UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark One)





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





For the
quarterly period ended August 31, 2009





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





For the
transition period from ______________ to ______________





Commission
      File Number: 333-118259





CHINA
      SUN GROUP HIGH-TECH CO.


(Exact
      name of registrant as specified in its
charter)





Delaware
            54-2142880(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)








1
Hutan Street, Zhongshan District


Dalian,
The People’s Republic of China


(Address
of principal executive offices) (Zip Code)





011
– 86- (411) 8288 9800/ 8289 2736


(Registrant’s
telephone number, including area code)





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


þ Yes  □
No







Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).□Yes□No







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







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







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




□  Yes 
      þNo





APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:




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


□  Yes   □
      No





APPLICABLE
ONLY TO CORPORATE ISSUERS:





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.





There are
presently 53,422,971 shares of common stock, $.001 par value, issued and
outstanding as of October 9, 2009.











TABLE
OF CONTENTS





PART
I – FINANCIAL INFORMATION





PageItem
      1.
            Financial
      Statements.
            F-1Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
            3Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk.
            7Item
      4.
            Controls
      and Procedures.
            7





PART
II – OTHER INFORMATION





Item
      1.
            Legal
      Proceedings.
            8Item
      1A.
            Risk
      Factors.
            8Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds.
            8Item
      3.
            Defaults
      Upon Senior Securities.
            8Item
      4.
            Submission
      of Matters to a Vote of Security Holders.
            8Item
      5.
            Other
      Information.
            8Item
      6.
            Exhibits.
            8





2


PART
I – FINANCIAL INFORMATION





Item
1.                      Financial
Statements.





CHINA
SUN GROUP HIGH-TECH CO.


INDEX
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)











PageCondensed
      Consolidated Balance Sheets as of August 31, 2009 and May 31,
      2009
            
            F-2Condensed
      Consolidated Statements of Operations and Comprehensive
Income
              for
      the three months ended August 31, 2009 and 2008
            
            F-3Condensed
      Consolidated Statements of Cash Flows
              for
      the three months ended August 31, 2009 and 2008
            
            F-4Condensed
      Consolidated Statement of Stockholders’ Equity
              for
      the three months ended August 31, 2009
            
            F-5Notes
      to Condensed Consolidated Financial Statements
            
            F-6
      – F-15











F-1


CHINA
SUN GROUP HIGH-TECH CO.


CONDENSED
CONSOLIDATED BALANCE SHEET


AS
OF AUGUST 31, 2009 AND MAY 31, 2009


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)





August
      31, 2009
            
            
            May
      31, 2009(Unaudited)
            
            
            (Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            11,413,650
            
            
            $
            9,209,953Accounts
      receivable, trade
            
            
            1,387,333
            
            
            
            1,580,220Inventories
            
            
            437,802
            
            
            
            1,657,023Value-added
      tax receivable
            
            
            -
            
            
            
            124,627Deposits
      and prepayments
            
            
            228,565
            
            
            
            439,560Total
      current assets
            
            
            13,467,350
            
            
            
            13,011,383Non-current
      assets:Technical
      know-how
            
            
            2,601,883
            
            
            
            2,608,059Property,
      plant and equipment, net
            
            
            20,414,033
            
            
            
            19,630,119TOTAL
      ASSETS
            
            $
            36,483,266
            
            
            $
            35,249,561LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable, trade
            
            $
            8,741
            
            
            $
            847,796Income
      tax payable
            
            
            1,388,179
            
            
            
            1,476,030Other
      payables and accrued liabilities
            
            
            1,194,844
            
            
            
            1,022,303Total
      liabilities
            
            
            2,591,764
            
            
            
            3,346,129Commitments
      and contingenciesStockholders’
      equity:Convertible
      preferred stock, $0.001 par value; 2,000,000 shares authorized; none of
      shares issued and outstanding as of August 31, 2009 and May 31,
      2009
            
            
            -
            
            
            
            -Common
      stock, $0.001 par value; 100,000,000 shares authorized; 53,422,971 shares
      issued and outstanding as of August 31, 2009 and May 31,
    2009
            
            
            53,423
            
            
            
            53,423Additional
      paid-in capital
            
            
            9,585,204
            
            
            
            9,585,204Accumulated
      other comprehensive income
            
            
            2,992,276
            
            
            
            3,067,549Statutory
      reserve
            
            
            1,387,775
            
            
            
            1,387,775Retained
      earnings
            
            
            19,872,824
            
            
            
            17,809,481Total
      stockholders’ equity
            
            
            33,891,502
            
            
            
            31,903,432TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            36,483,266
            
            
            $
            35,249,561




















See
accompanying notes to condensed consolidated financial
statements.


F-2


CHINA
SUN GROUP HIGH-TECH CO.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


FOR
THE THREE MONTHS ENDED AUGUST 31, 2009 AND 2008


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)





Three
      months ended August 31,2009
            
            
            2008Revenues,
      net
            
            $
            9,313,336
            
            
            $
            10,986,891Cost of revenue(inclusive of depreciation)
            
            
            6,254,566
            
            
            
            6,834,309Gross
      profit
            
            
            3,058,770
            
            
            
            4,152,582Operating
      expenses:Sales
      and marketing
            
            
            23,294
            
            
            
            369,681Research
      and development
            
            
            25,575
            
            
            
            24,641Depreciation
            
            
            64,503
            
            
            
            63,793General
      and administrative
            
            
            177,175
            
            
            
            475,306Total
      operating expenses
            
            
            290,547
            
            
            
            933,421INCOME
      FROM OPERATIONS
            
            
            2,768,223
            
            
            
            3,219,161Other
      income:Interest
      income
            
            
            8,058
            
            
            
            8,011INCOME
      BEFORE INCOME TAXES
            
            
            2,776,281
            
            
            
            3,227,172Income
      tax expense
            
            
            (712,938
            )
            
            
            (838,385
            )NET
      INCOME
            
            $
            2,063,343
            
            
            $
            2,388,787Other
      comprehensive (loss) income:-
      Foreign currency translation (loss) gain
            
            
            (75,273
            )
            
            
            387,157COMPREHENSIVE
      INCOME
            
            $
            1,988,070
            
            
            $
            2,775,944Net
      income per share – Basic and diluted
            
            $
            0.04
            
            
            $
            0.04Weighted
      average number of shares outstanding during the period – Basic and
      diluted
            
            
            53,422,971
            
            
            
            53,422,971













See
accompanying notes to condensed consolidated financial
statements.


F-3


CHINA
SUN GROUP HIGH-TECH CO.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THE THREE MONTHS ENDED AUGUST 31, 2009 AND 2008


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)





Three
      months ended August 31,2009
            
            
            2008Cash
      flows from operating activities:Net
      income
            
            $
            2,063,343
            
            
            $
            2,388,787Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
            
            
            210,253
            
            
            
            165,331Changes
      in operating assets and liabilities:Accounts
      receivable, trade
            
            
            189,105
            
            
            
            223,770Inventories
            
            
            1,215,028
            
            
            
            2,460,702Value-added
      tax receivable
            
            
            359,074
            
            
            
            619,916Deposits
      and prepayments
            
            
            209,908
            
            
            
            (457,664
            )Accounts
      payable, trade
            
            
            (836,861
            )
            
            
            231,921Customer
      deposits
            
            
            -
            
            
            
            593,685Income
      tax payable
            
            
            (84,338
            )
            
            
            838,385Other
      payables and accrued liabilities
            
            
            (60,292
            )
            
            
            25,436Net
      cash provided by operating activities
            
            
            3,265,220
            
            
            
            7,090,269Cash
      flows from investing activities:Purchase
      of plant and equipment
            
            
            (16,313
            )
            
            
            (3,068
            )Addition
      of construction in progress
            
            
            (1,024,155
            )
            
            
            -Net
      cash used in investing activities
            
            
            (1,040,468
            )
            
            
            (3,068
            )Effect
      of exchange rate changes on cash and cash equivalents
            
            
            (21,055
            )
            
            
            122,692NET
      CHANGE IN CASH AND CASH EQUIVALENTS
            
            
            2,203,697
            
            
            
            7,209,893CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            9,209,953
            
            
            
            3,879,114CASH
      AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            11,413,650
            
            
            $
            11,089,007SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for income taxes
            
            $
            797,276
            
            
            $
            -Cash
      paid for interest
            
            $
            -
            
            
            $
            -NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Transfer
      from construction in progress to property, plant and
    equipment
            
            $
            2,560,385
            
            
            $
            -










See
accompanying notes to condensed consolidated financial
statements.


F-4


CHINA
SUN GROUP HIGH-TECH CO.


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


FOR
THE THREE MONTHS ENDED AUGUST 31, 2009


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)





Convertible
              preferred
      stock
            
            
            Common
      stock
            
            
            Additional
              paid-in
            
            
            Accumulated
              other
              comprehensive
            
            
            Statutory
            
            
            Retained
            
            
            Total
              stockholders’No.
      of share
            
            
            Amount
            
            
            No.
      of share
            
            
            Amount
            
            
            capital
            
            
            income
            
            
            reserve
            
            
            earnings
            
            
            equityBalance
      as of June 1, 2009
            
            
            -
            
            
            
            -
            
            
            
            53,422,971
            
            
            $
            53,423
            
            
            $
            9,585,204
            
            
            $
            3,067,549
            
            
            $
            1,387,775
            
            
            $
            17,809,481
            
            
            $
            31,903,432Net
      income for the period
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,063,343
            
            
            
            2,063,343Foreign
      currency translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (75,273
            )
            
            
            -
            
            
            
            -
            
            
            
            (75,273
            )Balance
      as of August 31, 2009
            
            
            -
            
            
            $
            -
            
            
            
            53,422,971
            
            
            $
            53,423
            
            
            $
            9,585,204
            
            
            $
            2,992,276
            
            
            $
            1,387,775
            
            
            $
            19,872,824
            
            
            $
            33,891,502
















See
accompanying notes to condensed consolidated financial
statements.


F-5
 CHINA
SUN GROUP HIGH-TECH CO.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED AUGUST 31, 2009
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)


NOTE-1                BASIS
OF PRESENTATION





The
accompanying unaudited condensed consolidated financial statements have been
prepared by management in accordance with both accounting principles generally
accepted in the United States (“GAAP”) and the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Certain information and note disclosures normally
included in audited financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to those
rules and regulations, although the Company believes that the disclosures made
are adequate to make the information not misleading.





In the
opinion of management, the consolidated balance sheet as of May 31, 2009 which
has been derived from audited financial statements and these unaudited condensed
consolidated financial statements reflect all normal and recurring adjustments
considered necessary to state fairly the results for the periods presented. The
results for the period ended August 31, 2009 are not necessarily indicative of
the results to be expected for the entire fiscal year ending May 31, 2010 or for
any future periods.





These
unaudited condensed consolidated financial statements and notes thereto should
be read in conjunction with the Management’s Discussion and the audited
financial statements and notes thereto included in the Annual Report on Form
10-K for the year ended May 31, 2009.




NOTE-2                   ORGANIZATION
AND BUSINESS BACKGROUND





China Sun
Group High-Tech Co. (the “Company” or “CSGH”) was organized under the laws of
the State of North Carolina on February 2, 2004 as a subchapter S-Corporation.
On August 24, 2007, the Company was reincorporated in the State of Delaware and
changed its name from “Capital Resource Funding, Inc.” to “China Sun Group
High-Tech Co.”





The
Company, through its operating subsidiaries in the PRC, mainly engages in the
production and sales of cobaltosic oxide and lithium cobalt oxide, both anode
materials used in lithium ion rechargeable batteries in the PRC. The operation
activity was commenced from April 2006.





CSGH and
its subsidiaries are hereinafter referred to as (the “Company”).





NOTE-3                   SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





The
accompanying condensed consolidated financial statements reflect the application
of certain significant accounting policies as described in this note and
elsewhere in the accompanying condensed consolidated financial statements and
notes.





l
            Use
      of estimates





In
preparing these consolidated financial statements, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities in
the balance sheets and revenues and expenses during the periods reported. Actual
results may differ from these estimates.





l
            Basis
      of consolidation





The
unaudited condensed consolidated financial statements include the financial
statements of CSGH and its subsidiaries. All significant inter-company balances
and transactions among CSGH and its subsidiaries have been eliminated upon
consolidation.






F-6






CHINA
SUN GROUP HIGH-TECH CO.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED AUGUST 31, 2009
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)


l
            Revenue
      recognition





Revenue
is recognized when products are delivered to customers. Provisions for discounts
and rebates to customers, estimated returns and allowances, and other
adjustments are provided for in the same period the related sales are recorded.
In instances where products are configured to customer requirements, revenue is
recorded upon the successful completion of the Company’s final test procedures
and the customer’s acceptance.





Revenue
represents the invoiced value of goods, net of value-added tax (“VAT”). All of
the Company's products that are sold in the PRC are subject to VAT which is
levied at the rate of 17% on the invoiced value of sales. Output VAT is borne by
customers in addition to the invoiced value of sales and input VAT is borne by
the Company in addition to the invoiced value of purchases to the extent not
refunded for export sales.





l
            Cash
      and cash equivalents





Cash and
cash equivalents are carried at cost and represent cash on hand, demand deposits
placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the purchase
date of such investments.





l
            Accounts
      receivable





Accounts
receivable are recorded at the invoiced amount and do not bear interest. The
Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. An allowance for doubtful accounts is
established and determined based on managements’ assessment of known
requirements, aging of receivables, payment history, the customers’ current
credit worthiness and the economic environment.





l
            Inventories





Inventories
include material, labor and manufacturing overhead and are stated at lower of
cost or market value, cost being determined on a weighted average method. The
Company periodically reviews historical sales activity to determine excess, slow
moving items and potentially obsolete items and also evaluates the impact of any
anticipated changes in future demand. The Company provides inventory allowances
based on excess and obsolete inventories determined principally by customer
demand. As of August 31, 2009, the Company did not record an allowance for
obsolete inventories, nor have there been any write-offs.





l
            Technical
      know-how





Technical
know-how represents the developed product technology acquired from a third party
and is carried at its purchase cost, net of accumulated amortization. The
Company determined that the estimated useful life of the acquired technology is
15 years and subject to amortization using a straight-line basis over the
estimated useful life when its developed products are approved by the government
agency.





l
            Property,
      plant and equipment





Property,
plant and equipment are stated at cost less accumulated depreciation and
accumulated impairment losses, if any. Depreciation is calculated on the
straight-line basis over the following expected useful lives from the date on
which they become fully operational and after taking into account their
estimated residual values:





Depreciable
      life
            
            Residual
      valueBuilding
            40
      years
            
            5%Plant
      and machinery
            5-40
      years
            
            5%Office
      equipment
            5
      years
            
            5%Motor
      vehicle
            5
      years
            
            5%





Expenditure
for repairs and maintenance is expensed as incurred. When assets have retired or
sold, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized in the results of
operations.






F-7






CHINA
SUN GROUP HIGH-TECH CO.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED AUGUST 31, 2009
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)


l
            Construction
      in progress





Construction
in progress is stated at cost, which includes the cost of construction,
acquisition of plant and equipment and other direct costs attributable to the
construction. Construction in progress is not depreciated until such time as the
assets are completed and put into operational use. No capitalized interest is
incurred during the period of construction.





l
            Valuation
      of long-lived assets





Long-lived
assets primarily include technical know-how and property, plant and equipment.
In accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” the Company periodically reviews
long-lived assets for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully
recoverable or that the useful lives are no longer appropriate. Each impairment
test is based on a comparison of the undiscounted cash flows to the recorded
value of the asset. If an impairment is indicated, the asset is written down to
its estimated fair value based on a discounted cash flow analysis. Determining
the fair value of long-lived assets includes significant judgment by management,
and different judgments could yield different results. There has been no
impairment as of August 31, 2009.





l
            Comprehensive
      income





SFAS No.
130, “Reporting Comprehensive
Income” establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income as defined
includes all changes in equity during the period from non-owner sources.
Accumulated comprehensive income consists of changes in unrealized gains and
losses on foreign currency translation. This comprehensive income is not
included in the computation of income tax expense or benefit.





l
            Income
      taxes





The
Company accounts for income tax using SFAS No. 109“Accounting for Income
Taxes,” which requires the asset and liability approach for financial
accounting and reporting for income taxes. Under this approach, deferred income
taxes are provided for the estimated future tax effects attributable to
temporary differences between financial statement carrying amounts of assets and
liabilities and their respective tax bases, and for the expected future tax
benefits from loss carry-forwards and provisions, if any. Deferred tax assets
and liabilities are measured using the enacted tax rates expected in the periods
of recovery or reversal and the effect from a change in tax rates is recognized
in the consolidated statement of operations and comprehensive income in the
period of enactment. A valuation allowance is provided to reduce the amount of
deferred tax assets if it is considered more likely than not that some portion
of, or all of the deferred tax assets will not be realized.





The
Company also adopted Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”). FIN 48 prescribes a more likely than not
threshold for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. This Interpretation also provides
guidance on derecognition of income tax assets and liabilities, classification
of current and deferred income tax assets and liabilities, accounting for
interest and penalties associated with tax positions, accounting for income
taxes in interim periods, and income tax disclosures. In accordance with FIN 48,
the Company also adopted the policy of recognizing interest and penalties, if
any, related to unrecognized tax positions as income tax expense. For the period
ended August 31, 2009 and 2008, the Company did not have any interest and
penalties associated with tax positions. As of August 31, 2009, the Company did
not have any significant unrecognized uncertain tax positions.





The
Company conducts its major business in the PRC and is subject to tax in this
jurisdiction. As a result of its business activities, the Company files tax
returns that are subject to examination by the foreign tax
authorities.






F-8






CHINA
SUN GROUP HIGH-TECH CO.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED AUGUST 31, 2009
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)


l
            Net
      income per share





The
Company calculates net income per share in accordance with SFAS No. 128,“Earnings per Share.” Basic
income per share is computed by dividing the net income by the weighted-average
number of common shares outstanding during the period. Diluted income per share
is computed similar to basic income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common stock equivalents had been issued and if the
additional common shares were dilutive.





l
            Foreign
      currencies translation





Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the dates of the
transaction. Monetary assets and liabilities denominated in currencies other
than the functional currency are translated into the functional currency using
the applicable exchange rates at the balance sheet dates. The resulting exchange
differences are recorded in the condensed consolidated statement of
operations.





The
reporting currency of the Company is United States dollar ("US$"). The Company's
subsidiaries in the PRC, maintain their books and records in its local currency,
Renminbi Yuan ("RMB"), which is functional currency as being the primary
currency of the economic environment in which these entities
operate.





In
general, for consolidation purposes, assets and liabilities of its subsidiaries
whose functional currency is not the US$ are translated into US$, in accordance
with SFAS No 52. “Foreign
Currency Translation”, using the exchange rate on the balance sheet date.
Revenues and expenses are translated at average rates prevailing during the
period. The gains and losses resulting from translation of financial statements
of foreign subsidiaries are recorded as a separate component of accumulated
other comprehensive income within the statement of stockholders’
equity.





Translation
of amounts from RMB into US$1 has been made at the following exchange rates for
the respective year:





August
      31, 2009
            
            
            August
      31, 2008Period-end
      RMB:US$1 exchange rate
            
            
            6.8412
            
            
            
            6.8452Average
      monthly RMB:US$1 exchange rate
            
            
            6.8427
            
            
            
            6.8991





l
            Segment
      reporting





SFAS No.
131 “Disclosures about
Segments of an Enterprise and Related Information” establishes standards
for reporting information about operating segments on a basis consistent with
the Company’s internal organization structure as well as information about
geographical areas, business segments and major customers in the financial
statements. The Company operates one reportable business segment in the
PRC.





l
            Fair
      value measurement





The
Company adopts SFAS No. 157, “Fair Value Measurements” (FAS
157), for all financial instruments and non-financial instruments accounted for
at fair value on a recurring basis and for all non-financial instruments
accounted for at fair value on a non-recurring basis. SFAS 157 establishes a new
framework for measuring fair value and expands related disclosures. The Company
has also adopted FASB FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly. Adoption of
the FSP had an insignificant effect on the Company’s financial
statements.






F-9






CHINA
SUN GROUP HIGH-TECH CO.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED AUGUST 31, 2009
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)


FAS 157
establishes a new framework for measuring fair value and expands related
disclosures. Broadly, FAS 157 framework requires fair value to be determined
based on the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants. FAS 157 establishes a three-level valuation hierarchy based upon
observable and non-observable inputs. These tiers include: Level 1, defined as
observable inputs such as quoted prices in active markets; Level 2, defined as
inputs other than quoted prices in active markets that are either directly or
indirectly observable; and Level 3, defined as unobservable inputs in which
little or no market data exists, therefore requiring an entity to develop its
own assumptions.





For
financial assets and liabilities, fair value is the price the Company would
receive to sell an asset or pay to transfer a liability in an orderly
transaction with a market participant at the measurement date. In the absence of
active markets for the identical assets or liabilities, such measurements
involve developing assumptions based on market observable data and, in the
absence of such data, internal information that is consistent with what market
participants would use in a hypothetical transaction that occurs at the
measurement date.





l
            Recent
      accounting pronouncements





The
Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and do not believe the future adoption of any such pronouncements
may be expected to cause a material impact on its financial condition or the
results of its operations.





In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of
Financial Assets, an amendment to SFAS No. 140” (“FAS 166”). FAS 166
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and requires additional
disclosures in order to enhance information reported to users of financial
statements by providing greater transparency about transfers of financial
assets, including securitization transactions, and an entity’s continuing
involvement in and exposure to the risks related to transferred financial
assets. FAS 166 is effective for fiscal years beginning after November 15, 2009.
The Company will adopt FAS 166 in fiscal 2010 and is evaluating the impact it
will have on the consolidated results of the Company.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R)” (“FAS 167”). The amendments include: (1) the elimination of
the exemption for qualifying special purpose entities, (2) a new approach for
determining who should consolidate a variable-interest entity, and (3) changes
to when it is necessary to reassess who should consolidate a variable-interest
entity. FAS 167 is effective for the first annual reporting period beginning
after November 15, 2009 and for interim periods within that first annual
reporting period. The Company will adopt FAS 167 in fiscal 2010 and is
evaluating the impact it will have on the consolidated results of the
Company.





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting
Principles,” (“Codification”), which supersedes all existing accounting
standard documents and will become the single source of authoritative
non-governmental U.S. GAAP. All other accounting literature not included in the
Codification will be considered non-authoritative. The Codification was
implemented on July 1, 2009 and will be effective for interim and annual periods
ending after September 15, 2009. The Company expects to conform its consolidated
financial statements and related notes to the new Codification for the quarter
ending November 30, 2009.


NOTE-4                   ACCOUNTS
RECEIVABLE, NET





The
majority of the Company’s sales are on open credit terms and in accordance with
terms specified in the contracts governing the relevant transactions. The
Company evaluates the need of an allowance for doubtful accounts based on
specifically identified amounts that management believes to be uncollectible. If
actual collections experience changes, revisions to the allowance may be
required. Based upon the aforementioned criteria, the Company has determined
that no allowance for doubtful accounts is required for the period ended August
31, 2009 and 2008.






F-10


CHINA
SUN GROUP HIGH-TECH CO.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED AUGUST 31, 2009
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)






NOTE-5                   TECHNICAL
KNOW-HOW





In March
2009, the Company’s subsidiary, Dalian Xinyang High-Tech Development Co. Ltd
(”DLXY”) entered into an agreement (the “Agreement”) with an independent third
party, Mr. Wang Ka Gui to acquire the technology to develop a new product,
lithium iron phosphate, which is used as anode material for the new generation
of lithium ion batteries. Pursuant to the Agreement, Mr. Wang Ka Gui agreed not
to re-sell or disclose to third party under the confidentiality covenant. The
total purchase price of the technology was approximately $2,608,059 (equivalent
to RMB17,800,000). The Company has determined that the technology has an
estimated useful life of 15 years and is being amortized on a straight-line
method over its useful life when its products are approved by the government
agency. The approval was granted to the Company in late August
2009.





To make
use of this technology, the Company has developed a production facility for the
manufacturing purpose of lithium ion batteries under this technology and the
development project is completed in September 2009 and will begin depreciating
at the time when the assets are substantially complete and ready for their
intended use. As of August 31, 2009, the Company has totally expended $2,560,385
on developing the plant and machinery for the application of the technology
which was recorded under “Property, plant and equipment” in Note 6.




NOTE-6                   PROPERTY,
PLANT AND EQUIPMENT





Property,
plant and equipment, net, consisted of:





August
      31, 2009
            
            
            May
      31, 2009(Unaudited)
            
            
            (Audited)Building
            
            $
            6,308,373
            
            
            $
            6,308,373Plant
      and machinery
            
            
            13,757,724
            
            
            
            11,181,025Office
      equipment
            
            
            205,467
            
            
            
            205,467Motor
      vehicle
            
            
            34,816
            
            
            
            34,816Construction
      in progress
            
            
            -
            
            
            
            1,540,220Foreign
      translation difference
            
            
            2,140,944
            
            
            
            2,187,53622,447,324
            
            
            
            21,457,437Less:
      accumulated depreciation
            
            
            (1,906,463
            )
            
            
            (1,696,209
            )Less:
      foreign translation difference
            
            
            (126,828
            )
            
            
            (131,109
            )Property,
      plant and equipment, net
            
            $
            20,414,033
            
            
            $
            19,630,119





Depreciation
expenses for the period ended August 31, 2009 and 2008 were $210,253 and
$165,331, which included $145,750 and $101,538 in cost of revenue,
respectively.




NOTE-7                   OTHER
PAYABLES AND ACCRUED LIABILITIES





Other
payables and accrued liabilities consisted of:





August
      31, 2009
            
            
            May
      31, 2009(Unaudited)
            
            
            (Audited)Welfare
      payable
            
            $
            292,568
            
            
            $
            293,262Accrued
      operating expense
            
            
            149,171
            
            
            
            126,209Payable
      to equipment vendor
            
            
            -
            
            
            
            83,623Purchase
      price payable for technical know-how
            
            
            390,282
            
            
            
            391,209VAT
      payable
            
            
            234,823
            
            
            
            -Other
      payable
            
            
            128,000
            
            
            
            128,000Other
      payables and accrued liabilities
            
            $
            1,194,844
            
            
            $
            1,022,303








F-11







CHINA
SUN GROUP HIGH-TECH CO.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED AUGUST 31, 2009
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)


NOTE-8                   INCOME
TAXES





For the
period ended August 31, 2009 and 2008, the local (“United States of America”)
and foreign components of income before income taxes were comprised of the
following:





Three
      months ended August 31,2009
            
            
            2008Tax
      jurisdiction from:–
      Local
            
            $
            (62,543
            )
            
            $
            (127,016
            )–
      Foreign
            
            
            2,838,824
            
            
            
            3,354,188Income
      before income taxes
            
            $
            2,776,281
            
            
            $
            3,227,172





The
provision for income taxes consisted of the following:





Three
      months ended August 31,2009
            
            
            2008Current
      tax:–
      Local
            
            $
            -
            
            
            $
            -–
      Foreign
            
            
            -
            
            
            
            -Deferred
      tax:–
      Local
            
            
            -
            
            
            
            -–
      Foreign
            
            
            712,938
            
            
            
            838,385Income
      tax expense
            
            $
            712,938
            
            
            $
            838,385





The
effective tax rate in the periods presented is the result of the mix of income
earned in various tax jurisdictions that apply a broad range of income tax
rates. The Company operates in various countries: United States of America and
the PRC that are subject to tax in the jurisdictions in which they operate, as
follows:





United
States of America





The
Company is registered in the State of Delaware and is subject to the tax laws of
the United States of America.





As of
August 31, 2009, the operation in the United States of America incurred
$1,025,403 of cumulative net operating losses carryforwards for federal tax
purposes, which are available to offset future taxable income. The Company has
provided for a full valuation allowance for any future tax benefits from the net
operating loss carryforwards as the management believes it is more likely than
not that these assets will not be realized in the future.





The
PRC





The
Company’s PRC subsidiaries are subject to the Corporate Income Tax governed by
the Income Tax Law of the People’s Republic of China, at a statutory income tax
rate of 25%.






F-12








CHINA
SUN GROUP HIGH-TECH CO.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED AUGUST 31, 2009
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)





The
reconciliation of income tax rate to the effective income tax rate based on
income before income taxes from the operation in the PRC for the periods ended
August 31, 2009 and 2008 are as follows:





Three
      months ended August 31,2009
            
            
            2008Income
      before income taxes
            
            $
            2,838,824
            
            
            $
            3,354,188Income
      statutory tax rate
            
            
            25
            %
            
            
            25
            %Income
      taxes calculated at statutory income tax rate
            
            
            709,706
            
            
            
            838,547Add:
      items not deductible to taxes-
      Provision and accrued expenses
            
            
            1,826
            
            
            
            (162
            )-
      Prior year’s adjustment
            
            
            1,406
            
            
            
            -Income
      tax expense
            
            $
            712,938
            
            
            $
            838,385





The
following table sets forth the significant components of the aggregate net
deferred tax assets of the Company as of August 31, 2009 and May 31,
2009:





August
      31, 2009
            
            
            May
      31, 2009(Unaudited)
            
            
            (Audited)Deferred
      tax assets:-
      Net operating loss carryforwards
            
            $
            348,987
            
            
            $
            327,723Less:
      valuation allowance
            
            
            (348,987
            )
            
            
            (327,723
            )Deferred
      tax assets
            
            $
            -
            
            
            $
            -





Management
believes that it is more likely than not that the deferred tax assets will not
be fully realizable in the future. Accordingly, the Company provided for a full
valuation allowance against its deferred tax assets of $348,987 as of August 31,
2009. During the period ended August 31, 2009, the valuation allowance increased
by $21,264, primarily relating to net operating loss carryforwards from the
local tax regime.




NOTE-9                   CONCENTRATIONS
OF RISK





The
Company is exposed to the following concentrations of risk:





(a)
            Major
      customers





For the
periods ended August 31, 2009 and 2008, the customers who account for 10% or
more of revenues of the Company are presented as follows:





Three
      months ended August 31, 2009
            
            August
      31, 2009Revenues
            
            
            Percentage
              of
      revenues
            
            Trade
      accounts receivableCustomer
      B
            
            $
            1,755,308
            
            
            
            19
            %
            
            $
            609,975Customer
      D
            
            
            1,640,989
            
            
            
            18
            %
            
            
            302,466Customer
      E
            
            
            1,919,462
            
            
            
            21
            %
            
            
            352,837Customer
      F
            
            
            927,200
            
            
            
            10
            %
            
            
            -Total:
            
            $
            6,242,959
            
            
            
            67
            %
            
            $
            1,265,278








F-13






CHINA
SUN GROUP HIGH-TECH CO.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED AUGUST 31, 2009
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)




Three
      months ended August 31, 2008
              
              
              August
      31, 2008Revenues
              
              
              Percentage
                of
      revenues
              
              
              Trade
      accounts receivableCustomer
      B
              
              $
              7,239,841
              
              
              
              66
              %
              
              $
              1,097,151Customer
      D
              
              
              2,613,066
              
              
              
              24
              %
              
              
              -Total:
              
              $
              9,852,907
              
              
              
              90
              %
              
              $
              1,097,151





For the
periods ended August 31, 2009 and 2008, 100% of the Company’s revenues were
derived from customers located in the PRC.





(b)
            Major
      vendors





For the
periods ended August 31, 2009 and 2008, the vendors who account for 10% or more
of purchases of the Company are presented as follows:




Three
      months ended August 31, 2009
              
              
              August
      31, 2009Purchases
              
              
              Percentage
                of
      purchase
              
              
              Accounts
                payableVendor
      A
              
              $
              2,544,963
              
              
              
              54
              %
              
              $
              -Vendor
      B
              
              
              1,240,858
              
              
              
              26
              %
              
              
              -Vendor
      C
              
              
              946,971
              
              
              
              20
              %
              
              
              -Total:
              
              $
              4,732,792
              
              
              
              100
              %
              
              $
              -




Three
      months ended August 31, 2008
              
              
              August
      31, 2008Purchases
              
              
              Percentage
                of
      purchase
              
              
              Accounts

                PayableVendor
      B
              
              $
              2,171,834
              
              
              
              32
              %
              
              $
              -Vendor
      C
              
              
              2,179,175
              
              
              
              32
              %
              
              
              978,788Total:
              
              $
              4,351,009
              
              
              
              64
              %
              
              $
              978,788





For the
periods ended August 31, 2009 and 2008, 100% of the Company’s purchases were
derived from vendors located in the PRC.





(c)         Credit
risk





Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and trade accounts receivable. The
Company performs ongoing credit evaluations of its customers' financial
condition, but does not require collateral to support such
receivables.





(d)         Exchange
rate risk





The
reporting currency of the Company is US$, to date the majority of the revenues
and costs are denominated in RMB and a significant portion of the assets and
liabilities are denominated in RMB. As a result, the Company is exposed to
foreign exchange risk as its revenues and results of operations may be affected
by fluctuations in the exchange rate between US$ and RMB. If the RMB depreciates
against US$, the value of the RMB revenues and assets as expressed in US$
financial statements will decline. The Company does not hold any derivative or
other financial instruments that expose to substantial market risk.






F-14




CHINA
SUN GROUP HIGH-TECH CO.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED AUGUST 31, 2009
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)


(e)         Economic
and political risks





The
Company's operations are conducted in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC economy.





The
Company's operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Company's results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation.








NOTE-10                      COMMITMENTS
AND CONTINGENCIES





(a)         Operating
lease commitment





The
Company leases an office premise under a non-cancelable operating lease for a
term of 10 years, due July 25, 2010. Costs incurred under this operating lease
are recorded as rental expense and totaled approximately $1,826 and $1,812 for
the period ended August 31, 2009 and 2008.





As of
August 31, 2009, the Company has the future minimum rental payments of $6,698
under the operating lease agreement within the next 12 months.





(b)         Capital
commitment





On June
9, 2007, the Company’s subsidiary, DLXY entered into an African Mining Project
Contract of Cooperation (the “Purchase Agreement”) with Shengbao Group and South
African Shengbao Mining Enterprises (“Shengbao”). Pursuant to the Purchase
Agreement, DLXY is obliged to purchase the prospecting and mining rights of a
cobalt ore mine for a purchase price of $2 million over a term of 15 years. As
of August 31, 2009, the Company had the capital commitment of $2 million in the
purchase of the prospecting and mining rights which was contracted for but not
provided in the financial statements.

















F-15


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





Results
of Operations





Three Months Ended August
31, 2009 and August 31, 2008





Net
Revenue





Net
revenue for the three months period ended August 31, 2009 totaled $9,313,336, as
compared to $10,986,891 for the three months ended August 31, 2008. This
represents a decrease of $1,673,555 or 15% for the three months period compared
to 2008. The decrease in revenue was primarily attributable to the general
decrease of the market prices.





Cost
of Revenue





Cost of
revenue for the three months period ended August 31, 2009 totaled $6,254,566,
compared to $6,834,309 for the three months ended August 31, 2008. This
represents a decrease of $579,743 or 8% for the three months period compared to
2008. The decrease in cost of revenue was primarily attributable to general
decrease of the market prices.





Gross
Profit





Gross
profit for the three months period ended August 31, 2009 was $3,058,770, a
decrease of $1,093,812 or 26% from $4,152,582 for the corresponding period in
2008.  The decrease in gross profit was primarily due to the
transformation of production lines and consequently both production and sales
volume decreased. The decrease in sales margin was mainly due to higher rate of
decrease of market prices than the decrease of prices for material
costs.





Sales
and Marketing Expenses





Sales and
marketing expenses for the three months period ended August 31, 2009 totaled
$23,294, compared to $369,681 for the three months ended August 31, 2008. This
represents a decrease of $346,387 or 94% for the three months period compared to
2008. The decrease was primarily attributable to the one-off advertising and
promotion expenses of $559,000 during the three months period ended August 31,
2008.





General
and Administrative Expenses





General
and administrative expenses for the three months period ended August 31, 2009
totaled $177,175, compared to $475,306 for the three months ended August 31,
2008. This represents a decrease of $298,131 or 63% for the three months period
compared to 2008. The decrease was primarily attributable to the one-off
property repairing expenses of $210,000 during the three months period ended
August 31, 2008.





Income
from Operations





Income
from operations for the three months period ended August 31, 2009 totaled
$2,768,223, compared to $3,219,161 for the three months ended August 31, 2008.
This represents a decrease of $450,938 or 14% for the three months period
compared to 2008. The decrease resulted primarily from the general decrease of
the market prices.





Income
Taxes





Provision
for income tax expense was $712,938 for the three months ended August 31, 2009,
a decrease of $125,447 or 15% as compared to $838,385 for the corresponding
period in 2008. The decrease resulted primarily from the decrease in sales
during the period.





Net
Income





Net
income for the three months ended August 31, 2009 was $2,063,343, a decrease of
$325,444 or 14% as compared to the net income of $2,388,787 for the
corresponding period in 2008. The decrease was primarily attributable to the
decrease in sales in the three months ended August 31, 2009.








3





Liquidity
and Capital Resources





Cash
and Cash Equivalents





Our cash
and cash equivalents were $9,209,953 at the beginning of the three months ended
August 31, 2009 and increased to $11,413,650 by the end of period. There was an
increase of $2,203,697 or 24% for the three months period ended August 31,
2009.





Net
cash provided by operating activities





During
the three months period ended August 31, 2009, net cash generated from operating
activities was $3,265,220. The cash inflow from operation for the period was
primarily attributable to net income generated from sales of products and
decrease of inventories.





Net
cash used in investing activities





Net cash
used in investing activities was $1,040,468 for the three months ended August
31, 2009. The cash outflow was primarily attributable to the payment for
construction of production lines and purchase of plant and equipment during the
period.





Cash
paid for income Taxes





Cash paid
for income tax expense was $797,276 for the three months ended August 31, 2009.
There was no cash paid for the income taxes for the same period in
2008.





As of
August 31, 2009, we had working capital of $10,875,586, as compared to
$9,665,254 at May 31, 2009, due primarily to the decrease of accounts payables
by $839,055 and increase of cash and cash equivalents by $2,203,697, offset by
decreases in accounts receivable of $192,887, inventories of $1,219,221,
deposits, prepayment and other receivables of $335,622. In light of our working
capital of $10,875,586 as at August 31, 2009, we believe that we had current and
available capital resources sufficient to fund planned operations for the
current fiscal year.





Trends





Currently,
many companies in the cobalt product industry are looking to directly own cobalt
producing mines which will provide direct access and supply to cobalt ore, the
primary raw material in the cobalt product industry. In June 2007, we acquired
certain rights to a cobalt mine in Africa. We anticipate that this acquisition
will help us avoid export limitations imposed by the Congo, reduce freight
expenses, and help ensure a stable supply of cobalt ore.





We are
not aware of any trends, events or uncertainties that have or are reasonably
likely to have a material impact on our short-term or long-term
liquidity.





Inflation





We
believe that inflation has not had a material or significant impact on our
revenue or our results of operations.





Material
Commitments for Capital Expenditures





Currently,
we own the prospecting and mining rights of a cobalt mine in Congo. We plan to
start the construction of a processing plant in Congo in the second quarter of
the 2010 fiscal year. We anticipate that the construction of the plant will cost
approximately $2,000,000 to $3,000,000.











4





General





We
believe that we currently have sufficient income generated from our operations
to meet our operating and/or capital needs.





However,
we will continue to evaluate various sources of capital to meet our growth
requirements. Such sources will include debt financings, the issuance of equity
securities, and entrance into other financing arrangements. There can be no
assurance, however, that any of the contemplated financing arrangements
described herein will be available and, if available, can be obtained on terms
favorable to us.





Contractual
Obligations and Commitments





We leased
an office premise under a non-cancelable operating lease agreement for a period
of ten years, due July 25, 2010. The annual lease payment is
$6,698.





On June
9, 2007, our subsidiary, DLXY entered into an African Mining Project Contract of
Cooperation (the “Purchase Agreement”) with Shengbao Group and South African
Shengbao Mining Enterprises (“Shengbao”). Pursuant to the Purchase Agreement,
DLXY is obliged to purchase the prospecting and mining rights of a cobalt ore
mine for a purchase price of $2 million over a term of 15 years.  As
of August 31, 2009, DLXY had the capital commitment of $2 million in the
purchase of the prospecting and mining rights which was contracted for but not
provided in the financial statements.





Liquidity
and Capital Resources





Cash
and Cash Equivalents





Our cash
and cash equivalents were $9,209,953 at the beginning of the three months ended
August 31, 2009 and increased to $11,413,650 by the end of period. There was an
increase of $2,203,697 or 24% for the three months period ended August 31,
2009.





Net
cash provided by operating activities





During
the three months period ended August 31, 2009, net cash generated from operating
activities was $3,265,220 compared to $7,090,269 for the corresponding period in
2008, a decrease of $3,825,049.





This
decrease was resulted primarily due to the decrease in cash inflows from gross
profit, accounts payable and decrease of inventory by $1,093,812, $1,068,782,
and $1,245,674 respectively as well as the payment for income tax for $797,276
compared to the corresponding period in 2008.





Net
cash used in investing activities





Net cash
used in investing activities was $1,040,468 for the three months ended August
31, 2009, an increase of $1,037,400 or 33,814% from $3,068 for the same period
in 2008. The increase was primarily attributable to the addition of construction
of production lines during the period in 2009.





Cash
paid for income Taxes





Cash paid
for income tax expense was $797,276 for the three months ended August 31, 2009.
There was no cash paid for the income taxes for the same period in
2008.





As of
August 31, 2009, we had working capital of US$10,875,586, as compared to
$9,665,254 at May 31, 2009, due primarily to the decrease of accounts payables
by $839,055 and increase of cash and cash equivalents by $2,203,697, offset by
decreases in accounts receivable of $192,887, inventories of $1,219,221,
deposits, prepayment and other receivables of $335,622. In light of our working
capital of $10,875,586 as at August 31, 2009, we believe that we had current and
available capital resources sufficient to fund planned operations for the
current fiscal year.





Trends





Currently,
many companies in the cobalt product industry are looking to directly own cobalt
producing mines which will provide direct access and supply to cobalt ore, the
primary raw material in the cobalt product industry. In June 2007, we acquired
certain rights to a cobalt mine in Africa. We anticipate that this acquisition
will help us avoid export limitations imposed by the Congo, reduce freight
expenses, and help ensure a stable supply of cobalt ore.





We are
not aware of any trends, events or uncertainties that have or are reasonably
likely to have a material impact on our short-term or long-term
liquidity.







5






Inflation





We
believe that inflation has not had a material or significant impact on our
revenue or our results of operations.





Material
Commitments for Capital Expenditures





Currently,
we own the prospecting and mining rights of a cobalt mine in Congo. We plan to
start the construction of a processing plant in Congo in the second quarter of
the 2010 fiscal year. We anticipate that the construction of the plant will cost
approximately $2,000,000 to $3,000,000.





General





We
believe that we currently have sufficient income generated from our operations
to meet our operating and/or capital needs.





However,
we will continue to evaluate various sources of capital to meet our growth
requirements. Such sources will include debt financings, the issuance of equity
securities, and entrance into other financing arrangements. There can be no
assurance, however, that any of the contemplated financing arrangements
described herein will be available and, if available, can be obtained on terms
favorable to us.





Contractual
Obligations and Commitments





We leased
an office premise under a non-cancelable operating lease agreement for a period
of ten years, due July 25, 2010. The annual lease payment is
$6,698.





On June
9, 2007, our subsidiary, Dalian Xinyang High-Tech Development Co. Ltd (“DLXY”)
entered into an African Mining Project Contract of Cooperation (the “Purchase
Agreement”) with Shengbao Group and South African Shengbao Mining Enterprises
(“Shengbao”). Pursuant to the Purchase Agreement, DLXY is obliged to purchase
the prospecting and mining rights of a cobalt ore mine for a purchase price of
$2 million over a term of 15 years.  As of August 31, 2009, DLXY had
the capital commitment of $2 million in the purchase of the prospecting and
mining rights which was contracted for but not provided in the financial
statements.





Critical
accounting policies and estimates





Revenue
recognition





Revenue
is recognized when products are delivered to customers. Provisions for discounts
and rebates to customers, estimated returns and allowances, and other
adjustments are provided for in the same period the related sales are recorded.
In instances where products are configured to customer requirements, revenue is
recorded upon the successful completion of the Company’s final test procedures
and the customer’s acceptance.





Our
subsidiary, DLXY is subject to valued-added tax (“VAT”) which is levied on the
majority of the products of DLXY at the rate of 17% on the invoiced value of
sales sold in the People’s Republic of China. Output VAT is borne by customers
in addition to the invoiced value of sales and input VAT is borne by the Company
in addition to the invoiced value of purchases to the extent not refunded for
export sales.






6







Account receivables and
allowance for doubtful accounts





Accounts
receivable are recorded at the invoiced amount and do not bear interest. We
extend unsecured credit to its customers in the ordinary course of business but
mitigates the associated risks by performing credit checks and actively pursuing
past due accounts. An allowance for doubtful accounts is established and
determined based on managements’ assessment of known requirements, aging of
receivables, payment history, the customers’ current credit worthiness and the
economic environment. We write off accounts receivable when they become
uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts.





New Financial Accounting
Pronouncements





In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of
Financial Assets, an amendment to SFAS No. 140” ("FAS 166"). FAS 166
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and requires additional
disclosures in order to enhance information reported to users of financial
statements by providing greater transparency about transfers of financial
assets, including securitization transactions, and an entity’s continuing
involvement in and exposure to the risks related to transferred financial
assets. FAS 166 is effective for fiscal years beginning after November 15, 2009.
The Company will adopt FAS 166 in fiscal 2010 and is evaluating the impact it
will have on the consolidated results of the Company.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R)” ("FAS 167"). The amendments include: (1) the elimination of
the exemption for qualifying special purpose entities, (2) a new approach for
determining who should consolidate a variable-interest entity, and (3) changes
to when it is necessary to reassess who should consolidate a variable-interest
entity. FAS 167 is effective for the first annual reporting period beginning
after November 15, 2009 and for interim periods within that first annual
reporting period. The Company will adopt FAS 167 in fiscal 2010 and is
evaluating the impact it will have on the consolidated results of the
Company.





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting
Principles,” (“Codification”), which supersedes all existing accounting
standard documents and will become the single source of authoritative
non-governmental U.S. GAAP. All other accounting literature not included in the
Codification will be considered non-authoritative. The Codification was
implemented on July 1, 2009 and will be effective for interim and annual periods
ending after September 15, 2009. The Company expects to conform its consolidated
financial statements and related notes to the new Codification for the quarter
ending November 30, 2009.








Item
3.                      Quantitative
and Qualitative Disclosures About Market Risk.





Not
applicable.





Item
4.                      Controls
and Procedures.





Evaluation
of our Disclosure Controls





As of the
end of the period covered by this Quarterly Report on Form 10-Q, our principal
executive officer and principal financial officer have evaluated the
effectiveness of our “disclosure controls and procedures” (“Disclosure
Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), are procedures that are
designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Exchange Act, such as this Quarterly
Report, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms.
Disclosure Controls are also designed with the objective of ensuring that such
information is accumulated and communicated to our management, including the CEO
and CFO, as appropriate to allow timely decisions regarding required disclosure.
Our management, including the CEO and CFO, does not expect that our Disclosure
Controls will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions.





Based
upon their controls evaluation, our CEO and CFO have concluded that our
Disclosure Controls are effective at a reasonable assurance level.





Changes
in Internal Control over Financial Reporting





There
have been no changes in our internal controls over financial reporting during
our first fiscal quarter that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.


7


PART
II – OTHER INFORMATION


Item
      1.
            Legal
      Proceedings.





There is no material legal proceeding pending against
us.





Item
      1A.
            Risk
      Factors.





Not
applicable.





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





None.





Item
      3.
            Defaults
      Upon Senior Securities.





None.





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





None.





Item
      5.
            Other
      Information.





In March
2009, the Company’s subsidiary, DLXY, entered into an agreement (the
“Agreement”) with an independent third party, Mr. Wang Ka Gui to acquire the
technology to develop a new product,


lithium
iron phosphate, which is used as anode material for the new generation of
lithium ion batteries.


Pursuant
to the Agreement, Mr. Wang Ka Gui agreed to be bound by a confidentiality clause
by which he would not re-sell or disclose the technology to a third party. The
total purchase price of the technology was approximately $2,608,059 (equivalent
to RMB17,800,000). Approval for the technology was granted to the Company in
late August 2009.  A copy of the agreement is provided as Exhibit 10.1
to this 10-K hereto.





To make
use of this technology, the Company has developed a production facility for
the


manufacturing
purpose of lithium ion batteries under this technology and the development
project was


completed
in September 2009.








Item
      6.
            Exhibits.





Copies of
the following documents are included as exhibits to this report pursuant to Item
601 of Regulation S-K.





Exhibit
      No.
            
            SEC
      Ref.No.
            
            Title
      of Document1
            
            31.1
            
            Certification
      of the Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.2
            
            10.1
            
            Lithium
      Iron Phosphate Technology Transfer Agreement, dated March 5, 2009, by and
      between DLXY and Wang Ka Gui Technology Group.3
            
            31.2
            
            Certification
      of the Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.4
            
            32.1
            
            Certification
      of the Principal Executive Officer pursuant to U.S.C. Section 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.5
            
            32.2
            
            Certification
      of the Principal Financial Officer pursuant to U.S.C. Section 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.





8


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.





CHINA
      SUN GROUP HIGH-TECH CO.Date:
      October 15, 2009
            By:
            /s/ Bin WangName:  Bin
      WangTitle:   President,
      Chief Executive Officer and Chairman(Principle
      Executive Officer)





.Date:
      October 15, 2009
            By:
            /s/ Ming Fen LiuName:  Ming
      Fen LiuTitle:   Chief
      Financial Officer(Principle
      Executive Officer)