**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 June 30, 2008
 
 **o**
              **TRANSITION
                  REPORT UNDER SECTION 13 OR 15 (D) OF THE EXCHANGE ACT**
 
 For
        the
        transition period from __________ to __________
 
 *COMMISSION
        FILE NUMBER: 33-16335*
 
 **CHINA
        WIND SYSTEMS, INC.**
 (Name
        of
        Registrant as specified in its charter)
 
 DELAWARE
              
              74-2235008(State
                  or other jurisdiction of
              
              (I.R.S.
                  Employerincorporation
                  of organization)
              
              Identification
                  No.)
 
 **No.
        9 Yanyu Middle Road**
 **Qianzhou
        Township, Huishan District, Wuxi City**
 **Jiangsu
        Province, China 150090**
 (Address
        of principal executive office)
 
 **(86)
        51083397559**
 (Registrant’s
        telephone number)
 
 **Not
        applicable**
 (Former
        name, former address and former fiscal year, if changed since last
        report)
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days. Yes xNo o
 
 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 o
              
              Accelerated
                  filer oNon-accelerated
                  filer o
                (Do
                  not check if smaller reporting company)
              
              Smaller
                  reporting company x
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act)
 Yes
oNo
x
 
 Indicated
        the number of shares outstanding of each of the issuer's classes of common
        stock, as of the latest practicable date. 40,399,974 shares of common stock
        are
        issued and outstanding as of August 12, 2008.
  
  **CHINA
        WIND SYSTEMS, INC. AND SUBSIDIARIES**
 **FORM
        10-Q**
 **June
        30, 2008**
  **TABLE
        OF CONTENTS**
 
 PageNo.**PART
                  I. - FINANCIAL INFORMATION**Item
                  1.
              
              Financial
                  Statements
              
              1Item
                  2.
              
              Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              25Item
                  3
              
              Quantitative
                  and Qualitative Disclosures About Market Risk
              
              39Item
                  4
              
              Controls
                  and Procedures
              
              39**PART
                  II - OTHER INFORMATION**Item
                  2.
              
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              
              41Item
                  6.
              
              Exhibits
              
              41
  
  **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 SUBSIDIARIESCONSOLIDATED
                  BALANCE SHEETS
  June
                  30,
              
              December
                  31,2008
              
              2007(Unaudited)ASSETSCURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              2,274,524
              
              $
              5,025,434Accounts
                  receivable, net of allowance for doubtful accounts
              
              
              4,037,060
              
              
              2,158,412Inventories,
                  net of reserve for obsolete inventory
              
              
              2,992,334
              
              
              1,929,796Advances
                  to suppliers
              
              
              332,707
              
              
              938,331Prepaid
                  expenses and other
              
              
              124,051
              
              
              378,429Total
                  Current Assets
              
              
              9,760,676
              
              
              10,430,402PROPERTY
                  AND EQUIPMENT - Net
              
              
              8,802,673
              
              
              6,525,986OTHER
                  ASSETS:Deposit
                  on long-term assets - related party
              
              
              5,993,550
              
              
              10,863,706Deposit
                  on long-term assets
              
              
              2,725,487
              
              
              -Intangible
                  assets, net of accumulated amortization
              
              
              6,127,043
              
              
              502,634Investment
                  in cost method investee
              
              
              -
              
              
              34,181Due
                  from related parties
              
              
              47,581
              
              
              139,524Total
                  Assets
              
              $
              33,457,010
              
              $
              28,496,433LIABILITIES
                  AND STOCKHOLDERS' EQUITYCURRENT
                  LIABILITIES:Loans
                  payable
              
              $
              1,018,656
              
              $
              820,333Convertible
                  debt, net of discount on debt
              
              
              -
              
              
              3,261,339Accounts
                  payable
              
              
              1,841,809
              
              
              1,845,769Accrued
                  expenses
              
              
              191,201
              
              
              198,542VAT
                  and service taxes payable
              
              
              225,417
              
              
              434,839Advances
                  from customers
              
              
              83,226
              
              
              77,357Due
                  to related party
              
              
              -
              
              
              98,541Income
                  taxes payable
              
              
              617,448
              
              
              508,407Total
                  Current Liabilities
              
              
              3,977,757
              
              
              7,245,127STOCKHOLDERS'
                  EQUITY:Series
                  A convertible preferred ($0.001 par value; 60,000,000 shares
                  authorized;14,028,189 and 0 shares issued and outstanding at June
                  30, 2008
                  and December 31, 2007, respectively)
              
              
              14,028
              
              
              -Common
                  stock ($0.001 par value; 150,000,000 shares authorized;39,656,241
                  and
                  37,384,295 shares issued and outstanding at June 30, 2008 and December
                  31,
                  2007, respectively)
              
              
              39,657
              
              
              37,385Additional
                  paid-in capital
              
              
              12,810,998
              
              
              3,488,896Retained
                  earnings
              
              
              13,235,643
              
              
              16,074,270Statutory
                  reserve
              
              
              421,360
              
              
              305,472Other
                  comprehensive gain - cumulative foreign currency translation
                  adjustment
              
              
              2,957,567
              
              
              1,345,283Total
                  Stockholders' Equity
              
              
              29,479,253
              
              
              21,251,306Total
                  Liabilities and Stockholders' Equity
              
              $
              33,457,010
              
              $
              28,496,433
  See
                  notes to unaudited consolidated financial
                  statements
 
 1
 
 CHINA
                  WIND SYSTEMS, INC. AND SUBSIDIARIESCONSOLIDATED
                  STATEMENTS OF OPERATIONS(Unaudited)
  For
                  the Three Months Ended
              
              For
                  the Six Months EndedJune
                  30,
              
              June
                  30,2008
              
              2007
              
              2008
              
              2007NET
                  REVENUES
              
              $
              11,182,950
              
              $
              4,459,972
              
              $
              19,630,024
              
              $
              8,589,182COST
                  OF SALES
              
              
              8,419,505
              
              
              3,135,450
              
              
              14,692,331
              
              
              6,197,569GROSS
                  PROFIT
              
              
              2,763,445
              
              
              1,324,522
              
              
              4,937,693
              
              
              2,391,613OPERATING
                  EXPENSES:Depreciation
                  and amortization
              
              
              141,568
              
              
              67,464
              
              
              219,588
              
              
              139,268Selling,
                  general and administrative
              
              
              589,420
              
              
              235,951
              
              
              1,205,988
              
              
              342,942Total
                  Operating Expenses
              
              
              730,988
              
              
              303,415
              
              
              1,425,576
              
              
              482,210INCOME
                  FROM OPERATIONS
              
              
              2,032,457
              
              
              1,021,107
              
              
              3,512,117
              
              
              1,909,403OTHER
                  INCOME (EXPENSE):Interest
                  income
              
              
              4,011
              
              
              180
              
              
              9,644
              
              
              281Interest
                  expense
              
              
              (18,753
              )
              
              (13,366
              )
              
              (2,278,447
              )
              
              (21,414
              )Debt
                  issuance costs
              
              
              -
              
              
              -
              
              
              (21,429
              )
              
              -Total
                  Other Income (Expense)
              
              
              (14,742
              )
              
              (13,186
              )
              
              (2,290,232
              )
              
              (21,133
              )INCOME
                  BEFORE INCOME TAXES
              
              
              2,017,715
              
              
              1,007,921
              
              
              1,221,885
              
              
              1,888,270INCOME
                  TAXES
              
              
              606,531
              
              
              301,670
              
              
              1,060,562
              
              
              600,254NET
                  INCOME
              
              
              1,411,184
              
              
              706,251
              
              
              161,323
              
              
              1,288,016DEEMED
                  PREFERRED DIVIDEND
              
              
              -
              
              
              -
              
              
              (2,884,062
              )
              
              -NET
                  INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
              
              $
              1,411,184
              
              $
              706,251
              
              $
              (2,722,739
              )
              $
              1,288,016COMPREHENSIVE
                  INCOME:NET
                  INCOME
              
              $
              1,411,184
              
              $
              706,251
              
              $
              161,323
              
              $
              1,288,016OTHER
                  COMPREHENSIVE INCOME:Unrealized
                  foreign currency translation gain
              
              
              605,039
              
              
              141,135
              
              
              1,612,284
              
              
              224,296COMPREHENSIVE
                  INCOME
              
              $
              2,016,223
              
              $
              847,386
              
              $
              1,773,607
              
              $
              1,512,312NET
                  INCOME (LOSS) PER COMMON SHARE:Basic
              
              $
              0.04
              
              $
              0.02
              
              $
              (0.07
              )
              $
              0.04Diluted
              
              $
              0.02
              
              $
              0.02
              
              $
              (0.07
              )
              $
              0.04WEIGHTED
                  AVERAGE COMMON SHARES OUTSTANDING:Basic
              
              
              38,036,208
              
              
              36,577,704
              
              
              37,760,355
              
              
              36,577,704Diluted
              
              
              65,712,820
              
              
              36,577,704
              
              
              37,760,355
              
              
              36,577,704
  See
                  notes to unaudited consolidated financial
                  statements
 
 2
 
 CHINA
                  WIND SYSTEMS, INC. AND SUBSIDIARIESCONSOLIDATED
                  STATEMENTS OF CASH FLOWS(Unaudited)
  For
                  the Six Months EndedJune
                  30,2008
              
              2007CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              161,323
              
              $
              1,288,016Adjustments
                  to reconcile net income from operations to net cash provided by
                  operating
                  activities:Depreciation
                  and amortization
              
              
              389,684
              
              
              299,451Amortization
                  of debt discount to interest expense
              
              
              2,263,661
              
              
              -Amortization
                  of debt offering costs
              
              
              21,429
              
              
              -Increase
                  in allowance for doubtful accounts
              
              
              170,024
              
              
              133,693Increase
                  in reserve for inventory obsolescence
              
              
              -
              
              
              71,853Stock
                  based compensation expense
              
              
              75,000
              
              
              -Changes
                  in assets and liabilities:Accounts
                  receivable
              
              
              (1,860,346
              )
              
              (1,706,864
              )Inventories
              
              
              (911,684
              )
              
              580,971Prepaid
                  and other current assets
              
              
              235,398
              
              
              71,321Advances
                  to suppliers
              
              
              647,106
              
              
              (860,923
              )Accounts
                  payable
              
              
              (137,507
              )
              
              781,112Accrued
                  expenses
              
              
              3,085
              
              
              (6,938
              )VAT
                  and service taxes payable
              
              
              (230,670
              )
              
              461,352Income
                  taxes payable
              
              
              74,150
              
              
              603,112Advances
                  from customers
              
              
              864
              
              
              1,231,834NET
                  CASH PROVIDED BY OPERATING ACTIVITIES
              
              
              901,517
              
              
              2,947,990CASH
                  FLOWS FROM INVESTING ACTIVITIES:Decrease
                  in due from related parties
              
              
              98,058
              
              
              (3,523,139
              )Proceeds
                  from sale of cost-method investee
              
              
              35,348
              
              
              -Deposit
                  on long-term assets - related party
              
              
              (88,783
              )
              
              -Deposit
                  on long-term assets
              
              
              (2,648,096
              )
              
              -Purchase
                  of property and equipment
              
              
              (2,126,847
              )
              
              (7,740
              )NET
                  CASH USED IN INVESTING ACTIVITIES
              
              
              (4,730,320
              )
              
              (3,530,879
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from loans payable
              
              
              141,390
              
              
              258,736Proceeds
                  from exercise of warrants
              
              
              854,340
              
              
              -Payments
                  on related party advances
              
              
              (101,905
              )
              
              -NET
                  CASH PROVIDED BY FINANCING ACTIVITIES
              
              
              893,825
              
              
              258,736EFFECT
                  OF EXCHANGE RATE ON CASH
              
              
              184,068
              
              
              6,182NET
                  DECREASE IN CASH
              
              
              (2,750,910
              )
              
              (317,971
              )CASH
                  - beginning of year
              
              
              5,025,434
              
              
              421,390CASH
                  - end of period
              
              $
              2,274,524
              
              $
              103,419SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:Cash
                  paid for:Interest
              
              $
              35,505
              
              $
              21,414Income
                  taxes
              
              $
              1,169,603
              
              $
              -NON-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
              
              $
              -Deposit
                  on long-term assets -related party reclassified to intangible
                  assets
              
              $
              5,500,030
              
              $
              -Series
                  A preferred converted to common shares
              
              $
              759
              
              $
              -
  See
                  notes to unaudited consolidated financial
                  statements.
 
 3
  CHINA
        WIND SYSTEMS, INC. AND SUBSIDIARIES
 NOTES
        TO
        UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 June
        30,
        2008
 
 NOTE
        1 - ORGANIZATION
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Organization
 
 China
        Winds Systems, Inc. (the “Company”) was incorporated in Delaware on June 24,
        1987 under the name of Malex, Inc. On December 18, 2007, the Company’s corporate
        name was changed to China Wind Systems, Inc.
 
 On
        November 13, 2007, the Company entered into a Share Exchange Agreement (the
        “Exchange Agreement”) among Fulland Limited, a Cayman Islands corporation
        (“Fulland”), the stockholders of Fulland, and Synergy Business Consulting, LLC
        (“Synergy”), the then principal stockholder of the Company, pursuant to which,
        simultaneously with the financing described in Note 6, the Company (i) issued
        36,577,704 shares of common stock to the former stockholders of Fulland,
        (ii)
        purchased 8,006,490 shares of common stock from Synergy for $625,000 and
        cancelled such shares, (iii) issued Synergy 291,529 shares of common stock
        for
        professional services, and (iv) paid cash fees of $415,000 in connection
        with
        the Exchange Agreement. The Company paid $1,040,000 from the proceeds of
        the
        financing for closing costs, including the $625,000 paid for shares from
        Synergy. At the time of the closing, under the Exchange Agreement and the
        financing, the Company, then known as Malex, Inc. was not engaged in any
        business activity and was considered a blank check shell.
 
 The
        Company is the sole stockholder of Fulland. Fulland owns 100% of Green Power
        Environment Technology (Shanghai) Co., Ltd. (“Green Power”), which is a wholly
        foreign-owned enterprise (“WFOE”) organized under the laws of the People’s
        Republic of China (“PRC” or “China”). Green Power is a party to a series of
        contractual arrangements, as fully described below, dated October 12, 2007
        with
        Wuxi Huayang 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 Hui Zong Fa [2007]
        No. 106
        (“Circular 106”), which requires the owners of any Chinese company to obtain
        SAFE’s approval before establishing any offshore holding company structure for
        foreign financing as well as subsequent acquisition matters in China.
        Accordingly, the owners of the Huayang Companies, Mr. Jianhua Wu and Ms.
        Lihua
        Tang, submitted their application to SAFE in early September 2007. On October
        11, 2007, SAFE approved their application, permitting these Chinese citizens
        to
        establish an offshore company, Fulland, as a special purpose vehicle for
        any
        foreign ownership and capital raising activities by the Huayang Companies.
 
 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.
 
 4
 CHINA
          WIND SYSTEMS, INC. AND SUBSIDIARIES
 NOTES
          TO
          UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 NOTE
        1 - ORGANIZATION
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 *Wuxi
        Huayang Dyeing Machinery Co., Ltd.*
 
 Wuxi
        Huayang Dyeing Machinery Co., Ltd. (“Dyeing”) is a Chinese limited liability company and was formed under laws of
        the People’s Republic of China on August 17, 1995. Dyeing
        produces a variety of high and low temperature dyeing and finishing
        machinery.
 
 *Wuxi
        Huayang Electrical 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. Beginning in April 2007, Electric began to produce
        large-scaled forged rolled rings for the wind-power and other industries
        that
        are up to three meters in diameter. Commencing in 2008, the sale of rolled
        rings
        accounted for more than 85% or Electric’s revenue. As a result, we are referring
        to this segment of our business as the forged rolled rings and electric power
        equipment division. In addition to forged rolled rings, Electric continues
        to
        manufacture electric power auxiliary apparatuses (including coking equipment)
        and provide of related engineering services. Electric equipment products
        mainly
        include various auxiliary equipment of power stations, chemical equipment,
        dust
        removal and environmental protection equipment, and metallurgy non- standard
        equipment.
 
 As
        a
        result of the transaction effected by the Exchange Agreement, the Company’s
        business has become the business of the Huayang Companies.
 
 Contemporaneously
        with the closing under the Exchange Agreement, the Company sold its 3%
        convertible notes in the principal amount of $5,525,000 to an investor group.
        Pursuant to the securities purchase agreement relating to the issuance of
        the
        convertible notes, on March 28, 2008, the Company amended and restated its
        certificate of incorporation to provide for the authorization of a class
        of
        preferred stock with the directors having the right to designate one or more
        series of preferred stock and set the rights, preferences, privileges and
        limitations of each such series and set forth the rights, preferences,
        privileges and limitations of a series of preferred stock designated as the
        series A convertible preferred stock (“series A preferred stock”). The notes
        were, by their terms, automatically converted into 14,787,135 shares of series
        A
        preferred stock and warrants to purchase a total of 18,829,756 shares of
        common
        stock upon the filing the restated certificate of incorporation. (See Note
        6 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.
  5
 CHINA
          WIND SYSTEMS, INC. AND SUBSIDIARIES
 NOTES
          TO
          UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 NOTE
        1 - ORGANIZATION
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 The
        Huayang Companies are considered variable interest entities
        (“VIE”), and the Company is the primary beneficiary. The Company’s relationships
        with the Huayang Companies and their shareholders are governed by a series
        of
        contractual arrangements between Green Power, the Company’s wholly foreign-owned
        enterprise in the PRC, and each of the Huayang Companies, which are the
        operating companies of the Company in the PRC. Under PRC laws, each of Green
        Power, Huayang Dye Machine and Huayang Electrical Power Equipment is an
        independent legal person and none of them is exposed to liabilities incurred
        by
        the other parties. The contractual arrangements constitute valid and binding
        obligations of the parties of such agreements. Each of the contractual
        arrangements and the rights and obligations of the parties thereto are
        enforceable and valid in accordance with the laws of the PRC. On October
        12,
        2007, the Company entered into the following contractual arrangements with
        each
        of Huayang Dye Machine and Huayang Electrical Power Equipment:
 
 Consulting
        Services Agreement .
        Pursuant to the exclusive consulting services agreements between Green Power
        and
        the Huayang Companies, Green Power has the exclusive right to provide to
        the
        Huayang Companies general business operation services, including advice and
        strategic planning, as well as consulting services related to the technological
        research and development of dye and finishing machines, electrical equipments
        and related products (the “ Services ”).
        Under
        this agreement, Green Power owns the intellectual property rights developed
        or
        discovered through research and development, in the course of providing the
        Services, or derived from the provision of the Services. The Huayang Companies
        shall pay a quarterly consulting service fees in Renminbi (“RMB”) to Fulland
        that is equal to all of the Huayang Companies’ profits for such
        quarter.
 
 Operating
        Agreement .
        Pursuant to the operating agreement among Green Power, the Huayang Companies
        and
        all shareholders of the Huayang Companies (collectively the “ Huayang
        Companies Shareholders ”),
        Green
        Power provides guidance and instructions on the Huayang Companies’ daily
        operations, financial management and employment issues. The Huayang Companies
        Shareholders must designate the candidates recommended by Green Power as
        their
        representatives on the boards of directors of each of the Huayang Companies.
        Green Power has the right to appoint senior executives of the Huayang Companies.
        In addition, Green Power agrees to guarantee the Huayang Companies’ performance
        under any agreements or arrangements relating to the Huayang Companies’ business
        arrangements with any third party. The Huayang Companies, in return, agrees
        to
        pledge their accounts receivable and all of their assets to Green Power.
        Moreover, the Huayang Companies agrees that without the prior consent of
        Green
        Power, the Huayang Companies will not engage in any transactions that could
        materially affect their respective assets, liabilities, rights or operations,
        including, without limitation, incurrence or assumption of any indebtedness,
        sale or purchase of any assets or rights, incurrence of any encumbrance on
        any
        of their assets or intellectual property rights in favor of a third party
        or
        transfer of any agreements relating to their business operation to any third
        party. The term of this agreement is ten (10) years from October 12, 2007
        and
        may be extended only upon Green Power’s written confirmation prior to the
        expiration of the this agreement, with the extended term to be mutually agreed
        upon by the parties.
 
 Equity
        Pledge Agreement *.* Under
        the
        equity pledge agreement between the Huayang Companies Shareholders and Green
        Power, the Huayang Companies Shareholders pledged all of their equity interests
        in the Huayang Companies to Green Power to guarantee the Huayang Companies’
performance of their obligations under the consulting services agreement.
        If the
        Huayang Companies or the Huayang Companies Shareholders breaches their
        respective contractual obligations, Green Power, as pledgee, will be entitled
        to
        certain rights, including the right to sell the pledged equity interests.
        the
        Huayang Companies Shareholders also agreed that upon occurrence of any event
        of
        default, Green Power shall be granted an exclusive, irrevocable power of
        attorney to take actions in the place and stead of the Huayang Companies
        Shareholders to carry out the security provisions of the equity pledge agreement
        and take any action and execute any instrument that Green Power may deem
        necessary or advisable to accomplish the purposes of the equity pledge
        agreement. The Huayang Companies Shareholders agreed not to dispose of the
        pledged equity interests or take any actions that would prejudice Green Power’s
        interest. The equity pledge agreement will expire two (2) years after the
        Huayang Companies’ obligations under the consulting services agreements have
        been fulfilled.
 
 6
 CHINA
          WIND SYSTEMS, INC. AND SUBSIDIARIES
 NOTES
          TO
          UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 NOTE
        1 - ORGANIZATION
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Option
        Agreement *.*  ** Under
        the
        option agreement between the Huayang Companies Shareholders and Green Power,
        the
        Huayang Companies Shareholders irrevocably granted Green Power or its designated
        person an exclusive option to purchase, to the extent permitted under PRC
        law,
        all or part of the equity interests in the Huayang Companies for the cost
        of the
        initial contributions to the registered capital or the minimum amount of
        consideration permitted by applicable PRC law. Green Power or its designated
        person has sole discretion to decide when to exercise the option, whether
        in
        part or in full. The term of this agreement is ten (10) years from October
        12,
        2007 and may be extended prior to its expiration by written agreement of
        the
        parties.
 
 The
        accounts of the
        Huayang Companies are consolidated in the accompanying financial statements
        pursuant to Financial Accounting Standards Board Interpretation No. 46
        (Revised), “Consolidation of Variable Interest Entities - an Interpretation of
        ARB No. 51”. As a VIE, the
        Huayang Companies sales are included in the Company’s total sales, its income
        from operations is consolidated with the Company’s, and the Company’s net income
        includes all of the
        Huayang Companies net income. The Company does not have any non-controlling
        interest and accordingly, did not subtract any net income in calculating
        the net
        income attributable to the Company. Because of the contractual arrangements,
        the
        Company had a pecuniary interest in the
        Huayang Companies that require consolidation of the Company’s and the
        Huayang Companies financial statements.
 
 Use
        of
        estimates
 
 The
        preparation of the financial statements in conformity with accounting principles
        generally accepted in the U.S. requires management to make estimates and
        assumptions that affect the reported amounts of assets, liabilities, revenues,
        expenses, and the related disclosures at the date of the financial statements
        and during the reporting period. Actual results could materially differ from
        these estimates. Significant estimates in 2008 and 2007 include the allowance
        for doubtful accounts, the allowance for obsolete inventory, the useful life
        of
        property and equipment and intangible assets, accruals for taxes due, and
        the
        calculation of the value of warrants granted upon the conversion of debt
        to
        preferred stock.
 
 Fair
        value of financial instruments
 
 Effective
        January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements (SFAS
        157). SFAS 157 clarifies the definition of fair value, prescribes methods
        for
        measuring fair value, and establishes a fair value hierarchy to classify
        the
        inputs used in measuring fair value as follows:
 
 Level
        1-Inputs are unadjusted quoted prices in active markets for identical assets
        or
        liabilities available at the measurement date.
  Level
        2-Inputs are unadjusted quoted prices for similar assets and liabilities
        in
        active markets, quoted prices for identical or similar assets and liabilities
        in
        markets that are not active, inputs other then quoted prices that are
        observable, and inputs derived from or corroborated by observable market
        data.
  Level
        3-Inputs are unobservable inputs which reflect the reporting entity’s own
        assumptions on what assumptions the market participants would use in pricing
        the
        asset or liability based on the best available information.
 
 The
        adoption of SFAS No. 157 did not have a material impact on the Company’s fair
        value measurements. The
        carrying amounts reported in the balance sheet for cash, accounts receivable,
        loans payable, accounts payable and accrued expenses, customer advances,
        and
        amounts due from related parties approximate their fair market value based
        on
        the short-term maturity of these instruments.
 
 7
  CHINA
          WIND SYSTEMS, INC. AND SUBSIDIARIES
 NOTES
          TO
          UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 NOTE
        1 - ORGANIZATION
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Cash
        and cash equivalents
 
 For
        purposes of the consolidated statements of cash flows, the Company considers
        all
        highly liquid instruments purchased with a maturity of three months or less
        and
        money market accounts to be cash equivalents. The Company maintains cash
        and
        cash equivalents with various financial institutions mainly in the PRC and
        the
        United States. Balances in the United States are insured up to $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 June 30, 2008 and December 31, 2007, the
        Company’s bank deposits by geographic area were as follows:
 **June
                    30, 2008**
                
                **December
                    31, 2007**Country:United
                    States
                
                $
                777,352
                
                
                34.2
                %
                $
                171,121
                
                
                3.4
                %China
                
                
                1,497,172
                
                
                65.8
                %
                
                4,854,313
                
                
                96.6
                %Total
                    cash and cash equivalents
                
                $
                2,274,524
                
                
                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 June
        30, 2008 and December 31, 2007, the Company has established, based on a review
        of its outstanding balances, an allowance for doubtful accounts in the amount
        of
        $841,517 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 $78,967 and $74,192 at June 30, 2008 and December 31, 2007,
        respectively.
  8
 CHINA
          WIND SYSTEMS, INC. AND SUBSIDIARIES
 NOTES
          TO
          UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 NOTE
        1 - ORGANIZATION
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Property
        and equipment
 
 Property
        and equipment are carried at cost and are
        depreciated on a straight-line basis over the estimated useful lives of the
        assets .
        The
        cost of repairs and maintenance is expensed as incurred; major replacements
        and
        improvements are capitalized. When assets are retired or disposed of, the
        cost
        and accumulated depreciation are removed from the accounts, and any resulting
        gains or losses are included in income in the year of disposition. The Company
        examines the possibility of decreases in the value of fixed assets when events
        or changes in circumstances reflect the fact that their recorded value may
        not
        be recoverable.
 
 Investment
        in non-marketable equity securities
 
 Certain
        securities that the Company may invest in can be determined to be
        non-marketable. Non-marketable securities where the Company owns less than
        20%
        of the investee are accounted for at cost pursuant to APB No. 18, “The Equity
        Method of Accounting for Investments in Common Stock” (“APB 18”). At December
        31, 2007, the Company had a 5% membership interest in Wuxi Huayang Yingran
        Machinery Co. Ltd. (“Yingran”) amounting to $34,181, which at December 31, 2007,
        is reflected on the accompanying consolidated balance sheet as investments
        in
        cost method investee. In March 2008, the Company sold its 5% investment in
        Yingran to an individual related to the Company’s chief executive officer for a
        price which approximated its carrying value.
 
 I mpairment
        of long-lived assets
 
 In
        accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
        “Accounting for the Impairment or Disposal of Long-Lived Assets”, The Company
        periodically reviews its long-lived assets for impairment whenever events
        or
        changes in circumstances indicate that the carrying amount of the assets
        may not
        be fully recoverable. The Company recognizes an impairment loss when the
        sum of
        expected undiscounted future cash flows is less than the carrying amount
        of the
        asset. The amount of impairment is measured as the difference between the
        asset’s estimated fair value and its book value. The Company did not consider it
        necessary to record any impairment charges during the six months ended June
        30,
        2008 and 2007.
 
 Advances
        from customers
 
 Advances
        from customers at June 30, 2008 and December 31, 2007 amounted to $83,226
        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.
 
 9
 CHINA
          WIND SYSTEMS, INC. AND SUBSIDIARIES
 NOTES
          TO
          UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 NOTE
        1 - ORGANIZATION
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Revenue
        recognition
 
 The
        Company recognizes revenue when persuasive evidence of an arrangement exists,
        delivery has occurred or services have been rendered, the purchase price
        is
        fixed or determinable and collectability is reasonably assured. The Company
        accounts for the product sale as a multiple element arrangement. Revenue
        from
        multiple element arrangements is allocated among the separate accounting
        units
        based on the residual method. Under the residual method, the revenue is
        allocated to undelivered elements based on fair value of such undelivered
        elements and the residual amounts of revenue allocated to delivered elements.
        The Company recognizes revenues from the sale of dyeing equipment, forged
        rolled
        rings, and electric equipment upon shipment and transfer of title. The other
        elements may include installation and generally a one-year warranty. Equipment
        installation revenue is valued based on estimated service person hours to
        complete installation and is recognized when the labor has been completed
        and
        the equipment has been accepted by the customer, which is generally within
        a
        couple days of the delivery of the equipment. Warranty revenue is valued
        based
        on estimated service person hours to complete a service and generally is
        recognized over the contract period. For the six months ended June 30, 2008
        and
        2007, amounts allocated to warranty revenues were not material. Based on
        historical experience, warranty service calls and any related labor costs
        have
        been minimal.
  All
        other
        product sales with customer specific acceptance provisions, including the
        forged
        rolled rings, are recognized upon customer acceptance and the delivery of
        the
        parts or service. Revenues related to spare part sales are recognized upon
        shipment or delivery based on the trade terms.
 
 Stock-based
        compensation
 
 The
        Company accounts for stock options issued to employees in accordance with
        SFAS
        123R, “Share-Based Payment, an Amendment of FASB Statement No. 123” (“SFAS
        123R”). SFAS 123R requires companies to recognize in the statement of operations
        the grant-date fair value of stock options and other equity based compensation
        issued to employees.
 
 Shipping
        costs
 
 Shipping
        costs are included in selling expenses and totaled $85,340 and $0 for the
        six
        months ended June 30, 2008 and 2007, respectively.
 
 A dvertising
 
 Advertising
        is expensed as incurred and is included in selling, general and administrative
        expenses on the accompanying consolidated statement of operations and was
        not
        material.
 
 Research
        and development
 
 Research
        and development costs are expensed as incurred. For the six months ended
        June
        30, 2008 and 2007, research and development costs were not material.
 
 10
 CHINA
          WIND SYSTEMS, INC. AND SUBSIDIARIES
 NOTES
          TO
          UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 NOTE
        1 - ORGANIZATION
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Foreign
        currency translation
 
 The
        reporting currency of the Company is the U.S. dollar. The functional currency
        of
        the Company is the local currency, the Chinese Renminbi (“RMB”). Results of
        operations and cash flows are translated at average exchange rates during
        the
        period, assets and liabilities are translated at the unified exchange rate
        at
        the end of the period, and equity is translated at historical exchange rates.
        Translation adjustments resulting from the process of translating the local
        currency financial statements into U.S. dollars are included in determining
        comprehensive income. The cumulative translation adjustment and effect of
        exchange rate changes on cash for the six months ended June 30, 2008 and
        2007
        was $184,067 and $6,182, 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 June 30, 2008 and December 31, 2007 were translated
        at
        6.8718 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 six months ended June 30, 2008 and 2007
        were 7.07263 RMB and 7.7299 RMB to $1.00 USD, respectively. In accordance
        with
        Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows,"
        cash flows from the Company's operations are calculated based upon the local
        currencies using the average translation rate. As a result, amounts related
        to
        assets and liabilities reported on the statement of cash flows will not
        necessarily agree with changes in the corresponding balances on the balance
        sheet.
 
 Earnings
        (loss) per share of common stock
  Basic
        earnings per share is computed by dividing net earnings by the weighted average
        number of shares of common stock outstanding during the period. Diluted income
        per share is computed by dividing net income by the weighted average number
        of
        shares of common stock, common stock equivalents and potentially dilutive
        securities outstanding during each period. Potentially dilutive common shares
        consist of common shares issuable upon the conversion of Series A convertible
        stock (using the if-converted method) and common stock warrants. The following
        table presents a reconciliation of basic and diluted earnings per
        share:
 
 For
                  the Three Months Ended
                June
                  30,
              
              For
                  the Six Months Ended
                June
                  30,2008
              
              2007
              
              2008
              
              2007Net
                  income (loss) available to common shareholders for basic and diluted
                  earnings per share
              
              $
              1,411,184
              
              $
              706,251
              
              $
              (2,722,739
              )
              $
              1,288,016Weighted
                  average shares outstanding - basic
              
              
              38,036,208
              
              
              36,577,704
              
              
              37,760,355
              
              
              36,577,704Effect
                  of dilutive securities:Unexercised
                  warrants and preferred stock
              
              
              27,676,612
              
              
              -
              
              
              -
              
              
              -Weighted
                  average shares outstanding- diluted
              
              
              65,712,820
              
              
              36,577,704
              
              
              37,760,355
              
              
              36,577,704Earnings
                  (loss) per share - basic
              
              $
              0.04
              
              $
              0.02
              
              $
              (0.07
              )
              $
              0.04Earnings
                  (loss) per share - diluted
              
              $
              0.02
              
              $
              0.02
              
              $
              (0.07
              )
              $
              0.04
 
 11
 CHINA
          WIND SYSTEMS, INC. AND SUBSIDIARIES
 NOTES
          TO
          UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 NOTE
        1 - ORGANIZATION
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 In
        calculating earnings (loss) per common share for the six months ended June
        30,
        2008, the Company’s common stock equivalents were anti-dilutive and are not
        reflected in diluted earnings per shares, At June 30, 2007, the Company did
        not
        have any dilutive securities. The Company's common stock equivalents at June
        30,
        2008 include the following:
 
 Warrants
              
              
              17,756,756Series
                  A convertible preferred stock
              
              
              14,028,189Total
              
              
              31,784,945
 
 The
        warrants and series A convertible preferred stock were issued on March 28,
        2008
        upon conversion of the notes. The shares of series A preferred stock held
        in
        escrow pursuant
        to an
        escrow
        agreement (see Note 6) are not treated as outstanding at June 30, 2008 because
        the delivery of shares is contingent upon certain events, and any shares
        not
        delivered will be returned to the Company for cancellation.
 .
 Accumulated
        other comprehensive income
  The
        Company follows Statement of Financial Accounting Standards No. 130 (SFAS
        130) " *Reporting
        Comprehensive Income* "
        to
        recognize the elements of comprehensive income. Comprehensive income is
        comprised of net income and all changes to the statements of stockholders'
        equity, except those due to investments by stockholders, changes in paid-in
        capital and distributions to stockholders. For the Company, comprehensive
        income
        for the six months ended June 30, 2008 and 2007 included net income and foreign
        currency translation adjustments.
 
 Related
        parties
 
 Parties
        are considered to be related to the Company if the parties that, directly
        or
        indirectly, through one or more intermediaries, control, are controlled by,
        or
        are under common control with the Company. Related parties also include
        principal owners of the Company, its management, members of the immediate
        families of principal owners of the Company and its management and other
        parties
        with which the Company may deal if one party controls or can significantly
        influence the management or operating policies of the other to an extent
        that
        one of the transacting parties might be prevented from fully pursuing its
        own
        separate interests.
 
 Recent
        Accounting Pronouncements
 
 In
        June
        2007, the Emerging Issues Task Force of the FASB issued EITF Issue No. 07-3, *Accounting
        for Nonrefundable Advance Payments for Goods or Services to be Used in Future
        Research and Development Activities* ,
        (“EITF
        07-3”) which is effective for fiscal years beginning after December 15, 2007.
        EITF 07-3 requires that nonrefundable advance payments for future research
        and
        development activities be deferred and capitalized. Such amounts will be
        recognized as an expense as the goods are delivered or the related services
        are
        performed. 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.
  12
 CHINA
          WIND SYSTEMS, INC. AND SUBSIDIARIES
 NOTES
          TO
          UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 NOTE
        1 - ORGANIZATION
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 In
        December 2007, the FASB issued SFAS No. 160, *“Non-controlling
        Interests in Consolidated Financial Statements - an amendment of Accounting
        Research Bulletin No. 51”* (“SFAS
        160”), which establishes accounting and reporting standards for ownership
        interests in subsidiaries held by parties other than the parent, the amount
        of
        consolidated net income attributable to the parent and to the non-controlling
        interest, changes in a parent’s ownership interest and the valuation of retained
        non-controlling equity investments when a subsidiary is deconsolidated. The
        Statement also establishes reporting requirements that provide sufficient
        disclosures that clearly identify and distinguish between the interests of
        the
        parent and the interests of the non-controlling owners. SFAS 160 is effective
        for fiscal years beginning after December 15, 2008. The Company has not
        determined the effect that the application of SFAS 160 will have on its
        financial statements.
 
 In
        March 2008, the FASB issued SFAS 161, “ *Disclosures
        about Derivative Instruments and Hedging Activities* ” *.* The new
        standard is intended to improve financial reporting about derivative instruments
        and hedging activities by requiring enhanced disclosures to enable investors
        to
        better understand their effects on an entity’s financial position, financial
        performance, and cash flows. It is effective for financial statements issued
        for
        fiscal years and interim periods beginning after November 15, 2008, with
        early application encouraged. The Company is currently evaluating the impact
        of
        adopting SFAS 161 on its consolidated financial statements.
 
 In
        May
        2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
        Position (“FSP”) APB 14-1, *Accounting
        for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
        (Including Partial Cash Settlement)* .
        FSP APB
        14-1 clarifies that convertible debt instruments that may be settled in cash
        upon either mandatory or optional conversion (including partial cash settlement)
        are not addressed by paragraph 12 of APB Opinion No. 14, *Accounting
        for Convertible Debt and Debt issued with Stock Purchase
        Warrants* .
        Additionally, FSP APB 14-1 specifies that issuers of such instruments should
        separately account for the liability and equity components in a manner that
        will
        reflect the entity’s non-convertible debt borrowing rate when interest cost is
        recognized in subsequent periods. FSP APB 14-1 is effective for financial
        statements issued for fiscal years beginning after December 15, 2008, and
        interim periods within those fiscal years. The Company will adopt FSP APB
        14-1
        beginning in the first quarter of fiscal 2009, and this standard must be
        applied
        on a retrospective basis. The Company is evaluating the impact the adoption
        of
        FSP APB 14-1 will have on its consolidated financial position and results
        of
        operations.
 
 In
        May
        2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.
        162, *The
        Hierarchy of Generally Accepted Accounting Principles* .
        This
        standard is intended to improve financial reporting by identifying a consistent
        framework, or hierarchy, for selecting accounting principles to be used in
        preparing financial statements that are presented in conformity with generally
        accepted accounting principles in the United States for non-governmental
        entities. SFAS No. 162 is effective 60 days following approval by the U.S.
        Securities and Exchange Commission (“SEC”) of the Public Company Accounting
        Oversight Board’s amendments to AU Section 411, *The
        Meaning of Present Fairly in Conformity with Generally Accepted Accounting
        Principles* .
        The
        Company does not expect SFAS No. 162 to have a material impact on the
        preparation of its consolidated financial statements.
 
 On
        June
        16, 2008, the FASB issued final Staff Position (FSP) No. EITF 03-6-1,
“ *Determining
        Whether Instruments Granted in Share-Based Payment Transactions Are
        Participating Securities* ,”
to
        address the question of whether instruments granted in share-based payment
        transactions are participating securities prior to vesting. The FSP determines
        that unvested share-based payment awards that contain rights to dividend
        payments should be included in earnings per share calculations. The guidance
        will be effective for fiscal years beginning after December 15, 2008. The
        Company is currently evaluating the requirements of (FSP) No. EITF 03-6-1
        as
        well as the impact of the adoption on its consolidated financial
        statements.
 
 13
 CHINA
          WIND SYSTEMS, INC. AND SUBSIDIARIES
 NOTES
          TO
          UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 NOTE
        2 - ACCOUNTS
        RECEIVABLE
 
 At
        June
        30, 2008 and December 31, 2007, accounts receivable consisted of the
        following:
 
 2008
              
              2007Accounts
                  receivable
              
              $
              4,878,577
              
              $
              2,784,630Less:
                  allowance for doubtful accounts
              
              
              (841,517
              )
              
              (626,218
              )$
              4,037,060
              
              $
              2,158,412
 
 NOTE
        3 - INVENTORIES
 
 At
        June
        30, 2008 and December 31, 2007, inventories consisted of the
        following:
 
 2008
              
              2007Raw
                  materials
              
              $
              2,104,582
              
              $
              1,135,697Work
                  in process
              
              
              565,216
              
              
              454,788Finished
                  goods
              
              
              401,503
              
              
              413,5033,071,301
              
              
              2,003,988Less:
                  Reserve for obsolete inventory
              
              
              (78,967
              )
              
              (74,192
              )$
              2,992,334
              
              $
              1,929,796
 
 NOTE
        4 - PROPERTY
        AND EQUIPMENT
 
 At
        June
        30, 2008 and December 31, 2007, property and equipment consist of the
        following:
  Useful
                  Life
              
              
              2008
              
              
              2007Office
                  equipment and furniture
              
              
              5
                  Years
              
              $
              89,959
              
              $
              78,430Manufacturing
                  equipment
              
              
              5
                  - 10 Years
              
              
              3,746,274
              
              
              3,516,584Vehicles
              
              
              5
                  Years
              
              
              66,984
              
              
              62,933Construction
                  in progress
              
              
              -
              
              
              2,179,177
              
              
              -Building
                  and building improvements
              
              
              20
                  Years
              
              
              5,991,521
              
              
              5,629,20112,073,915
              
              
              9,287,148Less:
                  accumulated depreciation
              
              
              
              
              
              (3,271,242
              )
              
              (2,761,162
              )$
              8,802,673
              
              $
              6,525,986
 
 For
        the
        six months ended June 30, 2008 and 2007, depreciation expense amounted to
        $322,923 and $294,281, of which $170,096
        and $160,183 is included in cost
        of sales, respectively.
   NOTE
        5 - INTANGIBLE
        ASSETS
 
 There
        is
        no private ownership of land in China. Land is owned by the government and
        the
        government grants land use rights for specified terms. The Company’s land use
        rights are valued at a fixed amount, which is RMB 42,895,674 at June 30, 2008
        and the dollar value of the land use right fluctuates based on the exchange
        rate. In 2008, in connection with the acquisition of land use rights from
        a
        related party (See Note 8), the Company was granted the transferred land
        use
        rights from the government and accordingly, the Company reclassified
        approximately $5,500,000 from deposits on long-term assets to intangible
        assets.
        The Company’s land use rights have terms of 45 and 50 years and expire on
        January 1, 2053 and October 30, 2053, respectively. The Company amortizes
        these
        land use rights over the term of the respective land use right. For the six
        months ended June 30, 2008 and 2007, amortization expense amounted to $66,761
        and $5,170, respectively.
 
 14
 CHINA
          WIND SYSTEMS, INC. AND SUBSIDIARIES
 NOTES
          TO
          UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 At
        June
        30, 2008 and December 31, 2007, intangible assets consist of the
        following:
  Useful
                  Life
              
              2008
              
              2007Land
                  Use Rights
              
              
              45
                  - 50 years
              
              $
              6,242,276
              
              $
              546,341Less:
                  Accumulated Amortization
              
              
              
              
              
              (115,233
              )
              
              (43,707
              )$
              6,127,043
              
              $
              502,634
  Amortization
        expense attributable to future periods is as follows:
 
 Period
                  ending June 30:2009
              
              $
              133,5232010
              
              
              133,5232011
              
              
              133,5232012
              
              
              133,523Thereafter
              
              
              5,592,951$
              6,127,043
 
 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.
 
 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.
 
 On
        June
        12, 2008, the Company issued 758,946 shares of its common stock upon the
        conversion of 758,946 shares of Series A preferred stock.
 
 During
        the three months ended June 30, 2008, the Company issued 1,150,000 shares
        of its
        common stock pursuant to an exercise of warrants for proceeds of
        $667,000.
 
 (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.
  15
 CHINA
          WIND SYSTEMS, INC. AND SUBSIDIARIES
 NOTES
          TO
          UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 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 he series A preferred stock
                have
                a liquidated preference of $.374 per
                share.  ·
            Each
                share of series A preferred stock shall be initially convertible
                (subject
                to the 4.9% limitations described below) into such number of shares
                of
                common stock based on the conversion ratio of one share of series
                A
                preferred stock for one share of common stock at the option of the
                holders, at any time after the original issue
                date.  ·
            All
                of the outstanding shares of series A preferred stock shall be
                automatically converted into common stock upon the close of business
                on
                the business day immediately preceding the date fixed for consummation
                of
                any transaction resulting in a change of control of the Company,
                as
                defined in the statement of designation.  ·
            The
                holders may not convert the series A preferred stock to the extent
                that
                such conversion would result in the holder and its affiliates beneficially
                owning more than 4.9% of the Company’s common stock. This provision may
                not be waived or amended.  16
 CHINA
          WIND SYSTEMS, INC. AND SUBSIDIARIES
 NOTES
          TO
          UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 (d)  Securities
        Purchase Agreement
 
 Pursuant
        to the purchase agreement, in addition to the issuance of the convertible
        notes:
  ·
            The
                Company agreed to have appointed such number of independent directors
                that
                would result in a majority of its directors being independent directors,
                that the audit committee would be composed solely of not less than
                three
                independent directors and the compensation committee would have at
                least
                three directors, a majority of which shall be independent directors
                within
                90 days after the closing, which was February 11, 2008. Failure to
                meet
                this date will result in liquidated damages commencing February 12,
                2008,
                until the date on which the requirement is satisfied. Thereafter,
                if the
                Company does not meet these requirements for a period of 60 days
                for an
                excused reason, as defined in the Purchase Agreement, or 75 days
                for a
                reason which is not an excused reason, this would result in the imposition
                of liquidated damages. The investors have agreed to waive any liquidated
                damages related to the initial appointment of independent directors
                and
                the establishment of the committees which occurred in March
                2008.  ·
            The
                Company agreed to have a qualified chief financial officer who may
                be a
                part-time chief financial officer until February 13, 2008. If the
                Company
                cannot hire a qualified chief financial officer promptly upon the
                resignation or termination of employment of a former chief financial
                officer, the Company may engage an accountant or accounting firm
                to
                perform the duties of the chief financial officer.In
                no event shall the Company either (i) fail to file an annual, quarter
                or
                other report in a timely manner because of the absence of a qualified
                chief financial officer, or (ii) not have a person who can make the
                statements and sign the certifications required to be filed in an
                annual
                or quarterly report under the Securities Exchange Act of
                1934.  ·
            Liquidated
                damages for failure to comply with the preceding two covenants are
                computed in an amount equal to 12% per annum of the purchase price,
                up to
                a maximum of 12% of the purchase price, which is $663,000, which
                is
                payable in cash or series A preferred stock, at the election of the
                investors. If payment is made is shares of series A preferred stock,
                each
                share is valued at $.374 per share.  ·
            The
                Company and the investors entered into a registration rights agreement
                pursuant to which the Company agreed to file, by January 12, 2008,
                a
                registration statement covering the common stock issuable upon conversion
                of the series A preferred stock and exercise of the warrants and
                to have
                the registration statement declared effective by June 11, 2008. The
                failure of the Company to have the registration statement declared
                effective by June 11, 2008 and other timetables provided in the
                registration rights agreement would result in the imposition of liquidated
                damages, which are payable through the issuance of additional shares
                of
                series A preferred stock at the rate of 4,860 shares of series A
                preferred
                stock for each day, based on the proposed registration of all of
                the
                underlying shares of common stock, with a maximum of 1,770,000 shares.
                The
                number of shares issuable per day is subject to adjustment if the
                Company
                cannot register all of the required shares as a result of the Securities
                and Exchange Commission’s interpretation of Rule 415. The registration
                rights agreement also provides for additional demand registration
                rights
                in the event that the investors are not able to register all of the
                shares
                in the initial registration statement. 
 The
        Company filed its registration on February 14, 2008 and 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,* 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.  17
 CHINA
          WIND SYSTEMS, INC. AND SUBSIDIARIES
 NOTES
          TO
          UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 ·
            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.  ·
            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.  ·
            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.  ·
            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.  ·
            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. 
 ·
            In
                connection with the Securities Purchase Agreement, $30,000 was deducted
                from the gross proceeds and was paid to an investor as reimbursement
                for
                due diligence expenses, which was deferred as a debt discount and
                was
                amortized over the life of the convertible notes. Other fees incurred
                in
                connection with the debt issuance include $25,000 of legal fees,
                which
                were treated as a deferred debt issue costs and are being amortized
                to
                debt issue cost expense over the life of the notes. The unamortized
                portion of this debt discount on March 28, 2008, the date on which
                the
                convertible notes were automatically converted, was recognized at
                that
                time. 
 18
 CHINA
          WIND SYSTEMS, INC. AND SUBSIDIARIES
 NOTES
          TO
          UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 (e)  Warrants
  The
        warrants issued upon conversion of the notes have a term of five years from
        the
        date of the notes, and expire on November 13, 2012. The warrants provide
        a
        cashless exercise feature; however, the holders of the warrants may not make
        a
        cashless exercise prior to November 13, 2008 in the case of the $0.58 warrants,
        and prior to May 13, 2009 in the case of the $0.83 warrants and $0.92 warrants,
        and after these respective periods only if the underlying shares are not
        covered
        by an effective registration statement.
  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 $0.13131 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
        activities for the six months ended June 30, 2008 are summarized as
        follows:
 
 Number
                  of
                shares
              
              Weighted
                  average exercise priceOutstanding
                  at December 31, 2007
              
              
              400,000
              
              $
              0.50Granted
              
              
              18,829,756
              
              
              0.65Exercised
              
              
              (1,473,000
              )
              
              0.58Cancelled
              
              
              -
              
              
              -Outstanding
                  at June 30, 2008
              
              
              17,756,756
              
              $
              0.70
 
 The
        following table summarizes the shares of the Company's common stock issuable
        upon exercise of warrants outstanding at June 30, 2008:
 
 Warrants
                  Outstanding
              
              Warrants
                  ExercisableRange
                  of
                Exercise
                  Price
              
              Number
                  Outstandingat
                June
                  30,2008
              
              Weighted
                  Average Remaining Contractual Life (Years)
              
              Weighted
                  Average
                Exercise
                  Price
              
              Number
                Exercisable
                  at
                June
                  30,2008
              
              Weighted
                Average
                Exercise
                  Price$
              0.50
              
              
              400,000
              
              
              4.37
              
              $
              0.50
              
              
              400,000
              
              $
              0.500.58
              
              
              9,703,504
              
              
              4.37
              
              
              0.58
              
              
              9,703,504
              
              
              0.580.83
              
              
              5,588,252
              
              
              4.37
              
              
              0.83
              
              
              5,588,252
              
              
              0.830.92
              
              
              2,065,000
              
              
              4.37
              
              
              0.92
              
              
              2,065,000
              
              
              0.9217,756,756
              
              
              
              
              $
              0.70
              
              
              17,756,756
              
              $
              0.70
  (f)  Beneficial
        Conversion Feature; Deemed Dividend
 
 The
        Company evaluated the application of EITF 98-5, “ *Accounting
        for Convertible Securities with Beneficial Conversion Features or Contingently
        Adjustable Conversion Ratios,”* and EITF
        00-27, *“Application
        of Issue No. 98-5 to Certain Convertible Instruments”* and
        concluded that the convertible notes have a beneficial conversion option
        Pursuant to EITF 00-27, Issue 15, the Company computed the intrinsic value
        of
        the conversion option at $2,610,938 based on a comparison of (a) the proceeds
        of
        the convertible debt allocated to the common stock portion of the conversion
        option by first allocating the proceeds received from the convertible debt
        offering to the debt and the detachable warrants on a relative fair value
        basis,
        and (b) the fair value at the commitment date of the common stock to be received
        by the Company upon conversion. The excess of (b) over (a) is the intrinsic
        value of the embedded conversion option of $2,610,938 that has been recognized
        by the Company as discount to the notes were amortized using the straight-line
        method over the shorter (1) the term of Notes, (2) the conversion of the
        notes
        to common stock, or (3) upon filing by the Company of certificate
        of designation and
        immediate conversion of the notes to the series A preferred stock and warrants.
  19
 CHINA
          WIND SYSTEMS, INC. AND SUBSIDIARIES
 NOTES
          TO
          UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 The
        Company filed the Restated Certificate on March 28, 2008 and accordingly,
        the
        Company recognized the value of the warrants and any remaining debt discount
        upon conversion of the debt.
 
 The
        conversion features for the convertible notes have been evaluated under FAS 150,
        FAS
        133, and EITF 00-19 and are deemed not to be an embedded derivative and any
        value attributable to these features would be classified as
        equity.
 
 As
        discussed above, upon filing of the Company’s restated certificate of
        incorporation on March 28, 2008, the Company issued warrants to purchase
        18,829,756 shares of the common stock. At November 13, 2007, 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 at
        March
        28, 2008. The non-cash, deemed dividend did not have an effect on net earnings
        or cash flows for the six months ended June 30, 2008. The estimated fair
        market
        value of the warrants of $2,884,062 has been recorded as additional paid-in
        capital and a reduction to retained earnings.
 
 During
        the six months ended June 30, 2008, amortization of debt issue costs was
        $21,429
        and included any remaining balance of debt issue costs that was expensed
        upon
        conversion of the convertible debt to the series A preferred stock. At December
        31, 2007, deferred debt costs of $21,429 were included in prepaid expenses
        and
        other on the consolidated balance sheets. The amortization of debt discounts
        for
        the six months ended June 30, 2008 was $2,263,661, which has been included
        in
        interest expense on the accompanying statement of operations and included
        any
        remaining balance of the debt discount that was expense upon conversion of
        the
        convertible debt to the series A preferred stock, which occurred on March
        28,
        2008.
 
 In
        November 2007, the Company evaluated whether or not the convertible notes
        contain embedded conversion options, which meet the definition of derivatives
        under SFAS 133 “Accounting for Derivative Instruments and Hedging Activities”
and related interpretations. The Company concluded that since the convertible
        notes had a fixed conversion rate of $0.374, the convertible notes were not
        derivative instruments. The Company analyzed this provision under EITF 05-04
        and, although the debt is unconventional, the reset provision is deemed within
        the Company’s control and therefore it qualified as equity under EITF
        00-19
  The
        convertible notes liability is as follows at June 30, 2008 and December 31,
        2007:
 June
                    30,
                  2008
                
                December
                    31,
                  2007Convertible
                    notes payable
                
                $
                -
                
                $
                5,525,000Less:
                    unamortized discount on notes
                
                
                -
                
                
                (2,263,661
                )Convertible
                    notes, net
                
                $
                -
                
                $
                3,261,339
  20
 CHINA
          WIND SYSTEMS, INC. AND SUBSIDIARIES
 NOTES
          TO
          UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 NOTE
        7 - LOANS
        PAYABLE
 
 At
        June
        30, 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.
              
              $
              291,045
              
              $
              273,444Loan
                  payable to Transportation Bank of China, due on June 10, 2008 with
                  annual
                  interest of 7.23% secured by assets of the Company.
              
              
              -
              
              
              410,167Loan
                  payable to Transportation Bank of China, due on December 10, 2008
                  with
                  annual interest of 7.78% secured by assets of the Company.
              
              
              436,567
              
              
              -Loan
                  payable to Industrial and Commercial Bank of China due on August
                  1, 2008
                  with annual interest of 7.56% secured by assets of the
                  Company.
              
              
              145,522
              
              
              -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.
              
              
              145,522
              
              
              136,722Total
                  Current Loans Payable
              
              $
              1,018,656
              
              $
              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
        June
        30, 2008 and December 31, 2007, due from related parties was due from the
        following:
 
 Name
              
              Relationship
              
              June
                  30, 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)
              
              
              47,581
              
              
              -$
              47,581
              
              $
              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 June 30, 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. 
 21
 CHINA
          WIND SYSTEMS, INC. AND SUBSIDIARIES
 NOTES
          TO
          UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          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 June 30, 2008 and December
        31, 2007, the Company did not have any payable to the chief executive officer
        and his spouse. These advances were short-term in nature and non-interest
        bearing.
 
 Boiler,
        from time to time, provided advances to the Company for working capital
        purposes. At June 30, 2008 and December 31, 2007, the Company had a payable
        to
        Boiler of $0 and $98,541, respectively. These advances were short-term in
        nature
        and non-interest bearing.
 
 **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 June 30, 2008 and
        December 31, 2007, payments totaling 80,086,159 RMB and 79,458,230 RMB or
        approxmately $11,654,000 and $10,864,000, respectively, had been made to
        Boiler,
        adjusted by the foreign exchange rate. In 2008, in connection with the
        acquisition of land use rights from a related party, the Company was granted
        the
        transferred land use rights from the government and accordingly, the Company
        reclassified approximately $5,500,000 from deposits on long-term assets to
        intangible assets (See Note 5). As of June 30, 2008, the Company has not
        received title to the facilities and the property has not been placed in
        service.  The
        Company has initiated the transfer of the title to the facilities and the
        transfer is expected to be completed in the third quarter of 2008 at which
        time
        the deposit on long-term assets will be reclassified to property and equipment.
 
 Additionally,
        during the six months ended June 30, 2008, the Company made of cash deposit
        of
        $2,725,487 for factory equipment for the new factory, having a total cost
        of
        approximately $6,368,000. As of June 30, 2008, the Company had not received
        the
        equipment and this deposit is included in Deposits on Long-term Assets. At
        June
        30, 2008 and December 31, 2007, deposits on long-term assets are as follows:
 
 2008
              
              2007Factory
                  building and related leasehold improvements - related
                  party
              
              $
              5,993,550
              
              $
              10,863,706Deposit
                  of factory equipment
              
              
              2,725,487
              
              
              -$
              8,719,037
              
              $
              10,863,706
  22
 CHINA
          WIND SYSTEMS, INC. AND SUBSIDIARIES
 NOTES
          TO
          UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          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 and
        six
        months ended June 30, 2008 and 2007, the Company operated in two reportable
        business segments - (1) the manufacture of dyeing & finishing equipment and
        (2) the manufacture of forged rolled rings and other components for the wind
        power and other industries and electric power auxiliary apparatuses (including
        coking equipment). The Company's reportable segments are strategic business
        units that offer different products. They are managed separately based on
        the
        fundamental differences in their operations.
 
 Information
        with respect to these reportable business segments for the three and six
        months
        ended June 30, 2008 and 2007 is as follows:
  For
                  the Three Months Ended
                June
                  30,
              
              For
                  the Six Months Ended
                June
                  30,2008
              
              2007
              
              2008
              
              2007Revenues:Dyeing
                  & finishing equipment
              
              $
              6,514,153
              
              $
              4,320,676
              
              $
              11,167,291
              
              $
              8,199,433Forged
                  rolled rings and electric power equipment
              
              
              4,668,797
              
              
              139,296
              
              
              8,462,733
              
              
              389,74911,182,950
              
              
              4,459,972
              
              
              19,630,024
              
              
              8,589,182Depreciation
                  and amortization:Dyeing
                  & finishing equipment
              
              
              103,724
              
              
              93,089
              
              
              204,346
              
              
              185,813Forged
                  rolled rings and electric power equipment
              
              
              124,114
              
              
              57,501
              
              
              185,338
              
              
              113,638227,838
              
              
              150,590
              
              
              389,684
              
              
              299,451Interest
                  expense:Dyeing
                  & finishing equipment
              
              
              -
              
              
              -
              
              
              -
              
              
              -Forged
                  rolled rings and electric power equipment
              
              
              18,753
              
              
              13,366
              
              
              35,505
              
              
              21,414Other
                  (a)
              
              
              -
              
              
              -
              
              
              2,242,942
              
              
              -18,753
              
              
              13,366
              
              
              2,278,447
              
              
              21,414Net
                  income (loss):Dyeing
                  & finishing equipment
              
              
              1,086,989
              
              
              781,302
              
              
              1,791,375
              
              
              1,329,334Forged
                  rolled rings and electric power equipment
              
              
              488,913
              
              
              (75,051
              )
              
              1,129,862
              
              
              (41,318
              )Other
                  (a)
              
              
              (164,718
              )
              
              -
              
              
              (2,759,914
              )
              
              -1,411,184
              
              
              706,251
              
              
              161,323
              
              
              1,288,016Identifiable
                  assets at June 30, 2008 andDecember
                  31, 2007:Dyeing
                  & finishing equipment
              
              $
              20,792,961
              
              $
              17,914,593Forged
                  rolled rings and electric power equipment
              
              
              11,782,125
              
              
              7,455,095Other
                  (a)
              
              
              881,924
              
              
              3,126,745$
              33,457,010
              
              $
              28,496,433
  (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. Additionally, other identifiable assets
                represents assets located in the United States and are not allocated
                to
                reportable segments  23
 CHINA
          WIND SYSTEMS, INC. AND SUBSIDIARIES
 NOTES
          TO
          UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          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 six months ended June 30, 2008, statutory
        reserve activity is as follows:
 
 Dyeing
              
              Electric
              
              TotalBalance
                  - December 31, 2007
              
              
              72,407
              
              $
              233,065
              
              $
              305,472Additional
                  to statutory reserves
              
              
              -
              
              
              115,888
              
              
              115,888Balance
                  - June 30, 2008
              
              $
              72,407
              
              $
              348,953
              
              $
              421,360
  NOTE
        12 - SUBSEQUENT
        EVENTS
 
 From
        July
        1, 2008 to August 8, 2008, the Company issued 828,377 shares of its common
        stock
        pursuant to an exercise of warrants for proceeds of $676,328.
 
 24
  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
        six
        months ended June 30, 2008 and notes thereto contained in this quarterly
        report
        on Form 10-Q.
 
 **Overview**
 
 Prior
        to
        November 13, 2007, we were a public reporting blind pool company with no
        assets.
        On November 13, 2007, we executed and completed the transactions contemplated
        by
        the share exchange agreement with Fulland and its stockholders and Synergy,
        which was then principal stockholder. Pursuant to this agreement, simultaneously
        with the financing as discussed below, (i) the Company issued 36,577,704
        shares
        of common stock to the former stockholders of Fulland, (ii) purchased 8,006,490
        shares of common stock from Synergy for $625,000 and cancelled such shares,
        (iii) issued Synergy 291,529 shares of common stock for professional services,
        and (iv) paid cash fees of $415,000 in connection with the exchange agreement.
        Aggregate payments of $1,040,000 were made from the proceeds of the financing,
        including the $625,000 paid to Synergy as described above.
 
 Fulland
        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
        manufacture of high precision forged rolled rings for the wind power industry
        and other industries and the design, manufacture and sale of electric power
        auxiliary apparatuses (including coking equipment), sewage-treatment equipment
        and related parts or fittings. Green Power operates and controls the Huayang
        Companies through contractual arrangements. Fulland used the contractual
        arrangements to acquire control of the Huayang Companies, instead of acquiring
        the business of Huayang Companies in order not to violate the laws of the
        PRC
        that significantly restrict a PRC company from selling its assets to a foreign
        entity other than for cash and otherwise impose restriction on foreign
        investment in PRC companies.
 
 The
        acquisition of Fulland was accounted for as a reverse merger because on a
        post-merger basis, the former shareholders of Fulland held a majority of
        our
        outstanding common stock on a voting and fully-diluted basis. As a result
        of the
        share exchange, Fulland was deemed to be the acquirer for accounting purposes.
        Accordingly, the financial statement data presented are those of Fulland
        (including the Huayang Companies) for all periods prior to our acquisition
        of
        Fulland on November 13, 2007, and the financial statements of the consolidated
        companies from the acquisition date forward. Since Fulland did not have any
        separate operations prior to November 13, 2007, the financial statements
        of
        Fulland reflect the operations of the Huayang Companies.
 
 Our
        revenues are derived from two unrelated businesses - (1) the manufacture
        of
        dyeing & finishing equipment and (2) the manufacture of forged rolled rings
        and other components for the wind power and other industries and electric
        power
        auxiliary apparatuses (including coking equipment). We market products from
        these two segments with independent marketing groups to different customer
        bases.
 
 Dyeing
        and finishing equipment segment
  The
        dyeing and finishing equipment business has been the principal source of
        our
        revenue and operating income, accounting for 56.9% of revenue for the six
        months
        ended June 30, 2008 and 81.1% of revenues for the year ended December 31,
        2007.
        Substantially all of our sales of these products are made to companies in
        the
        PRC. As a result, we are dependent upon the continued growth of the textile
        industry in the PRC. To the extent that growth in this industry stagnates
        in the
        PRC, whether as a result of export restrictions from countries such as the
        United States, who are major importers of Chinese-made textiles, or shifts
        in
        international manufacturing to countries which may have a lower cost than
        the
        PRC or overexpansion of the Chinese textile industry, we will have more
        difficulty in selling these products in the PRC, and we may have difficulty
        exporting our equipment. Further, as the textile industry seeks to lower
        costs
        by purchasing equipment that uses the most technological developments to
        improve
        productivity, reduce costs and have less adverse environmental impact, if
        we are
        not able to offer products utilizing the most current technology, our ability
        to
        market our products will suffer. Although we seek to work with our customers
        in
        designing equipment to meet their anticipated needs, we cannot assure you
        that
        we will be able to develop products and enhancements that are required or
        desired by the industry.
  25
  Forged
        rolled rings and electric power equipment segment
  In
        our
        forged rolled rings and electrical power equipment segment, we manufacture
        high
        precision forged rolled rings for the wind power industry and other industries.
        Additionally, we also manufacture specialty equipment used in the production
        of
        coal generated electricity. Revenue from our forged rolled rings and electrical
        power equipment segment accounted for 41.7% of revenue for the three months
        ended June 30, 2008, 43.1% of revenues for the six months ended June 30,
        2008,
        and 18.9% of revenues for the year ended December 31, 2007 and is summaries
        as
        follows:
 
 For
                  the Three Months Ended June 30, 2008
              
              For
                  the Six Months Ended June 30, 2008
              
              For
                  the Year
                Ended
                December
                  31,
                2007Forged
                  rolled rings - wind power industry
              
              $
              1,669,459
              
              $
              2,630,749
              
              $
              458,988Forged
                  rolled rings - other industries
              
              
              2,412,286
              
              
              4,655,262
              
              
              1,443,930Electrical
                  equipment
              
              
              587,052
              
              
              1,176,722
              
              
              2,722,432Total
                  forged rolled rings and electric equipment segment
                  revenues
              
              $
              4,668,797
              
              $
              8,462,733
              
              $
              4,625,350
 
 During
        2007, we began to generate revenue from the forging of rolled rings for the
        wind
        power and other industries. These activities accounted for 36.5% of net revenues
        for the three months ended June 30, 2008, 37.1% for the six months ended
        June
        30, 2008 and 7.8% for the year ended December 31, 2007. We expect that rolled
        rings will become a more significant percentage of total revenues in the
        future,
        and, in this connection we are expanding our manufacturing facilities to
        enable
        us to manufacture forged rolled rings with a larger diameter in order to
        meet
        the perceived needs of the wind power industry.
 
 We
        acquired from an affiliated company for a net price of approximately
        $10,950,000, an approximately 100,000 square foot factory which was
        substantially completed in 2005 together with the related land use rights,
        employee housing facilities and other leasehold improvements. As of June
        30,
        2008, the purchase price was fully paid. Furthermore, through June 30, 2008,
        we
        have incurred additional costs of approximately $2.2 million for leasehold
        improvements to upgrade this facility for the eventual manufacture of larger
        roll rings and other componenets with a focus on the wind power industry.
        Although we have received the land use rights, as of the date of this report,
        we
        have not received title to the factory facilities and the property has not
        been
        placed in service. We intend to use this new facility to manufacture forged
        rolled rings and other components for use in the wind power and other
        industries. To date, most of our rolled ring sales have been for non-wind
        applications.  As we expand our facilities to accommodate the manufacture
        of rolled rings with larger diameters, we plan to develop products for which
        the
        wind industry is a more important target market. Wind power accounts for
        an
        insignificant percentage of the power generated in the PRC, and our ability
        to
        market to this segment is dependent upon both the growth of the acceptance
        of
        wind power as an energy source in the PRC and the acceptance of our products.
 
 In
        addition to manufacturing forged roll rings, we market electrical power
        equipment to operators of coal-fired electricity generation plants. Our ability
        to market these products is dependent upon the continued growth of
        coal-generated power plants and our ability to offer products that enable
        the
        operators of the power plants to produce electricity through a cleaner process
        than would otherwise be available at a reasonable cost. To the extent that
        government regulations are adopted that require the power plants to reduce
        or
        eliminate polluting discharges from power plants, our equipment would need
        to be
        redesigned to meet such requirements.
  26
  **Critical
        Accounting Policies and Estimates**
 
 **Use
        of Estimates**
  The
        preparation of our consolidated financial statements requires us to make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and the disclosure of contingent assets and liabilities at the
        date
        of the financial statements as well as the reported net sales and expenses
        during the reporting periods. On an ongoing basis, we evaluate our estimates
        and
        assumptions. We base our estimates on historical experience and on various
        other
        factors that we believe are reasonable under the circumstances, the results
        of
        which form the basis for making judgments about the carrying value of assets
        and
        liabilities that are not readily apparent from other sources. Actual results
        may
        differ from these estimates under different assumptions or
        conditions. Significant estimates in 2008 and 2007 include the allowance for doubtful
        accounts, the allowance for obsolete inventory, the useful life of property
        and
        equipment and intangible assets, and accruals for taxes due.
 
 **Variable
        Interest Entities**
 
 Pursuant
        to Financial
        Accounting Standards Board Interpretation No. 46 (Revised), “Consolidation of
        Variable Interest Entities - an Interpretation of ARB No. 51” (“FIN 46R”) we
        are
        required to include in our consolidated financial statements the financial
        statements of variable interest entities. FIN 46R requires a variable interest
        entity to be consolidated by a company if that company is subject to a majority
        of the risk of loss for the variable interest entity or is entitled to receive
        a
        majority of the variable interest entity’s residual returns. Variable interest
        entities are those entities in which we, through contractual arrangements,
        bear
        the risk of, and enjoy the rewards normally associated with ownership of
        the
        entity, and therefore we are the primary beneficiary of the entity.
 
 The
        Huayang Companies are considered variable interest entities (“VIE”), and we are
        the primary beneficiary. On November 13, 2007, we entered into agreements
        with the
        Huayang Companies pursuant to which we shall receive 100% of the
        Huayang Companies net income. In accordance with these agreements, the
        Huayang Companies shall pay consulting fees equal to 100% of its net income
        to
        our wholly-owned foreign subsidiary,Green
        Power, and Green Power shall supply the technology and administrative services
        needed to service the
        Huayang Companies.
 
 The
        accounts of the Huayang Companies are consolidated in the accompanying financial
        statements pursuant to FIN 46R. As a VIE, the Huayang Companies sales are
        included in our total sales, its income from operations is consolidated with
        our, and our net income includes all of the Huayang Companies net income.
        We do
        not have any non-controlling interest and accordingly, did not subtract any
        net
        income in calculating the net income attributable to us. Because of the
        contractual arrangements, we have pecuniary interest in the Huayang Companies
        that require consolidation of our financial statements and the Huayang Companies
        financial statements.
 
 **Inventories**
 
 Inventories,
        consisting of raw materials and finished goods related our products are stated
        at the lower of cost or market utilizing the weighted average
        method. An
        allowance is established when management determines that certain inventories
        may
        not be saleable. If inventory costs exceed expected market value due to
        obsolescence or quantities in excess of expected demand, we will record reserves
        for the difference between the cost and the market value. These reserves
        are
        recorded based on estimates.
 
 **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
  27
  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 land use
        right terms ranging from 45 to 50 years.
 
 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.
 
 **Revenue
        recognition**
 
 We
        recognize revenue when persuasive evidence of an arrangement exists, delivery
        has occurred or services have been rendered, the purchase price is fixed
        or
        determinable and collectability is reasonably assured. We account for the
        product sales as a multiple element arrangement. Revenue from multiple element
        arrangements is allocated among the separate accounting units based on the
        residual method. Under the residual method, the revenue is allocated to
        undelivered elements based on fair value of such undelivered elements and
        the
        residual amounts of revenue allocated to delivered elements. We recognize
        revenue from the sale of dyeing and electric equipment upon shipment and
        transfer of title. The other elements may include installation and generally
        a
        one-year warranty. Equipment installation revenue is valued based on estimated
        service person hours to complete installation and is recognized when the
        labor
        has been completed and the equipment has been accepted by the customer, which
        is
        generally within a close to the date of delivery of the equipment. Warranty
        revenue is valued based on estimated service person hours to complete a service
        and generally is recognized over the contract period. For the three and six
        months ended June 30, 2008, amounts allocated to warranty revenues were not
        material. Based on historical experience, warranty service calls and any
        related
        labor costs have been minimal.
  All
        other
        product sales, including the forging of parts, with customer specific acceptance
        provisions, are recognized upon customer acceptance and the delivery of the
        parts or service. Revenues related to spare part sales are recognized upon
        shipment or delivery based on the trade terms.
 
 **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 June 30, 2008
        has
        not been significant and is included in selling, general and administrative
        expenses.
 
 28
  **Income
        taxes**
 
 We
        are
        governed by the Income Tax Law of the PRC. Income taxes are accounted for
        under
        Statement of Financial Accounting Standards No. 109, “Accounting for Income
        Taxes,” which is an asset and liability approach that requires the recognition
        of deferred tax assets and liabilities for the expected future tax consequences
        of events that have been recognized in our financial statements or tax returns.
        The charge for taxes is based on the results for the year as adjusted for
        items,
        which are non-assessable or disallowed. It is calculated using tax rates
        that
        have been enacted or substantively enacted by the balance sheet
        date.
  Deferred
        tax is accounted for using the balance sheet liability method in respect
        of
        temporary differences arising from differences between the carrying amount
        of
        assets and liabilities in the financial statements and the corresponding
        tax
        basis used in the computation of assessable tax profit. In principle, deferred
        tax liabilities are recognized for all taxable temporary differences, and
        deferred tax assets are recognized to the extent that it is probably that
        taxable profit will be available against which deductible temporary differences
        can be utilized.
 
 Deferred
        tax is calculated using tax rates that are expected to apply to the period
        when
        the asset is realized or the liability is settled. Deferred tax is charged
        or
        credited in the income statement, except when it is related to items credited
        or
        charged directly to equity, in which case the deferred tax is also dealt
        with in
        equity.
 
 Deferred
        tax assets and liabilities are offset when they related to income taxes levied
        by the same taxation authority and the Company intends to settle its current
        tax
        assets and liabilities on a net basis.
 
 We
        adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes”
(“FIN 48”), as of January 1, 2007. A tax position is recognized as a benefit
        only if it is “more likely than not” that the tax position would be sustained in
        a tax examination, with a tax examination being presumed to occur. The amount
        recognized is the largest amount of tax benefit that is greater than 50%
        likely
        of being realized on examination. For tax positions not meeting the “more likely
        than not” test, no tax benefit is recorded. The adoption had no affect on our
        financial statements.
 
 **Recent
        accounting pronouncements** ******
 
 In
        June
        2007, the Emerging Issues Task Force of the FASB issued EITF Issue No. 07-3, *Accounting
        for Nonrefundable Advance Payments for Goods or Services to be Used in Future
        Research and Development Activities* ,
        (“EITF
        07-3”) which is effective for fiscal years beginning after December 15, 2007.
        EITF 07-3 requires that nonrefundable advance payments for future research
        and
        development activities be deferred and capitalized. Such amounts will be
        recognized as an expense as the goods are delivered or the related services
        are
        performed. 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.
 
 29
  In
        March 2008, the FASB issued SFAS 161, “ *Disclosures
        about Derivative Instruments and Hedging Activities* ” *.* The new
        standard is intended to improve financial reporting about derivative instruments
        and hedging activities by requiring enhanced disclosures to enable investors
        to
        better understand their effects on an entity’s financial position, financial
        performance, and cash flows. It is effective for financial statements issued
        for
        fiscal years and interim periods beginning after November 15, 2008, with
        early application encouraged. We are currently evaluating the impact of adopting
        SFAS 161 on our consolidated financial statements.
 
 In
        May
        2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
        Position (“FSP”) APB 14-1, *Accounting
        for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
        (Including Partial Cash Settlement)* .
        FSP APB
        14-1 clarifies that convertible debt instruments that may be settled in cash
        upon either mandatory or optional conversion (including partial cash settlement)
        are not addressed by paragraph 12 of APB Opinion No. 14, *Accounting
        for Convertible Debt and Debt issued with Stock Purchase
        Warrants* .
        Additionally, FSP APB 14-1 specifies that issuers of such instruments should
        separately account for the liability and equity components in a manner that
        will
        reflect the entity’s non-convertible debt borrowing rate when interest cost is
        recognized in subsequent periods. FSP APB 14-1 is effective for financial
        statements issued for fiscal years beginning after December 15, 2008, and
        interim periods within those fiscal years. The Company will adopt FSP APB
        14-1
        beginning in the first quarter of fiscal 2009, and this standard must be
        applied
        on a retrospective basis. The Company is evaluating the impact the adoption
        of
        FSP APB 14-1 will have on its consolidated financial position and results
        of
        operations.
 
 In
        May
        2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.
        162, *The
        Hierarchy of Generally Accepted Accounting Principles* .
        This
        standard is intended to improve financial reporting by identifying a consistent
        framework, or hierarchy, for selecting accounting principles to be used in
        preparing financial statements that are presented in conformity with generally
        accepted accounting principles in the United States for non-governmental
        entities. SFAS No. 162 is effective 60 days following approval by the U.S.
        Securities and Exchange Commission (“SEC”) of the Public Company Accounting
        Oversight Board’s amendments to AU Section 411, *The
        Meaning of Present Fairly in Conformity with Generally Accepted Accounting
        Principles* .
        The
        Company does not expect SFAS No. 162 to have a material impact on the
        preparation of its consolidated financial statements.
 
 On
        June
        16, 2008, the FASB issued final Staff Position (FSP) No. EITF 03-6-1,
“ *Determining
        Whether Instruments Granted in Share-Based Payment Transactions Are
        Participating Securities* ,”
to
        address the question of whether instruments granted in share-based payment
        transactions are participating securities prior to vesting. The FSP determines
        that unvested share-based payment awards that contain rights to dividend
        payments should be included in earnings per share calculations. The guidance
        will be effective for fiscal years beginning after December 15, 2008. The
        Company is currently evaluating the requirements of (FSP) No. EITF 03-6-1
        as
        well as the impact of the adoption on its consolidated financial
        statements.
 
 30
  **RESULTS
        OF OPERATIONS**
 
 The
        following table sets forth the results of our operations for the periods
        indicated as a percentage of net revenues:
 
 Three
                  Months Ended June 30,
              
              Six
                  Months Ended June 30,2008
              
              2007
              
              2008
              
              2007($)
              
              (%)
              
              ($)
              
              (%)
              
              ($)
              
              (%)
              
              ($)
              
              (%)Net
                  Revenues
              
              
              11,182,950
              
              
              100.0
              
              
              4,459,972
              
              
              100.0
              
              
              19,630,024
              
              
              100.0
              
              
              8,589,182
              
              
              100.0Cost
                  of Revenues
              
              
              8,419,505
              
              
              75.3
              
              
              3,135,450
              
              
              70.3
              
              
              14,692,331
              
              
              74.8
              
              
              6,197,569
              
              
              72.2Gross
                  Profit
              
              
              2,763,445
              
              
              24.7
              
              
              1,324,522
              
              
              29.7
              
              
              4,937,693
              
              
              25.2
              
              
              2,391,613
              
              
              27.8Operating
                  Expenses
              
              
              730,988
              
              
              6.5
              
              
              303,415
              
              
              6.8
              
              
              1,425,576
              
              
              7.3
              
              
              482,210
              
              
              5.6Income
                  from Operations
              
              
              2,032,457
              
              
              18.1
              
              
              1,021,107
              
              
              22.9
              
              
              3,512,117
              
              
              17.9
              
              
              1,909,403
              
              
              22.2Other
                  Income (Expenses)
              
              
              (14,742
              )
              
              (0.1
              )
              
              (13,186
              )
              
              (0.3
              )
              
              (2,290,232
              )
              
              (11.7
              )
              
              (21,133
              )
              
              (0.2
              )Income
                  Before Provision for Income Taxes
              
              
              2,017,715
              
              
              18.0
              
              
              1,007,921
              
              
              22.6
              
              
              1,221,885
              
              
              6.2
              
              
              1,888,270
              
              
              22.0Provision
                  for Income Taxes
              
              
              606,531
              
              
              5.4
              
              
              301,670
              
              
              6.8
              
              
              1,060,562
              
              
              5.4
              
              
              600,254
              
              
              7.0Net
                  Income
              
              
              1,411,184
              
              
              12.6
              
              
              706,251
              
              
              15.8
              
              
              161,323
              
              
              0.8
              
              
              1,288,016
              
              
              15.0Other
                  Comprehensive Income:Foreign
                  Currency TranslationAdjustment
              
              
              605,039
              
              
              5.4
              
              
              141,135
              
              
              3.2
              
              
              1,612,284
              
              
              8.2
              
              
              224,296
              
              
              2.6Comprehensive
                  Income
              
              
              2,016,223
              
              
              18.0
              
              
              847,386
              
              
              19.0
              
              
              1,773,607
              
              
              9.0
              
              
              1,512,312
              
              
              17.6
 
 The
        following table sets forth information as to the gross margin for our two
        lines
        of business for the three and six months ended June 30, 2008 and 2007.
  For
                  the Three Months Ended
                June
                  30,
              
              For
                  the Six Months Ended
                June
                  30,2008
              
              2007
              
              2008
              
              2007Dyeing
                  and finishing equipment:Revenue
              
              
              6,514,153
              
              
              4,320,676
              
              
              11,167,291
              
              
              8,199,433Cost
                  of sales
              
              
              4,827,184
              
              
              2,961,949
              
              
              8,266,411
              
              
              5,839,873Gross
                  profit
              
              
              1,686,969
              
              
              1,358,727
              
              
              2,900,880
              
              
              2,359,560Gross
                  margin
              
              
              25.9
              %
              
              31.45
              %
              
              26.0
              %
              
              28.8
              %Forged
                  rolled rings and electric power equipmentRevenue
              
              
              4,668,797
              
              
              139,296
              
              
              8,462,733
              
              
              389,749Cost
                  of sales
              
              
              3,592,321
              
              
              173,501
              
              
              6,425,920
              
              
              357,696Gross
                  profit
              
              
              1,076,476
              
              
              (34,205
              )
              
              2,036,813
              
              
              32,053Gross
                  margin
              
              
              23.1
              %
              
              (24.56
              )%
              
              24.1
              %
              
              8.2
              %
 
 31
  **Six
        Months Ended June 30, 2008 and 2007**
 
 *Revenues.* For the
        six months ended June 30,
        2008,
        we had revenues of $19,630,024, as compared to revenues of $8,589,182 for
        the
        six months ended June 30, 2007, an increase of $11,040,842 or approximately
        128.5%. The increase
        in total revenue was attributable to increases from both of our segments
        and is
        summarized as follows:
 
 For
                  the Six Months
                Ended
                  June 30,2008
              
              For
                  the Six Months
                Ended
                  June 30, 2007
              
              Increase
              
              Percentage
                  ChangeDyeing
                  and finishing equipment
              
              $
              11,167,291
              
              $
              8,199,433
              
              $
              2,967,858
              
              
              36.2
              %Forged
                  rolled rings - wind power industry
              
              
              2,630,749
              
              
              8,625
              
              
              2,622,124
              
              
              *Forged
                  rolled rings - other industries
              
              
              4,655,262
              
              
              25,863
              
              
              4,629,399
              
              
              *Electrical
                  equipment
              
              
              1,176,722
              
              
              355,261
              
              
              821,461
              
              
              231.2
              %Total
                  net revenues
              
              $
              19,630,024
              
              $
              8,589,182
              
              $
              11,040,842
              
              
              128.5
              %
 
 *
        Because
        the sales for the six months ended June 30, 2007 was minimal, the percentage
        increase is not meaningful.
 
 Our
        revenue increases were attributable to:
 
 ·
            The
                increase in revenues from the sale of dyeing and finishing equipment
                was
                attributable to continued strong sales of our equipment to the textile
                industry.  ·
            We
                have experienced an increase in revenues from the sale of forged
                rings to
                the other industries such as the railway, heavy machinery manufacturing,
                petrochemical, metallurgical, sea port machinery, and defense and
                radar
                industry. This source of revenue was nominal for the six months ended
                June
                30, 2007.  ·
            Revenue
                from the sale of forged rings to the wind power industry, which was
                nominal in the six months ended June 30, 2007 increased to $2.6 million
                and is attributable to the demand for our forged rolled rings that
                will be
                used in the production of wind turbine components such as gear boxes
                and
                yaw bearings. The wind power industry is experiencing such tremendous
                growth that the industry is facing a serious shortage of various
                components, principally gearboxes and
                bearings.  ·
            The
                increase in revenues from the sale of standard and custom auxiliary
                equipment for use in the power industry in China is attributable
                to the
                continued sale of additional pieces of equipment to the power
                industry. 
 *Cost
        of sales.* Cost of
        sales for the six months ended June 30,
        2008
        increased $8,494,762 or 137.1%, from  $6,197,569
        for the six
        months ended June 30, 2007 to
        $14.692.331 for the six
        months ended June 30, 2008. Cost of goods sold for Dyeing  was
        $8,266,411 for the six months ended June 30, 2008, as compared to $5,839,873
        for
        the six months ended June 30, 2007. Cost of sales related to electric power
        generating equipment and the manufacture of forged rolled rings and other
        components was $6,425,920 for the six months ended
        June 30, 2008 as compared to $357,696
        for the six
        months ended June 30, 2007.
 
 *Gross
        margin.* Our
        gross profit was $4,937,693 for the six months ended June 30, 2008 as compared
        to $2,391,613 for the six months ended June 30, 2007, representing gross
        margins
        of 25.2% and 27.8%, respectively. Gross profit for Dyeing was $2,900,880
        for the
        six months ended June 30, 2008 as compared to $2,359,560 for the six months
        ended June 30, 2007, representing gross margins of approximately 26.0% and
        28.8%, respectively. The modest decrease in our gross margin was attributable
        to
        an increase in raw material costs such as steel and other metals which could
        not
        be passed on to our customers during that period. Gross profits from forged
        rolled rings and electric power equipment segment were $2,036,813 for the
        six
        months ended June 30, 2008 as compared to $32,053 for the six months ended
        June
        30, 2007, representing gross margins of approximately 24.1% and 8.2%,
        respectively. The gross
        margins for the six months ended June 30, 2007 for this segment is not
        meaningful, since sale of the forged rolled rings were nominal and we were
        in
        the start up phase for all aspects of this segment.
 
 32
  *Depreciation
        and amortization expense* . For
        the
        six months ended June 30, 2008 and 2007, depreciation
        expense amounted to $389,684 and $299,451, of which $170,096 and $160,183
        is
        included in cost of sales and
        $219,588 and $139,268 is included in
        operating expenses ,
        respectively. The overall increase in depreciation and amortization is
        attributable to an increase in equipment as well as amortization of recently
        acquired land use rights.
 
 *Selling,
        general and administrative expenses.* Selling,
        general and administrative expenses totaled $1,205,988 for the six months
        ended
        June 30, 2008, as compared to $342,942 for the six months ended June 30,
        2007,
        an increase of $863,046 or approximately 251.7%. Selling, general and
        administrative expenses
        consisted of the following:
 
 Six
                  MonthsEnded
                June
                  30,2008
              
              Six
                  MonthsEnded
                June
                  30,2007Professional
                  fees
              
              $
              380,520
              
              $
              -Payroll
                  and related benefits
              
              
              222,521
              
              
              22,629Travel
              
              
              102,196
              
              
              83,968Bad
                  debt expense
              
              
              170,024
              
              
              133,693Other
              
              
              330,727
              
              
              102,652$
              1,205,988
              
              $
              342,942
 
 ·
            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
                six
                months ended June 30, 2008,professional
                fees amounted to $380,520 as compared to $0 in the 2007 period. Included
                in professional fees are legal fees of $132,739, audit fees of $95,520,
                investor relation fees of $74,107, and other professional
                fees.  ·
            Payroll
                and related benefits increased for the six months ended June 30,
                2008by
                $199,892, or 883.3%, as compared to the six months ended June 30,
                2007. In
                November 2007, we hired additional personnel in accounting, our chief
                financial officer, a translator, and administration staff due to
                our
                increased operations and additional workload in connection with being
                a
                public company. Additionally, the increase in payroll and related
                benefits
                reflected stock based compensation of $75,000 resulting from the
                issuance
                of common stock to two independent
                directors.  ·
            Travel
                expense for the six months ended June 30, 2008 increased by$18,228,
                or 21.7%, as compared to the six months ended June 30, 2007. The
                increase
                is related to increased travel by sales personnel and engineers.  ·
            Bad
                debts expenses increased by $36,331 for thesix months ended June 30, 2008 as compared to the six months ended
                June
                30, 2007 based on our analysis of accounts receivable
                balances.  ·
            Other
                selling, general and administrative expenses increased by $228,075
                for
                thesix months ended June 30, 2008 as compared to the six months ended
                June
                30, 2007 due to increased operations. 
 *Income
        from operations.* For
        the
        six months ended June 30, 2008, income from operations was $3,512,117 as
        compared to $1,909,403 for the six months ended June 30, 2007, an increase
        of
        $1,602,714 or 83.9%.
 
 *Other
        income (expenses)* .
        For the
        six months ended June 30, 2008, other expense amounted to $2,290,232 as compared
        to other expenses of $21,133 for the six months ended June 30, 2007. For
        the six
        months ended June 30, 2007, other expenses consisted of interest expense
        of
        $21,414 offset by interest income of $281. For the six months ended June
        30,
        2008, other expenses included i) interest expense of $2,278,447 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 $9,644.
 
 *Income
        tax expense* .
        Income
        tax expense increased $460,308 or approximately 76.7% during the six
        months ended June 30, 2008 primarily as a result of the increase in taxable
        income generated by our operating entities.
  *Net
        income (loss).* ****** For
        the
        six months ended June 30, 2008, we recorded net income of $161,323 as compared
        to net income of $1,288,016 for the six months ended June 30, 2007. For the
        six
        months ended June 30, 2008, we recorded a deemed beneficial dividend related
        to
        the fair value of warrants granted in March 2008, which reduced the net income
        available to common stockholders. Accordingly, for the six months ended June
        30,
        2008, we generated a net loss available to common stockholders of $2,722,739
        or
        $(0.07) per share (basic and diluted) as compared to net income per common
        share
        of $0.04 (basic and diluted) for the six months June 30, 2007.
  33
  *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 $1,612,284 for the six months ended June 30,
        2008 as compared to $224,296 for
        comparable period in 2007. This non-cash gain had the effect of increasing
        our
        reported comprehensive income.
  *Comprehensive
        income (loss).* For
        the
        six months ended June 30, 2008, comprehensive income of $1,773,607 is derived
        from the sum of our net income of $161,323 plus foreign currency translation
        gains of $1,612,284.
 
 **Three
        Months Ended June 30, 2008 and 2007**
 
 *Revenues.* For the
        three months ended June 30, 2008, we had revenues of $11,182,950, as compared
        to
        revenues of $4,459,972 for the three months ended June 30, 2007, an increase
        of
        $6,722,978 or approximately 150.7%. The
        increase in total revenue was attributable to increases from both of our
        segments and is summarized as follows:
 
 For
                  the Three Months Ended June 30, 2008
              
              For
                  the Three Months Ended June 30, 2007
              
              Increase
              
              Percentage
                  ChangeDyeing
                  and finishing equipment
              
              $
              6,514,153
              
              $
              4,320,676
              
              $
              2,193,477
              
              
              50.8
              %Forged
                  rolled rings - wind power industry
              
              
              1,669,459
              
              
              8,625
              
              
              1,660,834
              
              
              *Forged
                  rolled rings - other industries
              
              
              2,412,286
              
              
              25,863
              
              
              2,386,423
              
              
              *Electrical
                  equipment
              
              
              587,052
              
              
              104,808
              
              
              482,244
              
              
              460.1
              %Total
                  net revenues
              
              $
              11,182,950
              
              $
              4,459,972
              
              $
              6,722,978
              
              
              150.7
              %
  *
              Because
                  the sales for the six months ended June 30, 2007 was minimal, the
                  percentage increase is not
                  meaningful.
  ·
            Increases
                in revenues for the three months ended June 30, 2008 as compared
                to the
                three months ended June 30, 2007 are attributable to similar explanations
                provided in our discussion of results of operations for the six month
                period. 
 *Cost
        of sales.* Cost of
        sales for the three months ended June 30, 2008 increased $5,284,055 or 168.5%,
        from $3,135,450 for the three months ended June 30, 2007 to $8,419,505
        for the
        three months ended June 30, 2008. Cost of goods sold for Dyeing  was
        $4,827,184 for the
        three months ended June 30, 2008, as compared to
        $2,961,949 for the
        three months ended June 30, 2007. Cost
        of
        sales related to electric power generating equipment and the manufacture
        of
        forged rolled rings and other components was $3,592,321 for the three
        months ended
        June 30, 2008 as compared to $173,501
        for the
        three months ended June 30, 2007.
 
 *Gross
        margin.* Our
        gross profit was $2,763,445 for the three months ended June 30, 2008 as compared
        to $1,324,522 for the three months ended June 30, 2007, representing gross
        margins of 24.7% and 29.7%, respectively. Gross profit for Dyeing was $1,686,969
        for the
        three months ended June 30 ,
        2008 as
        compared to $1,358,727 for the three months ended June 30, 2007, representing
        gross margins of approximately 25.9% and 31.45%, respectively .
        The
        decrease in our gross margin was attributable to an increase in raw material
        costs such as steel and other metals which could not be passed on to our
        customers during that period. Gross profit related
        to the forged rolled rings and electric power equipment was $1,076,476 for
        the
        three months ended June 30, 2008 representing a gross margin of 23.1%. We
        had
        negative gross
        margins for the three months ended June 30, 2007, since sales of the forged
        rolled rings were nominal and we were in a start up phase for all aspects
        of
        this segment.
  34
  *Depreciation
        and amortization expense* .
        Depreciation and amortization amounted to $227,838 for the three months ended
        June 30, 2008 and $150,590 for the three months ended June 30, 2007, of which
        $86,270 and $83,126 is included in cost of sales and $141,568 and $67,464
        is
        included in operating expenses, respectively. The
        overall increase in depreciation and amortization is attributable to an increase
        in equipment as well as amortization of recently acquired land use
        rights.
 
 *Selling,
        general and administrative expenses.* Selling,
        general and administrative expenses totaled $589,420 for the three months
        ended
        June 30, 2008, as compared to $235,951 for the three months ended June 30,
        2007,
        an increase of $353,469 or approximately 149.8%. Selling, general and
        administrative expenses consisted of the following:
 
 Three
                  Months Ended June 30, 2008
              
              Three
                  Months Ended June 30, 2007Professional
                  fees
              
              $
              138,815
              
              $
              -Payroll
                  and related benefits
              
              
              102,705
              
              
              17,254Travel
              
              
              19,804
              
              
              45,219Bad
                  debt
              
              
              170,024
              
              
              133,693Other
              
              
              158,072
              
              
              39,785$
              589,420
              
              $
              235,951
 
 ·
            Since
                the share exchange in November 2007, we have incurred professional
                fees,
                principally as a result of our status as a public company.For
                the three months ended June 30, 2008, professional fees amounted
                to
                $138,815 as compared to $0 in the 2007 period.  ·
            Payroll
                and related benefits increased for the three months ended June 30,
                2008 by
                $85,451, or 495.3%, as compared to the three months ended June 30,
                2007.
                In November 2007, we hired additional personnel in accounting, our
                chief
                financial officer, a translator, and administration staff due to
                our
                increased operations and additional workload in connection with being
                a
                public company. Additionally, the increase in payroll and related
                benefits
                reflected stock based compensation of $30,000 resulting from the
                issuance
                of common stock to an independent director,  ·
            Travel
                expense in 2008 decreased by $25,415, or 56.2%, as compared to the
                three
                months ended June 30, 2007.  ·
            Bad
                debts expenses increased by $36,331 for the three months ended June
                30,
                2008 as compared to the three months ended June 30, 2007based
                on our analysis of accounts receivable balances.  ·
            Other
                selling, general and administrative expenses increased by $118,287
                for the
                three monthsended June 30, 2008 as compared with the three months ended June
                30,
                2007. 
 *Income
        from operations.* For
        the
        three months ended June 30, 2008, income from operations was $2,032,457 as
        compared to $1,021,107 for the three months ended June 30, 2007, an increase
        of
        $1,011,350 or 99.0%.
 
 *Other
        income (expenses)* .
        For the
        three months ended June 30, 2008, other expense amounted to $14,742 as compared
        to other expenses of $13,186 for the three months ended June 30, 2007. For
        the
        three months ended June 30, 2007, other expenses consisted of interest expense
        of $13,366 offset by interest income of $180. For the three months ended
        June
        30, 2008, other expenses reflected interest expense of $18,753 offset by
        interest income of $4,011.
 
 *Income
        tax expense* .
        Income
        tax expense increased $304,861 or approximately 101.1% during the three months
        ended June 30, 2008 primarily as a result of the increase in taxable income
        generated by our operating entities .
  *Net
        income.* ****** For
        the
        three months ended June 30, 2008, we recorded net income of $1,411,184, or
        $0.04
        per share (basic) and $0.02 per share (diluted) as compared to net
        income of $706,251,
        or $0.02 per share (basic and diluted) for the
        three months ended June 30, 2007.
 
 *Foreign
        currency translation gain.* The
        functional currency of our subsidiaries operating in the PRC is the Chinese
        Yuan
        or Renminbi (“RMB”). The financial statements of our subsidiaries
        are translated to U.S. dollars using period end rates of exchange for assets
        and
        liabilities, and average rates of exchange (for the period) for revenues,
        costs,
        and expenses. Net gains and losses resulting from foreign exchange transactions
        are included in the consolidated statements of operations. As a result of
        these
        translations, which are a non cash adjustment, we reported a foreign currency
        translation gain of $605,039 for the three months ended June 30, 2008 as
        compared to $141,135 for comparable period in 2007. This non-cash gain had
        the
        effect of increasing our reported comprehensive income.
  35
  *Comprehensive
        income.* For
        the
        three months ended June 30, 2008, comprehensive income of $2,016,223 is derived
        from the sum of our net income of $141,184 plus foreign currency translation
        gains of $605,039.
 
 **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 June 30, 2008 and December 31, 2007, we had cash balances of $2,274,524
        and
        $5,025,434, respectively. These funds are located in financial institutions
        located as follows:
  **June
                    30, 2008**
                
                **December
                    31, 2007**Country:United
                    States
                
                $
                777,352
                
                
                34.2
                %
                $
                171,121
                
                
                3.4
                %China
                
                
                1,497,172
                
                
                65.8
                %
                
                4,854,313
                
                
                96.6
                %Total
                    cash and cash equivalents
                
                $
                2,274,524
                
                
                100.0
                %
                $
                5,025,434
                
                
                100.0
                %
  Our
        working capital position increased $2,597,644 to $5,782,919 at June 30, 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, a
        net
        increase in accounts receivable of $1,878,648 and an increase in inventory
        of
        $1,062,538 offset by a decrease in cash $2,750,910.
 
 Net
        cash
        flow provided
        by operating activities was $901,517 for the six months ended June 30, 2008
        as
        compared to net cash flow provided by in operating activities was $2,947,990
        for
        the six months ended June 30 2007, a decrease of $2,046,473. Ne t
        cash
        flow provided by operating activities for the six months ended June 30, 2008
        was
        mainly due to net income of $161,323, the add-back of non-cash items of
        depreciation and amortization
        of $389,684, the amortization of debt discount of
        $2,263,661, the amortization of
        deferred debt costs
        of
        $21,429, the increase in our allowance for bad debt of $170,024, and the
        add-back of stock-based compensation of $75,000,
        the decrease
        in prepaid and other assets of $235,398 and advances to suppliers of
        $647, 106
        offset by an increase in accounts receivable of $1,860,346, inventories of
        $911,684, the payment of accounts payable of $137,507 and the payment of
        VAT and
        service taxes of $230,670. Net cash flow provided by operating activities
        for
        the six months ended June 30, 2007 was mainly due to our net income of
        $1,288,016, a decrease in inventories of $580,971, and increase in accounts
        payable of $781,112, an increase in VAT and services taxes payable of $461,352,
        an increase in income taxes payable of $603,112, and increase in advanced
        from
        customers of $1,231,834, and the add-back of non-cash items of depreciation
        and
        amortization of $299,451 offset by an increase in accounts receivable of
        $1,706,864 and increases in advances to suppliers of $860,923.
  Net
        cash
        flow used in investing activities was $4,730,320 for the six months ended
        June
        30, 2008 and compared to net cash used in investing activities of $3,530,879
        for
        the six months ended June 30, 2007. For the six months ended June 30, 2008,
        we
        received cash from the repayment of amounts due from related parties of $98,058
        and from the sale of our cost-method investee of $35,348 offset by the purchase
        of property and equipment of $2,126,847 and the payment of deposits on factory
        equipment of $2,736,879. For the six months ended June 30, 2007, we used
        cash
        for advances for amounts due from related parties of $3,523,139 and for the
        purchase of property and equipment of $7,740. The deposits of $2,725,487
        for
        factory equipment related to the new factory, having a total cost of
        approximately $6,368,000. The balance is due on delivery.
 
 Net
        cash
        flow provided by financing activities was
        $893,825 for the six months ended June 30, 2008 as compared to net cash provided
        by financing activities of $258,736 for the six months ended June 30, 2007.
        For
        the six months ended June 30, 2008, we received proceeds from short-term
        bank
        loans of $141,390, and proceeds from the exercise of warrants of $854,340
        offset
        by the repayment of related party advances of $101,905. For the six months
        ended
        June 30, 2007, we received proceeds from short-term bank loans of
        $258,736.
  36
  In
        July
        2007, in connection with the expansion of our forged rolled ring and electrical
        power equipment segment to develop and market forged rolled rings and related
        equipment to the wind power industry, we acquired a factory, together with
        the
        related land use rights, employee housing facilities and other leasehold
        improvements from a related party for a net price of approximately $10,950,000.
        As of June 30, 2008, the amount was paid in full. We also incurred costs
        of $2.2
        million in making structural improvements that are necessary for our planned
        expansion of our rolled ring business to enable us to manufacture larger
        rolled
        rings and other components
 
 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.
 
 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 we do
                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 June 30, 2008
                any
                liquidated 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 we cannot hire
                a
                qualified chief financial officer promptly upon the resignation or
                termination of employment of a former chief financial officer, we
                may
                engage an accountant or accounting firm to perform the duties of
                the chief
                financial officer.In
                no event shall we 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. Our failure 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
                was declared effective on June 13, 2008. We did not incur any liquidated
                damages under the registration rights
                agreement.  37
  ·
            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.  ·
            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.  ·
            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.  ·
            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.  ·
            If
                we do not file our 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.  ·
            The
                remaining 10,000,000 shares of Series A preferred stock are to be
                delivered to the Investors in the event that, based on our audited
                financial statements for 2007 or 2008 we 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, we 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 prior to November 13, 2008 in the
        case
        of the $0.58 warrants, and prior to May 13, 2009 in the case of the $0.83
        warrants and $0.92 warrants, and after these respective periods only if the
        underlying shares are not covered by an effective registration
        statement.
  38
  **Contractual
        Obligations and Off-Balance Sheet Arrangements**
  ***Contractual
        Obligations***
  We
        have
        certain fixed contractual obligations and commitments that include future
        estimated payments. Changes in our business needs, cancellation provisions,
        changing interest rates, and other factors may result in actual payments
        differing from the estimates. We cannot provide certainty regarding the timing
        and amounts of payments. We have presented below a summary of the most
        significant assumptions used in our determination of amounts presented in
        the
        tables, in order to assist in the review of this information within the context
        of our consolidated financial position, results of operations, and cash
        flows.
 
 The
        following tables summarize our contractual obligations as of June 30, 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)
              
              $
              1,018,656
              
              $
              1,018,656
              
              $
              -
              
              $
              -
              
              $
              -Equipment
                  purchases
              
              
              3,643,000
              
              
              3,643,000Total
                  Contractual Obligations:
              
              $
              4,661,656
              
              $
              4,661,656
              
              $
              -
              
              $
              -
              
              $
              -
  (1)
            Bank
                indebtedness include short term bank loans and notes
                payable.  ***Off-balance
        Sheet Arrangements***
  We
        have
        not entered into any other financial guarantees or other commitments to
        guarantee the payment obligations of any third parties. We have not entered
        into
        any derivative contracts that are indexed to our shares and classified as
        shareholder’s equity or that are not reflected in our consolidated financial
        statements. Furthermore, we do not have any retained or contingent interest
        in
        assets transferred to an unconsolidated entity that serves as credit, liquidity
        or market risk support to such entity. We do not have any variable interest
        in
        any unconsolidated entity that provides financing, liquidity, market risk
        or
        credit support to us or engages in leasing, hedging or research and development
        services with us.
 
 ITEM
        3.
        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
 Foreign
        Currency Exchange Rate Risk
 
 We
        produce and sell almost all our products in China. Thus, most of our revenues
        and operating results may be impacted by exchange rate fluctuations between
        RMB
        and US dollars. For the six months ended June 30, 2008, we has unrealized
        foreign currency translation gain of $1,617,253, 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
        our
        Chief Executive Officer, and our Chief Financial Officer, evaluated the
        effectiveness of the design and operation of our disclosure controls
        and procedures
        as of June 30, 2008.
  39
  Disclosure controls
        and procedures
        refer to controls
        and other procedures
        designed to ensure that information required to be disclosed in the reports
        we
        file or submit under the Securities Exchange Act is recorded, processed,
        summarized and reported within the time periods specified in the rules and
        forms
        of the SEC and that such information is accumulated and communicated to our
        management, including our chief executive officer and chief financial officer,
        as appropriate, to allow timely decisions regarding required disclosure.
        In
        designing and evaluating our disclosure controls
        and procedures,
        management recognizes that any controls
        and procedures,
        no matter how well designed and operated, can provide only reasonable assurance
        of achieving the desired control objectives, and management is required to
        apply
        its judgment in evaluating and implementing possible controls
        and procedures.
 
 Management
        conducted its evaluation of disclosure controls
        and procedures
        under the supervision of our chief executive officer and our chief financial
        officer. Based on that evaluation, we concluded that because of the significant
        deficiencies in internal control over financial reporting described below,
        our
        disclosure controls
        and procedures
        were not effective as of December 31, 2007.
  ***Management’s
        Report on Internal Control over Financial Reporting***
 
 Our
        management is responsible for establishing and maintaining adequate internal
        control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
        under the Securities Exchange Act.  Our management is also required to
        assess and report on the effectiveness of our internal control over financial
        reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002
        (“Section 404”).   Management assessed the effectiveness of our
        internal control over financial reporting as of December 31, 2007.  In
        making this assessment, we used the criteria set forth by the Committee of
        Sponsoring Organizations of the Treadway Commission (COSO) in Internal
        Control - Integrated Framework.  During our assessment of the effectiveness
        of internal control over financial reporting as of December 31, 2007,
        management identified significant deficiencies related to (i) the U.S. GAAP
        expertise of our internal accounting staff, (ii) our internal audit functions
        and, and (iii) a lack of segregation
        of duties within accounting functions .
 
 Although
        we were a black check shell company prior to November 13, 2007 with reporting
        obligations, our present business did not become subject to the reporting
        requirements of the Exchange Act until November 13, 2007.  We began
        preparing to be in compliance with the internal control obligations, for
        our
        fiscal year ending December 31, 2007. During most of 2007 our internal
        accounting staff was primarily engaged in ensuring compliance with PRC
        accounting and reporting requirements for our operating affiliates and was
        not
        required to meet or apply U.S. GAAP requirements.  We addressed this
        condition by hiring of our chief financial officer who is familiar with U.S.
        GAAP and, under his supervision, we are implanting the related internal control
        procedures required of U.S. public companies, including providing training
        and
        assistance of our accounting staff in U.S. GAAP matters.  We also have
        elected independent directors and have established an audit committee which
        meets with management and our independent auditors. Management has determined
        that our internal audit function is also deficient due to insufficient qualified
        resources to perform internal audit functions, and we are seeking to address
        this deficiency.
 
 Due
        to
        our size and nature, segregation of all conflicting duties may not always
        be
        possible and may not be economically feasible.  However, to the extent
        possible, we will implement procedures to assure that the initiation of
        transactions, the custody of assets and the recording of transactions will
        be
        performed by separate individuals.
 
 We
        believe that the foregoing steps have significantly remediated the deficiencies
        previously reported, and we will continue to monitor the effectiveness of
        these
        steps and make any changes that our management deems appropriate.
 
 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.
  40
  Our
        management is not aware of any material weaknesses in our internal control
        over
        financial reporting, and we are addressing the significant weaknesses in
        internal controls over financial reporting. Nothing has come to the attention
        of
        management that causes them to believe that any material inaccuracies or
        errors
        exist in our financial statement as of June 30, 2008.  The reportable
        conditions and other areas of our internal control over financial reporting
        identified by us as needing improvement have not resulted in a material
        restatement of our financial statements. We are not aware of any instance
        where
        such reportable conditions or other identified areas of weakness have resulted
        in a material misstatement of omission in any report we have filed with or
        submitted to the Commission.
 
 Because
        of its inherent limitations, internal control over financial reporting may
        not
        prevent or detect misstatements. Projections of any evaluation of effectiveness
        to future periods are subject to the risk that controls may become inadequate
        because of changes in conditions, or that the degree of compliance with the
        policies and procedures may deteriorate.
 
 ***Changes
        in Internal Controls over Financial Reporting***
 
 Except
        as
        described above, there were no changes in our internal controls over financial
        reporting during the second 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
 
 On
        April
        28, 2008, we issued 15,000 of our 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, we recorded stock-based compensation
        of
        $30,000.
 
 The
        above
        recipient is a sophisticated investor who had such knowledge and experience
        in
        financial, investment and business matters that they were capable of evaluating
        the merits and risks of the prospective investment in our securities. The
        recipient had access to business and financial information concerning our
        company. The issuance was exempt from registration under the Securities Act
        in
        reliance on an exemption provided by Section 4(2) of that act.
 
 ITEM
        6.
        EXHIBITS
 
 31.1
              Rule
                  13a-14(a)/15d-14(a) certification of Chief Executive
                  Officer
  31.2
              Rule
                  13a-14(a)/15d-14(a) certificate of Principal Financial
                  Officer
  32.1
              Section
                  1350 certification of Chief Executive Officer and Chief Financial
                  Officer
  41
  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:
                August 14, 2008
              By:
              /s/
                Jianhua WuJianhua
                Wu, Chief Executive
                Officer
  Date:
                August 14, 2008
              By:
              /s/
                Adam
                WassermanAdam
                Wasserman, Chief Financial
                Officer
  42