many agreements permit the 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 2004 and 2005.
      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.





***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 from 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 terminate or expire, 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.





15


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





Seven
      of
      our total of eight raw coking coal suppliers provided 10% or more of our total
      raw coal purchases in tonnage in 2004. Jucai Coal, the coal mine owned 75%
      by
      Zhao Yao, supplies us with top quality coking coal. Jucai Coal also sells top
      quality coking coal to other customers. Jucai Coal sold approximately 20% and
      10% of its top quality raw coal production in 2003 and 2004, respectively,
      to us
      at prevailing market prices. The raw coking coal purchased from Jucai Coal
      accounted for approximately 19% and 12.5% of our total raw coal purchases in
      tonnage in 2003 and 2004, respectively. In 2005 we purchased approximately
      13.7%
      of our raw coal from Jucai Coal and in 2006 we anticipate approximately 300,000
      MT of raw coal will be purchased from Jucai Coal. Jucai Coal is an important
      source of top quality coking coal to Shanxi Coal. If for any reason, Jucai
      Coal
      is unable or unwilling to supply its top quality coking coal to us in sufficient
      quantities, our business will be adversely affected because 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
      be required to 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.





***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.





16


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





Both
      our
      operating company, Shanxi Coal, and Puda Coal are highly dependent on the
      services of Zhao Ming and Zhao Yao and the loss of their services would have
      a
      material and adverse impact on our operations. We are also dependent upon our
      relationship with the Zhao Ming and Zhao Yao’s other controlled businesses. They
      have 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 Zhao Ming and Zhao Yao currently have formal employment
      agreements with Puda Coal or Shanxi Coal. None of our companies have applied
      for
      key-man life insurance on the lives of these executives.





***Significant
      Control of Puda.*** **





As
      of
      December 31, 2005, approximately 90% of Puda’s outstanding Common Stock was
      owned by Zhao Ming and Zhao Yao, who are brothers. Acting together, they would
      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, including
      exercising the Option to purchase Shanxi Coal and pay the Option purchase price,
      $2,717,000. Through their concentration of voting power, they could delay,
      deter
      or prevent a change in control of the Company or other business combinations
      that might otherwise be beneficial to the other stockholders. Accordingly,
      this
      concentration of ownership may harm the market price of our ordinary shares.
      In
      addition, the interests of the two principal shareholders may not always
      coincide with the interests of other shareholders, and accordingly, they could
      cause us to enter into transactions or agreements that we would not otherwise
      consider.





***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 will have a material adverse effect on our financial condition and
      operations.***





We
      and
      our subsidiaries and operating company are insured in amounts that do 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 would have a material adverse affect on our
      financial condition and operations. Neither we or our subsidiaries nor our
      operating company, Shanxi Coal, carries officer and director liability
      insurance. This may cause us to experience difficulties in convincing qualified
      persons to fill such positions.





***Significant
      assets are subject to a lien held by a company controlled by the Zhaos. 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 Zhong
      Yang Plant through Resources Group, an entity owned 60% by Zhao Ming and 20%
      by
      Zhao Yao, 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
      Zhao’s 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. Zhao Ming and Zhao
      Yao
      may have, or may develop in the future, conflicts of interest with us. They
      are
      the equity owners of Shanxi Coal and it may be in their personal economic
      interest to cause Shanxi Coal to disregard its contractual obligations under
      the
      Operating Agreements. As the 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 Zhao’s. 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 87.7% and 41.5% upon the Conversion), they
      can control the actions which we take. They are also officers and Zhao Ming
      is
      our Chairman of the Board. In addition, they 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, “Stockholders, who are also officers and directors, have
      significant control over the company and may have conflicts of interest with
      the
      company.”*





17


***Because
      we are expanding capacity, we may be forced to make sales to customers whose
      creditworthiness is not known to us. 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 revenues and profitability will be negatively affected.





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





We
      have
      recently significantly expanded its production capacity through the acquisition
      of new facilities. One of the plants is still in the testing phase and full
      production may be delayed by many risks, including shortages of skilled labor,
      unforeseen environmental or engineering problems, weather interferences and
      unanticipated cost increases, any of which could have a material adverse effect
      on the project and could delay the scheduled opening. Such a delay would result
      in a delay in production of our product and could have a negative effect on
      total sales. Even when both facilities are fully operational, we may not
      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 and control expenses. We have
      also incurred new debt in order to finance the projects. 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. 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.




**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




18


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 measure 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, the stated positions of the Chinese authorities may change and
      possible new laws, regulations or policies will impact our business and
      operations. For example, it is possible the Operating Agreements and other
      similar contractual agreements may be subject to differing applications and
      interpretations under Chinese laws. Further, 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 in
      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 to regulation and/or licensing
      by federal, state, or local authorities as well as 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 the 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 impose 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 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 subsidiaries, we have no assets
      in
      the United States. In addition, all of our senior 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 judgment 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. 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.





20


In
      order
      to pay dividends, a conversion of Renminbi into U.S. dollars 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.
      However, Putai is presently classified as a wholly-owned foreign enterprise
      (“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 Coal 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 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 affiliated
      entities in China, we may be restricted from distributing dividends to
      stockholders if we do not receive distributions of dividends from our
      affiliates.




***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 notice. However, Putai has not notified
      SAFE
      of the recent ownership changes of BVI in connection with the Exchange
      Agreement. Further, to our knowledge, none of the shareholders of Puda Coal
      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. Penalties for non-compliance which may be issued by SAFE can
      impact the PRC resident investor 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 Coal 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, if Puda
      Coal decides to cause Putai to exercise its option to acquire all of the capital
      stock of Shanxi Coal pursuant to the Exclusive Option Agreements dated June
      24,
      2005, Puda Coal and the equity owners of Shanxi Coal 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.





***The
      contractual arrangements through which we operate Shanxi Coal may not be
      enforceable or in compliance with Chinese laws. Since Shanxi Coal is our only
      source of revenue, our results of operation would be materially adversely
      effected if the Operating Agreements were found to be illegal or could not
      be
      enforced.***





Through
      the Operating Agreements and an offshore holding structure, we manage and
      control the operations of Shanxi Coal and receive the economic benefits of
      and
      incur the risks from Shanxi Coal’s operations. Neither we or BVI nor Putai have
      any equity ownership in Shanxi Coal. If the Chinese government determines that
      our agreements with Shanxi Coal are not in compliance with applicable
      regulations, our business interests in China could be adversely




21




affected.
      Shanxi Coal’s operations are our sole source of revenue. Pursuant to the
      Operating Agreements, Putai has 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. Further, each of the individual owners of Shanxi Coal have granted Putai
      the exclusive right and option to acquire all of their registered capital of
      Shanxi Coal and have authorized Putai to vote at any meeting or action of the
      owners of Shanxi Coal and to act as the representative for such owners in all
      matters respecting Shanxi Coal. The Chinese government may determine that the
      Operating Agreements are not in compliance with Chinese licensing, registration
      or other regulatory requirements, with existing policies or with requirements
      or
      policies that may be adopted in the future. If we are determined not to be
      in
      compliance, the Chinese government could revoke our business and operating
      licenses, require us to discontinue or restrict our operations, restrict our
      right to collect revenues, require us to restructure our operations, impose
      additional conditions or requirements with which we may not be able to comply,
      impose restrictions on our business operations or on our customers, or take
      other regulatory or enforcement actions against us that could be harmful to
      our
      business.





We
      may
      also encounter difficulties in obtaining performance under, or enforcement
      of,
      the Operating Agreements. We must rely on the Operating Agreements to control
      and operate Shanxi Coal’s business. These contractual arrangements may not be as
      effective in providing control over these entities as direct ownership. For
      example, Shanxi Coal could fail to take actions required for our business or
      fail to maintain and operate its business in compliance with its contractual
      obligation to do so. Shanxi Coal may transact business with parties not
      affiliated with us. If Shanxi Coal fails to perform under its agreements with
      us, we may have to rely on legal remedies under Chinese law, which may not
      be
      effective. Individual equity owners of Shanxi Coal may have conflicts of
      interest and may not act in our best interest, especially if they leave the
      employ of Puda Coal.





***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. It is expected that the revaluation of the Renminbi and the exchange
      rate of the Renminbi will 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, contract awards for development projects, etc. 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.





**Item
      2. Description of Property**





**DESCRIPTION
      OF PROPERTY**





22


The
      Shanxi Liulin Dongqiang Plant, which Shanxi Coal owns, has an annual capacity
      of
      400,000 MT. Shanxi Coal has significantly increasing its coal cleaning capacity
      through its acquisition of a facility near the formerly leased Shanxi Liulin
      Jucai Plant, 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 Zhong Yang
      County, Shanxi Province which will have an annual capacity of 1.2 million MT
      when it starts formal production, expected in April of 2006.





The
      two
      new plants, related land-use rights and coal washing equipment were acquired
      by
      Shanxi Coal from Resources Group, which is controlled by Zhao Ming (80%), Zhao
      Yao (10%), Xue Ning (5%) and Xue Yue (5%). The New Shanxi Liulin County Plant
      started formal production in late 2005. The New Shanxi Liulin County Plant,
      land-use rights and related equipment were purchased for a cost of $5.8 million.
      The New Zhong Yang County Plant has started trial production, with formal
      production expected to start in April of 2006. The New Zhong Yang 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 Zhong Yang Plant.





The
      Shanxi Liulin Jucai Plant, which Shanxi Coal leased from Jucai Coal, is located
      about two miles from the Jucai Coal mine and has an annual capacity of 100,000
      MT. The lease for the Shanxi Liulin Jucai Plant expired on December 31, 2005
      and
      was not renewed.





The
      Company maintains insurance coverage for its fixed assets in the amount of
      $3,699,136.87 (RMB30,000,000) through The People’s Insurance Company of China as
      follows:





Total
      Fixed Assets of the Insured: $3,699,136.87 (RMB30,000,000).





**Risk
                Covered**
            **Insured
                Amount**
              **(RMB)**
            **Insured
                Amount**
              **(US)**
            **Premium**
              **(RMB)**
            **Premium**
              **(US)**Risk
                of Loss of New Equipments
            10,000,000.00
            1,233,045.62
            36,000.00
            4,438.96100,000.00
            12,330.46
            887.00
            109.37Risk
                of Theft and Robbery
            10,000,000.00
            1,233,045.62
            36,000.00
            4,438.96Irrespective
                of Percentage
            30,000,000.00
            3,699,136.87
            108,000.00
            13,316.89Risk
                of Spontaneous Combustion
            30,000,000.00
            3,699,136.87
            15,000.00
            1,849.57Risk
                of Malicious Damage
            10,000,000.00
            1,233,045.62
            36,000.00
            4,438.96Total
            
            
            231,887.00
            28,592.73





The
      Company is reviewing its insurance requirements as it believes it may be under
      insured.




**Item
      3. Legal Proceedings**




Not
      applicable.




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





On
      October 12, 2005, the Company obtained authorization by written consent of
      the
      stockholders to remove Rachel Li as a director of the Company effective August
      23, 2005. The written consent was given by stockholders holding 71,093,500
      shares of common stock representing 96.4% of the total 73,750,000 shares of
      common stock outstanding after giving effect to the reverse split effective
      September 8, 2005. Pursuant to Chapter 607.0704 of the Florida Business
      Corporation Act, written notice was given to stockholders who did not consent
      in
      writing within 10 days after obtaining the written consent. Zhao Ming and Wang
      Lisheng continue as directors of the Company. No other matters were submitted
      to
      our stockholders by written consent in lieu of a meeting under the written
      consent obtained October 12, 2005.





23





**PART
      II**




**Item
      5. Market for Common Equity and Related Stockholder
      Matters** **and
      Small Business Issuers Purchase of Equity Securities**




**Market
      Information**





Our
      common stock is quoted under the symbol, “PUDC” on the OTC Bulletin Board, a
      service maintained by the National Association of Securities Dealers, Inc.
      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. All prices prior to the quarter ended June 30, 2004
      reflect activity in our common stock prior to the announcement of our agreement
      to enter into the exchange to acquire BVI. Further, all prices reflect
      inter-dealer prices without retail mark-up, mark-down, or commission and may
      not
      necessarily reflect actual transactions.:





**High**
            **Low****2003**March
                31, 2003
            *
            *June
                30, 2003
            *
            *September
                30, 2003
            *
            *December
                31, 2003
            *
            ***2004**March
                31, 2004**
            .200
            .200June
                30, 2004
            .800
            .200September
                30, 2004
            1.000
            .700December
                31, 2004
            1.000
            1.000**2005**March
                31, 2005
            1.000
            1.000June
                30, 2005
            9.000
            1.000September
                30, 2005***
            3.900
            1.000December
                31, 2005
            3.750
            1.020*no
                available quoted prices during these periods.**first
                available price February 17, 2004.***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 $2.30; the low of $1.00 occurred before the split;
                the
                post-split low was $1.05.




**Holders**





As
      of
      December 31, 2005, there were approximately 90 stockholders of record of our
      common stock.




24


**Dividends**





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. $992,000 remains declared but unpaid. The dividends
      were
      distributed between Zhao Ming (80%) and Zhao Yao (20%).





Any
      future determination as to the declaration and payment of dividends on Puda
      Coal’s Common Stock will be made at the discretion of Puda Coal’s board of
      directors out of funds legally available for such purpose. Puda Coal 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 affiliated entities in China, 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. Because we do not own Shanxi Coal we will not receive
      stock dividends from them. If we do receive proceeds from them, it will be
      through our Operating Agreement. If we were to acquire 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 our subsidiaries, 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.




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





Neither
      we nor Shanxi Coal maintain any equity incentive or stock option plan.
      Accordingly, the Company granted no options to purchase any equity interests
      to
      any employees or officers and issued no stock options to any officers.




**Recent
      Sales of Unregistered Securities**





On
      December 5, 2005, the Company issued 10,000 restricted shares of common stock
      to
      Aurelius Consulting Group, Inc. (“Aurelius”) in exchange for after market and
      investor relations support services for the Company pursuant to a marketing
      agreement between the two parties dated December 5, 2005. The terms of the
      marketing agreement require a one time payment of the stock consideration and
      a
      payment of $10,000 per month to Aurelius during the six month term of the
      marketing agreement. The restricted shares were issued and sold in a private
      transaction under the exemption from registration provided by Section 4(2)
      of
      the Securities Act of 1933.





**Purchase
      of Equity Securities by the Issuer**




During
      the fourth quarter of 2005 we did not purchase any of our equity
      securities.


25




**Item
      6. Management’s Discussion and Analysis or Plan of
      Operation**





You
      should read the following description of our results of operations and financial
      condition in conjunction with the audited financial statements presented in
      this
      Amendment No. 2 to the annual report on Form 10-KSB/A. Unless otherwise
      specified, all dollar amounts are in U.S. dollars.





**Forward-Looking
      Statements**





The
      following discussion may contain certain forward-looking statements within
      the
      meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
      Securities Exchange Act of 1934. Such statements are intended to be covered
      by
      the safe harbor created by such provisions. These statements include the plans
      and objectives of management for the future growth of Puda Coal, Inc., formerly
      Purezza Group, Inc. (“Puda Coal” or the “Company”) and its controlled
      affiliates, including plans and objectives related to the consummation of
      acquisitions and future private and public issuances of Puda Coal’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 Coal. Although Puda Coal 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-KSB/A
      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 Coal or any
      other
      person that the objectives and plans of Puda Coal will be achieved.





The
      words
“we,” “us” and “our” refer to Puda Coal and its subsidiaries and controlled
      affiliates. 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; and
      (c) other risks that are discussed in this Form 10-KSB/A and incorporated herein
      by reference or included in our previous filings with the SEC.





**Restatement
      of Financial Statements**





On
      January 8, 2007, the Company determined to further amend its quarterly reports
      on Forms 10-QSB for the quarterly periods ended June 30, 2005, September 30,
      2005, March 31, 2006, June 30, 2006 and September 30, 2006 and its annual report
      on Form 10-KSB for the fiscal year ended December 31, 2005, as amended and
      restated, because its previously issued financial statements for the fiscal
      periods covered by these reports should no longer be relied upon.  No prior
      period financial statements will be restated because the quarterly period ended
      June 30, 2005 is the first reporting period impacted by the restatements. Ming
      Zhao, Chief Executive Officer, Xia Jin, Chief Financial Officer and Wenwei
      Tian,
      Chief Operating Officer of the Company made such determination.





In
      connection with the review of Amendment No. 4 to the Company’s Registration
      Statement on Form SB-2, the SEC asked the Company to explain the basis for
      its
      accounting treatment of an Option to purchase Shanxi Coal under an Exclusive
      Option Agreement dated June 24, 2005 among Taiyuan Putai Business Consulting
      Co.
      Ltd., Shanxi Coal, and the two shareholders of Shanxi Coal, Ming Zhao and Yao
      Zhao, who are also the two principal shareholders of the Company. The Company
      determined that the accounting treatment for the Option as reflected in its
      financial statements for the above mentioned periods, as amended and restated,
      should be revised. As a result of its analysis of EITF Topic D-98, the Company
      determined that due to the cross-ownership of the Company and Shanxi Coal the
      exercise of the Option can be deemed outside of the control of the Company
      and,
      consequently, the accounting for the Option price, approximately $2,717,000
      (RMB22,500,000, the amount of registered capital of Shanxi Coal), which was
      originally recorded as paid-in capital under stockholders' equity, should be
      reclassified as temporary equity of the Company under a caption “Option to
      buy-out Shanxi Coal.” The restatement has the effect of decreasing shareholders'
      equity by $2,717,000 and increasing “Option to buy-out Shanxi Coal” by the same
      amount for each period referenced above.





26


Moore
      Stephens, the Company's independent accountant, discussed with the Company's
      officers the above-referenced matters. On January 8, 2007, MS advised the
      Company that the financial statements in its quarterly reports on Forms 10-QSB
      for the quarterly periods ended June 30, 2005, September 30, 2005, March 31,
      2006, June 30, 2006 and September 30, 2006 and its annual report on Form 10-KSB
      for the fiscal year ended December 31, 2005, as amended and restated, needed
      to
      be further amended. Specifically, MS advised that the accounting for the Option
      price should be reclassified from permanent to temporary equity under the
      caption of “Option to buy-out Shanxi Coal”;





The
      following discussion and analysis gives effect to the restatement described
      in
      Note 28 to the audited consolidated financial statements for the year ended
      December 31, 2005 contained herein. Such restatement has no impact on the
      Company’s results of operations except for the addition of pro forma earnings
      per share for the year ended December 31, 2005.





**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, 2005 Compared to Year Ended December 31, 2004**





*Net
      Revenue* .
      Net
      revenue for the year ended December 31, 2005 increased $31,975,000, or 162%,
      from $19,735,000 in the year ended December 31, 2004 to $51,710,000 in the
      year
      ended December 31, 2005. The tonnage sales of cleaned coal increased
      approximately 365,000 tons from approximately 315,000 tons in the year ended
      December 31, 2004 to approximately 680,000 tons in the year ended December
      31,
      2005, a 116% increase. This was the primary reason for our increase in net
      revenue. The increase in tonnage sales was primarily due to increased orders
      of
      cleaned coal from existing and new customers in the year ended December 31,
      2005. The increase in net revenue was also due to the increase in the per ton
      sales price of cleaned coal we sold in all regions, which went from an average
      of approximately $63 per ton in the year ended December 31, 2004 to an average
      of approximately $77 per ton in the year ended December 31, 2005, a 22%
      increase. Both the increase in orders and the increase in our average sales
      price was primarily because of the increase in the general demand for high-grade
      coking coal in China, which was largely driven by the substantial economic
      growth that China continued to experience in 2005. Steel is a key component
      of
      the rail systems, bridges, ports, airports, construction projects and car
      production spearheading China’s economic growth and the increased demand for
      steel directly affects the demand for the cleaned high-grade metallurgical
      coking coal, which we sell.





In
      response to this increase in general demand, we are in the process of
      significantly expanding our capacity to 2.7 million MT per year through the
      purchase of two new coal processing facilities in November 2005. One of our
      new
      facilities became operational in late 2005 and the other, which is in testing,
      is expected to become operational in April of 2006. Management anticipates
      that
      China’s strong economic growth will continue in 2006 and we believe that this
      will drive strong 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, and notwithstanding the expected strong demand, our average per ton
      sales price is not expected to increase.





*Cost
      of Revenues* .
      Puda’s
      cost of revenue for the year ended December 31, 2005 increased $26,818,000,
      or
      203%, from $13,229,000 in the year ended December 31, 2004 to $40,047,000 in
      the
      year ended December 31, 2005. This was primarily due to the increase in the
      price per ton of raw coal we paid to our suppliers and the increase in sales
      volume. The price we paid for raw coal increased from an average of
      approximately $35 per ton in the year ended December 31, 2004 to an average
      of
      approximately $42 per ton in the year ended December 31, 2005, a 20% increase.
      Furthermore, the quality of raw coal we purchased varied and this inconsistency
      in the quality of our supplies led to a decrease in our production efficiency,
      measured by the amount of cleaned coal we yield from one MT of raw coal, in
      the
      year ended December 31, 2005.





27


*Gross
      Profit.* Gross
      profit for the year ended December 31, 2005 increased $5,157,000 or 79%, from
      $6,506,000 in the year ended December 31, 2004 to $11,663,000 in the year ended
      December 31, 2005 due to the increase in sales volume of $5,289,000 and selling
      price of $1,014,000, which were offset by the decrease in gross profit margin
      of
      $1,146,000. Gross profit margin in the year ended December 31, 2005 was 23%
      versus 33% in the year ended December 31, 2004. The decrease in gross profit
      margin was primarily due to the significant increase we paid in the price per
      ton of raw coal.





*Selling
      Expenses.* Selling
      expenses were $791,000 for the year ended December 31, 2005, compared to
      $322,000 for the year ended December 31, 2004. This represents an increase
      of
      $469,000, or 146%, primarily due to the increase in sales volume.





*General
      and Administrative Expenses.* General
      and administrative expenses were $789,000 for the year ended December 31, 2005,
      compared to $203,000 for the year ended December 31, 2004. This represents
      an
      increase of $586,000, or 289%, primarily due to increases in salary and
      benefits, legal and professional fee and investor relations expenses.





*Other
      Operating Expenses.* Other
      operating expenses were $902,000 in the year ended December 31, 2005, compared
      to $414,000 in the year ended December 31, 2004. The increase of $488,000,
      or
      118% was due to the increase in professional and regulatory charges related
      to
      our Exchange Agreement transaction on July 15, 2005 and subsequent public
      securities compliance.





*Income
      from Operations.* Operating profit was $5,567,000 in the year ended December 31, 2004 and
      $9,181,000 in the year ended December 31, 2005. The increase of $3,614,000,
      or
      65%, was primarily the result of increased gross profit of $5,157,000, which
      was
      offset by the increased operating expenses of $1,543,000.





*Interest
      Expense.* Interest
      expense was $4,000 in the year ended December 31, 2004 and $531,000 in the
      year
      ended December 31, 2005. The increase of $527,000 was primarily the result
      of
      interest expense of $114,000 on the 8% convertible notes issued on November
      18,
      2005, and the amortization, due to converted shares, of $417,000 of the discount
      on the conversion feature related to the notes.





*Debt
      Financing Costs.* Debt
      financing costs in the year ended December 31, 2005 include amortization of
      debt
      issue costs of $739,000, and amortization of discount on convertible notes
      and
      deferred financing costs of warrants of $4,225,000. No such expense was incurred
      in the year ended December 31, 2004.





*Derivative
      Unrealized Fair Value Gain.* Derivative unrealized fair value gain in the year ended December 31, 2005 of
      $700,000 represented the change in fair value of the warrants.





*Income
      Taxes.* Income
      taxes increased $1,573,000, or 84%, from $1,866,000 in the year ended December
      31, 2004 to $3,439,000 in the year ended December 31, 2005 due to the increase
      in the operating profit of Shanxi Coal from $5,559,000 in the year ended
      December 31, 2004 to $9,358,000 in the year ended December 31, 2005. Income
      tax
      was imposed on Shanxi Coal by the China Tax Bureau.





*Net
      Income* .
      Net
      income was $965,000 in the year ended December 31, 2005, compared to $3,693,000
      in the year ended December 31, 2004, a decrease of $2,728,000, or 74%, mainly
      due to increased gross profit of $5,157,000 and increased derivative unrealized
      fair value gain of $700,000, which was offset by increased operating expenses
      of
      $1,543,000, increased interest expenses of $527,000, increased debt financing
      costs of $4,964,000 and increased income taxes of $1,573,000 in the year ended
      December 31, 2005. ****





28


**Liquidity
      and Capital Resources**





Net
      cash
      provided by operating activities was $1,577,000 in the year ended December
      31,
      2005, compared to $2,604,000 in the year ended December 31, 2004, a decrease
      of
      $1,027,000 or 39%. This was primarily due to negative cash flows for inventory
      and accounts receivable, which were offset by the increase in net income and
      improved working capital cash flows for accounts payable, other payables and
      VAT
      payable in the year ended December 31, 2005 compared to the year ended December
      31, 2004.





Net
      cash
      provided by financing activities was $10,020,000 in the year ended December
      31,
      2005, compared with net cash used in financing activities of $3,204,000 in
      the
      year ended December 31, 2004. The increase of $13,224,000 was principally due
      to
      the issuance of convertible notes of $12,500,000 on November 18, 2005 and the
      decrease in dividend distribution of $2,257,000, which was offset by the
      increase in debt issue costs of $1,583,000.





Shanxi
      Coal leased the Liulin Jiucai Plant from Jucai Coal Industry Co., Limited,
      which
      has an annual clean coal washing capacity of 100,000 MT. This facility is
      located about two miles away from the premises of coal mine owned and operated
      by Jucai Coal. Zhao Yao is a 75% owner of Jucai Coal. The lease agreement was
      entered on December 2, 2001 and was terminated on December 31, 2005. The cost
      for the leased capacity was approximately $611,000 annually with four quarterly
      payments per year.





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 Zhong
      Yang County, Shanxi Province. The Liulin County plant is expected to have an
      annual clean coal washing capacity of 1.1 million MT while the Zhong Yang County
      plant is expected to have an annual clean coal washing capacity of 1.2 million
      MT. After completing trial production, the Liulin County plant started formal
      production at the end of November 2005. The Liulin County plant, land-use rights
      and related equipment were purchased for a cost of $5,800,000. The Zhong Yang
      County plant started trial production at the end of November, with formal
      production expected to start in April of 2006. The Zhong Yang 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, be amortized over 10 years from
      December 31, 2005 and bear interest at a rate of 6% per annum payable quarterly.





Our
      principal on-going capital requirements are to finance our coal washing
      operations and to fund the payment of the loans totaling $13,000,000 for the
      acquisition of the New Shanxi Liulin Jucai Plant and the New Zhong Yang Plant.
      We must also pay interest on the notes issued in our November 18, 2005 private
      placement which have an aggregate principal amount of $12.5 million, 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 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
      25,000,000 shares of our common stock which are exercisable at price of $.60
      per
      share, or an aggregate of $15,000,000. 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.





Our
      business is heavily dependent on our coal inventory. Because of recent 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 300,000 MT output per year, are closing mines
      that
      produce less than 90,000 MT per year and are consolidating existing mines into
      larger mines with outputs between 300,000 and 900,000 MT. 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, making the collection of our
      accounts receivable more difficult.





29


Our
      Zhong
      Yang County plant, which started trial production at the end of November, is
      expected to start formal production in April of 2006. If technical issues arise
      during trial production of the plant or thereafter, we may need to pay further
      costs towards making it fully operational. In such an event, we would use the
      proceeds we received from our private placement in November 18, 2005 to pay
      these further costs. We are also considering the construction of a power
      generating plant. We intend to use a portion of the proceeds from the exercise
      of the warrants issued in our November 2005 private placement to the extent
      such
      warrants are exercised. However, these proceeds which would aggregate
      $15,000,000 to the extent they are all fully exercised are not sufficient to
      pay
      the $18,100,000 the plant is projected to cost. The balance of the cost would
      be
      paid from our operations, or we would have to secure a loan or issue additional
      equity.





We
      believe that our liquidity will be adequate to satisfy our obligations for
      the
      foreseeable future. The adjustments in the amortization method affected some
      of
      the items within the Company’s consolidated statement of cash flows for the
      fiscal year ended December 31, 2005 but did not impact the cash and cash
      equivalents at the end of the period. Future requirements for our 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. However, we may not be able
      to
      generate sufficient operating cash flow and external financing sources may
      not
      be available in amounts or on terms sufficient to meet our liquidity needs.
      Our
      opinion concerning our liquidity is based on current information. If this
      information proves to be inaccurate, or if circumstances change, we may not
      be
      able to meet our liquidity needs.





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, Zhao Ming
      and
      Zhao Yao, who are also the two principal shareholders of Puda. Due to the
      cross-ownership of Puda and Shanxi Coal, the Option may be exercised outside
      of
      the control of Puda. The two principal shareholders of Puda may compel Puda
      to
      exercise the Option to buy-out Shanxi Coal, in which case Puda will have an
      obligation to pay the Option exercise price of $2,717,000 (RMB22,500,000, the
      amount of registered capital of Shanxi Coal). Puda may pay the Option price
      through existing cash resources or other internally generated funds or through
      proceeds of third party equity or debt financing.




**Puda
      Coal’s Significant Accounting Estimates and Policies**





The
      discussion and analysis of Puda Coal’s financial condition and results of
      operations is based upon Shanxi Coal’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 Shanxi
      Coal’s to make estimates and judgments that affect the reported amounts of
      assets and liabilities. On an on-going basis, Shanxi Coal’s evaluates its
      estimates including the allowance for doubtful accounts, the salability and
      recoverability of inventory, income taxes and contingencies. Shanxi Coal’s 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 Shanxi Coal’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.





Shanxi
      Coal must make estimates of the collectability of accounts receivable. Shanxi
      Coal 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 Shanxi Coal 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, Shanxi Coal 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.





Goodwill
      is reviewed at least annually for impairment, or more frequently if indicators
      of impairment exist, goodwill is tested by comparing net book value of the
      reporting entity to fair values require significant judgment because broad
      economic factors, industry factors and technology considerations can result
      in
      variable and volatile fair values.





30


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 balance sheet accounts are translated
      into U.S. dollars at the year-end exchange rates prevailing during the periods
      in which these items arise. Translation gains and losses are deferred and
      accumulated as a component of other comprehensive income in owners’ 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 statement of operations as incurred. The translation and
      transaction gains and losses were immaterial in the statement of operations
      as
      incurred. The translation and transaction gains and losses were immaterial
      for
      the years ended December 31, 2003 and 2004. The PRC during 2003 and 2004 fixed
      the exchange rate of 8.28 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 Coal because it has not previously engaged in
      any
      significant transactions that are subject to the restrictions.





31


**Item
      7. Financial Statements**








**PUDA
      COAL, INC.**





**CONSOLIDATED
      FINANCIAL STATEMENTS**


**December
      31, 2005 And 2004**


**Together
      With Report Of**


**Independent
      Registered Public Accounting Firm**










































































F-1





**PUDA
      COAL, INC.**


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**








Report
                of Independent Registered Public Accounting Firm
            F3Consolidated
                Balance Sheet
            F4
                - F5Consolidated
                Statements of Operations F6-F7Consolidated
                Statements of Changes in Stockholders’ Equity
            F8Consolidated
                Statements of Cash Flows F9Notes
                to Consolidated Financial Statements
            F10
                - F39























F-2





**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 sheet of Puda Coal, Inc. and
      subsidiaries as of December 31, 2005, and the related consolidated statements
      of
      operations, changes in stockholders’ equity, and cash flows for each of the two
      years in the period then ended. These 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. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. 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, 2005 and the results of their operations and
      their cash flows for each of the two years in the period then ended in
      conformity with accounting principles generally accepted in the United States
      of
      America.





As
      discussed in Note 28 to the accompanying financial statements, the Company
      restated its financial statements as of and for the year ended December 31,
      2005.











Moore
      Stephens





*Certified
      Public Accountants*


*Hong
      Kong*





February
      24, 2006 (except for Note 25


as
      to
      which the date is March 20, 2006;


Note
      11
      as to which the date is


September
      13, 2006; and Notes 1 and 28


as
      to
      which the date is January 8, 2007)


F-3


**PUDA
      COAL, INC.**


**CONSOLIDATED
      BALANCE SHEET**


**December
      31, 2005**


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





Note(s)
            
            December
                31, 2005(Restated
                - see Note 28)**ASSETS**CURRENT
                ASSETSCash
                and cash equivalents
            
            
            22
            
            $
            12,067Restricted
                cash
            
            
            3,
                22
            
            
            615Accounts
                receivable, net
            
            
            4
            
            
            4,224Other
                receivables-
                Related parties
            
            
            5
            
            
            17-
                Third parties
            
            
            
            
            
            36Advances
                to suppliers
            
            
            
            
            
            2,959Deferred
                charges
            
            
            11
            
            
            4,594Inventories
            
            
            6
            
            
            7,559Total
                current assets
            
            
            
            
            
            32,071PROPERTY,
                PLANT AND EQUIPMENT, NET
            
            
            7
            
            
            10,823INTANGIBLE
                ASSETS, NET
            
            
            8
            
            
            3,807TOTAL
                ASSETS
            
            
            
            
            $
            46,701**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**CURRENT
                LIABILITIESCurrent
                portion of long-term debt-
                Related party
            
            
            5,
                10
            
            $
            1,300Accounts
                payable-
                Related party
            
            
            5
            
            
            154-
                Third parties
            
            
            
            
            
            1,172Other
                payables-
                Related party
            
            
            5
            
            
            874-
                Third parties
            
            
            
            
            
            708Accrued
                expenses
            
            
            
            
            
            363Income
                taxes payable
            
            
            9
            
            
            1,397VAT
                payable
            
            
            9
            
            
            317Distribution
                payable
            
            
            
            
            
            992Total
                current liabilities
            
            
            
            
            
            7,277LONG-TERM
                LIABILITIESLong-term
                debt-
                Related party
            
            
            5,
                10
            
            
            11,700Convertible
                notes
            
            
            11
            
            
            1,917Derivative
                conversion feature
            
            
            11
            
            
            5,720Derivative
                warrants
            
            
            11
            
            
            11,288Total
                long-term liabilities
            
            
            
            
            
            30,625COMMITMENTS
                AND CONTINGENCIES
            
            
            12







F-4


**PUDA
      COAL, INC.**


**CONSOLIDATED
      BALANCE SHEET (Continued)**


**December
      31, 2005**


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





Note(s)
            
            December
                31, 2005(Restated
                - see Note 28)TEMPORARY
                EQUITYOption
                to buy-out Shanxi Coal
            
            
            1,
                28
            
            
            2,717STOCKHOLDERS’
                EQUITYPreferred
                stock, authorized 5,000,000 shares, parvalue
                $0.01, issued and outstanding Nil
            
            
            
            
            
            -Common
                stock, authorized 150,000,000 shares,par
                value $0.001, issued and outstanding75,450,000
            
            
            13
            
            
            75Paid-in
                capital
            
            
            
            
            
            4,6254,700Less:
                reclassified to temporary equity
            
            
            1,
                28
            
            
            (2,717
            )Statutory
                surplus reserve fund
            
            
            14
            
            
            1,366Retained
                earnings
            
            
            
            
            
            2,579Accumulated
                other comprehensive income
            
            
            
            
            
            154Total
                stockholders’ equity
            
            
            
            
            
            6,082TOTAL
                LIABILITIES AND STOCKHOLDERS’EQUITY
            
            
            
            
            $
            46,701








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


























F-5


**PUDA
      COAL, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**For
      the years ended December 31, 2005 and 2004**


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





Years
                ended December 31,Note(s)
            
            2005
            
            2004(Restated
                -
              see
                Note 28)NET
                REVENUE
            
            
            
            
            $
            51,710
            
            $
            19,735COST
                OF REVENUE
            
            
            5
            
            
            (40,047
            )
            
            (13,229
            )GROSS
                PROFIT
            
            
            
            
            
            11,663
            
            
            6,506OPERATING
                EXPENSESSelling
                expenses
            
            
            
            
            
            791
            
            
            322General
                and administrative expenses
            
            
            5
            
            
            789
            
            
            203Other
                operating expenses
            
            
            15
            
            
            902
            
            
            414TOTAL
                OPERATING EXPENSES
            
            
            
            
            
            2,482
            
            
            939INCOME
                FROM OPERATIONS
            
            
            
            
            
            9,181
            
            
            5,567GAIN/(LOSS)
                ON SHORT-TERM INVESTMENTS
            
            
            
            
            
            6
            
            
            (4
            )INTEREST
                INCOME
            
            
            
            
            
            12
            
            
            -INTEREST
                EXPENSE
            
            
            
            
            
            (531
            )
            
            (4
            )DEBT
                FINANCING COSTS
            
            
            16
            
            
            (4,964
            )
            
            -DERIVATIVE
                UNREALIZED FAIR VALUE GAIN
            
            
            17
            
            
            700
            
            
            -INCOME
                BEFORE INCOME TAXES
            
            
            
            
            
            4,404
            
            
            5,559INCOME
                TAXES
            
            
            18
            
            
            (3,439
            )
            
            (1,866
            )NET
                INCOME
            
            
            
            
            
            965
            
            
            3,693OTHER
                COMPREHENSIVE INCOMEForeign
                currency translation adjustment
            
            
            
            
            
            154
            
            
            -COMPREHENSIVE
                INCOME
            
            
            
            
            $
            1,119
            
            $
            3,693NET
                INCOME
            
            
            
            
            
            965
            
            
            3,693PRO
                FORMA ADJUSTMENTDeemed
                preferred dividend
            
            
            1,
                28
            
            
            (2,717
            )
            
            -PRO
                FORMA NET (LOSS)/INCOME
            
            
            
            
            $
            (1,752
            )
            $
            3,693





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





F-6


**PUDA
      COAL, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS (Continued)**


**For
      the years ended December 31, 2005 and 2004**


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











Years
                ended December 31,Note(s)
            
            2005
            
            2004(Restated
                -
              see
                Note 28)EARNINGS
                PER SHARE-BASIC
            
            
            
            
            $
            0.01
            
            $
            0.05-DILUTED
            
            
            
            
            $
            0.01
            
            $
            0.05PRO
                FORMA (LOSS)/EARNINGS PER SHARE-BASIC
            
            
            
            
            $
            (0.02
            )
            $
            0.05-DILUTED
            
            
            
            
            $
            (0.02
            )
            $
            0.05WEIGHTED
                AVERAGE NUMBER OF SHARESOUTSTANDING-BASIC
            
            
            19
            
            
            73,950,274
            
            
            73,750,000-DILUTED
            
            
            19
            
            
            77,576,036
            
            
            73,762,817















































F-7


**PUDA
      COAL, INC.**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**


**For
      the years ended December 31, 2005 and 2004**


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





COMMON
                STOCK
              AT
                PAR PLUS
              PAID-IN
                CAPITAL
            
            STATUTORY
                SURPLUS RESERVE FUND
            
            RETAINED
              EARNINGS
            
            ACCUMULATED
                OTHER COMPREHENSIVE INCOME
            
            TOTAL
              STOCKHOLDERS’
                EQUITYNo.
                of sharesBalance,
                January 1, 2004, as recapitalized (see Notes 1 and 13)
            
            
            73,750,000
            
            $
            2,717
            
            $
            675
            
            $
            2,457
            
            $
            -
            
            $
            5,849Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            3,693
            
            
            -
            
            
            3,693Transfer
                to statutorysurplus
                reserve fund
            
            
            -
            
            
            -
            
            
            568
            
            
            (568
            )
            
            -
            
            
            -Dividend
                distribution
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,393
            )
            
            -
            
            
            (2,393
            )Balance,
                December 31,2004
            
            
            73,750,000
            
            
            2,717
            
            
            1,243
            
            
            3,189
            
            
            -
            
            
            7,149Shareholder
                contribution
            
            
            -
            
            
            50
            
            
            -
            
            
            -
            
            
            -
            
            
            50Notes
                converted to common stock, November 18, 2005, at $0.50 per share
            
            
            1,700,000
            
            
            850
            
            
            -
            
            
            -
            
            
            -
            
            
            850Conversion
                feature transferred to equity upon conversion
            
            
            -
            
            
            417
            
            
            -
            
            
            -
            
            
            -
            
            
            417Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            965
            
            
            -
            
            
            965Transfer
                to statutorysurplus
                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 (see Notes 7 and
                8)
            
            
            -
            
            
            666
            
            
            -
            
            
            -
            
            
            -
            
            
            666Foreign
                currencytranslation
                adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            154
            
            
            15475,450,000
            
            
            4,700
            
            
            1,366
            
            
            2,579
            
            
            154
            
            
            8,799Reclassification
                to temporary equity (Notes 1 and 28)
            
            
            -
            
            
            (2,717
            )
            
            -
            
            
            -
            
            
            -
            
            
            (2,717
            )Balance,
                December 31, 2005 (Restated - see Note 28)
            
            
            75,450,000
            
            $
            1,983
            
            $
            1,366
            
            $
            2,579
            
            $
            154
            
            $
            6,082








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, 2005 and 2004**


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





Years
                ended December 31,Notes
            
            2005
            
            2004(Restated
                - see Note 28)CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            
            
            
            $
            965
            
            $
            3,693Adjustments
                to reconcile net income to net cash provided byoperating
                activitiesAmortization
                of land-use rights
            
            
            
            
            
            9
            
            
            4Depreciation
            
            
            
            
            
            183
            
            
            111Provision
                for doubtful debts
            
            
            
            
            
            5
            
            
            1Amortization
                of debt issue costs
            
            
            
            
            
            739
            
            
            -Amortization
                of discount on convertible notes and warrants
            
            
            
            
            
            4,225
            
            
            -Derivative
                unrealized fair value gain
            
            
            
            
            
            (700
            )
            
            -Discount
                on converted shares expensed as interest expense
            
            
            
            
            
            417
            
            
            -Changes
                in operating assets and liabilities:Decrease/(increase)
                in short-term investments
            
            
            
            
            
            117
            
            
            (117
            )Increase
                in accounts receivable
            
            
            
            
            
            (1,507
            )
            
            (383
            )Decrease/(increase)
                in notes receivable
            
            
            
            
            
            638
            
            
            (372
            )Decrease
                in other receivables
            
            
            
            
            
            2,251
            
            
            569Increase
                in advances to suppliers
            
            
            
            
            
            (2,430
            )
            
            (70
            )(Increase)/decrease
                in inventories
            
            
            
            
            
            (3,994
            )
            
            20Increase
                in accounts payable
            
            
            
            
            
            610
            
            
            37Decrease
                in notes payable
            
            
            
            
            
            -
            
            
            (72
            )Increase
                in accrued expenses
            
            
            
            
            
            115
            
            
            73Decrease
                in advance from customers
            
            
            
            
            
            -
            
            
            (368
            )Increase
                in other payables
            
            
            
            
            
            1,094
            
            
            147(Decrease)/increase
                in income tax payable
            
            
            
            
            
            (611
            )
            
            187Increase/(decrease)
                in VAT payable
            
            
            
            
            
            66
            
            
            (856
            )Increase
                in restricted cash
            
            
            
            
            
            (615
            )
            
            -Net
                cash provided by operating activities
            
            
            
            
            
            1,577
            
            
            2,604CASH
                FLOWS FROM FINANCING ACTIVITIES:Issue
                of convertible notes
            
            
            
            
            
            12,500
            
            
            -Debt
                issue costs
            
            
            
            
            
            (1,583
            )
            
            -Shareholder
                contribution
            
            
            
            
            
            50
            
            
            -Distribution
                paid to owners of a subsidiary
            
            
            
            
            
            (947
            )
            
            (3,204
            )Net
                cash provided by/(used in) financing activities
            
            
            
            
            
            10,020
            
            
            (3,204
            )Effect
                of exchange rate changes on cash
            
            
            
            
            
            157
            
            
            -Net
                increase/(decrease) in cash and cash equivalents
            
            
            
            
            
            11,754
            
            
            (600
            )Cash
                and cash equivalents at beginning of year
            
            
            
            
            
            313
            
            
            913Cash
                and cash equivalents at end of year
            
            
            
            
            $
            12,067
            
            $
            313Supplementary
                cash flow information:
            
            
            20





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







F-9




**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 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. 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"). As a result of this transfer and the Distribution, PMI operates
      independently from the Company and as a successor to the Company's business
      and
      operations and the Company no longer had any meaningful business assets,
      operations or sources of revenue.





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
      (Note 13).





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 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,
      2005.

















F-10


**PUDA
      COAL, INC.**


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





**1.
      The Company (continued)**





BVI,
      in
      turn, owns all of the registered capital of 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 restructuring
      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 are Mr. Zhao Ming (80%) and Mr. Zhao Yao
      (20%). Zhao Ming and Zhao Yao are executive officers of Puda and are
      brothers.





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 “Restructuring Agreements”). Under the
      Restructuring Agreements, Putai has 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”. As the exercise of the Option
      is analogous to a preferred dividend, the amount of $2,717,000 was deducted
      from
      net income in calculating the pro forma earnings per share (Note 28). 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 owns none of the outstanding equity interests in Shanxi Coal, the
      Restructuring Agreements provide 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.
      Zhao Ming and Mr. Zhao Yao in the Group companies are as follows:





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





l
            Puda
                Investment Holding Limited: Mr. Zhao Ming (approximately 74%); Mr.
                Zhao
                Yao (approximately 18%) held indirectly through
                Puda.





l
            Taiyuan
                Putai Business Consulting Co., Ltd: Mr. Zhao Ming (approximately
                74%); Mr.
                Zhao Yao (approximately 18%) held indirectly through Puda and
                BVI.





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











F-11


**PUDA
      COAL, INC.**


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








**1.
      The Company (continued)**





After
      the
      above reorganization, Puda Coal, Inc. owns all of the outstanding capital stock
      of Puda Investment Holging Limited, which in turn, owns all of the outstanding
      capital stock of Taiyuan Business Consulting Co. Ltd. and as of December 31,
      2005, the organizational structure of the Group as at December 31, 2005 is
      as
      follows:





Puda
                Coal, Inc.
              “Puda”|
                100%Puda
                Investment
              Holding
                Limited
              “BVI”
            
            Zhao
                Ming (80%)
              and
              Zhao
                Yao (20%)|
                100%
            
            |Taiyuan
                Putai Business Consulting Co., Ltd.
              "Putai"
            **Operating
                Agreements**
              
              Operation
                and Controlà
              
              ßEconomic Benefits and Risks
            Shanxi
                Puda Coal Group Co., Ltd.
              “Shanxi
                Coal”







**2.
      Summary of Significant Accounting Policies**





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





These
      consolidated financial statements include Puda (Registrant and Legal Parent),
      BVI, Putai and Shanxi Coal (Operating Company). Puda controls BVI and Putai
      through stock ownership. Puda controls Shanxi Coal by means other than record
      ownership of voting stock (Note 1). Intercompany items have been eliminated.
      The
      consolidated financial statements give effect to the Mandatory Conversion and
      Reverse Split. For accounting purpose, the transactions are effective on January
      1, 2004.





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.





The
      consolidated balance sheet as of December 31, 2005 includes Puda, BVI, Putai
      and
      Shanxi Coal (‘the Group”). The consolidated statement of operations for the year
      ended December 31, 2005 include Shanxi Coal for the full year, BVI and Putai
      from June 24, 2005, and Puda from July 15, 2005. The consolidated statements
      of
      operations for the year ended December 31, 2004 include Shanxi Coal only.







F-12




**PUDA
      COAL, INC.**


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





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





**(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,
      2005,
      the Group did not have any cash equivalents.





**(d)
      Short-term Investments**





Short-term
      investments are classified as trading securities and are carried at readily
      determinable fair value, with the unrealized or realized gains and losses,
      if
      any, reported in other income in the consolidated statement of operations.
      The
      cost of securities sold is based on the specific-identification method.





**(e)
      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.





**(f)
      Inventories**





Inventories
      comprise 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-13





**PUDA
      COAL, INC.**


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








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





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





Property,
      plant and equipment is 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 they have 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.





**(h)
      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.





**(i)
      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.





**(j)
      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-14


**PUDA
      COAL, INC.**


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








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





**(k)
      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, 2005.





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





**(l)
      Revenue Recognition**





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





**(m)
      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, 2005 and
      2004.





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.














F-15





**PUDA
      COAL, INC.**


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








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





**(n)
      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 approximate fair value based on the current
      rates at which the Group could borrow funds with similar remaining
      maturities.





**(o)
      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.
      Shares issued in the exchange (see Note 1) are presented as outstanding for
      all
      years.





**(p)
      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.





**3.
      Restricted Cash**





Restricted
      cash comprised of $233,000 reserved
      for interest payment on convertible notes and $382,000 reserved for payment
      of
      post-market support and investor relations expenses.





**4.
      Allowance for Doubtful Receivables**





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





December
                31, 2005’000Balance,
                beginning of year
            
            $
            29Additions
            
            
            5Balance,
                end of year
            
            $
            34





The
      Group
      did not have any bad debts in the years ended December 31, 2005 and
      2004.





F-16


**PUDA
      COAL, INC.**


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








**5.
      Related Party Transactions**





As
      of
      December 31, 2005, the Group had the following amounts due from/to related
      parties:-





December
                31, 2005$’000Other
                receivable from an owner, Zhao Ming
            
            $
            17





Accounts
                payable to Shanxi Liulin Jucai Coal Industry
              Co.,
                Limited. (“Jucai Coal”), a related company with a
              common
                owner
            
            $
            154





Other
                payable to Shanxi Puda Resources Group Limited
              (“Resources
                Group”), a related company with common owners
            
            $
            673Other
                payable to an owner, Zhao Yao
            
            
            201$
            874





Loan
                payable to Resources Group:-current
                portion
            
            $
            1,300-non-current
                portion
            
            
            11,700$
            13,000





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





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





In
      2001,
      Shanxi Coal entered into agreements with Resources Group to lease an office
      and
      certain equipment. In the years ended December 31, 2005 and 2004, rental
      expenses payable to Resources Group were $24,000 and $24,000, respectively,
      which were charged to cost of revenue and general and administrative expenses
      in
      the consolidated statements of operations (see Note 12).





By
      an
      agreement entered into between Shanxi Coal and Resources Group on April 25,
      2005, Resources Group agreed to act as Shanxi Coal’s agent and to pay all the
      tax liabilities (including surcharges and penalties) on behalf of Shanxi Coal
      with retrospective effect from its establishment to December 31, 2004. The
      China
      Tax Bureau approved the arrangement by issuing an approval notice to Shanxi
      Coal. In the years ended December 31, 2005 and 2004, Shanxi Coal has paid
      $251,000 and $2,968,000, respectively, to Resources Group for payment of income
      taxes and value-added tax (“VAT”). In December 2004, Resources Group paid Shanxi
      Coal’s income taxes of $1,678,000 and VAT of $1,950,000 to the China Tax Bureau.
      In April 2005, Resources Group paid Shanxi Coal’s VAT of $251,000 to the China
      Tax Bureau. In September 2005, Resources Group paid Shanxi Coal’s income taxes
      of $2,054,000 for the China Tax Bureau (see Notes 9 and 20).








F-17


**PUDA
      COAL, INC.**


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








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





In
      the
      years ended December 31, 2005 and 2004, Resources Group paid professional and
      regulatory charges related to the public listing on behalf of the Company in
      the
      amounts of $901,000 and $nil, respectively (see Note 15). The balance payable
      to
      Resources Group of $673,000 includes these charges of $901,000, netted against
      other receivables of $228,000 due from Resources Group.





In
      2001,
      Shanxi Coal entered into an agreement with Jucai Coal to lease a coal washing
      plant. In the years ended December 31, 2005 and 2004, rental expenses in the
      amounts of $611,000 and $604,000, respectively, were paid to Jucai Coal and
      these rental expenses were charged to cost of revenue in the consolidated
      statements of operations. The lease was terminated on December 31,
      2005.





In
      the
      years ended December 31, 2005 and 2004, Shanxi Coal purchased raw coal from
      Jucai Coal in the amounts of $4,367,000 and $1,556,000,
      respectively.





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 Zhong
      Yang County, Shanxi Province. The Liulin County plant is expected to have an
      annual clean coal washing capacity of 1.1 million metric tons while the Zhong
      Yang County plant is expected to have an annual clean coal washing capacity
      of
      1.2 million metric tons. The Liulin County plant started formal production
      at
      the end of November 2005. The Liulin County plant, land-use rights and related
      equipment were purchased for a cost of $5,800,000. The Zhong Yang County plant
      started trial production at the end of November 2005, with formal production
      expected to start by the end of March 2006. The Zhong Yang 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, be amortized over ten years from
      December 31, 2005 and bear interest at a rate of 6% per annum payable quarterly
      (see Notes 7, 8 and 10). The conveyance loan is subordinated to the convertible
      notes (see Note 10).





**6.
      Inventories**





As
      of
      December 31, 2005, inventories consist of the following:





December
                31, 2005$’000Raw
                materials
            
            $
            6,516Finished
                goods
            
            
            1,043Total
            
            $
            7,559





There
      was
      no allowance for losses on inventories as of December 31, 2005.








F-18


**PUDA
      COAL, INC.**


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








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





As
      of
      December 31, 2005 property, plant and equipment consist of
      following:





December
                31, 2005$’000**Cost:**Buildings
                and facilities
            
            $
            2,961Machinery
                equipment
            
            
            8,131Motor
                vehicles
            
            
            254Office
                equipment and others
            
            
            7611,422**Accumulated
                depreciation:**Buildings
                and facilities
            
            
            107Machinery
                equipment
            
            
            345Motor
                vehicles
            
            
            118Office
                equipment and others
            
            
            29599**Carrying
                value:**Buildings
                and facilities
            
            
            2,854Machinery
                equipment
            
            
            7,786Motor
                vehicles
            
            
            136Office
                equipment and others
            
            
            47$
            10,823





On
      November 17, 2005, Shanxi Coal purchased two new coal washing plants and related
      coal washing equipment in Liulin County and Zhong Yang County, Shanxi Province
      for a total purchase price of $13,000,000, of which land-use rights amounted
      to
      $2,900,000 (see Note 8), buildings and facilities amounted to $2,000,000 and
      machinery equipment amounted to $8,100,000. The total purchase price of
      $13,000,000 is seller-financed, with an interest rate of 6% per annum, and
      is
      payable in ten years from December 31, 2005. 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 (see Note
      5).
      The costs of these buildings and facilities and machinery equipment in the
      financial statements are $2,534,000 and $7,498,000, respectively, being the
      book
      value of these buildings and facilities and machinery equipment of Resources
      Group on transfer. The total difference between the purchase price and the
      book
      value of Resources Group for these buildings and facilities and machinery
      equipment of $68,000 was debited to paid-in capital.





Depreciation
      expense for the years ended December 31, 2005 and 2004 was approximately
      $183,000 and $111,000, respectively. In the year ended December 31, 2005, the
      amount included in cost of sales and general and administrative expenses was
      approximately $158,000 (2004: $86,000) and $25,000 (2004: $25,000),
      respectively.











F-19


**PUDA
      COAL, INC.**


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








**8.
      Intangible Assets**





Land-use
                rightsDecember
                31, 2005$’000Cost
            
            $
            3,831Accumulated
                amortization
            
            
            24Carrying
                value
            
            $
            3,807





Land-use
      rights of $197,000 paid by Zhao Yao on behalf of Shanxi Coal is located in
      Liulin County, Shanxi Province and are amortized over fifty years up to March
      2051 (see Note 5).





On
      November 17, 2005, Shanxi Coal purchased two new coal washing plants and related
      coal washing equipment in Liulin County and Zhong Yang County, Shanxi Province
      for a total purchase price of $13,000,000, of which land-use rights amounted
      to
      $2,900,000, buildings and facilities amounted to $2,000,000 (see Note 7) and
      machinery equipment amounted to $8,100,000 (see Note 7). The purchase price
      of
      the land-use rights of Liulin County and Zhong Yang County are $900,000 and
      $2,000,000, respectively. The costs of the land-use rights of Liulin County
      and
      Zhong Yang County in the financial statements are $1,392,000 and $2,242,000,
      respectively, being the book value of these land-use rights of Resources Group
      on transfer. The total difference between the purchase price and the book value
      of Resources Group of $734,000 was credited to paid-in capital. The land-use
      rights of Liulin County are amortized over fifty years up to August 4, 2055
      and
      land-use rights of Zhong Yang County are amortized over fifty years up to May
      20, 2055.





Amortization
      expense for the years ended December 31, 2005 and 2004 was approximately $9,000
      and $4,000, respectively. The estimated aggregate amortization expense for
      the
      five years ending December 31, 2006, 2007, 2008, 2009 and 2010 amounts to
      approximately $62,000, $62,000, $62,000, $62,000 and $62,000,
      respectively.





**9.
      Income and Other Taxes Payable**





By
      an
      agreement entered into between Shanxi Coal and Resources Group on April 25,
      2005, Resources Group agreed to act as Shanxi Coal’s agent and to pay all the
      tax liabilities (including surcharges and penalties) on behalf of Shanxi Coal
      with retrospective effect from its establishment to December 31, 2004. Shanxi
      Coal has advanced funds to Resources Group for payment of income tax and VAT
      (see Note 5).








F-20


**PUDA
      COAL, INC.**


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








**10.
      Long-term Debt**





December
                31, 2005$’000Conveyance
                loan
            
            $
            13,000Less:
                current portion
            
            
            (1,300
            )Long-term
                portion
            
            $
            11,700





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 Zhong
      Yang County, Shanxi Province for a total purchase price of $13,000,000. The
      purchase price of $13,000,000 is seller-financed, payable over ten years from
      December 31, 2005 and bears interest at a rate of 6% per annum, payable
      quarterly. Amount payable of $1,300,000 in 2006 was included in current portion
      of long-term debt. 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
      Note
      5).





The
      future principal payments under the conveyance loan as of December 31, 2005
      are
      as follows:





December
                31, 2005Year
            
            $’0002006
            
            $
            1,3002007
            
            
            1,3002008
            
            
            1,3002009
            
            
            1,3002010
            
            
            1,300Thereafter
            
            
            6,500$
            13,000







**11.
      Convertible Notes and Related Warrants**





On
      November 18, 2005, the Company issued $12,500,000 aggregate principal amount
      of
      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 and $850,000 was
      converted into 1,700,000 shares of common stock immediately. The related
      warrants to purchase 25,000,000 aggregate principal amount of shares of common
      stock, exercisable at $.60 per share, have a term of five years from the date
      of
      issuance.





F-21


**PUDA
      COAL, INC.**


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





**11.
      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-22





**PUDA
      COAL, INC.**


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








**11.
      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 portion of the discount of $417,000 related to the
      converted shares was recorded in interest expense. The amount amortized in
      the
      year ended December 31, 2005 was $229,000. The unamortized amount of $5,491,000
      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 year ended December 31, 2005 was
      $2,121,000. The unamortized amount of $4,242,000 was offset against convertible
      notes. There was no material change in the allocated fair values of conversion
      feature and warrants as of December 31, 2005.





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. 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 year ended December 31, 2005
      was
      $1,875,000. The unamortized amount of $3,750,000 was recorded in deferred
      charges. As of December 31, 2005, these warrants were valued at $1.97 per share
      according to a Black-Scholes pricing model and the unrealized gain on the change
      in fair value of these warrants of $700,000 was included in the consolidated
      statements of operations.





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 amount
      amortized in the year ended December 31, 2005 was $739,000. The unamortized
      amount of $844,000 as of December 31, 2005 was recorded in deferred charges.











F-23





**PUDA
      COAL, INC.**


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








**11.
      Convertible Notes and Related Warrants (continued)**








As
      of
      December 31, 2005, long-term liabilities include the following:





December
                31, 2005$000Convertible
                notes:Gross
                amount issued
            
            $
            12,500Less:
                amount converted on November 18, 2005
            
            
            (850
            )Less:
                unamortized discount on conversion feature
            
            
            (5,491
            )Less:
                unamortized discount on note warrants
            
            
            (4,242
            )$
            1,917Derivative
                conversion feature:Amount
                allocated to conversion feature
            
            $
            6,137Less:
                amount transferred to equity upon conversion
            
            
            (417
            )$
            5,720Derivative
                warrants:Amount
                allocated to investor warrants
            
            $
            6,363Placement
                agent warrants
            
            
            5,625Less:
                change in fair value
            
            
            (700
            )$
            11,288





Interest
      expense on the convertible notes in the year ended December 31, 2005 amounted
      to
      $114,000.





**12.
      Commitments and Contingencies**





As
      of
      December 2005 and 2004, the Group leased equipment, plant and office premises
      under several operating lease agreements expiring in 2006, 2007 and 2008,
      respectively (see Note 5).





The
      future minimum lease payments under the above-mentioned leases as of December
      31, 2005 are as follows:-





December
                31, 2005Year
            
            $’0002006
            
            $
            62007
            
            
            62008
            
            
            6$
            18





The
      above
      future lease payments represent amounts payable to Resources Group.





As
      of
      December 2005 and 2004, the Group
      did
      not have any contingent liabilities.




F-24





**PUDA
      COAL, INC.**


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








**13.
      Common Stock**





The
      number of shares of common stock presented as outstanding as of January 1,
      2004
      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 ofthe
                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, 2004
            73,750,000





**14.
      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.





**15.
      Other Operating Expenses**





Other
      operating expenses for the year ended December 31, 2005 mainly include $901,000
      for professional and regulatory charges related to the public listing (2004:
      $414,000).





**16.
      Debt Financing Costs**





Debt
      financing costs for the year ended December 31, 2005 include amortization of
      debt issue costs of $739,000 (2004: $nil) and amortization of discount on
      convertible notes and warrants of $4,225,000 (2004: $nil) (See Note
      11).





**17.
      Derivative Unrealized Fair Value Gain**





Derivative
      unrealized fair value gain of $700,000 (2004: $nil) represented the change
      in
      fair value of the derivative warrants (see Note 11).




F-25


**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 year ended
      December 31, 2005, as they did not generate any taxable profits during the
      year.





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 31,2005
            
            2004$’000
            
            $’000Current
                year provision
            
            $
            3,439
            
            $
            1,866





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 31,2005
            
            2004$’000
            
            $’000Income
                before income taxes
            
            $
            4,404
            
            $
            5,559Income
                tax on pretax income at statutory rate
            
            
            1,497
            
            
            1,890Tax
                effect of expenses that are not deductible indetermining
                taxable profits
            
            
            2,195
            
            
            32Tax
                effect of income that is not taxable indetermining
                taxable profits
            
            
            (238
            )
            
            -Effect
                of different tax rates of subsidiary operating inother
                jurisdictions
            
            
            (94
            )
            
            (56
            )Valuation
                allowance
            
            
            79
            
            
            -Income
                tax at effective rate
            
            $
            3,439
            
            $
            1,866





As
      at
      December 31, 2005 and 2004, the Group had accumulated net operating loss
      carryforwards for United States federal tax purposes of approximately of
      $1,337,000 and $nil, 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, 2005. The
      net
      operating loss carryforwards expires in years 2021, 2022, 2023, 2024 and 2025
      in
      the amounts of $132,000, $394,000, $153,000, $371,000 and $287,000,
      respectively.





At
      December 31, 2005, deferred tax assets consist of:





December
                31, 2005$’000Net
                operating loss carryforwards
            
            $
            455Less:
                Valuation allowance
            
            
            (455
            )Net
            
            $
            -






F-26




**PUDA
      COAL, INC.**


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








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





Year
                ended December 31,2005
            
            2004Basic
                weighted average number of shares
            
            
            73,950,274
            
            
            73,750,000Options
                outstanding, after adjusting for 10 to 1 reverse split
            
            
            56,218
            
            
            12,817Assumed
                conversion of notes
            
            
            1,742,904
            
            
            -Assumed
                exercise of warrants
            
            
            1,826,640
            
            
            -Diluted
                weighted average number of shares
            
            
            77,576,036
            
            
            73,762,817








**20.
      Supplementary cash flow information**





Years
                ended December 31,2005
            
            2004$’000
            
            $’000Cash
                paid during the period for:Interest
            
            $
            114
            
            $
            4Income
                taxes (see Note 5)
            
            $
            2,039
            
            $
            -Major
                non-cash transactions:Notes
                converted into common shares
            
            $
            850
            
            $
            -Dividend
                declared
            
            $
            1,452
            
            $
            2,393Purchase
                of land-use rights, property, plantand
                equipment from Resources Group(see
                Note 5)
            
            $
            13,000
            
            $
            -








**21.
      Options**





As
      at
      December 31, 2005, 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
            
            17500,000
            
            50,000
                (ii)
            
            $
                10
            
            October
                27, 2006
            
            01,000,000
            
            100,000
                (iii)
            
            $
                10
            
            November
                5, 2006
            
            0





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


(ii)
            were
                granted in 2003 to Sanzari Family Trust and TJP Management, Inc.
                in
                consideration of providing working capital to the
                Company.


(iii)
            were
                granted in 2003 to Gregory A. Nagel in consideration of providing
                working
                capital to the Company.







F-27




**PUDA
      COAL, INC.**


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








**21.
      Options (continued)**





The
      following summarizes the share option transactions during the
      years:







Number
                of
            
            Weighted
                averageoptions
            
            exercise
                price$Options
                outstanding at December 31, 2003(after
                adjusting for the 10 to 1 reverse stock split)
            
            
            165,000
            
            
            9.2Granted
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -Expired
            
            
            -
            
            
            -Options
                outstanding at December 31, 2004
            
            
            165,000
            
            
            9.2Granted
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -Expired
            
            
            -
            
            
            -Options
                outstanding at December 31, 2005
            
            
            165,000
            
            
            9.2








**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, 2005, the Group has a credit risk exposure of uninsured cash in
      banks of approximately $12,682,000. 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:





December
                31,Customers
            
            2005
            
            2004$’000
            
            %
            
            $’000
            
            %Customer
                A
            
            $
            6,588
            
            
            13
            
            $
            2,664
            
            
            13Customer
                B
            
            $
            7,810
            
            
            15
            
            $
            -
            
            
            -Customer
                C
            
            $
            -
            
            
            -
            
            $
            2,056
            
            
            10Customer
                D
            
            $
            -
            
            
            -
            
            $
            2,923
            
            
            15















F-28





**PUDA
      COAL, INC.**


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








**22.
      Concentrations and Credit Risk (continued)**





The
      following customers had balances greater than 10% of the total accounts
      receivable as of December 31, 2005 and 2004, respectively:





December
                31,Customers
            
            2005
            
            2004$’000
            
            %
            
            $’000
            
            %Customer
                E
            
            $
            480
            
            
            11
            
            $
            327
            
            
            12Customer
                F
            
            $
            470
            
            
            11
            
            $
            -
            
            
            -Customer
                G
            
            $
            465
            
            
            11
            
            $
            323
            
            
            12Customer
                A
            
            $
            -
            
            
            -
            
            $
            451
            
            
            16Customer
                C
            
            $
            -
            
            
            -
            
            $
            300
            
            
            11








**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 $115,000 and $73,000 for the years ended December 31, 2005 and
      2004, respectively and were recorded as accrued expenses. As of December 31,
      2005 and 2004, the total amount included in accrued expenses for the provision
      is $363,000 and $248,000, 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,
      2005 and 2004. 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.














F-29


**PUDA
      COAL, INC.**


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








**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 14, 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.





**25.
      Subsequent Events**





As
      at the
      date of the auditor’s report on this Subsequent Events note to the financial
      statements (March 20, 2006), the registration statement regarding the
      convertible notes and related warrants as described in Note 11 has not been
      declared effective by the SEC. The relevant date of March 17, 2006 for having
      the SEC declare the registration date has passed. Therefore, Puda is required
      to
      pay the penalty to investors for the delay in getting them registration rights.
      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 approximately $4,200 per day after the relevant date.





**26.
      New Accounting Pronouncements**





In
      December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment, an Amendment
      of SFAS No. 123." SFAS No. 123R requires companies to recognize in the statement
      of operations the grant-date fair value of stock options and other equity-based
      compensation issued to employees. SFAS No. 123R is effective for the Group
      for
      the year ending December 31, 2006. The adoption of SFAS No. 123R is expected
      to
      have no material impact on the Group’s consolidated financial
      statements.





In
      December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary Assets."
      The Statement is an amendment of APB Opinion No. 29. SFAS No. 153 eliminates
      the
      exception for non-monetary exchanges of similar productive assets and replaces
      it with a general exception for exchanges of non-monetary assets that do not
      have commercial substance. SFAS No. 153 is effective for the year ending
      December 31, 2006. The adoption of SFAS No. 153 is expected to have no material
      impact on the Group’s consolidated financial statements.











F-30





**PUDA
      COAL, INC.**


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





**27.
      Condensed Financial Information of Registrant**





The
      condensed financial information of Registrant includes the balance sheet as
      at
      December 31, 2005 and the statement of operations and cash flows for the period
      from July 1, 2005 to December 31, 2005. The parent only financial information
      before July 15, 2005 was deemed not meaningful as the Registrant was an
      unrelated shell at that time. Furthermore, such financial information was
      already filed in the previous 10K-SB and 10Q-SB of Purezza Group
      Inc.





Balance
      Sheet-Parent Company Only (In thousand of United States dollars)





December
                31, 2005(Restated
                - see
              Note
                28)**ASSETS**CURRENT
                ASSETSRestricted
                cash
            
            $
            615Deferred
                charges
            
            
            4,594Total
                current assets
            
            
            5,209INVESTMENT
                IN SUBSIDIARIES
            
            
            12,465TOTAL
                ASSETS
            
            $
            17,674**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**LONG-TERM
                LIABILITIESConvertible
                notes
            
            
            1,917Derivative
                conversion feature
            
            
            5,720Derivative
                warrants
            
            
            11,288Total
                long-term liabilities
            
            
            18,925TEMPORARY
                EQUITYOption
                to buy-out Shanxi Coal
            
            
            2,717STOCKHOLDERS’
                EQUITYPreferred
                stock, authorized 5,000,000 shares, par
              value
                $0.01, issued and outstanding Nil
            
            
            -Common
                stock, authorized 150,000,000 shares, par
              value
                $0.001, issued and outstanding 75,450,000 shares
            
            
            75Paid-in
                capital
            
            
            4,6924,767Less:
                reclassified to temporary equity
            
            
            (2,717
            )Accumulated
                deficit
            
            
            (6,018
            )Total
                stockholders’ equity
            
            
            (3,968
            )TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            17,674






F-31





**PUDA
      COAL, INC.**


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








**27.
      Condensed Financial Information of Registrant (continued)**





Statement
      of Operations-Parent Company Only


(In
      thousand of United States dollars)





For
                the period from
              July
                15, 2005 to
              December
                31, 2005(Restated
                - see
              Note
                28)Revenue
            
            $
            -General
                and administrative expenses
            
            
            (118
            )Loss
                from operations
            
            
            (118
            )Interest
                expenses
            
            
            (531
            )Debt
                financing costs
            
            
            (4,964
            )Derivative
                unrealized fair value gain
            
            
            700Net
                loss
            
            
            (4,913
            )PRO
                FORMA ADJUSTMENTDeemed
                preferred dividend
            
            
            (2,717
            )PRO
                FORMA NET LOSS
            
            $
            (7,630
            )























F-32


**PUDA
      COAL, INC.**


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








**27.
      Condensed Financial Information of Registrant (continued)**





Statement
      of Cash Flows-Parent Company Only


(In
      thousand of United States dollars)





For
                the period from
              July
                15, 2005
              to
                December 31, 2005(Restated
                - see
              Note
                28)CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                loss
            
            $
            (4,913
            )Adjustments
                to reconcile net income to net cash used in
              Operating
                activitiesAmortization
                of debt issue costs
            
            
            739Amortization
                of discount on convertible notes and warrants
            
            
            4,225Derivative
                unrealized fair value gain
            
            
            (700
            )Discount
                on converted shares expensed as interest expense
            
            
            417Changes
                in operating assets and liabilities:Advances
                to subsidiaries
            
            
            (10,070
            )Increase
                in restricted cash
            
            
            (615
            )Net
                cash used in operating activities
            
            
            (10,917
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Issue
                of convertible notes
            
            
            12,500Debt
                issue costs
            
            
            (1,583
            )Net
                cash provided by financing activities
            
            
            10,917Net
                increase in cash and cash equivalents
            
            
            -Cash
                and cash equivalents at beginning of period
            
            
            -Cash
                and cash equivalents at end of period
            
            $
            -


























F-33





**PUDA
      COAL, INC.**


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








**28.
      Restatements**





After
      reviewing certain accounting principles the Company had applied in its
      previously issued financial statements, management determined that the Company's
      accounting for derivative feature relating to the Company’s convertible note
      should have been classified as a liability and revalued at the end of each
      period in its consolidated balance sheet in accordance with SFAS No. 133 and
      EITF 00-19. Consequently, management restated its annual consolidated financial
      statements as of December 31, 2005 and for the year then ended. The first and
      second restatements, as detailed below, were made in accordance with the
      provisions of SFAS 154 for correction of errors. No prior period financial
      statements have been restated because 2005 is the first year impacted by the
      restatements. There was no tax effect as a result of the restatements. These
      restatements affected some of the items within the Company’s consolidated
      statement of cash flows for the year ended December 31, 2005 but did not impact
      cash at the end of the year.





The
      first
      restatement, which was made on May 9, 2006, involved the adjustment in the
      presentation of the Company's derivative feature associated with its convertible
      note and the adjustment in the amortization periods of the discounts and debt
      issue costs. The restatement has the effect of increasing current assets by
      $819,000, decreasing current liabilities by $10,450,000, increasing long-term
      liabilities by $9,346,000 and increasing the stockholders' equity by $1,923,000
      as of December 31, 2005, and increasing the Company’s net income by $8,364,000
      for the year ended December 31, 2005.





The
      second restatement, which was made on September 13, 2006, involved the usage
      of
      the contractual terms of the conversion feature and warrants of 3 years and
      5
      years, respectively, instead of an expected term of one year as originally
      used
      under the Black-Scholes Model in calculating the fair values of the conversion
      feature and warrants, and the adjustment in the amortization method from
      straight line to effective interest method for debt issue costs and discount
      on
      convertible feature and warrants. The restatement has the effect of decreasing
      current assets by $1,565,000, increasing long-term liabilities by $2,616,000
      and
      decreasing the stockholders' equity by $4,181,000 as of December 31, 2005,
      and
      decreasing the Company’s net income by $4,164,000 for the year ended December
      31, 2005.





The
      third
      restatement, which was made on January 8, 2007 involved the reclassification
      of
      the Option purchase price, which equals the registered capital of Shanxi Coal
      under the Exclusive Option Agreement dated June 24, 2005 (Note 1), from
      permanent equity to temporary equity in accordance with EITF Topic No. D-98,
      paragraph 4, as the exercise of the Option can be deemed outside of the control
      of the Company due to the cross-ownership of the Company and Shanxi Coal. As
      the
      exercise of the Option is a nalogous
      to a preferred dividend, the amount of $2,717,000 was deducted from net income
      in calculating the pro forma earnings per share. The restatement was made in
      accordance with the provisions of SFAS 154 for correction of errors.
      Consolidated balance sheets as of June 30, 2005 and September 30, 2005 have
      also
      been restated. There was no tax effect as a result of the restatement. The
      reclassification has the effect of increasing temporary equity by $2,717,000
      and
      decreasing stockholders' equity (permanent equity) by the same amount as of
      December 31, 2005. The restatement has no impact on the Company’s statements of
      operations (except that we add the disclosure for the pro forma earnings per
      share) and cash flows for the year ended December 31, 2005.




The
      adjustments to the consolidated financial statements are summarized as
      follows:








F-34


**PUDA
      COAL, INC.**


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








**28.
      Restatements (continued)**





CONSOLIDATED
      BALANCE SHEET


December
      31, 2005


(In
      thousand of United States dollars)





Initial
              Filing
            
            First
                Restatement
            
            Restated
                (after
              first
                restatement)
            
            Second
              Restatement
            
            Restated
                (after second restatement)
            
            Third
              Restatement
            
            Restated
                (after
              Third
              Restatement)**ASSETS**CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            12,067
            
            $
            -
            
            $
            12,067
            
            $
            -
            
            $
            12,067
            
            $
            -
            
            $
            12,067Restricted
                cash
            
            
            615
            
            
            -
            
            
            615
            
            
            -
            
            
            615
            
            
            -
            
            
            615Accounts
                receivable, net
            
            
            4,224
            
            
            -
            
            
            4,224
            
            
            -
            
            
            4,224
            
            
            -
            
            
            4,224Other
                receivables-
                Related parties
            
            
            17
            
            
            -
            
            
            17
            
            
            -
            
            
            17
            
            
            -
            
            
            17-
                Third parties
            
            
            36
            
            
            -
            
            
            36
            
            
            -
            
            
            36
            
            
            -
            
            
            36Advances
                to suppliers
            
            
            2,959
            
            
            -
            
            
            2,959
            
            
            -
            
            
            2,959
            
            
            -
            
            
            2,959Deferred
                charges
            
            
            5,340
            
            
            819
            
            
            6,159
            
            
            (1,565
            )
            
            4,594
            
            
            -
            
            
            4,594Inventories
            
            
            7,559
            
            
            -
            
            
            7,559
            
            
            
            
            
            7,559
            
            
            -
            
            
            7,559Total
                current assets
            
            
            32,817
            
            
            819
            
            
            33,636
            
            
            (1,565
            )
            
            32,071
            
            
            -
            
            
            32,071PROPERTY,
                PLANT ANDEQUIPMENT,
                NET
            
            
            10,823
            
            
            -
            
            
            10,823
            
            
            -
            
            
            10,823
            
            
            -
            
            
            10,823INTANGIBLE
                ASSETS, NET
            
            
            3,807
            
            
            -
            
            
            3,807
            
            
            -
            
            
            3,807
            
            
            -
            
            
            3,807TOTAL
                ASSETS
            
            $
            47,447
            
            $
            819
            
            $
            48,266
            
            $
            (1,565
            )
            $
            46,701
            
            $
            -
            
            $
            46,701CURRENT
                LIABILITIESCurrent
                portion of long-termdebt-
                Related party
            
            $
            1,300
            
            $
            -
            
            $
            1,300
            
            $
            -
            
            $
            1,300
            
            $
            -
            
            $
            1,300Accounts
                payable-
                Related party
            
            
            154
            
            
            -
            
            
            154
            
            
            -
            
            
            154
            
            
            -
            
            
            154-
                Third parties
            
            
            1,172
            
            
            -
            
            
            1,172
            
            
            -
            
            
            1,172
            
            
            -
            
            
            1,172Other
                payables-
                Related party
            
            
            874
            
            
            -
            
            
            874
            
            
            -
            
            
            874
            
            
            -
            
            
            874-
                Third parties
            
            
            708
            
            
            -
            
            
            708
            
            
            -
            
            
            708
            
            
            -
            
            
            708Accrued
                expenses
            
            
            363
            
            
            -
            
            
            363
            
            
            -
            
            
            363
            
            
            -
            
            
            363Income
                taxes payable
            
            
            1,397
            
            
            -
            
            
            1,397
            
            
            -
            
            
            1,397
            
            
            -
            
            
            1,397VAT
                payable
            
            
            317
            
            
            -
            
            
            317
            
            
            -
            
            
            317
            
            
            -
            
            
            317Distribution
                payable
            
            
            992
            
            
            -
            
            
            992
            
            
            -
            
            
            992
            
            
            -
            
            
            992Warrants
            
            
            10,450
            
            
            (10,450
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                current liabilities
            
            
            17,727
            
            
            (10,450
            )
            
            7,277
            
            
            -
            
            
            7,277
            
            
            -
            
            
            7,277











F-35





**PUDA
      COAL, INC.**


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





**28.
      Restatements (continued)**





CONSOLIDATED
      BALANCE SHEET (continued)


December
      31, 2005


(In
      thousand of United States dollars)





Initial
              Filing
            
            First
                Restatement
            
            Restated
              (after
              first
                restatement)
            
            Second
              Restatement
            
            Restated
                (after second restatement)
            
            Third
              Restatement
            
            Restated(after
              third
              restatement)LONG-TERM
                LIABILITIESLong-term
                debt-
                Related party
            
            
            11,700
            
            
            -
            
            
            11,700
            
            
            -
            
            
            11,700
            
            
            -
            
            
            11,700Convertible
                notes
            
            
            11,650
            
            
            (11,532
            )
            
            118
            
            
            1,799
            
            
            1,917
            
            
            -
            
            
            1,917Less:
                discount on convertiblenotes
            
            
            (4,687
            )
            
            4,687
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Derivative
                conversion feature
            
            
            -
            
            
            5,943
            
            
            5,943
            
            
            (223
            )
            
            5,720
            
            
            -
            
            
            5,720Derivative
                warrants
            
            
            -
            
            
            10,248
            
            
            10,248
            
            
            1,040
            
            
            11,288
            
            
            -
            
            
            11,288Total
                long-term liabilities
            
            
            18,663
            
            
            9,346
            
            
            28,009
            
            
            2,616
            
            
            30,625
            
            
            -
            
            
            30,625TEMPORARY
                EQUITYOption
                to buy-out Company
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,717
            
            
            2,717STOCKHOLDERS’
                EQUITYPreferred
                stock, authorized5,000,000
                shares,
              parvalue
                $0.01, issued andoutstanding
                Nil
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Common
                stock, authorized 150,000,000 shares,
              par
                value $0.001, issued and outstanding 75,450,000
            
            
            75
            
            
            -
            
            
            75
            
            
            -
            
            
            75
            
            
            -
            
            
            75Paid-in
                capital
            
            
            4,208
            
            
            434
            
            
            4,642
            
            
            (17
            )
            
            4,625
            
            
            -
            
            
            4,625Paid-in
                capital-conversionfeature
            
            
            6,875
            
            
            (6,875
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -11,158
            
            
            (6,441
            )
            
            4,717
            
            
            (17
            )
            
            4,700
            
            
            -
            
            
            4,700Less:
                reclassified totemporary
                equity
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,717
            )
            
            (2,717
            )Statutory
                surplus reserveFund
            
            
            1,366
            
            
            -
            
            
            1,366
            
            
            -
            
            
            1,366
            
            
            -
            
            
            1,366(Accumulated
                deficit)/retainedearnings
            
            
            (1,621
            )
            
            8,364
            
            
            6,743
            
            
            (4,164
            )
            
            2,579
            
            
            -
            
            
            2,579Accumulated
                othercomprehensive
                income
            
            
            154
            
            
            -
            
            
            154
            
            
            -
            
            
            154
            
            
            -
            
            
            154Total
                stockholders’ equity
            
            
            11,057
            
            
            1,923
            
            
            12,980
            
            
            (4,181
            )
            
            8,799
            
            
            (2,717
            )
            
            6,082TOTAL
                LIABILITIES ANDSTOCKHOLDERS’
                EQUITY
            
            $
            47,447
            
            $
            819
            
            $
            48,266
            
            $
            (1,565
            )
            $
            46,701
            
            $
            -
            
            $
            46,701








F-36


**PUDA
      COAL, INC.**


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





**28.
      Restatements (continued)**





CONSOLIDATED
      STATEMENTS OF OPERATIONS


For
      the
      year ended December 31, 2005


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





Initial
              Filing
            
            First
                Restatement
            
            Restated
                (after first
              restatement)
            
            Second
              Restatement
            
            Restated
                (after second restatement)NET
                REVENUE
            
            $
            51,710
            
            $
            -
            
            $
            51,710
            
            $
            -
            
            $
            51,710COST
                OF REVENUE
            
            
            (40,047
            )
            
            -
            
            
            (40,047
            )
            
            -
            
            
            (40,047
            )GROSS
                PROFIT
            
            
            11,663
            
            
            -
            
            
            11,663
            
            
            -
            
            
            11,663OPERATING
                EXPENSESSelling
                expenses
            
            
            791
            
            
            -
            
            
            791
            
            
            -
            
            
            791General
                and administrative expenses
            
            
            789
            
            
            -
            
            
            789
            
            
            -
            
            
            789Other
                operating expenses
            
            
            902
            
            
            -
            
            
            902
            
            
            -
            
            
            902TOTAL
                OPERATING EXPENSES
            
            
            2,482
            
            
            -
            
            
            2,482
            
            
            -
            
            
            2,482INCOME
                FROM OPERATIONS
            
            
            9,181
            
            
            -
            
            
            9,181
            
            
            -
            
            
            9,181GAIN
                ON SHORT-TERM INVESTMENTS
            
            
            6
            
            
            -
            
            
            6
            
            
            -
            
            
            6INTEREST
                INCOME
            
            
            12
            
            
            -
            
            
            12
            
            
            -
            
            
            12INTEREST
                EXPENSE
            
            
            (114
            )
            
            (434
            )
            
            (548
            )
            
            17
            
            
            (531
            )DEBT
                FINANCING COSTS
            
            
            (8,881
            )
            
            8,098
            
            
            (783
            )
            
            (4,181
            )
            
            (4,964
            )DERIVATIVE
                UNREALIZED FAIR VALUEGAIN
            
            
            -
            
            
            700
            
            
            700
            
            
            -
            
            
            700INCOME
                BEFORE INCOME TAXES
            
            
            204
            
            
            8,364
            
            
            8,568
            
            
            (4,164
            )
            
            4,404INCOME
                TAXES
            
            
            (3,439
            )
            
            -
            
            
            (3,439
            )
            
            -
            
            
            (3,439
            )NET
                (LOSS)/INCOME
            
            
            (3,235
            )
            
            8,364
            
            
            5,129
            
            
            (4,164
            )
            
            965OTHER
                COMPREHENSIVE INCOMEForeign
                currency translation adjustment
            
            
            154
            
            
            -
            
            
            154
            
            
            -
            
            
            154COMPREHENSIVE
                (LOSS)/INCOME
            
            $
            (3,081
            )
            $
            8,364
            
            $
            5,283
            
            $
            (4,164
            )
            $
            1,119(LOSS)/EARNINGS
              PER
              SHARE-BASIC
            
            $
            (0.04
            )
            $
            0.11
            
            $
            0.07
            
            $
            (0.05
            )
            $
            0.01-DILUTED
            
            $
            (0.04
            )
            $
            0.11
            
            $
            0.07
            
            $
            (0.06
            )
            $
            0.01WEIGHTED
                AVERAGE NUMBER OFSHARE
              OUTSTANDING-BASIC
            
            
            73,950,274
            
            
            -
            
            
            73,950,274
            
            
            -
            
            
            73,950,274-DILUTED
            
            
            73,950,274
            
            
            3,625,762
            
            
            77,576,036
            
            
            -
            
            
            77,576,036







F-37





**PUDA
      COAL, INC.**


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





**28.
      Restatements (continued)**





CONSOLIDATED
      STATEMENTS OF CASH FLOWS


For
      the
      year ended December 31, 2005


(In
      thousand of United States dollars)





Initial
              Filing
            
            First
                Restatement
            
            Restated
                (after
              first
                restatement)
            
            Second
              Restatement
            
            Restated
                (after second restatement)CASH
                FLOWS FROM OPERATINGACTIVITIES:Net
                (loss)/income
            
            $
            (3,235
            )
            $
            8,364
            
            $
            5,129
            
            $
            (4,164
            )
            $
            965Adjustments
                to reconcile net income to net cash provided by operating
                activitiesAmortization
                of land-use rights
            
            
            9
            
            
            -
            
            
            9
            
            
            -
            
            
            9Depreciation
            
            
            183
            
            
            -
            
            
            183
            
            
            -
            
            
            183Provision
                for doubtful debts
            
            
            5
            
            
            -
            
            
            5
            
            
            -
            
            
            5Amortization
                of debt issue costs
            
            
            264
            
            
            (176
            )
            
            88
            
            
            651
            
            
            739Amortization
                of discount on convertiblenotes
                and warrants
            
            
            8,617
            
            
            (7,922
            )
            
            695
            
            
            3,530
            
            
            4,225Derivative
                unrealized fair value gain
            
            
            -
            
            
            (700
            )
            
            (700
            )
            
            -
            
            
            (700
            )Discount
                on converted shares expensedas
                interest expense
            
            
            -
            
            
            434
            
            
            434
            
            
            (17
            )
            
            417Changes
                in operating assets and liabilities:Decrease
                in short-term investments
            
            
            117
            
            
            -
            
            
            117
            
            
            -
            
            
            117Increase
                in accounts receivable
            
            
            (1,507
            )
            
            -
            
            
            (1,507
            )
            
            -
            
            
            (1,507
            )Decrease
                in notes receivable
            
            
            638
            
            
            -
            
            
            638
            
            
            -
            
            
            638Decrease
                in other receivables
            
            
            2,251
            
            
            -
            
            
            2,251
            
            
            -
            
            
            2,251Increase
                in advances to suppliers
            
            
            (2,430
            )
            
            -
            
            
            (2,430
            )
            
            -
            
            
            (2,430
            )Increase
                in inventories
            
            
            (3,994
            )
            
            -
            
            
            (3,994
            )
            
            -
            
            
            (3,994
            )Increase
                in accounts payable
            
            
            610
            
            
            -
            
            
            610
            
            
            -
            
            
            610Increase
                in accrued expenses
            
            
            115
            
            
            -
            
            
            115
            
            
            -
            
            
            115Increase
                in other payables
            
            
            1,094
            
            
            -
            
            
            1,094
            
            
            -
            
            
            1,094Decrease
                in income tax payable
            
            
            (611
            )
            
            -
            
            
            (611
            )
            
            -
            
            
            (611
            )Increase
                in VAT payable
            
            
            66
            
            
            -
            
            
            66
            
            
            -
            
            
            66Increase
                in restricted cash
            
            
            (615
            )
            
            -
            
            
            (615
            )
            
            -
            
            
            (615
            )Net
                cash provided by operating activities
            
            
            1,577
            
            
            -
            
            
            1,577
            
            
            -
            
            
            1,577CASH
                FLOWS FROM FINANCINGACTIVITIES:Issue
                of convertible notes
            
            
            12,500
            
            
            -
            
            
            12,500
            
            
            -
            
            
            12,500Debt
                issue costs
            
            
            (1,583
            )
            
            -
            
            
            (1,583
            )
            
            -
            
            
            (1,583
            )Shareholder
                contribution
            
            
            50
            
            
            -
            
            
            50
            
            
            -
            
            
            50Distribution
                paid to owners of a subsidiary
            
            
            (947
            )
            
            -
            
            
            (947
            )
            
            -
            
            
            (947
            )Net
                cash provided by financing activities
            
            
            10,020
            
            
            -
            
            
            10,020
            
            
            -
            
            
            10,020Effect
                of exchange rate changes on cash
            
            
            157
            
            
            -
            
            
            157
            
            
            -
            
            
            157




F-38




**PUDA
      COAL, INC.**


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





**28.
      Restatements (continued)**





CONSOLIDATED
      STATEMENTS OF CASH FLOWS (continued)


For
      the
      year ended December 31, 2005


(In
      thousand of United States dollars)





Initial
              Filing
            
            First
                Restatement
            
            Restated
              (after
                first restatement)
            
            Second
              Restatement
            
            Restated
                (after second restatement)Net
                increase in cash and cash equivalents
            
            
            11,754
            
            
            -
            
            
            11,754
            
            
            -
            
            
            11,754Cash
                and cash equivalents at beginning of year
            
            
            313
            
            
            -
            
            
            313
            
            
            -
            
            
            313Cash
                and cash equivalents at end of year
            
            $
            12,067
            
            $
            -
            
            $
            12,067
            
            $
            -
            
            $
            12,067









































F-39


**Item
      8. Changes In and Disagreements with Accountants on Accounting** **and
      Financial Disclosure**





On
      July
      19, 2005, we dismissed Durland & Company, CPA’s, P.A. (“Durland”) as our
      independent certified public accountants. The decision was approved by the
      Board
      of Directors.





The
      report of Durland on the Company’s financial statements for its fiscal years
      ended December 31, 2004 and 2003 did not contain an adverse opinion or
      disclaimer of opinion nor was qualified or modified as to any uncertainty,
      audit
      scope or accounting principles. During the our fiscal year ended December 31,
      2004 and 2003 and the subsequent interim periods preceding the termination,
      there were no disagreements with Durland on any matter of accounting principles
      or practices, financial statement disclosure, or auditing scope or procedure,
      which disagreements, if not resolved to the satisfaction of Durland would have
      caused Durland to make reference to the subject matter of the disagreements
      in
      connection with its report on the financial statements for such years or
      subsequent interim periods.





Effective
      July 19, 2005, Moore Stephens was engaged as the Company’s new independent
      registered accounting firm.





We
      did
      not consult with Moore Stephens regarding the application of accounting
      principles to any specific completed or contemplated transaction, or the type
      of
      audit opinion that might be provided on our financial statements, nor was there
      any written or oral advice provided to us that was an important factor
      considered by us in reaching a decision on any accounting , auditing or
      financial reporting issue.





We
      provided Durland with a copy of our Form 8-K/A announcing our change in
      certifying accountant prior to filing it with the SEC on August 11, 2005 and
      requested a response thereto from Durland. A copy of the letter from Durland
      stating its agreement with the statements in Item 4.01 was filed as Exhibit
      16.1
      to that Form 8-K/A.




**Item
      8A. Controls and Procedures.**





**Evaluation
      of Disclosure Controls and Procedures** .





Our
      management, with the participation of our principal executive officer and
      principal financial officer, has evaluated the effectiveness of our disclosure
      controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
      Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the
      end
      of the period covered by this annual report on Form 10-KSB/A. Based on such
      evaluation, our principal executive officer and principal financial officer
      have
      concluded that as of that date, our disclosure controls and procedures were
      designed to ensure that the information required to be disclosed in reports
      that
      we file or submit under the Exchange Act is recorded, processed, summarized
      and
      reported within the time periods specified in applicable SEC rules and forms
      and
      were effective.





The
      certifying officers of the Original Filing, the Amendment No. 1, the Amendment
      No.2 and this Form 10-KSB/A, Zhao Ming, our Chief Executive Officer, and Jin
      Xia, our Chief Financial Officer, have considered the effect on the
      effectiveness of the Company’s disclosure controls and procedures in light of
      the revisions to the financial statements contained in the Original Filing,
      the
      Amendment No. 1, the Amendment No.2 and the Amendment No.3 on this form 10-KSB/A
      and have determined that the Company’s disclosure controls and procedures are
      effective for the fiscal year ended December 31, 2005. The revisions to the
      financial statements relate to complicated accounting matters while the Company
      had the correct information regarding the conversion, feature warrants, debt
      issuance and Option to buy-out Shanxi Coal and therefore believes it has
      adequate disclosure controls and procedures, it came to the wrong conclusion
      regarding applicable accounting treatments. The Company is currently seeking
      a
      Chief Financial Officer with more expertise in the generally accepted accounting
      principles of the U.S. and experience in financial reporting requirements and
      guidelines of the SEC.








32




**Changes
      in Internal Control over Financial Reporting.**





There
      have been no changes in our internal controls 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 period
      covered by this report that has materially affected, or is reasonably likely
      to
      materially affect, our internal control over financial reporting.





**PART
      III**




**Item
      9. Directors, Executive Officers, Promoters and Control Persons;**




**Compliance
      with Section 16(a) of the Exchange Act**







**Directors
      and Executive Officers**





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





**Name**
            **Age**
            **Position**Zhao
                Ming
            34
            Chief
                Executive Officer, President and Chairman of the BoardZhao
                Yao
            46
            Chief
                Operating OfficerJin
                Xia
            40
            Chief
                Financial OfficerWang
                Lisheng
            41
            Director





**Zhao
      Ming** has been
      the CEO and Chairman of Shanxi Coal since 1995. He was appointed Chief Executive
      Officer, President and Chairman of the Board of Puda Coal on July 15, 2005.
      He
      was one of the co-founders of Shanxi Coal. Zhao Ming and Zhao Yao are
      brothers.





**Zhao
      Yao** was one
      the co-founders of Shanxi Coal. He was named Chief Operating Officer of Shanxi
      Coal in 1999, and he was appointed Vice President in June 1995. He also serves
      as an executive officer and is a 75% owner of Shanxi Liulin Jucai Coal Industry
      Co., Limited, a coal mine which supplies raw coal to Shanxi Coal. He is a
      contributor to the Chinese Hope Project for child education. Zhao Ming and
      Zhao
      Yao are brothers.





**Jin
      Xia** joined
      Shanxi Coal in 2003 as Chief Financial Officer. From 2000 to 2003 she was an
      accounting consultant to several companies. She was the Financial Accountant
      at
      a local government agency in Xinhualing of Taiyuan City, Shanxi Province from
      1991 to 1999. She served as an accountant at Xinhua Machinery Factory from
      1987
      to 1991.





**Wang
      Lisheng** became
      an
      independent director of Shanxi Group Co., Ltd. in October 2004. He has been
      a
      bank manager with Industrial and Commercial Bank of China Taiyuan Branch since
      1986. Industrial and Commercial Bank of China is the largest commercial bank
      in
      China.





Zhao
      Ming
      and Zhao Yao are brothers.





Under
      a
      certain Voting Agreement, effective as of the closing of the Exchange Agreement,
      Keating Reverse Merger Fund and each BVI Member have agreed to vote their shares
      of Puda Coal’s Common Stock to: (i) elect a person designated by Keating Reverse
      Merger Fund to the board for a period of one year following the closing of
      the
      Exchange Agreement; and (ii) elect such other persons that may be designated
      by
      Zhao Ming from time to time to fill any vacant position on the board of
      directors (other than the Keating Reverse Merger Designate). The Keating Reverse
      Merger Fund has advised us that it intends to appoint the Keating Reverse Merger
      Designate to the Board in early 2006.





33





All
      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.





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




**Audit
      Committee**





Because
      we are not listed on an issuer listed on a national securities exchange or
      listed in an automated inter-dealer quotation system of a national securities
      association, we are not required to have an audit committee. Although we hope
      to
      have an audit committee established at some time in the future, we have not
      done
      so yet. Since we have not established such a committee, we have not identified
      any member of such a committee as a financial expert.





**Code
      of Ethics**





**The
      Company had not yet adopted a Code of Ethics, but is in the process of doing
      so.**




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





Because
      none of our stock is registered pursuant to Section 12 of the Exchange Act
      of
      1934, as amended, our officers, directors and principal stockholders are not
      required to comply with the reporting requirements of Section 16(a) of the
      Exchange Act.





**Item
      10. Executive Compensation**





**Summary
      Compensation Table**





The
      following table sets forth information concerning all compensation paid for
      services to Shanxi Coal by its executive officers in all capacities for 2002,
      2003 and 2004. No other executive officer received total annual salary and
      bonus
      payments in excess of $100,000 during these periods.





**Annual
                Compensation****Name**
              **and**
              **Principal**
              **Position**
            **Year**
            **Salary
                ($)**
            **Bonus
                ($)**
            **Other**
              **Annual**
              **Compensation($)**Zhao
                Ming
              (Chairman
                and Chief
              Executive
                Officer)
            2005
              2004
              2003
            19,900
              4,833
              5,075
            -
              -
              -
            -
              -
              -Zhao
                Yao
              (Chief
                Operating
              Officer
                andDirector)
            2005
              2004
              2003
            20,398
              4,833
              5,075
            -
              -
              -
            -
              -
              -Jin
                Xia
              (Chief
                Financial
              Officer)
            2005
              2004
              2003
            11,123
              2,388
              1,913
            -
              -
              -
            -
              -
              -








34





**Option
      Grants**





Neither
      we nor Shanxi Coal maintain any equity incentive or stock option plan.
      Accordingly, the Company granted no options to purchase any equity interests
      to
      any employees or officers and issued no stock options to any officers.





**Employment
      Contracts**





Shanxi
      Coal does not have formal employment agreements with any of its executive
      officers or key employees. Puda Coal does not have formal employment agreements
      with any of its executive officers or key employees.





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





**PRINCIPAL
      STOCKHOLDERS**





The
      following table sets forth certain information regarding our Common Stock
      beneficially owned on December 31, 2005, and as adjusted after giving effect
      to
      the sale of the shares being sold in this offering 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 December 31, 2005,
      we
      had 75,460,487 shares of our Common Stock outstanding.





The
      following table excludes any shares of the Company’s 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.





**Name
                of Beneficial Owner**
            
            **Amount
                of Beneficial Ownership**
            
            **Percent
                of Beneficial Ownership**Zhao
                Ming (1), (2), (3)
            
            
            53,100,000
            
            
            70.2
            %Zhao
                Yao (1), (2), (3)
            
            
            13,275,000
            
            
            17.5
            %Jin
                Xia (1)
            
            
            0
            
            
            -Wang
                Lisheng (1)
            
            
            0
            
            
            -Keating
                Reverse Merger Fund, LLC (2)
              c/o
                Timothy J. Keating, Manager
              5251
                DTC Parkway, Suite 1090
              Greenwood
                Village, Colorado 80111
            
            
            4,718,500
            
            
            6.3
            %All
                Executive Officers and Directors as a group
            
            
            66,375,000
            
            
            87.7
            %





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





(2)
      Keating Reverse Merger Fund and each BVI Member have agreed to vote their shares
      of Puda Coal’s Common Stock to (i) elect a person designated by Keating Reverse
      Merger Fund from time to time to Puda Coal’s board for a period of one year
      following the closing of the Exchange Agreement; and (ii) elect such other
      persons that may be designated by Zhao Ming from time to time to fill any vacant
      position on the board of directors (other than the Keating Reverse Merger
      Designate).





(3)
      Zhao
      Ming and Zhao Yao are brothers.


35





**Item
      12. Certain Relationships and Related Transactions**





**CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**





**Related
      Party Transactions**





*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. $992,000 remains declared but unpaid. The dividends
      were
      distributed between Zhao Ming (80%) and Zhao Yao (20%).





*Supply
      Agreement with Jucai Coal, a company controlled by Zhao Yao.* We
      currently secure raw coal from a diversified pool of local Liulin County coal
      mines, including Jucai Coal, a coal mine that is owned 75% by Zhao Yao. Jucai
      Coal supplies raw coal to both Shanxi Coal and other unrelated parties. Jucai
      Coal sold its raw coal production in 2003 and 2004 to Shanxi Coal at prevailing
      market prices.





The
      raw
      coal purchased from Jucai Coal accounted for approximately 19% and 12.5% of
      Shanxi Coal’s total raw coal purchases in tonnage in 2003 and 2004,
      respectively. Accounts payable to Jucai Coal in 2003 and 2004 were $114,000
      and
      $268,000, respectively. In 2005 we purchased approximately 135,273.4 MT or
      13.7%
      of our purchased raw coal from Jucai Coal. In 2006 we anticipate purchasing
      approximately 300,000 MT of raw coal from Jucai Coal.





On
      November 17th, 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 $3.70
      to $6.17 (RMB30 to RMB50) per MT of coal from the price Jucai Coal charges
      to
      its other customers.





*Loan
      for Trip Expense.* In 2004,
      Zhao Ming borrowed approximately $2,000 from the Shanxi Coal for travel
      expenses. The loan was interest free, unsecured with no fixed term for
      repayment. The amount has been paid back to the Company.





The
      above
      related party receivable and payable balances are unsecured, interest-free
      and
      there are no fixed terms for repayment.





*Headquarters
      Lease.* In 2001,
      Shanxi Coal entered into agreements with Resources Group, to lease an office
      and
      certain equipment. In the years ended December 31, 2003 and 2004, rental
      expenses payable to Resources Group were $24,000 and $24,000 respectively.
      In
      2005 the rents paid were approximately $15,500. The rental reflects a discount
      of approximately 10-15% over prevailing market rentals.





*Tax
      Liability Payments.* By an
      agreement entered into between Shanxi Coal and Resources Group on April 25,
      2005, Resources Group agreed to pay all the tax liabilities (including
      surcharges and penalties) of Shanxi Coal with retrospective effect from its
      establishment to December 31, 2004. As of December 31, 2003 and 2004, Shanxi
      Coal has paid $2,800,000 and $5,768,000, respectively, to Resources Group for
      payment of income taxes and value-added tax (“VAT”). In December 2004, Resources
      Group paid Shanxi Coal’s income taxes of $1,678,000 and VAT of $1,950,000 to the
      China Tax Bureau. Resources Group has fully performed its obligations under
      the
      tax agreement. In April 2005, Resources Group paid Shanxi Coal’s VAT of $251,000
      to the China Tax Bureau. Shanxi Coal has advanced funds to Resources Group
      for
      payment of income tax and VAT.





36





*Shanxi
      Liulin Jucai Plant Lease* .
      Shanxi
      Coal had a lease for the Shanxi Liulin Jucai Plant, which had an annual clean
      coal washing capacity of 100,000 MT. This facility is located about two miles
      from the premises of coal mine owned and was operated by Shanxi Liulin Jucai
      Coal Industry Co., Limited (“Jucai Coal”). Zhao Yao is a 75% owner of Jucai
      Coal. Jucai Coal leased this coal processing facility to Shanxi 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. The
      lease
      expired on December 31, 2005 and was not renewed.


*New
      Shanxi Liulin Jucai Plant and New Zhong Yang Plant
      Acquisitions.* We
      financed our acquisition of the New Shanxi Liulin Jucai Plant and the New Zhong
      Yang Plant through Resources Group, an entity owned 60% by Zhao Ming and 20%
      by
      Zhao Yao, for an aggregate cost of $13 million paid through
      a 6% secured loan amortized over 10 years. The interest rate was approximately
      .9% lower than could have been obtained from a third-party bank.





*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.* Zhao Yao
      advanced funds to the Company for payments due for land use rights for the
      land
      used for old Jucai Liulan Plant of $197,000 in 2000. The land use rights were
      for use of the land upon which the old Shanxi Liulin Jucai Plant was
      constructed.





*Agreements
      with Keating Securities.* Keating
      Securities, LLC, a registered broker-dealer, was the exclusive placement agent
      for the private placement in which we sold the Notes and Warrants and was paid a
      commission equal to 9% of the aggregate gross proceeds from that offering plus
      a
      non-accountable expense allowance equal to 2% of the aggregate gross proceeds.
      In connection with the private placement, Keating Securities also received,
      for
      nominal consideration, five-year warrants to purchase Common Stock. Warrants
      were also granted to employees of Keating Securities and to others acting on
      behalf of Keating Securities in connection with the private placement. A total
      of 2,072,500 warrants were granted to Keating Securities and its agents and
      employees, 1,250,000 of which went to Keating Securities and the balance to
      the
      agents and employees. Keating Securities also was a financial advisor in
      connection with an exchange agreement in which shares of the Company’s stock
      were exchanged for all of the outstanding capital stock and ownership interests
      of BVI from the Puda BVI Members. Prior to the exchange, the Company was a
      public shell company. The transaction advisory fee was $400,000.





*Conflicts
      of Interest.* Zhao
      Ming and Zhao Yao may have, or may develop in the future, conflicts of interest
      with us. They are the equity owners of Shanxi Coal and it may be in their
      personal economic interest to cause Shanxi Coal to disregard its contractual
      obligations under the Operating Agreements. As the 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 Zhao’s. 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 (87.7%, and 51.8% after
      the
      Conversion), they can control the actions which we take. They are also officers
      and Zhao Ming is our Chairman of the Board. In addition, they 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.





37




**Item
      13. Exhibits**




The
      following exhibits are filed as part of this Amendment No. 2 to Annual Report
      on
      Form 10-KSB/A:




3.1
            Articles
                of Incorporation (incorporated by reference to Current Report of
                the
                Company on Form 8-K file September 21, 2005)3.2
            By-Laws
                (incorporated by reference to Exhibit 3.2 to SB-2/A , File #333-85306
                filed on April 1, 20034.1
            Voting
                Agreement dated June 29, 2005 by and among Keating Revenue Merger
                Fund,
                LLC, Zhao Ming and Other Shareholders.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., 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, Zhao Ming and
                Zhao Yao
                (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)10.6
            Exclusive
                Option Agreement dated June 24, 2005 between Puda, Putai, Zhao Ming
                and
                Zhao Yao (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 Zhao Ming (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 Zhao Yao (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)






38




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 the Registration
                Statement on Form 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 the Registration Statement
                on Form 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 the Registration Statement
                on Form 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 the Registration Statement
                on Form 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 the
                Registration Statement on Form 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 the Registration Statement on Form
                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 the Registration Statement
                on Form 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 the Registration
                Statement on Form SB-2/A filed March 10, 2006)10.24
            Clean
                Coal Supply Contract - Shandong Haihua Group(incorporated by reference
                to
                Exhibit 10.24 to the Registration Statement on Form SB-2/A filed
                March 10,
                2006)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.
                (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, 200516.1
            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,
                200531.1
                *
            Certification
                of Mr. Zhao Ming 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.




39


**Item
      14. Principal Accountant Fees and Services**







**Fees
      of Independent Public Accountants**





The
      fees
      billed to us by our independent auditors, Moore Stephens, for services for
      the
      fiscal year ended December 31, 2005, were as follows:





**Audit
      Fees** .
      This
      category consists of fees for the audit of financial statements and review
      of
      financial statements included in the our annual report on Form 10-KSB and
      quarterly reports on Form 10-QSB, 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, 2005 and December 31, 2004, Moore Stephens billed us for audit fees in
      the
      amount of approximately $ 62,500, and $0, 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 reporting the
      reverse merger which occurred on July 15, 2005. For the years ended December
      31,
      2005 and December 31, 2004, Moore Stephens billed us for audit related fees
      in
      the amount of approximately $200,000 and $45,000, 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,
      2005 and December 31, 2004, 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, 2005 and December 31, 2004, Moore
      Stephens bill us for other fees in the amount of approximately $0 and
      $0.





Moore
      Stephen’s predecessor, Durland & Company, CPA’s, P.A. billed us for
      professional services rendered by the
      principal accountant for the audit of the Company’s annual financial statements
      and review of financial statements included in the Company’s Form 10-KSB (17 CFR
      249.308a) or 10-QSB (17 CFR 249.308b) or services that are normally provided
      by
      the accountant in connection with statutory and regulatory filings or
      engagements for $4,000 for the fiscal year ended December 31, 2003 and $8,000
      for the fiscal year ended December 31, 2004. We also paid them $1,000 for
      services provided in connection with the 10-QSB filed for the quarter ended
      March 31, 2005.








40








**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-KSB/A to be signed on its behalf by the undersigned
      thereunto duly authorized.





PUDA
                COAL, INC.Dated:
                February 1, 2007
            By:
                /s/ Zhao MingChief
                Executive Officer and President




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





Signature/Title
            
            **Date**(i)
                Principal Executive Officer:/s/
                Zhao Ming
            Chief
                Executive Officer
            Dated:
                February 1, 2007(ii)Principal
                Financial and Accounting Officer:/s/
                Jin Xia
            Chief
                Financial Officer
            Dated:
                February 1, 2007(iv)
                Directors:/s/
                Zhao Ming
            President
                and Chairman of the Board
            Dated:
                February 1, 2007










41