**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**Form
      10-KSB/A**




**Amendment
      No. 1**





(Mark
                One)x
            ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934For
                the fiscal year ended December 31, 2006o
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934For
                the transition period from __________ to __________Commission
                file number 333-85306.




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




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


Issuer’s
        Telephone Number: 011 86 351 228 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 o









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 o No
x





State
      issuer’s revenues for its most recent fiscal year: $137,771,000





As
      of
      April 9, 2007, the aggregate market value of the Issuer’s voting and non-voting
      common equity held by non-affiliates, computed by reference to the closing
      price
      at which the common equity was sold, was approximately $20,108,100. Solely
      for
      the purposes of this calculation, “affiliate” has the meaning defined in Rule
      12b-2 of the Exchange Act.




The
      total
      number of shares of common stock of the Registrant that were outstanding on
      April 9, 2007 was 94,750,089.




Transitional
      Small Business Disclosure Format (Check one): Yes o No
x




*
      The
      issuer, as a voluntary filer, is not subject to the filing requirements under
      Section 13 or 15(d) of the Exchange Act but has been filing all reports required
      to be filed by those sections for the past 12 months.







**EXPLANATORY
      NOTE**





This
      Amendment No. 1 on Form 10-KSB/A amends 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 April 16,
      2007 (the “Original Filing”) for the fiscal year ended December 31,
      2006.





In
      connection with the review of Amendment No. 6 to the Company’s Registration
      Statement on Form SB-2 filed by the Company on April 18, 2007 and the Original
      Filing, the SEC asked the Company to:





(i)
      include the preference dividend for each year that the amount remains
      outstanding;





(ii)
      expand its disclosure within Note 10 to the financial statements to explain
      the
      facts and circumstances surrounding its cashless exercise of placement agent
      warrants and disclose how it accounted for the exercise;





(iii)
      reconcile the amount presented as additional paid-in capital for the derivative
      conversion feature transferred to equity upon conversion, totaling $3,314,
      with
      that presented on page F-21, totaling $3,731. In addition, expand its disclosure
      in Note 10 to explain the facts and circumstances surrounding the derivative
      conversion feature and derivative warrants transferred to equity upon
      conversion; and





(iv)
      include a more comprehensive disclosure of controls and procedures.





Based
      on
      its discussion with the independent auditors, Moore Stephens, the Company
      determined that it would amend its financial statements and annual report for
      the year ended December 31, 2006.





The
      amendment has no impact on the Company’s balance sheet and statement of changes
      in stockholders’ equity for the year ended December 31, 2006.





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





This
      Form
      10-KSB/A only amends certain information in the following items related to
      the
      fiscal year ended December 31, 2006:





Cover
      Page


Explanatory
      Note


Part
      III


Item
      6 -
      Management’s Discussion and Analysis or Plan of Operations


Item
      7 -
      Financial Statements


Report
      of
      Independent Registered Public Accounting Firm


Audited
      Consolidated Financial Statements


Note
      5
      Related Party Transactions


Note
      10
      Convertible Notes and Related Warrants


Item
      8A -
      Controls and Procedures


Exhibits


Signature
      Page


Certifications





The
      application of the foregoing has resulted in certain amendments to the Original
      Filing. Primarily these amendments are to reflect reclassification as discussed
      above. Except for the amended 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 these disclosures affected by subsequent 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 amendment), 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 filing made with the SEC subsequent to the
      Original Filing, including any amendments to those filings.





1


**TABLE
      OF CONTENTS**





PagePART
                I
            
            4Item
                1. Description of Business
            
            
            1-33Item
                2. Description of Property
            
            
            34Item
                3. Legal Proceedings
            
            
            35Item
                4. Submission of Matters to a Vote of Security Holders
            
            
            35PART
                II
            
            
            35Item
                5. Market for Common Equity and Related Stockholder Matters and Small
                Business Issuers Purchases of Equity Securities
            
            
            35Item
                6. Management’s Discussion and Analysis or Plan of
                Operation
            
            
            35-42Item
                7. Financial Statements
            
            
            F1-F31Item
                8. Changes In and Disagreements With Accountants on Accounting and
                Financial Disclosure
            
            
            48Item
                8A. Controls and Procedures
            
            
            48Item
                8B. Other Information
            
            
            48PART
                III
            
            
            49Item
                9. Directors, Executive Officers, Promoters, Controls Persons and
                Corporate Governance; Compliance with Section 16(a) of the Exchange
                Act
            
            
            49Item
                10. Executive Compensation
            
            
            50Item
                11. Security Ownership of Certain Beneficial Owners and Management
                and
                Related Stockholder Matters
            
            
            52Item
                12. Certain Relationships and Related Transactions and Director
                Independence
            
            
            53




2




Item
                13. Exhibits
            
            
            48-51Item
                14. Principal Accountant Fees and Services
            
            
            51SignaturesExhibitsCertifications




3




**PART
      I**




**Item
      1. Description of Business**




**BUSINESS**


**Overview**





We
      are a
      supplier of high-grade metallurgical coking coal to the industrial sector in
      the
      People’s Republic of China (the “PRC” or “China”). Our processed coking coal is
      primarily purchased by coke and steel producers for the purpose of making the
      coke required for the steel manufacturing process. Our operations are conducted
      exclusively by an 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
      expanded our coal washing capacity to a 2.7 million MT per year through the
      acquisition in 2005 of two new coal washing facilities, which became operational
      in December 2005 and March 2006, respectively. 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.





In
      2006,
      we had three cleaning facilities located in Liulin County and Zhongyang County,
      Shanxi Province with an annual cleaned coal washing capacity of 2,700,000 MT.
      Liulin and Zhongyang County are neighbor counties and are located approximately
      120 miles southwest of Shanxi Coal’s executive offices in Taiyuan City. Shanxi
      Coal obtained approximately 2.3 million MT of annual clean coal capacity in
      late
      2005 as the result of the acquisition of a new coal processing plant in Liulin
      County (the “New Shanxi Liulin Plant”) and acquisition of a new coal processing
      plant in Zhongyang County, Shanxi Province (the “New Zhongyang Plant”). The New
      Shanxi Liulin Plant became operational in December 2005 and the New Zhongyang
      Plant became operational in March 2006.




4




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.




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.





**History
      and Background of the Company**





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





On
      April
      23, 2004, the Company transferred all of its assets including, cash on hand,
      the
      Phoslock product line, and all of the Company’s rights under a license agreement
      for the use of the Phoslock product line, to Purezza Marketing, Inc. (“PMI”), a
      wholly owned subsidiary of the Company. 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”), an International Business
      Company organized in the British Virgin Islands, through a reverse merger and
      BVI became a wholly-owned subsidiary of the Company. In exchange, Puda issued
      to
      the BVI members 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.




5




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





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





BVI,
      in
      turn, owns all of the registered capital of Shanxi Putai Resources Limited
      (formerly, Taiyuan Putai Business Consulting Co., Ltd.) (“Putai”), a wholly
      foreign owned enterprise (“WFOE”) registered under the wholly foreign-owned
      enterprises laws of the People’s Republic of China (“PRC”). Putai was
      incorporated on November 5, 2004 and has a registered capital of $20,000. Putai
      did not have any operating activities from November 5, 2004 (inception) until
      June 24, 2005 when it entered into certain 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 is the chairman and chief executive officer of Puda. Zhao
      Yao
      was the chief operating officer of Puda until his resignation became effective
      on November 20, 2006. Zhao Ming and Zhao Yao 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”. The exercise of the Option is
      analogous to creating a second class of common stock, which is referred to
      as
“Option holder preference” on the consolidated statements of operations. 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:


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


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


6
  ·
                Taiyuan
                    Putai Business Consulting Co., Ltd (now known as Shanxi Putai
                    Resources
                    Limited): Mr. Zhao Ming (approximately 74%); Mr. Zhao Yao (approximately
                    18%) held indirectly through Puda and
                    BVI.


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




**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 (“BVI”), an International Business Company
      incorporated in the British Virgin Islands; BVI owns Taiyuan Putai Business
      Consulting Co., Ltd. (now known as Shanxi Putai Resources Limited, referred
      to
      hereinafter as “Putai”), a wholly foreign-owned enterprise established under the
      laws of the PRC.




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 his brother Zhao Yao (20%), who is a
      manger of the coal washing plants of Shanxi Coal. Both Zhao Ming and Zhao Yao
      are PRC citizens. Puda does not have a direct equity interest in Shanxi Coal,
      however, through the Operating Agreements, our wholly owned subsidiary Putai
      manages and controls the operations of Shanxi Coal and receives all of the
      economic benefits of Shanxi Coal and bears all of the risks derived from Shanxi
      Coal’s operations. Through the Operating Agreements, Putai is entitled to
      receive 100% of the net income of Shanxi Coal, and Putai guarantees the
      performance of all contracts, agreements and transactions executed by Shanxi
      Coal and related to Shanxi Coal’s business. The Operating Agreements consist of
      the (i) Exclusive Consulting Agreement, (ii) Operating Agreement, (iii)
      Technology License Agreement, and (iv) Exclusive Option Agreement, each entered
      into on June 24, 2005. These agreements were filed with the SEC on July 18,
      2005
      as exhibits to a Form 8-K. 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.





(i)
      Exclusive Consulting Agreement.





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





(ii)
      Operating Agreement.





Under
      the
      Operating Agreement among Putai, Shanxi Coal, Zhao Ming and Zhao Yao, Putai
      agrees to guarantee the performance of contracts, agreements and transactions
      executed by Shanxi Coal and in return, Putai will receive 50% of Shanxi Coal’s
      net income for each fiscal year. Net income is calculated in accordance with
      U.S. GAAP based on Shanxi Coal’s financial statements as reviewed or audited by
      the Registrant’s auditors. Pursuant
      to the Operating Agreement, Shanxi Coal, together with Zhao Ming and Zhao Yao,
      will not conduct any transaction which may materially affect Shanxi Coal’s
      assets, obligations, rights or business without prior written consent of Putai
      and will appoint personnel recommended by Putai as the management of Shanxi
      Coal. This agreement has a term of 10 years and can be automatically renewed
      for
      an additional 10 years or any other renewal term unless terminated. During
      the
      initial or renewal term of the agreement, the agreement cannot be terminated
      by
      Shanxi Coal or by Zhao Ming or Zhao Yao in their individual capacities as
      parties to the agreement. It may be terminated by Putai at any time with a
      30-day notice.




7




(iii)
      Technology License Agreement.





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





(iv)
      Exclusive Option Agreement.





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





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





Although
      the Registrant does not own Shanxi Coal, under accounting principles generally
      accepted in the United States of America, or U.S. GAAP, Shanxi Coal is included
      in the Registrant’s consolidated financial statements because its contractual
      arrangements with the Registrant provide the Registrant with the risks and
      rewards associated with equity ownership and grant the Registrant control over
      Shanxi Coal. Each of the individual owners of Shanxi Coal has authorized Putai,
      the wholly owned indirect subsidiary of the Registrant, 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
      Operating Agreements appoint China International Economic and Trade Arbitration
      (“CIETAC”) as the dispute resolution mechanism and these agreements are governed
      by PRC law. In the event of a breach of the agreements, the Company will have
      remedies under PRC Contract Law and Company Law. According to Chapter VII of
      PRC
      Contract Law, remedies for breach of contract include specific performance,
      payment for damage, and corrective measures. In addition, under the Technology
      License Agreement, Shanxi Coal expressly acknowledges that the licensed
      technology is a trade secret of Putai, the disclosure of which would cause
      substantial harm to Putai that could not be remedied by payment of damages
      alone
      and Putai will be entitled to preliminary and permanent injunctive relief and
      other equitable relief for any breach of this agreement. If the Company brings
      an arbitration petition to CIETAC, CIETAC will be able to render an arbitration
      award that grants one or more forms of relief discussed above. If the breaching
      party does not voluntarily comply with the arbitration award, the other party
      may seek enforcement of the award in a Chinese court. Currently Mr. Zhao Ming
      is
      the CEO of the Company, and in determining whether the Company should bring
      an
      arbitration petition in the event of a breach of contract by Shanxi Coal, which
      is owned by Zhao Ming and his brother Zhao Yao, he may act in self-interest
      and
      against the interest of other shareholders of the Registrant. See the risk
      factor disclosure on page 33 of this Form 10-KSB/A under the heading “Our
      principal stockholders have significant control over the company and may have
      conflicts of interest with the company.”




8




Zhao
      Ming
      and Zhao Yao are brothers and significant shareholders of Puda Coal. As of
      December 31, 2006 Zhao Ming owns 57.2% and Zhao Yao owns 14.3% of total
      outstanding shares of Common Stock of Puda Coal and assuming conversion of
      all
      of the notes and exercise of all outstanding warrants (the “Conversion”), they
      will own 42.1% ****** and ****** 10.5% ****** of
      total
      outstanding shares of Common Stock, respectively.





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.




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.





9




The
      following chart depicts our organizational structure:











**Our
      Business**





**Coal
      Cleaning**





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




10




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.





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 in 2005, a 15% increase over 2004, and in 2006 production
      reached 2.38 billion MT, a 9% increase over 2005.





Coal,
      in
      its raw or processed forms, is mainly used in four major
      industries:





·
            Coal-fired
                power plants




·
            Steel
                manufacturing




·
            Metallurgy
                of non-ferrous metals




11




·
            Cement
                production




Steel
      production is highly dependent on high quality coking coal feedstock. China
      was
      the largest steel producer in the world, producing 423 million MT in 2006,
      representing a 19.7% increase over 2005 and 34% of the world’s total steel
      production in 2006. The next two largest steel producers in the world - Japan
      and the United States - produced a combined 214.7 million MT, or 17% 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 approximately 374 million MT in 2006, or 33% global steel
      consumption.





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, 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.





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.




12




·
            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 currently owned 75% by Zhao Yao, a manager
      at
      the coal washing plants of Shanxi Coal and brother of our CEO, Zhan Ming and
      a
      14.3% (10.5% ****** 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 135,273 MT and 375,177.50MT
      in
      2005 and 2006, respectively.





We
      have a
      preferred supply arrangement with Jucai Coal. This agreement gives us priority
      over its other customers and subject to its output capacity, has agreed to
      supply us with our entire high quality raw coking coal requirements pursuant
      to
      a coal supply agreement. We receive favorable pricing terms which are at a
      RMB30
      to RMB50 discount per MT from the price Jucai Coal sells its high quality raw
      coking coal to its other customers. Payment terms are based on industry
      standards of 75% of the total purchase price 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:





·
            **Liujiazhuang
                Coal Mine**-
                Shanxi Coal purchased about 47,049 MT, 60,572 MT and 136,838 MT from
                this
                mine in 2004, 2005 and 2006.




·
            **Liulin
                Dadongzhuang Coal Mine**-
                Shanxi Coal purchased about 47,220 MT, 107,010 MT and 129,151 MT
                from this
                mine in 2004, 2005 and 2006.




13




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 (10%). Zhao Ming
      is
      executive officer of Shanxi Coal and Puda Coal, and Zhao Yao is Zhao Ming’s
      brother and a manager of our coal washing plants. They are also significant
      shareholders of Puda Coal, owning 57.2% and 14.3% of our common stock,
      respectively (42.1% and ****** 10.5%,
      respectively after the Conversion). Resources Group has raw coking coal
      available from Miao Wan Coal Mine in Liulin County and Zhongyang Coal Mine
      in
      Zhongyang County, Shanxi Province. These two mines produce raw coking coal
      with
      maximum 0.6% sulfur content, 7% internal ash content, and 12 to 14% external
      ash
      content. Miao Wan Coal Mine and Zhongyang Coal Mine each have current annual
      production of 400,000 MT, while Zhongyang 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 2006 and 2005 were as follows:





**2006****Amount**
            
            **%
                of****Suppliers**
            
            **($
                ‘000)**
            
            **Total**Jucai
                Coal Mine
            
            
            15,906
            
            
            14.3
            %Shipogou
                Coal Mine
            
            
            8,305
            
            
            7.5
            %Yumenzhen
                Coal Mine
            
            
            7,495
            
            
            6.7
            %Liujiawan
                Coal Mine
            
            
            7,492
            
            
            6.7
            %Liulin
                Nanpo Coal Mine
            
            
            7,451
            
            
            6.7
            %Huajin
                Coke
            
            
            7,298
            
            
            6.6
            %Jijiata
                Coal Mine
            
            
            7,080
            
            
            6.4
            %Liulin
                Nianyan Coal Mine
            
            
            7,014
            
            
            6.3
            %Liulin
                Nanyu Coal Mine
            
            
            6,813
            
            
            6.1
            %Renjiasan
                Coal Mine
            
            
            6,492
            
            
            5.8
            %Liujiazhuang
                Coal Mine
            
            
            6,270
            
            
            5.6
            %Jijiata
                Dongzhuang
            
            
            6,042
            
            
            5.4
            %Liulin
                Dadongzhuang Coal Mine
            
            
            5,996
            
            
            5.4
            %Dengjiagua
                Coal Mine
            
            
            4,760
            
            
            4.3
            %Zhaiyadi
                Coal
            
            
            4,735
            
            
            4.2
            %Meisheng
                Dengjiazhuang
            
            
            2,171
            
            
            2.0
            %**Total**
            
            
            **111,320**
            
            
            **100**
            **%**




14





**2005****Amount**
            
            **%
                of****Suppliers**
            
            **($
                ‘000)**
            
            **Total**Jucai
                Coal Mine
            
            
            5,469
            
            
            13.6
            %Liulin
                Dadongzhuang Coal Mine
            
            
            4,444
            
            
            11.0
            %Yumenzhen
                Coal Mine
            
            
            4,152
            
            
            10.3
            %Liulin
                Nanpo Coal Mine
            
            
            4,040
            
            
            10.0
            %Renjiasan
                Coal Mine
            
            
            3,605
            
            
            9.0
            %Jijiata
                Coal Mine
            
            
            3,221
            
            
            8.0
            %Pangpangta
                Coal Mine
            
            
            3,044
            
            
            7.6
            %Jijiata
                Dongzhuang
            
            
            2,725
            
            
            6.8
            %Liujiazhuang
                Coal Mine
            
            
            2,523
            
            
            6.3
            %Liulin
                Nanyu Coal Mine
            
            
            2,360
            
            
            5.8
            %Liulin
                Nianyan Coal Mine
            
            
            1,829
            
            
            4.5
            %Shipogou
                Coal Mine
            
            
            1,533
            
            
            3.8
            %Liujiawan
                Coal Mine
            
            
            1,332
            
            
            3.3
            %**Total**
            
            
            **40,277**
            
            
            **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.




The
      above
      price guidance is the latest available price guidance issued by the Chinese
      government.





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.





**Operations**





We
      have
      significantly expanded our coal cleaning capacity through the acquisition of
      our
      New Shanxi Liulin Jucai Plant as through our acquisition and the New Zhongyang
      Plant. Both facilities were acquired in 2005. Currently we operate three coal
      cleaning facilities in Liulin County and Zhongyang County, Shanxi
      Province.




15




·
            **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.





·
            **New
                Shanxi Liulin Jucai Plant**-
                This facility, which is adjacent to the formerly leased Shanxi Liulin
                Jucai Plant in Liulin County and located in Liulin County about 2
                miles
                away from Jucai Coal, has an annual cleaning capacity of 1.1 million
                MT.
                After completing its testing phase, the New Shanxi Liulin Jucai Plant
                became fully operational in December 2005. This new facility has
                separate
                land use rights owned by Shanxi Coal. Shanxi Coal purchased New Shanxi
                Liulin Jucai Plant from Resources Group, a related party, at cost
                for
                approximately $5,800,000, of which $900,000 is for the 50-year land
                use
                rights, $1,000,000 is for the plant and $3,900,000 is for the equipment.
                Resources Group financed the new facility under a
                loan.





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




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 5 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. 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.





We
      have a
      total annual cleaned coking coal capacity of approximately 2.7 million MT.
      The
      two new coal washing facilities we acquired in 2005 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. With the new facilities
      becoming fully operational, the yield realized on 1 MT of raw coal blend input
      increased from .70 MT of cleaned coking coal to .75-.80 MT of cleaned coking
      coal. The management expects that, in the future, such yield will eventually
      increase to 0.83 MT of cleaned coking coal. The addition of this new cleaning
      capacity is the cornerstone of our strategic growth plan.




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




16




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 Zhaos, provide us with
      potential access to coking coal supply, a large storage facility and machinery.




With
      our
      significant expansion of coking coal cleaning capacity, we believe that we
      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 300,000MT output per year,
      are closing mines that produce less than 90,000MT per year and are consolidating
      existing mines with outputs between 300,000 and 900,000 into larger mines,
      in an
      effort to stream line 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. In 2006 we
      sold
      1,758,061.60 MT of cleaned coking coal to 16 different customers, with no
      customer accounting for more than 20.0% of total tonnage sales. This represents
      an increase of over 159% from 2005, due primarily to continued strong demand
      from existing customers, new capacity coming on line in the fourth quarter
      of
      2005 and the first quarter of 2006, and new customer sales.




Sales
      to
      our customers in 2006 and 2005 were as follows:




**2006****Amount**
            
            **%
                of****Customers**
            
            **($’000)**
            
            **Total**Baotou
                Steel Group
            
            
            27,450
            
            
            19.9
            %Xuanhua
                Steel Group
            
            
            13,219
            
            
            9.6
            %Wulin
                Coke
            
            
            11,996
            
            
            8.6
            %Liulin
                Coal Cleaning Plant
            
            
            9,968
            
            
            7.2
            %Liulin
                Jinmei Coal
            
            
            9,249
            
            
            6.7
            %Liulin
                Huatai Coke
            
            
            7,937
            
            
            5.7
            %Xiaoyi
                Jinyan Electricity
            
            
            7,554
            
            
            5.5
            %Liulin
                Changzhong Coke
            
            
            7,273
            
            
            5.3
            %Liulin
                Dongjiagou Coal Mine
            
            
            7,118
            
            
            5.2
            %Liulin
                Luojiapo Coal Mine
            
            
            6,565
            
            
            4.8
            %Jiangsu
                Yueda
            
            
            6,211
            
            
            4.5
            %Shizhou
                Coal Gas
            
            
            5,603
            
            
            4.1
            %Lvliang
                Longteng Coke
            
            
            4,769
            
            
            3.5
            %Zhongyang
                Rongxin
            
            
            4,487
            
            
            3.3
            %Gengyang
                Coal
            
            
            4,299
            
            
            3.1
            %Yatai
                Coke
            
            
            4,073
            
            
            3.0
            %**Total**
            
            
            **137,771**
            
            
            **100**
            **%**




17




**2005****Amount**
            
            **%
                of****Customers**
            
            **($’000)**
            
            **Total**Baotou
                Steel Group
            
            
            7,858
            
            
            15.2
            %Liulin
                Coal Cleaning Plant
            
            
            6,629
            
            
            12.8
            %Liulin
                Jinmei Coal
            
            
            4,964
            
            
            9.6
            %Jiangsu
                Yueda
            
            
            4,823
            
            
            9.3
            %Xiaoyi
                Jinyan Electricity
            
            
            4,435
            
            
            8.6
            %Shizhou
                Coal Gas
            
            
            4,169
            
            
            8.1
            %Liulin
                Dongjiagou Coal Mine
            
            
            3,826
            
            
            7.4
            %Liuliang
                Longteng Coking Corporation
            
            
            3,530
            
            
            6.8
            %Liulin
                Luojiapo Coal Mine
            
            
            3,405
            
            
            6.6
            %Zhongyang
                Rongxin
            
            
            3,198
            
            
            6.2
            %Liulin
                Changzhong Coke
            
            
            2,548
            
            
            4.9
            %Liulin
                Huatai Coke
            
            
            2,325
            
            
            4.5
            %**Total**
            
            
            **51,710**
            
            
            **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, and specification grade coking coal at competitive
      prices.




18




We
      have
      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 30th 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 away 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 600,000MT in 2006.




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




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




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




None
      of
      the above contracts was performed due to transportation problems.




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 600,000MT in
                2006.
                This sales volume is based on a portion of the expressed intent in
                the
                non-binding letter to purchase 1,320,000MT in 2006 from us.




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




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.




19




**Employees**





We
      currently have approximately 232 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
            
            9Finance
            
            Finance
                and Accounting
            
            10Supply;
                Marketing and Sales
            
            Purchase
                raw coal and maintain relationship with suppliers; Sell cleaned coal,
                maintain relationship with customers, and acquire new
                customers
            
            48Transportation
            
            Short-range
                truck drivers (within plant)
            
            10Production
            
            Produce
                cleaned coal
            
            126Quality
                Control
            
            Quality
                check on input (raw coal) and output (cleaned coal)
            
            17Reception
                and Security
            
            Administrative
                matters on reception and security
            
            12Total
            
            
            
            232




**Distribution**




The
      Company sells its clean coking coal through a direct sales force of
      approximately 33 full-time employees who market directly to our customers who
      are mostly, coking companies that supply steel mills and steel mills with their
      own coking facilities. We do not have any agreements with any third-party
      distributors or wholesalers. While individual sales might be made to a customer
      who is not subject to a supply agreement if requested and we had adequate
      capacity at the time, most of our sales are pursuant to agreements which are
      signed for one year terms, with annual renewals. Our customers are mostly
      located in Shanxi Province, Inner Mongolia Autonomous Region, Hebei Province,
      Beijing and Tianjin, all of which are accessible by rail lines, which is the
      most cost effective method for coal transport.




**Intellectual
      Property**





Our
      cleaning facilities use a proprietary, water supported jig washing technology
      that management believes gives it a competitive advantage in providing high
      quality, cleaned coking coal for China’s steel making industry. 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 products and we do
      not
      expect any probably government regulations on our products in the foreseeable
      future.





In
      2006
      and 2005, we did not incur any expenditures on research and development
      activities. We are not required to take any particular measures to comply with
      environmental laws in China.





**Available
      Information**





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




20




**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 with Putai,
      Shanxi Coal, Zhao Ming and Zhao Yao, we manage and control the operations of
      Shanxi Coal and receive all of the economic benefits and bears all of 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.




***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, could not be
      enforced, or were cancelled.***




Through
      the Operating Agreements and an offshore holding structure, we manage and
      control the operations of Shanxi Coal and receive all of the economic benefits
      of and incur all of the risks from Shanxi Coal’s operations. Neither we, BVI or
      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
      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 Puda
      Coal.




21




If
      the
      Operating Agreements were terminated, our business in China could be adversely
      affected. The Operating Agreements are comprised of the Exclusive Consulting
      Agreement, the Operating Agreement, the Technology License and the Exclusive
      Option Agreement. All of the Operating Agreements, except for the Technology
      License Agreement, have a term of 10 years from the date they were entered
      into
      on June 24, 2005. None of the Operating Agreements may be cancelled by Shanxi
      Coal, or by Zhao Ming or Zhao Yao in their individual capacities as parties
      to
      the Operating Agreements during their term. However, they may be terminated
      by
      Putai with 30 days notice to the other parties to the agreements. Although
      we
      are the beneficial owners in the entire registered capital of Putai, Zhao Ming
      and Zhao Yao are managers of Putai. In the event that Zhao Ming and Zhao Yao
      acted in their capacity as management of Putai to terminate the Operating
      Agreements, we may have to rely on legal remedies which would arise under their
      fiduciary obligations to us and to Putai. For example, Putai is subject to
      the
      Company Law of the PRC, including Article 59 thereof which requires that
      directors, supervisors and managers shall faithfully execute their official
      duties and protect their company’s interests. However, laws in the PRC related
      to such concepts as management’s fiduciary duty are not well developed and may
      not protect us in the event we have to rely upon them.




***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, 38.7% of our sales
      in
      U.S. dollar were to our top three major customers, Liudian Burning Materials
      (14.8%), Liulin Coal Cleaning Plant (13.5%) and Xiaoyi Jinyan Corp. (10.4%).
      In
      2005, 37.6% of our sales in U.S. dollar were to our top three major customers,
      Baotou Steel Group (15.2%), Liulin Coal Cleaning Plant (12.8%) and Liulin Jinmei
      Corp. (9.6%). In 2006, 38.1% of our sales in U.S. dollar were to our top three
      major customers, Baotou Steel Group (19.9%), Xuanhua Steel Group (9.6%) and
      Wulin Coke (8.6%). 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, in 2004, 2005 and 2006, 58%, 56% and 52% of total cleaned coking
      coal revenues, respectively, 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.




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




Our
      operating profits may be negatively affected by fluctuations in the price of
      raw
      coking coal. We are subject to short-term coal price volatility and may be
      forced to purchase raw coking coal at higher prices and may be unable to pass
      the cost increase of raw coal on to customers. This may adversely affect gross
      margins and profitability. Our sales agreements with customers generally contain
      provisions that permit the parties to adjust the contract price of the cleaned
      coking coal upward or downward at specified times. For example, we may adjust
      these contract prices because of increases or decreases in the price of raw
      coal
      from our mining suppliers, general inflation or deflation, or changes in the
      cost of producing raw or cleaned coking coal caused by such things as changes
      in
      taxes, fees, royalties or the laws regulating the mining, production, sale
      or
      use of coal. However, if we fail to agree on a price with our customer under
      these provisions, many agreements permit the customer 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.
      In
      2006, the price of raw coking coal rose slightly in the first two quarters
      and
      then remained steady in the last two quarters (this judgment is based on the
      purchase price of our raw coal supply). 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.




22




***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.




23




***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.  In 2005 and 2006, with our effort
      to diversify supply, only four of thirteen and one of sixteen suppliers,
      respectively, provided 10% or more of our total raw coal purchases in tonnage.
      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 33%, 17% and 10% of its top quality raw coal
      production in 2006, 2005 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 purchased 375,177.50MT raw coal 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 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.




24




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





***Significant
      Control of Puda.***





As
      of
      December 31, 2006, approximately 71.5% 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 stock holder 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. The important technology that we
      license from Putai under the Technology License Agreement is not patented.
      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.




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




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




Since
      the
      Zhaos are equity owners of Resources Group they may have a conflict of interest
      with the Company. If the lien is enforced after a default, the secured assets
      would be transferred to an entity which is owned by them. 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 Zhaos and their family. It
      could be in their economic interest to cause us to default on the payment of
      the
      loan with Resources Group since Resources Group could acquire the assets which
      are subject to the lien as a result of enforcement of the lien after a default.
      With their combined ownership of us (currently 71.5% and 52.6% upon the
      Conversion), they can control the actions which we take. Zhao Ming is our CEO
      and Chairman of the Board. In addition, the Zhao brothers also control the
      mines
      from which we get most of our coal. By limiting or eliminating our supply,
      they
      could materially adversely impact our production and revenue, which in turn
      could cause us to default on our loan to Resources Group. See also the risk
      below, “Our principal stockholders have significant control over the company and
      may have conflicts of interest with the company.”




25




***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 our production capacity through the acquisition
      of two new facilities, the New Shanxi Liulin Jucai Plant and the New Zhongyang
      Plant. Both facilities have completed testing and are now fully operational.
      We
      may not be able to successfully integrate these new operations and capitalize
      on
      any of the opportunities from these new facilities. We will be required to
      add
      and train personnel, expand management information systems, deal with any
      engineering and technical problems which may arise and control expenses. We
      have
      also incurred new debt of $13 million in the form of a 6% secured loan amortized
      over 10 years in order to finance the two new facilities. If we do not
      successfully address our increased management needs or we are otherwise unable
      to manage growth effectively, our operating results could be materially and
      adversely affected. 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.




26




**Risks
      Relating to Doing Business in China**




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




Substantially
      all of our business operations are conducted in China. Accordingly, our results
      of operations, financial condition and prospects are subject to economic,
      political and legal developments in China. China’s economy differs from the
      economies of most developed countries in many respects, including its levels
      of
      government involvement, level of development, growth rate, control of foreign
      exchange and allocation of resources. Doing business in China involves various
      risks including internal and international political risks, evolving national
      economic policies as well as financial accounting standards, expropriation
      and
      the potential for a reversal in economic conditions. Since the late 1970s,
      the
      Chinese government has been reforming its economic system. These policies and
      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.




27




***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.




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 executive officers reside within
      China. As a result, it may not be possible to affect 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.




28




***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.




In
      order
      to pay dividends, a conversion of Renminbi into U.S. dollar is required. Under
      current Chinese law, the conversion of Renminbi into foreign currency generally
      requires government consent. Government authorities may impose restrictions
      that
      could have a negative impact in the future on the conversion process and upon
      the ability of Shanxi Coal to meet its cash needs, and to pay dividends.
      However, Putai is presently classified as a wholly-owned foreign enterprise,
      or
      WFOE, in China that has verifiable foreign investment in China, funding having
      been made through an official Chinese banking channel. Because Putai qualifies
      for treatment as a WFOE, it can convert Renminbi, declare dividends and its
      funds can be repatriated to Puda 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.




29




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
      in the reverse merger. 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. Puda has not complied with the SAFE No.
      75
      and is working on the compliance process. Penalties for non-compliance which
      may
      be issued by SAFE can impact the PRC resident investors as well as the onshore
      subsidiary. However, certain matters related to implementation of Circular
      No.
      75 remain unclear or untested. As a result, Putai may be impacted by potential
      penalties which may be issued by SAFE. For instance, remedial action for
      violation of the SAFE requirements may be to restrict the ability of Putai
      to
      repatriate and distribute its profits to BVI and ultimately, to Puda 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 decides to cause Putai to exercise its option to acquire
      all of the capital stock of Shanxi Coal pursuant to the Exclusive Option
      Agreement 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.




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




Effective
      July 21, 2005, The People’s Bank of China announced that the Renminbi exchange
      rate regime is reformed by moving from a fixed rate of exchange based upon
      the
      U.S. dollar to a managed floating exchange rate regime based upon market supply
      and demand of a basket of currencies. As of July 26, 2005, the exchange rate
      against the Renminbi was adjusted to 8.11 Renminbi per U.S. dollar from 8.28
      Renminbi per U.S. dollar, which represents an adjustment of approximately two
      percent. As of December 29, 2006, the last trading day in 2006, Renminbi
      appreciated to approximately 7.81 Renminbi per U.S. dollar. 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 and contract awards for development projects will not be readily
      available to shareholders. Shareholders will be dependent upon Shanxi Coal’s
      management for reports of Shanxi Coal’s progress, development, activities and
      expenditure of proceeds.




30




**Risks
      Associated with Our Common Stock**




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




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





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




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




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




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




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




A
      substantial majority of Puda’s outstanding shares of Common Stock are
“restricted securities” within the meaning of Rule 144 under the Securities Act.
      As restricted shares, these shares may be resold only pursuant to an effective
      registration statement or under the requirements of Rule 144 or other applicable
      exemption from registration under the Act and as required under applicable
      state
      securities laws. Rule 144 provides in essence that a person who has held
      restricted securities for a period of at least one year may, under certain
      conditions, sell every three months, in brokerage transactions, a number of
      shares that does not exceed the greater of 1.0% of a our outstanding Common
      Stock or the average weekly trading volume during the four calendar weeks prior
      to the sale. There is no limit on the amount of restricted securities that
      may
      be sold by a non-affiliate after the restricted securities have been held by the
      owner for a period of two years or more. If a substantial number of shares
      of
      our stock are sold under Rule 144 or other exemption, it could cause the price
      our stock to go down.




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




31




As
      of
      December 31, 2006, Zhao Ming and Zhao Yao own approximately 71.5% of the Company
      and upon the conversion of all of the outstanding convertible notes and the
      exercise of all of the outstanding warrants (“Conversion”), they will own
      approximately 52.6 ***%*** of our
      outstanding stock and, acting together, will be able to exert a significant
      degree of influence over our management and affairs and all actions requiring
      stockholder approval, such as the election of directors and approval of
      significant corporate transactions, including exercising the option to purchase
      Shanxi Coal and pay the option purchase price of $2,717,000. In addition,
      Florida corporate law provides that certain actions may be taken by consent
      action of stockholders holding a majority of the outstanding shares. In the
      event that the requisite approval of stockholders is obtained, dissenting or
      non-participating stockholders generally would be bound by such vote. Through
      their concentration of voting power, the Zhao brothers could delay, deter or
      prevent a change in control of our company or other business combinations that
      might otherwise be beneficial to our other stockholders. Accordingly, this
      concentration of ownership may harm the market price of our ordinary shares.
      In
      addition, the interest of the Zhao brothers may not always coincide with the
      interest of the Company’s other stockholders. In deciding how to vote on such
      matters, the Zhao brothers may be influenced by interests that conflict with
      yours. You should not buy our common stock unless you are willing to entrust
      all
      aspects of operational control to Puda’s current management team.





In
      addition, under a 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’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 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 Fund designee). This voting
      agreement has already expired.




As
      of
      December 31, 2006, Keating Reverse Merger Fund owns 4,718,500 shares of our
      stock, or 5.1% (3.7 ***%*** after
      the Conversion).




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




Zhao
      Ming
      and Zhao Yao may have, or may develop in the future, conflicts of interest
      with
      us. First, 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. Second, the loan used to finance our recent facility expansions
      are held by Resources Group, a company which is owned by the Zhaos. It could
      be
      in their economic interest to cause us to default on the payment of the loan
      with Resources Group since Resources Group could acquire the assets which are
      subject to the lien as a result of enforcement of the lien after a default.
      With
      their combined ownership of us (71.5%, and 52.6 ***%*** after
      the Conversion), they can control the actions which we take. Zhao Ming is our
      CEO and Chairman of the Board. Third, the Zhao brothers control the mines from
      which we obtain most of our coal. We currently secure raw coal from a local
      Liulin County coal mines, including Jucai Coal, a coal mine that is currently
      75% owned by Zhao Yao, Mr. Zhao Ming’s brother and a manager of the coal washing
      plants of Shanxi Coal. By limiting or eliminating our supply, the Zhao brothers,
      who control our coal mine supplies, could materially adversely impact our
      production and revenue, which in turn could cause us to default on our loan
      to
      Resources Group. Furthermore, Putai, our wholly-owned indirect subsidiary,
      has
      an option to purchase Shanxi Coal (the “Option”) 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 our two principal shareholders.
      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). Such exercise
      of the buy-out option may not be in the best interest of Puda and its
      shareholders other than the Zhao brothers. In addition, the Zhao Brothers may
      declare dividends out of Shanxi Coal that they together receive 100% of the
      benefit, even though it would be in the interests of Puda for Shanxi Coal to
      reinvest its profits into the business.




32




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




Outstanding
      derivative securities, including convertible notes and warrants, and current
      and
      future obligations to issue Puda Coal’s securities to various parties may dilute
      the value of your investment. As of December 31, 2006, excluding warrants,
      there
      were 15,000 options exercisable at $1.00 per share which will expire on October
      20, 2008. The weighted average exercise price of these options is $1.00. For
      the
      length of time these warrants and options are outstanding, the holders thereof
      will have an opportunity to profit from a rise in the market price of our Common
      Stock without assuming the risks of ownership. This may have an adverse effect
      on the terms upon which we can obtain additional capital. It should be expected
      that the holders of such derivative securities would exercise or convert them
      at
      a time when we would be able to obtain equity capital on terms more favorable
      than the exercise or conversion prices provided by the warrants or options.
      There are no preemptive rights in connection with Puda Coal’s Common Stock.




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




We
      do not
      intend to pay any dividends in the foreseeable future. We do not plan on making
      any cash distributions in the manner of a dividend or otherwise. Our board
      of
      directors presently intends to follow a policy of retaining earnings, if any.
      See “Dividend Policy”.




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 to Zhao Ming (80%) and Zhao Yao (20%). No dividend was declared
      in
      2006. In the future, the Zhao Brothers may continue declaring dividends out
      of
      Shanxi Coal that they together receive 100% of the benefit, even though it
      would
      be in the interests of Puda for Shanxi Coal to reinvest its profits into the
      business.




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




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




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




***We
      could incur costs from liabilities related to our operations before our reverse
      merger.***




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




33




**Item
      2. Description of Property**




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





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
      100,000MT. The lease for the Shanxi Liulin Jucai Plant expired on December
      31,
      2005 and was not renewed. The Shanxi Liulin Dongqiang Plant, which is located
      in
      Liulin County, Shanxi province and owned by Shanxi Coal, has annual capacity
      of
      400,000MT. Shanxi Coal has significantly increasing its coal cleaning capacity
      through its acquisition of a new facility in Liulin County, which has an annual
      capacity of 1.1 million MT, as well as through its acquisition of a new facility
      and related land use rights in Zhongyang County, Shanxi Province which has
      an
      annual capacity of 1.2 million MT.




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





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





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





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




As
      of
      December 31, 2006, Shanxi Coal maintains insurance coverage in the amount of
      $11,109,740 (RMB90,100,000) through The People’s Insurance Company of China as
      follows:




**Risk
                Covered**
            
            **Insured
                Amount**
              **(RMB)**
            
            **Insured
                Amount**
              **($)**
            
            **Premium**
              **(RMB)**
            
            **Premium**
              **($)**Risk
                of Loss of New Equipments
            
            
            10,000,000
            
            
            1,233,046
            
            
            36,000
            
            
            4,439Third
                Party Liability
            
            
            100,000
            
            
            12,330
            
            
            887
            
            
            109Risk
                of Theft and Robbery
            
            
            10,000,000
            
            
            1,233,046
            
            
            36,000
            
            
            4,440Irrespective
                of Percentage
            
            
            30,000,000
            
            
            3,699,137
            
            
            108,000
            
            
            13,317Risk
                of Spontaneous Combustion
            
            
            30,000,000
            
            
            3,699,137
            
            
            15,000
            
            
            1,850Risk
                of Malicious Damage
            
            
            10,000,000
            
            
            1,233,046
            
            
            36,000
            
            
            4,439**Total**
            
            
            **90,100,000**
            
            
            **11,109,740**
            
            
            **231,887**
            
            
            **28,594**




34




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





**Item
      3. Legal Proceedings**




None.




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





None.




**PART
      II**




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




**Market
      Information**





Our
      common stock is quoted under the symbol, “PUDC.OB” 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. The high and low sales prices for
      the
      periods presented have been adjusted to reflect stock splits:





2005
            
            **High***
            
            **Low***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




2006
            
            **High**
            
            **Low**March
                31, 2006
            
            
            4.700
            
            
            1.950June
                30, 2006
            
            
            6.35
            
            
            3.00September
                30, 2006
            
            
            3.80
            
            
            2.54December
                31, 2006
            
            
            4.95
            
            
            1.30








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




35




**Holders**




As
      of
      December 31, 2006 there were 92,881,301 shares outstanding and approximately
      190
      holders of record of our common stock.




**Dividends**





Prior
      to
      our entering into the Operating Agreements, Shanxi Coal declared dividends
      of
      $2,393,000 and $1,452,000 in 2004 and 2005 respectively. Of the amounts
      declared, we distributed $3,204,000 and $944,000 in 2004 and 2005, respectively.
      $1,026,000 remains declared but unpaid. The dividends were distributed between
      Zhao Ming (80%) and Zhao Yao (20%). No dividend was declared in 2006.




Any
      future determination as to the declaration and payment of dividends on Puda’s
      Common Stock will be made at the discretion of Puda’s board of directors out of
      funds legally available for such purpose. Puda is under no contractual
      obligations or restrictions to declare or pay dividends on its Common Stock.
      In
      addition we currently have no plans to pay such dividends. However, even if
      we
      wish to pay dividends, because our cash flow is dependent on dividend
      distributions from our 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
      Agreements. 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. See “Risk Factors.”




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





Neither
      we nor Shanxi Coal have any equity incentive or stock option plan. The Company
      has 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**





Fourth
      Quarter of 2006





In
      October 2006, we issued 200,000 common shares of our stock to David Baum upon
      conversion of the balance of his convertible Note. Mr. Baum acquired the
      convertible Note in our private placement of Notes and securities which closed
      in November, 2005.




36




In
      November 2006, we issued 50,000 common shares of our stock to Kurt Stowell
      upon
      conversion of the balance of his convertible Note. Mr. Stowell acquired the
      Note
      in our private placement of Notes and securities which closed in November,
      2005.




In
      November 2006, we issued 50,000 common shares of our stock to Michael Conn
      upon
      conversion of the balance of his convertible Note. Mr. Conn acquired the Note
      in
      our private placement of Notes and securities which closed in November,
      2005.




In
      November 2006, we issued 200,000 common shares of our stock to Cimarolo Partners
      LLC upon conversion of the balance of his convertible Note. Cimarolo Partners
      LLC acquired the Note in our private placement of Notes and securities which
      closed in November, 2005.




In
      November 2006, we issued 300,000 common shares of our stock to Silicon Prairie
      Partners LP upon conversion of the balance of his convertible Note. Silicon
      Prairie Partners LP acquired the Note in our private placement of Notes and
      securities which closed in November, 2005.




In
      November 2006, we issued 200,000 common shares of our stock to John Micek III
      upon conversion of the balance of his convertible Note. Mr. Micek acquired
      the
      Note in our private placement of Notes and securities which closed in November,
      2005.




In
      November 2006, we issued 50,000 common shares of our stock to Philadelphia
      Health & Education upon conversion of the balance of his convertible Note.
      Philadelphia Health & Education acquired the Note in our private placement
      of Notes and securities which closed in November, 2005.




In
      November 2006, we issued 50,000 common shares of our stock to Bimalkumar P
      Brahmbhatt, upon conversion of the balance of his convertible Note. Mr.
      Brahmbhatt acquired the Note in our private placement of Notes and securities
      which closed in November, 2005.




In
      November 2006, we issued 50,000 common shares of our stock to William Petrino
      upon conversion of the balance of his convertible Note. Mr. Petrino acquired
      the
      Note in our private placement of Notes and securities which closed in November,
      2005.




In
      November 2006, we issued 100,000 common shares of our stock to H L Severance
      Inc
      Pension Plan upon conversion of the balance of his convertible Note. H L
      Severance Inc Pension Plan acquired the Note in our private placement of Notes
      and securities which closed in November, 2005.




In
      November 2006, we issued 150,000 common shares of our stock to H L Severance
      Inc. Profit Sharing Plan upon conversion of the balance of his convertible
      Note.
      H L Severance Inc. Profit Sharing Plan acquired the Note in our private
      placement of Notes and securities which closed in November, 2005.




In
      November 2006, we issued 250,000 common shares of our stock to H. Leigh
      Severance upon conversion of the balance of his convertible Note. Mr. Severance
      acquired the Note in our private placement of Notes and securities which closed
      in November, 2005.




In
      November 2006, we issued 50,000 common shares of our stock to Janet Carter
      upon
      conversion of the balance of his convertible Note. Janet Carter acquired the
      Note in our private placement of Notes and securities which closed in November,
      2005.




In
      November 2006, we issued 300,000 common shares of our stock to Dowling, Victor
      & Jody JTWROS upon conversion of the balance of his convertible Note.
      Dowling, Victor & Jody JTWROS acquired the Note in our private placement of
      Notes and securities which closed in November, 2005.




37




In
      November 2006, we issued 50,000 common shares of our stock to Gibson Living
      Trust upon conversion of the balance of his convertible Note. Gibson Living
      Trust acquired the Note in our private placement of Notes and securities which
      closed in November, 2005.




In
      November 2006, we issued 100,000 common shares of our stock to Peter Levy upon
      conversion of the balance of his convertible Note. Peter Levy acquired the
      Note
      in our private placement of Notes and securities which closed in November,
      2005.




In
      November 2006, we issued 100,000 common shares of our stock to Peter Levy upon
      partial exercise of its Warrant to purchase 200,000 common shares of stock
      at
      $0.60 per share for total proceeds to us of $60,000. Peter Levy acquired the
      Warrant in our private placement of Notes and securities which closed in
      November, 2005.




In
      November 2006, we issued 50,000 common shares of our stock to Adrienne Baker
      upon conversion of the balance of his convertible Note. Adrienne Baker acquired
      the Note in our private placement of Notes and securities which closed in
      November, 2005.




In
      November 2006, we issued 250,000 common shares of our stock to F. Berdon Co.
      LP
      upon conversion of the balance of his convertible Note. F. Berdon Co. LP
      acquired the Note in our private placement of Notes and securities which closed
      in November, 2005.




In
      November 2006, we issued 800,000 common shares of our stock to Southridge
      Partners LP upon conversion of the balance of his convertible Note. Southridge
      Partners LP acquired the Note in our private placement of Notes and securities
      which closed in November, 2005.




In
      November 2006, we issued 200,000 common shares of our stock to Christopher
      Baker
      upon conversion of the balance of his convertible Note. Christopher Baker
      acquired the Note in our private placement of Notes and securities which closed
      in November, 2005.




In
      November 2006, we issued 300,000 common shares of our stock to Anasazi Partners
      III LLC upon conversion of the balance of his convertible Note. Anasazi Partners
      III LLC acquired the Note in our private placement of Notes and securities
      which
      closed in November, 2005.




In
      November 2006, we issued 300,000 common shares of our stock to Anasazi Partners
      III Offshore Ltd. upon conversion of the balance of his convertible Note.
      Anasazi Partners III Offshore Ltd. acquired the Note in our private placement
      of
      Notes and securities which closed in November, 2005.




In
      November 2006, we issued 150,000 common shares of our stock to Nite Capital
      LP
      upon conversion of the balance of his convertible Note. Nite Capital LP acquired
      the Note in our private placement of Notes and securities which closed in
      November, 2005.





In
      November 2006, we issued 150,000 common shares of our stock to Alpha Capital
      AG
      upon conversion of the balance of his convertible Note. Alpha Capital AG
      acquired the Note in our private placement of Notes and securities which closed
      in November, 2005.




In
      November 2006, we issued 600,000 common shares of our stock to Banca Gesfid
      upon
      conversion of the balance of his convertible Note. Banca Gesfid acquired the
      Note in our private placement of Notes and securities which closed in November,
      2005.




In
      November 2006, we issued 50,000 common shares of our stock to James W. Fuller,
      upon conversion of the balance of his convertible Note. James W. Fuller acquired
      the Note in our private placement of Notes and securities which closed in
      November, 2005.




38




In
      November 2006, we issued 200,000 common shares of our stock to Jonathan Ungar
      upon conversion of the balance of his convertible Note. Jonathan Ungar acquired
      the Note in our private placement of Notes and securities which closed in
      November, 2005.




In
      November 2006, we issued 100,000 common shares of our stock to White Sand
      Investors upon conversion of the balance of his convertible Note. White Sand
      Investors acquired the Note in our private placement of Notes and securities
      which closed in November, 2005.




In
      November 2006, we issued 30,000 common shares of our stock to Whalehaven Capital
      Fund Limited upon conversion of the balance of his convertible Note. Whalehaven
      Capital Fund Limited acquired the Note in our private placement of Notes and
      securities which closed in November, 2005.




In
      November 2006, we issued 200,000 common shares of our stock to Alpha Capital
      AG
      upon conversion of the balance of his convertible Note. Alpha Capital AG
      acquired the Note in our private placement of Notes and securities which closed
      in November, 2005.




In
      November 2006, we issued 100,000 common shares of our stock to Masters, Paul
      IRA
      upon conversion of the balance of his convertible Note. Masters, Paul IRA
      acquired the Note in our private placement of Notes and securities which closed
      in November, 2005.




In
      November 2006, we issued 100,000 common shares of our stock to Professional
      Offshore Opportunity upon conversion of the balance of his convertible Note.
      Professional Offshore Opportunity acquired the Note in our private placement
      of
      Notes and securities which closed in November, 2005.




In
      November 2006, we issued 200,000 common shares of our stock to Professional
      Traders Fund LLC upon conversion of the balance of his convertible Note.
      Professional Traders Fund LLC acquired the Note in our private placement of
      Notes and securities which closed in November, 2005.




In
      December 2006, we issued 800,000 common shares of our stock to Crestview Capital
      master LLC upon conversion of the balance of his convertible Note. Crestview
      Capital master LLC acquired the Note in our private placement of Notes and
      securities which closed in November, 2005.




In
      December 2006, we issued 500,000 common shares of our stock to Vision
      Opportunity Master Fund upon conversion of the balance of his convertible Note.
      Vision Opportunity Master Fund acquired the Note in our private placement of
      Notes and securities which closed in November, 2005.




In
      December 2006, we issued 200,000 common shares of our stock to Double U Master
      Fund LP upon conversion of the balance of his convertible Note. Double U Master
      Fund LP acquired the Note in our private placement of Notes and securities
      which
      closed in November, 2005.




In
      December 2006, we issued 720,000 common shares of our stock to Wahlehaven
      Capital Fund Limited upon conversion of the balance of his convertible Note.
      Wahlehaven Capital Fund Limited acquired the Note in our private placement
      of
      Notes and securities which closed in November, 2005.





In
      December 2006, we issued 1,100,000 common shares of our stock to Chelverton
      Dividend Income Fund (now known as CIM Dividend Income Fund) upon conversion
      of
      the balance of his convertible Note. Chelverton acquired the Note in our private
      placement of Notes and securities which closed in November, 2005.




39




In
      December 2006, we issued and delivered 578,634 shares of Common Stock of Puda
      Coal to the investors in the November 2005 private placement as penalty shares
      due on March 17, 2006 through November 12, 2006 for our failure to make the
      resale registration statement on Form SB-2 effective according to the time
      frame
      agreed upon with the investors in the Subscription Agreement. The investors
      acquired the Notes and Warrants in our private placement which closed in
      November 2005. The followings are the breakdown of the penalty
      shares:




**Shareholder**
            
            **Number
                of**
              **Penalty
                Shares**Silver
                Rock I, Ltd.
            
            
            11,573Alpha
                Capital AG
            
            
            16,202Anasazi
                Partners III Offshore, Ltd.
            
            
            9,258Anasazi
                Partners III, LLC
            
            
            13,887Anima
                S.G.R.p.A. RUBRICA ANIMA EMERGING MARKETS
            
            
            9,258Anima
                S.G.R.p.A. RUBRICA ANIMA FONDO TRADING
            
            
            25,460Baker,
                Adrienne
            
            
            1,157Baker,
                Christopher
            
            
            9,258Banca
                Gesfid
            
            
            18,516Barish,
                Michae
            
            
            4,629Barletta,
                Joseph & Karen JTWROS
            
            
            1,157Baum,
                David
            
            
            9,258Beeman
                Insurance Agency Inc.
            
            
            1,157Brahmbhatt,
                Bimalkumar P.
            
            
            1,157Carter,
                Janet
            
            
            1,157Chelverton
                Dividend Income Fund Limited (now known as CIM Dividend Income
                Fund)
            
            
            25,460Chilcott,
                John
            
            
            2,315Cimarolo
                Partners, LLC
            
            
            4,629Conn,
                Michael
            
            
            1,157Crestview
                Capital
            
            
            46,290Datsopoulos,
                Milton
            
            
            4,629DD
                Euro Growth Fund
            
            
            2,315DD
                Growth Premium Fund
            
            
            2,315DiPietro,
                Robert
            
            
            1,157Double
                U Master Fund L.P.
            
            
            4,629Dowling,
                Victor & Jody JTWROS
            
            
            6,944Erigero,
                Greg
            
            
            1,157F.
                Berdon Co. L.P.
            
            
            5,786Flynn,
                Jason
            
            
            1,157French,
                David
            
            
            2,315Fuller,
                James W.
            
            
            1,157Gerdz
                Investments Limited Partnership, RLLLP
            
            
            1,157Gibson
                Living Trust
            
            
            1,157Grose,
                D. Austin
            
            
            2,315H.L.
                Severance Inc., Pension Plan & Trust
            
            
            2,315




40




H.L.
                Severance Inc., Profit Sharing Plan & Trust
            
            
            3,472Hodel,
                Ann
            
            
            1,157Hollman,
                Mark & Stacia (Tenants by Entirety)
            
            
            1,157Hollman,
                Scott
            
            
            2,315Jayhawk
                China Fund (Cayman) Ltd
            
            
            15,044Johnson,
                Bruce
            
            
            3,472Kahn,
                Sheldon & Liron, Sarah (Community Property)
            
            
            9,258Katz,
                Michael
            
            
            2,315Lapidus,
                Robert & Donna JTWROS
            
            
            1,157Lemak,
                John S.
            
            
            4,629Levy,
                David
            
            
            1,157Levy,
                Peter
            
            
            2,315Masters,
                Paul IRA
            
            
            2,315Micek
                II, John Revocable Trust Dated 03/27/03
            
            
            3,472Micek
                III, John
            
            
            4,629Micek,
                Maurice & Jennifer JTWROS
            
            
            3,472Micek,
                Maurice Custodian for Andrew Micek
            
            
            1,157Micek,
                Maurice Custodian for Benjamin Micek
            
            
            1,157Murphy,
                Brian
            
            
            1,157Nite
                Capital LP
            
            
            6,944Ossellos
                of Butte Profit Sharing Trust FBO Guy J. Ossello ttee
            
            
            1,157Parsley,
                Rod
            
            
            1,157Perinvest
                Dividend Equity Fund Limited
            
            
            6,944Wachovia
                FBO PerInvest Special Situations
            
            
            4,629Peterson,
                Jerry
            
            
            2,315Petrino,
                William
            
            
            1,157Philadelphia
                Health & Education Corporation
            
            
            1,157Professional
                Traders Fund, LLC
            
            
            4,629Purvis,
                Steve
            
            
            2,315Rock
                Associates c/o Stuart Schapiro
            
            
            2,315Samuels,
                Leonard & Kaplan-Samuels, Leah JTWROS
            
            
            3,472Sandor
                Capital Master Fund, L. P.
            
            
            23,145Severance,
                H. Leigh
            
            
            5,786Silicon
                Prairie Partners, L. P.
            
            
            6,944Simgest
                (Italy)
            
            
            46,290Southridge
                Partners, LP
            
            
            24,302Stowell,
                Kurt
            
            
            1,157Thompson,
                Jack
            
            
            3,472Ungar,
                Jonathan
            
            
            4,629Vicis
                Capital Master Fund
            
            
            23,145Vision
                Opportunity
            
            
            11,573Vision
                Opportunity Master Fund
            
            
            16,202




41




Weissenberger,
                Erich
            
            
            11,573Whalehaven
                Capital Fund Limited
            
            
            27,774White
                Sand Investors
            
            
            2,315Wrolstad,
                Christopher
            
            
            2,315Zelinger,
                Steven & Gordon, Lisa (Community Property)
            
            
            1,157Whitehorse
                Capital
            
            
            2,315JP
                Carey
            
            
            2,315Granada
            
            
            2,315Maytiv
            
            
            1,736Alexander
                Westcott & Co
            
            
            579Sage
                Capital Investments
            
            
            1,157




The
      convertible Notes which were converted in connection with each of the above
      issuances were offered and sold and the penalty shares were acquired and fully
      paid for in our November 2005 private placement only to accredited investors
      in
      the United States and to persons who are not “U.S. persons” as defined in
      Regulation S under the Securities Act. The Notes and related Warrants, or Units,
      offered in such private placement and the shares of Common Stock issued or
      issuable upon the conversion of the Notes and exercise of the Warrants, and
      the
      penalty shares, were offered and sold in reliance on the exemptions from
      registration afforded under Rule 506 of Regulation D and Regulation S under
      the
      Securities Act. We did not engage in any public advertising or general
      solicitation in connection with the issuance of the securities.





Sales
      of
      unregistered securities in the first three quarters of 2006 were disclosed
      in
      our quarterly reports for each of these periods filed with the SEC.




**Purchases
      of Equity Securities by the Issuer**





We
      did
      not purchase any of our equity securities in 2006.





**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 contained herein.
      Unless otherwise specified, all dollar amounts are in U.S. dollars.





**Forward-Looking
      Statements**





The
      following discussion may contain certain forward-looking statements 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” 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’s equity and debt securities. The
      forward-looking statements included herein are based on current expectations
      that involve numerous risks and uncertainties. Assumptions relating to the
      foregoing involve judgments with respect to, among other things, future
      economic, competitive and market conditions and future business decisions,
      all
      of which are difficult or impossible to predict accurately and many of which
      are
      beyond the control of Puda. Although Puda believes that the assumptions
      underlying the forward-looking statements are reasonable, any of the assumptions
      could be inaccurate and, therefore, there can be no assurance that the
      forward-looking statements included in this Form 10-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 or any other person that
      the
      objectives and plans of Puda will be achieved.




42




The
      words
“we,” “us” and “our” refer to Puda 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.





**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.





**Amendment
      to Financial Statements**





The
      following discussion and analysis gives effect to the changes to the audited
      consolidated financial statements for the year ended December 31, 2006 contained
      herein. They have no impact on the Company’s balance sheet and statements of
      changes in stockholders’ equity for the fiscal year ended December 31,
      2006.





**Results
      of Operations**





***Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005***





Net
      Revenue. Net revenue was $137,771,000 in the year ended December 31, 2006,
      compared to $51,710,000 in the year ended December 31, 2005, representing an
      increase of $86,061,000, or 166%. The tonnage sales of cleaned coal increased
      from approximately 680,000 MT in the year ended December 31, 2005 to
      approximately 1,758,000 MT in the year ended December 31, 2006, representing
      a
      159% increase. The increase in tonnage sales of our cleaned coal 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, 2006. The increase in purchase orders
      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 2006. 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. The average sales price of cleaned coal was
      approximately $78 and $77 per ton in the years ended December 31, 2006 and
      2005,
      respectively.





In
      response to this increase in general demand, we have significantly expanded
      our
      coal washing 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 December 2005 and the other became operational in March 2006.
      Management anticipates that China’s strong economic growth will continue in 2007
      and believes that this growth will drive a 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.




43




Cost
      of
      Revenue. Cost of revenue was $109,381,000 in the year ended December 31, 2006,
      compared to $40,047,000 in the year ended December 31, 2005, representing an
      increase of $69,334,000, or 173%. This was primarily due to an increase in
      sales
      volume and an increase in the average price of raw coal from approximately
      $42
      per ton in the year ended December 31, 2005 to approximately $45 per ton in
      the
      year ended December 31, 2006.





Gross
      Profit. Gross profit was $28,390,000 in the year ended December 31, 2006,
      compared to $11,663,000 in the year ended December 31, 2005, representing an
      increase of $16,727,000, or 143%, due to an increase in sales volume. Gross
      profit margin in the year ended December 31, 2006 was 21% versus 23% in the
      year
      ended December 31, 2005 due to an increase in average price of raw coal in
      the
      year ended December 31, 2006.





Selling
      Expenses. Selling expenses were $3,231,000 in the year ended December 31, 2006,
      compared to $791,000 in the year ended December 31, 2005, representing an
      increase of $2,440,000, or 308%. The increase in selling expenses was primarily
      due to the increased sales volume.





General
      and Administrative Expenses. General and administrative expenses were $2,387,000
      in the year ended December 31, 2006, compared to $789,000 in the year ended
      December 31, 2005, representing an increase of $1,598,000, or 203%. This
      increase was primarily due to increases in salary and benefits, legal and
      professional fees and investor relation expenses.





Other
      Operating Expenses. Other operating expenses of $902,000 in the year ended
      December 31, 2005 mainly represented professional and regulatory charges related
      to the public offering of securities. No such expenses were incurred in the
      year
      ended December 31, 2006.





Income
      from Operations. Operating profit was $22,772,000 in the year ended December
      31,
      2006, compared to $9,181,000 in the year ended December 31, 2005. The increase
      of $13,591,000, or 148%, was primarily the result of an increase in gross profit
      of $16,727,000, which was partially offset by an increase in operating expenses
      of $3,136,000.




Interest
      Expense. Interest expense was $4,441,000 in the year ended December 31, 2006,
      compared to $531,000 in the year ended December 31, 2005, representing an
      increase of $3,910,000, or 736%. This increase was primarily due to an increase
      in $2,481,000 for the expensed portion of the discount on the conversion feature
      and warrants related to converted shares and exercised warrants, an increase
      in
      interest payments of $750,000 for the 6% loan from Resources Group for the
      purchase of the Liulin and Zhongyang plants, and an increase in interest
      payments of $679,000 for the 8% convertible notes.





Debt
      Financing Costs. Debt financing costs were $10,669,000 in the year ended
      December 31, 2006, compared to $4,964,000 in the year ended December 31, 2005.
      This represents an increase of $5,705,000, or 115%, primarily due to an increase
      in amortization of discount on convertible notes and warrants of $4,402,000,
      an
      increase in penalty of $1,204,000 for not getting the registration statement
      on
      SB-2 effective by March 17, 2006 as required by the Subscription Agreement,
      and
      an increase in amortization of debt issue costs of $99,000.





Derivative
      Unrealized Fair Value Gain. Derivative unrealized fair value gain were
      $1,237,000 in the year ended December 31, 2006, compared to $700,000 in the
      year
      ended December 31, 2005, an increase of $537,000, or an increase of 77%.
      Derivative unrealized fair value gain in the year ended December 31, 2006 and
      2005 represented a change in fair value of the warrants issued to the placement
      agent.





Income
      Before Income Taxes. Income before income taxes was $8,958,000 in the year
      ended
      December 31, 2006, compared to $4,404,000 in the year ended December 31, 2005.
      The increase of $4,554,000 or 103% was primarily the result of an increase
      in
      operating profit of $13,591,000 and an increase in derivative unrealized fair
      value gain of $537,000, which were partially offset by an increase in debt
      financing costs of $5,705,000 and an increase in interest expenses of
      $3,910,000.




44




Income
      Taxes. Income taxes were $7,604,000 in the year ended December 31, 2006,
      compared to $3,439,000 in the year ended December 31, 2005, an increase of
      $4,165,000 or 121%, due to an increase in the operating profit of Shanxi Coal
      from $9,364,000 in the year ended December 31, 2005 to $23,402,000 in the year
      ended December 31, 2006. Income tax was imposed on Shanxi Coal by the China
      Tax
      Bureau.





Net
      Income. Net income was $1,354,000 in the year ended December 31, 2006, compared
      to $965,000 in the year ended December 31, 2005, representing an increase of
      $389,000, or 40%. This increase was mainly due to an increase in gross profit
      of
      $16,727,000 and an increase in derivative unrealized fair value gain of
      $537,000, which were partially offset by an increase in debt financing costs
      of
      $5,705,000, an increase in income taxes of $4,165,000, an increase in interest
      expenses of $3,910,000 and an increase in operating expenses of $3,136,000
      in
      the year ended December 31, 2006.





**Liquidity
      and Capital Resources**





Net
      cash
      provided by operating activities was $11,296,000 in the year ended December
      31,
      2006, compared to $1,577,000 in the year ended December 31, 2005, representing
      an increase of $9,719,000. This was primarily due to increased income from
      operations after adjusting for non-cash items.




Net
      cash
      provided by financing activities of $560,000 in the year ended December 31,
      2006
      was related to the cash received from the exercise of warrants of $1,860,000,
      which was partially offset by the repayment of long-term debt of $1,300,000.
      Net
      cash provided by financing activities of $10,020,000 in the year ended December
      31, 2005 was mainly related to the
      issuance of convertible notes of $12,500,000, which was offset by an increase
      in
      debt issue costs of $1,583,000 and an increase in dividend distribution of
      $947,000 .





On
      November 17, 2005, Shanxi Coal entered into two conveyance agreements with
      Resources Group. The two agreements transfer two new coal washing plants,
      related land-use rights and coal washing equipment in Liulin County and
      Zhongyang County, Shanxi Province. The Liulin County plant is expected to have
      an annual clean coal washing capacity of 1.1 million MT while the Zhongyang
      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
      full production in December 2005. The Liulin County plant, land-use rights
      and
      related equipment were purchased for a cost of $5,800,000. The Zhongyang County
      plant started full production in March 2006. The Zhongyang County plant,
      land-use rights and related equipment were purchased for a cost of $7,200,000.
      Each conveyance agreement provides that the purchase price paid by Shanxi Coal
      to Resources Group, which totals $13,000,000, be amortized over 10 years from
      December 31, 2005 and bears 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 $11,700,000 for the
      acquisition of the New Shanxi Liulin Jucai Plant and the New Zhongyang Plant.
      We
      must also pay interest on the notes issued in our November 18, 2005 private
      placement which have an aggregate principal amount of $4,900,000, an interest
      rate of 8% per annum and a maturity date of October 31, 2008. Interest is
      payable quarterly and the principal amount is payable at the maturity date.
      These notes may be converted into our common stock at the conversion price
      of
      $.50 per share. The price of our stock is likely to impact our liquidity needs
      for payment of these notes on both a long-term and short-term basis. We believe
      that as our stock becomes more valuable, the note holders will be more likely
      to
      convert their notes into common stock, and we would not be required to pay
      the
      interest any longer or the principal at all, decreasing our need for cash.





Conversely,
      if our stock price decreases, note holders are less likely to convert 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 21,900,000 shares
      of
      our common stock which are exercisable at price of $.60 per share, or an
      aggregate of $13,140,000. 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.




45




Our
      business is heavily dependent on our coal inventory. Because of certain coal
      mining accidents, the Chinese government has been closing mines throughout
      China. In addition, in Shanxi Province, the authorities are not approving new
      mines that produce less than 300,000 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.





We
      are
      considering the acquisition of a new coal washing plant. We intend to use the
      proceeds from the exercise of the warrants issued in our November 2005 private
      placement, to the extent such warrants are exercised from this purchase. If
      these proceeds, which would aggregate $13,140,000 only when they are all fully
      exercised for this purpose, are not sufficient to pay the $14,100,000 the plant
      is projected to cost, the balance of the cost would be paid from internal
      resources, or we would have to secure a loan, or issue additional
      equity.





We
      believe that our cash resources will be adequate to satisfy our obligations
      for
      the foreseeable future. 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. ****** 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’s
      Significant Accounting Estimates and Policies**





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





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





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




46




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, 2004, and 2005. The PRC during 2003 and
      2004
      fixed the exchange rate of 8.28 RMB per US$1.00. In July, 2005, Chinese
      government changed its exchange rate regime to a managed floating exchange
      rate
      regime and appreciated Renminbi rate to 8.11 RMB per US$ 1.00. On December
      31,
      2006, the Renminbi rate was 7.81 RMB per US$ 1.00.





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.





In
      July
      2006, the FASB issued Financial Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”
(“FIN 48”), which is a change in accounting for income taxes. FIN 48 specifies
      how tax benefits for uncertain tax positions are to be recognized, measured,
      and
      derecognized in financial statements; requires certain disclosures of uncertain
      tax matters; specifies how reserves for uncertain tax positions should be
      classified on the balance sheet; and provides transition and interim-period
      guidance, among other provisions. FIN 48 is effective for fiscal years beginning
      after December 15, 2006. The adoption of FIN 48 is expected to have no
      material impact on the Group’s consolidated financial statements.




In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”),
“Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements.” SAB 108 provides
      interpretative guidance on the process of quantifying financial statement
      misstatements and is effective for fiscal years ending after November 15, 2006.
      The adoption of SAB 108 is expected to have no material impact on the Group’s
      consolidated financial statements.




**Off
      Balance Sheet Arrangements.**





None.




47




**Item
      7. Financial Statements**




**PUDA
      COAL, INC.**





**CONSOLIDATED
      FINANCIAL STATEMENTS**


**December
      31, 2006 And 2005**


**Together
      With Report Of**


**Independent
      Registered Public Accounting Firm**





**PUDA
      COAL, INC.**


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**




Report
                of Independent Registered Public Accounting Firm
            
            
            F1Consolidated
                Balance Sheet
            
            
            F3-F4Consolidated
                Statements of Operations
            
            
            F5-F6Consolidated
                Statements of Changes in Stockholders’ Equity
            
            
            F7Consolidated
                Statements of Cash Flows
            
            
            F8Notes
                to Consolidated Financial Statements
            
            
            F9-F31




F-1




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors and Stockholders of


Puda
      Coal, Inc.





We
      have
      audited the accompanying consolidated balance sheet of Puda Coal, Inc. and
      subsidiaries as of December 31, 2006, 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 consolidated financial statements are
      the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these consolidated financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The
      Company is not required to have, nor were we engaged to perform, an audit of
      its
      internal control over financial reporting. Our audit included consideration
      of
      internal control over financial reporting as a basis for designing audit
      procedures that are appropriate in the circumstances, but not for the purposes
      of expressing an opinion on the effectiveness of the Company's internal control
      over financial reporting. Accordingly, we express no such opinion.  An
      audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall financial statement presentation.
      We believe that our audits provide a reasonable basis for our
      opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Puda Coal, Inc. and
      subsidiaries as of December 31, 2006 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.







/s/
      Moore
      Stephens





*Certified
      Public Accountants*


*Hong
      Kong*





May
      10,
      2007




F-2




**PUDA
      COAL, INC.**


**CONSOLIDATED
      BALANCE SHEET**


**December
      31, 2006**


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





Note(s)
            
            December
                31, 2006**ASSETS**CURRENT
                ASSETSCash
                and cash equivalents
            
            
            22
            
            $
            24,943Restricted
                cash
            
            
            3,
                22
            
            
            233Accounts
                receivable, net
            
            
            4
            
            
            7,186Other
                receivables-
                Related parties
            
            
            5
            
            
            9-Third
                parties
            
            
            
            
            
            40Advances
                to suppliers-
                Related parties
            
            
            5
            
            
            602-
                Third parties
            
            
            
            
            
            538Deferred
                charges
            
            
            10
            
            
            171Inventories
            
            
            6
            
            
            15,663Total
                current assets
            
            
            
            
            
            49,385PROPERTY,
                PLANT AND EQUIPMENT, NET
            
            
            7
            
            
            9,870INTANGIBLE
                ASSETS, NET
            
            
            8
            
            
            3,729TOTAL
                ASSETS
            
            
            
            
            $
            62,984**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**CURRENT
                LIABILITIESCurrent
                portion of long-term debt-
                Related party
            
            
            5,
                9
            
            $
            1,300Accounts
                payable-
                Related parties
            
            
            5
            
            
            221-
                Third parties
            
            
            
            
            
            2,531Other
                payables-
                Related party
            
            
            5
            
            
            901-
                Third parties
            
            
            
            
            
            2,113Accrued
                expenses
            
            
            
            
            
            951Income
                taxes payable
            
            
            
            
            
            2,485VAT
                payable
            
            
            
            
            
            1,204Distribution
                payable
            
            
            
            
            
            1,026Penalty
                payable
            
            
            10
            
            
            204Total
                current liabilities
            
            
            
            
            
            12,936LONG-TERM
                LIABILITIESLong-term
                debt-
                Related party
            
            
            5,
                9
            
            
            10,400Convertible
                notes
            
            
            10
            
            
            3,108Derivative
                conversion feature
            
            
            10
            
            
            2,406Derivative
                warrants
            
            
            10
            
            
            8,380Total
                long-term liabilities
            
            
            
            
            
            24,294COMMITMENTS
                AND CONTINGENCIES
            
            
            11




F-3




**PUDA
      COAL, INC.**


**CONSOLIDATED
      BALANCE SHEET (Continued)**


**December
      31, 2006**


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





Note(s)
            
            December
                31, 2006TEMPORARY
                EQUITYOption
                to buy-out Shanxi Coal
            
            
            1
            
            
            2,717STOCKHOLDERS’
                EQUITYPreferred
                stock, authorized 5,000,000 shares, parvalue
                $0.01, issued and outstanding None
            
            
            
            
            
            -Common
                stock, authorized 150,000,000 shares,par
                value $0.001, issued and outstanding92,881,301
            
            
            
            
            
            93Paid-in
                capital
            
            
            
            
            
            16,506Statutory
                surplus reserve fund
            
            
            13
            
            
            1,366Retained
                earnings
            
            
            
            
            
            3,933Accumulated
                other comprehensive income
            
            
            
            
            
            1,139Total
                stockholders’ equity
            
            
            
            
            
            23,037TOTAL
                LIABILITIES AND STOCKHOLDERS’EQUITY
            
            
            
            
            $
            62,984




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




F-4


**PUDA
      COAL, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


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


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





Years
                ended December 31,Note(s)
            
            2006
            
            2005NET
                REVENUE
            
            
            
            
            $
            137,771
            
            $
            51,710COST
                OF REVENUE
            
            
            
            
            
            (109,381
            )
            
            (40,047
            )GROSS
                PROFIT
            
            
            
            
            
            28,390
            
            
            11,663OPERATING
                EXPENSESSelling
                expenses
            
            
            
            
            
            3,231
            
            
            791General
                and administrative expenses
            
            
            
            
            
            2,387
            
            
            789Other
                operating expenses
            
            
            14
            
            
            -
            
            
            902TOTAL
                OPERATING EXPENSES
            
            
            
            
            
            5,618
            
            
            2,482INCOME
                FROM OPERATIONS
            
            
            
            
            
            22,772
            
            
            9,181GAIN
                ON SHORT-TERM INVESTMENTS
            
            
            
            
            
            -
            
            
            6INTEREST
                INCOME
            
            
            
            
            
            59
            
            
            12INTEREST
                EXPENSE
            
            
            15
            
            
            (4,441
            )
            
            (531
            )DEBT
                FINANCING COSTS
            
            
            16
            
            
            (10,669
            )
            
            (4,964
            )DERIVATIVE
                UNREALIZED FAIR VALUE GAIN
            
            
            10(c),
                17
            
            
            1,237
            
            
            700INCOME
                BEFORE INCOME TAXES
            
            
            
            
            
            8,958
            
            
            4,404INCOME
                TAXES
            
            
            18
            
            
            (7,604
            )
            
            (3,439
            )NET
                INCOME
            
            
            
            
            
            1,354
            
            
            965OTHER
                COMPREHENSIVE INCOMEForeign
                currency translation adjustment
            
            
            
            
            
            985
            
            
            154COMPREHENSIVE
                INCOME
            
            
            
            
            $
            2,339
            
            $
            1,119NET
                INCOME
            
            
            
            
            
            1,354
            
            
            965LESS:
                DIVIDENDSOption
                holder preference dividend
            
            
            1,
                2(n
            )
            
            (2,717
            )
            
            (2,717
            )Common
                dividend
            
            
            
            
            
            -
            
            
            -UNDISTRIBUTED
                EARNINGS
            
            
            
            
            $
            (1,363
            )
            $
            (1,752
            )




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




F-5


**PUDA
      COAL, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS (Continued)**


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


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





Years
                ended December 31,Note(s)
            
            2006
            
            2005BASIC
                EARNINGS/(LOSS) PER SHARE-
                Option holder preference
            
            
            
            
            $
            0.04
            
            $
            0.04-
                Other common holders
            
            
            
            
            
            (0.02
            )
            
            (0.03
            )$
            0.02
            
            $
            0.01DILUTED
                EARNINGS/(LOSS) PER SHARE-
                Option holder preference
            
            
            
            
            $
            0.04
            
            $
            0.04-
                Other common holders
            
            
            
            
            
            (0.02
            )
            
            (0.03
            )$
            0.02
            
            $
            0.01WEIGHTED
                AVERAGE NUMBER OF SHARESOUTSTANDING-BASIC
            
            
            19
            
            
            80,167,110
            
            
            73,950,274-DILUTED
            
            
            19
            
            
            80,176,793
            
            
            77,576,036





F-6


**PUDA
      COAL, INC.**


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


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


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





COMMON
                STOCK
            
            PAID-IN
                CAPITAL
            
            STATUTORY
                SURPLUS RESERVE FUND
            
            RETAINED
              EARNINGS
            
            ACCUMULATED
                OTHER COMPREHENSIVE INCOME
            
            TOTAL
              STOCKHOLDERS’
                EQUITYNo.
                of sharesBalance,
                January 1, 2005, as recapitalized (see Notes 1 and 12)
            
            
            73,750,000
            
            $
            74
            
            $
            2,643
            
            $
            1,243
            
            $
            3,189
            
            $
            -
            
            $
            7,149Shareholder
                contribution
            
            
            -
            
            
            -
            
            
            50
            
            
            -
            
            
            -
            
            
            -
            
            
            50Notes
                converted to common stock, at $0.50 per share (Note 10(a)
            
            
            1,700,000
            
            
            1
            
            
            849
            
            
            -
            
            
            -
            
            
            -
            
            
            850Conversion
                feature transferred to equity upon conversion (Note 10(c)
            
            
            -
            
            
            -
            
            
            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
            
            
            -
            
            
            -
            
            
            666
            
            
            -
            
            
            -
            
            
            -
            
            
            666Reclassification
                to temporary equity (Note 1)
            
            
            -
            
            
            -
            
            
            (2,717
            )
            
            -
            
            
            -
            
            
            -
            
            
            (2,717
            )Foreign
                currencytranslation
                adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            154
            
            
            154Balance,
                December 31, 2005
            
            
            75,450,000
            
            
            75
            
            
            1,908
            
            
            1,366
            
            
            2,579
            
            
            154
            
            
            6,082Notes
                converted to common stock, at $0.50 per share (Note 10(a)
            
            
            13,500,000
            
            
            14
            
            
            6,736
            
            
            -
            
            
            -
            
            
            -
            
            
            6,750Exercise
                of warrants, at $0.60 per share (Note 10(a)
            
            
            3,100,000
            
            
            3
            
            
            1,857
            
            
            -
            
            
            -
            
            
            -
            
            
            1,860Cashless
                exercise of placement agent warrants (Note 10(b)
            
            
            242,180
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Derivative
                conversion feature transferred to equity upon conversion (Note
                10(c)
            
            
            -
            
            
            -
            
            
            3,314
            
            
            -
            
            
            -
            
            
            -
            
            
            3,314Derivative
                warrants transferred to equity upon exercise (Note 10(c)
            
            
            -
            
            
            -
            
            
            1,671
            
            
            -
            
            
            -
            
            
            -
            
            
            1,671Issue
                of common stock for services
            
            
            10,000
            
            
            -
            
            
            21
            
            
            -
            
            
            -
            
            
            -
            
            
            21Issue
                of common stock for fractional shares and round lot holders
            
            
            487
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Issue
                of penalty shares (Note 10(a)
            
            
            578,634
            
            
            1
            
            
            999
            
            
            -
            
            
            -
            
            
            -
            
            
            1,000Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,354
            
            
            -
            
            
            1,354Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            985
            
            
            985Balance,
                December 31, 2006
            
            
            92,881,301
            
            $
            93
            
            $
            16,506
            
            $
            1,366
            
            $
            3,933
            
            $
            1,139
            
            $
            23,037




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




F-7


**PUDA
      COAL, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


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


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





Years
                ended December 31,Notes
            
            2006
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            
            
            
            $
            1,354
            
            $
            965Adjustments
                to reconcile net income to net cash provided byoperating
                activitiesAmortization
                of land-use rights
            
            
            
            
            
            78
            
            
            9Depreciation
            
            
            
            
            
            953
            
            
            183Provision
                for doubtful debts
            
            
            
            
            
            10
            
            
            5Amortization
                of debt issue costs
            
            
            
            
            
            838
            
            
            739Amortization
                of discount on convertible notes and warrants
            
            
            
            
            
            8,627
            
            
            4,225Derivative
                unrealized fair value gain
            
            
            
            
            
            (1,237
            )
            
            (700
            )Discount
                on converted shares and exercised warrants
            
            
            
            
            
            2,898
            
            
            417Issue
                of common stock for services
            
            
            
            
            
            21
            
            
            -Issue
                of common stock for penalty
            
            
            
            
            
            1,000
            
            
            -Changes
                in operating assets and liabilities:Decrease
                in short-term investments
            
            
            
            
            
            -
            
            
            117Increase
                in accounts receivable
            
            
            
            
            
            (2,972
            )
            
            (1,507
            )Decrease
                in notes receivable
            
            
            
            
            
            -
            
            
            638Decrease
                in other receivables
            
            
            
            
            
            4
            
            
            2,251Decrease/(increase)
                in advances to suppliers
            
            
            
            
            
            1,819
            
            
            (2,430
            )Increase
                in inventories
            
            
            
            
            
            (8,104
            )
            
            (3,994
            )Increase
                in accounts payable
            
            
            
            
            
            1,426
            
            
            610Increase
                in accrued expenses
            
            
            
            
            
            588
            
            
            115Increase
                in other payables
            
            
            
            
            
            1,432
            
            
            1,094Increase/(decrease)
                in income tax payable
            
            
            
            
            
            1,088
            
            
            (611
            )Increase
                in VAT payable
            
            
            
            
            
            887
            
            
            66Increase
                in penalty payable
            
            
            
            
            
            204
            
            
            -Decrease/(increase)
                in restricted cash
            
            
            
            
            
            382
            
            
            (615
            )Net
                cash provided by operating activities
            
            
            
            
            
            11,296
            
            
            1,577CASH
                FLOWS FROM FINANCING ACTIVITIES:Exercise
                of warrants
            
            
            
            
            
            1,860
            
            
            -Repayment
                of long-term debt
            
            
            
            
            
            (1,300
            )
            
            -Issue
                of convertible notes
            
            
            
            
            
            -
            
            
            12,500Debt
                issue costs
            
            
            
            
            
            -
            
            
            (1,583
            )Shareholder
                contribution
            
            
            
            
            
            -
            
            
            50Distribution
                paid to owners of a subsidiary
            
            
            
            
            
            -
            
            
            (947
            )Net
                cash provided by financing activities
            
            
            
            
            
            560
            
            
            10,020Effect
                of exchange rate changes on cash
            
            
            
            
            
            1,020
            
            
            157Net
                increase in cash and cash equivalents
            
            
            
            
            
            12,876
            
            
            11,754Cash
                and cash equivalents at beginning of year
            
            
            
            
            
            12,067
            
            
            313Cash
                and cash equivalents at end of year
            
            
            
            
            $
            24,943
            
            $
            12,067Supplementary
                cash flow information:
            
            
            20





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




F-8




**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 12).





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





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




F-9




**PUDA
        COAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
        (Continued)**


**1.
      The Company (continued)**





BVI,
      in
      turn, owns all of the registered capital of Shanxi Putai Resources Limited
      (formerly, Taiyuan Putai Business Consulting Co., Ltd.) (“Putai”), a wholly
      foreign owned enterprise (“WFOE”) registered under the wholly foreign-owned
      enterprises laws of the People’s Republic of China (“PRC”). Putai was
      incorporated on November 5, 2004 and has a registered capital of $20,000. Putai
      did not have any operating activities from November 5, 2004 (inception) until
      June 24, 2005 when it entered into certain 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 is
      the
      chairman and chief executive officer of Puda. Zhao Yao was the chief operating
      officer of Puda until his resignation became effective on November 20, 2006.
      Zhao Ming and Zhao Yao 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”. The
      exercise of the Option is analogous to creating a second class of common stock,
      which is referred to as “Option holder preference” on the consolidated
      statements of operations. 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:





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





·
            Shanxi
                Putai Resources Limited: Mr. Zhao Ming (approximately 74%); Mr. Zhao
                Yao
                (approximately 18%) held indirectly through Puda and
                BVI.





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





F-10




**PUDA
      COAL, INC.**


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


**1.
      The Company (continued)**





After
      the
      above reorganization and as of December 31, 2006, the organizational structure
      of the Group is as follows:





Puda
                Coal, Inc.
              “Puda”|
                100%Puda
                Investment
              Holding
                Limited
              “BVI”
            
            Zhao
                Ming (80%)
              and
              Zhao
                Yao (20%)|
                100%
            
            |Shanxi
                Putai Resources Limited
              "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, 2005.





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





The
      consolidated balance sheet as of December 31, 2006 includes Puda, BVI, Putai
      and
      Shanxi Coal (‘the Group”). The consolidated statement of operations for the year
      ended December 31, 2006 includes Puda, Shanxi Coal, BVI and Putai for the full
      year. The consolidated statement of operations for the year ended December
      31,
      2005 includes Shanxi Coal for the full year, BVI and Putai from June 24, 2005,
      and Puda from July 15, 2005.




F-11




**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,
      2006,
      the Group did not have any cash equivalents.





**(d)
      Allowance for Doubtful Accounts**





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





**(e)
      Inventories**





Inventories
      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-12




**PUDA
      COAL, INC.**


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





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





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





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





Management
      considers that we 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.





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





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





**(h)
      Impairment of Assets**





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





**(i)
      Derivative Financial Instruments**





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




F-13





**PUDA
      COAL, INC.**


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


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





**(j)
      Income Taxes**





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





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





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





**(k)
      Revenue Recognition**





Revenue
      from goods sold is recognized when (i) persuasive evidence of an arrangement
      exists, which is generally represented by a contract 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.





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





**(l)
      Foreign Currency Transactions**





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





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




F-14




**PUDA
      COAL, INC.**


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





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





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





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





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





**(n)
      Earnings Per Share**





Basic
      earnings per share is computed by dividing the earnings for the year by the
      weighted average number of common shares outstanding for the year. Diluted
      earnings per share reflects the potential dilution of securities by including
      other potential common stock, including stock options and warrants, in the
      weighted average number of common shares outstanding for the year, if dilutive.
      Shares issued in the exchange (see Note 1) are presented as outstanding for
      all
      years. A
      method
      akin to the two-class method is presented to reflect the presumed exercise
      of
      the Option to buy-out Shanxi Coal (Note 1).





**(o)
      Accumulated Other Comprehensive Income**





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





**3.
      Restricted Cash**





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





**4.
      Allowance for Doubtful Receivables**





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





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





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




F-15




**PUDA
      COAL, INC.**


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





**5.
      Related Party Transactions**





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





December
                31, 2006$’000Other
                receivable from Zhao Ming, CEO, director and major shareholder of
                Puda
            
            $
            9





Advance
                to Shanxi Liulin Jucai Coal Industry Co., Limited.(“Jucai
                Coal”), a related company with a common owner
            
            $
            602Accounts
                payable to Jucai Coal
            
            $
            221





Other
                payable to Shanxi Puda Resources Group Limited(“Resources
                Group”), a related company with common owners
            
            $
            696Other
                payable Zhao Yao, manager and shareholder of Puda
            
            
            205$
            901





Loan
                payable to Resources Group-current
                portion
            
            $
            1,300-long-term
                portion
            
            
            10,400$
            11,700





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





The
      balance payable to Resources Group of $696,000 includes professional and
      regulatory charges related to the public listing paid by Resources Group on
      behalf of the Company of $901,000, netted against other receivables of $205,000
      due from Resources Group.




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, 2006 and 2005, rental
      expenses paid to Resources Group were $6,000 and $24,000 (see Note
      11).





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




F-16




**PUDA
      COAL, INC.**


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





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





On
      November 17, 2005, Shanxi Coal entered into two conveyance agreements with
      Resources Group. The two agreements transfer two new coal washing plants,
      related land-use rights and coal washing equipment in Liulin County and
      Zhongyang County, Shanxi Province. The Liulin County plant is expected to have
      an annual clean coal washing capacity of 1.1 million metric tons while the
      Zhongyang 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 Zhongyang County plant
      started formal production at the end of March 2006. The Zhongyang County plant,
      land-use rights and related equipment were purchased for a cost of $7,200,000.
      Each conveyance agreement provides that the purchase price paid by Shanxi Coal
      to Resources Group, which totals $13,000,000, be amortized over ten years from
      December 31, 2005 and bear interest at a rate of 6% per annum payable quarterly.
      In the year ended December 31, 2006, Shanxi Coal paid principal of $1,300,000
      and interest of $750,000 to Resources Group. The conveyance loan is subordinated
      to the convertible notes (see Notes 7, 8 and 9).





**6.
      Inventories**





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





December
                31, 2006$’000Raw
                materials
            
            $
            12,342Finished
                goods
            
            
            3,321Total
            
            $
            15,663





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




F-17


**PUDA
        COAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
        (Continued)**


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





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





December
                31, 2006$’000**Cost:**Buildings
                and facilities
            
            $
            2,961Machinery
                equipment
            
            
            8,131Motor
                vehicles
            
            
            254Office
                equipment and others
            
            
            7611,422**Accumulated
                depreciation:**Buildings
                and facilities
            
            
            243Machinery
                equipment
            
            
            1,130Motor
                vehicles
            
            
            143Office
                equipment and others
            
            
            361,552**Carrying
                value:**Buildings
                and facilities
            
            
            2,718Machinery
                equipment
            
            
            7,001Motor
                vehicles
            
            
            111Office
                equipment and others
            
            
            40$
            9,870





Shanxi
      Coal pledged the Liulin and Zhongyang coal washing plant and related equipment
      to Resources Group until such time when the purchase price and interest thereon
      is fully paid by Shanxi Coal (see Notes 5 and 9).





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




F-18





**PUDA
      COAL, INC.**


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





**8.
      Intangible Assets**





Land-use
                rightsDecember
                31, 2006$’000Cost
            
            $
            3,831Accumulated
                amortization
            
            
            102Carrying
                value
            
            $
            3,729





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





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





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





**9.
      Long-term Debt**





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





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




F-19




**PUDA
      COAL, INC.**


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





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





The
      future principal payments under the conveyance loan as of December 31, 2006
      are
      as follows:





Year
            
            December
                31, 2006$’0002007
            
            $
            1,3002008
            
            
            1,3002009
            
            
            1,3002010
            
            
            1,3002011
            
            
            1,300Thereafter
            
            
            5,200$
            11,700




**10.
      Convertible Notes and Related Warrants**





(a)
      On
      November 18, 2005, the Company issued $12,500,000 8% unsecured convertible
      notes
      due October 31, 2008 and related warrants to purchase shares of common stock
      of
      the Company. The notes are convertible into common stock at $.50 per share
      over
      the term of the debt and $850,000 was converted into 1,700,000 shares of common
      stock immediately. During the year ended December 31, 2006, $6,750,000 was
      converted into 13,500,000 shares of common stock. The related warrants to
      purchase 25,000,000 shares of common stock, exercisable at $.60 per share,
      have
      a term of five years from the date of issuance. During the year ended December
      31, 2006, 3,100,000 warrants were exercised into 3,100,000 shares of common
      stock.





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.




F-20


**PUDA
        COAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
        (Continued)**


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




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)”.





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





As
      these
      values are greater than the debt of $12,500,000, the total issue was discounted.
      The discount was allocated between the warrants and conversion feature based
      on
      their relative fair values, resulting in the warrants being valued at $6,363,000
      and the conversion feature at $6,137,000. The conversion feature was recorded
      as
      a derivative liability as the contract does not contain an explicit limit on
      the
      number of shares to be delivered in a share settlement, and is being amortized
      over the life of the debt of three years using the effective interest method,
      up
      to October 31, 2008. The amount amortized in the years ended December 31, 2006
      and 2005 were $1,263,000 and $229,000, respectively. The portion of the discount
      related to the converted shares of $2,690,000 and $417,000 in the years ended
      December 31, 2006 and 2005, respectively were recorded in interest expense.
      The
      unamortized amount of $1,538,000 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 years ended December 31, 2006 and 2005 were $3,908,000 and $2,121,000,
      respectively. The portion of the discount of $80,000 related to the exercised
      warrants in the years ended December 31, 2006 was recorded in interest expense.
      The unamortized amount of $254,000 was offset against convertible notes.





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




F-21




**PUDA
      COAL, INC.**


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





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





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





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




(b)
      In
      conjunction with the issuance of the notes, the placement agent was issued
      five
      year warrants, exercisable from November 18, 2005, to purchase 2,500,000 shares
      of common stock of the Company at an exercise price of $.60 per
      share. The
      warrants issued to the placement agent have the same terms and conditions as
      the
      warrants issued to the investors, including "full ratchet" anti-dilution
      protection, proportional exercise price adjustments based on issuances of stock
      as dividends and share splits, and Puda’s right to redeem the warrants subject
      to an effective registration statement covering the underlying shares of the
      placement agent’s warrant, and certain share price and trading volume
      requirements. However, the warrants issued to the placement agent, unlike the
      warrants issued to the investors, have a cashless exercise feature. With
      a
      cashless exercise feature, the warrant holders have the option to pay the
      exercise price of $0.60 not in cash, but by reducing the number of common share
      issued to them. These warrants were valued at $2.25 per share and the total
      value amounted to $5,625,000. As with the warrants related to the notes, the
      placement agent warrants are classified as a derivative liability and are
      freestanding derivative financial instruments and contain Registration Rights
      and Late Filing Penalties identical to those held by the investors. These
      warrants are being amortized over the term of five years using the effective
      interest method, up to October 31, 2010. The amount amortized in the years
      ended
      December 31, 2006 and 2005 were $3,456,000 and $1,875,000, respectively. The
      portion of the discount of $129,000 in the year ended December 31, 2006 related
      to the exercised warrants was recorded in interest expense. The unamortized
      amount of $165,000 was recorded in deferred charges. As of December 31, 2006,
      these warrants were valued at $1.26 per share according to a Black-Scholes
      pricing model and the unrealized gain on the change in fair value of these
      warrants of $1,237,000 was included in the consolidated statements of
      operations. In the year ended December 2006, 273,334 placement agent warrants
      were exercised in a cashless method and resulted in the issuance of 242,180
      common shares




F-22





**PUDA
      COAL, INC.**


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


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





(c)
      As of
      December 31, 2006, long-term liabilities include the following:




December
                31, 2006$000Convertible
                notes:Gross
                amount issued
            
            $
            12,500Less:
                amount converted
            
            
            (7,600
            )Less:
                unamortized discount on conversion feature
            
            
            (1,538
            )Less:
                unamortized discount on note warrants
            
            
            (254
            )$
            3,108Derivative
                conversion feature:Amount
                allocated to conversion feature
            
            $
            6,137Less:
                amount transferred to equity upon conversion in 2005
            
            
            (417
            )Less:
                amount transferred to equity upon conversion in 2006
            
            
            (3,314
            )$
            2,406Derivative
                warrants:Amount
                allocated to investor warrants
            
            $
            6,363Placement
                agent warrants
            
            
            5,625Less:
                amount transferred to equity upon exercise in 2006
            
            
            (1,671
            )Less:
                change in fair value in 2005
            
            
            (700
            )Less:
                change in fair value in 2006
            
            
            (1,237
            )$
            8,380





**11.
      Commitments and Contingencies**





As
      of
      December 2006, the Group leased office premises under the operating lease
      agreement expiring in 2008.





The
      future minimum lease payments under the above-mentioned leases as of December
      31, 2006 are as follows:-





Year
            
            December
                31, 2006$’0002007
            
            $
            62008
            
            
            6$
            12





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





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




F-23




**PUDA
        COAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
        (Continued)**


**12.
      Common Stock**





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





**12.
      Common Stock (continued)**





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 consolidatedstatement
                of changes in stockholders’ equity as of January 1, 2005
            
            
            73,750,000




**13.
      Profit Appropriation**





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





**14.
      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. There
      were no such expenses in the year ended December 31, 2006.





**15.
      Interest Expense**





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





**16.
      Debt Financing Costs**





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




**17.
      Derivative Unrealized Fair Value Gain**





Derivative
      unrealized fair value gain of $1,237,000 (2005: $700,000) represented the change
      in fair value of the derivative warrants (see Note 10).




F-24




**PUDA
      COAL, INC.**


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





**18.
      Taxation**





No
      provision for taxation has been made for Puda, BVI and Putai for the years
      ended
      December 31, 2006 and 2005, as they did not generate any taxable profits during
      these years.





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 31,2006
            
            2005$’000
            
            $’000Current
                year provision
            
            $
            7,604
            
            $
            3,439





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




Years
                ended December 31,2006
            
            2005$’000
            
            $’000Income
                before income taxes
            
            $
            8,958
            
            $
            4,404Income
                tax on pretax income at statutory rate
            
            
            3,046
            
            
            1,497Tax
                effect of expenses that are not deductible indetermining
                taxable profits
            
            
            4,544
            
            
            2,195Tax
                effect of income that is not taxable indetermining
                taxable profits
            
            
            (421
            )
            
            (238
            )Effect
                of different tax rates of subsidiary operating inother
                jurisdictions
            
            
            (234
            )
            
            (94
            )Valuation
                allowance
            
            
            669
            
            
            79Income
                tax at effective rate
            
            $
            7,604
            
            $
            3,439





As
      at
      December 31, 2006 and 2005, the Group had accumulated net operating loss
      carryforwards for United States federal tax purposes of approximately of
      $3,305,000 and $1,337,000, respectively that are available to offset future
      taxable income. Realization of the net operating loss carryforwards is dependent
      upon future profitable operations. In addition, the carryforwards may be limited
      upon a change of control in accordance with Internal Revenue Code Section 382,
      as amended. Accordingly, management has recorded a valuation allowance to reduce
      deferred tax assets associated with the net operating loss carryforwards to
      zero
      at December 31, 2006. The
      net
      operating loss carryforwards expires in years 2021, 2022, 2023, 2024, 2025
      and
      2026 in the amounts of $132,000, $394,000, $153,000, $371,000 and $287,000,
      $1,968,000 respectively.





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




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




F-25


**PUDA
        COAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


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





Years
                ended December 31,2006
            
            2005Basic
                weighted average number of shares
            
            
            80,167,110
            
            
            73,950,274Options
                outstanding, after adjusting for 10 to 1 reverse split
            
            
            9,683
            
            
            56,218Assumed
                conversion of notes
            
            
            -
            
            
            1,742,904Assumed
                exercise of warrants
            
            
            -
            
            
            1,826,640Diluted
                weighted average number of shares
            
            
            80,176,793
            
            
            77,576,036





The
      conversion of the convertible notes and the exercise of the warrants are not
      assumed for the diluted calculation in the year ended December 31, 2006 because
      the effect would be anti-dilutive. However, these items and t he
      issuance of additional penalty shares (Note 10) could potentially dilute
      earnings per share in the future.





**20.
      Supplementary cash flow information**





Years
                ended December 31,2006
            
            2005$’000
            
            $’000Cash
                paid during the period for:Interest
            
            $
            1,543
            
            $
            114Income
                taxes
            
            $
            6,516
            
            $
            2,039Major
                non-cash transactions:Notes
                converted into common shares
            
            $
            6,750
            
            $
            850Dividend
                declared
            
            $
            -
            
            $
            1,452Purchase
                of land-use rights, property, plantand
                equipment from Resources Group
            
            $
            -
            
            $
            13,000




**21.
      Options**





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




Number
                of
              options
                granted
            
            After
                adjusting for the 10 to 1 reverse stock split
            
            Exercise
                price
            
            Expiry
                date
            
            Estimated
              Fair
                value$’000150,000
            
            
            15,000
                (i
            )
            $
            1
            
            
            October
                20, 2008
            
            
            5





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




F-26


**PUDA
        COAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


**21.
      Options (continued)**





The
      following summarizes the share option transactions during the
      years:


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





**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, 2006, the Group has a credit risk exposure of uninsured cash in
      banks of approximately $25,176,000. 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:





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





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





Customers
            
            December
                31, 2006$’000
            
            %Customer
                A
            
            $
            2,135
            
            
            30Customer
                C
            
            $
            863
            
            
            12Customer
                B
            
            $
            798
            
            
            11Customer
                D
            
            $
            739
            
            
            10Customer
                E
            
            $
            729
            
            
            10





F-27


**PUDA
        COAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
        (Continued)**


**23.
      Retirement Benefits**





The
      full-time employees of Shanxi Coal are entitled to staff welfare benefits
      including medical care, casualty, housing benefits, education benefits,
      unemployment insurance and pension benefits through a Chinese
      government-mandated multi-employer defined contribution plan. The Group is
      required to accrue the employer-portion for these benefits based on certain
      percentages of the employees’ salaries. The total provision for such employee
      benefits was $332,000 and $115,000 for the years ended December 31, 2006 and
      2005, respectively and were recorded as accrued expenses. As of December 31,
      2006 and 2005, the total amount included in accrued expenses for the provision
      is $709,000 and $363,000, 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,
      2006 and 2005. The PRC government is responsible for the staff welfare benefits
      including medical care, casualty, housing benefits, unemployment insurance
      and
      pension benefits to be paid to these employees. The Group is responsible for
      the
      education benefits to be paid and it has been accrued for in the consolidated
      financial statements.





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





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





In
      the
      United States of America, companies are responsible under the Federal Coal
      Mine
      Health and Safety Act of 1969, as amended, and various states’ statutes for the
      payment of medical and disability benefits to employees and their dependents
      resulting from occurrences of coal worker’s pneumoconiosis disease (black lung).
      In the PRC, besides a uniform contribution plan described in Note 13, 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.
      New Accounting Pronouncements**





In
      July
      2006, the FASB issued Financial Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”
(“FIN 48”), which is a change in accounting for income taxes. FIN 48 specifies
      how tax benefits for uncertain tax positions are to be recognized, measured,
      and
      derecognized in financial statements; requires certain disclosures of uncertain
      tax matters; specifies how reserves for uncertain tax positions should be
      classified on the balance sheet; and provides transition and interim-period
      guidance, among other provisions. FIN 48 is effective for fiscal years beginning
      after December 15, 2006. The adoption of FIN 48 is expected to have no
      material impact on the Group’s consolidated financial statements.





In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”),
“Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements.” SAB 108 provides
      interpretative guidance on the process of quantifying financial statement
      misstatements and is effective for fiscal years ending after November 15, 2006.
      The adoption of SAB 108 is expected to have no material impact on the Group’s
      consolidated financial statements.




F-28


**PUDA
        COAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
        (Continued)**


**26.
      Condensed Financial Information of Registrant**





The
      condensed financial information of Registrant includes the balance sheet as
      at
      December 31, 2006 and the statement of operations and cash flows for the year
      ended December 31, 2006.





Balance
      Sheet-Parent Company Only


(In
      thousand of United States dollars)




December
                31, 2006**ASSETS**CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            (15
            )Restricted
                cash
            
            
            233Deferred
                charges
            
            
            171Total
                current assets
            
            
            389INVESTMENT
                IN SUBSIDIARIES
            
            
            29,099TOTAL
                ASSETS
            
            $
            29,488**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**CURRENT
                LIABILITIESOther
                payable
            
            $
            523Accrued
                expenses
            
            
            242Penalty
                payable
            
            
            204Total
                current liabilities
            
            
            969LONG-TERM
                LIABILITIESConvertible
                notes
            
            
            3,108Derivative
                conversion feature
            
            
            2,406Derivative
                warrants
            
            
            8,380Total
                long-term liabilities
            
            
            13,894TEMPORARY
                EQUITYOption
                to buy-out Shanxi Coal
            
            
            2,717STOCKHOLDERS’
                EQUITYPreferred
                stock, authorized 5,000,000 shares, parvalue
                $0.01, issued and outstanding None
            
            
            -Common
                stock, authorized 150,000,000 shares, parvalue
                $0.001, issued and outstanding 92,881,301 shares
            
            
            93Paid-in
                capital
            
            
            32,128Accumulated
                deficit
            
            
            (20,313
            )Total
                stockholders’ equity
            
            
            11,908TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            29,488




F-29


**PUDA
            COAL, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **26.
            Condensed Financial Information of Registrant (continued)**
 
 Statement
            of Operations-Parent Company Only
 (In
            thousand of United States dollars)
 Year
                      ended December 31, 2006Revenue
                  
                  $
                  -General
                      and administrative expenses
                  
                  
                  (1,171
                  )Loss
                      from operations
                  
                  
                  (1,171
                  )Interest
                      expense
                  
                  
                  (3,691
                  )Debt
                      financing costs
                  
                  
                  (10,669
                  )Derivative
                      unrealized fair value gain
                  
                  
                  1,237Net
                      loss
                  
                  
                  (14,294
                  )






F-30




**PUDA
      COAL, INC.**


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


**26.
      Condensed Financial Information of Registrant (continued)**





Statement
      of Cash Flows-Parent Company Only


(In
      thousand of United States dollars)





Year
                ended December 31, 2006CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                loss
            
            $
            (14,294
            )Adjustments
                to reconcile net income to net cash used inOperating
                activitiesAmortization
                of debt issue costs
            
            
            838Amortization
                of discount on convertible notes and warrants
            
            
            8,627Derivative
                unrealized fair value gain
            
            
            (1,237
            )Discount
                on converted shares and exercised warrants
            
            
            2,898Issue
                of common stock for services
            
            
            21Issue
                of common stock for penalty
            
            
            1,000Changes
                in operating assets and liabilities:Advances
                to subsidiaries
            
            
            (1,079
            )Increase
                in other payable
            
            
            523Increase
                in accrued expenses
            
            
            242Increase
                in penalty payable
            
            
            204Decrease
                in restricted cash
            
            
            382Net
                cash used in operating activities
            
            
            (1,875
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Exercise
                of warrants
            
            
            1,860Net
                cash provided by financing activities
            
            
            1,860Net
                decrease in cash and cash equivalents
            
            
            (15
            )Cash
                and cash equivalents at beginning of year
            
            
            -Cash
                and cash equivalents at end of year
            
            $
            (15
            )





F-31




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





There
      was
      no change in and no disagreement with accountants on any accounting and
      financial disclosure matters during 2006.





**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
      by
      us 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 including, without limitation, controls and procedures that
      are
      designed to ensure that information required to be disclosed by us in the
      reports that we file or submit under the Exchange Act is accumulated and
      communicated to our management, including our principal executive and principal
      financial officers, as appropriate to allow timely discussions regarding
      required disclosures, and that our disclosure controls and procedures were
      effective at accomplishing all of the items included within the definition
      of
      disclosure controls and procedures as defined in Rule 13a-15(c) of the Exchange
      Act.





The
      Company has amended the financial statements contained in its annual report
      on
      Form 10-KSB for the fiscal year ended December 31, 2005, 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, 2006. The
      certifying officers of 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 above reports
      and
      have determined that the Company’s disclosure controls and procedures are
      effective for the fiscal year ended December 31, 2006. The revisions to the
      financial statements relate to the complicated accounting matters as disclosed
      in the above referenced amendments. While the Company had the correct
      information and therefore believes it has effective disclosure controls and
      procedures, it came to an incorrect conclusion regarding applicable accounting
      treatments and method of presentation. 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.





**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 fourth
      fiscal quarter that has materially affected, or is reasonably likely to
      materially affect, our internal control over financial reporting.





**Item
      8B. Other information**





None.




48


**PART
      III**




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




NAME
            
            AGE
            
            POSITIONZhao
                Ming
            
            34
            
            Chief
                Executive Officer, President and Chairman of the BoardTian
                Wenwei
            
            36
            
            Chief
                Operating OfficerJin
                Xia
            
            41
            
            Chief
                Financial Officer




**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 on July 15, 2005. He was
      one of the co-founders of Shanxi Coal. He is the brother of Zhao Yao, our 14.03%
      shareholder and a manager of our coal washing plants.




**Tian
      Wenwei** joined
      Puda Coal in February 2006 and was appointed to be Chief Operating Officer
      in
      November 2006. Mr. Tian was a project manager at China Digital Finance Company
      from July 2000 to August 2001 and a business analyst at Odyssey Applied
      Technologies Company from April to August 2002.





**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.





Other
      Significant Employees





**Zhao
      Yao** ,
      manager
      of coal washing plants of Shanxi Coal and former Chief Operating Officer of
      the
      Company, was one the two co-founders of Shanxi Coal. He was appointed to be
      Chief Operating Officer of Shanxi Coal and manager of coal washing plant in
      1999, and he resigned from the Chief Operating Officer position in November
      2006. Zhao Yao also serves as an executive officer and currently is a 75% owner
      of Shanxi Liulin Jucai Coal Industry Co., Limited, a coal mine which supplies
      raw coal to Shanxi Coal. Zhao Ming, our Chief Executive Officer, and Zhao Yao
      are brothers.





On
      November 18, 2006, Mr. Zhao Yao resigned as Chief Operating Officer and Mr.
      Wang
      Lisheng resigned as a director. The Board of Directors accepted their
      resignations and appointed Mr. Tian Wenwei as Chief Operating
      Officer.





Under
      a
      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’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 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 Fund designee). This voting agreement has already
      expired. ******




49




Our
      sole
      director, Zhao Ming, holds office until the next annual meeting of stockholders
      and the election and qualification of his successor(s). 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.





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





**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 2005
      and
      2006. No other executive officer received total annual salary and bonus payments
      in excess of $100,000 in any of the previous two years. Our executive officers
      did not receive any compensation from Puda Coal in addition to the compensation
      they received from Shanxi Coal. As Shanxi Coal is consolidated into Puda Coal’s
      financial statements, we provided the executive compensation information of
      Shanxi Coal.




Annual
                CompensationName
                and Principal Position
            
            Year
            
            Salary
                ($)
              (cash
                or non-cash)
            
            Bonus
                ($)
              (cash
                or non-cash)
            
            Other
              Annual
              Compensation
                ($)
            
            Total
                ($)Zhao
                Ming
              (Chairman
                and Chief Executive Officer)
            
            
            2006
              2005
            
            
            79,747
              20,000
            
            
            —
              —
            
            
            —
              —
            
            
            79,747
              20,000Zhao
                Yao (1)
            
            
            2006
              2005
            
            
            79,747
              20,000
            
            
            —
              —
            
            
            —
              —
            
            
            79,747
              20,000Tian
                Wenwei (2)
            
            
            2006
            
            
            12,683
            
            
            —
            
            
            986
            (3)
            
            13,669(Chief
                Operating Officer and Vice President)
            
            
            2005
            
            
            0
            
            
            —
            
            
            —
            
            
            0Jin
                Xia
              (Chief
                Financial Officer)
            
            
            2006
              2005
            
            
            14,889
              11,920
            
            
            —
              —
            
            
            —
              —
            
            
            14,889
              11,920







(1)
            Zhao
                Yao resigned from the Chief Operating Officer position in November
                2006.
                (Currently, Zhao Yao is a manager of coal washing plants of Shanxi
                Coal
                and former Chief Operating Officer of the Company.)(2)
            Tian
                Wenwei joined Puda in February 2006 and became the Chief Operating
                Officer
                in November 2006.(3)
            Non-cash
                benefit - apartment rental. Shanxi Coal rented a 77-square meter-apartment
                for Tian Wenwei, with monthly rental of RMB700, from February to
                December
                2006.




50




**Narrative
      Discussion of Compensation Table**





We
      have
      three executive officers, Zhao Ming, Chief Executive Officer, Jin Xia, Chief
      Financial Officer, and Tian Wenwei, Chief Operating Officer. The Board of
      Directors performs the function of compensation committee. The Board of
      Directors’ goal in determining compensation levels is to adequately reward the
      efforts and achievements of executive officers for the management of the
      Company. The level of our executive compensation is guided by the following
      two
      principles: (i) attract and retain talented executive personnel by providing
      competitive compensation opportunities; and (ii) directly link compensation
      to
      individual contribution and company performance. It is important for us to
      attract and retain talented executive personnel by paying them a salary at
      a
      level comparable to the market. Offering a competitive salary is designed to
      provide executive personnel with the benefits of compensation that is comparable
      to what they would receive from other comparable U.S. public companies based
      in
      China. In determining our compensation level, we reviewed the compensation
      information of other U.S. public companies based in China. We have not used
      a
      compensation consultant in any capacity but believe that our executive officer
      compensation package is comparable and competitive to similar businesses in
      our
      location of operations. We used Sorl Auto Parts, Inc., which is a comparable
      to
      us as to the size of assets and used the same financial advisors as the
      Registrant, and General Steel, which is another Chinese company listed on OTCBB
      and is in our downstream industry, as the benchmarks. In 2006, Sorl’s CEO salary
      was $50,000 and its CFO salary was $20,000. In 2006, General Steel’s CEO
      received compensation of approximately $75,000.




Our
      CEO,
      Zhao Ming, and CFO, Jin Xia, received a substantial increase in their 2006
      salaries. This is due to the substantially increased responsibilities assumed
      by
      the CEO and CFO as public company officers after the Registrant completed the
      reverse merger in June 2005 and our improved results of operations and economic
      performance in the fiscal year ended December 31, 2006. Net revenue increased
      166% from 2005 to 2006 and income from operations increased 148% from 2005
      to
      2006.




Pension
      plan, stock option plan, non-equity incentive plan and deferred compensation
      plan




Neither
      we nor Shanxi Coal maintain any equity incentive or stock option plan.
      Accordingly, neither company granted options to purchase any equity interests
      to
      any employees or officers, nor no stock options are issued or outstanding to
      any
      officers. Neither we nor Shanxi Coal has any pension plan, non-equity incentive
      plan or deferred compensation arrangement either.




Employment
      contracts and change of control arrangement




Shanxi
      Coal does not have employment agreements with any of its executive officers
      or
      key employees. Puda Coal does not have employment agreements with any of its
      executive officers or key employees. None of the executive officers has a
      change-of-control related arrangement with Puda or Shanxi Coal.





51





**Director
      Compensation**




None
      of
      the directors who served during the past two fiscal years received any form
      of
      compensation from the Company. The current sole director of the Company, Zhao
      Ming, is also an officer of the Company and received no additional compensation
      for being a director.




**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, 2006 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, 2006, we
      had
      92,881,301 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)
            
            
            53,100,000
            
            
            57.2
            %Jin
                Xia (1)
            
            
            0
            
            
            —Tian
                Wenwei (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
            
            
            5.1
            %All
                Executive Officers and Directors as a group
            
            
            53,100,000
            
            
            57.2
            %







(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 (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) vote
                their
                shares of Puda Coal’s Common Stock to elect such persons that may be
                designated by Zhao Ming from time to time to fill any vacant position
                on
                the board of directors. This voting agreement has already
                expired.




52




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





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





**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. $1,026,000 remains declared but unpaid. The dividends
      were distributed between Zhao Ming (80%), an officer and significant stockholder
      of the Company, and Zhao Yao (20%), a former officer and still a significant
      stockholder of the Company. No dividend was declared in 2006.




*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 12.5%, 13.7% and
      15.28% of Shanxi Coal’s total raw coal purchases in tonnage in 2004, 2005, and
      2006, respectively. In 2005 we purchased approximately 135,273.4 MT or 13.7%
      of
      our purchased raw coal from Jucai Coal. In 2006 we purchased approximately
      375,177.50 MT or 15.28% of raw coal from Jucai Coal.




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 MT of coal from the price Jucai Coal charges to its other customers.
      This
      pricing is more favorable than could be obtained by us from other non-affiliate
      suppliers.




*Loan
      for Trip Expense* .
      On
      December 31, 2006, Zhao Ming owed the Shanxi Coal a balance of approximately
      $9,000 for travel expenses. The loan was interest free, unsecured with no fixed
      term for repayment.




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, an entity owned
      80% by Zhao Ming and 10% by Zhao Yao, 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 $24,000. The rental reflects a discount of approximately
      20-25% over prevailing market rentals. In 2006, the rent expense paid to
      Resource Group was $6,000.




*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.




53




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”), which were due by the end of 2004. 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. The payments from Shanxi Coal to Resources Group in 2005 were in
      imbursement of the income taxes and VAT paid by Resources Group for Shanxi
      Coal
      in 2004.




Prior
      to
      the agreement, Resources Group paid the aggregate tax liabilities of all of
      its
      affiliated companies as a matter of convenience. These payments included
      Resources Group’s own liabilities, Shanxi Coal’s liabilities and Jucai Coal’s
      liabilities. In late 2004, Shanxi Coal decided it wanted to become a public
      company in the United States by entering into the Operating Agreements. Its
      management was concerned that the tax arrangement might create confusion on
      the
      part of local authorities with respect to the division of tax liabilities and
      might negatively impact its plan to go public. In order to clarify and
      memorialize the arrangement to avoid confusion of local authorities, Shanxi Coal
      and Resources Group entered into the tax agreement. The Resource Group’s
      obligation to make the payments ceased after December 31, 2004.




It
      is
      unlikely that any such agreement could be entered into with a non-affiliate,
      however, were such an agreement possible, it is probable that any party assuming
      such liability would only do so in exchange for a premium, which we were not
      required to pay.




*Professional
      and Regulatory Fees* .
      In 2005
      and 2004, Resources Group paid professional and regulatory charges related
      to
      the exchange agreement transaction, private placement and public regulatory
      fees
      on behalf of the Company in the amounts of $901,000 and $0, respectively. The
      balance payable to Resources Group included these charges payable of $901,000
      and the net amounts of other receivables of $205,000 for a net other payable
      to
      Resources Group of $696,000. No such amounts were paid by Resources Group in
      the
      years ended December 31, 2004 and 2003. No such fee was incurred in
      2006.




*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 100,000MT. This facility is located about two miles
      from the premises of coal mine owned and was operated by 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 Zhongyang Plant Acquisitions* .
      We
      financed our acquisition of the New Shanxi Liulin Jucai Plant and the New
      Zhongyang Plant through Resources Group, an entity owned 80% by Zhao Ming and
      10% 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 0.9% lower
      than could have been obtained from a third-party bank. Shanxi Coal pledged
      the
      land use rights, plant and equipment of the plants to Resources Group until
      such
      time when the purchase price and interest thereon are fully paid by Shanxi
      Coal
      to Resources Group. The conveyance loans financing the acquisitions are
      subordinated to the convertible notes issued by the Company to the investors
      in
      the November 2005 private placement. Payments by Shanxi Coal to Resources Group
      under the conveyance loans may not be accelerated while the Company has
      obligations of principal or interest outstanding to investors under the
      convertible notes, nor may Shanxi Coal make payments under the conveyance loan
      if the Company is in default to the investors under the notes. If Shanxi Coal
      fails to pay the principal and interest of the purchase price of the new plants
      financed by Resources Group in full when due, the properties acquired by Shanxi
      Coal, which have been pledged to Resources Group as a collateral, are revertible
      to Resources Group.




54




*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 amount payable
      to
      Zhao Yao, adjusted for changes in exchange rate is $209,000. 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 2,500,000 warrants were granted to Keating Securities, of which the total
      amount was transferred to its 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. The advisory relationship between Keating Securities and
      the
      Company expired on November 17, 2006.




We
      believe our payments to Keating Securities for these transactions were
      consistent with prevailing market rates.





*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 Zhaos.
      It could be in their economic interest to cause us to default on the payment
      of
      the loan with Resources Group since Resources Group could acquire the assets
      which are subject to the lien as a result of enforcement of the lien after
      a
      default. With their combined ownership of us ***(*** 71.5%,
      and 52.6 ***%*** after
      the Conversion), they can control the actions which we take. Zhao Ming is our
      CEO and Chairman of the Board. In addition, they also control the mines from
      which we get most of our coal. By limiting or eliminating our coal supply,
      they
      could materially adversely impact our production and revenue, which in turn
      could cause us to default on our loan to Resources Group.




**Director
      Independence**





Our
      Board
      of Directors only has only director, Zhao Ming, who is also an officer of the
      Company and therefore are not “independent” under the rules of the Nasdaq Stock
      Market. Since the Company is not listed on any stock exchange, it is not
      required to have a board of directors with a majority of independent directors.




**Item
      13. Exhibits**




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




3.1
            Articles
                of Incorporation (incorporated by reference to Current Report of
                the
                Company on Form 8-K file September 21, 2005)




55




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)




56




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)




57




10.26
            Agreement
                between Shanxi Puda Resources Group, Ltd. and Shanxi Puda Resources
                Co.,
                Ltd. dated April 25, 2005




16.1
            Letter
                from Durland & Company, CPA’s, P.A. dated July 19, 2005 regarding
                change in certifying accountant (incorporated by reference to Exhibit
                16/1.7 to Current Report of the Company filed on Form 8-K filed July
                22,
                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.




*
      Filed
      herewith





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





The
      fees
      billed to us by our independent auditors, Moore Stephens, for services for
      the
      fiscal year ended December 31, 2006, 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, 2006 and December 31, 2005, Moore Stephens billed us for audit fees in
      the
      amount of approximately $92,500, and $62,500, respectively.





**Audit-Related
      Fees** .
      This
      category consists of assurance and related services by the independent auditor
      that are reasonably related to the performance of the audit and review of
      financial statements and not reported under audit fees. It also includes fees
      incurred in connection with the issuance of consents related to SEC registration
      statements, and our current report on Form 8-K and Form 8-K/A. For the years
      ended December 31, 2006 and December 31, 2005, Moore Stephens billed us for
      audit related fees in the amount of approximately $80,000 and $200,000,
      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,
      2006 and December 31, 2005, 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, 2006 and December 31, 2005, Moore
      Stephens bill us for other fees in the amount of approximately $0 and
      $0.




58


**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:
                November 13, 2007
            By:
            /s/
              Zhao
              MingZhao
                Ming, Chief Executive Officer and President




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







Signature/Title(i)
                Principal Executive Officer:/s/
                Zhao Ming
              
              Zhao
                Ming
            
            Chief
                Executive Officer
            
            Dated:
                November 13, 2007(ii)
                Principal Financial and Accounting Officer:/s/
                Jin Xia
              
              Jin
                Xia
            
            Chief
                Financial Officer
            
            Dated:
                  November 13, 2007(iii)
                Directors:/s/
                Zhao Ming
              
              Zhao
                Ming
            
            President
                and Chairman of the Board
            
            Dated:
                  November 13, 2007/s/
                Jianfei Ni
              
              Jianfei
                Ni
            
            Director
            
            Dated:
                  November 13, 2007/s/
                C. Mark Tang
              
              C.
                Mark Tang
            
            Director
            
            Dated:
                  November 13, 2007/s/
                Lawrence Wizel
              
              Lawrence
                Wizel
            
            Director
            
            Dated:
                  November 13, 2007