**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 March 31, 2008





** ̈** **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
      Village, Huishan District, Wuxi City**


**Jiangsu
      Province, China 214181**


(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





Indicated
      the number of shares outstanding of each of the issuer's classes of common
      stock, as of the latest practicable date. 37,747,295 shares of common stock
      are
      issued and outstanding as of May 10, 2008.







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


**FORM
      10-Q**


**March
      31, 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.
            
            26Item
                3
            Quantitative
                and Qualitative Disclosures About Market Risk.
            
            37Item
                4
            Controls
                and Procedures.
            
            37**PART
                II - OTHER INFORMATION**Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds.
            
            39Item
                6.
            Exhibits.
            
            39




**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
 
 March 31,
              
              December 31,2008
              
              2007(Unaudited)ASSETSCURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              2,580,723
              
              $
              5,025,434Accounts
                  receivable, net of allowance for doubtful accounts
              
              
              3,539,495
              
              
              2,158,412Inventories,
                  net of reserve for obsolete inventory
              
              
              3,171,362
              
              
              1,929,796Advances
                  to suppliers
              
              
              649,745
              
              
              938,331Prepaid
                  expenses and other
              
              
              412,506
              
              
              378,429Total
                  Current Assets
              
              
              10,353,831
              
              
              10,430,402PROPERTY
                  AND EQUIPMENT - Net
              
              
              6,638,714
              
              
              6,525,986OTHER
                  ASSETS:Deposit
                  on long-term assets - related party
              
              
              12,155,472
              
              
              10,863,706Intangible
                  assets, net of accumulated amortization
              
              
              520,682
              
              
              502,634Investment
                  in cost method investee
              
              
              -
              
              
              34,181Due
                  from related parties
              
              
              46,561
              
              
              139,524Total
                  Assets
              
              $
              29,715,260
              
              $
              28,496,433LIABILITIES
                  AND STOCKHOLDERS' EQUITYCURRENT
                  LIABILITIES:Loans
                  payable
              
              $
              996,839
              
              $
              820,333Convertible
                  debt, net of discount on debt
              
              
              -
              
              
              3,261,339Accounts
                  payable
              
              
              688,576
              
              
              1,845,769Accrued
                  expenses
              
              
              191,307
              
              
              198,542VAT
                  and service taxes payable
              
              
              516,940
              
              
              434,839Advances
                  from customers
              
              
              91,613
              
              
              77,357Due
                  to related party
              
              
              -
              
              
              98,541Income
                  taxes payable
              
              
              463,955
              
              
              508,407Total
                  Current Liabilities
              
              
              2,949,230
              
              
              7,245,127STOCKHOLDERS'
                  EQUITY:Series
                  A convertible preferred ($0.001 par value; 60,000,000 shares authorized;
                  14,787,135 and 0 shares issued and outstanding at March 31, 2008
                  and
                  December 31, 2007, respectively)
              
              
              14,787
              
              
              -Common
                  stock ($0.001 par value; 150,000,000 shares authorized; 37,732,295
                  and
                  37,384,295 shares issued and outstanding at March 31, 2008 and
                  December
                  31, 2007, respectively)
              
              
              37,733
              
              
              37,385Additional
                  paid-in capital
              
              
              12,115,163
              
              
              3,488,896Retained
                  earnings
              
              
              11,874,576
              
              
              16,074,270Statutory
                  reserve
              
              
              371,243
              
              
              305,472Other
                  comprehensive gain - cumulative foreign currency translation
                  adjustment
              
              
              2,352,528
              
              
              1,345,283Total
                  Stockholders' Equity
              
              
              26,766,030
              
              
              21,251,306Total
                  Liabilities and Stockholders' Equity
              
              $
              29,715,260
              
              $
              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
                March 31,2008
              
              2007NET
                  REVENUES
              
              $
              8,447,074
              
              $
              4,129,210COST
                  OF SALES
              
              
              6,272,826
              
              
              3,062,119GROSS
                  PROFIT
              
              
              2,174,248
              
              
              1,067,091OPERATING
                  EXPENSES:Depreciation
                  and amortization
              
              
              78,020
              
              
              71,804Selling,
                  general and administrative
              
              
              616,568
              
              
              106,991Total
                  Operating Expenses
              
              
              694,588
              
              
              178,795INCOME
                  FROM OPERATIONS
              
              
              1,479,660
              
              
              888,296OTHER
                  INCOME (EXPENSE):Interest
                  income
              
              
              5,633
              
              
              101Interest
                  expense
              
              
              (2,259,694
              )
              
              (8,048
              )Debt
                  issuance costs
              
              
              (21,429
              )
              
              -Total
                  Other Income (Expense)
              
              
              (2,275,490
              )
              
              (7,947
              )INCOME
                  (LOSS) BEFORE INCOME TAXES
              
              
              (795,830
              )
              
              880,349INCOME
                  TAXES
              
              
              454,031
              
              
              298,584NET
                  INCOME (LOSS)
              
              
              (1,249,861
              )
              
              581,765DEEMED
                  PREFERRED DIVIDEND
              
              
              (2,884,062
              )
              
              -NET
                  INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
              
              $
              (4,133,923
              )
              $
              581,765COMPREHENSIVE
                  INCOME (LOSS):NET
                  INCOME (LOSS)
              
              $
              (1,249,861
              )
              $
              581,765OTHER
                  COMPREHENSIVE INCOME:Unrealized
                  foreign currency translation gain
              
              
              1,007,245
              
              
              83,161COMPREHENSIVE
                  INCOME (LOSS)
              
              $
              (242,616
              )
              $
              664,926NET
                  INCOME (LOSS) PER COMMON SHARE:Basic
              
              $
              (0.11
              )
              $
              0.02Diluted
              
              $
              (0.11
              )
              $
              0.02WEIGHTED
                  AVERAGE COMMON SHARES OUTSTANDING:Basic
              
              
              37,484,504
              
              
              36,577,704Diluted
              
              
              37,484,504
              
              
              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 Three Months Ended
                March 31,2008
              
              2007CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income (loss)
              
              $
              (1,249,861
              )
              $
              581,765Adjustments
                  to reconcile net income (loss) from operations to net cash provided
                  by
                  (used in) operating activities:Depreciation
                  and amortization
              
              
              161,846
              
              
              148,861Amortization
                  of debt discount to interest expense
              
              
              2,263,661
              
              
              -Amortization
                  of debt offering costs
              
              
              21,429
              
              
              -Stock
                  based compensation expense
              
              
              45,000
              
              
              -Changes
                  in assets and liabilities:Accounts
                  receivable
              
              
              (1,263,740
              )
              
              (1,818,385
              )Inventories
              
              
              (1,136,507
              )
              
              806,749Prepaid
                  and other current assets
              
              
              (49,696
              )
              
              42,988Advanced
                  to suppliers
              
              
              320,583
              
              
              2,173Accounts
                  payable
              
              
              (1,225,962
              )
              
              487,098Accrued
                  expenses
              
              
              7,150
              
              
              47,042VAT
                  and service taxes payable
              
              
              62,655
              
              
              287,500Income
                  taxes payable
              
              
              (64,183
              )
              
              275,060Advances
                  from customers
              
              
              10,804
              
              
              380,041NET
                  CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
              
              
              (2,096,821
              )
              
              1,240,892CASH
                  FLOWS FROM INVESTING ACTIVITIES:Decrease
                  in due from related parties
              
              
              96,650
              
              
              (1,009
              )Proceeds
                  from sale of cost-method investee
              
              
              34,840
              
              
              -Deposit
                  on long-term assets - related party
              
              
              (822,212
              )
              
              (316,319
              )Purchase
                  of property and equipment
              
              
              (3,907
              )
              
              (3,337
              )NET
                  CASH USED IN INVESTING ACTIVITIES
              
              
              (694,629
              )
              
              (320,665
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from loans payable
              
              
              139,360
              
              
              386,033Proceeds
                  from exercise of warrants
              
              
              187,340
              
              
              -Payments
                  on related party advances
              
              
              (100,441
              )
              
              -NET
                  CASH PROVIDED BY FINANCING ACTIVITIES
              
              
              226,259
              
              
              386,033EFFECT
                  OF EXCHANGE RATE ON CASH
              
              
              120,480
              
              
              9,311NET
                  INCREASE (DECREASE) IN CASH
              
              
              (2,444,711
              )
              
              1,315,571CASH
                  - beginning of year
              
              
              5,025,434
              
              
              421,390CASH
                  - end of period
              
              $
              2,580,723
              
              $
              1,736,961SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:Cash
                  paid for:Interest
              
              $
              16,752
              
              $
              8,048Income
                  taxes
              
              $
              518,214
              
              $
              1,345NON-CASH
                  INVESTING AND FINANCING ACTIVITIES:Deemed
                  preferred dividend reflected in paid-in capital
              
              $
              2,884,062
              
              $
              -Convertible
                  debt converted to series A preferred stock
              
              $
              5,525,000
              
              $
              -
 
 See
        notes
        to unaudited consolidated financial statements.
  5




CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March
      31,
      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 shares from former
      principal stockholders. 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
      Peoples’ 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 Dye Machine Co., Ltd. (“Huayang
      Dye Machine”) and Wuxi Huayang Electrical Power Equipment Co., Ltd. (“Huayang
      Electrical Power Equipment”, and together with Huayang Dye Machines, 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 Hi Zhong 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.





In
      2007,
      the Company recapitalized the Company to give effect to the share 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 takeover 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


March
      31,
      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 Equipment Co., Ltd.*





Wuxi
      Huayang Electrical 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. Electric is a manufacturer of electric power auxiliary apparatuses
      (including coking equipment) and a provider of relevant 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. Additionally,
      Electric produces
      large-scaled wind-powered electricity engine rings that are three meters in
      diameter





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 its 3%
      Convertible Notes in the principal amount of $5,525,000 to an investor group.
      The Company has agreed to amend its certificate of incorporation which will
      include the authorization of a class of preferred stock. The notes were, by
      their terms, automatically converted into 14,787,135 shares of series A
      convertible preferred stock (“series A preferred stock”) and warrants to
      purchase a total of 18,829,756 shares of common stock upon the filing, on March
      28, 2008, of a restated certificate of incorporation and a certificate of
      designation setting forth the rights, preferences, privileges and limitation
      of
      the holders of the series A preferred stock (See Note 6 and 9).





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


March
      31,
      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


March
      31,
      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 and warrants.





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


March
      31,
      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 $100,000 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 March 31, 2008 and December 31, 2007, the
      Company’s bank deposits by geographic area were as follows:


**March 31, 2008**
              
              **December 31, 2007**Country:United
                  States
              
              $
              211,855
              
              
              8.2
              %
              $
              171,121
              
              
              3.4
              %China
              
              
              2,368,868
              
              
              91.8
              %
              
              4,854,313
              
              
              96.6
              %Total
                  cash and cash equivalents
              
              $
              2,580,723
              
              
              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
      March 31, 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 $652,249 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 $77,276 and $74,192 at March 31, 2008 and December 31, 2007,
      respectively.





10





CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March
      31,
      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 three months ended March
      31, 2008 and 2007.





Advances
      from customers





Advances
      from customers at March 31, 2008 and December 31, 2007 amounted to $91,613
      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


March
      31,
      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 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
      three months ended March 31, 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, including 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.





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 cost of sales and totaled $57,463 and $6,627 for the
      three
      months ended March 31, 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.





Research
      and development





Research
      and development costs are expensed as incurred. For the three months ended
      March
      31, 2008 and 2007, research and development costs were not material.





12





CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March
      31,
      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 three months ended March 31, 2008 and
      2007
      was $120,480 and $9,311, 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 March 31, 2008 and December 31, 2007 were translated
      at
      7.0222 RMB to $1.00 USD and at 7.3141 RMB to $1.00 USD, respectively. Equity
      accounts were stated at their historical rate. The average translation rates
      applied to income statements for the three months ended March 31, 2008 and
      2007
      were 7.17568 RMB and 7.77136 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 common share




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 the common shares issuable upon the conversion of convertible debt
      (using the if-converted method). The following table presents a reconciliation
      of basic and diluted earnings per share:




For the Three Months Ended March 31,2008
              
              2007Net
                  income (loss) available to common shareholders for basic and diluted
                  earnings per share
              
              $
              (4,133,923
              )
              $
              581,765Weighted
                  average shares outstanding – basic
              
              
              37,484,504
              
              
              36,577,704Effect
                  of dilutive securities:Unexercised
                  warrants
              
              
              -
              
              
              —Series
                  A convertible preferred stock
              
              
              -
              
              
              —Weighted
                  average shares outstanding– diluted
              
              
              37,484,504
              
              
              36,577,704Earnings
                  (loss) per share - basic
              
              $
              (0.11
              )
              $
              0.02Earnings
                  (loss) per share - diluted
              
              $
              (0.11
              )
              $
              0.02





At
      March
      31, 2008, the Company’s common stock equivalents were anti-dilutive and are not
      reflected in diluted earnings per shares, At March 3 1, 2007, the Company did
      not have any dilutive securities. The Company's common stock equivalents at
      March 31, 2008 include the following:





Warrants
            
            
            18,906,756Series
                A convertible preferred stock
            
            
            14,787,135Total
            
            
            37,693,891





13





CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March
      31,
      2008





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





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 are not treated as outstanding at March 31, 2008 because its delivery
      is
      contingent upon certain events.





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 three months ended March 31, 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
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* (“SFAS
      159”).  SFAS 159 is effective for fiscal years beginning after
      November 15, 2007.  The adoption of SFAS 159 did not have a material
      impact on the Company’s results of operations, financial position or
      liquidity.





In
      September 2006, the EITF reached a consensus on EITF Issue No. 06-1, *Accounting
      for Consideration Given by a Service Provider to Manufacturers or Resellers
      of
      Equipment Necessary for an End-Customer to Receive Service from the Service
      Provider* (EITF 06-1).
      EITF 06-1 provides that consideration provided to the manufacturers or
      resellers of specialized equipment should be accounted for as a reduction of
      revenue if the consideration provided is in the form of cash and the service
      provider directs that such cash be provided directly to the customer. Otherwise,
      the consideration should be recorded as an expense. The provisions of
      EITF 06-1 are effective on January 1, 2008. The
      adoption of EITF 06-1 had no effect on the Company’s financial position or
      results of operations.





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. It is expected that adoption of EITF 07-3 will 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


March
      31,
      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.





NOTE
      2 – ACCOUNTS
      RECEIVABLE





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





2008
            
            2007Accounts
                receivable
            
            $
            4,191,744
            
            $
            2,784,630Less:
                allowance for doubtful accounts
            
            
            (652,249
            )
            
            (626,218
            )$
            3,539,495
            
            $
            2,158,412





NOTE
      3 - INVENTORIES





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





2008
            
            2007Raw
                materials
            
            $
            2,322,793
            
            $
            1,135,697Work
                in process
            
            
            703,596
            
            
            454,788Finished
                goods
            
            
            222,249
            
            
            413,5033,248,638
            
            
            2,003,988Less:
                Reserve for obsolete inventory
            
            
            (77,276
            )
            
            (74,192
            )$
            3,171,362
            
            $
            1,929,796





15





CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March
      31,
      2008





NOTE
      4 - PROPERTY
      AND EQUIPMENT





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


Useful Life
              
              2008
              
              2007Office
                  equipment and furniture
              
              
              5
                  Years
              
              $
              85,683
              
              $
              78,430Manufacturing
                  equipment
              
              
              5
                  – 10 Years
              
              
              3,662,762
              
              
              3,516,584Vehicles
              
              
              5
                  Years
              
              
              65,549
              
              
              62,933Building
                  and building improvements
              
              
              20
                  Years
              
              
              5,863,197
              
              
              5,629,2019,677,191
              
              
              9,287,148Less:
                  accumulated depreciation
              
              
              
              
              
              (3,038,477
              )
              
              (2,761,162
              )$
              6,638,714
              
              $
              6,525,986





For
      the
      three months ended March 31, 2008 and 2007, depreciation expense amounted to
      $159,062 and $146,290, of which $83,826 and $77,057 is included in cost of
      sales, respectively.




NOTE
      5 – INTANGIBLE
      ASSETS





There
      is
      no private ownership of land in China. The land is owned by the government
      and
      the government grants land use rights for a specified term. The land use rights
      are valued at a fixed amount, which is RMB 3,995,995 and the dollar value of
      theland use right fluctuates based on the exchange rate. The Company’s land use
      rights have a term of 50 years and expires October 30, 2053. The Company
      amortizes these land use rights over the term of the land use right, which
      is
      the 50 year period beginning November 1, 2003. For the three months ended March
      31, 2008 and 2007, amortization expense amounted to $2,784 and $2,571,
      respectively. At March 31, 2008 and December 31, 2007, intangible assets consist
      of the following:





2008
            
            2007Land
                Use Rights
            
            
            Estimated life - 50 year
            
            $
            569,052
            
            $
            546,341Less:
                Accumulated Amortization
            
            
            
            
            
            (48,370
            )
            
            (43,707
            )$
            520,682
            
            $
            502,634





Amortization
      expense attributable to future periods is as follows:





Period
                ending March 31:2009
            
            $
            11,3812010
            
            
            11,3812011
            
            
            11,3812012
            
            
            11,381Thereafter
            
            
            475,158$
            520,682





16





CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March
      31,
      2008





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 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.





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





On
      November 13, 2007, concurrently with the closing of 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 a 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 to 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.




17





CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March
      31,
      2008





·
            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.




·
            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 provisoin 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 liquidating
                damages related to the 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.





18





CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March
      31,
      2008





The
      Company filed its registration on February 14, 2008. The registration
      statement has not been declared effective as of March 15, 2008. However,
      pursuant to FASB Staff Position, or FSP, EITF 00-19-2, *Accounting
      for Registration Payment Arrangements,* the
      Company has determined that it is unlikely that circumstances allowing for
      the
      aforementioned liquidated damages would arise, and therefore no contingent
      liability has been recorded and believes
      that the registration statement will be declared effective by June 11,
      2008 .





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




·
            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 the14,787,135
                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
            14,787,135
                shares are 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.




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.




·
            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.





19





CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March
      31,
      2008





·
            In
                connection with the Securities Purchase Agreement, $30,000 was deducted
                from the gross proceeds and was paid to an investor, which was deferred
                as
                a debt discount and will be amortized over the life of the convertible
                debentures or until the certificate of designation is filed. 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 debenture
                or
                until the Company files its certificate of
                designation.





(d)  Warrants




The
      warrants issued upon conversion of the notes have a term of five years, 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 during
      the
      twelve months commencing on November 13, 2007 in the case of the $0.58 warrants,
      and during the eighteen (18) period commencing on November 13, 2007 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.




The
      warrants provide that the exercise price of the warrants may be reduced by
      up to
      90% if the Company’s pre-tax income per share of common stock, on a
      fully-diluted basis as described above, is less than $0.08316 per share for
      2007
      and $0.13131 per share for 2008. The warrants also had a target for 2007, which
      was met, and there was no adjustment in the exercise price for
      2007.




Warrant
      activity for the three months ended March 31, 2008 is summarized as
      follows:





Number of
            
            Weighted averageshares
            
            exercise priceOutstanding
                at December 31, 2007
            
            
            400,000
            
            $
            0.50Granted
            
            
            18,829,756
            
            
            0.68Exercised
            
            
            (323,000
            )
            
            0.58Cancelled
            
            
            -
            
            
            -Outstanding
                at March 31, 2008
            
            
            18,906,756
            
            $
            0.69





The
      following table summarizes the Company's stock warrants outstanding at March
      31,
      2008:





Warrants Outstanding
            
            Warrants ExercisableRange of
              Exercise
              Price
            
            Number
              Outstanding at
              March 31,
              2008
            
            Weighted
              Average
              Remaining
              Contractual
              Life (Years)
            
            Weighted
              Average
              Exercise
              Price
            
            Number
              Exercisable at
              March 31,
              2008
            
            Weighted
              Average
              Exercise
              Price$
            0.50
            
            
            400,000
            
            
            4.62
            
            $
            0.50
            
            
            400,000
            
            $
            0.500.58
            
            
            10,853,504
            
            
            4.62
            
            
            0.58
            
            
            10,853,504
            
            
            0.580.83
            
            
            5,588,252
            
            
            4.62
            
            
            0.83
            
            
            5,588,252
            
            
            0.830.92
            
            
            2,065,000
            
            
            4.62
            
            
            0.92
            
            
            2,065,000
            
            
            0.9218,906,756
            
            
            
            
            $
            0.69
            
            
            18,906,756
            
            $
            0.69





20





CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March
      31,
      2008





(e)  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 debenture has 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 debenture was amortized using the
      straight-line method over the shorter (1) the term of Debenture, (2) the
      conversion of the debenture to common stock and warrants, or (3) upon filing
      by
      the Company of certificate
      of designation and
      automatic conversion of the debenture to the series A preferred stock and
      warrants. 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, t he
      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 during
      the three months ended March 31, 2008. The non-cash, deemed dividend did not
      have an effect on net earnings or cash flows for the three months ended March
      31, 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 three months ended March 31, 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 accompanying consolidated balance sheets. The
      amortization of debt discounts for the three months ended March 31, 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 secured convertible
      debentures 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
      secured convertible debentures had a fixed conversion rate of $0.374, the
      secured convertible debt was not a derivative instrument. 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 debenture liability is as follows at March 31, 2008 and December
      31,
      2007:


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





21





CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March
      31,
      2008





NOTE
      7 – LOANS
      PAYABLE





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





2008
            
            2007Loan
                payable to Transportation Bank of China, due on July 31, 2008 with
                annual
                interest of 7.23% secured by assets of the Company.
            
            $
            284,811
            
            $
            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.
            
            
            427,216
            
            
            410,167Loan
                payable to Transportation Bank of China due on August 1, 2008 with
                annual
                interest of 7.56% secured by assets of the Company.
            
            
            142,406
            
            
            -Loan
                payable to Industrial and Commercial Bank of China, due on July 31,
                2008
                with annual interest of 7.56% secured by assets of the
                Company.
            
            
            142,406
            
            
            136,722Total
                Loans Payable
            
            $
            996,839
            
            $
            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
      March
      31, 2008 and December 31, 2007, due from related parties was due from the
      following:





Name
            
            Relationship
            
            March 31, 2008
            
            December 31, 2007Wuxi
                Huayang Yingran
              Machinery
                Co. Ltd.
            
            
            5%
                cost method investee which was sold in March 2008
            
            $
            -
            
            $
            139,524Wuxi
                Huayang Boiler Company Ltd. (“Boiler”)
            
            
            (a)
            
            
            46,561
            
            
            -$
            46,561
            
            $
            139,524





(a)
            In
                May 2007, the Company sold its 33% interest in Boiler to an individual
                related to the Company’s chief executive officer for 500,000 RMB or
                approximately $65,000. The remaining 67% of Boiler is owned by the
                spouse
                and son of the Company’s chief executive officer. The amount outstanding
                at March 31, 2008 reflects the unpaid receivable from the sale. No
                amount
                is shown at December 31, 2007, since Boiler’s obligation to the Company
                was offset by the Company’s obligation to
                Boiler.





22





CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March
      31,
      2008





NOTE
      8 – RELATED
      PARTY TRANSACTIONS (continued)





**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 March 31, 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.





Boiler,
      from time to time, provided advances to the Company for working capital
      purposes. At March 31, 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.





**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 atrtributable 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 March 31, 2008 and
      December 31, 2007, payments totaling 80,086,159 RMB and 79,458,230 RMB or
      approxmately $11,405,000 and $10,864,000 had been made to Boiler, respectively,
      and are reflected on the accompanying consolidiated balance sheets as Deposits
      on Long-term Assets. As of May 13, 2008, the Company has not received title
      to
      the facilities and land use rights 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 second quarter of 2008
      at
      which time the deposit on long-term assets will be reclassified to property
      and
      equipment.





Additionally,
      during the three months ended March 31, 2008, the Company’s subsidiary, Green
      Power made of cash deposit of $750,762 for factory equipment for the new
      factory. As of the date of this report, the Company has not received the
      equipment and this deposit is included in Deposits on Long-term Assets. At
      March
      31, 2008 and December 31, 2007, deposits on long-term assets is as follows:





2008
            
            2007Factory
                and Land Use Rights – related party
            
            $
            11,404,710
            
            $
            10,863,706Deposit
                of factory equipment
            
            
            750,762
            
            
            -$
            12,155,472
            
            $
            10,863,706





23





CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March
      31,
      2008




NOTE
      9 - 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 months
      ended March 31, 2008 and 2007, the Company operated in two reportable business
      segments - (1) the manufacture of dyeing & finishing equipment and (2) the
      manufacture of electrical and wind 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 months ended
      March 31, 2008 and 2007 is as follows:




**Three Months Ended March 31, 2008**
            
            **Dyeing &**
              **Finishing**
              **Equipment**
            
            **Electrical**
              **Equipment and**
              **Wind**
              **Equipment**
            
            **Unallocated
                (a)**
            
            **Total****Net
                Revenues**
            
            $
            4,653,138
            
            $
            3,793,936
            
            $
            -
            
            $
            8,447,074**Cost
                of Sales (excluding depreciation)**
            
            
            3,415,623
            
            
            2,773,377
            
            
            -
            
            
            6,189,000**Cost
                of Sales - depreciation**
            
            
            23,604
            
            
            60,222
            
            
            -
            
            
            83,826**Operating
                expenses (excluding depreciation and
                amortization)**
            
            
            197,757
            
            
            87,421
            
            
            331,390
            
            
            616,568**Depreciation
                and Amortization**
            
            
            77,018
            
            
            1,002
            
            
            -
            
            
            78,020**Interest
                Income**
            
            
            (45
            )
            
            (5,023
            )
            
            (565
            )
            
            (5,633
            )**Interest
                Expense**
            
            
            -
            
            
            16,752
            
            
            2,242,942
            
            
            2,259,694**Other
                (Income) Expense**
            
            
            -
            
            
            -
            
            
            21,429
            
            
            21,429**Income
                Tax Expense**
            
            
            234,795
            
            
            219,236
            
            
            -
            
            
            454,031**Net
                Income (Loss)**
            
            $
            704,386
            
            $
            640,949
            
            $
            (2,595,196
            )
            $
            (1,249,861
            )**Total
                Assets**
            
            $
            21,171,078
            
            $
            8,141,203
            
            $
            402,979
            
            $
            29,715,260




(a)
            The
                Company does not allocate and general and administrative expenses
                of its
                US activities to its reportable segments, because these activities
                are
                managed at a corporate level. The
                unallocated interest expense reflects the amortization of the debt
                discount on conversion of the convertible notes into shares of Series
                A
                preferred stock and
                warrants.




**Three Months Ended March 31, 2007**
            
            **Dyeing &**
              **Finishing**
              **Equipment**
            
            **Electrical**
              **Equipment**
            
            **Total****Net
                Revenues**
            
            $
            3,878,757
            
            $
            250,453
            
            $
            4,129,210**Cost
                of Sales (excluding depreciation)**
            
            
            2,856,443
            
            
            128,619
            
            
            2,985,062**Cost
                of Sales - depreciation**
            
            
            21,481
            
            
            55,576
            
            
            77,057**Operating
                expenses (excluding depreciation and
                amortization)**
            
            
            93,512
            
            
            13,479
            
            
            106,991**Depreciation
                and Amortization**
            
            
            71,243
            
            
            561
            
            
            71,804**Interest
                Income**
            
            
            (101
            )
            
            -
            
            
            (101
            )**Interest
                Expense**
            
            
            -
            
            
            8,048
            
            
            8,048**Income
                Tax Expense**
            
            
            288,147
            
            
            10,437
            
            
            298,584**Net
                Income**
            
            $
            548,032
            
            $
            33,733
            
            $
            581,765




24





CHINA
      WIND SYSTEMS, INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March
      31,
      2008





NOTE
      10
– OPERATING
      RISK





(a)
      Country risk





Currently,
      the Company’s revenues are primarily derived from the sale of machinery to
      customers in China. A downturn or stagnation in the economic environment of
      the
      PRC could have a material adverse effect on the Company’s financial
      condition.





(b)
      Exchange risk





The
      Company cannot guarantee that the current exchange rate will remain steady,
      therefore there is a possibility that the Company could post the same amount
      of
      profit for two comparable periods and because of a fluctuating exchange rate
      actually post higher or lower profit depending on exchange rate of Chinese
      Renminbi (RMB) converted to U.S. dollars on that date. The exchange rate could
      fluctuate depending on changes in the political and economic environments
      without notice.





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 three months ended March 31, 2008,
      statutory reserve activity is as follows:





Dyeing
            
            Electric
            
            TotalBalance
                – December 31, 2007
            
            
            72,407
            
            $
            233,065
            
            $
            305,472Additional
                to statutory reserves
            
            
            -
            
            
            65,771
            
            
            65,771March
                31, 2008
            
            $
            72,407
            
            $
            298,836
            
            $
            371,243





NOTE
      12 – SUBSEQUENT
      EVENTS





On
      April
      28, 2008, the Company issued 15,000 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.





25





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 three
      months ended March 31, 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
      c onducts
      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
      design, manufacture and sale of electric power auxiliary apparatuses (including
      coking equipment), sewage-treatment equipment and related parts or fittings,
      and
      the design and sales of rolled rings for use in windmills. 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.





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 the
      outstanding common stock of the Company 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 – the manufacturing of dyeing
      and finishing equipment and the manufacture of electrical power equipment.
      We
      market products from these two segments with independent marketing groups to
      different customer bases. The dyeing and finishing equipment business has been
      the principal source of our revenue and operating income, accounting for 55.1%
      of revenue for the three months ended March 31, 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.





26


In
      our
      electrical power equipment segment, we manufacture specialty equipment used
      in
      the production of coal generated electricity. In 2007, we commenced the
      manufacturing of rolled rings as part of our electrical power equipment segment.
      Revenue from our electrical power equipment segment accounted for 44.9% of
      revenues for the three months ended March 31, 2008 and 18.9% of revenues for
      the
      year ended December 31, 2007. We market the 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.





During
      2007, we began to generate revenue from the forging of rolled rings, primarily
      for the wind power industry. These activities accounted for 13.5% and 7.8%
      of
      revenue for the three months ended March 31, 2008 and for the year ended
      December 31, 2007, respectively.





In
      order
      to develop the rolled rings business, we agreed to acquire 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 March 31, 2008, we had paid approximately $11,405,000.
      As of
      the date of this report, we have not received title to the facilities and land
      use rights and the property has not been placed in service. We intend to use
      this new facility to manufacture components in our rolled ring operations for
      use in the wind power industry. 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.





**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 2007 and 2006 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.




27




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.





**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
            
            
            20
            
            
            YearsManufacturing
                equipment
            
            
            5 – 10
            
            
            YearsOffice
                equipment and furniture
            
            
            5
            
            
            YearsVehicle
            
            
            5
            
            
            Years




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.





**Intangible
      assets**





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 with a term of
      50
      years. Any transfer of the land use right requires government approval. We
      have
      recorded as an intangible asset the costs paid to acquire a land use right.
      The
      land use rights are amortized on the straight-line method over the term of
      the
      50-year term of the land use right.





Intangible
      assets are reviewed periodically or more often if circumstances dictate, to
      determine whether its 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.




28




**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 years ended
      December 31, 2007 and 2006, 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.





**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 March 31, 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 taxation 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.




29




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





In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* (“SFAS
      159”).  SFAS 159 is effective for fiscal years beginning after
      November 15, 2007.  The adoption of SFAS 159 did not have a material
      impact on our results of operations, financial position or
      liquidity.





In
      September 2006, the EITF reached a consensus on EITF Issue No. 06-1, *Accounting
      for Consideration Given by a Service Provider to Manufacturers or Resellers
      of
      Equipment Necessary for an End-Customer to Receive Service from the Service
      Provider* (EITF 06-1).
      EITF 06-1 provides that consideration provided to the manufacturers or
      resellers of specialized equipment should be accounted for as a reduction of
      revenue if the consideration provided is in the form of cash and the service
      provider directs that such cash be provided directly to the customer. Otherwise,
      the consideration should be recorded as an expense. The provisions of
      EITF 06-1 are effective on January 1, 2008. The
      adoption of EITF 06-1 had no effect on our financial position or results of
      operations.





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. It is expected that adoption of EITF 07-3 will not have a material
      impact on tour 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.




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.




30




**RESULTS
      OF OPERATIONS**





**Three
      Months Ended March 31, 2008 (“2008 Period”) and 2007 (“2007
      Period”).**





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





Three Months Ended March 31,2008
            
            2007**Dollars**
            
            **Percent**
            
            **Dollars**
            
            **Percent**NET REVENUES
            
            $
            8,447,074
            
            
            100.0
            %
            $
            4,129,210
            
            
            100.0
            %COST
                OF REVENUES
            
            
            6,272,826
            
            
            74.3
            %
            
            3,062,119
            
            
            74.2
            %GROSS
                PROFIT
            
            
            2,174,248
            
            
            25.7
            %
            
            1,067,091
            
            
            25.8
            %OPERATING
                EXPENSES
            
            
            694,588
            
            
            8.2
            %
            
            178,795
            
            
            4.3
            %INCOME
                FROM OPERATIONS
            
            
            1,479,660
            
            
            17.5
            %
            
            888,296
            
            
            21.5
            %OTHER
                INCOME (EXPENSES)
            
            
            (2,275,490
            )
            
            (26.9
            )%
            
            (7,947
            )
            
            (0.2
            )%INCOME
                (LOSS) BEFORE PROVISION FOR INCOME TAXES
            
            
            (795,830
            )
            
            (9.4
            )%
            
            880,349
            
            
            21.3
            %PROVISION
                FOR INCOME TAXES
            
            
            454,031
            
            
            5.4
            %
            
            298,584
            
            
            7.2
            %NET
                INCOME (LOSS)
            
            
            (1,249,861
            )
            
            (14.8
            )%
            
            581,765
            
            
            14.1
            %OTHER
                COMPREHENSIVE INCOME
              Foreign
                currency translation adjustment
            
            
            1,007,245
            
            
            11.9
            %
            
            83,161
            
            
            2.0
            %COMPREHENSIVE
                INCOME (LOSS)
            
            $
            (242,616
            )
            
            (2.9
            )%
            $
            664,926
            
            
            16.1
            %




The
      following table sets forth information as to the gross margin for our two lines
      of business for the three months ended March 31, 2008 and 2007.




**Three Months Ended**
              **March 31,****2008**
            
            **2007**Dyeing
                and finishing equipmentRevenue
            
            $
            4,653,138
            
            $
            3,878,757Cost
                of sales
            
            
            3,439,227
            
            
            2,877,924Gross
                profit
            
            
            1,213,911
            
            
            1,000,833Gross
                margin
            
            
            26.1
            %
            
            25.8
            %Electric
                power equipmentRevenue
            
            $
            3,793,936
            
            $
            250,453Cost
                of sales
            
            
            2,833,599
            
            
            184,195Gross
                profit
            
            
            960,337
            
            
            66,258Gross
                margin
            
            
            25.3
            %
            
            26.5
            %




31




*Revenues.* During
      the 2008 Period, we had revenues of $8,447,074, as compared to revenues of
      $4,129,210 for the 2007 Period, an increase of $4,317,864 or approximately
      104.6%. The increase in total revenue was attributable to increases from both
      of
      our segments. Revenues from our electric power equipment segment increased
      from
      $250,453 for the three months ended March 31, 2007 to $3,793,936 for the three
      months ended March 31, 2008, an increase of $3,543,483, or 1414.8%. This
      increase resulted from an increase in revenues from forging services to new
      customers of $3,217,702 and an increase in the sale of coking and electric
      equipment of $324,781. Forging is a manufacturing process where metal is
      pressed, pounded or squeezed under great pressure into high strength parts
      including the forging of rolled rings with a three-meter diameter for use in
      large-scaled wind-powered electricity generators, which accounted for
      approximately $1.14 million or 30% of Electric revenues. Revenues from dyeing
      and finishing equipment increased $774,381, or 20%, from $3,878,757 for the
      three months ended March 31, 2007 to $4,653,138 for the three months ended
      March
      31, 2008. This
      increase primarily resulted from our marketing efforts to develop new customers.
      Revenues to new Dyeing customers accounted for approximately $2.9 million or
      64%
      of total Dyeing revenues for the 2008 period.





*Cost
      of sales.* Cost of
      sales for the 2008 Period increased $3,210,707 or 104.9%, from $3,062,119 for
      the 2007 Period to $6,272,826 for 2008 Period. Cost of goods sold for Dyeing was
      $3,439,227 for the 2008 period, as compared to $2,877,924 for the 2007 period.
      Cost of sales for Electronic was
      $2,833,599 for the 2008 period as compared to $184,195 for the 2007
      period.





*Gross
      margin.* Our
      gross profit was $2,174,248 for the 2008 Period as compared to $1,067,091 for
      the 2007 Period, representing gross margins of 25.7% and 25.8%, respectively.
      Gross profit for Dyeing was
      $1,213,911 for the 2008 Period as compared to $1,000,833 for the 2007 Period,
      representing gross margins of approximately 26.1% and 25.8%, respectively.
      The
      modest increase in our gross margin was attributable to normal fluctuations.
      Gross profit for Electronic was
      $960,337 for the 2008 Period as compared to $66,258 for the 2007 Period,
      representing gross margins of approximately 25.3% and 26.5%, respectively.
      The
      modest decrease in our gross profits was attributable to normal fluctuations.





*Depreciation
      and amortization expense* . Depreciation
      and amortization amounted to $161,846 for the 2008 Period and $148,861 for
      the
      2007 Period, of which $83,826 and $77,057 is included in cost of sales and
      $78,020 and $71,804 is included in operating expenses for the 2008 and 2007
      Period, respectively.




*Selling,
      general and administrative expenses.* Selling,
      general and administrative expenses totaled $616,568 for the 2008 Period, as
      compared to $106,991 for the 2007 Period, an increase of $509,577 or
      approximately 476.3%. Selling, general and administrative expenses consisted
      of
      the following:





2008 Period
            
            2007 PeriodProfessional
                fees
            
            $
            241,705
            
            $
            -Payroll
                and related benefits
            
            
            119,816
            
            
            5,375Travel
            
            
            82,392
            
            
            38,749Other
            
            
            172,655
            
            
            62,867$
            616,568
            
            $
            106,991





·
            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
                2008
                Period, professional fees amounted to $241,705 as compared to $0
                in the
                2007 period. Included in professional fees are legal fees of $109,739,
                audit fees of $85,520, and investor relation fees of
                $25,669.


·
            Payroll
                and related benefits increased for the 2008 Period by $114,441, or
                2,129%,
                as compared to the 2007 Period. In 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.


·
            Travel
                expense in 2007 increased by $43,643, or 112.6%, as compared to the
                2007
                period. The increase is related to increased travel by sales personnel
                and
                engineers.


·
            Other
                selling, general and administrative expenses increased by $109,788
                in the
                2008 period as compared with 2007
                period.


·
            We
                did not record any bad debt expense during the 2008 and 2007
                Period.




32




*Income
      from operations.* For
      the
      2008 Period, income from operations was $1,479,660 as compared to $888,296
      for
      the 2007 Period, an increase of $591,364 or 66.6%.





*Other
      income (expenses)* .
      For the
      2008 Period, other expense amounted to $2,275,490 as compared to other expenses
      of $7,947 for the 2007 Period. In the 2007 Period, other expenses consisted
      of
      interest expense of $8,048 offset by interest income of $101. For the 2008
      Period, other expenses included i) interest expense of $2,259,694 consisting
      of
      non-cash interest expense of $2,263,661from 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 $5,633.





*Income
      tax expense* .
      Income
      tax expense increased $155,447 or approximately 52.1% during the first quarter
      of 2008 primarily as a result of the increase in taxable income generated by
      our
      operating entities.




*Net
      income (loss).* ****** For
      the
      three months ended March 31, 2008, we recorded a net loss of $(1,249,861) as
      compared to net income of $581,765 for the 2007 period. **





*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 $1,007,245 for the 2008 Period as compared to $83,161 for
      comparable period in 2007. This non-cash gain had the effect of decreasing
      our
      reported comprehensive loss.




*Comprehensive
      income (loss).* For
      the
      2008 period, comprehensive loss of approximately $243,000 is derived from the
      sum of our net loss of approximately $1,250,000 less foreign currency
      translation gains of $1,007,245.





*Non-GAAP
      Information*





We
      refer
      to EBITDA, which is a non-GAAP performance measure because we believe that
      it is
      reasonable means of understanding our business, particularly in view of non-cash
      charges which we incurred. In connection with our November 2007 private
      placement, we issued 3% convertible notes to the investor in the principal
      amount of the $5,525,000. Because of the favorable conversion terms, the debt
      was issued deemed issued as a discount of $2,610,938. Upon the conversion of
      the
      debt into equity in March 2008, the unamortized debt discount of $2,263,661
      was
      amortized and treated as additional interest, and the amount of the amortized
      debt discount was reclassified as a deemed dividend to the holders of the series
      A preferred stock. Both the amortization of the debt discount and the
      reclassification as a deemed dividend are non-cash events which do not affect
      our operations. EBITDA is determined by adding to net income the amount deducted
      for interest, taxes, depreciation and amortization. The following table shows
      the relationship between net income and EBITDA for the 2008 Period and the
      2007
      Period.





Three Months Ended March 31,2008
            
            2007Net income (loss) allocable to
                common stockholders
            
            $
            (4,133,923
            )
            $
            581,765Add
                back of income taxes, interest and other non-cash charges:Deemed
                dividend to preferred stockholders
            
            
            2,884,062
            
            
            -Income
                taxes
            
            
            454,031
            
            
            298,584Interest
            
            
            2,259,694
            
            
            8,048Amortization
                of debt discount
            
            
            21,429
            
            
            -Depreciation
                and other amortization
            
            
            161,846
            
            
            148,861EBITDA
            
            $
            1,647,139
            
            $
            1,037,258


This
        additional non-GAAP information is not meant to be considered as a substitute
        for GAAP financials. The non-GAAP financial information that the Company
        provides also may differ from the non-GAAP information provided by other
        companies.




33




**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 March 31, 2008 and December 31, 2007, we had cash balances of $2,580,723
      and
      $5,025,434, respectively. These funds are located in financial institutions
      located as follows:





**March 31, 2008**
            
            **December 31, 2007**Country:United
                States
            
            $
            211,855
            
            
            8.2
            %
            $
            171,121
            
            
            3.4
            %China
            
            
            2,368,868
            
            
            91.8
            %
            
            4,854,313
            
            
            96.6
            %Total
                cash and cash equivalents
            
            $
            2,580,723
            
            
            100.0
            %
            $
            5,025,434
            
            
            100.0
            %





Our
      working capital position increased $4,219,326 to $7,404,601 at March 31, 2008
      from working capital of $3,185,275 at December 31, 2007. This increase in
      working capital is primarily attributable to the conversion of convertible
      debt
      of $3,261,339 into shares of our series A preferred stock and warrants and
      a
      decrease in accounts payable of $1,157,193.





Net
      cash
      flow used in operating activities was $2,096,821 for the 2008 Period as compared
      to net cash flow provided by in operating activities was $1,240,892 in the
      2007
      Period, a decrease of $3,337,713. Net cash flow used in operating activities
      for
      the 2008 Period was mainly due to the decrease in accounts payable of
      $1,225,962, an increase in accounts receivable of 1,263,740 and an increase
      in
      inventories of $1,136,507, which was offset by the add-back of non-cash items
      of
      depreciation and amortization of $161,846, the amortization of debt discount
      of
      $2,263,661, the amortization of deferred debt costs of $21,429 and the add-back
      of stock-based compensation of $45,000. Net cash flow provided by operating
      activities for the 2007 period was mainly due to our net income of $581,765,
      a
      decrease in inventories of $806,749, and increase in accounts payable of
      $487,098, an increase in VAT and services taxes payable of $287,500, an increase
      in income taxes payable of $275,060, and the add-back of non-cash items of
      depreciation and amortization of $148,861 offset by an increase in accounts
      receivable of $1,818,385.




Net
      cash
      flow used in investing activities was $694,629 for the 2008 Period and compared
      to net cash used in investing activities of $320,665. For the 2008 Period,
      we
      received cash from the repayment of amounts due from related parties of $96,650
      and from the sale of our cost-method investee of $34,840 offset by the purchase
      of property and equipment of $3,907 and the payment of deposits on long-term
      assets of $822,212. For the 2007 Period, we used cash for advances for amounts
      due from related parties of $1,009, for the purchase of property and equipment
      of $3,337 and the payment of deposits on long-term assets of
      $316,319.





Net
      cash
      flow provided by financing activities was $226,259 for the 2008 Period as
      compared to net cash provided by financing activities of $386,033 for the 2007
      Period. For the 2008 Period, we received proceeds from short-term bank loans
      of
      $139,360, and proceeds from the exercise of warrants of $187,340 offset by
      the
      repayment of related party advances of $100,441. For the 2007 Period, we
      received proceeds from short-term bank loans of $386,033.





In
      July
      2007, in connection with the expansion of our electrical equipment segment
      to
      develop and market rolled rings and related equipment to the wind power
      industry, we agreed to acquire 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 $10,950,000. As of March 31,
      2008, the amount was paid in full.





On
      November 13, 2007, we raised gross proceeds of $5,525,000 from the sale of
      our
      3% notes in the principal amount of $5,525,000. On March 28, 2008, the notes
      were automatically converted into an
      aggregate of 14,787,135 shares of series A preferred stock and 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 of common stock at
      $0.92 per share upon the filing of the restated certificate of incorporation
      and
      a statement of designations setting forth the rights of the holders of the
      series A convertible preferred stock.




34




The
      purchase agreement pursuant to which we issued the notes includes the following
      provisions.





·
            We
                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 that is not an excused reason, this would result in the imposition
                of liquidated damages. The investors have agreed to waive through
                March
                31, 2008 any liquidating damages related to the appointment of independent
                directors and the establishment of the committees. In March 2008,
                we
                elected independent directors and have the required
                committees.




·
            We
                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 valued at $0.374 per
                share, at
                the election of the investors.




·
            We
                and the investors entered into a registration rights agreement pursuant
                to
                which we 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 we cannot register all of the required
                shares
                as a result of the SEC’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. We
                filed a registration on February 14, 2008 and the registration statement
                has not been declared effective as of the date of this report.However,
                pursuant to FASB Staff Position, or FSP, EITF 00-19-2,*Accounting
                for Registration Payment Arrangements,*we
                have determined that it is unlikely that circumstances allowing for
                the
                aforementioned liquidated damages would arise, and therefore no contingent
                liability has been recorded.





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




·
            Until
                the earlier of November 13, 2011 or such time as the Investors shall
                have
                sold all of the underlying shares of common stock, we are 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, our debt cannot exceed
                twice
                the preceding four quarters earnings before interest, taxes, depreciation
                and amortization.




·
            Our
                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.




·
            We
                paid Barron Partners $30,000 for its due diligence
                expenses.




35




·
            We
                entered into an escrow agreement pursuant to which we issued our
                3%
                convertible promissory note due March 31, 2008 in the principal amount
                of
                $3,000,000, which is in addition to the notes in the principal amount
                of
                $5,525,000 which were issued to the investors. Upon the filing of
                the
                restated certificate of incorporation and the certificate of designation
                relating to the Series A preferred stock, this note automatically
                converted into 24,787,135 shares of Series A preferred stock. The
                series A
                preferred stock are held in escrow subject to the
                following.




o
            14,787,135
                shares are held pursuant to the following provisions. If, for either
                the
                year ended December 31, 2007 or 2008, our 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. If, for either year, 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. The
                target
                number for 2007 was met and there were no deliveries from
                escrow.




o
            The
                target number for 2008 is $0.13131per
                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. Based on the formula in the agreement,
                there is no adjustment for 2007.




o
            If
                we do not file our Form 10-KSB 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 or 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 covered by this
                covenant, as a result of which there was no delivery from escrow
                with
                respect to 2007.




·
            With
                certain exceptions, until the investors have sold all of the underlying
                shares of common stock, if we sell common stock or issues convertible
                securities with a conversion or exercise price which is less than
                the
                conversion price of the Series A preferred stock and the exercise
                price of
                the warrants is reduced to the lower
                price.




The
      warrants have a term of five years, 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 during the twelve months commencing
      on
      November 13, 2007 in the case of the $0.58 warrants, and during the 18 month
      period commencing on November 13, 2007 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.





**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.




36




The
      following tables summarize our contractual obligations as of March 31, 2008,
      and
      the effect 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)
            
            $
            996,839
            
            $
            996,839
            
            $
            -
            
            $
            -
            
            $
            -Total
                Contractual Obligations:
            
            $
            996,839
            
            $
            996,839
            
            $
            -
            
            $
            -
            
            $
            -




(1)  Bank
      indebtedness amounts include the short term bank loans amount and notes payable
      amount.




***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 three months ended March 31, 2008, we has unrealized
      foreign currency translation gain of $1,007,245, because of the change in the
      exchange rate.





I TEM
      4.
      CONTROLS AND PROCEDURES





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





As
      required by Rule 13a-15 under the Exchange Act, our management, including Jianhua Wu, our
      Chief Executive Officer, and Adam Wasserman, our Chief Financial Officer,
      evaluated the effectiveness of the design and operation of our disclosure controls
      and procedures
      as of December 31, 2007.





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.




37




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, Messrs. Wu and Wasserman 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 March 31, 2008.




***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 .





The
      Company became a reporting company in November 2007.  We began preparing to
      be in compliance with the internal control obligations, including Section 404,
      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.  As a result, with the
      exception of certain additional persons hired at the end of 2007 to address
      these deficiencies, including the hiring of our chief financial officer, our
      current internal accounting department responsible for financial reporting
      of
      the Company, on a consolidated basis, is relatively new to U.S. GAAP and the
      related internal control procedures
      required of U.S. public companies. Although our accounting staff is professional
      and experienced in accounting requirements and procedures
      generally accepted in the PRC, management has determined that they require
      additional training and assistance in U.S. GAAP matters.  Management has
      determined that our internal audit function is also significantly deficient
      due
      to insufficient qualified resources to perform internal audit functions.
 Finally, management determined that the lack of an Audit Committee of the
      board of directors of the Company also contributed to insufficient oversight
      of
      our accounting and audit functions.





In
      order
      to correct the foregoing deficiencies, we have taken the following remediation
      measures:


(i)


·
            In
                late 2007, we engaged Adam Wasserman, a senior financial executive
                from
                the U.S. to serve as our Chief Financial Officer.  Mr. Wasserman has
                extensive experience in internal control and U.S. GAAP reporting
                compliance, and together with our chief executive officer will oversee
                and
                manage our the financial reporting process and required training
                of the
                accounting staff.




·
            We
                have committed to the establishment of effective internal audit functions,
                however, due to the scarcity of qualified candidates with extensive
                experience in U.S. GAAP reporting and accounting in the region, we
                were
                not able to hire sufficient internal audit resources before end of
                2007.
                However, we will increase our search for qualified candidates with
                assistance from recruiters and through
                referrals.


·
            On
                March 28, 2008, we elected an independent director to serve on an
                audit
                committee and we have set up a compensation committee to be headed
                by one
                of our independent directors. On April 28, 2008, we hired an additional
                director who will serve on the audit
                committee.




·
            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 will remediate the significant deficiency
      identified above, and we will continue to monitor the effectiveness of these
      steps and make any changes that our management deems appropriate.





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.




38




Our
      management is not aware of any material weaknesses in our internal control
      over
      financial reporting, and 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 March 31, 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***




Except
      as
      described above, there were no changes in our internal controls
      over financial reporting during the first 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





In
      February 2008, we issued 323,000 shares of our common stock pursuant to an
      exercise of warrants for proceeds of $187,340 which was used for working
      capital.





On
      March
      28, 2008, we issued 25,000 of our 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, we recorded stock-based compensation of
      $45,000.





The
      above
      recipients were sophisticated investors 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
      recipients 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




39




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:
                May 15, 2008
            By:
            /s/
                Jianhua WuJianhua
                Wu, Chief Executive OfficerDate:
                May 15, 2008
            By:
            /s/
                Adam WassermanAdam
                Wasserman, Chief Financial Officer




40