UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549



FORM 10-Q



(Mark One)



| | x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
| | - | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30,
2012



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



For the transition period from _____ to _____.



Commission File No. 0-54117



ANNEC GREEN REFRACTORIES CORPORATION

(Exact Name of Registrant as Specified
in Its Charter)



|Delaware                                        | 27-2951584         
|----------------------------------------------- | -------------------
|(State or Other Jurisdiction of                 | (IRS Employer      
|Incorporation)                                  | Identification No.)
|                                                |                    
|No. 5 West Section, Xidajie Street, Xinmi City, |                    
|Henan Province, P.R. China                      | 452370             
|(Address of Principal Executive Offices)        | (Zip Code)         



86-371- 69999012

(Registrant’s telephone number, including

area code)



Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days.

YesxNo ̈



Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).

YesxNo ̈



Indicate by checkmark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-3 of the Exchange Act.



|Large accelerated filer ̈                                                           | Accelerated filer ̈        
|---------------------------------------------------------------------------------- | --------------------------
|Non-accelerated
        filer ̈
        (Do not check if smaller reporting company) | Smaller reporting companyx



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

Yes ̈Nox



APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:



Indicate by check mark whether the registrant
has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent
to the distribution of securities under a plan confirmed by a court.

YesxNo ̈



APPLICABLE ONLY TO CORPORATE ISSUERS:



As of August 7, 2012, there were 19,995,701 shares of the registrant’s
common stock issued and outstanding.











ANNEC GREEN REFRACTORIES CORPORATION



FORM 10-Q INDEX



TABLE OF CONTENTS



|PART I – FINANCIAL INFORMATION |                                                                                                                                              |   
|------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------- | --
|Item 1.                        | Financial Statements                                                                                                                         |   
|                               | Condensed Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011                                                  |   
|                               | Condensed Consolidated Statements of Operations and Comprehensive loss for the Three and Six Months Ended June 30, 2012 and 2011 (Unaudited) |   
|                               | Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (Unaudited)                                  |   
|                               | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                                             |   
|Item 2.                        | Management’s Discussion and Analysis of Financial Condition and Results of Operations                                                        |   
|Item 3.                        | Quantitative and Qualitative Disclosures About Market Risk                                                                                   |   
|Item 4.                        | Controls and Procedures                                                                                                                      |   
|                               |                                                                                                                                              |   
|PART II – OTHER INFORMATION    |                                                                                                                                              |   
|Item 1.                        | Legal Proceedings                                                                                                                            |   
|Item 1A.                       | Risk Factors                                                                                                                                 |   
|Item 2.                        | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                  |   
|Item 3.                        | Defaults Upon Senior Securities                                                                                                              |   
|Item 4.                        | Mine Safety Disclosures                                                                                                                      |   
|Item 5.                        | Other Information                                                                                                                            |   
|Item 6.                        | Exhibits                                                                                                                                     |   
|Signature Page                 |                                                                                                                                              | 36



In this Quarterly Report on Form 10-Q,
references to “dollars” and “$” are to United States dollars and, unless the context otherwise requires,
references to “we,” “us”, “our” and the Company refer to Annec Green Refractories Corporation and
its consolidated subsidiaries.



This Quarterly Report contains certain
forward-looking statements.  When used in this Quarterly Report, statements which are not historical in nature, including
the words “anticipate,” “estimate,” “should,” “expect,” “believe,”
“intend,” “may,” “project,” “plan” or “continue,” and similar expressions
are intended to identify forward-looking statements.  They also include statements containing anticipated business developments,
a projection of revenues, earnings or losses, capital expenditures, dividends, capital structure or other financial terms.



The forward-looking statements in this Quarterly Report are
based upon management’s beliefs, assumptions and expectations of our future operations and economic performance, taking into
account the information currently available to them.  These statements are not statements of historical fact.  Forward-looking
statements involve risks and uncertainties, some of which are not currently known to us that may cause our actual results,
performance or financial condition to be materially different from the expectations of future results, performance or financial
condition we express or imply in any forward-looking statements.  These forward-looking statements are based on
our current plans and expectations and are subject to a number of uncertainties and risks that could significantly affect current
plans and expectations and our future financial condition and results.



2







ANNEC GREEN REFRACTORIES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                             |  | June 30,    |             |  | December 31, |  
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ----------- |  | ------------ | -
|                                                                                                                                             |  | 2012        |             |  | 2011         |  
|                                                                                                                                             |  | (Unaudited) |             |  |              |  
|ASSETS                                                                                                                                       |  |             |             |  |              |  
|Current assets:                                                                                                                              |  |             |             |  |              |  
|Cash                                                                                                                                         |  | $           | 495,734     |  |              | $
|Restricted cash                                                                                                                              |  |             | 7,199,599   |  |              |  
|Bank notes receivable                                                                                                                        |  |             | 250,930     |  |              |  
|Accounts receivable (net of allowance of $480,000 and
    $792,000 at June 30, 2012 and December 31, 2011, respectively)                     |  |             | 28,189,700  |  |              |  
|Retentions receivable                                                                                                                        |  |             | 10,391,329  |  |              |  
|Prepaid expenses and deposits                                                                                                                |  |             | 7,404,143   |  |              |  
|Other receivables                                                                                                                            |  |             | 5,048,662   |  |              |  
|Inventories                                                                                                                                  |  |             | 35,983,259  |  |              |  
|Total current assets                                                                                                                         |  |             | 94,963,356  |  |              |  
|Long-term retentions receivable                                                                                                              |  |             | 4,775,623   |  |              |  
|Deposits for capital expenditure                                                                                                             |  |             | 677,293     |  |              |  
|Plant and equipment, net                                                                                                                     |  |             | 16,610,103  |  |              |  
|Land use rights, net                                                                                                                         |  |             | 2,217,521   |  |              |  
|Long-term investment                                                                                                                         |  |             | 158,507     |  |              |  
|                                                                                                                                             |  |             |             |  |              |  
|Total assets                                                                                                                                 |  | $           | 119,402,403 |  |              | $
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                         |  |             |             |  |              |  
|Current liabilities:                                                                                                                         |  |             |             |  |              |  
|Short-term loans                                                                                                                             |  | $           | 16,462,536  |  |              | $
|Bank notes payable                                                                                                                           |  |             | 6,023,266   |  |              |  
|Accounts payable and accrued expenses                                                                                                        |  |             | 16,403,616  |  |              |  
|Advances from customers                                                                                                                      |  |             | 25,757,525  |  |              |  
|Salaries payable                                                                                                                             |  |             | 681,460     |  |              |  
|Taxes payable                                                                                                                                |  |             | 2,406,894   |  |              |  
|Related party payables                                                                                                                       |  |             | 682,753     |  |              |  
|Loans payable to employees                                                                                                                   |  |             | 2,111,977   |  |              |  
|Loans payable to other individuals                                                                                                           |  |             | 4,478,140   |  |              |  
|Other payable                                                                                                                                |  |             | 2,431,041   |  |              |  
|Total current liabilities                                                                                                                    |  |             | 77,439,208  |  |              |  
|Deferred income                                                                                                                              |  |             | 2,749,369   |  |              |  
|Long-term loans                                                                                                                              |  |             | 776,684     |  |              |  
|                                                                                                                                             |  |             |             |  |              |  
|Total liabilities                                                                                                                            |  |             | 80,965,261  |  |              |  
|Commitments and contingencies (Note 13)                                                                                                      |  |             |             |  |              |  
|Stockholders' equity:                                                                                                                        |  |             |             |  |              |  
|Series A preferred stock, $0.0001 par value; 20,000,000 shares authorized; zero shares issued and outstanding                                |  |             | -           |  |              |  
|Common stock, $0.0001 par value; 100,000,000 shares authorized; 19,995,701 issued and
    outstanding at June 30, 2012 and December 31, 2011 |  |             | 2,000       |  |              |  
|Additional paid-in capital                                                                                                                   |  |             | 4,046,992   |  |              |  
|Retained earnings                                                                                                                            |  |             | 32,413,924  |  |              |  
|Accumulated other comprehensive income                                                                                                       |  |             | 1,974,226   |  |              |  
|Total stockholders' equity                                                                                                                   |  |             | 38,437,142  |  |              |  
|Total liabilities and stockholders' equity                                                                                                   |  | $           | 119,402,403 |  |              | $



See accompanying notes to the consolidated
financial statements.



3







ANNEC GREEN REFRACTORIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)



|                                                                 |  | Three Months Ended June 30, |            |   | Six Months Ended June 30, |  
|---------------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | -
|                                                                 |  | 2012                        |            |   | 2011                      |  
|Revenues                                                         |  | $                           | 17,884,034 |   |                           | $
|Cost of revenues                                                 |  |                             | 10,393,274 |   |                           |  
|Gross profit                                                     |  |                             | 7,490,760  |   |                           |  
|                                                                 |  |                             |            |   |                           |  
|Operating expenses:                                              |  |                             |            |   |                           |  
|Sales and marketing                                              |  |                             | 3,219,462  |   |                           |  
|General and administrative                                       |  |                             | 1,328,102  |   |                           |  
|Total operating expenses                                         |  |                             | 4,547,564  |   |                           |  
|                                                                 |  |                             |            |   |                           |  
|Income from operations                                           |  |                             | 2,943,196  |   |                           |  
|                                                                 |  |                             |            |   |                           |  
|Other income (expense):                                          |  |                             |            |   |                           |  
|Interest income                                                  |  |                             | 65,545     |   |                           |  
|Interest expense                                                 |  |                             | (996,960   | ) |                           |  
|Other (expense) income, net                                      |  |                             | (29,101    | ) |                           |  
|Total other expense                                              |  |                             | (960,516   | ) |                           |  
|                                                                 |  |                             |            |   |                           |  
|Income before provision for income taxes                         |  |                             | 1,982,680  |   |                           |  
|Provision for income taxes                                       |  |                             | 487,598    |   |                           |  
|Net income                                                       |  |                             | 1,495,082  |   |                           |  
|                                                                 |  |                             |            |   |                           |  
|Other comprehensive income:                                      |  |                             |            |   |                           |  
|Foreign currency translation adjustment                          |  |                             | 92,209     |   |                           |  
|Comprehensive income                                             |  | $                           | 1,587,291  |   |                           | $
|                                                                 |  |                             |            |   |                           |  
|Net income per share-basic and dilutive                          |  | $                           | 0.07       |   |                           | $
|                                                                 |  |                             |            |   |                           |  
|Shares used in computing net income per share-basic and dilutive |  |                             | 19,995,701 |   |                           |  



See accompanying notes to the consolidated
financial statements.



4







ANNEC GREEN REFRACTORIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS

(Unaudited)



|                                                                                             |  | Six months Ended June 30, |           
|-------------------------------------------------------------------------------------------- |  | ------------------------- | ----------
|                                                                                             |  | 2012                      |           
|Cash flows from operating activities:                                                        |  |                           |           
|                                                                                             |  |                           |           
|Net income                                                                                   |  | $                         | 1,102,172 
|Adjustments to reconcile net income to net cash (used in ) provided by operating activities: |  |                           |           
|Depreciation and amortization                                                                |  |                           | 862,424   
|Provision (recovery) for bad debt                                                            |  |                           | (132,211  
|Loss (gain) on sale of plant and equipment                                                   |  |                           | 144,909   
|Change in assets and liabilities:                                                            |  |                           |           
|Restricted cash                                                                              |  |                           | (5,603,010
|Bank notes receivable                                                                        |  |                           | 1,796,449 
|Accounts receivable, retentions, and long-term retentions receivable                         |  |                           | 7,570,001 
|Prepaid expenses and deposits                                                                |  |                           | 3,197,484 
|Other receivables                                                                            |  |                           | (1,193,542
|Inventories                                                                                  |  |                           | (1,256,072
|Bank notes payable                                                                           |  |                           | 4,428,767 
|Accounts payable and accrued expenses                                                        |  |                           | (2,992,392
|Advances from customers                                                                      |  |                           | (4,234,505
|Salary payable                                                                               |  |                           | 146,622   
|Tax payable                                                                                  |  |                           | (921,295  
|Deferred income                                                                              |  |                           | (88,006   
|Other payable                                                                                |  |                           | (1,279,733
|Net cash provided by (used in) operating activities                                          |  |                           | 1,548,062 
|                                                                                             |  |                           |           
|Cash flows from investing activities:                                                        |  |                           |           
|Deposits for capital expenditure                                                             |  |                           | (179,336  
|Purchase of plant and equipment                                                              |  |                           | (457,334  
|Purchase of land use rights                                                                  |  |                           | -         
|(Payments) Proceeds from sale of plant and equipment                                         |  |                           | (3,171    
|Net cash used in investing activities                                                        |  |                           | (639,841  
|                                                                                             |  |                           |           
|Cash flows from financing activities:                                                        |  |                           |           
|Payments of dividends                                                                        |  |                           | -         
|Proceeds from loans to related parties, employees, and other individuals, net of payments    |  |                           | (1,671,639
|Proceeds from short-term borrowings                                                          |  |                           | 9,496,179 
|Payment of short-term borrowings                                                             |  |                           | (8,386,442
|Proceeds from issuance of long-term borrowings, net of payments                              |  |                           | (155,212  
|Net cash (used in) provided by financing activities                                          |  |                           | (717,114  
|                                                                                             |  |                           |           
|Net (decrease) increase in cash                                                              |  |                           | 191,107   
|                                                                                             |  |                           |           
|Effect of exchange rate changes                                                              |  |                           | (38,401   
|Cash at beginning of period                                                                  |  |                           | 343,028   
|                                                                                             |  |                           |           
|Cash at end of period                                                                        |  | $                         | 495,734   
|                                                                                             |  |                           |           
|Supplementary disclosure of cash flow information                                            |  |                           |           
|Noncash investing activities:                                                                |  |                           |           
|Reduction of accounts payable through disposal of plant and equipment                        |  |                           | 85,695    
|Reduction of accounts receivable through purchase of plant and equipment                     |  |                           | 548,527   
|                                                                                             |  |                           |           
|Cash paid during the period                                                                  |  |                           |           
|Interest                                                                                     |  |                           | 677,148   
|Income taxes                                                                                 |  |                           | 356,811   



See accompanying notes to the consolidated
financial statements.



5







Annec
Green Refractories Corporation and Subsidiaries



Notes
to CONDENSED consolidated financial statements

(unaudited)



| | 1. | Basis of Presentation and Description of the Company
| | -- | ----------------------------------------------------



The accompanying unaudited
condensed consolidated financial statements of Annec Green Refractories Corporation (the Company) have been prepared in accordance
with generally accepted accounting principles in the United States for interim financial information in pursuant to the instructions
to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management,
all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the financial statements
have been included. The financial information for December 31, 2011 has been derived from the consolidated audited financial statements
included in our annual report filed on Form 10-K with the SEC for the year ended December 31, 2011.



The accompanying unaudited
condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto,
together with management’s discussion and analysis of the Company’s financial condition and results of operations,
contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, which was filed with the Securities and
Exchange Commission (SEC) on April 25, 2012. The results of operations for the six-month period ended June 30, 2012 are not necessarily
indicative of the results for the year ending December 31, 2012 or any other interim period. The accompanying condensed consolidated
financial statements include all wholly-owned subsidiaries and all subsidiaries over which the Company exercises the power and
control to direct activities significantly impacting financial performance. All significant intercompany accounts and transactions
have been eliminated in consolidation.



On February 11, 2011, Annec
Green Refractories Corporation, formerly E-Band Media, Inc. (“E-Band Media”) entered and closed a Share Exchange Agreement
(“Share Exchange Agreement”), with certain shareholders and warrant holders, Dean Konstantine, Muzeyyen Balaban, Bernieta
Masters, and Linda Masters, and with China Green Refractories Limited, a BVI corporation (“China Green”), and its shareholders,
New-Source Group Limited, a BVI company, High-Sky Assets Management Limited, a BVI company, Joint Rise Investments Limited, a BVI
company, Giant Harvest Investment Limited, a BVI company, and Mr. QIAN Yun Ting (collectively the “China Green Shareholders”),
pursuant to which E-Band Media acquired 100% of the issued and outstanding capital stock of China Green in exchange for 19,220
shares of E-Band Media’s Series A Convertible Preferred Stock (“Series A Preferred Stock”). Pursuant to the terms
of the Share Exchange Agreement, E-Band Media agreed to affect a 1-for-14.375 reverse stock split (“Reverse Split”)
of its outstanding common stock. The Reverse Stock Split was affected on April 18, 2011. In addition, pursuant to the Share Exchange
Agreement, the China Green shareholders acquired all 10,000,000 shares of E-Band Media’s common stock from Dean Konstantine
(“Controlled Shares”) and all outstanding warrants of E-Band Media from Muzeyyen Balaban, Bernieta Masters, and Linda
Masters, representing warrants to purchase up to 5,000,000 shares of our common stock (“Warrants”) for an aggregate
purchase price of $250,000 and 100 shares of Series A Preferred Stock held by China Green shareholders. The Warrants were cancelled
by the China Green shareholders pursuant to the Share Exchange Agreement. As a result of the Share Exchange Agreement, the China
Green shareholders owned 96% of our issued and outstanding common stock on an as-converted common stock basis as of and immediately
after the effectiveness of the Reverse Split as contemplated by the Share Exchange Agreement.



6







Annec
Green Refractories Corporation and Subsidiaries



Notes
to CONDENSED consolidated financial statements

(unaudited)



| | 1. | Basis of Presentation and Description of the Company, continued
| | -- | ---------------------------------------------------------------



The consolidated financial
statements following unaudited combined condensed financial statements have been prepared with the effect of the merger of China
Green and E-Band Media, Inc. as a reverse acquisition of assets and a recapitalization in accordance with accounting principles
generally accepted in the United States. For accounting purposes, China Green was considered to be the acquirer of E-Band Media,
Inc. in the merger and E-Band Media, Inc. did not meet the definition of a business in accordance with ASC Topic 805-10, Business
Combinations, because E-Band Media, Inc. had no material assets or liabilities at the time of closing of the merger and these assets
and liabilities did not constitute a business pursuant to ASC Topic 805. Consequently, all of the assets and liabilities of E-Band
Media, Inc. were reflected in the financial statements at their respective fair values and no goodwill or other intangibles were
recorded as part of acquisition accounting, and the cost of the merger was measured at net assets acquired.



7







Annec
Green Refractories Corporation and Subsidiaries



Notes
to CONDENSED consolidated financial statements

(unaudited)



| | 1. | Basis of Presentation and Description of the Company, continued
| | -- | ---------------------------------------------------------------



Business Description



Zhengzhou Annec is principally
engaged in the manufacture, design, development, sale, installation, and maintenance of refractory materials and products. Zhengzhou
Annec’s primary products are heat shock bricks for internal, top, and external combustion hot air stoves, high alumina brick
with heat shock, cordierite-mullite bricks, non-recasting, soft and high-heating andalusite brick, and silica bricks with high
thermal conductivity and high density. Zhengzhou Annec produces refractory products through three factories in the Henan Province,
PRC: Fuliang, Fuhua, and Fugang.



Beijing Annec’s primary
business is to design and build blast furnaces and hot air stoves. Beijing Annec acts as a general contractor and has outside construction
companies serve as sub-contractors. Beijing Annec also derives revenue from technology research and development, graphic design,
production, engineering and technical consulting, and sales of building material



8







Annec
Green Refractories Corporation and Subsidiaries



Notes
to CONDENSED consolidated financial statements

(unaudited)



| | 2. | Summary of Significant Accounting Policies
| | -- | ------------------------------------------



Basis of Presentation



The financial statements are
prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The consolidated
financial statements include the balances and results of Zhengzhou Annec and Beijing Annec (collectively, the “Company”).
All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have
been reclassified in the consolidated financial statements to conform to the current period presentation.



The preparation of financial
statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses, and the related disclosure of contingent assets and liabilities. Significant estimates and
assumptions are used for, but not limited to: (1) allowance for doubtful accounts, (2) economic lives of property, plant, and equipment,
(3) asset impairments, (4) percentage of completion on construction projects, and (5) contingency reserves. We base our estimates
on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results
of which form the 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. In addition, any change in these estimates or their related
assumptions could have an adverse effect on our operating results.



Cash



Cash consists primarily of
cash on hand or cash deposits in banks that are available for withdrawal without restriction.



Bank Notes Receivable



Bank notes receivable
consists of bank notes from various banks in the PRC, which generally have a maturity of one to six months. The bank notes
are highly liquid and are given to or received by vendors and customers instead of the local currency (“Renminbi”
or “RMB”). The bank notes can generally be presented to the bank before maturity and in such case are redeemable
at a slight discount.



9







Annec
Green Refractories Corporation and Subsidiaries



Notes
to CONDENSED consolidated financial statements

(unaudited)



| | 2. | Summary of Significant Accounting Policies, continued
| | -- | -----------------------------------------------------



Accounts Receivable



Accounts receivable are reported
at net realizable value. The Company has established an allowance for doubtful accounts based on an estimate of the amounts that
may be uncollectible. On a monthly basis, the Company examines all significant past due amounts. The Company considers the age
of the receivable, the financial standing and credit rating of the customer, and the history of payments or guarantee of payment
made by the customer. Many of the Company’s contracts are with large Chinese government-backed organizations with an excellent
but slow payment history. Normal payment terms for custom contract sales are: (i) 30% of the contract price as advanced payment
after signing of the contract which is used to buy materials and production; (ii) 30% of the contract price will be collected
when production is finished and goods are inspected by the customer; (iii) 30% of the contract price will be received after
the completion of refractory installation and testing by the customer; and (iv) the final installment of 10% retentions are
usually due one year after the hot air stove is put into service to allow for quality guarantee. Such retentions are presented
as retentions receivable or long-term retentions receivable on the consolidated balance sheets.



Estimated warranty costs, if
material, are accrued at the time of sales. Such costs have not been material to date.



Concentration of Credit
and Other Risks



Financial instruments which
potentially subject us to concentrations of credit risk consist principally of cash, restricted cash, bank notes receivable, accounts
receivable and other receivables. The Company holds all its bank deposits with banks in China. In China, there is no equivalent
federal deposit insurance as in the United States; as such, these amounts held in banks in China are not insured. The Company has
not experienced any losses in such bank accounts through June 30, 2012. In an effort to mitigate any potential risk, the Company
periodically evaluates the credit quality of the financial institutions which hold the bank deposits and the Company holds its
cash in multiple banks supported by the local and Central Government of the PRC.



The Company does not require
collateral or other security to support the trade receivables. The Company is exposed to credit risk in the event of nonpayment
by customers to the extent of amounts recorded on the balance sheet. One customer accounted for 30% and 25% of our trade receivables
balance as of June 30, 2012 and December 31, 2011. An additional customer accounted for 19% and 16% of the Company’s
trade receivables balance as of June 30, 2012 and December 31, 2011.



10







Annec
Green Refractories Corporation and Subsidiaries



Notes
to CONDENSED consolidated financial statements

(unaudited)



| | 2. | Summary of Significant Accounting Policies, continued
| | -- | -----------------------------------------------------



Concentration of Credit
and Other Risks,continued







Two customers individually
accounted for 39% and 21% of our revenue in three months ended June 30, 2012, and two customers individually accounted for
31% and 21% of our revenue in three months ended June 30, 2011, respectively. Two customers individually accounted for 38%,
and 15% of our revenue in the six month periods ended June 30, 2012. Two customers individually accounted for 26%, and 14% of our
revenue in the six month periods ended June 30, 2011.



The operations of the Company
are located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced
by the political, economic, and legal environment in the PRC. The Chinese Government controls its foreign currency reserves through
restrictions on imports and conversion of Renminbi (RMB) into foreign currency. During January 2008 to June 2012, the exchange
rate between RMB and U. S. Dollars (USD) has fluctuated from USD $1.00 to RMB 7.3141 and USD $1.00 to RMB 6.3089, respectively.
There can be no assurance that the exchange rate will remain stable. The Renminbi could appreciate or depreciate against the U
..S .Dollar. The Company’s financial condition and results of operations may also be affected by changes in the value of certain
currencies other than the Renminbi in which its earnings and obligations are denominated.



Inventories



Inventories are stated at the
lower of cost or market. Cost is determined on an average cost basis, which approximates actual cost on a first-in, first-out (FIFO)
method. Lower of cost or market is evaluated by considering obsolescence, excessive levels of inventory, deterioration, and other
factors. Adjustments to reduce the cost of inventory to its net realizable value, if required, are made for estimated excess or
obsolescence and are charged to cost of revenues.



Plant and Equipment



Plant and equipment are stated
at cost less accumulated depreciation. Depreciation is computed using the straight-line basis over the estimated useful lives of
the related assets as follows:



|Plant and buildings     | 20 years
|----------------------- | --------
|Machinery and equipment | 10 years
|Vehicles                | 4 years 
|Electronic equipment    | 3 years 
|Furniture and tools     | 5 years 
|Software                | 5 years 



11







Annec
Green Refractories Corporation and Subsidiaries



Notes
to CONDENSED consolidated financial statements

(unaudited)



| | 2. | Summary of Significant Accounting Policies, continued
| | -- | -----------------------------------------------------



Plant and Equipment,
continued



Repairs and maintenance costs
are expensed as incurred. Gains or losses on disposals are included in general and administrative expense.



The Company capitalizes interest
attributable to capital construction projects, if material, in accordance with Accounting Standards Codification (ASC) Subtopic
835-20, Capitalization of Interest, which defines that interest shall be capitalized for assets that are constructed or otherwise
produced for an entity’s own use, including assets constructed or produced for the entity by others for which deposits or
progress payments have been made.



Occasionally the Company will
settle outstanding accounts receivable and accounts payable balances through non-monetary exchanges such as receiving or signing
over the title to vehicles. The Company accounts for these transactions in accordance with ASC 845, Nonmonetary Transactions. The
Company records a gain or loss on the disposal/transfer of the vehicles to the extent that the fair value of the receivable or
payable balance differs from the book value of the vehicles.



Land Use Rights



In the PRC there is no land
ownership, but land use rights can be obtained. Land use rights are stated at cost less accumulated amortization. Amortization
expense is recorded on a straight-line basis over the term of the land use rights. Land use rights are an intangible asset. The
Company reviews intangible assets for impairment periodically and at least annually.



Long-term Investment



Long-term investment represents
an investment the Company has in a regional bank within China. The Company does not hold a greater than a 5% interest and has determined
that the Company does not have significant control or influence in the bank. Accordingly, The Company records the investment at
cost. The Company’s investment is in a private company where there is not a market to determine the value of the investment.



Impairment of Long-Lived
Assets



Long-lived assets held and
used by the Company, including long-term investments, are reviewed for impairment annually or more frequently if events or changes
in circumstances indicate that the carrying amount of the asset may not be recoverable. If the carrying amount of an asset or asset
group (in use or under development) is evaluated and found not to be recoverable (carrying amount exceeds the gross, undiscounted
cash flows from use and disposition), then an impairment loss is recognized. The impairment loss is measured as the excess of the
carrying amount over the asset’s or asset group’s fair value. Through June 30, 2012, the Company has not recorded
any impairment of its long-lived assets.



12







Annec
Green Refractories Corporation and Subsidiaries



Notes
to CONDENSED consolidated financial statements

(unaudited)



| | 2. | Summary of Significant Accounting Policies, continued
| | -- | -----------------------------------------------------



Fair Value of Financial
Instruments



Fair Value Measurements and
Disclosures (ASC 820-10) include a fair value hierarchy that is intended to increase the consistency and comparability in fair
value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to
measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would
use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a
reporting entity’s pricing an asset or liability based upon their own market assumptions. The fair value hierarchy consists
of the following three levels:



Level 1 –inputs
are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at
the measurement date.



Level 2– observable
inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are
not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term
of the assets or liabilities.



Level 3 –instrument
valuations are obtained without observable market values and require a high-level of judgment to determine the fair value.



The Company’s financial
instruments consist mainly of cash, restricted cash, bank notes receivable, other receivables, and debt obligations. Other receivable
are reflected in the accompanying financial statements at historical cost, which approximates fair value due to the short-term
nature of these instruments. Based on the borrowing rates currently available to the Company for loans and similar terms and average
maturities, the fair value of debt obligations also approximates its carrying value due to the short-term nature of the instruments.
While the Company believes its valuation methodologies are appropriate and consistent with other market participants, the use of
different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different
estimate of fair value at the reporting date.



The Company had no assets or
liabilities measured at fair value and subject to the disclosure requirements based on the fair value hierarchy.



13







Annec
Green Refractories Corporation and Subsidiaries



Notes
to CONDENSED consolidated financial statements

(unaudited)



| | 2. | Summary of Significant Accounting Policies, continued
| | -- | -----------------------------------------------------



Government Assistance



The Company is currently the
beneficiary of government grants that are generally intended to be used towards capital technology improvement with the end goal
of increased production and energy efficiency. These grants are recorded as deferred income in the liabilities section of the balance
sheet when cash is received and are accreted into non-operating income over the life of the asset, to the extent that the grant
is related to an asset. For grants not related to any assets in certain cases, the Company records non-operating income when earned.
The government grant income included in other income amounted to approximately $44,000 and $88,800 for the three month periods
ended June 30, 2012 and 2011, respectively, and approximately $170,500 and $140,200 for the six month periods ended June 30,
2012 and 2011.



Foreign Currency Translation



The accompanying financial
statements are presented in United States Dollars. The functional currency of the Company is the Renminbi, the official currency
of the PRC. Capital accounts of the financial statements are translated into United States Dollars from RMB at their historical
exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rates as of the balance
sheet date. Income and expenditures are translated at the average exchange rates for the periods ended June 30, 2012 and 2011.
Items in the Company’s consolidated statement of cash flows are translated using a weighted average exchange rate, which
approximates the exchange rate in effect at the time of the cash flows. For all periods reported, there were no transactions outside
the PRC; thus, all of our transactions are in RMB, our functional currency. Currency translation adjustments from translation to
U.S. Dollars for financial reporting purposes are recorded in other comprehensive income (loss) as a component of equity.



A summary of the conversion
rates for the periods presented is as follows:



|                                          |  | Three Months Ended |        |  | December | 
|----------------------------------------- |  | ------------------ | ------ |  | -------- | 
|                                          |  | June 30,           |        |  | 31       | 
|                                          |  | 2012               |        |  | 2011     | 
|                                          |  |                    |        |  |          | 
|Period end RMB: U.S. Dollar exchange rate |  |                    | 6.3089 |  |          | 
|                                          |  |                    |        |  |          | 
|Average RMB: U.S. Dollar exchange rate    |  |                    | 6.3078 |  |          | 



14







Annec
Green Refractories Corporation and Subsidiaries



Notes
to CONDENSED consolidated financial statements

(unaudited)



| | 2. | Summary of Significant Accounting Policies, continued
| | -- | -----------------------------------------------------



Accumulated Other Comprehensive
Income



The Company reports comprehensive
income in accordance with the provisions of ASC Topic 220, Comprehensive Income, which establishes standards for reporting
comprehensive income or loss and its components in the financial statements. The accumulated other comprehensive income represents foreign currency translation adjustments.



Revenue Recognition



The Company’s principal
revenue sources are from the sale of refractory materials and products and from sales generated from the designing and building
of blast furnaces and hot-air stoves.



Zhengzhou Annec primarily generates
revenue from the sale of a variety of refractory bricks and the sales from kits of pre-assembled hot-air ovens. Zhengzhou Annec
recognizes such revenue when: (1) there is persuasive evidence of an arrangement; (2) customers have accepted receipt
of the goods in accordance with the shipping terms; (3) the amount to be paid by the customer is fixed or determinable; and
(4) collectability is reasonably assured. Zhengzhou Annec recognizes revenue from the sale of a kit when the kit has been
delivered and accepted by the customer.



During 2011, Zhengzhou ANNEC
began entering into certain short-term contracts to build blast furnaces and hot blast stoves. These contracts have an average
duration of approximately three to six months and do not exceed a period of one year. Zhengzhou ANNEC recognizes these revenues
based on project completion and acceptance by the customer.



Beijing Annec enters into contracts
to design and build blast furnaces and hot-air stoves and recognizes revenues during the construction period using the percentage
of completion method. Most of the contracts are fixed-price contracts, which typically provide for a stated contract price and
a specified scope of the work to be performed. Beijing Annec estimates the percentage of the job that is complete using variations
of the cost-to-cost method. Cost is used as the primary indicator, but the Company also considers contract milestones and work
in progress from subcontractor companies. If the estimate of costs left to be incurred plus actual costs already incurred exceeds
the total revenue to be expected from a contract, then the full amount of the difference is recognized in the current period as
a loss and presented on the consolidated balance sheet as a current liability. Beijing Annec also generates revenue from the sale
of a variety of machines and equipment which the Company purchases from vendors. Beijing Annec recognized revenue from this type
of sale when the machines and equipment have been delivered and accepted by the customer.



15







Annec
Green Refractories Corporation and Subsidiaries



Notes
to CONDENSED consolidated financial statements

(unaudited)



| | 2. | Summary of Significant Accounting Policies, continued
| | -- | -----------------------------------------------------



Sales Returns Allowance



The Company estimates future
product returns related to current period product revenue. The Company analyzes historical returns, and changes in customer demand
and acceptance of the Company’s products when evaluating the adequacy of the sales returns allowance. Significant management
judgment and estimates must be made and used in connection with establishing the sales returns allowance in any accounting period.
Material differences may result in the amount and timing of the Company’s revenue for any period if management made different
judgments or utilized different estimates. Based on the Company’s analysis, The Company did not record any provision for
sales returns as of June 30, 2012 and 2011.



Shipping and Handling
Costs



Shipping and handling costs
billed to customers are recorded net of the amount collected. Shipping and handling expense included in selling expenses amounted
to $279,796 and $2,307,394 for the three month periods ended June 30, 2012 and 2011, respectively, and $771,074 and $3,110,010
for the six month periods ended June 30, 2012 and 2011, respectively.



Income Taxes



The Company accounts for income
taxes in accordance with ASC 740, Income Taxes. ASC 740 requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method,
deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable
to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized. The Company adopted accounting policies in accordance to U.S.
GAAP as its basis for computing the current income tax provision. Therefore, there were no significant deferred tax assets or liabilities
during the quarter ended June 30, 2012 and 2011.



The Company adopted the Interpretation
provisions of ASC 740, Income Taxes, on January 1, 2009, that clarifies the accounting for income taxes by prescribing the minimum
recognition threshold a tax position is required to meet before being recognized in the Company’s financial statements. The
Interpretation also provides guidance for the measurement and classification of tax positions, interest and penalties, and requires
additional disclosure on an annual basis. The adoption had no effect on the Company’s financial statements. Following implementation,
the ongoing recognition of changes in measurement of uncertain tax positions will be reflected as a component of income tax expense.
Interest and penalties incurred associated with unresolved income tax positions will continue to be included in other income (expense).



16







Annec
Green Refractories Corporation and Subsidiaries



Notes
to CONDENSED consolidated financial statements

(unaudited)



| | 2. | Summary of Significant Accounting Policies, continued
| | -- | -----------------------------------------------------



Reclassification





Certain amounts reported
in the 2011 consolidated statement of cash flows have been reclassified to conform to the 2012 presentation. The Company
determined that the net change in bank notes receivable and payable should be reclassified from investing and financing
activities, respectively, to operating activities, because such receivables and payables arise directly in connection with
the sale of products and purchases of raw materials. The net change in restricted cash used to secure the related payables
has also been reclassified from financing activities to operating activities. As a result of the reclassifications, net cash
used in operating activities decreased by $243,000, net cash used in investing activities decreased by $1,278,000, and net
cash provided by financing activities decreased by $1,521,000 from the amounts previously presented in the June 30, 2011
statement of cash flows. There was no impact to the Company’s June 30, 2011 consolidated balance sheet or statement of
operations and no impact to the net decrease in cash for the period ended June 30, 2011.





Recent Accounting Pronouncements



In June 2011, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, comprehensive income
(Topic 220): Presentation of Comprehensive Income. The objective of this Update is to improve the comparability, consistency, and
transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The amendments
require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive
income or in two separate but consecutive statements. Under the amendments to Topic 220, Comprehensive Income, in this Update,
an entity has the option to present the total of comprehensive income, the components of net income, and the components of other
comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.
The amendments in this Update should be applied retrospectively and are effective for fiscal years, and interim periods within
those years, beginning after December 15, 2011. The Company has adopted this standard since January 1, 2012. The adoption of this
standard does not have a material impact on the Company’s financial position, results of operations, or cash flows.



In May 2011, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement
(Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U. S. GAAP and IFRSs. The amendments
in this Update are the result of the work by the FASB and the IASB to develop common requirements for measuring fair value and
for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles (GAAP)
and International Financial Reporting Standards (IFRSs). The amendments in this Update apply to all reporting entities that are
required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting
entity’s shareholders’ equity in the financial statements. The amendments in this Update are to be applied prospectively
and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has
adopted this standard since January 1, 2012. The adoption of this standard does not have a material impact on our financial position,
results of operations, or cash flows.



17







Annec
Green Refractories Corporation and Subsidiaries



Notes
to CONDENSED consolidated financial statements

(unaudited)



| | 3. | Retentions Receivable and Long-term Retentions Receivable
| | -- | ---------------------------------------------------------



The Company enters into sales
contracts with customers whereas there is a retainage provision in which the customer can retain a portion of the payment, generally
10% of the contract price, until the completed stoves or refractory materials sold by the Company have been demonstrated to be
of good quality. The retention period is usually one year from the date the stoves are placed into service. The current portion
on the Balance Sheet represents amounts due within a year. The long-term portion represents the amount that are due over a year
or that is already over a year old.



The following table shows the
components of retentions receivable from long-term contracts:



|                                                |  | June 30, 2012         |            |  | December 31, 2011             
|----------------------------------------------- |  | --------------------- | ---------- |  | ------------------------------
|                                                |  | Retentions receivable |            |  | Long-term retention receivable
|                                                |  |                       |            |  |                               
|Chinese government or province owned customers: |  |                       |            |  |                               
|Amounts billed and due                          |  | $                     | 335,733    |  |                               
|Amounts billed and not due                      |  |                       | 5,462,843  |  |                               
|                                                |  |                       | 5,798,576  |  |                               
|Commercial customers:                           |  |                       |            |  |                               
|Amounts billed and due                          |  |                       | 148,348    |  |                               
|Amounts billed and not due                      |  |                       | 4,444,405  |  |                               
|                                                |  |                       | 4,592,753  |  |                               
|Total                                           |  | $                     | 10,391,329 |  |                               



The balances billed but not
due by customers pursuant to retainage provisions in contracts will generally be due one year after the blast furnaces or hot air
stoves are placed in service by the customers. Based on the Company’s historical experience with similar contracts, all such
retention amounts are expected to be collectible, and accordingly, no allowance has been recorded.



| | 4. | Other Receivables
| | -- | -----------------



The components of the Company’s
other receivables are as follows:



|                                            |  | June 30, |           |  | December 31, |  
|------------------------------------------- |  | -------- | --------- |  | ------------ | -
|                                            |  | 2012     |           |  | 2011         |  
|                                            |  |          |           |  |              |  
|Other receivables–individuals and employees |  | $        | 1,604,794 |  |              | $
|Other receivables–companies                 |  |          | 2,611,327 |  |              |  
|Security deposits                           |  |          | 832,541   |  |              |  
|Total other receivables                     |  | $        | 5,048,662 |  |              | $



18







Annec
Green Refractories Corporation and Subsidiaries



Notes
to CONDENSED consolidated financial statements

(unaudited)



Other receivables are comprised
of three categories: receivables from individuals (both employees and other individuals), receivables from other companies and
security deposits for large contracts and are generally unsecured. Security deposits are to be returned to the Company upon the
completion of the projects. Receivables from employees include cash advanced to employees for purchased supplies and services and
employees’ travel and miscellaneous business expenses.



| | 5. | Inventories
| | -- | -----------



The components of the Company’s
inventories are as follows:



|                  |  | June 30, |            |  | December 31, |  
|----------------- |  | -------- | ---------- |  | ------------ | -
|                  |  | 2012     |            |  | 2011         |  
|                  |  |          |            |  |              |  
|Raw materials     |  | $        | 3,579,193  |  |              | $
|Work in process   |  |          | 233,567    |  |              |  
|Finished goods    |  |          | 32,170,499 |  |              |  
|Total inventories |  | $        | 35,983,259 |  |              | $



| | 6. | Plant and Equipment, net
| | -- | ------------------------



The components of the Company’s
plant and equipment are as follows:



|                               |  | June 30, |            |   | December 31, |  
|------------------------------ |  | -------- | ---------- | - | ------------ | -
|                               |  | 2012     |            |   | 2011         |  
|                               |  |          |            |   |              |  
|Plant and buildings            |  | $        | 14,290,394 |   |              | $
|Machinery and equipment        |  |          | 5,076,890  |   |              |  
|Vehicles                       |  |          | 2,239,155  |   |              |  
|Others                         |  |          | 338,370    |   |              |  
|                               |  |          | 21,944,809 |   |              |  
|Less accumulated depreciation  |  |          | (5,334,706 | ) |              |  
|Total plant and equipment, net |  | $        | 16,610,103 |   |              | $



Depreciation expense related to property and equipment
was $436,838 and $337,790 for the three month periods ended June 30, 2012 and 2011, respectively, and was $834,713 and $660,176
for the six month periods ended June 30, 2012 and 2011, respectively. The Company recorded a loss on sale of property and equipment
of $123,337 and $6,118 for the three month periods ended June 30, 2012 and 2011, respectively, and $144,909 and $34,700 for
the six month periods ended June 30, 2012 and 2011, respectively.



19













Annec
Green Refractories Corporation and Subsidiaries



Notes
to CONDENSED consolidated financial statements

(unaudited)



| | 7. | Land Use Rights, net
| | -- | --------------------



The components of the Company’s
land use rights are as follows:



|                              |  | Estimated   |  |          |           |   |              |  
|----------------------------- |  | ----------- |  | -------- | --------- | - | ------------ | -
|                              |  | Remaining   |  | June 30, |           |   | December 31, |  
|                              |  | Life        |  | 2012     |           |   | 2011         |  
|Land use rights               |  | 47.40 years |  | $        | 2,334,872 |   |              | $
|Less accumulated amortization |  |             |  |          | (117,351  | ) |              |  
|Total land use rights, net    |  |             |  | $        | 2,217,521 |   |              | $



Amortization expense related to land use rights
was $11,825 and $14,705 for the three month periods ended June 30, 2012 and 2011, respectively, and $27,711 and $27,419 for
the six month periods ended June 30, 2012 and 2011, respectively. The difference between the amortization expense and accumulated
amortization is due to exchange rate differences as we translate expense using an average exchange rate for the fiscal year and
translate the accumulated amortization using the fiscal year end exchange rate.



Amortization of land use rights
attributable to future periods is as follows:



|Period ending June 30: |  |   |           | 
|---------------------- |  | - | --------- | 
|2013                   |  | $ | 47,293    | 
|2014                   |  |   | 47,293    | 
|2015                   |  |   | 47,293    | 
|2016                   |  |   | 47,293    | 
|2017                   |  |   | 47,293    | 
|Thereafter             |  |   | 1,981,056 | 
|                       |  |   |           | 
|                       |  | $ | 2,217,521 | 



| | 8 | Short-Term Loans
| | - | ----------------



The components of the Company’s
short-term loans are as follows:



| |  | June 30, |            |  | December 31, |  
| |  | -------- | ---------- |  | ------------ | -
| |  | 2012     |            |  | 2011         |  
| |  |          |            |  |              |  
| |  | $        | 16,462,536 |  |              | $



At June 30, 2012, the
Company has ten loans with four different banks that are due within one year and have interest rates ranging from 6.941% to
11.628% during 2012 and 2011. Five of the short-term loans are guaranteed by the third parties, Beijing Annec or Fuchao Li,
the Company’s Chairman. Four of the loans are collateralized by the Company’s office building, land use rights, or
machinery and equipment. One of the loans is secured by a cash deposit of the Company.



20







Annec
Green Refractories Corporation and Subsidiaries



Notes
to CONDENSED consolidated financial statements

(unaudited)



| | 9. | Bank Notes Payable
| | -- | ------------------



The components of the Company’s
bank notes payable are as follows:



| |  | June 30, |           |  | December 31, |  
| |  | -------- | --------- |  | ------------ | -
| |  | 2012     |           |  | 2011         |  
| |  |          |           |  |              |  
| |  | $        | 6,023,266 |  |              | $



Bank notes
payable represent bank notes paid to the Company’s vendors for purchase of inventory. At June 30, 2012, the Company had
bank notes payable with four different banks  with maturity dates of six months. All are noninterest-bearing notes. The notes
payable require cash to be held in reserve of 100% of the total outstanding notes payable balance.



| | 10. | Long-Term Loan
| | --- | --------------



The Company’s long-term
loan is as follows:



| |  | June 30, |         |  | December 31, |  
| |  | -------- | ------- |  | ------------ | -
| |  | 2012     |         |  | 2011         |  
| |  |          |         |  |              |  
| |  | $        | 776,684 |  |              | $



The long-term loan is due on
December 13, 2015, and has an interest rate of 7.152% and is secured by one of the Company’s office buildings.



Future minimum payments
for the long-term loan are as follows:



|Period ending June 30: |  |   |         | 
|---------------------- |  | - | ------- | 
|2013                   |  | $ | 310,672 | 
|2014                   |  |   | 310,672 | 
|2015                   |  |   | 155,340 | 
|                       |  |   |         | 
|                       |  | $ | 776,684 | 





21







Annec
Green Refractories Corporation and Subsidiaries



Notes
to CONDENSED consolidated financial statements

(unaudited)



| | 11. | Related Party Transactions
| | --- | --------------------------



At June 30, 2012, the
Company had loans payable to the Chairman (Fuchao Li), and a minority shareholder (Yinling Fan) of the Company. The Company and
the owners have not signed notes, there are no specific due dates, and no interest is paid on the loans. Money is transferred between
the owners and the Company mainly for cash flow purposes. The amounts loaned to the Company are short-term in nature. The following
amounts were payable to the owners as of June 30, 2012 and December 31, 2011:



|            |  | June 30, |         |  | December 31, |  
|----------- |  | -------- | ------- |  | ------------ | -
|            |  | 2012     |         |  | 2011         |  
|            |  |          |         |  |              |  
|Fuchao Li   |  | $        | 489,374 |  |              | $
|Yinling Fan |  |          | 193,379 |  |              |  
|            |  |          |         |  |              |  
|            |  | $        | 682,753 |  |              | $



During six months ended June 30, 2012, the Company
repaid $88,320 to Fuchao Li.



| | 12. | Income Taxes
| | --- | ------------



The Company is subject to applicable
local tax statutes and is governed by the Income Tax Law of the PRC and local income tax laws (the “PRC Income Tax Law”).



Zhengzhou Annec qualified as
a hi-tech corporation and was accorded certain tax incentives for said designation. Accordingly, Zhengzhou Annec was subject to
tax at a statutory rate of 15% for the three and six month ended June 30, 2012 and 2011. Zhengzhou Annec will become subject to
a rate of 25% after 2012 unless Zhengzhou Annec applies for and receives a further tax holiday for the succeeding five years.



Beijing Annec is subject to
taxes at a statutory rate of 25%.



22







Annec
Green Refractories Corporation and Subsidiaries



Notes
to CONDENSED consolidated financial statements

(unaudited)



| | 13. | Commitments and Contingencies
| | --- | -----------------------------



Third Party Guarantees



The Company entered into
agreements as a debt guarantor during 2012 for seven third parties. The maximum guaranteed amount is $16,009,000. The total
outstanding borrowings by these parties were approximately $12,839,000 as of June 30, 2012.



These parties also acted
as debt guarantors for the Company during 2012 with a maximum guaranteed amount of 12,680,000. As of June 30, 2012, the
Company’s loans guaranteed by these parties were approximately $6,340,000. The Company has not historically incurred
any losses due to such debt guarantees. Additionally, the Company has determined that the difference between fair value and
the carrying amount of the guarantees is immaterial.



Leases



The Company leases
one factory and one office building under  non-cancelable operating leases with  the third parties through April 1, 2014 and
May 31, 2013, respectively. Rent expense included in general and administrative expense is $84,430 and $66,429 for the three
months end June 30, 2012 and 2011, and $177,282 and $120,452 for the six months ended June 30, 2012 and 2011. A
summary of future minimum lease payments as of June 30, 2012 is presented below.



|                     |  | Minimum  |        
|-------------------- |  | -------- | -------
|                     |  | Lease    |        
|                     |  | Payments |        
|Year ending June 30: |  |          |        
|2013                 |  | $        | 262,070
|2014                 |  |          | 168,809
|                     |  |          |        
|                     |  | $        | 430,879



| | 14. | Segment Reporting
| | --- | -----------------



The Company operates in two
reportable segments: Zhengzhou Annec and Beijing Annec. The Zhengzhou Annec segment manufactures and sells a variety of refractory
bricks and kits of pre-assembled hot-air ovens. The Beijing Annec segment designs and builds blast furnaces and hot-air stoves
on a contract basis and uses subcontractors throughout the construction process.



All revenues are related to
end customers in China.



Information on reportable segments
for the three and six months ended June 30, 2012 and 2011 is as follows:



23







Annec
Green Refractories Corporation and Subsidiaries



Notes
to CONDENSED consolidated financial statements

(unaudited)



| | 14. | Segment Reporting, continued
| | --- | ----------------------------



|                       |  | Three Months Ended |            |  | Six Months Ended |  
|---------------------- |  | ------------------ | ---------- |  | ---------------- | -
|                       |  | June 30,           |            |  | June 30,         |  
|                       |  | 2012               |            |  | 2011             |  
|Revenues:              |  |                    |            |  |                  |  
|Zhengzhou Annec        |  | $                  | 17,884,034 |  |                  | $
|Beijing Annec          |  |                    | -          |  |                  |  
|Total                  |  |                    | 17,884,034 |  |                  |  
|Cost of revenues:      |  |                    |            |  |                  |  
|Zhengzhou Annec        |  |                    | 10,393,274 |  |                  |  
|Beijing Annec          |  |                    | -          |  |                  |  
|Total                  |  |                    | 10,393,274 |  |                  |  
|Operating expenses:    |  |                    |            |  |                  |  
|Zhengzhou Annec        |  |                    | 3,738,430  |  |                  |  
|Beijing Annec          |  |                    | 809,134    |  |                  |  
|Total                  |  |                    | 4,547,564  |  |                  |  
|Income from operations |  | $                  | 2,943,196  |  |                  | $



|                          |  | June 30, |            |  | December 31, |  
|------------------------- |  | -------- | ---------- |  | ------------ | -
|                          |  | 2012     |            |  | 2011         |  
|Plant and equipment, net: |  |          |            |  |              |  
|Zhengzhou Annec           |  | $        | 13,345,348 |  |              | $
|Beijing Annec             |  |          | 3,264,755  |  |              |  
|Total identifiable assets |  | $        | 16,610,103 |  |              | $



24







Item 2.  Management’s Discussion and Analysis
of Financial Condition and Results of Operations



The following discussion and analysis
of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements
and related notes appearing elsewhere in this Quarterly Report.  In addition to historical financial information, the
following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.  Our actual results
could differ materially from those discussed in the forward-looking statements.  Factors that could cause or contribute
to these differences include those discussed below and elsewhere in this Quarterly Report. See also “Risk Factors”
contained in our amended current report on Form 10-K filed on April 25, 2012.



Overview



We are a refractory and production-based
company that designs, develops, produces, and markets refractory products.  All of our current business operations are
conducted through our wholly-foreign owned Chinese subsidiary, Zhengzhou Annec Industrial Co., Ltd. (“Zhengzhou Annec”)
and our variable interest entity, Annec (Beijing) Engineering Technology Co., Ltd. (“Beijing Annec”).



Through our subsidiary, Zhengzhou Annec,
we are primarily engaged in the manufacture, design, development, sale, installation, and maintenance of refractory materials and
products. Zhengzhou Annec’s primary products are heat shock bricks for internal, top, and external combustion hot air stoves,
high alumina brick with heat shock, cordierite-mullite bricks, non-recasting, soft and high-heating andalusite brick, and silica
bricks with high thermal conductivity and high density. Zhengzhou Annec produces refractory products through three factories in
the Henan Province, PRC: Fuliang, Fuhua, and Fugang.   Through a contractual agreement, between Zhengzhou Annec
and Beijing Annec, we design and build blast furnaces and hot air stoves, and act as a general contractor working with outside
construction companies which serve as sub-contractors. Beijing Annec also derives revenue from technology research and development,
graphic design, production, engineering and technical consulting, and sales of building materials.



We generate revenues from the sale of our
refractory products, which consists of bricks of various size, shape, and construction material, and from services related to the
design, engineering and build out of stoves.



Recent Developments



In 2011, Xinmi
Technological and Industrial Information Bureau released a document titled “On the Special Protection of Enterprises for
Their Patents”. The document is to enhance the protection of enterprises for their patents, contain the infringement on the
intellectual property, encourage innovation and creation, and improve capacity for independent innovation so as to develop an array
of products and techniques with significant intellectual property advantage and core competiveness and to propel economic development
of Xinmi city. On April 26, 2012, Zhengzhou Annec Industrial Co., Ltd was accredited as “Specially Protected Enterprise for
Its Patents” in accordance with the requirements of the document.



On May 14, 2012,
Zhengzhou Annec entered into an Amendment to Supplemental Agreement to Exclusive Business Cooperation (“Amendment”)
with Annec (Beijing) Engineering Technology Co., Ltd, a PRC limited company and a variable interest entity of Zhengzhou Annec (“Annec
Beijing”), pursuant to which certain provisions of the Supplement Agreement to Exclusive Business Cooperation Agreement dated
January 16, 2011 (the “Original Agreement”) was amended. Under the Original Agreement, Zhengzhou Annec agreed to provide
Annec Beijing with exclusive technical, consulting and other services in connection with Annec Beijing’s principal business
utilizing its own advantages in human resources, technology and information in exchange for an annual service fee. Under the Amendment,
Article 2.2 and 2.3 of the Original Agreement were amended to specify that the payment of the annual service fee will be made upon
request of Zhengzhou Annec.



25







Summary of Critical Accounting Policies
and Estimates



Management’s
discussion and analysis of results of operations and financial condition are based upon our financial statements.  These
statements have been prepared in accordance with accounting principles generally accepted in the United States of America.  These
principles require management to make certain estimates and assumptions that affect amounts reported and disclosed in the financial
statements and related notes.  See Note 2 to our financial statements, “Summary of Significant Accounting Policies.”  We
believe that the following paragraphs reflect our most critical accounting policies that currently affect our financial condition
and results of operations.



Use of Estimates



The preparation of financial statements
in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, and expenses, and the related disclosure of contingent assets and liabilities. Significant estimates and assumptions
are used for, but not limited to: (1) allowance for doubtful accounts, (2) economic lives of property, plant, and equipment, (3)
asset impairments, (4) percentage of completion on construction projects, and (5) contingency reserves. We base our estimates
on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results
of which form the 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. In addition, any change in these estimates or their related
assumptions could have an adverse effect on our operating results.



Accounts Receivable



Accounts receivable are reported at net
realizable value. We have established an allowance for doubtful accounts based on an estimate of the amounts that may be uncollectible.
On a monthly basis, we examine all significant past due amounts. We consider the age of the receivable, the financial standing
and credit rating of the customer, and the history of payments or guarantee of payment made by the customer. Many of our contracts
are with large Chinese government-backed organizations with an excellent but slow payment history. Normal payment terms for custom
contract sales are: (i) 30% of the contract price as advanced payment after signing of the contract which is used to buy materials
and production; (ii) 30% of the contract price will be collected when production is finished and goods are inspected by the customer;
(iii) 30% of the contract price will be received after the completion of refractory installation and testing by the customer; and
(iv) the final installment of 10% (retentions) is usually due one year after the stove is put into service to allow for quality
guarantee. Such retentions are presented as retentions receivable or long-term retentions receivable on the consolidated balance
sheets.



Inventories



Inventories are stated at the lower of
cost or market. Cost is determined on an average cost basis, which approximates actual cost on a first-in, first-out (FIFO) method.
Lower of cost or market is evaluated by considering obsolescence, excessive levels of inventory, deterioration, and other factors.
Adjustments to reduce the cost of inventory to its net realizable value, if required, are made for estimated excess or obsolescence
and are charged to cost of revenues.



26







Revenue Recognition



Our principal revenue sources are from the
sale of refractory materials and products and from sales generated from the designing and building of blast furnaces and hot-air
stoves. Zhengzhou Annec generates revenue from the sale of a variety of refractory bricks and the sales from kits of pre-assembled
hot-air ovens. Zhengzhou Annec primarily recognizes such revenue when: (1) there is persuasive evidence of an arrangement; (2)
customers have accepted receipt of the goods in accordance with the shipping terms; (3) the amount to be paid by the customer is
fixed or determinable; and (4) collectability is reasonably assured. Zhengzhou Annec recognizes revenue from the sale of a kit
when the kit has been delivered and accepted by the customer.



During 2011, Zhengzhou ANNEC began entering
into short-term contracts to build blast furnaces and hot blast stoves. These contracts have an average duration of three to six
months and do not exceed a period of one year. Zhengzhou ANNEC recognizes these revenues based on project completion and acceptance
by the customer.



Beijing Annec enters into contracts to design
and build blast furnaces and hot-air stoves and recognizes revenues during the construction period using the percentage of completion
method. Most of the contracts are fixed-price contracts, which typically provide for a stated contract price and a specified scope
of the work to be performed. Beijing Annec estimates the percentage of the job that is complete using variations of the cost-to-cost
method. Cost is used as the primary indicator, but we also consider contract milestones and work in progress from subcontractor
companies. If the estimate of costs left to be incurred plus actual costs already incurred exceeds the total revenue to be expected
from a contract, then the full amount of the difference is recognized in the current period as a loss and presented on the consolidated
balance sheet as a current liability. Beijing Annec also generates revenue from the sale of a variety of machines and equipment
which we purchase from vendors. Beijing Annec recognized revenue from this type of sale when the machines and equipments have been
delivered and accepted by the customer.



Shipping and Handling Costs



Shipping and handling costs billed to customers
are recorded net of the amount collected. Shipping and handling expense included in sales and marketing expenses amounted to $279,796
and $2,307,394 for the three months ended June 30, 2012, and 2011, respectively, and $771,074 and $3,110,010 for the six months
ended June 30, 2012 and 2011, respectively.



Results of Operations



Comparison for the Three Months ended June 30, 2012 and
2011



|                                         |  | Three Months Ended June 30 |           
|---------------------------------------- |  | -------------------------- | ----------
|                                         |  |                            |           
|Statements of Operations Data            |  | 2012                       |           
|Revenues                                 |  | $                          | 17,884,034
|Cost of Revenues                         |  |                            | 10,393,274
|Gross Profit                             |  |                            | 7,490,760 
|Operating Expenses:                      |  |                            |           
|Sales and marketing                      |  |                            | 3,219,462 
|General and administrative               |  |                            | 1,328,102 
|Total other expense                      |  |                            | (960,516  
|Income before provision for income taxes |  |                            | 1,982,680 
|Provision for income taxes               |  |                            | 487,598   
|Net income                               |  |                            | 1,495,082 



Revenues



We operate in two
reportable segments: Zhengzhou Annec and Beijing Annec. The Zhengzhou Annec segment manufactures and sells a variety of
refractory bricks and kits of pre-assembled hot-air ovens. In 2011, Zhengzhou Annec signed several refractory turnkey
projects which  was under a new business model. Beijing Annec segment designs and builds blast furnaces and hot-air
stoves on a contract basis and uses subcontractors throughout the construction process. In addition, Beijing Annec also sells
a variety of machines and equipment which are required as part of the entire blast furnace and hot-air stove package. We
purchase these machines and equipment from outside vendors and generally sell them at cost plus a small mark-up.



27







|Segments        |  | June 30,   2012 |            |  | % of  Revenue |  |     | June 30,   2011 |  |   | % of  Revenue | 
|--------------- |  | --------------- | ---------- |  | ------------- |  | --- | --------------- |  | - | ------------- | 
|Zhengzhou Annec |  | $               | 17,884,034 |  |               |  | 100 | %               |  | $ | 18,694,933    | 
|Beijing Annec   |  |                 | -          |  |               |  | -   |                 |  |   | 5,576,361     | 
|Total           |  | $               | 17,884,034 |  |               |  | 100 | %               |  | $ | 24,271,294    | 



Revenues for the three months ended
June 30, 2012 was $17,884,034 compared to $24,271,294 for the three months ended June 30, 2011. Revenues for the three months
ended June 30, 2012 decreased by $6,387,260 or by 26% because the iron industry demands are weak, and no new contracts were
entered into and no projects were completed during the three months ended June 30, 2012, which lead to no revenues
from Beijing Annec for the three months ended June 30, 2012. Revenues for Zhengzhou Annec for the three month ended June
30, 2012, decreased by $810,899 or 4% to $17,884,034 from $18,694,933 for the three months ended June 30, 2011. The decrease
in sales of refractory products by Zhengzhou Annec was mainly due to a decrease in the number of orders. The following table
shows product sales of Zhengzhou Annec from existing and new customers during the three months ended June 30, 2012:



|Type of Customers’ Sales |  | Amount (US$) |           
|------------------------ |  | ------------ | ----------
|                         |  |              |           
|Existing customers       |  | $            | 17,858,879
|                         |  |              |           
|New customers            |  | $            | 25,155    



Cost of Revenue



Cost of revenue was $10,393,274 and
$15,791,816 for the three months ended June 30, 2012 and 2011, respectively. Cost of revenue for the three months ended June
30, 2012 decreased by $5,398,542 or by 34%.  Stated as a percentage of revenues, the cost of revenue for the three
months ended June 30, 2012 was 58% compared to 65% for the three months ended June 30, 2011. Cost of revenue related to
Zhengzhou Annec for the three months ended June 30, 2012 decreased by $563,752, or 5% to $10,393,274 from $10,957,026 for the
same period in 2011. The decrease in cost of revenue was primarily a result of decrease in sales in Zhengzhou Annec
and no sales in Beijing Annec for the three months ended June 30, 2012.



Operating Expenses



General and Administrative. General and administrative
expenses include payroll and related employee benefits, and other headcount-related costs associated with facilities, and other
administrative expenses. General and administrative expenses were $1,328,102 and $1,329,832 for the three months ended June
30, 2012 and 2011, respectively. There was a slight decrease of $1,730, or 0.1%, in general and administrative expenses.



Sales and Marketing Expenses. Sales and marketing
expenses include payroll, employee benefits, and other headcount-related costs associated with sales and marketing personnel
and travel, advertising, promotions, trade shows, seminars, and other programs. Sales and marketing expenses were $3,219,462
and $4,540,047 for the three months ended June 30, 2012 and 2011, respectively. The decrease of $1,320,585, or 29%, in sales
and marketing expense was due to decreased revenue and variable cost like shipping expense, packaging expense and traveling
expense.



28







Total Other
Expense.The total other expense  was $960,516 and $896,503 for the three months ended June 30, 2012
and 2011, respectively. The increase of $64,013, or 7%, in total other expense was primarily attributable to recognition of
a government grant in the three months ended June 30, 2011 and there was no government grant in the same period as of June
30, 2012, and an increase in other  expense as detailed in the following table:



|                            |  | Three Months End |         
|--------------------------- |  | ---------------- | --------
|                            |  | June 30,         |         
|                            |  | 2012             |         
|Other income (expense):     |  |                  |         
|Interest income             |  | $                | 65,545  
|Interest expense            |  |                  | (996,960
|Other income (expense), net |  |                  | (29,101 
|Total Other expense         |  | $                | (960,516



Comparison for the Six Months ended June 30, 2012 and
2011



|                                         |  | Six  Months Ended June 30 |           
|---------------------------------------- |  | ------------------------- | ----------
|                                         |  |                           |           
|Statements of Operations Data            |  | 2012                      |           
|Revenues                                 |  | $                         | 33,734,005
|Cost of Revenues                         |  |                           | 20,670,630
|Gross Profit                             |  |                           | 13,063,375
|Operating Expenses:                      |  |                           |           
|Sales and marketing                      |  |                           | 6,380,751 
|General and administrative               |  |                           | 2,922,369 
|Total other expense                      |  |                           | (2,144,573
|Income before provision for income taxes |  |                           | 1,615,682 
|Provision for income taxes               |  |                           | 513,510   
|Net income                               |  |                           | 1,102,172 



|Segments        |  | June 30,   2012 |            |  | % of  Revenue |  |     | June 30,   2011 |  |   | % of  Revenue | 
|--------------- |  | --------------- | ---------- |  | ------------- |  | --- | --------------- |  | - | ------------- | 
|Zhengzhou Annec |  | $               | 33,734,005 |  |               |  | 100 | %               |  | $ | 31,752,962    | 
|Beijing Annec   |  |                 | -          |  |               |  | -   |                 |  |   | 5,576,361     | 
|Total           |  | $               | 33,734,005 |  |               |  | 100 | %               |  | $ | 37,329.323    | 



Revenues for the six months ended
June 30, 2012 was $33,734,005 compared to $37,329,323 for the six months ended June 30, 2011. Revenues for the six months
ended June 30, 2012 decreased by $3,595,318, or by 10%.  The decrease of the total revenue was due to the decline of the
iron industry demands, and no new contracts were entered into and no projects were completed in Beijing Annec during the six
months ended June 30, 2012. Revenues for Zhengzhou Annec for the six month ended June 30, 2012 increased by $1,981,043 or 6%, to
$33,734,005 from $31,752,962 for the six months ended June 30, 2011. The increase in sales of refractory products by
Zhengzhou Annec was mainly due to the increase in number of orders in the first quarter 2012. The existing customers
increased their demand and Zhengzhou Annec obtained new customers in the six months  ended June 30, 2012 compared to June
30, 2011, as set forth below:



29







|Type of Customers’ Sales |  | Amount (US$) |           
|------------------------ |  | ------------ | ----------
|                         |  |              |           
|Existing customers       |  | $            | 33,694,282
|                         |  |              |           
|New customers            |  | $            | 39,723    



Cost of Revenue



Cost of revenue was $20,670,630 and $23,365,232 for
the six months ended June 30, 2012 and 2011, respectively. Cost of revenue for the six months ended June 30, 2012 decreased $2,694,602
or by 12%. Stated as a percentage of revenues, the cost of revenue for the six months ended June 30, 2012 was 61% compared to 63%
for the six months ended June 30, 2011. Cost of revenue related to Zhengzhou Annec for the six months ended June 30, 2012 increased
by $2,140,188 or 12% to $20,670,630 from $18,530,442 for the same period in 2011. The increase in cost of revenue of Zhengzhou
Annec was primarily attributable to the increase of sales for the same proportion. The total cost of revenue decreased because
there was no revenue in Beijing Annec for the six months ended June 30, 2012.



Operating Expenses



General and Administrative. General and administrative
expenses include payroll and related employee benefits, and other headcount-related costs associated with facilities, and other
administrative expenses.  General and administrative expenses were $2,922,369 and $2,681,962 for the six months ended
June 30, 2012 and 2011, respectively. The increase of $240,407 or 9% in general and administrative expense was primarily due to
an increase of salaries of managements.



Sales and Marketing Expenses. Sales and marketing
expenses include payroll, employee benefits, and other headcount-related costs associated with sales and marketing personnel and
travel, advertising, promotions, trade shows, seminars, and other programs. Sales and marketing expenses were $ 6,380,751 and
$6,637,934 for the six months ended June 30, 2012 and 2011, respectively. The decrease of $257,183 or 4%, in sales and marketing
expense was due to decreased revenue and variable cost like shipping expense, packaging expense and traveling expense.



Total Other Expense.The
total other expense was $2,144,573 and $1,266,377 for the six months ended June 30, 2012 and 2011,
respectively.  The increase of $878,196, or 69%, in total other expense was primarily due to increase of interest
expense for increased loans and increase in other expense as detailed in the following table:



|                            |  | Six Months Ended |           
|--------------------------- |  | ---------------- | ----------
|                            |  | June 30,         |           
|                            |  | 2012             |           
|Other income (expense):     |  |                  |           
|Interest income             |  | $                | 162,733   
|Interest expense            |  |                  | (2,276,862
|Other income (expense), net |  |                  | (30,444   
|Total other expense         |  | $                | (2,144,573



Liquidity and Capital Resources



We had retained earnings $32,413,924 and
$31,311,752 as of June 30, 2012 and December 31, 2011 respectively.



30







As of June 30, 2012, we had cash and restricted
cash of $7,695,333 and total current assets of $94,963,356 compared to cash and restricted cash of $1,914,194 and total current
assets of $98,671,393 as of December 31, 2011. Restricted cash is used to secure bank notes. The guaranteed percentage at June
30, 2012 was 100% compared to 100% at December 31, 2011.



As of June 30, 2012, we had accounts
receivable $28,189,700, representing 30% of our total current assets compared to $34,410,920, representing 35% of total current
assets as of December 31, 2011. Accounts receivable had decreased $6,221,220 or 18% because of the collection of accounts receivable
and 10% decrease of total revenue.



Our
total liabilities as of June 30, 2012 were $80,965,261 compared to $85,946,386 at December 31,
2011. The decrease of $4,981,125 or 6% was a result of decrease in advances from customers, loans payables to other
individuals, accounts payables andaccrued expenses, taxes payable, and other payable.



We generally require 30% of contract price
as advanced payment after we sign contract which is used to buy materials and production. 30% of contract price will be collected
when we finished production and inspected by customer. These two 30% pieces of the contract price are the main components of our
advances from customer. 30% of contract price will be received after the refractory installation is finished and tested by client.
The final installment of 10% is due one year after the stove is used to allow for quality guarantee. The last 30% and 10% are the
main components of our accounts receivable. As our business is contract-based sale, differentiations exist between contracts signed
by different customer.



As of June 30, 2012 we had working capital
of $17,524,148, compared to working capital of $16,461,409 as of December 31, 2011.  We believe our cash and accounts receivable
are adequate to satisfy our working capital needs and sustain our ongoing operations for the remainder of our fiscal year. However,
to develop new product and expand our market, we need improve our cash support, we must obtain additional short-term and long term
loans from bank and/or- raise additional capital by the sale of our securities in order to implement our strategic growth plans
which include increasing our product line, promoting our design and engineering services, improving our products, and the potential
acquisitions of mines and other refractory companies.



Although we continue to explore opportunities
for raising capital, we have no funding commitments in place at this time and we can give no assurance that such capital will be
available on favorable terms, or at all. Even if we are successful in raising additional funds, there is no assurance regarding
the terms of any additional investment and any such investment or other strategic alternative would likely substantially dilute
or eliminate the interests of our shareholders.



Below is a summary of our cash flow:



Net Cash Provided by (Used in)
Operating Activities. For the six months ended June 30, 2012, net cash used in operating activities was $1,548,062
compared to cash used in operating activities of  $557,442 for the six months ended June 30, 2011. The increase in net cash
provided by operating activities for the six months ended June 30, 2012 was primarily due to changes in prepaid expenses and
deposits, account receivable, retentions receivable and long term retentions receivable, advances from customers, account
payable and accrued expenses, restricted cash for issuance of bank notes payable, net proceeds from bank notes receivable and
proceeds from notes payable as set forth below:



31









|Items                                                                           |  | 2012  (US$) |            |   | 2011 (US$) |  |            | Increase /(Decrease)(US$) |  |  | Percentage  |  
|------------------------------------------------------------------------------- |  | ----------- | ---------- | - | ---------- |  | ---------- | ------------------------- |  |  | ----------- | -
|Prepaid expenses and deposits                                                   |  |             | 3,197,484  |   |            |  | (6,376,591 | )                         |  |  | 9,574,075   |  
|Accounts receivable, retentions receivable, and long term retentions receivable |  |             | 7,570,001  |   |            |  | (5,457,306 | )                         |  |  | 13,027,307  |  
|Advances from customers                                                         |  |             | (4,234,505 | ) |            |  | 4,634,280  |                           |  |  | (8, 868,785 | )
|Account payable and accrued expenses                                            |  |             | (2,992,392 | ) |            |  | 6,590,848  |                           |  |  | (9,583,240  | )
|Restricted cash for issuance of bank notes payable                              |  |             | (5,603,010 | ) |            |  | (891,829   | )                         |  |  | (4,711,181  | )
|Net proceeds from bank notes receivable                                         |  |             | 1,796,449  |   |            |  | (386,224   | )                         |  |  | 2,182,673   |  
|Proceeds from notes payable                                                     |  |             | 4,428,767  |   |            |  | 1,521,392  |                           |  |  | 2,907,375   |  





New Cash Used in Investing
Activities. For the six months ended June 30, 2012, net cash used in investing activities was $639,841,
compared to net cash used in investing activities of $922,837, for the six months ended June 30, 2011. The increase of net
cash used in investment activities for six months ended June 30, 2012 was primarily due to the increase of purchase of plant
and equipment, and deposits in capital expenditures.





|Items                            |  | 2012 (US$) |          |   | 2011(US$) |  |            | Increase/(Decrease)(US$) |  |  | Percentage |  
|-------------------------------- |  | ---------- | -------- | - | --------- |  | ---------- | ------------------------ |  |  | ---------- | -
|Deposits for capital expenditure |  |            | (179,336 | ) |           |  | (126,799   | )                        |  |  | (306,135   | )
|Purchase of plant and equipment  |  |            | (457,334 | ) |           |  | (1,129,047 | )                        |  |  | 671,173    |  







Net Cash (Used in) Provided by
Financing Activities. For the six months ended June 30, 2012, net cash used in financing activities was
 $717,114 compared to $1,005,483 in net cash provided by financing activities for the six months ended June 30, 2011. The
increase of the net cash  used in financing activities was primarily due to the changes of payments of dividends, payment of
short-term borrowings, proceeds from loans to related parties, employees, and other individuals, net of payments, proceeds
from short-term borrowings.



|Type of Proceeds                                                                          |  | 2012 (US$) |            |   | 2011(US$) |  |            | Increase/(Decrease)(US$) |  |  | Percentage |  
|----------------------------------------------------------------------------------------- |  | ---------- | ---------- | - | --------- |  | ---------- | ------------------------ |  |  | ---------- | -
|Payments of dividends                                                                     |  |            | -          |   |           |  | (700,731   | )                        |  |  | 700,731    |  
|Proceeds from loans to related parties, employees, and other individuals, net of payments |  |            | (1,671,639 | ) |           |  | 933,845    |                          |  |  | (2,605,484 | )
|Proceeds from short-term borrowings                                                       |  |            | 9,496,179  |   |           |  | 10,280,604 |                          |  |  | (784,425   | )
|Payment of short-term borrowings                                                          |  |            | (8,386,442 | ) |           |  | (9,358,576 | )                        |  |  | 972,134    |  
|Proceeds from issuance of long-term borrowings, net of payments                           |  |            | (155,212   | ) |           |  | (149,659   | )                        |  |  | (5,553     | )



Loan Facilities



In China, banks usually do not provide
long term loans to businesses. Most loans are short term loans (12 months or less). All of our loans with Chinese banks are for
a period of twelve months. As such, each year we repay our loans and/or apply for new loans with our banks or with other banks
for working capital needs. At June 30, 2012, we borrowed approximately $16.46 million from various short-term bank loans for
the working capital needs. All of our bank borrowings are secured by our land and buildings and/or guaranteed by third parties.
As of June 30, 2012, the Company and its subsidiaries have the following loan facilities with the following terms:



32









|Lender                         |  | Secured                  |  | Duration |  | Outstanding as of June, 30 2012 |            | Interest rates |       
|------------------------------ |  | ------------------------ |  | -------- |  | ------------------------------- | ---------- | -------------- | ------
|Agricultural credit union      |  | By third parties         |  | 1 year   |  |                                 | 1,585,070  |                | 8.640 
|Agricultural credit union      |  | Machinery and equipment  |  | 1 year   |  |                                 | 317,014    |                | 11.628
|Shanghai Pufa Development Bank |  | Office building and land |  | 1 year   |  |                                 | 3,170,140  |                | 7.216 
|Shanghai Pufa Development Bank |  | Office building and land |  | 6 months |  |                                 | 1,585,070  |                | 7.216 
|Shanghai Pufa Development Bank |  | By cash deposit          |  | 6 months |  |                                 | 2,647,067  |                | 7.900 
|Shanghai Pufa Development Bank |  | By Beijing Annec         |  | 6 months |  |                                 | 1,299,757  |                | 7.216 
|Shanghai Pufa Development Bank |  | Office building and land |  | 1 year   |  |                                 | 310,674    |                | 7.152 
|China Citic Bank               |  | By Fuchao Li             |  | 1 year   |  |                                 | 1,585,070  |                | 6.941 
|China Citic Bank               |  | By third parties         |  | 1 year   |  |                                 | 792,535    |                | 7.216 
|LuoYang  Bank                  |  | By third parties         |  | 1 year   |  |                                 | 3,170,140  |                | 7.872 
|                               |  |                          |  |          |  | $                               | 16,462,537 |                |       















The Company also has a
long-term bank loan with a balance of $776,684 as of June 30, 2012. The long-term loan is due on December 13, 2015, and has
an interest rate of 7.152% and is secured by one of the Company’s office buildings.



Future minimum payments
for the long-term loan are as follows:



|Period ending June 30: |  |  
|---------------------- |  | -
|2013                   |  | $
|2014                   |  |  
|2015                   |  |  
|                       |  |  
|                       |  | $





Off-Balance Sheet Arrangements



Under SEC regulations, we are required to
disclose our off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual
arrangement to which any entity that is not consolidated with us is a party, under which we have:



| | · | Any obligation under certain guarantee contracts;
| | - | -------------------------------------------------



| | · | Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as
credit, liquidity or market risk support to that entity for such assets;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our
stock and classified in stockholder’s equity in our statement of financial position; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing,
liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In China, because the bank lending system
is still relatively new, it is common practice for companies to enter into cross-guarantee arrangements in order to secure lines
of credit with banks. During 2012, Zhengzhou Annec had agreements as a debt guarantor for seven unaffiliated companies (“Unaffiliated
Companies”). We do not
consolidate the Unaffiliated Companies into our financial statements. In China, companies provide guarantees to other companies
in the community to assist them in getting bank loans. The guaranteed amount is approximately $12,839,000 as of June 30, 2012 compared
to $9,584,000 as of December 31, 2011. In exchange, the other unaffiliated companies also act as a debt guarantor for Zhengzhou
Annec. As of June 30, 2012, Zhengzhou Annec's loans guaranteed by other unaffiliated companies are approximately $6,340,000 compared
to $9,427,000 as of December 31, 2011. Zhengzhou Annec has not historically incurred any losses due to such debt guarantees.



Item 3. Quantitative and Qualitative Disclosures about
Market Risk



Not Applicable.



33









Item 4. Controls and Procedures



Evaluation of Disclosure Controls and Procedures



Under the supervision and with the participation
of our management, including our principal executive officer and principal financial officer, as of the end of the period covered
by this report, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures,
as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Act of 1934. Our disclosure controls and procedures are designed
to provide reasonable assurance that the information required to be included in our Securities and Exchange Commission (“SEC”)
reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, relating to the
Company, including our consolidated subsidiaries, and was made known to them by others within those entities, particularly during
the period when this report was being prepared. Based on the management's assessment and review of our financial statements and
results for the quarter ended June 30, 2012 and inability to file our Form 10-Q for the quarter ended March 31, 2012 in a timely
manner, we have concluded that our disclosure controls and procedures were not effective as of the end of the period covered by
this Report.



We discovered information that indicated
deficiencies in the controls and procedures we use to ensure that information we are required to disclose in our reports to the
SEC is summarized and reported within the required periods. The material weakness we have found include: (1) lack of sufficient
staff with appropriate knowledge, experience, and training in the application of U.S. GAAP, and (2) lack of an appropriate level
of company qualified resources to perform internal audit properly and inability to effectively communicate its accounting policies
and procedures to its accounting staff resulting in inconsistent practice. As a result of these deficiencies, we determined that
our internal controls over financial reporting were not effective as of the end of the period covered by this Report.



Remediation Plan



We intend to devote resources to remediating,
improving and documenting our disclosure controls and procedures and internal controls and procedures, including actively recruiting
a new chief financial officer with US GAAP and SEC reporting experience, additional accounting, and finance staff, and consultants
to assist with these functions, and implementing additional financial and management controls, reporting systems and procedures.
These measures may not ensure the adequacy of our internal controls over our financial processes and reporting in the future.



Changes in Internal Controls over Financial Reporting



There have been no material changes in our
internal controls over financial reporting that occurred during the period covered by this quarterly report, that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.



PART II - OTHER INFORMATION



Item 1. Legal Proceedings



We may be involved from time to time in
ordinary litigation, negotiation and settlement matters that will not have a material effect on our operations or finances.  We
are not aware of any pending or threatened litigation against us or our officers and directors in their capacity as such that could
have a material impact on our operations or finances.



Item 1A. Risk Factors



Not Applicable



Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds



None.



34







Item 3. Defaults Upon Senior Securities



None.



Item 4. Mine Safety Disclosures.



Not Applicable.



Item 5. Other Information



None.



Item 6. Exhibits no material agreements



|Exhibit No. |  | Description                                                                                                                            
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                        
|31.1        |  | Certification of Officers pursuant to Rules 13a-14 and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
|32.1        |  | Certification of Officers pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*          
|101.INS     |  | XBRL Instance Document (1)                                                                                                             
|101.SCH     |  | XBRL Taxonomy Extension Schema (1)                                                                                                     
|101.CAL     |  | XBRL Taxonomy Extension Calculation Linkbase(1)                                                                                        
|101.DEF     |  | XBRL Taxonomy Extension Definition Linkbase(1)                                                                                         
|101.LAB     |  | XBRL Taxonomy Extension Label Linkbase(1)                                                                                              
|101.FRE     |  | XBRL Taxonomy Extension Presentation Linkbase(1)                                                                                       










| | * | Filed here with.
| | - | ----------------

| | (1) | *  XBRL Interactive Data File will be filed by amendment to this Form 10-Q within 30 days of
the filing date of this Form 10-Q, as permitted by Rule 405(f)(3) of Regulation S-T
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



35







SIGNATURES



In accordance with Section 13 or 15(d) of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”) the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.



|                       | ANNEC GREEN REFRACTORIES
CORPORATION                                                                                   
|---------------------- | -----------------------------------------------------------------------------------------------------------------------
|                       |                                                                                                                        
|Dated: August 14, 2012 | /s/ LI Jiantao                                                                                                         
|                       | By: LI Jiantao                                                                                                         
|                       | Its: Chief Executive Officer and Chief Financial
Officer (Principal Executive Officer and Principal Financial  Officer)



36