**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-Q**





(Mark
      One)





**x QUARTERLY
      REPORT
      UNDER SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE ACT OF 1934**





For
      the
      quarterly period ended September 30, 2008





**o TRANSITION
      REPORT
      UNDER SECTION 13 OR 15 (D) OF THE EXCHANGE ACT**





For
      the
      transition period from __________ to __________





*COMMISSION
      FILE NUMBER: 33-16335*





**CHINA
      WIND SYSTEMS, INC.**


(Name
      of
      Registrant as specified in its charter)





DELAWARE
            
            74-2235008(State
                or other jurisdiction of
            
            (I.R.S.
                Employerincorporation
                of organization)
            
            Identification
                No.)





**No.
      9 Yanyu Middle Road**


**Qianzhou
      Township, Huishan District, Wuxi City**


**Jiangsu
      Province, China 150090**


(Address
      of principal executive office)




**(86)
      51083397559**


(Registrant’s
      telephone number)





**Not
      applicable**


(Former
      name, former address and former fiscal year, if changed since last
      report)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes þ No  ̈





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





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





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





Indicate
      the number of shares outstanding of each of the issuer's classes of common
      stock, as of the latest practicable date. 44,679,496 shares of common stock
      are
      issued and outstanding as of November 10, 2008.







**CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES**


**FORM
      10-Q**


**September
      30, 2008**




**TABLE
      OF CONTENTS**




Page
                No.**PART
                  I. - FINANCIAL INFORMATION**Item
                  1.
              Financial
                  Statements
              3Item
                  2.
              Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations.
              28Item
                  3
              Quantitative
                  and Qualitative Disclosures About Market Risk.
              41Item
                  4
              Controls
                  and Procedures.
              42**PART
                  II - OTHER INFORMATION**Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds.
              43Item
                  6.
              Exhibits.
              43









**FORWARD
      LOOKING STATEMENTS**




This
      report contains forward-looking statements regarding our business, financial
      condition, results of operations and prospects. Words such as “expects,”
“anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar
      expressions or variations of such words are intended to identify forward-looking
      statements, but are not deemed to represent an all-inclusive means of
      identifying forward-looking statements as denoted in this report. Additionally,
      statements concerning future matters are forward-looking
      statements.




Although
      forward-looking statements in this report reflect the good faith judgment of
      our
      management, such statements can only be based on facts and factors currently
      known by us. Consequently, forward-looking statements are inherently subject
      to
      risks and uncertainties and actual results and outcomes may differ materially
      from the results and outcomes discussed in or anticipated by the forward-looking
      statements. Factors that could cause or contribute to such differences in
      results and outcomes include, without limitation, those specifically addressed
      under the headings “Risks Factors” and “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations” in our annual report on Form
      10-KSB, in “Management’s Discussion and Analysis of Financial Condition and
      Results of Operations” in this Form 10-Q and in other reports that we file with
      the SEC. You are urged not to place undue reliance on these forward-looking
      statements, which speak only as of the date of this report. We file reports
      with
      the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy
      and information statements, and other information regarding issuers that file
      electronically with the SEC, including us. You can also read and copy any
      materials we file with the SEC at the SEC’s Public Reference Room at 100 F
      Street, NE, Washington, DC 20549. You can obtain additional information about
      the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.




We
      undertake no obligation to revise or update any forward-looking statements
      in
      order to reflect any event or circumstance that may arise after the date of
      this
      report, except as required by law. Readers are urged to carefully review and
      consider the various disclosures made throughout the entirety of this Quarterly
      Report, which are designed to advise interested parties of the risks and factors
      that may affect our business, financial condition, results of operations and
      prospects.







**PART
      1 - FINANCIAL INFORMATION**





Item
      1.  Financial
      Statements.




CHINA
        WIND SYSTEMS, INC. AND SUBSIDIARIES
 CONSOLIDATED
        BALANCE SHEETS
 
 September 30,
              
              December 31,2008
              
              2007(Unaudited)ASSETSCURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              744,885
              
              $
              5,025,434Accounts
                  receivable, net of allowance for doubtful accounts
              
              
              3,942,594
              
              
              2,158,412Inventories,
                  net of reserve for obsolete inventory
              
              
              2,185,721
              
              
              1,929,796Advances
                  to suppliers
              
              
              259,190
              
              
              938,331Prepaid
                  expenses and other
              
              
              78,847
              
              
              378,429Total
                  Current Assets
              
              
              7,211,237
              
              
              10,430,402PROPERTY
                  AND EQUIPMENT - Net
              
              
              18,343,726
              
              
              6,525,986OTHER
                  ASSETS:Deposit
                  on long-term assets - related party
              
              
              5,603,128
              
              
              10,863,706Land
                  use rights, net
              
              
              3,827,481
              
              
              502,634Investment
                  in cost method investee
              
              
              -
              
              
              34,181Due
                  from related parties
              
              
              -
              
              
              139,524Total
                  Assets
              
              $
              34,985,572
              
              $
              28,496,433LIABILITIES
                  AND STOCKHOLDERS' EQUITYCURRENT
                  LIABILITIES:Loans
                  payable
              
              $
              1,021,138
              
              $
              820,333Convertible
                  debt, net of discount on debt
              
              
              -
              
              
              3,261,339Accounts
                  payable
              
              
              3,202,606
              
              
              1,845,769Accrued
                  expenses
              
              
              190,882
              
              
              198,542VAT
                  and service taxes payable
              
              
              65,831
              
              
              434,839Advances
                  from customers
              
              
              65,850
              
              
              77,357Due
                  to related party
              
              
              -
              
              
              98,541Income
                  taxes payable
              
              
              591,745
              
              
              508,407Total
                  Current Liabilities
              
              
              5,138,052
              
              
              7,245,127STOCKHOLDERS'
                  EQUITY:Series
                  A convertible preferred ($0.001 par value; 60,000,000 shares authorized;
                  14,028,189 and 0 shares issued and outstanding at September 30,
                  2008 and
                  December 31, 2007, respectively)
              
              
              14,028
              
              
              -Common
                  stock ($0.001 par value; 150,000,000 shares authorized; 40,976,062
                  and
                  37,384,295 shares issued and outstanding at September 30, 2008
                  and
                  December 31, 2007, respectively)
              
              
              40,976
              
              
              37,385Additional
                  paid-in capital
              
              
              13,966,914
              
              
              3,488,896Retained
                  earnings
              
              
              12,274,138
              
              
              16,074,270Statutory
                  reserve
              
              
              526,628
              
              
              305,472Other
                  comprehensive gain - cumulative foreign currency translation
                  adjustment
              
              
              3,024,836
              
              
              1,345,283Total
                  Stockholders' Equity
              
              
              29,847,520
              
              
              21,251,306Total
                  Liabilities and Stockholders' Equity
              
              $
              34,985,572
              
              $
              28,496,433
 
 See
        notes
        to unaudited consolidated financial statements
  3
 
 CHINA
        WIND SYSTEMS, INC. AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF OPERATIONS
 (Unaudited)
 
 For the Three Months Ended
              
              For the Nine Months EndedSeptember 30,
              
              September 30,2008
              
              2007
              
              2008
              
              2007NET
                  REVENUES
              
              $
              11,770,162
              
              $
              8,000,293
              
              $
              31,400,186
              
              $
              16,589,475COST
                  OF SALES
              
              
              8,816,389
              
              
              5,633,977
              
              
              23,508,720
              
              
              11,831,546GROSS
                  PROFIT
              
              
              2,953,773
              
              
              2,366,316
              
              
              7,891,466
              
              
              4,757,929OPERATING
                  EXPENSES:Depreciation
              
              
              69,712
              
              
              68,607
              
              
              228,189
              
              
              207,875Selling,
                  general and administrative
              
              
              414,078
              
              
              223,164
              
              
              1,681,177
              
              
              566,106Total
                  Operating Expenses
              
              
              483,790
              
              
              291,771
              
              
              1,909,366
              
              
              773,981INCOME
                  FROM OPERATIONS
              
              
              2,469,983
              
              
              2,074,545
              
              
              5,982,100
              
              
              3,983,948OTHER
                  INCOME (EXPENSE):Interest
                  income
              
              
              2,075
              
              
              91
              
              
              11,719
              
              
              372Interest
                  expense
              
              
              (20,427
              )
              
              (9,946
              )
              
              (2,298,874
              )
              
              (31,360
              )Other
                  income from foregiveness of income and VAT taxes
              
              
              -
              
              
              6,771,442
              
              
              -
              
              
              6,771,442Debt
                  issuance costs
              
              
              -
              
              
              -
              
              
              (21,429
              )
              
              -Total
                  Other Income (Expense)
              
              
              (18,352
              )
              
              6,761,587
              
              
              (2,308,584
              )
              
              6,740,454INCOME
                  BEFORE INCOME TAXES
              
              
              2,451,631
              
              
              8,836,132
              
              
              3,673,516
              
              
              10,724,402INCOME
                  TAXES
              
              
              590,769
              
              
              714,840
              
              
              1,651,331
              
              
              1,315,094NET
                  INCOME
              
              
              1,860,862
              
              
              8,121,292
              
              
              2,022,185
              
              
              9,409,308DEEMED
                  PREFERRED DIVIDEND
              
              
              -
              
              
              -
              
              
              (2,884,062
              )
              
              -NET
                  INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
              
              $
              1,860,862
              
              $
              8,121,292
              
              $
              (861,877
              )
              $
              9,409,308COMPREHENSIVE
                  INCOME:NET
                  INCOME
              
              $
              1,860,862
              
              $
              8,121,292
              
              $
              2,022,185
              
              $
              9,409,308OTHER
                  COMPREHENSIVE INCOME:Unrealized
                  foreign currency translation gain
              
              
              67,269
              
              
              299,690
              
              
              1,679,553
              
              
              523,986COMPREHENSIVE
                  INCOME
              
              $
              1,928,131
              
              $
              8,420,982
              
              $
              3,701,738
              
              $
              9,933,294NET
                  INCOME (LOSS) PER COMMON SHARE:Basic
              
              $
              0.05
              
              $
              0.22
              
              $
              (0.02
              )
              $
              0.26Diluted
              
              $
              0.03
              
              $
              0.22
              
              $
              (0.02
              )
              $
              0.26WEIGHTED
                  AVERAGE COMMON SHARES OUTSTANDING:Basic
              
              
              40,363,220
              
              
              36,577,704
              
              
              38,634,312
              
              
              36,577,704Diluted
              
              
              67,189,108
              
              
              36,577,704
              
              
              38,634,312
              
              
              36,577,704
 
 See
        notes
        to unaudited consolidated financial statements
  4
 
 CHINA
        WIND SYSTEMS, INC. AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 (Unaudited)
 
 For the Nine Months EndedSeptember 30,2008
              
              2007CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              2,022,185
              
              $
              9,409,308Adjustments
                  to reconcile net income from operations to net cashprovided
                  by operating activities:Depreciation
              
              
              482,376
              
              
              450,881Amortization
                  of debt discount to interest expense
              
              
              2,263,661
              
              
              -Amortization
                  of debt offering costs
              
              
              21,429
              
              
              -Rent
                  expense associated with prepaid land use rights
              
              
              63,346
              
              
              7,805Increase
                  in allowance for doubtful accounts
              
              
              171,816
              
              
              182,882Increase
                  in reserve for inventory obsolescence
              
              
              -
              
              
              106,942Stock
                  based compensation expense
              
              
              75,000
              
              
              -Other
                  income from forgiveness of income and VAT taxes
              
              
              -
              
              
              (6,771,442
              )Changes
                  in assets and liabilities:Accounts
                  receivable
              
              
              (1,777,797
              )
              
              (2,538,272
              )Inventories
              
              
              (124,107
              )
              
              426,386Prepaid
                  and other current assets
              
              
              280,762
              
              
              46,630Advances
                  to suppliers
              
              
              726,728
              
              
              (127,886
              )Accounts
                  payable
              
              
              1,189,915
              
              
              1,153,705Accrued
                  expenses
              
              
              2,343
              
              
              22,058VAT
                  and service taxes payable
              
              
              (389,946
              )
              
              1,011,064Income
                  taxes payable
              
              
              48,284
              
              
              957,899Advances
                  from customers
              
              
              (16,345
              )
              
              1,830,260NET
                  CASH PROVIDED BY OPERATING ACTIVITIES
              
              
              5,039,650
              
              
              6,168,220CASH
                  FLOWS FROM INVESTING ACTIVITIES:Proceeds
                  (payments) for due from related parties
              
              
              145,808
              
              
              (486,032
              )Proceeds
                  from sale of cost-method investee
              
              
              35,720
              
              
              26,056Deposit
                  on long-term assets - related party
              
              
              (89,721
              )
              
              (5,792,030
              )Purchase
                  of property and equipment
              
              
              (11,629,385
              )
              
              (17,581
              )NET
                  CASH USED IN INVESTING ACTIVITIES
              
              
              (11,537,578
              )
              
              (6,269,587
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from loans payable
              
              
              142,880
              
              
              260,561Proceeds
                  from exercise of warrants
              
              
              2,011,575
              
              
              -Payments
                  on related party advances
              
              
              (102,979
              )
              
              -NET
                  CASH PROVIDED BY FINANCING ACTIVITIES
              
              
              2,051,476
              
              
              260,561EFFECT
                  OF EXCHANGE RATE ON CASH
              
              
              165,903
              
              
              20,161NET
                  (DECREASE) INCREASE IN CASH
              
              
              (4,280,549
              )
              
              179,355CASH
                  - beginning of year
              
              
              5,025,434
              
              
              421,390CASH
                  - end of period
              
              $
              744,885
              
              $
              600,745SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:Cash
                  paid for:Interest
              
              $
              55,932
              
              $
              31,360Income
                  taxes
              
              $
              1,603,047
              
              $
              -NON-CASH
                  INVESTING AND FINANCING ACTIVITIES:Deemed
                  preferred dividend reflected in paid-in capital
              
              $
              2,884,062
              
              $
              -Reclassification
                  of long-term deposit - related party to distribution
              
              $
              2,717,099
              
              $
              -Convertible
                  debt converted to series A preferred stock
              
              $
              5,525,000
              
              $
              -Deposit
                  on long-term assets -related party reclassified to land use
                  rights
              
              $
              3,286,935
              
              $
              -Series
                  A preferred converted to common shares
              
              $
              759
              
              $
              -
 
 See
        notes
        to unaudited consolidated financial statements.
 
 5
  CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
      30, 2008





NOTE
      1 – ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Organization




China
      Winds Systems, Inc. (the “Company”) was incorporated in Delaware on June 24,
      1987 under the name of Malex, Inc. On December 18, 2007, the Company’s corporate
      name was changed to China Wind Systems, Inc.





On
      November 13, 2007, the Company entered into a Share Exchange Agreement (the
      “Exchange Agreement”) among Fulland Limited, a Cayman Islands corporation
      (“Fulland”), the stockholders of Fulland, and Synergy Business Consulting, LLC
      (“Synergy”), the then principal stockholder of the Company, pursuant to which,
      simultaneously with the financing described in Note 6, the Company (i) issued
      36,577,704 shares of common stock to the former stockholders of Fulland, (ii)
      purchased 8,006,490 shares of common stock from Synergy for $625,000 and
      cancelled such shares, (iii) issued Synergy 291,529 shares of common stock
      for
      professional services, and (iv) paid cash fees of $415,000 in connection with
      the Exchange Agreement. The Company paid $1,040,000 from the proceeds of the
      financing for closing costs, including the $625,000 paid for purchase of shares
      from Synergy. At the time of the closing, under the Exchange Agreement and
      the
      financing, the Company, then known as Malex, Inc. was not engaged in any
      business activity and was considered a blank check shell.





The
      Company is the sole stockholder of Fulland. Fulland owns 100% of Green Power
      Environment Technology (Shanghai) Co., Ltd. (“Green Power”), which is a wholly
      foreign-owned enterprise (“WFOE”) organized under the laws of the People’s
      Republic of China (“PRC” or “China”). Green Power is a party to a series of
      contractual arrangements, as fully described below, dated October 12, 2007
      with
      Wuxi Huayang Dyeing Machinery Co., Ltd. (“Dyeing”) and Wuxi Huayang Electrical
      Power Equipment Co., Ltd. (“Electrical”), and together with Dyeing, sometimes
      collectively referred to as the “Huayang Companies”), both of which are limited
      liability companies headquartered in, and organized under the laws of, the
      PRC.





Fulland
      is a limited liability company incorporated under the laws of the Cayman Islands
      on May 9, 2007, which was formed by the owners of the Huayang Companies as
      a
      special purpose vehicle for purposes of raising capital, in accordance with
      requirements of the PRC State Administration of Foreign Exchange (“SAFE”). On
      May 31, 2007, SAFE issued an official notice known as Hui Zong Fa [2007] No.
      106
      (“Circular 106”), which requires the owners of any Chinese company to obtain
      SAFE’s approval before establishing any offshore holding company structure for
      foreign financing as well as subsequent acquisition matters in China.
      Accordingly, the owners of the Huayang Companies, Mr. Jianhua Wu and Ms. Lihua
      Tang, submitted their application to SAFE in early September 2007. On October
      11, 2007, SAFE approved their application, permitting these Chinese citizens
      to
      establish an offshore company, Fulland, as a special purpose vehicle for any
      foreign ownership and capital raising activities by the Huayang Companies.





Additionally,
      on August 27, 2008, the Company incorporated Wuxi Fulland Wind Energy Equipment
      Co. , Ltd. (“Fulland Wind Energy”). Fulland owns 100% of Fulland Wind Energy,
      which is a wholly foreign-owned enterprise (“WFOE”) organized under the laws of
      the PRC.





In
      2007,
      the Company recapitalized the Company to give effect to the Exchange Agreement
      discussed above. Under generally accepted accounting principles, the acquisition
      by the Company of Fulland is considered to be capital transactions in substance,
      rather than a business combination. That is, the acquisition is equivalent,
      to
      the acquisition by Fulland of the Company, then known as Malex, Inc., with
      the
      issuance of stock by Fulland for the net monetary assets of the Company. This
      transaction is reflected as a recapitalization, and is accounted for as a change
      in capital structure. Accordingly, the accounting for the acquisition is
      identical to that resulting from a reverse acquisition. Under reverse
      acquisition accounting, the comparative historical financial statements of
      the
      Company, as the legal acquirer, are those of the accounting acquirer, Fulland.
      Since Fulland and Greenpower did not have any business activities, the Company’s
      financial statements prior to the closing on the reverse acquisition, reflect
      only business of the Huayang Companies. The accompanying financial statements
      reflect the recapitalization of the stockholders’ equity as if the transactions
      occurred as of the beginning of the first period presented. Thus, the 36,577,704
      shares of common stock issued to the former Fulland stockholders are deemed
      to
      be outstanding for all periods reported prior to the date of the reverse
      acquisition.


6





CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
      30, 2008





NOTE
      1 – ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





*Wuxi
      Huayang Dyeing Machinery Co., Ltd.*





Wuxi
      Huayang Dyeing Machinery Co., Ltd. (“Dyeing”) is a Chinese limited liability company and was formed under laws of
      the People’s Republic of China on August 17, 1995. Dyeing
      produces a variety of high and low temperature dyeing and finishing
      machinery.





*Wuxi
      Huayang Electrical Power Equipment Co., Ltd.*





Wuxi
      Huayang Electrical Power Equipment Co., Ltd. (“Electric”) a Chinese limited
      liability company and was formed under laws of the People’s Republic of China on
      May 21, 2004. Beginning in April 2007, Electric began to produce large-scaled
      forged rolled rings for the wind-power and other industries that are up to
      three
      meters in diameter. Commencing in 2008, the sale of rolled rings accounted
      for
      more than 85% or Electric’s revenue. As a result, we are referring to this
      segment of our business as the forged rolled rings and electric power equipment
      division. In addition to forged rolled rings, Electric continues to manufacture
      electric power auxiliary apparatuses (including coking equipment) and provide
      of
      related engineering services. Electric equipment products mainly include various
      auxiliary equipment of power stations, chemical equipment, dust removal and
      environmental protection equipment, and metallurgy non- standard equipment.





As
      a
      result of the transaction effected by the Exchange Agreement, the Company’s
      business has become the business of the Huayang Companies.





Contemporaneously
      with the closing under the Exchange Agreement, the Company sold 3% convertible
      notes in the principal amount of $5,525,000 to an investor group. Pursuant
      to
      the securities purchase agreement relating to the issuance of the convertible
      notes, on March 28, 2008, the Company amended and restated its certificate
      of
      incorporation to provide for the authorization of a class of preferred stock
      with the directors having the right to designate one or more series of preferred
      stock and set the rights, preferences, privileges and limitations of each such
      series and set forth the rights, preferences, privileges and limitations of
      a
      series of preferred stock designated as the series A convertible preferred
      stock
      (“series A preferred stock”). The notes were, by their terms, automatically
      converted into 14,787,135 shares of series A preferred stock and warrants to
      purchase a total of 18,829,756 shares of common stock upon the filing the
      restated certificate of incorporation (See Note 6).





Basis
      of presentation





Management
      acknowledges its responsibility for the preparation of the accompanying interim
      consolidated financial statements which reflect all adjustments, consisting
      of
      normal recurring adjustments, considered necessary in its opinion for a fair
      statement of its consolidated financial position and the results of its
      operations for the interim period presented. These consolidated financial
      statements should be read in conjunction with the summary of significant
      accounting policies and notes to consolidated financial statements included
      in
      the Company’s Form 10-KSB annual report for the year ended December 31, 2007.





The
      accompanying unaudited condensed consolidated financial statements for China
      Wind Systems, Inc., its subsidiaries and variable interest entities, have been
      prepared in accordance with accounting principles generally accepted in the
      United States of America for interim financial information and with the
      instructions to Form 10-Q and Article 8-03 of Regulation S-X. Operating results
      for interim periods are not necessarily indicative of results that may be
      expected for the fiscal year as a whole.





The
      Company’s consolidated financial statements include the financial statements of
      its wholly-owned subsidiaries, Fulland and Greenpower, as well as the financial
      statements of Huayang Companies, Dyeing and Electric. All significant
      intercompany accounts and transactions have been eliminated in
      consolidation.


7


CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
      30, 2008





NOTE
      1 – ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





The
      Huayang Companies are considered variable interest entities
      (“VIE”), and the Company is the primary beneficiary. The Company’s relationships
      with the Huayang Companies and their shareholders are governed by a series
      of
      contractual arrangements between Green Power, the Company’s wholly foreign-owned
      enterprise in the PRC, and each of the Huayang Companies, which are the
      operating companies of the Company in the PRC. Under PRC laws, each of Green
      Power, Huayang Dye Machine and Huayang Electrical Power Equipment is an
      independent legal person and none of them is exposed to liabilities incurred
      by
      the other parties. The contractual arrangements constitute valid and binding
      obligations of the parties of such agreements. Each of the contractual
      arrangements and the rights and obligations of the parties thereto are
      enforceable and valid in accordance with the laws of the PRC. On October 12,
      2007, the Company entered into the following contractual arrangements with
      each
      of Huayang Dye Machine and Huayang Electrical Power Equipment:





Consulting
      Services Agreement .
      Pursuant to the exclusive consulting services agreements between Green Power
      and
      the Huayang Companies, Green Power has the exclusive right to provide to the
      Huayang Companies general business operation services, including advice and
      strategic planning, as well as consulting services related to the technological
      research and development of dye and finishing machines, electrical equipments
      and related products (the “ Services ”).
      Under
      this agreement, Green Power owns the intellectual property rights developed
      or
      discovered through research and development, in the course of providing the
      Services, or derived from the provision of the Services. The Huayang Companies
      shall pay a quarterly consulting service fees in Renminbi (“RMB”) to Fulland
      that is equal to all of the Huayang Companies’ profits for such
      quarter.





Operating
      Agreement .
      Pursuant to the operating agreement among Green Power, the Huayang Companies
      and
      all shareholders of the Huayang Companies (collectively the “ Huayang
      Companies Shareholders ”),
      Green
      Power provides guidance and instructions on the Huayang Companies’ daily
      operations, financial management and employment issues. The Huayang Companies
      Shareholders must designate the candidates recommended by Green Power as their
      representatives on the boards of directors of each of the Huayang Companies.
      Green Power has the right to appoint senior executives of the Huayang Companies.
      In addition, Green Power agrees to guarantee the Huayang Companies’ performance
      under any agreements or arrangements relating to the Huayang Companies’ business
      arrangements with any third party. The Huayang Companies, in return, agrees
      to
      pledge their accounts receivable and all of their assets to Green Power.
      Moreover, the Huayang Companies agrees that without the prior consent of Green
      Power, the Huayang Companies will not engage in any transactions that could
      materially affect their respective assets, liabilities, rights or operations,
      including, without limitation, incurrence or assumption of any indebtedness,
      sale or purchase of any assets or rights, incurrence of any encumbrance on
      any
      of their assets or intellectual property rights in favor of a third party or
      transfer of any agreements relating to their business operation to any third
      party. The term of this agreement is ten (10) years from October 12, 2007 and
      may be extended only upon Green Power’s written confirmation prior to the
      expiration of the this agreement, with the extended term to be mutually agreed
      upon by the parties.





Equity
      Pledge Agreement *.* Under
      the
      equity pledge agreement between the Huayang Companies Shareholders and Green
      Power, the Huayang Companies Shareholders pledged all of their equity interests
      in the Huayang Companies to Green Power to guarantee the Huayang Companies’
performance of their obligations under the consulting services agreement. If
      the
      Huayang Companies or the Huayang Companies Shareholders breaches their
      respective contractual obligations, Green Power, as pledgee, will be entitled
      to
      certain rights, including the right to sell the pledged equity interests. the
      Huayang Companies Shareholders also agreed that upon occurrence of any event
      of
      default, Green Power shall be granted an exclusive, irrevocable power of
      attorney to take actions in the place and stead of the Huayang Companies
      Shareholders to carry out the security provisions of the equity pledge agreement
      and take any action and execute any instrument that Green Power may deem
      necessary or advisable to accomplish the purposes of the equity pledge
      agreement. The Huayang Companies Shareholders agreed not to dispose of the
      pledged equity interests or take any actions that would prejudice Green Power’s
      interest. The equity pledge agreement will expire two (2) years after the
      Huayang Companies’ obligations under the consulting services agreements have
      been fulfilled.


8


CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
      30, 2008





NOTE
      1 – ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Option
      Agreement *.*  ** Under
      the
      option agreement between the Huayang Companies Shareholders and Green Power,
      the
      Huayang Companies Shareholders irrevocably granted Green Power or its designated
      person an exclusive option to purchase, to the extent permitted under PRC law,
      all or part of the equity interests in the Huayang Companies for the cost of
      the
      initial contributions to the registered capital or the minimum amount of
      consideration permitted by applicable PRC law. Green Power or its designated
      person has sole discretion to decide when to exercise the option, whether in
      part or in full. The term of this agreement is ten (10) years from October
      12,
      2007 and may be extended prior to its expiration by written agreement of the
      parties.





The
      accounts of the
      Huayang Companies are consolidated in the accompanying financial statements
      pursuant to Financial Accounting Standards Board Interpretation No. 46
      (Revised), “Consolidation of Variable Interest Entities - an Interpretation of
      ARB No. 51”. As a VIE, the
      Huayang Companies sales are included in the Company’s total sales, its income
      from operations is consolidated with the Company’s, and the Company’s net income
      includes all of the
      Huayang Companies net income. The Company does not have any non-controlling
      interest and accordingly, did not subtract any net income in calculating the
      net
      income attributable to the Company. Because of the contractual arrangements,
      the
      Company had a pecuniary interest in the
      Huayang Companies that require consolidation of the Company’s and the
      Huayang Companies financial statements.





Use
      of
      estimates





The
      preparation of the financial statements in conformity with accounting principles
      generally accepted in the U.S. requires management to make estimates and
      assumptions that affect the reported amounts of assets, liabilities, revenues,
      expenses, and the related disclosures at the date of the financial statements
      and during the reporting period. Actual results could materially differ from
      these estimates. Significant estimates in 2008 and 2007 include the allowance
      for doubtful accounts, the allowance for obsolete inventory, the useful life
      of
      property and equipment and intangible assets, accruals for taxes due, and the
      calculation of the value of warrants granted upon the conversion of debt to
      preferred stock.





Fair
      value of financial instruments





Effective
      January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements (SFAS
      157). SFAS 157 clarifies the definition of fair value, prescribes methods for
      measuring fair value, and establishes a fair value hierarchy to classify the
      inputs used in measuring fair value as follows:





Level
      1-Inputs are unadjusted quoted prices in active markets for identical assets
      or
      liabilities available at the measurement date.




Level
      2-Inputs are unadjusted quoted prices for similar assets and liabilities in
      active markets, quoted prices for identical or similar assets and liabilities
      in
      markets that are not active, inputs other then quoted prices that are
      observable, and inputs derived from or corroborated by observable market
      data.




Level
      3-Inputs are unobservable inputs which reflect the reporting entity’s own
      assumptions on what assumptions the market participants would use in pricing
      the
      asset or liability based on the best available information.





The
      adoption of SFAS No. 157 did not have a material impact on the Company’s fair
      value measurements. The carrying amounts reported in the balance sheet for
      cash,
      accounts receivable, loans payable, accounts payable and accrued expenses,
      customer advances, and amounts due from related parties approximate their fair
      market value based on the short-term maturity of these instruments.




9


CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
      30, 2008





NOTE
      1 – ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Cash
      and cash equivalents





For
      purposes of the consolidated statements of cash flows, the Company considers
      all
      highly liquid instruments purchased with a maturity of three months or less
      and
      money market accounts to be cash equivalents. The Company maintains cash and
      cash equivalents with various financial institutions mainly in the PRC and
      the
      United States. Balances in the United States are insured up to $250,000 at
      each
      bank. Balances in banks in the PRC are uninsured.





Concentrations
      of credit risk




Financial
      instruments which potentially subject the Company to concentrations of credit
      risk consist principally of cash and trade accounts receivable. Substantially
      all of the Company’s cash is maintained with state-owned banks within the
      People’s Republic of China of which no deposits are covered by insurance. The
      Company has not experienced any losses in such accounts and believes it is
      not
      exposed to any risks on its cash in bank accounts. A significant portion of
      the
      Company's sales are credit sales which are primarily to customers whose ability
      to pay is dependent upon the industry economics prevailing in these areas;
      however, concentrations of credit risk with respect to trade accounts
      receivables is limited due to generally short payment terms. The Company also
      performs ongoing credit evaluations of its customers to help further reduce
      credit risk. At September 30 2008 and December 31, 2007, the Company’s bank
      deposits by geographic area were as follows:


**September 30, 2008**
                
                **December 31, 2007**Country:United
                    States
                
                $
                29,308
                
                
                3.9
                %
                $
                171,121
                
                
                3.4
                %China
                
                
                715,577
                
                
                96.1
                %
                
                4,854,313
                
                
                96.6
                %Total
                    cash and cash equivalents
                
                $
                744,885
                
                
                100.0
                %
                $
                5,025,434
                
                
                100.0
                %





Accounts
      receivable





Accounts
      receivable are presented net of an allowance for doubtful accounts. The Company
      maintains allowances for doubtful accounts for estimated losses. The Company
      reviews the accounts receivable on a periodic basis and makes general and
      specific allowances when there is doubt as to the collectability of individual
      balances. In evaluating the collectability of individual receivable balances,
      the Company considers many factors, including the age of the balance, customer’s
      historical payment history, its current credit-worthiness and current economic
      trends. Accounts are written off after exhaustive efforts at collection. At
      September 30, 2008 and December 31, 2007, the Company has established, based
      on
      a review of its outstanding balances, an allowance for doubtful accounts in
      the
      amount of $843,568 and $626,218, respectively.





Inventories





Inventories,
      consisting of raw materials, work in process and finished goods related to
      the
      Company’s products are stated at the lower of cost or market utilizing the
      weighted average method. An allowance is established when management determines
      that certain inventories may not be saleable. If inventory costs exceed expected
      market value due to obsolescence or quantities in excess of expected demand,
      the
      Company will record reserves for the difference between the cost and the market
      value. These reserves are recorded based on estimates. The Company recorded
      an
      inventory reserve of $79,159 and $74,192 at September 30, 2008 and December 31,
      2007, respectively.




10





CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
      30, 2008





NOTE
      1 – ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Property
      and equipment





Property
      and equipment are carried at cost and are depreciated on a straight-line basis
      over the estimated useful lives of the assets. The cost of repairs and
      maintenance is expensed as incurred; major replacements and improvements are
      capitalized. When assets are retired or disposed of, the cost and accumulated
      depreciation are removed from the accounts, and any resulting gains or losses
      are included in income in the year of disposition. The Company examines the
      possibility of decreases in the value of fixed assets when events or changes
      in
      circumstances reflect the fact that their recorded value may not be recoverable.





Investment
      in non-marketable equity securities





Certain
      securities that the Company may invest in can be determined to be
      non-marketable. Non-marketable securities where the Company owns less than
      20%
      of the investee are accounted for at cost pursuant to APB No. 18, “The Equity
      Method of Accounting for Investments in Common Stock” (“APB 18”). At December
      31, 2007, the Company had a 5% membership interest in Wuxi Huayang Yingran
      Machinery Co. Ltd. (“Yingran”) amounting to $34,181, which at December 31, 2007,
      is reflected on the accompanying consolidated balance sheet as investments
      in
      cost method investee. In March 2008, the Company sold its 5% investment in
      Yingran to an individual related to the Company’s chief executive officer for a
      price which approximated its carrying value.





I mpairment
      of long-lived assets





In
      accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
      “Accounting for the Impairment or Disposal of Long-Lived Assets”, The Company
      periodically reviews its long-lived assets for impairment whenever events or
      changes in circumstances indicate that the carrying amount of the assets may
      not
      be fully recoverable. The Company recognizes an impairment loss when the sum
      of
      expected undiscounted future cash flows is less than the carrying amount of
      the
      asset. The amount of impairment is measured as the difference between the
      asset’s estimated fair value and its book value. The Company did not consider it
      necessary to record any impairment charges during the nine months ended
      September 30, 2008 and 2007.





Advances
      from customers





Advances
      from customers at September 30, 2008 and December 31, 2007 amounted to
      $65,850 and $77,357, respectively, and consist of prepayments from third party
      customers to the Company for merchandise that had not yet been shipped. The
      Company will recognize the deposits as revenue as customers take delivery of
      the
      goods, in compliance with its revenue recognition policy.





Income
      taxes





The
      Company is governed by the Income Tax Law of the People’s Republic of China and
      the United States. Income taxes are accounted for under Statement of Financial
      Accounting Standards No. 109, “Accounting for Income Taxes”, which is an asset
      and liability approach that requires the recognition of deferred tax assets
      and
      liabilities for the expected future tax consequences of events that have been
      recognized in the Company's financial statements or tax returns.


11




CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
      30, 2008





NOTE
      1 – ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Revenue
      recognition





The
      Company recognizes revenue when persuasive evidence of an arrangement exists,
      delivery has occurred or services have been rendered, the purchase price is
      fixed or determinable and collectability is reasonably assured. The Company
      accounts for the product sale as a multiple element arrangement. Revenue from
      multiple element arrangements is allocated among the separate accounting units
      based on the residual method. Under the residual method, the revenue is
      allocated to undelivered elements based on fair value of such undelivered
      elements and the residual amounts of revenue allocated to delivered elements.
      The Company recognizes revenues from the sale of dyeing equipment, forged rolled
      rings, and electric equipment upon shipment and transfer of title. The other
      elements may include installation and generally a one-year warranty. Equipment
      installation revenue is valued based on estimated service person hours to
      complete installation and is recognized when the labor has been completed and
      the equipment has been accepted by the customer, which is generally within
      a
      couple days of the delivery of the equipment. Warranty revenue is valued based
      on estimated service person hours to complete a service and generally is
      recognized over the contract period. For the nine months ended September 30,
      2008 and 2007, amounts allocated to warranty revenues were not material. Based
      on historical experience, warranty service calls and any related labor costs
      have been minimal.




All
      other
      product sales with customer specific acceptance provisions, including the forged
      rolled rings, are recognized upon customer acceptance and the delivery of the
      parts or service. Revenues related to spare part sales are recognized upon
      shipment or delivery based on the trade terms.





Stock-based
      compensation





The
      Company accounts for stock options issued to employees in accordance with SFAS
      123R, “Share-Based Payment, an Amendment of FASB Statement No. 123” (“SFAS
      123R”). SFAS 123R requires companies to recognize in the statement of operations
      the grant-date fair value of stock options and other equity based compensation
      issued to employees.





Shipping
      costs





Shipping
      costs are included in selling expenses and totaled $113,367 and $664 for the
      nine months ended September 30, 2008 and 2007, respectively.





A dvertising





Advertising
      is expensed as incurred and is included in selling, general and administrative
      expenses on the accompanying consolidated statement of operations and was not
      material.





Research
      and development





Research
      and development costs are expensed as incurred. For the nine months ended
      September 30, 2008 and 2007, research and development costs were not material.


12





CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
      30, 2008





NOTE
      1 – ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Foreign
      currency translation





The
      reporting currency of the Company is the U.S. dollar. The functional currency
      of
      the Company is the local currency, the Chinese Renminbi (“RMB”). Results of
      operations and cash flows are translated at average exchange rates during the
      period, assets and liabilities are translated at the unified exchange rate
      at
      the end of the period, and equity is translated at historical exchange rates.
      Translation adjustments resulting from the process of translating the local
      currency financial statements into U.S. dollars are included in determining
      comprehensive income. The cumulative translation adjustment and effect of
      exchange rate changes on cash for the nine months ended September 30, 2008
      and
      2007 was $165,903 and $20,161, respectively. Transaction gains and losses that
      arise from exchange rate fluctuations on transactions denominated in a currency
      other than the functional currency are included in the results of operations
      as
      incurred.





Asset
      and
      liability accounts at September 30, 2008 and December 31, 2007 were translated
      at 6.8551 RMB to $1.00 USD and at 6.8718 RMB to $1.00 USD, respectively. Equity
      accounts were stated at their historical rate. The average translation rates
      applied to income statements for the nine months ended September 30, 2008 and
      2007 were 6.99886 RMB and 7.67576 RMB to $1.00 USD, respectively. In accordance
      with Statement of Financial Accounting Standards No. 95, "Statement of Cash
      Flows," cash flows from the Company's operations are calculated based upon
      the
      local currencies using the average translation rate. As a result, amounts
      related to assets and liabilities reported on the statement of cash flows will
      not necessarily agree with changes in the corresponding balances on the balance
      sheet.





Earnings
      (loss) per share of common stock




Basic
      earnings per share is computed by dividing net earnings by the weighted average
      number of shares of common stock outstanding during the period. Diluted income
      per share is computed by dividing net income by the weighted average number
      of
      shares of common stock, common stock equivalents and potentially dilutive
      securities outstanding during each period. Potentially dilutive common shares
      consist of common shares issuable upon the conversion of Series A convertible
      stock (using the if-converted method) and common stock warrants. The following
      table presents a reconciliation of basic and diluted earnings per
      share:





For the Three Months Ended
              September 30,
            
            For the Nine Months Ended
              September 30,2008
            
            2007
            
            2008
            
            2007Net
                income (loss) available to common shareholders for basic and diluted
                earnings per share
            
            $
            1,860,862
            
            $
            8,121,292
            
            $
            (861,877
            )
            $
            9,409,308Weighted
                average shares outstanding – basic
            
            
            40,363,220
            
            
            36,577,704
            
            
            38,634,312
            
            
            36,577,704Effect
                of dilutive securities:Series
                A convertible preferred stock
            
            
            14,028,189
            
            
            -
            
            
            -
            
            
            -Unexercised
                warrants
            
            
            12,797,699
            
            
            -
            
            
            -
            
            
            -Weighted
                average shares outstanding– diluted
            
            
            67,189,108
            
            
            36,577,704
            
            
            38,634,312
            
            
            36,577,704Earnings
                (loss) per share - basic
            
            $
            0.05
            
            $
            0.22
            
            $
            (0.02
            )
            $
            0.26Earnings
                (loss) per share - diluted
            
            $
            0.03
            
            $
            0.22
            
            $
            (0.02
            )
            $
            0.26




13








CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
      30, 2008





NOTE
      1 – ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





In
      calculating earnings (loss) per common share for the nine months ended September
      30, 2008, the Company’s common stock equivalents were anti-dilutive and are not
      reflected in diluted earnings per shares, At September 30, 2007, the Company
      did
      not have any dilutive securities. The Company's common stock equivalents at
      September 30, 2008 include the following:





Warrants
            
            
            16,436,935Series
                A convertible preferred stock
            
            
            14,028,189Total
            
            
            30,465,124





The
      warrants and series A convertible preferred stock were issued on March 28,
      2008
      upon conversion of the notes. The shares of series A preferred stock held in
      escrow pursuant to an escrow agreement (see Note 6) are not treated as
      outstanding at September 30, 2008 because the delivery of shares is contingent
      upon certain events, and any shares not delivered will be returned to the
      Company for cancellation.




Accumulated
      other comprehensive income




The
      Company follows Statement of Financial Accounting Standards No. 130 (SFAS
      130) " *Reporting
      Comprehensive Income* "
      to
      recognize the elements of comprehensive income. Comprehensive income is
      comprised of net income and all changes to the statements of stockholders'
      equity, except those due to investments by stockholders, changes in paid-in
      capital and distributions to stockholders. For the Company, comprehensive income
      for the nine months ended September 30, 2008 and 2007 included net income and
      foreign currency translation adjustments.





Related
      parties





Parties
      are considered to be related to the Company if the parties that, directly or
      indirectly, through one or more intermediaries, control, are controlled by,
      or
      are under common control with the Company. Related parties also include
      principal owners of the Company, its management, members of the immediate
      families of principal owners of the Company and its management and other parties
      with which the Company may deal if one party controls or can significantly
      influence the management or operating policies of the other to an extent that
      one of the transacting parties might be prevented from fully pursuing its own
      separate interests.





Recent
      Accounting Pronouncements





In
      June
      2007, the Emerging Issues Task Force of the FASB issued EITF Issue No. 07-3, *Accounting
      for Nonrefundable Advance Payments for Goods or Services to be Used in Future
      Research and Development Activities* ,
      (“EITF
      07-3”) which is effective for fiscal years beginning after December 15, 2007.
      EITF 07-3 requires that nonrefundable advance payments for future research
      and
      development activities be deferred and capitalized. Such amounts will be
      recognized as an expense as the goods are delivered or the related services
      are
      performed. The adoption of EITF 07-3 did not have a material impact on the
      Company’s results of operations, financial position or liquidity.




In
      December 2007, the FASB issued SFAS No. 141(R), *“Business
      Combinations”* (“SFAS
      141(R)”), which replaces SFAS No. 141. SFAS No. 141(R) establishes principles
      and requirements for how an acquirer recognizes and measures in its financial
      statements the identifiable assets acquired, the liabilities assumed, any
      non-controlling interest in the acquiree and the goodwill acquired. The
      Statement also establishes disclosure requirements which will enable users
      to
      evaluate the nature and financial effects of the business combination. SFAS
      141(R) is effective for fiscal years beginning after December 15, 2008. The
      adoption of SFAS 141(R) may have an impact on accounting for future business
      combinations once adopted.




14




CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
      30, 2008





NOTE
      1 – ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





In
      December 2007, the FASB issued SFAS No. 160, *“Non-controlling
      Interests in Consolidated Financial Statements – an amendment of Accounting
      Research Bulletin No. 51”* (“SFAS
      160”), which establishes accounting and reporting standards for ownership
      interests in subsidiaries held by parties other than the parent, the amount
      of
      consolidated net income attributable to the parent and to the non-controlling
      interest, changes in a parent’s ownership interest and the valuation of retained
      non-controlling equity investments when a subsidiary is deconsolidated. The
      Statement also establishes reporting requirements that provide sufficient
      disclosures that clearly identify and distinguish between the interests of
      the
      parent and the interests of the non-controlling owners. SFAS 160 is effective
      for fiscal years beginning after December 15, 2008. The Company has not
      determined the effect that the application of SFAS 160 will have on its
      financial statements.





In
      March 2008, the FASB issued SFAS 161, “ *Disclosures
      about Derivative Instruments and Hedging Activities* ” *.* The new
      standard is intended to improve financial reporting about derivative instruments
      and hedging activities by requiring enhanced disclosures to enable investors
      to
      better understand their effects on an entity’s financial position, financial
      performance, and cash flows. It is effective for financial statements issued
      for
      fiscal years and interim periods beginning after November 15, 2008, with
      early application encouraged. The Company is currently evaluating the impact
      of
      adopting SFAS 161 on its consolidated financial statements.





In
      May
      2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
      Position (“FSP”) APB 14-1, *Accounting
      for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
      (Including Partial Cash Settlement)* .
      FSP APB
      14-1 clarifies that convertible debt instruments that may be settled in cash
      upon either mandatory or optional conversion (including partial cash settlement)
      are not addressed by paragraph 12 of APB Opinion No. 14, *Accounting
      for Convertible Debt and Debt issued with Stock Purchase
      Warrants* .
      Additionally, FSP APB 14-1 specifies that issuers of such instruments should
      separately account for the liability and equity components in a manner that
      will
      reflect the entity’s non-convertible debt borrowing rate when interest cost is
      recognized in subsequent periods. FSP APB 14-1 is effective for financial
      statements issued for fiscal years beginning after December 15, 2008, and
      interim periods within those fiscal years. The Company will adopt FSP APB 14-1
      beginning in the first quarter of fiscal 2009, and this standard must be applied
      on a retrospective basis. The Company is evaluating the impact the adoption
      of
      FSP APB 14-1 will have on its consolidated financial position and results of
      operations.





In
      May
      2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.
      162, *The
      Hierarchy of Generally Accepted Accounting Principles* .
      This
      standard is intended to improve financial reporting by identifying a consistent
      framework, or hierarchy, for selecting accounting principles to be used in
      preparing financial statements that are presented in conformity with generally
      accepted accounting principles in the United States for non-governmental
      entities. SFAS No. 162 is effective 60 days following approval by the U.S.
      Securities and Exchange Commission (“SEC”) of the Public Company Accounting
      Oversight Board’s amendments to AU Section 411, *The
      Meaning of Present Fairly in Conformity with Generally Accepted Accounting
      Principles* .
      The
      Company does not expect SFAS No. 162 to have a material impact on the
      preparation of its consolidated financial statements.





On
      June
      16, 2008, the FASB issued final Staff Position (FSP) No. EITF 03-6-1,
“ *Determining
      Whether Instruments Granted in Share-Based Payment Transactions Are
      Participating Securities* ,”
to
      address the question of whether instruments granted in share-based payment
      transactions are participating securities prior to vesting. The FSP determines
      that unvested share-based payment awards that contain rights to dividend
      payments should be included in earnings per share calculations. The guidance
      will be effective for fiscal years beginning after December 15, 2008. The
      Company is currently evaluating the requirements of (FSP) No. EITF 03-6-1 as
      well as the impact of the adoption on its consolidated financial
      statements.




15




CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
      30, 2008





NOTE
      2 – ACCOUNTS
      RECEIVABLE





At
      September 30, 2008 and December 31, 2007, accounts receivable consisted of
      the
      following:





September 30, 2008
            
            December 31, 2007Accounts
                receivable
            
            $
            4,786,162
            
            $
            2,784,630Less:
                allowance for doubtful accounts
            
            
            (843,568
            )
            
            (626,218
            )$
            3,942,594
            
            $
            2,158,412





NOTE
      3 - INVENTORIES





At
      September 30, 2008 and December 31, 2007, inventories consisted of the
      following:





September 30, 2008
            
            December 31, 2007Raw
                materials
            
            $
            1,473,589
            
            $
            1,135,697Work
                in process
            
            
            294,500
            
            
            454,788Finished
                goods
            
            
            496,791
            
            
            413,5032,264,880
            
            
            2,003,988Less:
                Reserve for obsolete inventory
            
            
            (79,159
            )
            
            (74,192
            )$
            2,185,721
            
            $
            1,929,796





NOTE
      4 - PROPERTY
      AND EQUIPMENT





At
      September 30, 2008 and December 31, 2007, property and equipment consist of
      the
      following:


Useful Life
              
              2008
              
              2007Office
                  equipment and furniture
              
              
              5
                  Years
              
              $
              96,049
              
              $
              78,430Manufacturing
                  equipment
              
              
              5
                  – 10 Years
              
              
              10,369,583
              
              
              3,516,584Vehicles
              
              
              5
                  Years
              
              
              67,147
              
              
              62,933Construction
                  in progress
              
              
              -
              
              
              5,243,364
              
              
              -Building
                  and building improvements
              
              
              20
                  Years
              
              
              6,006,117
              
              
              5,629,20121,782,260
              
              
              9,287,148Less:
                  accumulated depreciation
              
              
              
              
              
              (3,438,534
              )
              
              (2,761,162
              )$
              18,343,726
              
              $
              6,525,986


For
      the
      nine months ended September 30, 2008 and 2007, depreciation expense amounted
      to
      $482,376 and $450,881, of which $254,187 and $243,006 is included in cost of
      sales, respectively.




NOTE
      5 – LAND
      USE RIGHTS





There
      is
      no private ownership of land in China. Land is owned by the government and
      the
      government grants land use rights for specified terms. The Company’s land use
      rights are valued at a fixed amount, which is RMB 27,000,795 at September 30,
      2008 and the dollar value of the land use right fluctuates based on the exchange
      rate. In 2008, in connection with the acquisition of land use rights from a
      related party (See Note 8), the Company was granted the transferred land use
      rights from the government and accordingly, the Company reclassified
      approximately $3,300,000 from deposits on long-term assets to prepaid land
      use
      rights and approximately $2,300,000 has been reclassified to distributions
      to
      related parties, which represents the excess paid for the land use rights to
      related parties over the related parties original costs. The Company’s land use
      rights have terms of 45 and 50 years and expire on January 1, 2053 and October
      30, 2053, respectively. The Company amortizes these land use rights over the
      term of the respective land use right. For the nine months ended September
      30,
      2008 and 2007, amortization expense amounted to $63,346 and $7,805,
      respectively.




16





CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
      30, 2008





At
      September 30, 2008 and December 31, 2007, land use rights consist of the
      following:




Useful Life
            
            2008
            
            2007Land
                Use Rights
            
            
            45
                - 50 years
            
            $
            3,938,790
            
            $
            546,341Less:
                Accumulated Amortization
            
            
            
            
            
            (111,309
            )
            
            (43,707
            )$
            3,827,481
            
            $
            502,634




Rent
      expense attributable to future periods is as follows:





Period
                ending September 30:2009
            
            $
            84,4482010
            
            
            84,4482011
            
            
            84,4482012
            
            
            84,448Thereafter
            
            
            3,489,689$
            3,827,481





NOTE
      6 –
STOCKHOLDERS’ EQUITY





(a)  Common
      stock





In
      February 2008, the Company issued 323,000 shares of its common stock pursuant
      to
      an exercise of warrants for proceeds of $187,340.





On
      March
      28, 2008, the Company issued 25,000 shares of its common stock to a director
      in
      connection with election as a director. The shares were valued at fair value
      on
      date of grant at $1.80 per share. Accordingly, the Company recorded stock-based
      compensation of $45,000.





On
      April
      28, 2008, the Company issued 15,000 shares of its common stock to a director
      in
      connection with his election as a director. The shares were valued at fair
      value
      on date of grant at $2.00 per share. Accordingly, the Company recorded
      stock-based compensation of $30,000.





On
      June
      12, 2008, the Company issued 758,946 shares of its common stock upon the
      conversion of 758,946 shares of Series A preferred stock.





During
      the three months ended June 30, 2008, the Company issued 1,150,000 shares of
      its
      common stock pursuant to an exercise of warrants for proceeds of
      $667,000.





During
      the three months ended September 30, 2008, the Company issued 1,319,821 shares
      of its common stock upon the exercise of warrants for which it received
      $1,157,235.





17




CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
      30, 2008





(b)  Conversion
      of Convertible Notes; Restatement of Certificate of Incorporation





On
      November 13, 2007, concurrently with the closing pursuant to the Exchange
      Agreement, the Company entered into a securities purchase agreement with three
      accredited investors including Barron Partners LP (the “Investors”). Pursuant to
      the agreement, the Company issued and sold to the Investors, for $5,525,000,
      the
      Company’s 3% convertible subordinated notes in the principal amount of
      $5,525,000. At the time of the financing, the Company did not have any
      authorized shares of preferred stock. On March 28, 2008, upon the filing of
      a
      restated certificate of incorporation which created a series of preferred stock
      and gave the board of directors broad authority to create one or more series
      of
      preferred stock as well as a statement of designation that set forth the rights,
      preferences, privileges and limitations of the holders of the series A
      convertible preferred stock, these notes were automatically converted into
      an
      aggregate of (i) 14,787,135 shares of series A preferred stock and (ii) warrants
      to purchase 11,176,504 shares of common stock at $0.58 per share, 5,588,252
      shares of common stock at $0.83 per share, and 2,065,000 shares at $0.92 per
      share.





The
      restated certificate of incorporation increased the number of authorized shares
      of capital stock from 75,000,000 to 210,000,000 shares, of which (i) 150,000,000
      shares are designated as common stock, par value of $.001 per share, and (ii)
      60,000,000 shares are designated as preferred stock, par value of $.001 per
      share.





(c)  Series
      A
      Preferred Stock





The
      series A preferred stock has the following rights, preferences and
      limitations:





·
            There
                are 60,000,000 authorized shares of series A preferred stock.




·
            No
                dividends shall be payable with respect to the series A preferred
                stock.
                No dividends shall be declared or payable with respect to the common
                stock
                while the series A preferred stock is outstanding. The Company shall
                not
                redeem or purchase any shares of Common Stock or any other class
                or series
                of capital stock which is junior to or on parity with the Series
                A
                Preferred Stock while the Series A Preferred Stock is
                outstanding.




·
            The
                holders of the series A preferred stock have no voting rights except
                as
                required by law. However, so long as any shares of series A preferred
                   stock are outstanding, the Company shall not, without the affirmative
                approval of the holders of 75% of the shares of the series A preferred
                stock then outstanding, (a) alter or change adversely the powers,
                preferences or rights given to the series A preferred stock or alter
                or
                amend the statement of designations relating to the series A preferred
                stock, (b) authorize or create any class of stock ranking as to dividends
                or distribution of assets upon a liquidation senior to or otherwise
                pari
                passu with the series A preferred stock, or any of preferred stock
                possessing greater voting rights or the right to convert at a more
                favorable price than the series A preferred stock, (c) amend its
                certificate of incorporation or other charter documents in breach
                of any
                of the provisions hereof, (d) increase the authorized number of shares
                of
                series A preferred stock or the number of authorized shares of preferred
                stock, or (e) enter into any agreement with respect to the foregoing.




·
            Upon
                any liquidation, dissolution or winding-up of the Company, whether
                voluntary or involuntary, the holders of the series A preferred stock
                have
                a liquidated preference of $.374 per
                share.




·
            Each
                share of series A preferred stock shall be initially convertible
                (subject
                to the 4.9% limitations described below) into such number of shares
                of
                common stock based on the conversion ratio of one share of series
                A
                preferred stock for one share of common stock at the option of the
                holders, at any time after the original issue
                date.




·
            All
                of the outstanding shares of series A preferred stock shall be
                automatically converted into common stock upon the close of business
                on
                the business day immediately preceding the date fixed for consummation
                of
                any transaction resulting in a change of control of the Company,
                as
                defined in the statement of
                designation.




18




CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
      30, 2008





·
            The
                holders may not convert the series A preferred stock to the extent
                that
                such conversion would result in the holder and its affiliates beneficially
                owning more than 4.9% of the Company’s common stock. This provision may
                not be waived or amended.




(d)  Securities
      Purchase Agreement





Pursuant
      to the purchase agreement, in addition to the issuance of the convertible
      notes:




·
            The
                Company agreed to have appointed such number of independent directors
                that
                would result in a majority of its directors being independent directors,
                that the audit committee would be composed solely of not less than
                three
                independent directors and the compensation committee would have at
                least
                three directors, a majority of which shall be independent directors
                within
                90 days after the closing, which was February 11, 2008. Failure to
                meet
                this date will result in liquidated damages commencing February 12,
                2008,
                until the date on which the requirement is satisfied. Thereafter,
                if the
                Company does not meet these requirements for a period of 60 days
                for an
                excused reason, as defined in the Purchase Agreement, or 75 days
                for a
                reason which is not an excused reason, this would result in the imposition
                of liquidated damages. The investors have agreed to waive any liquidated
                damages related to the initial appointment of independent directors
                and
                the establishment of the committees which occurred in March
                2008.




·
            The
                Company agreed to have a qualified chief financial officer who may
                be a
                part-time chief financial officer until February 13, 2008. If the
                Company
                cannot hire a qualified chief financial officer promptly upon the
                resignation or termination of employment of a former chief financial
                officer, the Company may engage an accountant or accounting firm
                to
                perform the duties of the chief financial officer.In
                no event shall the Company either (i) fail to file an annual, quarter
                or
                other report in a timely manner because of the absence of a qualified
                chief financial officer, or (ii) not have a person who can make the
                statements and sign the certifications required to be filed in an
                annual
                or quarterly report under the Securities Exchange Act of
                1934.




·
            Liquidated
                damages for failure to comply with the preceding two covenants are
                computed in an amount equal to 12% per annum of the purchase price,
                up to
                a maximum of 12% of the purchase price, which is $663,000, which
                is
                payable in cash or series A preferred stock, at the election of the
                investors. If payment is made is shares of series A preferred stock,
                each
                share is valued at $.374 per share.




·
            The
                Company and the investors entered into a registration rights agreement
                pursuant to which the Company agreed to file, by January 12, 2008,
                a
                registration statement covering the common stock issuable upon conversion
                of the series A preferred stock and exercise of the warrants and
                to have
                the registration statement declared effective by June 11, 2008. The
                failure of the Company to have the registration statement declared
                effective by June 11, 2008 and other timetables provided in the
                registration rights agreement would result in the imposition of liquidated
                damages, which are payable through the issuance of additional shares
                of
                series A preferred stock at the rate of 4,860 shares of series A
                preferred
                stock for each day, based on the proposed registration of all of
                the
                underlying shares of common stock, with a maximum of 1,770,000 shares.
                The
                number of shares issuable per day is subject to adjustment if the
                Company
                cannot register all of the required shares as a result of the Securities
                and Exchange Commission’s interpretation of Rule 415. The registration
                rights agreement also provides for additional demand registration
                rights
                in the event that the investors are not able to register all of the
                shares
                in the initial registration statement.





The
      Company filed its registration on February 14, 2008 and it was declared
      effective on June 13, 2008. No liquidated damages were incurred and accordingly,
      pursuant to FASB Staff Position, or FSP, EITF 00-19-2, *Accounting
      for Registration Payment Arrangements,* no
      liability was recorded.





·
            The
                Investors have a right of first refusal on future
                financings.




19




CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
      30, 2008





·
            Until
                the earlier of November 13, 2011 or such time as the Investors shall
                have
                sold all of the underlying shares of common stock, the Company is
                restricted from issuing convertible debt or preferred
                stock.




·
            Until
                the earlier of November 13, 2010 or such time as the Investors have
                sold
                90% of the underlying shares of common stock, the Company’s debt cannot
                exceed twice the preceding four quarters earnings before interest,
                taxes,
                depreciation and amortization.




·
            The
                Company’s officers and directors agreed, with certain limited exceptions,
                not to publicly sell shares of common stock for 27 months or such
                earlier
                date as all of the convertible securities and warrants have been
                converted
                or exercised and the underlying shares of common stock have been
                sold.




·
            The
                Company entered into an escrow agreement pursuant to which the Company
                issued into escrow its 3% convertible promissory note due March 31,
                2008
                in the principal amount of $3,000,000. Upon the filing of the Restated
                Certificate this note automatically was converted into 24,787,135
                shares
                of series A preferred stock. These shares of series A preferred stock
                are
                in addition to the 14,787,135 shares of series A preferred stock
                issued to
                the investors upon conversion of the convertible notes held by them.
                The
                series A preferred stock is to be held in escrow subject to the
                following.




o
            Prior
                to September 17, 2008, 14,787,135 shares were held pursuant to the
                following provisions. If, for the year ended December 31, 2008, the
                Company’s pre-tax earnings per share are less than the target numbers, all
                or a portion of such shares are to be delivered to the Investors.
                The
                agreement also had a target for 2007, which was met, and no shares
                were
                delivered with respect to 2007. If the pre-tax earnings are less
                than 50%
                of the target, all of the shares are to be delivered to the Investors.
                If
                the shortfall is less than 50%, the number of shares to be delivered
                to
                the Investors is determined on a formula basis. On September 12,
                2008, the
                Investors agreed to eliminate the provisions of the securities purchase
                agreement that provided for the delivery of shares held in escrow
                and a
                reduction in the warrant exercise price if certain levels of pre-tax
                income were not reached. Pursuant to this agreement, 14,787,135 shares
                of
                Series A preferred stock of the 24,787,135 shares held in an escrow
                account were returned to the Company, with the remaining 10,000,000
                reserved to cover potential tax liabilities for 2007 and
                2008.




o
            The
                target numberfor
                2008 is $0.13131 per share. The per share numbers are based on all
                shares
                that are outstanding or are issuable upon exercise or conversion
                of all
                warrants or options, regardless of whether such shares would be used
                in
                computing diluted earnings per share under
                GAAP.




o
            If
                the Company does not file its Form 10-K for 2008 within 30 days after
                the
                filing is required, after giving effect to any extension permitted
                by Rule
                12b-25 under the Securities Exchange Act of 1934, any shares remaining
                in
                escrow shall be delivered to the
                Investors.




o
            The
                remaining 10,000,000 shares of series A preferred stock are to be
                delivered to the Investors in the event that, based on the Company’s
                audited financial statements for 2007 and 2008 the Company or certain
                affiliated companies owes any taxes to the PRC government or any
                authority
                or taxing agency of the PRC for any period ended on or prior to September
                30, 2007. For each $1.00 of such tax liability, four shares of series
                A
                preferred stock are to be delivered to the Investors. At December
                31,
                2007, the Company did not have any tax liabilities for the period
                ended on
                or prior to September 30, 2007.




·
            In
                connection with the Securities Purchase Agreement, $30,000 was deducted
                from the gross proceeds and was paid to an investor as reimbursement
                for
                due diligence expenses, which was deferred as a debt discount and
                was
                amortized over the life of the convertible notes. Other fees incurred
                in
                connection with the debt issuance include $25,000 of legal fees,
                which
                were treated as a deferred debt issue costs and are being amortized
                to
                debt issue cost expense over the life of the notes. The unamortized
                portion of this debt discount on March 28, 2008, the date on which
                the
                convertible notes were automatically converted, was recognized at
                that
                time.




20




CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
      30, 2008





·
            With
                certain exceptions, until the Investors have sold all of the underlying
                shares of Common Stock, if the Company sells common stock or issues
                convertible securities with a conversion or exercise price which
                is less
                than the conversion price of the preferred stock, the conversion
                price of
                the series A preferred stock and the exercise price of the warrants
                is
                reduced to the lower price.





(e)  Warrants




The
      warrants issued upon conversion of the notes have a term of five years from
      the
      date of the notes, and expire on November 13, 2012. The warrants provide a
      cashless exercise feature; however, the holders of the warrants may not make
      a
      cashless exercise prior to November 13, 2008 in the case of the $0.58 warrants,
      and prior to May 13, 2009 in the case of the $0.83 warrants and $0.92 warrants,
      and after these respective periods only if the underlying shares are not covered
      by an effective registration statement.




Warrant
      activities for the nine months ended September 30, 2008 are summarized as
      follows:





Number of
            
            Weighted averageshares
            
            exercise priceOutstanding
                at December 31, 2007
            
            
            400,000
            
            $
            0.50Granted
            
            
            18,829,756
            
            
            0.65Exercised
            
            
            (2,792,821
            )
            
            0.72Cancelled
            
            
            -
            
            
            -Outstanding
                at Septemuer30, 2008
            
            
            16,436,935
            
            $
            0.68





The
      following table summarizes the shares of the Company's common stock issuable
      upon exercise of warrants outstanding at September 30, 2008:





Warrants Outstanding
            
            Warrants ExercisableRange of
              Exercise
              Price
            
            Number
              Outstanding at
              September 30,
              2008
            
            Weighted
              Average
              Remaining
              Contractual
              Life (Years)
            
            Weighted
              Average
              Exercise
              Price
            
            Number
              Exercisable at
              September 30,
              2008
            
            Weighted
              Average
              Exercise
              Price$0.50
            
            
            400,000
            
            
            4.12
            
            $
            0.50
            
            
            400,000
            
            $
            0.500.58
            
            
            9,535,858
            
            
            4.12
            
            
            0.58
            
            
            9,535,858
            
            
            0.580.83
            
            
            5,588,252
            
            
            4.12
            
            
            0.83
            
            
            5,588,252
            
            
            0.830.92
            
            
            912,825
            
            
            4.12
            
            
            0.92
            
            
            912,825
            
            
            0.9216,436,935
            
            
            
            
            $
            0.68
            
            
            16,436,935
            
            $
            0.68




(f)  Beneficial
      Conversion Feature; Deemed Dividend





The
      Company evaluated the application of EITF 98-5, “ *Accounting
      for Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios,”* and EITF
      00-27, *“Application
      of Issue No. 98-5 to Certain Convertible Instruments”* and
      concluded that the convertible notes have a beneficial conversion option
      Pursuant to EITF 00-27, Issue 15, the Company computed the intrinsic value
      of
      the conversion option at $2,610,938 based on a comparison of (a) the proceeds
      of
      the convertible debt allocated to the common stock portion of the conversion
      option by first allocating the proceeds received from the convertible debt
      offering to the debt and the detachable warrants on a relative fair value basis,
      and (b) the fair value at the commitment date of the common stock to be received
      by the Company upon conversion. The excess of (b) over (a) is the intrinsic
      value of the embedded conversion option of $2,610,938 that has been recognized
      by the Company as discount to the notes were amortized using the straight-line
      method over the shorter (1) the term of Notes, (2) the conversion of the notes
      to common stock, or (3) upon filing by the Company of certificate of designation
      and immediate conversion of the notes to the series A preferred stock and
      warrants.




21




CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
      30, 2008





The
      Company filed the Restated Certificate on March 28, 2008 and accordingly, the
      Company recognized the value of the warrants and any remaining debt discount
      upon conversion of the debt.





The
      conversion features for the convertible notes have been evaluated under FAS 150,
      FAS
      133, and EITF 00-19 and are deemed not to be an embedded derivative and any
      value attributable to these features would be classified as
      equity.





As
      discussed above, upon filing of the Company’s restated certificate of
      incorporation on March 28, 2008, the Company issued warrants to purchase
      18,829,756 shares of the common stock. At November 13, 2007, the fair value
      of
      the warrants used to calculate the intrinsic value of the conversion option
      was
      estimated at $2,884,062 and was computed using the Black-Scholes option-pricing
      model based on the assumed issuance of the warrants on the date the notes were
      issued. Variables used in the option-pricing model include (1) risk-free
      interest rate at the date of grant (3.84%), (2) expected warrant life of
      5 years, (3) expected volatility of 150%, and (4) 0% expected
      dividend.





As
      the
      series A preferred stock does not require redemption by the Company or have
      a
      finite life, upon issuance of the warrants, a one-time preferred stock deemed
      dividend of $2,884,062 was recognized immediately as a non-cash charge at March
      28, 2008. The non-cash, deemed dividend did not have an effect on net earnings
      or cash flows for the nine months ended September 30, 2008. The estimated fair
      market value of the warrants of $2,884,062 has been recorded as additional
      paid-in capital and a reduction to retained earnings.





During
      the nine months ended September 30, 2008, amortization of debt issue costs
      was
      $21,429 and included any remaining balance of debt issue costs that was expensed
      upon conversion of the convertible debt to the series A preferred stock. At
      December 31, 2007, deferred debt costs of $21,429 were included in prepaid
      expenses and other on the consolidated balance sheets. The amortization of
      debt
      discounts for the nine months ended September 30, 2008 was $2,263,661, which
      has
      been included in interest expense on the accompanying statement of operations
      and included any remaining balance of the debt discount that was expense upon
      conversion of the convertible debt to the series A preferred stock, which
      occurred on March 28, 2008.





In
      November 2007, the Company evaluated whether or not the convertible notes
      contain embedded conversion options, which meet the definition of derivatives
      under SFAS 133 “Accounting for Derivative Instruments and Hedging Activities”
and related interpretations. The Company concluded that since the convertible
      notes had a fixed conversion rate of $0.374, the convertible notes were not
      derivative instruments. The Company analyzed this provision under EITF 05-04
      and, although the debt is unconventional, the reset provision is deemed within
      the Company’s control and therefore it qualified as equity under EITF
      00-19




The
      convertible notes payable is as follows at September 30, 2008 and December
      31,
      2007:




September 30,
            
            December 31,2008
            
            2007Convertible
                notes payable
            
            $
            -
            
            $
            5,525,000Less:
                  unamortized discount on notes payable
            
            
            -
            
            
            (2,263,661
            )Convertible
                notes payable, net
            
            $
            -
            
            $
            3,261,339




22




CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
      30, 2008





NOTE
      7 – LOANS
      PAYABLE





At
      September 30, 2008 and December 31, 2007, loans payable consisted of the
      following:





2008
            
            2007Loan
                payable to Transportation Bank of China, due on January 29, 2009
                with
                annual interest of 7.45% secured by assets of the Company.
            
            $
            291,754
            
            $
            273,444Loan
                payable to Transportation Bank of China, due on June 10, 2008 with
                annual
                interest of 7.23% secured by assets of the Company.
            
            
            -
            
            
            410,167Loan
                payable to Transportation Bank of China, due on December 10, 2008
                with
                annual interest of 7.78% secured by assets of the Company.
            
            
            437,630
            
            
            -Loan
                payable to Industrial and Commercial Bank of China, due on February
                4,
                2009 with annual interest of 7.56% secured by assets of the
                Company.
            
            
            291,754
            
            
            136,722Total
                Current Loans Payable
            
            $
            1,021,138
            
            $
            820,333





NOTE
      8 – RELATED
      PARTY TRANSACTIONS




**Due
      from related parties**





From
      time
      to time, the Company advanced funds to companies partially owned by the Company
      for working capital purposes. These advances are non-interest bearing, unsecured
      and payable on demand. Through monthly payments, the affiliated companies intend
      to repay these advances.




At
      September 30, 2008 and December 31, 2007, due from related parties was due
      from
      the following:





Name
            
            Relationship
            
            September 30,
              2008
            
            December 31, 2007Wuxi
                Huayang Yingran Machinery Co. Ltd.
            
            
            5%
                cost method investee which was sold in March 2008
            
            $
            -
            
            $
            139,524$
            -
            
            $
            139,524





**Due
      to related parties**





The
      chief
      executive officer of the Company and his spouse, from time to time, provided
      advances to the Company for operating expenses. At September 30, 2008 and
      December 31, 2007, the Company did not have any payable to the chief executive
      officer and his spouse. These advances were short-term in nature and
      non-interest bearing.




Wuxi
      Huayang Boiler, a company related through common ownership, from time to time,
      provided advances to the Company for working capital purposes. At September
      30,
      2008 and December 31, 2007, the Company had a payable to Boiler of $0 and
      $98,541, respectively. These advances were short-term in nature and non-interest
      bearing.




23




CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
      30, 2008





**Deposits
      on long-term assets –related party and other**





In
      July
      2007, the Company agreed to acquire long-term assets from Boiler for an
      aggregate price of 89,282,500 RMB or approximately $12,207,000. This original
      purchase price was reduced by 9,196,341RMB or approximately $1,257,000 which
      represents 33% of the appreciation in the long-term assets attributable to
      Boiler prior to the Company’s sales of its interest in Boiler.The long-term
      assets consist of i) an approximately 100,000 square foot factory which was
      substantially completed in 2005, ii) land use rights, iii) employee housing
      facilities and iv) other leasehold improvements. As of September 30, 2008 and
      December 31, 2007, payments totaling 80,086,159 RMB and 79,458,230 RMB or
      approxmately $11,682,000 and $10,864,000, respectively, had been made to Boiler,
      adjusted by the foreign exchange rate. In 2008, in connection with the
      acquisition of land use rights from a related party, the Company was granted
      the
      transferred land use rights from the government and accordingly, the Company
      reclassified approximately $3,300,000 from deposits on long-term assets to
      land
      use rights (See Note 5) and the remaining amount of $2,300,000, which represents
      the excess of amount paid for land use rights over the original cost of the
      land
      use rights, has been reflected as a distribution to related parties. As of
      September 30, 2008, the Company has not received title to the facilities and
      the
      property has not been placed in service. The Company has initiated the transfer
      of the title to the facilities and the transfer is expected to be completed
      in
      the fourth quarter of 2008 at which time the deposit on long-term assets will
      be
      reclassified to property and equipment. In connection with the remaining deposit
      on long-term assets, the Company reclassified approximately $404,000 from a
      deposit on long-term assets to a distribution to related parties, which
      represents the excess of amount paid for the facilities including the factory
      and other buildings, over the original cost of the facilities.





At
      September 30, 2008 and December 31, 2007, deposits on long-term assets are
      as
      follows:




2008
            
            2007Factory
                building and related leasehold improvements – related
                party
            
            $
            5,603,128
            
            $
            10,863,706$
            5,603,128
            
            $
            10,863,706




NOTE
      9 – INCOME
      TAXES




The
      Company accounts for income taxes under Statement of Financial Accounting
      Standards No. 109, ‘‘Accounting for Income Taxes’’ (‘‘SFAS 109’’). SFAS 109
      requires the recognition of deferred tax assets and liabilities for both the
      expected impact of differences between the financial statements and the tax
      basis of assets and liabilities, and for the expected future tax benefit to
      be
      derived from tax losses and tax credit carryforwards. SFAS 109 additionally
      requires the establishment of a valuation allowance to reflect the likelihood
      of
      realization of deferred tax assets. Realization of deferred tax assets,
      including those related to the U.S. net operating loss carryforwards, are
      dependent upon future earnings, if any, of which the timing and amount are
      uncertain. Accordingly, the net deferred tax asset related to the U.S. net
      operating loss carryforward has been fully offset by a valuation allowance.
      The
      Company is governed by the Income Tax Law of the People’s Republic of China and
      the United States.





In
      2008
      and 2007, under the Income Tax Laws of PRC, Chinese companies are generally
      subject to an income tax at an effective rate of 25% and 33%, respectively,    on
      income
      reported in the statutory financial statements after appropriate tax
      adjustments. The Company’s VIE, Dyeing is subject to these statutory rates. In
      2007, pursuant to local taxing regulations, the Company’s VIE, Electric, paid
      tax under a simplified method of recording under the following formula: (Net
      revenues x 5% x 33%). China Wind Systems, Inc. was incorporated in the United
      States and has incurred net operating losses of approximately $100,000 for
      income tax purposes for the year ended December 31, 2007 subject to the Internal
      Revenue Code Section 382, which places a limitation on the amount of taxable
      income that can be offset by net operating losses after a change in ownership.
      The net operating loss carries forward for United States income taxes,
      which may be available to reduce future years’ taxable income. These carry
      forwards will expire, if not utilized, through 2027. Management believes that
      the realization of the benefits from these losses appears uncertain due to
      the
      Company’s limited operating history and continuing losses for United States
      income tax purposes. Accordingly, the Company has provided a 100% valuation
      allowance on the deferred tax asset benefit to reduce the asset to zero.
      Management will review this valuation allowance periodically and make
      adjustments as warranted.




24




CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
      30, 2008





The
      table
      below summarizes the differences between the U.S. statutory federal rate and
      the
      Company’s effective tax rate and as follows for the nine months ended September
      30, 2008 and 2007:





2008
            
            2007U.S
                statutory rates
            
            
            34.0
            %
            
            34.0
            %US
                effective rate in excess of China tax rate
            
            
            (16.1
            )%
            
            (0.4
            )%China
                income tax exemptions
            
            
            0.0
            %
            
            (21.3
            )%Non-deductible
                interest
            
            
            20.9
            %
            
            0.0
            %US
                valuation allowance
            
            
            6.2
            %
            
            0.0
            %Total
                provision for income taxes
            
            
            45.0
            %
            
            12.3
            %





Income
      tax expense for the nine months ended September 30, 2008 and 2007 was $1,651,331
      and $1,315,094, respectively.




NOTE
      10 - SEGMENT
      INFORMATION







The
      following information is presented in accordance with SFAS No. 131, Disclosure
      about Segments of an Enterprise and Related Information. For the three and
      nine
      months ended September 30, 2008 and 2007, the Company operated in two reportable
      business segments - (1) the manufacture of dyeing and finishing equipment and
      (2) the manufacture of forged rolled rings and other components for the wind
      power and other industries and electric power auxiliary apparatuses (including
      coking equipment). The Company's reportable segments are strategic business
      units that offer different products. They are managed separately based on the
      fundamental differences in their operations.




Information
      with respect to these reportable business segments for the three and nine months
      ended September 30, 2008 and 2007 is as follows:




For the Three Months Ended
              September 30,
            
            For the Nine Months Ended
              September 30,2008
            
            2007
            
            2008
            
            2007Revenues:Dyeing
                and finishing equipment
            
            $
            5,958,627
            
            $
            6,287,788
            
            $
            17,125,918
            
            $
            14,487,221Forged
                rolled rings and electric power equipment
            
            
            5,811,535
            
            
            1,622,505
            
            
            14,274,268
            
            
            2,102,25411,770,162
            
            
            8,000,293
            
            
            31,400,186
            
            
            16,589,475Depreciation
                and amortization:Dyeing
                and finishing equipment
            
            
            94,967
            
            
            87,198
            
            
            293,662
            
            
            273,011Forged
                rolled rings and electric power equipment
            
            
            64,487
            
            
            64,232
            
            
            188,714
            
            
            177,870159,454
            
            
            151,430
            
            
            482,376
            
            
            450,881Interest
                expense:Dyeing
                and finishing equipment
            
            
            -
            
            
            -
            
            
            -
            
            
            -Forged
                rolled rings and electric power equipment
            
            
            20,427
            
            
            9,946
            
            
            55,932
            
            
            31,360Other
                (a)
            
            
            -
            
            
            -
            
            
            2,242,942
            
            
            -20,427
            
            
            9,946
            
            
            2,298,874
            
            
            31,360Net
                income (loss):Dyeing
                and finishing equipment
            
            
            988,906
            
            
            7,007,814
            
            
            2,780,281
            
            
            8,337,148Forged
                rolled rings and electric power equipment
            
            
            1,039,993
            
            
            1,113,478
            
            
            2,169,855
            
            
            1,072,160Other
                (a)
            
            
            (168,037
            )
            
            -
            
            
            (2,927,950
            )
            
            -1,860,862
            
            
            8,121,292
            
            
            2,022,186
            
            
            9,409,308Identifiable
                assets at September 30, 2008 and
              December
                31, 2007:Dyeing
                and finishing equipment
            
            $
            17,660,956
            
            $
            17,914,593Forged
                rolled rings and electric power equipment
            
            
            17,222,834
            
            
            7,455,095Other
                (a)
            
            
            101,782
            
            
            3,126,745$
            34,985,572
            
            $
            28,496,433




(a)
            The
                Company does not allocate any general and administrative expenses
                of its
                US activities to its reportable segments, because these activities
                are
                managed at a corporate level. Additionally, other identifiable assets
                represents assets located in the United States and are not allocated
                to
                reportable segments




25






CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
      30, 2008




NOTE
      11 – STATUTORY
      RESERVES





The
      Company is required to make appropriations to reserve funds, comprising the
      statutory surplus reserve, statutory public welfare fund and discretionary
      surplus reserve, based on after-tax net income determined in accordance with
      generally accepted accounting principles of the People’s Republic of China (the
“PRC GAAP”). Appropriation to the statutory surplus reserve should be at least
      10% of the after tax net income determined in accordance with the PRC GAAP
      until
      the reserve is equal to 50% of the entities’ registered capital or members’
equity. Appropriations to the statutory public welfare fund are at a minimum
      of
      5% of the after tax net income determined in accordance with PRC GAAP.
      Commencing on January 1, 2006, the new PRC regulations waived the requirement
      for appropriating retained earnings to a welfare fund. As of December 31, 2006,
      the Company appropriated the required maximum 50% of its registered capital
      to
      statutory reserves for Dyeing. For the nine months ended September 30, 2008,
      statutory reserve activity is as follows:





Dyeing
            
            Rolled
                Rings
            
            TotalBalance
                – December 31, 2007
            
            
            72,407
            
            $
            233,065
            
            $
            305,472Additional
                to statutory reserves
            
            
            -
            
            
            221,156
            
            
            221,156Balance
                - September 30, 2008
            
            $
            72,407
            
            $
            454,221
            
            $
            526,628





NOTE
      12 – SUBSEQUENT
      EVENTS





From
      October 1, 2008 to November 10, 2008, the Company issued 303,434 shares of
      its
      common stock pursuant to an exercise of warrants for proceeds of
      $175,992.





On
      October 17, 2008, the Company entered into a purchase agreement with Eos
      Holdings LLC for the sale of a 17.4% subordinated note, due six months from
      the
      date of issuance (the “Note”) in the principal amount of $575,000, for a
      purchase price of $575,000. Under the terms of the purchase agreement and the
      Note, the Company may prepay the Note, in whole or in part, at any time prior
      to
      the maturity date of the Note upon five days’ oral or written notice to Eos
      Holdings. On November 14, 2008, the Company repaid the principal balance of
      this
      note in full.




As
      a
      condition to the sale of the Note, the purchase agreement requires that Eos
      Holdings exercise certain common stock purchase warrants having a total exercise
      price of not less than $175,000, at a per share exercise price of $.58. On
      October 17, 2008, Eos Holdings purchased the Note and exercised the
      warrants.




Payment
      of the Company’s obligations of the Note were initially secured by a pledge of
      and conversion right with respect to 959,000 shares (the “Pledged Shares”) of
      the Company’s common stock owned by Jianhua Wu, the Company’s chief executive
      officer and principal beneficial owner of common stock. The pledge and
      conversion right enables Eos Holdings to convert any or all of the principal
      amount of the Note into Pledged Shares at any time or from time to time until
      the Note is paid in full or until Eos Holdings exercises the conversion
      right in full, at an initial conversion price of $.60 per share (the “Conversion
      Price”). The number of Pledged Shares to be delivered shall be determined by
      dividing the principal amount of the Note being converted by the Conversion
      Price, with any fractional shares to be rounded to the nearest whole share.
      The
      Pledged Shares shall be held in escrow.




On
      October 23, 2008, pursuant to a restated pledge and conversion right agreement,
      the number of Pledged Shares was increased to 1,437,500 shares of common stock
      and the Conversion Price was reduced to $0.40 per share.


26




CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
      30, 2008


In
      connection with the issuance of the Note, on October 17, 2008, the Company
      entered into a consulting agreement with Eos Asia Investments Ltd., an affiliate
      of Eos Holdings, for the provision of consulting services. Pursuant to the
      consulting agreement, the Company shall pay consulting fees at a rate of
      $31,662.50 per month until the Company repays the Note in full or until Eos
      Holdings LLC exercises its right to receive the Pledged Shares. Assuming the
      Note is paid on the maturity date of April 20, 2009, the total payments made
      by
      the Company as interest on the Note and as consulting fees under the consulting
      agreement would total $240,000.





During
      the period from October 23, 2008 through the November 7, 2008, the Company
      sold
      to investors an aggregate of 3,400,000 shares of the Company’s common stock, at
      a purchase price of $0.40 per share, for an aggregate purchase price of $1,360,000.
      The sale of these securities was exempt from registration under
      Section 4(2) of the Securities Act. Each of the investors is either (a) an
“accredited investor” as defined in Rule 501 of Securities and Exchange
      Commission under the Securities Act, or (b) not a “U.S. person” as that term is
      defined in Rule 902(k) of Regulation S under the Act, and that such investor
      was
      acquiring our common stock, for investment purposes for their own respective
      accounts and not as nominees or agents, and not with a view to the resale or
      distribution thereof, and that each Investor understood that the shares of
      our
      common stock may not be sold or otherwise disposed of without registration
      under
      the Securities Act or an applicable exemption.





Certain
      of the investors had previously signed subscription agreements for the purchase
      of shares at a price of $0.60 per share. These investors signed a restated
      subscription agreement that reflected the $0.40 per share purchase
      price.


27


ITEM
      2. MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





The
      following analysis of the results of operations and financial condition should
      be read in conjunction with our consolidated financial statements for the nine
      months ended September 30, 2008 and notes thereto contained in this quarterly
      report on Form 10-Q.





**Overview**





Prior
      to
      November 13, 2007, we were a public reporting blind pool company with no assets.
      On November 13, 2007, we executed and completed the transactions contemplated
      by
      the share exchange agreement with Fulland and its stockholders and Synergy,
      which was then principal stockholder. Pursuant to this agreement, simultaneously
      with the financing as discussed below, (i) the Company issued 36,577,704 shares
      of common stock to the former stockholders of Fulland, (ii) purchased 8,006,490
      shares of common stock from Synergy for $625,000 and cancelled such shares,
      (iii) issued Synergy 291,529 shares of common stock for professional services,
      and (iv) paid cash fees of $415,000 in connection with the exchange agreement.
      Aggregate payments of $1,040,000 were made from the proceeds of the financing,
      including the $625,000 paid to Synergy as described above.





Fulland
      conducts its business operations through its wholly-owned subsidiary, Green
      Power, in PRC as a wholly-owned foreign limited liability company. Green Power,
      through the Huayang Companies, is engaged in the design, manufacture and sale
      of
      a variety of high and low temperature dyeing and finishing machinery, the
      manufacture of high precision forged rolled rings for the wind power industry
      and other industries and the design, manufacture and sale of electric power
      auxiliary apparatuses (including coking equipment), sewage-treatment equipment
      and related parts or fittings. Green Power operates and controls the Huayang
      Companies through contractual arrangements. Fulland used the contractual
      arrangements to acquire control of the Huayang Companies, instead of acquiring
      the business of Huayang Companies in order not to violate the laws of the PRC
      that significantly restrict a PRC company from selling its assets to a foreign
      entity other than for cash and otherwise impose restriction on foreign
      investment in PRC companies.





Additionally,
      on August 27, 2008, the Company incorporated Wuxi Fulland Wind Energy Equipment
      Co. , Ltd. (“Fulland Wind Energy”). Fulland owns 100% of Fulland Wind Energy,
      which is a wholly foreign-owned enterprise (“WFOE”) organized under the laws of
      the PRC.





The
      acquisition of Fulland was accounted for as a reverse merger because on a
      post-merger basis, the former shareholders of Fulland held a majority of our
      outstanding common stock on a voting and fully-diluted basis. As a result of
      the
      share exchange, Fulland was deemed to be the acquirer for accounting purposes.
      Accordingly, the financial statement data presented are those of Fulland
      (including the Huayang Companies) for all periods prior to our acquisition
      of
      Fulland on November 13, 2007, and the financial statements of the consolidated
      companies from the acquisition date forward. Since Fulland did not have any
      separate operations prior to November 13, 2007, the financial statements of
      Fulland reflect the operations of the Huayang Companies.





Our
      revenues are derived from two unrelated businesses – (1) the manufacture of
      dyeing and finishing equipment and (2) the manufacture of forged rolled rings
      and other components for the wind power and other industries and electric power
      auxiliary apparatuses (including coking equipment). We market products from
      these two segments with independent marketing groups to different customer
      bases.





Dyeing
      and finishing equipment segment




The
      dyeing and finishing equipment business has been the principal source of our
      revenue and operating income, accounting for 54.5% of revenue for the nine
      months ended September 30, 2008 and 81.1% of revenues for the year ended
      December 31, 2007. Substantially all of our sales of these products are made
      to
      companies in the PRC. As a result, we are dependent upon the continued growth
      of
      the textile industry in the PRC. To the extent that growth in this industry
      stagnates in the PRC, whether as a result of export restrictions from countries
      such as the United States, who are major importers of Chinese-made textiles,
      or
      shifts in international manufacturing to countries which may have a lower cost
      than the PRC or overexpansion of the Chinese textile industry, we will have
      more
      difficulty in selling these products in the PRC, and we may have difficulty
      exporting our equipment. Further, as the textile industry seeks to lower costs
      by purchasing equipment that uses the most technological developments to improve
      productivity, reduce costs and have less adverse environmental impact, if we
      are
      not able to offer products utilizing the most current technology, our ability
      to
      market our products will suffer. Although we seek to work with our customers
      in
      designing equipment to meet their anticipated needs, we cannot assure you that
      we will be able to develop products and enhancements that are required or
      desired by the industry.


28




Forged
      rolled rings and electric power equipment segment




In
      our
      forged rolled rings and electrical power equipment segment, we manufacture
      high
      precision forged rolled rings for the wind power industry and other industries.
      Additionally, we also manufacture specialty equipment used in the production
      of
      coal generated electricity. Revenue from our forged rolled rings and electrical
      power equipment segment accounted for 49.4% of revenue for the three months
      ended September 30, 2008, 45.5% of revenues for the nine months ended September
      30, 2008, and 18.9% of revenues for the year ended December 31, 2007 and is
      summaries as follows:





For the Three
              Months Ended
              September 30,
              2008
            
            For the Nine
              Months Ended
              September 30,
              2008
            
            For the Year Ended
              December 31, 2007Forged
                rolled rings - wind power industry
            
            $
            2,494,123
            
            $
            5,124,872
            
            $
            458,988Forged
                rolled rings – other industries
            
            
            2,764,328
            
            
            7,419,590
            
            
            1,443,930Electrical
                equipment
            
            
            553,084
            
            
            1,729,806
            
            
            2,722,433Total
                forged rolled rings and electric equipment segment
                revenues
            
            $
            5,811,535
            
            $
            14,274,268
            
            $
            4,625,351





During
      2007, we began to generate revenue from the forging of rolled rings for the
      wind
      power and other industries. These activities accounted for 44.7% of net revenues
      for the three months ended September 30, 2008, 40.0% for the nine months ended
      September 30, 2008 and 7.8% for the year ended December 31, 2007. We expect
      that
      rolled rings will become a more significant percentage of total revenues in
      the
      future, and, in this connection we are expanding our manufacturing facilities
      to
      enable us to manufacture forged rolled rings with a larger diameter in order
      to
      meet the perceived needs of the wind power industry.





We
      acquired from an affiliated company for a net price of approximately
      $10,950,000, an approximately 100,000 square foot factory which was
      substantially completed in 2005 together with the related land use rights,
      employee housing facilities and other leasehold improvements. As of September
      30, 2008, the purchase price was fully paid. Furthermore, through September
      30,
      2008, we have incurred additional costs of approximately $2.2 million for
      leasehold improvements to upgrade this facility for the eventual manufacture
      of
      larger roll rings and other components with a focus on the wind power industry.
      Although we have received the land use rights, as of the date of this report,
      we
      have not received title to the factory facilities and the property has not
      been
      placed in service. We intend to use this new facility to manufacture forged
      rolled rings and other components for use in the wind power and other
      industries. To date, most of our rolled ring sales have been for non-wind
      applications.  As we expand our facilities to accommodate the manufacture
      of rolled rings with larger diameters, we plan to develop products for which
      the
      wind industry is a more important target market. Wind power accounts for an
      insignificant percentage of the power generated in the PRC, and our ability
      to
      market to this segment is dependent upon both the growth of the acceptance
      of
      wind power as an energy source in the PRC and the acceptance of our products.





In
      addition to manufacturing forged roll rings, we market electrical power
      equipment to operators of coal-fired electricity generation plants. Our ability
      to market these products is dependent upon the continued growth of
      coal-generated power plants and our ability to offer products that enable the
      operators of the power plants to produce electricity through a cleaner process
      than would otherwise be available at a reasonable cost. To the extent that
      government regulations are adopted that require the power plants to reduce
      or
      eliminate polluting discharges from power plants, our equipment would need
      to be
      redesigned to meet such requirements.





Our
      products are sold for use by manufacturers of industrial equipment. Because
      of
      the recent decline in oil prices and the general international economic trends,
      the demand for products used in manufacturing in general, in the dyeing and
      finishing as well as wind power industries may be uncertain. Although we believe
      that over the long term, the wind power segment will expand, in the short term
      these factors may affect the requirements by our customers and potential
      customers for our products. To the extent that the demand for our forged rolled
      rings declines, our revenue and net income will be affected.


29


A
      major
      element of our cost of sales is raw materials, principally steel and other
      metals. These metals are subject to fluctuation prices, and recently these
      fluctuations have been significant. In
      times
      of increasing prices, we need to try to fix the price at which we purchases
      raw
      materials in order to avoid increases in costs which we cannot recoup through
      increases in sales prices. Similarly, in times of decreasing prices, we may
      have
      purchased metals at prices which are high in terms of the price at which we
      can
      sell our products, which also can impair our margins. During both the three
      and
      nine month periods ended September 30, 2008, are gross margins decreased from
      the prior year largely as a result of increases in the price of steel and other
      metals that we were not able to pass on to our customers.





**Critical
      Accounting Policies and Estimates**





**Use
      of Estimates**




The
      preparation of our consolidated financial statements requires us to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and the disclosure of contingent assets and liabilities at the
      date
      of the financial statements as well as the reported net sales and expenses
      during the reporting periods. On an ongoing basis, we evaluate our estimates
      and
      assumptions. We base our estimates on historical experience and on various
      other
      factors that we believe are reasonable under the circumstances, the results
      of
      which form the basis for making judgments about the carrying value of assets
      and
      liabilities that are not readily apparent from other sources. Actual results
      may
      differ from these estimates under different assumptions or conditions.
      Significant estimates in 2008 and 2007 include the allowance for doubtful
      accounts, the allowance for obsolete inventory, the useful life of property
      and
      equipment and intangible assets, and accruals for taxes due.





**Variable
      Interest Entities**





Pursuant
      to Financial Accounting Standards Board Interpretation No. 46 (Revised),
“Consolidation of Variable Interest Entities - an Interpretation of ARB No.
      51”
(“FIN 46R”) we
      are
      required to include in our consolidated financial statements the financial
      statements of variable interest entities. FIN 46R requires a variable interest
      entity to be consolidated by a company if that company is subject to a majority
      of the risk of loss for the variable interest entity or is entitled to receive
      a
      majority of the variable interest entity’s residual returns. Variable interest
      entities are those entities in which we, through contractual arrangements,
      bear
      the risk of, and enjoy the rewards normally associated with ownership of the
      entity, and therefore we are the primary beneficiary of the entity.





The
      Huayang Companies are considered variable interest entities (“VIE”), and we are
      the primary beneficiary. On November 13, 2007, we entered into agreements with the
      Huayang Companies pursuant to which we shall receive 100% of the
      Huayang Companies net income. In accordance with these agreements, the
      Huayang Companies shall pay consulting fees equal to 100% of its net income
      to
      our wholly-owned foreign subsidiary, Green Power, and Green Power shall supply
      the technology and administrative services needed to service the
      Huayang Companies.





The
      accounts of the Huayang Companies are consolidated in the accompanying financial
      statements pursuant to FIN 46R. As a VIE, the Huayang Companies sales are
      included in our total sales, its income from operations is consolidated with
      our, and our net income includes all of the Huayang Companies net income. We
      do
      not have any non-controlling interest and accordingly, did not subtract any
      net
      income in calculating the net income attributable to us. Because of the
      contractual arrangements, we have pecuniary interest in the Huayang Companies
      that require consolidation of our financial statements and the Huayang Companies
      financial statements.





**Inventories**





Inventories,
      consisting of raw materials and finished goods related our products are stated
      at the lower of cost or market utilizing the weighted average method. An
      allowance is established when management determines that certain inventories
      may
      not be saleable. If inventory costs exceed expected market value due to
      obsolescence or quantities in excess of expected demand, we will record reserves
      for the difference between the cost and the market value. These reserves are
      recorded based on estimates.





30


**Property
      and equipment**





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





Useful
                LifeBuilding
                and building improvements
            
            
            20YearsManufacturing
                equipment
            
            
            5
                – 10YearsOffice
                equipment and furniture
            
            
            5YearsVehicle
            
            
            5Years





The
      cost
      of repairs and maintenance is expensed as incurred; major replacements and
      improvements are capitalized. When assets are retired or disposed of, the cost
      and accumulated depreciation are removed from the accounts, and any resulting
      gains or losses are included in income in the year of disposition.





Long-lived
      assets are reviewed periodically or more often if circumstances dictate, to
      determine whether their carrying value has become impaired. We consider assets
      to be impaired if the carrying value exceeds the future projected cash flows
      from related operations. We also re-evaluate the amortization periods to
      determine whether subsequent events and circumstances warrant revised estimates
      of useful lives.




In
      accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
      “Accounting for the Impairment or Disposal of Long-Lived Assets,” we examine the
      possibility of decreases in the value of fixed assets when events or changes
      in
      circumstances reflect the fact that their recorded value may not be recoverable.
      We recognize an impairment loss when the sum of expected undiscounted future
      cash flows is less than the carrying amount of the asset. The amount of
      impairment is measured as the difference between the asset’s estimated fair
      value and its book value.





**Land
      use rights**





There
      is
      no private ownership of land in the PRC. All land in the PRC is owned by the
      government and cannot be sold to any individual or company. The government
      grants a land use right that permits the holder of the land use right to use
      the
      land for a specified period. Our land use rights were granted for a term of
      50
      years. Any transfer of the land use right requires government approval. We
      have
      recorded as land use rights the costs paid to acquire a land use rights. The
      land use rights are amortized on the straight-line method over the land use
      right terms which range from 45 to 50 years.





**Revenue
      recognition**





We
      recognize revenue when persuasive evidence of an arrangement exists, delivery
      has occurred or services have been rendered, the purchase price is fixed or
      determinable and collectability is reasonably assured. We account for the
      product sales as a multiple element arrangement. Revenue from multiple element
      arrangements is allocated among the separate accounting units based on the
      residual method. Under the residual method, the revenue is allocated to
      undelivered elements based on fair value of such undelivered elements and the
      residual amounts of revenue allocated to delivered elements. We recognize
      revenue from the sale of dyeing and electric equipment upon shipment and
      transfer of title. The other elements may include installation and generally
      a
      one-year warranty. Equipment installation revenue is valued based on estimated
      service person hours to complete installation and is recognized when the labor
      has been completed and the equipment has been accepted by the customer, which
      is
      generally within a close to the date of delivery of the equipment. Warranty
      revenue is valued based on estimated service person hours to complete a service
      and generally is recognized over the contract period. For the three and nine
      months ended September 30, 2008, amounts allocated to warranty revenues were
      not
      material. Based on historical experience, warranty service calls and any related
      labor costs have been minimal.




All
      other
      product sales, including the forging of parts, with customer specific acceptance
      provisions, are recognized upon customer acceptance and the delivery of the
      parts or service. Revenues related to spare part sales are recognized upon
      shipment or delivery based on the trade terms.


31


**Research
      and development**





Research
      and development costs are expensed as incurred, and are included in general
      and
      administrative expenses. These costs primarily consist of cost of material
      used
      and salaries paid for the development of our products and fees paid to third
      parties. Our total research and development expense through September 30, 2008
      has not been significant.





**Income
      taxes**





We
      are
      governed by the Income Tax Law of the PRC. Income taxes are accounted for under
      Statement of Financial Accounting Standards No. 109, “Accounting for Income
      Taxes,” which is an asset and liability approach that requires the recognition
      of deferred tax assets and liabilities for the expected future tax consequences
      of events that have been recognized in our financial statements or tax returns.
      The charge for taxes is based on the results for the year as adjusted for items,
      which are non-assessable or disallowed. It is calculated using tax rates that
      have been enacted or substantively enacted by the balance sheet
      date.




Deferred
      tax is accounted for using the balance sheet liability method in respect of
      temporary differences arising from differences between the carrying amount
      of
      assets and liabilities in the financial statements and the corresponding tax
      basis used in the computation of assessable tax profit. In principle, deferred
      tax liabilities are recognized for all taxable temporary differences, and
      deferred tax assets are recognized to the extent that it is probably that
      taxable profit will be available against which deductible temporary differences
      can be utilized.





Deferred
      tax is calculated using tax rates that are expected to apply to the period
      when
      the asset is realized or the liability is settled. Deferred tax is charged
      or
      credited in the income statement, except when it is related to items credited
      or
      charged directly to equity, in which case the deferred tax is also dealt with
      in
      equity.





Deferred
      tax assets and liabilities are offset when they related to income taxes levied
      by the same taxation authority and the Company intends to settle its current
      tax
      assets and liabilities on a net basis.





We
      adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes”
(“FIN 48”), as of January 1, 2007. A tax position is recognized as a benefit
      only if it is “more likely than not” that the tax position would be sustained in
      a tax examination, with a tax examination being presumed to occur. The amount
      recognized is the largest amount of tax benefit that is greater than 50% likely
      of being realized on examination. For tax positions not meeting the “more likely
      than not” test, no tax benefit is recorded. The adoption had no affect on our
      financial statements.





**Recent
      accounting pronouncements** ******





In
      June
      2007, the Emerging Issues Task Force of the FASB issued EITF Issue No. 07-3, *Accounting
      for Nonrefundable Advance Payments for Goods or Services to be Used in Future
      Research and Development Activities* ,
      (“EITF
      07-3”) which is effective for fiscal years beginning after December 15, 2007.
      EITF 07-3 requires that nonrefundable advance payments for future research
      and
      development activities be deferred and capitalized. Such amounts will be
      recognized as an expense as the goods are delivered or the related services
      are
      performed. The adoption of EITF 07-3 did not have a material impact on our
      results of operations, financial position or liquidity.




In
      December 2007, the FASB issued SFAS No. 141(R), *“Business
      Combinations”* (“SFAS
      141(R)”), which replaces SFAS No. 141. SFAS No. 141(R) establishes principles
      and requirements for how an acquirer recognizes and measures in its financial
      statements the identifiable assets acquired, the liabilities assumed, any
      non-controlling interest in the acquiree and the goodwill acquired. The
      Statement also establishes disclosure requirements which will enable users
      to
      evaluate the nature and financial effects of the business combination. SFAS
      141(R) is effective for fiscal years beginning after December 15, 2008. The
      adoption of SFAS 141(R) may have an impact on accounting for future business
      combinations once adopted.


32


In
      December 2007, the FASB issued SFAS No. 160, *“Non-controlling
      Interests in Consolidated Financial Statements – an amendment of Accounting
      Research Bulletin No. 51”* (“SFAS
      160”), which establishes accounting and reporting standards for ownership
      interests in subsidiaries held by parties other than the parent, the amount
      of
      consolidated net income attributable to the parent and to the non-controlling
      interest, changes in a parent’s ownership interest and the valuation of retained
      non-controlling equity investments when a subsidiary is deconsolidated. The
      Statement also establishes reporting requirements that provide sufficient
      disclosures that clearly identify and distinguish between the interests of
      the
      parent and the interests of the non-controlling owners. SFAS 160 is effective
      for fiscal years beginning after December 15, 2008. We have not determined
      the
      effect that the application of SFAS 160 will have on our financial
      statements.





In
      March 2008, the FASB issued SFAS 161, “ *Disclosures
      about Derivative Instruments and Hedging Activities* ” *.* The new
      standard is intended to improve financial reporting about derivative instruments
      and hedging activities by requiring enhanced disclosures to enable investors
      to
      better understand their effects on an entity’s financial position, financial
      performance, and cash flows. It is effective for financial statements issued
      for
      fiscal years and interim periods beginning after November 15, 2008, with
      early application encouraged. We are currently evaluating the impact of adopting
      SFAS 161 on our consolidated financial statements.





In
      May
      2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
      Position (“FSP”) APB 14-1, *Accounting
      for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
      (Including Partial Cash Settlement)* .
      FSP APB
      14-1 clarifies that convertible debt instruments that may be settled in cash
      upon either mandatory or optional conversion (including partial cash settlement)
      are not addressed by paragraph 12 of APB Opinion No. 14, *Accounting
      for Convertible Debt and Debt issued with Stock Purchase
      Warrants* .
      Additionally, FSP APB 14-1 specifies that issuers of such instruments should
      separately account for the liability and equity components in a manner that
      will
      reflect the entity’s non-convertible debt borrowing rate when interest cost is
      recognized in subsequent periods. FSP APB 14-1 is effective for financial
      statements issued for fiscal years beginning after December 15, 2008, and
      interim periods within those fiscal years. The Company will adopt FSP APB 14-1
      beginning in the first quarter of fiscal 2009, and this standard must be applied
      on a retrospective basis. The Company is evaluating the impact the adoption
      of
      FSP APB 14-1 will have on its consolidated financial position and results of
      operations.





In
      May
      2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.
      162, *The
      Hierarchy of Generally Accepted Accounting Principles* .
      This
      standard is intended to improve financial reporting by identifying a consistent
      framework, or hierarchy, for selecting accounting principles to be used in
      preparing financial statements that are presented in conformity with generally
      accepted accounting principles in the United States for non-governmental
      entities. SFAS No. 162 is effective 60 days following approval by the U.S.
      Securities and Exchange Commission (“SEC”) of the Public Company Accounting
      Oversight Board’s amendments to AU Section 411, *The
      Meaning of Present Fairly in Conformity with Generally Accepted Accounting
      Principles* .
      The
      Company does not expect SFAS No. 162 to have a material impact on the
      preparation of its consolidated financial statements.





On
      June
      16, 2008, the FASB issued final Staff Position (FSP) No. EITF 03-6-1,
“ *Determining
      Whether Instruments Granted in Share-Based Payment Transactions Are
      Participating Securities* ,”
to
      address the question of whether instruments granted in share-based payment
      transactions are participating securities prior to vesting. The FSP determines
      that unvested share-based payment awards that contain rights to dividend
      payments should be included in earnings per share calculations. The guidance
      will be effective for fiscal years beginning after December 15, 2008. The
      Company is currently evaluating the requirements of (FSP) No. EITF 03-6-1 as
      well as the impact of the adoption on its consolidated financial
      statements.


33


**RESULTS
      OF OPERATIONS**





The
      following table sets forth the results of our operations for the periods
      indicated as a percentage of net revenues:





Three Months Ended September 30,
            
            Nine Months Ended September 30,2008
            
            2007
            
            2008
            
            2007($)
            
            (%)
            
            ($)
            
            (%)
            
            ($)
            
            (%)
            
            ($)
            
            (%)Net
                Revenues
            
            
            11,770,162
            
            
            100.0
            
            
            8,000,293
            
            
            100.0
            
            
            31,400,186
            
            
            100.0
            
            
            16,589,475
            
            
            100.0Cost
                of Revenues
            
            
            8,816,389
            
            
            74.9
            
            
            5,633,977
            
            
            70.4
            
            
            23,508,720
            
            
            74.8
            
            
            11,831,546
            
            
            71.3Gross
                Profit
            
            
            2,953,773
            
            
            25.1
            
            
            2,366,316
            
            
            29.6
            
            
            7,891,466
            
            
            25.2
            
            
            4,757,929
            
            
            28.7Operating
                Expenses
            
            
            483,790
            
            
            4.1
            
            
            291,771
            
            
            3.7
            
            
            1,909,366
            
            
            6.1
            
            
            773,981
            
            
            4.7Income
                from Operations
            
            
            2,469,983
            
            
            21.0
            
            
            2,074,545
            
            
            25.9
            
            
            5,982,100
            
            
            19.1
            
            
            3,983,948
            
            
            24.0Other
                Income (Expenses)
            
            
            (18,352
            )
            
            (0.2
            )
            
            6,761,587
            
            
            84.5
            
            
            (2,308,584
            )
            
            (7.4
            )
            
            6,740,454
            
            
            40.6Income
                Before Provision for Income Taxes
            
            
            2,451,631
            
            
            20.8
            
            
            8,836,132
            
            
            110.4
            
            
            3,673,516
            
            
            11.7
            
            
            10,724,402
            
            
            64.6Provision
                for Income Taxes
            
            
            590,769
            
            
            5.0
            
            
            714,840
            
            
            8.9
            
            
            1,651,331
            
            
            5.3
            
            
            1,315,094
            
            
            7.9Net
                Income
            
            
            1,860,862
            
            
            15.8
            
            
            8,121,292
            
            
            101.5
            
            
            2,022,185
            
            
            6.4
            
            
            9,409,308
            
            
            56.7Other
                Comprehensive Income:Foreign Currency TranslationAdjustment
            
            
            67,269
            
            
            0.6
            
            
            299,690
            
            
            3.7
            
            
            1,679,553
            
            
            5.4
            
            
            523,986
            
            
            3.2Comprehensive
                Income
            
            
            1,928,131
            
            
            16.4
            
            
            8,420,982
            
            
            105.2
            
            
            3,701,738
            
            
            11.8
            
            
            9,933,294
            
            
            59.9





The
      following table sets forth information as to the gross margin for our two lines
      of business for the three and nine months ended September 30, 2008 and 2007.




For the Three Months Ended
              September 30,
            
            For the Nine Months Ended
              September 30,2008
            
            2007
            
            2008
            
            2007Dyeing
                and finishing equipment:Net
                revenues
            
            $
            5,958,627
            
            $
            6,287,788
            
            $
            17,125,918
            
            $
            14,487,221Cost
                of sales
            
            
            4,388,985
            
            
            4,419,881
            
            
            12,655,396
            
            
            10,259,754Gross
                profit
            
            
            1,569,642
            
            
            1,867,907
            
            
            4,470,523
            
            
            4,227,467Gross
                margin
            
            
            26.3
            %
            
            29.7
            %
            
            26.1
            %
            
            29.1
            %Forged
                rolled rings and electric power equipmentNet
                revenues
            
            $
            5,811,535
            
            $
            1,712,505
            
            $
            14,274,268
            
            $
            2,102,254Cost
                of sales
            
            
            4,427,404
            
            
            1,214,096
            
            
            10,853,324
            
            
            1,571,792Gross
                profit
            
            
            1,384,131
            
            
            498,409
            
            
            3,420,944
            
            
            530,462Gross
                margin
            
            
            23.8
            %
            
            29.1
            %
            
            24.0
            %
            
            25.2
            %


34


**Nine
      Months Ended September 30, 2008 and 2007**





*Revenues.* For the
      nine months ended September 30, 2008, we had revenues of $31,400,186, as
      compared to revenues of $16,589,475 for the nine months ended September 30,
      2007, an increase of approximately 89.3%. The increase in total revenue was
      attributable to increases from both of our segments and is summarized as
      follows:





For the Nine
              Months Ended
              September 30,
              2008
            
            For the Nine
              Months Ended
              September 30,
              2007
            
            Increase
            
            Percentage
              ChangeDyeing
                and finishing equipment
            
            $
            17,125,918
            
            $
            14,487,221
            
            $
            2,638,697
            
            
            18.2
            %Forged
                rolled rings - wind power industry
            
            
            5,124,872
            
            
            75,619
            
            
            5,049,253
            
            
            *Forged
                rolled rings – other industries
            
            
            7,419,590
            
            
            293,836
            
            
            7,125,754
            
            
            *Electrical
                equipment
            
            
            1,729,806
            
            
            1,732,799
            
            
            (2,993
            )
            
            0.1
            %Total
                net revenues
            
            $
            31,400,186
            
            $
            16,589,475
            
            $
            14,810,711
            
            
            89.3
            %





*
      Because
      the sales for the nine months ended September 30, 2007 was minimal, the
      percentage increase is not meaningful.





Our
      revenue increases were attributable to:




·
            The
                increase in revenues from the sale of dyeing and finishing equipment
                was
                attributable to continued strong sales of our equipment to the textile
                industry. However, the recent economic slowdown has affected various
                countries, especially the export sector in China. We expect to see
                a
                decreasing trend in our dyeing and finishing equipment business as
                we see
                the textile industry impacted by recessions in other countries. Yet,
                we
                remain confident with the outlook of our forging business for the
                wind
                power industry as the Chinese government is committed to supporting
                wind
                power in order to reduce the Country’s reliance on coal.




·
            We
                have experienced an increase in revenues from the sale of forged
                rings to
                the other industries such as the railway, heavy machinery manufacturing,
                petrochemical, metallurgical, sea port machinery, and defense and
                radar
                industry. This source of revenue was nominal for the nine months
                ended
                September 30, 2007.


·
            Revenue
                from the sale of forged rings to the wind power industry, which was
                nominal in the nine months ended September 30, 2007 increased to
                $5
                million and is attributable to the demand for our forged rolled rings
                that
                will be used in the production of wind turbine components such as
                gear
                boxes and yaw bearings. During the period, the wind power industry
                experienced tremendous growth and the industry faced a serious shortage
                of
                various components, principally gearboxes and
                bearings.


·
            The
                change in revenues from the sale of standard and custom auxiliary
                equipment for use in the power industry in China was minimal and
                is
                attributable to the continued sale of additional pieces of equipment
                to
                the power industry.





*Cost
      of sales.* Cost of
      sales for the nine months ended September 30, 2008 increased $11,677,174 or
      98.7%, from $11,831,546 for the nine months ended September 30, 2007 to
      $23,508,720 for the nine months ended September 30, 2008. Cost of goods sold
      for
      Dyeing was $12,655,396 for the nine months ended September 30, 2008, as compared
      to $10,259,754 for the nine months ended September 30, 2007. Cost of sales
      related to the manufacture of forged rolled rings and other components and
      electric power generating equipment and was $10,853,324 for the nine months
      ended September 30, 2008 as compared to $1,571,792 for the nine months ended
      September 30, 2007.





*Gross
      margin.* Our
      gross profit was $7,891,466 for the nine months ended September 30, 2008 as
      compared to $4,757,929 for the nine months ended September 30, 2007,
      representing gross margins of 25.2% and 28.7%, respectively. Gross profit for
      Dyeing was $4,470,523 for the nine months ended September 30, 2008 as compared
      to $4,227,467 for the nine months ended September 30, 2007, representing gross
      margins of approximately 26.1% and 29.1%, respectively. The modest decrease
      in
      our gross margin was attributable to an increase in raw material costs such
      as
      steel and other metals which could not be passed on to our customers during
      that
      period. Gross profits from forged rolled rings and electric power equipment
      segment were $3,420,944 for the nine months ended September 30, 2008 as compared
      to $530,462 for the nine months ended September 30, 2007, representing gross
      margins of approximately 24.0% and 25.2%, respectively.


35


*Depreciation
      and amortization expense* . For
      the
      nine months ended September 30, 2008 and 2007, depreciation expense amounted
      to
      $482,376 and $450,881, of which $254,187 and $243,006 is included in cost of
      sales and
      $228,189 and $207,875 is included in operating expenses ,
      respectively. The overall increase in depreciation and amortization reflects
      addition equipment which we purchased.





*Selling,
      general and administrative expenses.* Selling,
      general and administrative expenses totaled $1,681,177 for the nine months
      ended
      September 30, 2008, as compared to $566,106 for the nine months ended September
      30, 2007, an increase of $1,115,071 or approximately 197.0%. Selling, general
      and administrative expenses consisted of the following:





Nine Months Ended
              September 30, 2008
            
            Nine Months Ended
              September 30, 2007Professional
                fees
            
            $
            398,724
            
            $
            -Payroll
                and related benefits
            
            
            334,314
            
            
            55,166Travel
            
            
            175,199
            
            
            130,249Bad
                debt expense
            
            
            171,816
            
            
            182,882Other
            
            
            601,124
            
            
            197,809$
            1,681,177
            
            $
            566,106





·
            Since
                the share exchange in November 2007, we have incurred professional
                fees,
                principally as a result of our status as a public company. For the
                nine
                months ended September 30, 2008, professional fees amounted to $398,724
                as
                compared to $0 in the 2007 period. Our professional fees consisted
                primarily of legal fees of $165,027, audit fees of $103,020, investor
                relation fees of $108,055, and other professional
                fees.


·
            Payroll
                and related benefits increased for the nine months ended September
                30,
                2008 by $279,148, or 506.0%, as compared to the nine months ended
                September 30, 2007. In November 2007, we hired additional personnel
                in
                accounting, our chief financial officer, a translator, and administration
                staff due to our increased operations and additional workload in
                connection with being a public company. Additionally, the increase
                in
                payroll and related benefits reflected stock based compensation of
                $75,000
                resulting from the issuance of common stock to two independent directors,


·
            Travel
                expense for the nine months ended September 30, 2008 increased by
                $44,950,
                or 34.5%, as compared to the nine months ended September 30, 2007.
                The
                increase is related to increased travel by sales personnel and engineers
                as well as increased travel due to investor road shows.


·
            Bad
                debts expenses decreased by $11,066 for the nine months ended September
                30, 2008 as compared to the nine months ended September 30, 2007
                based on
                our analysis of accounts receivable
                balances.


·
            Other
                selling, general and administrative expenses increased by $403,315
                for the
                nine months ended September 30, 2008 as compared to the nine months
                ended
                September 30, 2007 due to increased operations, increases in insurance
                expense due to our directors’ and officers’ liability policy, and increase
                in rent expense related to our land use
                rights.





*Income
      from operations.* For
      the
      nine months ended September 30, 2008, income from operations was $5,982,100
      as
      compared to $3,983,948 for the nine months ended September 30, 2007, an increase
      of $1,998,152 or 50.2%.





*Other
      income (expenses)* .
      For the
      nine months ended September 30, 2008, other expense amounted to $2,308,584
      as
      compared to other income of $6,740,454 for the nine months ended September
      30,
      2007. For the nine months ended September 30, 2008, other expenses included
      i)
      interest expense of $2,298,874 consisting of non-cash interest expense of
      $2,263,661 from the amortization of the balance of debt discount arising from
      the valuation of the beneficial conversion features recorded in connection
      with
      our November 2007 private placement offset by the reversal of accrued interest
      of $20,719 and ii) amortization of debt issuance costs of $21,429 and iii)
      interest income of $11,719. For the nine months ended September 30, 2007, other
      income consisted of interest expense of $31,360 offset by interest income of
      $372.


Additionally,
      in the 2007 period, other income includes a gain from the forgiveness of income
      and value-added taxes of $6,771,442 and reflects the reversal of tax accruals
      previously made resulting from the grant by the local tax agency to the Huayang
      Companies of a special tax exemption and release from any unpaid corporate
      income tax and value added tax liabilities and any related penalties through
      September 30, 2007. This waiver covered all tax reporting periods through
      September 30, 2007.




*Income
      tax expense* .
      Income
      tax expense increased $336,237 or approximately 25.5% during the nine months
      ended September 30, 2008 primarily as a result of the increase in taxable income
      generated by our operating entities.


36


*Net
      income (loss).* ****** For
      the
      nine months ended September 30, 2008, we recorded net income of $2,022,185
      as
      compared to net income of $9,409,308 for the nine months ended September 30,
      2007. For the nine months ended September 30, 2008, we recorded a deemed
      beneficial dividend related to the fair value of warrants granted in March
      2008
      as a result of the automatic conversion of our convertible debt into series
      A
      preferred stock and warrants upon the amendment of our certificate of
      incorporation to create a class of preferred stock and the creation of the
      series A preferred stock. This deemed dividend reduced the net income available
      to common stockholders. Accordingly, for the nine months ended September 30,
      2008, we generated a net loss available to common stockholders of $861,877
      or
      $(0.02) per share (basic and diluted) as compared to net income per common
      share
      of $0.26 (basic and diluted) for the nine months September 30, 2007.





*Foreign
      currency translation gain.* The
      functional currency of our subsidiaries operating in the PRC is the Chinese
      Yuan
      or Renminbi (“RMB”). The financial statements of our subsidiaries are translated
      to U.S. dollars using period end rates of exchange for assets and liabilities,
      and average rates of exchange (for the period) for revenues, costs, and
      expenses. Net gains and losses resulting from foreign exchange transactions
      are
      included in the consolidated statements of operations. As a result of these
      translations, which are a non-cash adjustment, we reported a foreign currency
      translation gain of $1,679,553 for the nine months ended September 30, 2008
      as
      compared to $523,986 for comparable period in 2007. This non-cash gain had
      the
      effect of increasing our reported comprehensive income.




*Comprehensive
      income (loss).* For
      the
      nine months ended September 30, 2008, comprehensive income of $3,701,738 is
      derived from the sum of our net income of $2,022,185 plus foreign currency
      translation gains of $3,701,738.





**Three
      Months Ended September 30, 2008 and 2007**





*Revenues.* For the
      three months ended September 30, 2008, we had revenues of $11,770,162, as
      compared to revenues of $8,000,293 for the three months ended September 30,
      2007, an increase of $3,769,869 or approximately 47.1%. The increase in total
      revenue was attributable to increases from both of our segments and is
      summarized as follows:





For the Three
              Months Ended
              September 30,
              2008
            
            For the Three
              Months Ended
              September 30,
              2007
            
            Increase
            
            Percentage
              ChangeDyeing
                and finishing equipment
            
            $
            5,958,627
            
            $
            6,287,788
            
            $
            (329,161
            )
            
            (5.2
            )%Forged
                rolled rings - wind power industry
            
            
            2,494,123
            
            
            66,994
            
            
            2,427,129
            
            
            *Forged
                rolled rings – other industries
            
            
            2,764,328
            
            
            267,973
            
            
            2,496,355
            
            
            *Electrical
                equipment
            
            
            553,084
            
            
            1,377,538
            
            
            (824,454
            )
            
            (59.8
            )%Total
                net revenues
            
            $
            11,770,162
            
            $
            8,000,293
            
            $
            3,769,869
            
            
            47.1
            %





* Because
        the sales for the three months ended September 30, 2007 was minimal, the
        percentage increase is not meaningful.





·
            Increases
                in revenues for the three months ended September 30, 2008 as compared
                to
                the three months ended September 30, 2007 are attributable to similar
                explanations provided in our discussion of results of operations
                for the
                nine month period. We had a decrease in revenues of dyeing and finishing
                machines. The recent economic slowdown has affected various countries,
                especially the export sector in China. We expect to see a decreasing
                trend
                in our dyeing and finishing equipment business as we see the textile
                industry impacted by recessions in other countries. Yet, we remain
                confident with the outlook of our forging business for the wind power
                industry as the Chinese government is committed to supporting wind
                power
                in order to reduce the China’s reliance on coal. For the three months
                ended September 30, 2007, we had recognized increased revenues from
                the
                shipment of more units of electrical equipment as compared to the
                three
                months ended September 30, 2008.


37






*Cost
      of sales.* Cost of
      sales for the three months ended September 30, 2008 increased $3,182,412 or
      56.4%, from $5,633,977 for the three months ended September 30, 2007 to
      $8,816,389 for the three months ended September 30, 2008. Cost of goods sold
      for
      Dyeing was $4,388,985 for the three months ended September 30, 2008, as compared
      to $4,419,881 for the three months ended September 30, 2007. Cost of sales
      related to the manufacture of forged rolled rings and other components, and
      electric power generating equipment and was $4,427,404 for the three months
      ended September 30, 2008 as compared to $1,214,096 for the three months ended
      September 30, 2007.





*Gross
      margin.* Our
      gross profit was $2,953,773 for the three months ended September 30, 2008 as
      compared to $2,366,316 for the three months ended September 30, 2007,
      representing gross margins of 25.1% and 29.6%, respectively. Gross profit for
      Dyeing was $1,569,642 for the three months ended September 30, 2008 as compared
      to $1,867,907 for the three months ended September 30, 2007, representing gross
      margins of approximately 26.3% and 29.7%, respectively. Gross profit related
      to
      the forged rolled rings and electric power equipment was $1,384,131 for the
      three months ended September 30, 2008 as compared to $498,409 for the three
      months ended September 30, 2007, representing gross margins of approximately
      23.8% and 29.1%, respectively. The decrease in our gross margin was attributable
      to an increase in raw material costs such as steel and other metals which could
      not be passed on to our customers during that period as well as a decrease
      in
      revenues.





*Depreciation
      and amortization expense* .
      Depreciation and amortization amounted to $159,454 for the three months ended
      September 30, 2008 and $151,430 for the three months ended September 30, 2007,
      of which $89,742 and $82,823 is included in cost of sales and $69,712 and
      $68,607 is included in operating expenses, respectively. The
      overall increase in depreciation and amortization reflects addition equipment
      which we purchased.





*Selling,
      general and administrative expenses.* Selling,
      general and administrative expenses totaled $483,790 for the three months ended
      September 30, 2008, as compared to $291,771 for the three months ended September
      30, 2007, an increase of $192,019 or approximately 86%. Selling, general and
      administrative expenses consisted of the following:





Three Months Ended
              September 30, 2008
            
            Three Months Ended
              September 30, 2007Professional
                fees
            
            $
            18,204
            
            $
            -Payroll
                and related benefits
            
            
            111,793
            
            
            32,537Travel
            
            
            73,003
            
            
            46,281Bad
                debt
            
            
            1,792
            
            
            49,190Other
            
            
            209,286
            
            
            95,156$
            414,078
            
            $
            223,164





·
            Since
                the share exchange in November 2007, we have incurred professional
                fees,
                principally as a result of our status as a public company. For the
                three
                months ended September 30, 2008, professional fees amounted to $18,204
                as
                compared to $0 in the 2007 period.


·
            Payroll
                and related benefits increased for the three months ended September
                30,
                2008 by $79,256, or 243.6%, as compared to the three months ended
                September 30, 2007. In November 2007, we hired additional personnel
                in
                accounting, our chief financial officer, a translator, and administration
                staff due to our increased operations and additional workload in
                connection with being a public company.


·
            For
                the three months ended September 30, 2008, travel expense increased
                by
                $26,722, or 57.7%, as compared to the three months ended September
                30,
                2007 as a result of increased travel by sales personnel as well as
                increased travel for investor road shows.


·
            Bad
                debts expenses increased by $1,792 for the three months ended September
                30, 2008 as compared to the three months ended September 30, 2007
                based on
                our analysis of accounts receivable
                balances.


·
            Other
                selling, general and administrative expenses increased by $114,130
                for the
                three months ended September 30, 2008 as compared with the three
                months
                ended September 30, 2007 primarily resulting from an increase in
                insurance
                expense and rent expense related to prepaid land use
                rights.





*Income
      from operations.* For
      the
      three months ended September 30, 2008, income from operations was $2,469,983
      as
      compared to $2,074,545 for the three months ended September 30, 2007, an
      increase of $395,438 or 19.1%.


38





*Other
      income (expenses)* .
      For the
      three months ended September 30, 2008, other expense amounted to $18,352 as
      compared to other income of $6,761,587 for the three months ended September
      30,
      2007. For the three months ended September 30, 2008, other expenses reflected
      interest expense of $20,427 offset by interest income of $2,075. For
      the
      three months ended September 30, 2007, other income consisted of interest
      expense of $9,946 offset by interest income of $91. Additionally, for the three
      months ended September 30, 2007, other income includes a gain from the
      forgiveness of income and value-added taxes of $6,771,442 and reflects the
      reversal of tax accruals previously made resulting from the grant by the local
      tax agency to the Huayang Companies of a special tax exemption and release
      from
      any unpaid corporate income tax and value added tax liabilities and any related
      penalties through September 30, 2007. This waiver covered all tax reporting
      periods through September 30, 2007.





*Income
      tax expense* .
      Income
      tax expense decreased $124,071 or approximately 17.4% during the three months
      ended September 30, 2008 primarily as a result of the increase in taxable income
      generated by our operating entities offset by a reduction in the statutory
      rate
      from 33% to 25%.




*Net
      income.* ****** For
      the
      three months ended September 30, 2008, we recorded net income of $1,860,862,
      or
      $0.05 per share (basic) and $0.03 per share (diluted) as compared to net income
      of $8,121,292, or $0.22 per share (basic and diluted) for the three months
      ended
      September 30, 2007.





*Foreign
      currency translation gain.* The
      functional currency of our subsidiaries operating in the PRC is the Chinese
      Yuan
      or Renminbi (“RMB”). The financial statements of our subsidiaries are translated
      to U.S. dollars using period end rates of exchange for assets and liabilities,
      and average rates of exchange (for the period) for revenues, costs, and
      expenses. Net gains and losses resulting from foreign exchange transactions
      are
      included in the consolidated statements of operations. As a result of these
      translations, which are a non cash adjustment, we reported a foreign currency
      translation gain of $67,269 for the three months ended September 30, 2008 as
      compared to $299,690 for comparable period in 2007. This non-cash gain had
      the
      effect of increasing our reported comprehensive income.




*Comprehensive
      income.* For
      the
      three months ended September 30, 2008, comprehensive income of $1,928,131 is
      derived from the sum of our net income of $1,860,862 plus foreign currency
      translation gains of $67,269.





**Liquidity
      and Capital Resources**





Liquidity
      is the ability of a company to generate funds to support its current and future
      operations, satisfy its obligations and otherwise operate on an ongoing basis.
      At September 30, 2008 and December 31, 2007, we had cash balances of $744,885
      and $5,025,434, respectively. These funds are located in financial institutions
      located as follows:





**September 30, 2008**
            
            **December 31, 2007**Country:United
                States
            
            $
            29,308
            
            
            3.9
            %
            $
            171,121
            
            
            3.4
            %China
            
            
            715,577
            
            
            96.1
            %
            
            4,854,313
            
            
            96.6
            %Total
                cash and cash equivalents
            
            $
            744,885
            
            
            100.0
            %
            $
            5,025,434
            
            
            100.0
            %





Our
      working capital position decreased $1,112,090 to $2,073,185 at September 30,
      2008 from working capital of $3,185,275 at December 31, 2007. This decrease
      in
      working capital is primarily attributable to a decrease in cash of $4,280,549
      and an increase in accounts payable of $1,356,837 offset by a net increase
      in
      accounts receivable of $1,784,182 and the conversion of convertible debt of
      $3,261,339 into shares of our series A preferred stock and warrants.





Net
      cash
      flow provided by operating activities was $5,039,650 for the nine months ended
      September 30, 2008 as compared to net cash flow provided by operating activities
      was $6,168,220 for the nine months ended September 30, 2007, a decrease of
      $1,128,570. Net cash flow provided by operating activities for the nine months
      ended September 30, 2008 was mainly due to net income of $2,022,185, the
      add-back of non-cash items of depreciation and amortization of $482,376, the
      amortization of debt discount of $2,263,661, the amortization of deferred debt
      costs of $21,429, the increase in our allowance for bad debt of $171,816,
      non-cash rent expense associated with prepaid land use rights of $63,346, and
      the add-back of stock-based compensation of $75,000, the decrease in prepaid
      and
      other assets of $280,762 and advances to suppliers of $726,728 and an increase
      in accounts payable of $1,189,915 offset by an increase in accounts receivable
      of $1,777,797, inventories of $124,107, and the payment of VAT and service
      taxes
      of $389,946. Net cash flow provided by operating activities for the nine months
      ended September 30, 2007 was mainly due to our net income of $9,409,308, a
      decrease in inventories of $426,386, and increase in accounts payable of
      $1,153,705, an increase in VAT and services taxes payable of $1,011,064, an
      increase in income taxes payable of $957,899, and increase in advanced from
      customers of $1,830,260, and the add-back of non-cash items of depreciation
      and
      amortization of $450,881 offset by an increase in accounts receivable of
      $2,538,272, increases in advances to suppliers of $127,886, and the add back
      of
      other income from forgiveness of income and VAT taxes of $6,771,442.


39




Net
      cash
      flow used in investing activities was $11,537,578 for the nine months ended
      September 30, 2008 as compared to net cash used in investing activities of
      $6,269,587 for the nine months ended September 30, 2007. For the nine months
      ended September 30, 2008, we received cash from the repayment of amounts due
      from related parties of $145,808 and from the sale of our cost-method investee
      of $35,720 offset by the purchase of property and equipment of $11,629,385
      and
      the payment of deposits on factory equipment of $89,721. For the nine months
      ended September 30, 2007, we used cash for advances for amounts due from related
      parties of $486,032 and for the purchase of property and equipment of $17,581,
      and cash used deposits on long-term assets – related party of
      $5,792,030.





Net
      cash
      flow provided by financing activities was $2,051,476 for the nine months ended
      September 30, 2008 as compared to net cash provided by financing activities
      of
      $260,561 for the nine months ended September 30, 2007. For the nine months
      ended
      September 30, 2008, we received proceeds from short-term bank loans of $142,880,
      and proceeds from the exercise of warrants of $2,011,575 offset by the repayment
      of related party advances of $102,979. For the nine months ended September
      30,
      2007, we received proceeds from short-term bank loans of $260,561.





In
      July
      2007, in connection with the expansion of our forged rolled ring and electrical
      power equipment segment to develop and market forged rolled rings and related
      equipment to the wind power industry, we acquired a factory, together with
      the
      related land use rights, employee housing facilities and other leasehold
      improvements from a related party for a net price of approximately $10,500,000.
      As of September 30, 2008, the amount was paid in full. We also incurred
      additional construction and improvement costs and acquired new equipment of
      approximately $11.6 million for our planned expansion of our rolled ring
      business to enable us to manufacture larger rolled rings and other
      components.





At
      September 30, 2008, we required approximately $2,000,000 in order for us to
      continue the planned expansion of our business. We raised funds in October
      2008
      through the sale of debt and equity securities. On October 17, 2008, we entered
      into a purchase agreement with Eos Holdings LLC for the sale of a 17.4%
      subordinated note, due six months from the date of issuance (the “Note”) in the
      principal amount of $575,000, for a purchase price of $575,000. Under the terms
      of the purchase agreement and the Note, we may prepay the Note, in whole or
      in
      part, at any time prior to the maturity date of the Note upon five days’ notice
      to Eos Holdings. On November 14, 2008, we repaid the principal balance of
      $575,000 in full.




As
      a
      condition to the sale of the Note, the purchase agreement requires that Eos
      Holdings exercise certain common stock purchase warrants having a total exercise
      price of not less than $175,000, at a per share exercise price of $.58. On
      October 17, 2008, Eos Holdings purchased the Note and exercised the
      warrants.




Payment
      of our obligations of the Note were initially secured by a pledge of and
      conversion right with respect to 959,000 shares (the “Pledged Shares”) of the
      Company’s common stock owned by Jianhua Wu, the Company’s chief executive
      officer and principal beneficial owner of common stock. The pledge and
      conversion right enables Eos Holdings to convert any or all of the principal
      amount of the Note into Pledged Shares at any time or from time to time until
      the Note shall be paid in full or until Eos Holdings shall have exercised
      the conversion right in full, at an initial conversion price of $.60 per share
      (the “Conversion Price”). The number of Pledged Shares to be delivered shall be
      determined by dividing the principal amount of the Note being converted by
      the
      Conversion Price, with any fractional shares to be rounded to the nearest whole
      share. The Pledged Shares shall be held in escrow.




On
      October 23, 2008, pursuant to a restated pledge and conversion right agreement,
      the number of Pledged Shares was increased to 1,437,500 shares of common stock
      and the Conversion Price was reduced to $0.40 per share.


40





In
      connection with the issuance of the Note, on October 17, 2008, we entered into
      a
      consulting agreement with Eos Asia Investments Ltd., an affiliate of Eos
      Holdings, for the provision of consulting services. Pursuant to the consulting
      agreement, we shall pay consulting fees at a rate of $31,662.50 per month until
      the Company repays the Note in full or until Eos Holdings LLC exercises its
      right to receive the Pledged Shares. Assuming the Note is paid on the maturity
      date of April 20, 2009, the total payments made by us as interest on the
      $575,000 Note and as consulting fees under the consulting agreement would total
      $240,000. On November 14, 2008, we repaid the principal balance of $575,000
      in
      full.





During
      the period from October 23, 2008 through November 7, 2008, we sold an aggregate
      of 3,400,000 shares of the Company’s common stock, at a purchase price of $0.40
      per share, for an aggregate of $1,360,000.





Certain
      of the investors had previously signed subscription agreements for the purchase
      of shares at a price of $0.60 per share. These investors signed a restated
      subscription agreement that reflected the $0.40 per share purchase
      price.




**Contractual
      Obligations and Off-Balance Sheet Arrangements**




***Contractual
      Obligations***




We
      have
      certain fixed contractual obligations and commitments that include future
      estimated payments. Changes in our business needs, cancellation provisions,
      changing interest rates, and other factors may result in actual payments
      differing from the estimates. We cannot provide certainty regarding the timing
      and amounts of payments. We have presented below a summary of the most
      significant assumptions used in our determination of amounts presented in the
      tables, in order to assist in the review of this information within the context
      of our consolidated financial position, results of operations, and cash
      flows.





The
      following tables summarize our contractual obligations as of September 30,
      2008,
      and the effects of these obligations are expected to have on our liquidity
      and
      cash flows in future periods.





**Payments Due by Period****Total**
            
            **Less than**
              **1 year**
            
            **1-3 Years**
            
            **3-5**
              **Years**
            
            **5 Years**
              **+**Contractual
                Obligations :Bank
                indebtedness (1)
            
            $
            1,021,138
            
            $
            1,021,138
            
            $
            -
            
            $
            -
            
            $
            -Equipment
                purchases
            
            
            2,000,000
            
            
            2,000,000Total
                Contractual Obligations:
            
            $
            3,021,138
            
            $
            3,021,138
            
            $
            -
            
            $
            -
            
            $
            -




(1)  Bank
      indebtedness includes short term bank loans and notes payable.




***Off-balance
      Sheet Arrangements***




We
      have
      not entered into any other financial guarantees or other commitments to
      guarantee the payment obligations of any third parties. We have not entered
      into
      any derivative contracts that are indexed to our shares and classified as
      shareholder’s equity or that are not reflected in our consolidated financial
      statements. Furthermore, we do not have any retained or contingent interest
      in
      assets transferred to an unconsolidated entity that serves as credit, liquidity
      or market risk support to such entity. We do not have any variable interest
      in
      any unconsolidated entity that provides financing, liquidity, market risk or
      credit support to us or engages in leasing, hedging or research and development
      services with us.





ITEM
      3.
      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





Foreign
      Currency Exchange Rate Risk





We
      produce and sell almost all our products in China. Thus, most of our revenues
      and operating results may be impacted by exchange rate fluctuations between
      RMB
      and US dollars. For the nine months ended September 30, 2008, we has unrealized
      foreign currency translation gain of $1,679,553, because of the change in the
      exchange rate.


41





I TEM
      4.
      CONTROLS AND PROCEDURES





***Disclosure*** ***Controls
      and*** ***Procedures***





As
      required by Rule 13a-15 under the Exchange Act, our management, including our
      Chief Executive Officer, and our Chief Financial Officer, evaluated the
      effectiveness of the design and operation of our disclosure controls
      and procedures
      as of September 30, 2008.





Disclosure controls
      and procedures
      refer to controls
      and other procedures
      designed to ensure that information required to be disclosed in the reports
      we
      file or submit under the Securities Exchange Act is recorded, processed,
      summarized and reported within the time periods specified in the rules and
      forms
      of the SEC and that such information is accumulated and communicated to our
      management, including our chief executive officer and chief financial officer,
      as appropriate, to allow timely decisions regarding required disclosure. In
      designing and evaluating our disclosure controls
      and procedures,
      management recognizes that any controls
      and procedures,
      no matter how well designed and operated, can provide only reasonable assurance
      of achieving the desired control objectives, and management is required to
      apply
      its judgment in evaluating and implementing possible controls
      and procedures.





Management
      conducted its evaluation of disclosure controls
      and procedures
      under the supervision of our chief executive officer and our chief financial
      officer. Based on that evaluation, we concluded that because of the significant
      deficiencies in internal control over financial reporting described below,
      our
      disclosure controls
      and procedures
      were not effective as of December 31, 2007.




***Management’s
      Report on Internal Control over Financial Reporting***





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
      under the Securities Exchange Act.  Our management is also required to
      assess and report on the effectiveness of our internal control over financial
      reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002
      (“Section 404”).   Management assessed the effectiveness of our
      internal control over financial reporting as of December 31, 2007.  In
      making this assessment, we used the criteria set forth by the Committee of
      Sponsoring Organizations of the Treadway Commission (COSO) in Internal
      Control – Integrated Framework.  During our assessment of the effectiveness
      of internal control over financial reporting as of December 31, 2007,
      management identified significant deficiencies related to (i) the U.S. GAAP
      expertise of our internal accounting staff, (ii) our internal audit functions
      and, and (iii) a lack of segregation of duties within accounting functions.





Although
      we were a black check shell company prior to November 13, 2007 with reporting
      obligations, our present business did not become subject to the reporting
      requirements of the Exchange Act until November 13, 2007.  We began
      preparing to be in compliance with the internal control obligations, for our
      fiscal year ending December 31, 2007. During most of 2007 our internal
      accounting staff was primarily engaged in ensuring compliance with PRC
      accounting and reporting requirements for our operating affiliates and was
      not
      required to meet or apply U.S. GAAP requirements.  We addressed this
      condition by hiring of our chief financial officer who is familiar with U.S.
      GAAP and, under his supervision, we are implanting the related internal control
      procedures required of U.S. public companies, including providing training
      and
      assistance of our accounting staff in U.S. GAAP matters.  We also have
      elected independent directors and have established an audit committee which
      meets with management and our independent auditors. Management has determined
      that our internal audit function is also deficient due to insufficient qualified
      resources to perform internal audit functions, and we are seeking to address
      this deficiency.





Due
      to
      our size and nature, segregation of all conflicting duties may not always be
      possible and may not be economically feasible.  However, to the extent
      possible, we will implement procedures to assure that the initiation of
      transactions, the custody of assets and the recording of transactions will
      be
      performed by separate individuals.





We
      believe that the foregoing steps have significantly remediated the deficiencies
      previously reported, and we will continue to monitor the effectiveness of these
      steps and make any changes that our management deems appropriate.


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A
      material weakness (within the meaning of PCAOB Auditing Standard No. 5) is
      a
      deficiency, or a combination of deficiencies, in internal control over financial
      reporting, such that there is a reasonable possibility that a material
      misstatement of our annual or interim financial statements will not be prevented
      or detected on a timely basis. A significant deficiency is a deficiency, or
      a
      combination of deficiencies, in internal control over financial reporting that
      is less severe than a material weakness, yet important enough to merit attention
      by those responsible for oversight of the company's financial
      reporting.





Our
      management is not aware of any material weaknesses in our internal control
      over
      financial reporting, and we are addressing the significant weaknesses in
      internal controls over financial reporting. Nothing has come to the attention
      of
      management that causes them to believe that any material inaccuracies or errors
      exist in our financial statement as of September 30, 2008.  The reportable
      conditions and other areas of our internal control over financial reporting
      identified by us as needing improvement have not resulted in a material
      restatement of our financial statements. We are not aware of any instance where
      such reportable conditions or other identified areas of weakness have resulted
      in a material misstatement of omission in any report we have filed with or
      submitted to the Commission.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Projections of any evaluation of effectiveness
      to future periods are subject to the risk that controls may become inadequate
      because of changes in conditions, or that the degree of compliance with the
      policies and procedures may deteriorate.





***Changes
      in Internal Controls over Financial Reporting***





There
      were no changes in our internal controls over financial reporting during the
      third quarter of fiscal year 2008 that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.





PART
      II -
      OTHER INFORMATION





ITEM
      2.UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





During
      the three months ended September 30, 2008, we issued 1,152,175 shares of our
      common stock pursuant to an exercise of warrants with an exercise price of
      $0.92.





The
      above
      recipient is a sophisticated investor who had such knowledge and experience
      in
      financial, investment and business matters that they were capable of evaluating
      the merits and risks of the prospective investment in our securities. The
      recipient had access to business and financial information concerning our
      company. The issuance was exempt from registration under the Securities Act
      in
      reliance on an exemption provided by Section 4(2) of that act.





ITEM
      6.
      EXHIBITS





31.1
            Rule
                13a-14(a)/15d-14(a) certification of Chief Executive
                Officer


31.2
            Rule
                13a-14(a)/15d-14(a) certificate of Principal Financial
                Officer


32.1
            Section
                1350 certification of Chief Executive Officer and Chief Financial
                Officer


43





SIGNATURES





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.





CHINA WIND SYSTEMS, INC.Date: November 14, 2008
            By:
            /s/ Jianhua WuJianhua Wu, Chief Executive OfficerDate: November 14, 2008
            By:
            /s/ Adam WassermanAdam Wasserman, Chief Financial Officer


44