Securities
      and Exchange Commission


Washington,
      D.C. 20549





FORM
      10-Q


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





For
      the
      quarterly period ended September 30, 2008





**CHINA
      CARBON GRAPHITE GROUP, INC.**


(Exact
      name of registrant as specified in its charter)





Nevada
              
              98-0550699(State
                  or other jurisdiction of incorporation or organization)
              
              (I.R.S.
                  Employer Identification No.)




**China
      Carbon Graphite Group, Inc.**


**c/o
      Xinghe Yongle Carbon Co., Ltd.**


**787
      Xicheng Wai**


**Chengguantown**


**Xinghe
      County**


**Inner
      Mongolia, China**


(Address
      of principal executive offices)




(86)
      474-7209723


(Issuer’s
      telephone number)





Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be
      filed by Section 13 of 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 x No
o





Indicate
      by a check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer, see definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of Exchange Act. Check
      one:





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





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





On
      November 13, 2008, the Registrant had 12,218,412 shares of common stock, par
      value $.001 per share, outstanding.





Transitional
      Small Business Disclosure Format: Yes o No x






1




**CHINA
      CARBON GRAPHITE GROUP, INC. AND SUBSIDIARIES**





PagePart
                I. Financial InformationItem
                1. Condensed Consolidated Financial StatementsCondensed
                Consolidated Balance Sheets as of September 30, 2008 (Unaudited)
                and
                December 31, 2007
            3Condensed
                Consolidated Statements of Income for the nine months ended September
                30,
                2008 and 2007 (Unaudited)
            4Condensed
                Consolidated Statements of Income for the three months ended September
                30,
                2008 and 2007 (Unaudited)
            5Condensed
                Consolidated Statements of Cash Flows for the nine months ended September
                30, 2008 and 2007 (Unaudited)
            6Notes
                to Condensed Consolidated Financial Statements (Unaudited)
            7Item
                2. Management’s Discussion and Analysis or Plan of
                Operation
            17Item
                4. Controls and Procedures
            24Part
                II. Other InformationItem
                6. Exhibits
            26






2


**China
        Carbon Graphite Group, Inc.**
 **Condensed
        Consolidated Balance Sheets**
 
 **(US
                  Dollars)****Unaudited**
              
              **Audited****September
                  30, 2008**
              
              **December
                  31, 2007****ASSETS****Current
                  Assets**Cash
                  and cash equivalents
              
              $
              52,102
              
              $
              4,497Trade
                  accounts receivable
              
              
              5,854,729
              
              
              4,868,263Notes
                  receivable
              
              
              -
              
              
              243,426Other
                  receivables
              
              
              491,145
              
              
              766,945Advance
                  to suppliers
              
              
              885,705
              
              
              636,660Inventories
              
              
              17,163,642
              
              
              14,626,927Prepaid
                  expenses
              
              
              30,487
              
              
              -**Total
                  current assets**
              
              
              24,477,810
              
              
              21,146,718**Property
                  and equipment**
              
              
              20,081,305
              
              
              19,583,329**Construction
                  in progress**
              
              
              2,625,861
              
              
              38,282**Land
                  use rights, net**
              
              
              3,622,908
              
              
              2,841,954$
              50,807,884
              
              $
              43,610,283**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****Current
                  Liabilities**Accounts
                  payable and accrued expenses
              
              $
              907,846
              
              $
              988,470Advance
                  from customers
              
              
              3,520,899
              
              
              2,466,810Taxes
                  payable
              
              
              325,470
              
              
              232,234Notes
                  payable
              
              
              4,886,873
              
              
              6,715,778Convertible
                  note payable
              
              
              -
              
              
              400,000Loan
                  from shareholder
              
              
              4,800,453
              
              
              4,543,648Other
                  payables
              
              
              508,452
              
              
              -**Total
                  current liabilities**
              
              
              14,949,993
              
              
              15,346,940**Stockholders'
                  Equity**Convertible
                  preferred stock, par value $0.001 per share,authorized
                  20,000,000 shares, issued and outstanding 1,200,499shares
                  at September 30, 2008; none authorizedat
                  December 31, 2007
              
              $
              1,200
              
              $
              -Common
                  stock, $0.001 par value, authorized 100,000,000 shares,issued
                  and outstanding 12,218,412 shares and 13,218,412 sharesat
                  September 30, 2008 and December 31, 2007, respectively
              
              
              12,218
              
              
              13,218Additional
                  paid-in capital
              
              
              8,690,426
              
              
              6,637,326Accumulated
                  other comprehensive income
              
              
              5,012,768
              
              
              2,948,244Retained
                  earnings
              
              
              22,141,279
              
              
              18,814,255Treasury
                  Stock-common at cost - none at September 30,2008and
                  1,000,000 shares at December 31, 2007
              
              
              -
              
              
              (149,700
              )35,857,891
              
              
              28,263,343**$**
              **50,807,884**
              
              **$**
              **43,610,283**
  See
          accompanying notes to condensed consolidated financial statements.


3


**China
        Carbon Graphite Group, Inc**
 **Condensed
        Consolidated Statements of Income and Comprehensive income
        (Unaudited)**
 
 **(US
                  Dollars)****Nine
                  months ended September 30,****2008**
              
              **2007****Sales**
              
              $
              21,160,851
              
              
              18,799,732**Cost
                  of Goods Sold**
              
              
              15,567,633
              
              
              15,067,613**Gross
                  Margin**
              
              
              5,593,218
              
              
              3,732,119**Operating
                  Expenses**Selling
                  expenses
              
              
              439,004
              
              
              110,050General
                  and administrative
              
              
              575,936
              
              
              541,059Depreciation
                  and amortization
              
              
              49,399
              
              
              13,1761,064,339
              
              
              664,285**Operating
                  Income Before Other Income (Expense) and Income Tax
                  Expense**
              
              
              4,528,879
              
              
              3,067,834**Other
                  Income (Expense)**Other
                  income
              
              
              224,705
              
              
              286,779Interest
                  income
              
              
              910
              
              
              377Interest
                  expense
              
              
              (413,039
              )
              
              (393,540
              )Other
                  expense
              
              
              (11,431
              )
              
              (18,458
              )(198,855
              )
              
              (124,842
              )**Income
                  Before Income Tax Expense**
              
              
              4,330,024
              
              
              2,942,992**Income
                  tax expense**
              
              
              -
              
              
              -**Net
                  income**
              
              
              4,330,024
              
              
              2,942,992**Deemed
                  preferred stock dividend**
              
              
              (854,300
              )
              
              -**Net
                  income available to common shareholders**
              
              $
              3,475,724
              
              $
              2,942,992**Comprehensive
                  income:**Net
                  income
              
              $
              4,330,024
              
              $
              2,942,992**Other
                  comprehensive income**Foreign
                  currency translation gain
              
              
              2,064,524
              
              
              988,404**Comprehensive
                  Income**
              
              $
              6,394,548
              
              $
              3,931,396**Share
                  data**Basic
                  earnings per share
              
              $
              0.27
              
              $
              0.28Diluted
                  earnings per share
              
              $
              0.18
              
              $
              0.28Weighted
                  average common shares outstanding,basic
              
              
              12,716,587
              
              
              10,388,172Weighted
                  average common shares outstanding,diluted
              
              
              19,365,223
              
              
              10,388,172


See
        accompanying notes to condensed consolidated financial
        statements.


4


**China
        Carbon Graphite Group, Inc**
 **Condensed
        Consolidated Statements of Income and Comprehensive income
        (Unaudited)**
 
 **(US
                  Dollars)****Three
                  months ended September 30,****2008**
              
              **2007****Sales**
              
              $
              7,509,072
              
              $
              7,353,710**Cost
                  of Goods Sold**
              
              
              5,384,214
              
              
              5,967,498**Gross
                  Margin**
              
              
              2,124,858
              
              
              1,386,212**Operating
                  Expenses**Selling
                  expenses
              
              
              269,002
              
              
              19,034General
                  and administrative
              
              
              177,019
              
              
              301,602Depreciation
                  and amortization
              
              
              18,672
              
              
              11,725464,693
              
              
              332,361**Operating
                  Income Before Other Income (Expense)****and
                  Income Tax Expense**
              
              
              1,660,165
              
              
              1,053,851**Other
                  Income (Expense)**Other
                  income
              
              
              11,032
              
              
              46,773Interest
                  income
              
              
              493
              
              
              233Interest
                  expense
              
              
              (143,482
              )
              
              (61,213
              )Other
                  expense
              
              
              (120
              )
              
              (10,792
              )(132,077
              )
              
              (24,999
              )**Income
                  before income taxes**
              
              
              1,528,088
              
              
              1,028,852**Income
                  taxes**
              
              
              -
              
              
              -**Net
                  income**
              
              
              1,528,088
              
              
              1,028,852**Other
                  comprehensive income**Foreign
                  currency translation gain
              
              
              84,634
              
              
              363,683**Comprehensive
                  Income**
              
              $
              1,612,722
              
              $
              1,392,535**Share
                  data**Basic
                  earnings per share
              
              $
              0.13
              
              $
              0.10Diluted
                  earnings per share
              
              $
              0.08
              
              $
              0.10Weighted
                  average common shares outstanding,basic
              
              
              12,218,412
              
              
              10,388,172Weighted
                  average common shares outstanding,diluted
              
              
              19,418,911
              
              
              10,388,172
  See
            accompanying notes to condensed consolidated financial
            statements.
 5




**China
        Carbon Graphite Group, Inc**
 **Condensed
        Consolidated Statements of Cash Flows (Unaudited)**
 
 **(US
                  Dollars)****Nine
                  months ended September 30,****2008**
              
              **2007****Cash
                  flows from operating activities****Net
                  Income**
              
              $
              4,330,024
              
              $
              2,942,992**Adjustments
                  to reconcile net cash provided by **operating
                  activities****Depreciation
                  and amortization
              
              
              954,924
              
              
              832,927**Change
                  in operating assets and liabilities**Trade
                  accounts receivable
              
              
              (680,934
              )
              
              (921,340
              )Notes
                  receivable
              
              
              258,703
              
              
              (140,124
              )Prepaid
                  expenses
              
              
              (30,487
              )
              
              (10,644
              )Other
                  receivables
              
              
              323,933
              
              
              (158,108
              )Advance
                  to suppliers
              
              
              (209,088
              )
              
              -Inventory
              
              
              (1,618,729
              )
              
              (234,183
              )Accounts
                  payable and accrued expenses
              
              
              (36,385
              )
              
              (398,050
              )Advance
                  from customers
              
              
              899,273
              
              
              -Taxes
                  payable
              
              
              78,661
              
              
              448,261Other
                  payables
              
              
              508,451
              
              
              -**Net
                  cash provided by operating activities**
              
              
              4,778,346
              
              
              2,361,731**Cash
                  flows from investing activities**Acquisition
                  of property and equipment
              
              
              (132,731
              )Payment
                  for construction in progress
              
              
              (2,625,861
              )Additional
                  payment on land use rights
              
              
              (653,028
              )
              
              (1,684,847
              )**Net
                  cash used in investing activities**
              
              
              (3,411,620
              )
              
              (1,684,847
              )**Cash
                  flows from financing activities**Repayment
                  to related parties
              
              
              (28,353
              )
              
              (639,055
              )Repayment
                  on notes payable
              
              
              (1,506,456
              )
              
              (92,232
              )**Net
                  cash used in financing activities**
              
              
              (1,534,809
              )
              
              (731,287
              )**Effect
                  of exchange rate changes on cash**
              
              
              215,688
              
              
              60,264**Net
                  increase in cash and cash equivalents**
              
              
              47,605
              
              
              5,861**Cash
                  and cash equivalents at beginning of period**
              
              
              4,497
              
              
              45,460**Cash
                  and cash equivalents at end of period**
              
              $
              52,102
              
              $
              51,321**Supplemental
                  disclosure of cash flow information**Interest
                  paid
              
              $
              413,039
              
              $
              393,540Income
                  taxes paid
              
              $
              -
              
              $
              -**Non-cash
                  financing activities:**Deemed
                  preferred dividend reflected in paid-in capital
              
              $
              854,300
              
              $
              -
 
 See
          accompanying notes to condensed consolidated financial
          statements.
  6





**China
      Carbon Graphite Group, Inc.**


**Notes
      to Condensed Consolidated Financial Statements
      (Unaudited)**


**1.**
                **Organization
                      and Business**


China
      Carbon Graphite Group, Inc. (the “Company”), is a Nevada corporation,
      incorporated on February 13, 2003 under the name Achievers Magazine Inc. In
      connection with the reverse acquisition transaction described below, the
      Company’s corporate name was changed to China Carbon Graphite Group, Inc. on
      January 30, 2008.





On
      December 17, 2007, the Company completed a share exchange pursuant to a share
      exchange agreement, dated as of December 14, 2007, with Sincere Investment
      (PTC), Ltd. (“Sincere”), a British Virgin Islands corporation, which is the sole
      stockholder of Talent International Investment Limited (“Talent”), a British
      Virgin Islands corporation, which is the sole stockholder of Xinghe Yongle
      Carbon Co., Ltd. (“Yongle”), a company organized under the laws of the People’s
      Republic of China (the “PRC”). Pursuant to the share exchange agreement, the
      Company, then known as Achievers Magazine, Inc., issued 9,388,172 shares of
      common stock to Sincere in exchange for all of the outstanding common stock
      of
      Talent, and Talent became the Company’s wholly-owned subsidiary. From and after
      December 17, 2007, the Company’s sole business became the business of Talent,
      its subsidiaries and its affiliated variable interest entities.




Talent
      owns 100% of the stock of Yongle, which is a wholly foreign-owned enterprise
      under the laws of the PRC. Yongle is a party to a series of contractual
      arrangements with Xinghe Xingyong Carbon Co., Ltd. (“Xingyong”), a corporation
      organized under the laws of the PRC. Xingyong’s sole stockholder is the
      Company’s chief executive officer. These agreements give the Company the ability
      to operate and manage the business of Xingyong and to derive the profit (or
      sustain the loss) from Xingyong’s business. As a result, the operations of
      Xingyong are consolidated with those of the Company for financial reporting
      purposes. The relationship among the above companies as follows:









The
      Company manufactures graphite electrodes, fine grain graphite, high purity
      graphite and other carbon derived products.





**Stock
      conversion**





On
      January 22, 2008, the Company affected a 1.6-for-one stock conversion whereby
      each share of common stock became converted into 1.6 shares of common stock.
      All
      references to share and per share information in these financial statements
      reflect this stock conversion.





**2.**
            **Basis
                of Preparation of Financial
                Statements**





Management
      acknowledges its responsibility for the preparation of the accompanying interim
      condensed 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 condensed consolidated
      financial statements should be read in conjunction with the summary of
      significant accounting policies and notes to condensed consolidated financial
      statements included in the Company’s Form 10-KSB annual report for the year
      ended December 31, 2007.  Certain
      prior period balances have been reclassified to conform to the current period’s
      financial statement presentation. These reclassifications had no impact on
      previously reported financial position, results of operations or cash
      flows.





7


The
      accompanying unaudited condensed consolidated financial statements for China
      Carbon Graphite Group, Inc., its subsidiaries and variable interest entity,
      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 maintains its books and accounting records in Renminbi (“RMB”), and its
      reporting currency is United States dollars.





The
      financial statements have been prepared in order to present the financial
      position and results of operations of the Company, its subsidiaries and
      Xingyong, which is an affiliated company whose financial condition is
      consolidated with the Company pursuant to FIN 46R, in accordance with accounting
      principles generally accepted in the United States of America (“US
      GAAP”).





Under
      US
      GAAP, the acquisition by the Company of Talent is considered to be a capital
      transaction in substance, rather than a business combination. That is, the
      acquisition is equivalent, in the acquisition by Talent of the Company, then
      known as Achievers Magazine, Inc., with the issuance of stock by Talent for
      the
      net monetary assets of the Company. This transaction is accompanied by 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, except that no goodwill is recorded. Under reverse
      takeover accounting, the comparative historical financial statements of the
      Company, as the legal acquirer, are those of the accounting acquirer, Talent.
      Since Talent and Yongle did not have any business activities, the Company’s
      financial statements prior to the closing on the reverse acquisition, reflect
      the only business of Xingyong. 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 9,388,172 shares
      of
      common stock issued to Sincere and the 2,803,040 shares purchased by other
      investors are deemed to be outstanding for all period covered by these financial
      statements.





The
      Company’s condensed consolidated financial statements include the financial
      statements of its wholly owned subsidiaries, Talent and Yongle, as well as
      Xingyong, which is a variable interest entity whose financial statements are
      consolidated with those of the Company pursuant to FASB Interpretation No.
      46R
“Consolidation of Variable Interest Entities” (“FIN 46R”), an Interpretation of
      Accounting Research Bulletin No. 51. All significant intercompany accounts
      and
      transactions have been eliminated in the combination.





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 the
      Company, through contractual arrangements, bears the risks of, and enjoys the
      rewards normally associated with ownership of the entities, and therefore the
      Company is the primary beneficiary of these entities.





Yongle
      is
      a party to a series of contractual arrangements with Xingyong. These agreements
      include a management agreement pursuant to which all net income after deduction
      of necessary expenses, if any, generated by Xingyong is paid to Yongle and
      Yongle is responsible for paying Xingyong’s obligations incurred in connection
      with its business. In addition, Yongle manages and controls all of the funds
      of
      Xingyong. Yongle also has the right to purchase Xingyong’s equipment and patents
      and lease its manufacturing plants, land and remaining equipment. This agreement
      is designed so that Yongle can conduct its business in China. Pursuant to two
      other agreements, the sole stockholder of Xingyong, who is also the Company’s
      chief executive officer, has pledged all of his equity in Xingyong as security
      for performance of Xingyong’s obligations to Yongle. As a result, Xingyong is
      considered a variable interest entity.





**3.**
            **Summary
                of Significant Accounting
                Policies**





**Use
      of estimates** - The
      preparation of these financial statements in conformity with accounting
      principles generally accepted in the United States of America requires
      management to make estimates and assumptions that affected the reported amounts
      of assets and liabilities and disclosure of contingent assets and liabilities
      at
      the dates of the financial statements and the reported amounts of net sales
      and
      expenses during the reported periods.





Significant
      estimates included values and lives assigned to acquired property, equipment
      and
      intangible assets, reserves for customer returns and allowances, uncollectible
      accounts receivable, slow moving, obsolete and/or damaged inventory and stock
      warrant valuation. Actual results may differ from these estimates.





8


**Cash
      and cash equivalents -** The
      Company considers all highly liquid debt instruments purchased with maturity
      period of three months or less to be cash equivalents. The carrying amounts
      reported in the accompanying balance sheet for cash and cash equivalents
      approximate their fair value. Substantially all of the Company’s cash is held in
      bank accounts in The People’s Republic of China and is not protected by FDIC
      insurance or any other similar insurance.





**Inventory
      -** Inventory
      is stated at the lower of cost or market. Cost is determined using the weighted
      average method. Market value represents the estimated selling price in the
      ordinary course of business less the estimated costs necessary to complete
      the
      sale.





The
      cost
      of inventories comprises all costs of purchases, costs of conversion and other
      costs incurred in bringing the inventories to their present location and
      condition. The costs of conversion of inventories include fixed and variable
      production overhead, taking into account the stage of completion.





**Accounts
      receivable -** The
      Company uses the allowance method to account for uncollectible accounts
      receivable. As of September 30, 2008 all accounts receivable, advances to
      suppliers and other receivables were considered collectible and there was no
      allowance for bad debts required.




**Property
      and equipment** -
      Property and equipment is stated at the historical cost, less accumulated
      depreciation. Land use rights are being amortized to expense on a straight
      line
      basis over the life of the rights. Depreciation on property, plant and equipment
      is provided using the straight-line method over the estimated useful lives
      of
      the assets for both financial and income tax reporting purposes as
      follows:





Buildings
            
            
            25
                - 40 yearsMachinery
                and equipment
            
            
            10
                - 20 yearsMotor
                vehicles
            
            
            5
                years





Expenditures
      for renewals and betterments were capitalized while repairs and maintenance
      costs are normally charged to the statement of operations in the year in which
      they are incurred. In situations where it can be clearly demonstrated that
      the
      expenditure has resulted in an increase in the future economic benefits expected
      to be obtained from the use of the asset, the expenditure is capitalized as
      an
      additional cost of the asset.





Upon
      sale
      or disposal of an asset, the historical cost and related accumulated
      depreciation or amortization of such asset were removed from their respective
      accounts and any gain or loss is recorded in the Statements of
      Income.





The
      Company reviews the carrying value of property, plant, and equipment for
      impairment whenever events and circumstances indicate that the carrying value
      of
      an asset may not be recoverable from the estimated future cash flows expected
      to
      result from its use and eventual disposition. In cases where undiscounted
      expected future cash flows are less than the carrying value, an impairment
      loss
      is recognized equal to an amount by which the carrying value exceeds the fair
      value of assets. The factors considered by management in performing this
      assessment include current operating results, trends and prospects, the manner
      in which the property is used, and the effects of obsolescence, demand,
      competition, and other economic factors. Based on this assessment there was
      no
      impairment recorded during the nine months ended at September 30, 2008 and
      2007.





**Construction
      in progress** -
      Construction in progress represents the costs incurred in connection with the
      construction of buildings or additions to the Company’s plant facilities. No
      depreciation is provided for construction in progress until such time as the
      assets are completed and placed into service.





**Land
      Use Rights** -
      There
      is no private ownership of land in the PRC. The Company has acquired land use
      rights to a total of 2,356,209 square feet, on which a 290,626 square feet
      facility is located. The land use right has a term of 50 years, commencing
      in
      2002. The cost of the land use rights is amortized over the 50-year term of
      the
      land use right. The Company evaluates the carrying value of intangible assets
      during the fourth quarter of each year and between annual evaluations if events
      occur or circumstances change that would more likely than not reduce the fair
      value of the intangible asset below its carrying amount. There were no
      impairments recorded during the nine months ended September 30, 2008 or
      2007.





**Income
      recognition** -
      Revenue
      is recognized in accordance with Staff Accounting Bulletin No. 104, Revenue
      Recognition, which states that revenue should be recognized when the following
      criteria are met: (1) persuasive evidence of an arrangement exists; (2) the
      service has been rendered; (3) the selling price is fixed or determinable;
      and
      (4) collection of the resulting receivable is reasonably assured. The Company
      believes that these criteria are satisfied when the goods are shipped pursuant
      to a purchase order.





9


Interest
      income is recognized when earned, taking into account the average principal
      amounts outstanding and the interest rates applicable





**Advertising** - The
      Company expenses advertising costs as they are incurred. Advertising expenses
      are $7,400 and $1,057 for the nine months ended September 30, 2008 and 2007.
      No
      advertising expenses incurred during the three months ended September 30, 2008
      and 2007.




**Shipping
      and handling costs** - The
      Company follows Emerging Issues Task Force (“EITF”) No. 00-10, Accounting for
      Shipping and Handling Fees and Costs.  The Company does not charge its
      customers for shipping and handling. The Company classifies shipping and
      handling costs as part of the operating expenses. For the nine months ended
      September 30, 2008 and 2007, shipping and handling costs were $396,119 and
      $105,684.




**Segment
      reporting** -
      Statement of Financial Accounting Standards No 131 (“SFAS 131”), “Disclosure
      about Segments of an Enterprise and Related Information”, requires use of the
“management approach” model for segment reporting. Under this model, segment
      reporting is consistent with the manner that the Company’s management organizes
      segments within the company for making operating decisions and assessing
      performance. Reportable segments are based on products and services, geography,
      legal structure, management structure, or any other manner in which management
      disaggregates a company.





The
      Company only sells carbon graphite products and sells only to Chinese
      distributors and end users.





**Taxation
      -** Taxation
      on profits earned in the PRC has been calculated on the estimated assessable
      profits for the year at the rates of taxation prevailing in the PRC where the
      Company operates after taking into effect the benefits from any special tax
      credits or “tax holidays” allowed in the county of operations.





The
      Company does not accrue United States income tax since it has no significant
      operating income in the United States. Its operating subsidiaries are organized
      and located in the PRC and do not conduct any business in the United States.





In
      2006,
      the Financial Accounting Standards Board (FASB) issued FIN 48, which clarifies
      the application of SFAS 109 by defining a criterion that an individual income
      tax position must meet for any part of the benefit of that position to be
      recognized in an enterprise’s financial statements and provides guidance on
      measurement, recognition, classification, accounting for interest and penalties,
      accounting in interim periods, disclosure and transition. In accordance with
      the
      transition provisions, the Company adopted FIN 48 effective January 1,
      2007.





The
      Company recognizes that virtually all tax positions in the PRC are not free
      of
      some degree of uncertainty due to tax law and policy changes by the state.
      However, the Company cannot reasonably quantify political risk factors and
      thus
      must depend on guidance issued by current government officials.





Based
      on
      all known facts and circumstances and current tax law, the Company believes
      that
      the total amount of unrecognized tax benefits as of September 30, 2008 is not
      material to its results of operations, financial condition or cash flows. The
      Company also believes that the total amount of unrecognized tax benefits as
      of
      September 30, 2008, if recognized, would not have a material effect on its
      effective tax rate. The Company further believes that there are no tax positions
      for which it is reasonably possible, based on current Chinese tax law and
      policy, that the unrecognized tax benefits will significantly increase or
      decrease over the next 12 months producing, individually or in the aggregate,
      a
      material effect on the Company’s results of operations, financial condition or
      cash flows.





**Enterprise
      income tax**





Under
      the
      Provisional Regulations of The People’s Republic of China Concerning Income Tax
      on Enterprises promulgated by the PRC, income tax is payable by enterprises
      at a
      rate of 33% of their taxable income. Preferential tax treatment may, however,
      be
      granted pursuant to any law or regulations from time to time promulgated by
      the
      State Council.





The
      Company has been granted a tax holiday from 100% of the Enterprises Income
      Tax
      from the Xing He District Local Tax Authority in the Nei Mongol province for
      the
      five years 2003 through 2007.





On
      March
      16, 2007, the PRC’s parliament, the National People’s Congress, adopted the
      Enterprise Income Tax Law, which took effect on January 1, 2008. The new income
      tax law sets unified income tax rate for domestic and foreign companies at
      25%
      except a 15% corporation income tax rate for qualified high and new technology
      enterprises. In accordance with this new income tax law, low preferential tax
      rate in accordance with both the tax laws and administrative regulations prior
      to the promulgation of this Law shall gradually transit to the new tax rate
      within five years after the implementation of this law.





10


The
      Company has been recognized as a high technology and science company by the
      Ministry of Science and Technology of the People’s Republic of China. Therefore,
      Xing He District Local Tax Authority in the Nei Mongol province granted tax
      holiday from 100% of Enterprises Income Tax for additional three years 2008
      through 2010. Afterwards, based on the present tax law, the Company will be
      subject to a corporation income tax rate of 15% effective in 2011.





The
      enterprise income tax is calculated on the basis of the statutory profit for
      financial reporting purposes, adjusted for income and expense items that are
      not
      assessable or deductible for income tax purposes.





Deferred
      tax assets and liabilities are recognized for the future tax consequences
      attributable to differences between the financial statement carrying amounts
      of
      existing assets and liabilities and their respective tax basis. Deferred tax
      assets, including tax loss and credit carry forwards, and liabilities are
      measured using enacted tax rates expected to apply to taxable income in the
      years in which those temporary differences are expected to be recovered or
      settled. The effect of deferred tax assets and liabilities of a change in tax
      rates is recognized in income in the period that includes the enactment date.
      Deferred income tax expense represents the change during the period in the
      deferred tax assets and deferred tax liabilities. The components of the deferred
      tax assets and liabilities are individually classified as current and
      non-current based on their characteristics. Deferred tax assets are reduced
      by a
      valuation allowance when, in the opinion of management, it is more likely than
      not that some portion or all of the deferred tax assets will not be
      realized.





**Value
      added tax**





The
      Provisional Regulations of The People’s Republic of China Concerning Value Added
      Tax promulgated by the State Council came into effect on January 1, 1994. Under
      these regulations and the Implementing Rules of the Provisional Regulations
      of
      the PRC Concerning Value Added Tax, value added tax (“VAT”) is imposed on goods
      sold in or imported into the PRC and on processing, repair and replacement
      services provided within the PRC.




VAT
      payable in The People’s Republic of China is charged on an aggregated basis at a
      rate of 13% or 17% (depending on the type of goods involved) on the full price
      collected for the goods sold or, in the case of taxable services provided,
      at a
      rate of 17% on the charges for the taxable services provided, but excluding,
      in
      respect of both goods and services, any amount paid in respect of VAT included
      in the price or charges, and less any deductible value added tax already paid
      by
      the taxpayer on purchases of goods and services in the same financial
      year.





The
      Company has been granted an exemption from VAT by the Xing He County People’s
      Government and Xing He Tax Authority on some products in which an exchange
      agreement is in place for raw materials and fuel.





**Contingent
      liabilities and contingent assets -** A
      contingent liability is a possible obligation that arises from past events
      and
      whose existence will only be confirmed by the occurrence or non-occurrence
      of
      one or more uncertain future events not wholly within the control of the
      Company. It can also be a present obligation arising from past events that
      is
      not recognized because it is not probable that the Company will incur a
      liability or obligations as a result. A contingent liability, which might occur
      but is not probable, is not recorded but is disclosed in the notes to the
      financial statements. The Company will recognize a liability or obligation
      when
      it is probable that the Company will incur it.





A
      contingent asset is an asset, which could possibly arise from past events and
      whose existence will be confirmed only by the occurrence or non-occurrence
      of
      one or more uncertain events not wholly within the control of the Company.
      Contingent assets are not recorded but are disclosed in the notes to the
      financial statements when it is likely that the Company will recognize an
      economic benefit. When the benefit is virtually certain, the asset is
      recognized.





**Retirement
      benefit costs** -
      According to PRC regulations on pensions, the Company contributes to a defined
      contribution retirement program organized by the municipal government in the
      province in which the Company was registered and all qualified employees are
      eligible to participate in the program. Contributions to the program are
      calculated at 23.5% of the employees’ salaries above a fixed threshold amount
      and the employees contribute 2% to 8% while the Company contributes the balance
      contribution of 15.5% to 21.5%. The Company has no other material obligation
      for
      the payment of retirement benefits beyond the annual contributions under this
      program.




**Fair
      value of financial instruments** -
      In
      September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS
      157”). SFAS No. 157 defines fair value, establishes a framework for measuring
      fair value in accordance with generally accepted accounting principles, and
      expands disclosures about fair value measurements. This statement does not
      require any new fair value measurements; rather, it applies under other
      accounting pronouncements that require or permit fair value measurements. The
      provisions of this statement are to be applied prospectively as of the beginning
      of the fiscal year in which this statement is initially applied, with any
      transition adjustment recognized as a cumulative-effect adjustment to the
      opening balance of retained earnings. The provisions of SFAS 157 are effective
      for the fiscal years beginning after November 15, 2007.





11


Effective
      January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements (SFAS
      157). The adoption of SFAS No. 157 did not have a material impact on the
      Company’s fair value measurements. The carrying amounts of certain financial
      instruments, including cash, accounts receivable, notes receivable, other
      receivables, accounts payable, commercial notes payable, accrued expenses,
      and
      other payables approximate their fair values as of September 30, 2008 and
      December 31, 2007 because of the relatively short-term maturity of these
      instruments.





**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. Translation adjustments for the nine months ended
      September 30, 2008 and 2007 are $2,064,524 and $988,404, respectively. The
      cumulative translation adjustment and effect of exchange rate changes on cash
      for the nine months ended September 30, 2008 and 2007 was $215,687 and $60,265,
      respectively. Transaction gains and losses that arise from exchange rate
      fluctuations on transactions denominated in a currency other than the functional
      currency are included in the results of operations as incurred.





Asset
      and
      liability accounts at September 30, 2008 and December 31, 2007 were translated
      at 6.8551 RMB to $1.00 USD and at 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 nine months ended September 30, 2008 and
      2007 were 6.99886 RMB and 7.72999 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
      per share -** Basic
      earnings per share is computed by dividing net income available to common
      shareholders by the weighted average number of shares of common stock
      outstanding during the period. Diluted earnings per share is computed by
      dividing net income available to common shareholders by the weighted average
      number of shares of common stock, common stock equivalents and potentially
      dilutive securities outstanding during each period. Potentially dilutive shares
      of common stock consist of the common stock issuable upon the conversion of
      convertible debt, preferred stock and warrants (using the if-converted method).





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





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





**4.**
            **Concentrations
                of Business and Credit
                Risk**





Substantially
      all of the Company’s bank accounts are in banks located in the PRC and are not
      covered by any type of protection similar to that provided by the FDIC on funds
      held in U.S. banks.




The
      Company is operating in the PRC, which may give rise to significant foreign
      currency risks from fluctuations and the degree of volatility of foreign
      exchange rates between U.S. dollars and the Chinese RMB.





Financial
      instruments that potentially subject the Company to concentration of credit
      risk
      consist principally of cash, trade accounts receivables and inventories, the
      balances of which are stated on the balance sheet. The Company places its cash
      in banks located in China. Concentration of credit risk with respect to trade
      accounts receivables is limited due to the Company's large number of diverse
      customers in different locations in China. The Company does not require
      collateral or other security to support financial instruments subject to credit
      risk.





12


For
      the
      periods ended September 30, 2008 and 2007 no single customer accounted for
      10%
      or more of sales revenues. As of September 30, 2008, accounts receivable from
      two customers constitute 25% and 19% respectively of the Company’s total
      accounts receivable as of September 30, 2008.





As
      of
      September 30, 2008 and 2007, the Company had insurance expense of $5,778 and
      $0
      respectively. Accrual for losses is not recognized until such time a loss has
      occurred.





**5.**
            **Income
                Taxes**





Under
      the
      Provisional Regulations of The People’s Republic of China Concerning Income Tax
      on Enterprises promulgated by the PRC, income tax is payable by enterprises
      at a
      rate of 33% of their taxable income. Preferential tax treatment may, however,
      be
      granted pursuant to any law or regulations from time to time promulgated by
      the
      State Council.





The
      Company has been granted a 100% tax holiday from Enterprises Income Tax Policy
      from the Xing He District Local Tax Authority for the eight years 2003 through
      2010. This tax holiday could be challenged by higher taxing authorities in
      the
      PRC, which could result in taxes and penalties owed for those years. For the
      periods ended September 30, 2008 and 2007, the enterprise income tax at the
      statutory rates would have been approximately $1,428,908 and $ 971,187,
      respectively.




A
      reconciliation of the provision for income taxes with amounts determined by
      the
      PRC statutory income tax rate to income before income taxes is as
      follows:




2008
            
            2007Computed
                tax at the PRC statutory rate of 33%
            
            $
            1,428,908
            
            $
            971,187Benefit
                of tax holiday
            
            
            (1,428,908
            )
            
            (971,187
            )Income
                tax expenses per books
            
            $
            -
            
            $
            -





**6.**
            **Inventories**




As
      of
      September 30, 2008 and December 31, 2007, inventory consisted of the
      following:





2008
            
            2007Raw
                materials
            
            $
            3,511,000
            
            $
            1,198,174Work
                in process
            
            
            10,603,487
            
            
            10,119,774Finished
                goods
            
            
            2,995,332
            
            
            3,270,125Repair
                Parts
            
            
            53,823
            
            
            38,854$
            17,163,642
            
            $
            14,626,927




Raw
      materials consist primarily asphalt, petroleum coke, needle coke and other
      materials used in production. Finished goods consist graphite electrodes, fine
      grain graphite and high purity graphite. The costs of finished goods include
      direct costs of raw materials as well as direct labor used in production.
      Indirect production costs such as utilities and indirect labor related to
      production such as shipping and handling costs are also included in the cost
      of
      inventory.





13


**7.**
            **Property
                and Equipment; Land Use Rights**





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





September
                30, 2008
            
            December
                31, 2007Building
            
            $
            6,743,619
            
            $
            6,320,420Machinery
                and equipment
            
            
            19,505,594
            
            
            18,234,302Motor
                vehicles
            
            
            40,846
            
            
            -26,290,059
            
            
            24,554,722Less:
                Accumulated depreciation
            
            
            6,208,754
            
            
            4,971,393$
            20,081,305
            
            $
            19,583,329





For
      the
      nine months ended September 30, 2008 and 2007, depreciation expense was $905,525
      and $819,751.





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





2008
            
            2007Land
                Use Right
            
            $
            3,811,039
            
            $
            2,971,009Less:
                Accumulated amortization
            
            
            188,131
            
            
            129,055$
            3,622,908
            
            $
            2,841,954




For
      the
      nine months ended September 30, 2008 and 2007, amortization expenses were
      $49,399 and $13,176 respectively.





Amortization
      expense for the next five years ended September 30:





2009
            
            $
            74,6552010
            
            
            74,6552011
            
            
            74,6552012
            
            
            74,6552013
            
            
            74,655Thereafter
            
            
            3,249,633Total
            
            $
            3,622,908


**8.**
              **Stockholders’
                  equity**


(a)
            Restated
                Certificate of Incorporation





On
      January 22, 2008, the Company changed its authorized capital stock to
      120,000,000 shares of capital stock, of which 20,000,000 shares are shares
      of
      preferred stock, par value $0.001 per share, and 100,000,000 shares are shares
      of common stock, par value $0.001 per share. The restated certificate of
      incorporation included a statement of designations of the rights, preferences,
      privileges and limitation of the holders of the series A preferred stock. The
      terms of the statement of designations is set forth under “Conversion of
      Convertible Notes.”





(b)
            Conversion
                of Convertible Notes.





On
      January 22, 2008, upon the filing of a restated certificate of incorporation
      and
      a statement of designation for a newly created series of preferred stock
      designated as the series A convertible preferred stock, outstanding convertible
      notes in the principal amount of $1,200,000 were automatically converted into
      1,200,499 shares of series A convertible preferred stock and warrants to
      purchase 3,000,000 shares of common stock at $1.20 per share and 3,000,000
      shares of common stock at $2.00 per share. The statement of designation for
      the
      series A preferred stock provides the following:





·
            Each
                share of series A preferred stock is convertible into one share of
                common
                stock, at a conversion price of $1.00, subject to
                adjustment.




14


·
            While
                the series A preferred stock is outstanding, if the Company issues
                common
                stock at a price or warrants or other convertible securities at a
                conversion or exercise price which is less than the conversion price
                then
                in effect, the conversion price shall be adjusted on a formula
                basis.




·
            While
                the Series A Preferred Stock is outstanding, without the approval
                of the
                holders of 75% of the outstanding shares of Series A Preferred Stock,
                the
                Company may not pay cash dividends or other distributions of cash,
                property or evidences of indebtedness, nor redeem any shares of Common
                Stock.




·
            No
                dividends are payable with respect to the series A preferred
                stock.




·
            Upon
                any voluntary or involuntary liquidation, dissolution or winding-up,
                the
                holders of the series A preferred stock are entitled to a preference
                of
                $1.00 per share before any distributions or payments may be made
                with
                respect to the common stock or any other class or series of capital
                stock
                which is junior to the series A preferred stock upon voluntary or
                involuntary liquidation, dissolution or
                winding-up.




·
            The
                holders of the series A preferred stock have no voting rights. 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 outstanding shares of 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 certificate of
                designation, (b) authorize or create any class of stock ranking as
                to
                dividends or distribution of assets upon 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 our
                articles of incorporation or other charter documents in breach of
                any of
                the provisions thereof, (d) increase the authorized number of shares
                of
                series A preferred stock, or (e) enter into any agreement with respect
                to
                the foregoing




(c)
            Warrants





The
      warrants have terms of five years, and expire December 3, 2012. The warrants
      provide a cashless exercise feature; however, the holders of the warrants may
      not make a cashless exercise prior to December 17, 2008 and thereafter the
      holders may make a cashless exercise only if the underlying shares are not
      covered by an effective registration statement.




(d)
            Securities
                Purchase Agreement





Pursuant
      to the securities purchase agreement relating to the issuance of the 3%
      convertible notes, in addition to the foregoing:





·
            On
                January 22, 2008, we restates our articles of incorporation to change
                our
                corporate name to China Carbon Graphite Group, Inc., change our authorized
                capital stock to 120,000,000 shares of capital stock, of which 20,000,000
                shares are shares of preferred stock, par value $.001 per share,
                and
                100,000,000 shares are shares of common stock, par value $.001 per
                share.
                The restated articles included a statement of designations of the
                rights,
                preferences, privileges and limitations of the holders of the series
                A
                preferred stock.




·
            The
                Company agreed that, within 90 days after the closing on December
                17,
                2007, it would have appointed such number of independent directors
                that
                would result in a majority of the directors being independent directors
                and the Company would have an audit committee composed solely of
                at least
                three independent directors and a compensation committee would have
                a
                majority of independent directors. The Company is required to pay
                liquidated damages (i) if the Company fails to have a majority of
                independent directors 90 days after the closing or (ii) thereafter,
                if the
                Company subsequently fails to 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. Liquidated damages
                are
                payable in cash or additional shares of series A preferred stock,
                with the
                series A preferred stock being valued at the market price of the
                shares of
                common stock issuable upon conversion of the series A preferred stock.
                The
                liquidated damages are computed in an amount equal to 12% per annum
                of the
                purchase price, with a maximum of $144,000. Liquidated damages through
                September 30, 2008 have been
                waived.




·
            The
                Company and XingGuang entered into a registration rights agreement
                pursuant to which the Company is required to have a registration
                statement
                filed with the SEC by March 16, 2008 (subsequently extended to November
                16, 2008) and declared effective by the SEC not later than August
                13, 2008
                (subsequently extended to December 16, 2008). We are required to
                pay
                liquidated damages at the rate of 200 shares of series A preferred
                stock
                for each day after August 13, 2008 (subsequently extended to December
                16,
                2008) that the registration statement is not declared effective or
                for any
                period that we fail to keep the registration statement effective,
                up to a
                maximum of 100,000 shares. The number of shares of series A preferred
                stock issuable pursuant to the liquidated damages provision is subject
                to
                reduction based on the maximum number of shares that can be registered
                under the applicable SEC
                guidelines.




15


·
            XingGuang
                has a right of refusal on future
                financings.




(e)
            Cancellation
                of common stock





In
      connection with the acquisition of Talent, the Company entered buy-back
      agreement with the then majority stockholder. See Note 1 (a). The Company agreed
      to pay a purchase price of $700,000 for the shares, payable in installments
      of
      $350,000 on each of March 31, 2008 and June 30, 2008. The Company placed
      1,000,000 of the shares of common stock in escrow, and the shares are subject
      to
      release from escrow. The payments were made in the six months ended June 30,
      2008, and the 1,000,000 shares were returned to the Company and
      cancelled.





(f)
            Deemed
                Preferred Stock Dividend




Upon
      filing of the Company’s amended and restated articles of incorporation on
      January 22, 2008, $1,200,000 of convertible notes were automatically converted
      to 1,200,499 shares of preferred stock convertible into 1,200,499 shares of
      common stock at a conversion price of $1.00 per share and included detachable
      warrants to purchase 3,000,000 shares of the common stock at $1.20 and 3,000,000
      shares at $2.00 per share. At December 17, 2007, the fair value of the warrants
      used to calculate the intrinsic value of the conversion option was estimated
      at
      $3,831,900 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 (3.5%), (2) expected warrant life of
      5 years, (3) expected volatility of 100%, and (4) 0% expected
      dividend.   The Company used the market price of its common stock at
      December 17, 2007, $0.95 per share, and computed the effective preferred stock
      conversion price to be $0.24 per share.   The resulting intrinsic
      value of the conversion feature was $854,300 reported as a dividend.




As
      the
      series A preferred stock does not provide for redemption by the Company or
      have
      a finite life, upon the conversion to preferred stock, a one-time preferred
      stock deemed dividend of $854,300 was recognized immediately as a non-cash
      charge during the three months ended March 31, 2008. The deemed preferred stock
      dividend of $854,300 has been recorded as additional paid-in capital and a
      reduction to retained earnings.


**9.**
                **Notes
                    Payable**


As
      of
      September 30, 2008 and December 31, 2007, notes payable consist of the
      following:






September
                30, 2008
            
            December
                31, 2007Bank
                loans dated July 14, 2008, due May 6, 2009 with an interest rate
                of
                9.711%, interest payable monthly, secured by property and equipment
                and
                land use rights
            
            $
            656,446
            
            $
            -Bank
                loans dated July 14, 2008, due May 25, 2009 with an interest rate
                of
                9.711%, interest payable monthly, secured by property and equipment
                and
                land use rights
            
            
            1,167,014
            
            
            -Bank
                loans dated July 14, 2008, due June 15, 2009 with an interest rate
                of
                9.711%, interest payable monthly, secured by property and equipment
                and
                land use rights
            
            
            1,167,014
            
            
            -Bank
                loans dated July 14, 2008, due July 1, 2009 with an interest rate
                of
                9.711%, interest payable monthly, secured by property and equipment
                and
                land use rights
            
            
            1,167,014
            
            
            -Bank
                loans dated July 14, 2008, due July 13, 2009 with an interest rate
                of
                9.711%, interest payable monthly, secured by property and equipment
                and
                land use rights
            
            
            729,385
            
            
            -Bank
                loans dated June 12, 2007, due June 10, 2008 with an interest rate
                of
                8.541%, interest payable monthly, secured by property and equipment
                and
                land use rights
            
            
            -
            
            
            683,611Other
                loan dated June 22, 2007, due June 20, 2008 with an interest rate
                of
                7.227%, interest payable quarterly, secured by equipment and land
                use
                rights
            
            
            -
            
            
            5,332,167Notes
                payable to former principal shareholders pursuant to buy-back agreements
                in relation to the reverse acquisition, see Note 1.
            
            
            -
            
            
            700,000$
            4,886,873
            
            $
            6,715,778


**10.**
                **Loans
                    from Shareholder**


On
        September 30, 2008 and December 31, 2007, the Company had loans from CEO
        Dengyong Jin amounting to $4,800,453 and $4,543,648, respectively. The advances
        do not bear interest and are unsecured and due on demand.


16




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





**Forward
      Looking Statements**





The
      following discussion of the results of our operations and financial condition
      should be read in conjunction with our financial statements and the related
      notes, which appear elsewhere. Statements contained in this Form 10-Q include
      forward-looking statements that are subject to risks and uncertainties. In
      particular, statements in this Form 10-Q that state our intentions, beliefs,
      expectations, strategies, predictions or any other statements relating to our
      future activities or other future events or conditions are “forward-looking
      statements.” Forward-looking statements are subject to risks, uncertainties and
      other factors, including, but not limited to, those identified under “Risk
      Factors,” in our Form 10-KSB for the year ended December 31, 2007 and those
      described in “Management’s Discussion and Analysis of Financial Conditions and
      Results of Operations” in the Form 10-KSB and this Form 10-Q, and those
      described in any other filings by us with the Securities and Exchange
      Commission, as well as general economic conditions and economic conditions
      affecting the market for graphite electrode, fine grain graphite and high purity
      graphite, our ability to develop a higher purity graphite electrode, including
      our ability to obtain the necessary funding for such efforts, any one or more
      of
      which could cause actual results to differ materially from those stated in
      such
      statements. In addition, such statements could be affected by risks and
      uncertainties related to the ability to conduct business in China, product
      demand, our ability to develop products using the most current technology,
      our
      ability to raise any financing which we may require for our operations,
      competition, government regulations and requirements, pricing and development
      difficulties, as well as general industry and market conditions and growth
      rates, and general economic conditions. Any forward-looking statements speak
      only as of the date on which they are made, and we do not undertake any
      obligation to update any forward-looking statement to reflect events or
      circumstances after the date of this Form 10-Q.





**Overview**





Reference
      in this Form 10-Q to “we,” “us,” “our” and words of like import refer to the
      Company, its subsidiaries and its variable interest entity, Xinghe Xingyong
      Carbon Co., Ltd. (“Xingyong”). For periods prior to December 17, 2007, these
      terms refer to Xingyong.





Prior
      to
      December 17, 2007, we were a pubic reporting blind pool company. On December
      17,
      2007, we executed and completed the transactions contemplated by the agreement
      with Sincere Investment (PTC) Ltd. whereby Talent International Investment
      Limited (“Talent”), a British Virgin Islands corporation, became our
      wholly-owned subsidiary. Talent is the sole stockholder of Xinghe Yongle Carbon
      Co., Ltd. (“Yongle”), a company organized under the laws of the PRC. Yongle is a
      party to a series of contractual arrangements with Xingyong, as described
      below.




Xingyong
      was organized under the laws of the PRC in 2002. Xingyong’s business was
      formerly operated as a state-owned enterprise. The business was reorganized
      under the laws of the PRC as a limited liability company named Xinghe Xingye
      Carbon Co., Ltd. In December 2001, Mr. Dengyong Jin organized Xingyong to
      acquire the business of Xinghe Xingye Carbon Co., Ltd. by paying RMB 55,600,000
      (approximately US$7,900,000). Mr. Jin funded RMB 33,750,000 (approximately
      US$4,800,000) and the company obtained bank loans in the amount of RMB
      21,950,000 (approximately US$3,100,000).




From
      December 2001 until the reverse acquisition on December 17, 2007, our business
      was conducted by Xingyong, and this discussion relates to the business,
      financial condition and results of operations of Xingyong for all periods prior
      to December 17, 2007, and thereafter reflect the financial condition of the
      Company, its subsidiaries and Xingyong, which is a variable interest entity
      whose financial statements are consolidated with ours pursuant to FIN 46. We
      develop, manufacture and market graphite products. Our main products include
      graphite electrode, fine grain graphite and high purity graphite. We produce
      all
      of our products in China. Our products are generally used either as a component
      in other products, as an element of a facility or in the manufacturing process
      of other products. We sell our products to distributors who sell to producers
      in
      both the domestic Chinese market and the international market. We also sell
      graphite electrodes directly to domestic end users.




Although
      our products are sold in the international market, substantially all of our
      sales are to Chinese firms that may, in turn, sell the products in the
      international market. We believe that our products are not subject to export
      restrictions.




In
      accordance with the relevant Chinese rules and regulations on management of
      foreign exchange, the foreign currency generated from sales of our products
      outside of China is brought into China and sold to designated banks instead
      of
      depositing it in banks out of the PRC without authorization. In addition, we
      have to buy foreign currency from designated banks upon the strength of
      commercial bills when paying current expenditures with foreign currency. All
      of
      our transactions undertaken in the PRC are denominated in RMB, which must be
      converted into other currencies before remittance out of China. Both the
      conversion of RMB into foreign currencies and the remittance of foreign
      currencies abroad require the approval of the Chinese government.





17


Our
      principal raw materials are coal asphalt, asphalt coke, metallurgy coke, needle
      coke, metallurgy coke power, quartzose sand, coal, petroleum coke and calcined
      coke, all of which are carbon rich and used in manufacturing graphite with
      a
      high degree of purity. We purchase most of our raw materials from domestic
      Chinese suppliers. Because we do not have any long-term contracts for raw
      materials, any changes in prices of raw material will affect the price at which
      we can sell our product. Our raw materials are subject to rapid and significant
      price fluctuations. In
      times
      of increasing prices, we need to try to fix the price at which we purchases
      raw
      materials in order to avoid increases in costs which we cannot recoup through
      increases in sales prices. Similarly, in times of decreasing prices, we may
      have
      purchased raw materials at prices which are high in terms of the price at which
      we can sell our products, which also can impair our margins.





The
      laws
      of the PRC give the government broad power to fix and adjust prices. Although
      the government has not imposed price controls on our raw materials or on our
      products, it is possible that such controls may be implemented in the future.
      Since most of our sales are made to domestic companies, our gross margins can
      be
      affected by any price controls imposed by the government of the PRC. Our margins
      can be severely impacted in price controls are placed on the price at which
      we
      can sell products without any regulation of the prices at which we can purchase
      raw materials in the PRC. If the government places controls on both the price
      at
      which we purchase raw materials and the price at which we can sell our products,
      significant components in determining our margins would be determined by
      government policy.




The
      transaction whereby we acquired Talent is accounted for as a reverse
      acquisition. The exchange of our stock for the stock of Talent is considered
      to
      be capital transactions in substance, rather than a business combination. That
      is, the acquisition is equivalent to the acquisition by Talent of us, with
      the
      issuance of stock by Talent for the net monetary assets of Achievers. This
      transaction is accompanied by 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, our historical financial statements are those of Talent, which
      is
      treated as the acquiring party for accounting purposes. Since Talent and Yongle
      were not engaged in any business activities, our financial statements for
      periods prior to the closing of the reverse acquisition reflect only business
      of
      Xingyong. The financial statements reflect the recapitalization of the
      stockholders’ equity as if the transactions occurred as of the beginning of the
      first period presented.





Prior
      to
      December 17, 2007, we did not have the expenses of a public company. As a
      result, since December 17, 2007 we have incurred, and we are continuing to
      incur, significantly greater legal, accounting and other professional expenses
      relating to our status as a public company and compliance with SEC rules,
      including the development and implementation of internal controls.




Our
      internal financial statements are maintained in RMB. The financial statements
      included in this Form 10-Q are expressed in United States dollars. The
      translation adjustments in expressing the financial statements in United States
      dollars is shown on the statements of operation as a translation adjustment,
      and
      the cumulative translation adjustment is shown as an element of stockholders’
equity.





Although
      we do not believe that our operations for the nine months ended September 30,
      2008 were affected by the current economic conditions, these conditions,
      together with problems that our customers and potential customers may have
      in
      obtaining credit, in a reduction in demand for capital expenditures generally
      and our products in particular as well as delays in payments from our customers.
      The uncertainty of current economy could also adversely impact our ability
      to
      obtain financing for working capital, capacity expansion and other long term
      development plans.





**Critical
      Accounting Policies and Estimates**





*Use
      of Estimates*





The
      discussion and analysis of our financial condition and results of operations
      is
      based upon our financial statements that have been prepared in accordance with
      accounting principles generally accepted in the United States of America. The
      preparation of these financial statements requires us to make estimates and
      judgments that affect the reported amounts of assets and liabilities. On an
      on-going basis, we evaluate our estimates including the allowance for doubtful
      accounts, the salability and recoverability of our products, income taxes and
      contingencies. We base our estimates on historical experience and on other
      assumptions that we believe to be reasonable under the circumstances, the
      results of which form our basis for making judgments about the carrying values
      of assets and liabilities that are not readily apparent from other sources.
      Actual results may differ from these estimates under different assumptions
      or
      conditions.




18


*Variable
      Interest Entity*





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.





Xingyong
      is considered a variable interest entity (“VIE”), and we are the primary
      beneficiary. On December 17, 2007, we entered into agreements with the Xingyong
      pursuant to which we shall receive the benefit of the Xingyong’s net income. In
      accordance with these agreements, Xingyong shall pay consulting fees equal
      to
      80% to 100% of its net income to our wholly-owned foreign subsidiary, Yongle,
      and Yongle shall supply the technology and administrative services needed to
      service Xingyong.  Xingyong is owned by Mr. Jin, who is Yongle’s and our
      chief executive officer.




The
      accounts of Xingyong are consolidated in the accompanying financial statements
      pursuant to FIN 46R. As a VIE, Xingyong’s sales are included in our total sales,
      its income from operations is consolidated with our, and our net income includes
      all of Xingyong 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 Xingyong that require consolidation of our financial statements
      and
      Xingyong’s financial statements.




*Revenue
      Recognition*




We
      recognize revenue in accordance with Staff Accounting Bulletin No. 104,
      Revenue Recognition, which states that revenue should be recognized when the
      following criteria are met: (1) persuasive evidence of an arrangement
      exists; (2) the service has been rendered; (3) the selling price is
      fixed or determinable; and (4) collection of the resulting receivable is
      reasonably assured. Sales represent the invoiced value of goods, net of value
      added tax (“VAT”), if any, and are recognized upon delivery of goods and passage
      of title. Pursuant to China’s VAT rules and regulations, as an ordinary VAT
      taxpayer we are subject to a tax rate of 17% (“output VAT”). The output VAT is
      payable after offsetting VAT paid by us on purchases (“input VAT”). We have been
      granted an exemption from VAT by the Xinghe County People’s Government and
      Xinghe Tax Authority on some products for which an exchange agreement is in
      place for raw materials and fuel.





*Comprehensive
      Income*





We
      have
      adopted Statements of Financial Accounting Standards (“SFAS”) No. 130,
“Reporting Comprehensive Income,” which establishes standards for reporting and
      presentation of comprehensive income (loss) and its components in a full set
      of
      general-purpose financial statements. We have chosen to report comprehensive
      income (loss) in the statements of operations and comprehensive
      income.




*Income
      Taxes*





We
      account for income taxes under the provisions of SFAS No. 109, “Accounting for
      Income Taxes,” which requires recognition of deferred tax assets and liabilities
      for the expected future tax consequences of events that have been included
      in
      the consolidated financial statements or tax returns. Deferred tax assets and
      liabilities are recognized for the future tax consequence attributable to the
      difference between the tax bases of assets and liabilities and their reported
      amounts in the financial statements. Deferred tax assets and liabilities are
      measured using the enacted tax rate expected to apply to taxable income in
      the
      years in which those temporary differences are expected to be recovered or
      settled. The effect on deferred tax assets and liabilities of a change in tax
      rates is recognized in income in the period that includes the enactment date.
      With the approvals of the Xinghe County Government, we received a 100% tax
      holiday from enterprise income taxes from 2003 through and including 2007.




19


On
      March
      16, 2007, China’s parliament, the National People’s Congress, adopted the
      Enterprise Income Tax Law, which will take effect on January 1, 2008. The new
      income tax law sets unified income tax rate for domestic and foreign companies
      at 25 percent except a 15 percent corporate income tax rate for qualified high
      and new technology enterprises. In accordance with this new income tax law,
      low
      preferential tax rate in accordance with both the tax laws and administrative
      regulations prior to the promulgation of this Law shall gradually become subject
      to the new tax rate within five years after the implementation of this
      law.





We
      have
      been recognized as a high technology and science company by the Ministry of
      Science and Technology of the People’s Republic of China. The Xing He District
      Local Tax Authority in the Nei Monggol province granted us a tax holiday from
      100% of Enterprises Income Tax for additional three years - from 2008 through
      2010. Following expiration of the three year period, based on the present tax
      law, we will be subject to a corporation income tax rate of 15% effective in
      2011.




*Inventories*





Inventories
      are stated at the lower of cost, determined on a weighted average basis, and
      net
      realizable value. Work in progress and finished goods are composed of direct
      material, direct labor and a portion of manufacturing overhead. Net realizable
      value is the estimated selling price, in the ordinary course of business, less
      estimated costs to complete and dispose. Management believes that there was
      no
      obsolete inventory as of September 30, 2008.




*Property,
      Plant and Equipment*





Property,
      plant and equipment are stated at cost. Major expenditures for betterments
      and
      renewals are capitalized while ordinary repairs and maintenance costs are
      expensed as incurred. Depreciation and amortization is provided using the
      straight-line method over the estimated useful life of the assets after taking
      into account the estimated residual value.




There
      is
      no private ownership of land in China. All land ownership is held by the
      government of China, its agencies and collectives. Land use rights are obtained
      from government, and are typically renewable. Land use rights can be transferred
      upon approval by the land administrative authorities of China (State Land
      Administration Bureau) upon payment of the required transfer fee. We own the
      land use right for 2,356,209 **** square
      feet, of which 290,626 square feet is occupied by our facilities, for a term
      of
      50 years, beginning from issuance date of the certificates granting the land
      use
      right in 2002. We record the property subject to land use rights as intangible
      property.




Each
      intangible asset is 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.





*Research
      and development*




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





*Value
      added tax*





Enterprises
      or individuals who sell products, engage in repair and maintenance or import
      and
      export goods in the PRC are subject to a value added tax in accordance with
      Chinese laws. The value added tax standard rate is 17% of the gross sales price.
      A credit is available whereby VAT paid on the purchases of semi-finished
      products, raw materials used in the production of the Company’s finished
      products, and payment of freight expenses can be used to offset the VAT due
      on
      sales of the finished product. The amount of VAT liability is determined by
      applying the applicable tax rate to the invoiced amount of goods sold (output
      VAT) less VAT paid on purchases made with the relevant supporting invoices
      (input VAT). Under the commercial practice of the PRC, the Company
      paid **** VAT
      and
      business tax based on tax invoices issued. The tax invoices may be issued
      subsequent to the date on which revenue is recognized, and there may be a
      considerable delay between the date on which the revenue is recognized and
      the
      date on which the tax invoice is issued. In the event that the PRC tax
      authorities dispute the date of which revenue is recognized for tax purposes,
      the PRC tax office has the right to assess a penalty, which can range from
      zero
      to five times the amount of the taxes that are determined to be late or
      deficient. In the event that a tax penalty is assessed on late or deficient
      payments, the penalty will be expensed as a period expense if and when a
      determination has been made by the taxing authorities that a penalty is
      due.





20


**RESULTS
      OF OPERATIONS**





The
      following tables set forth information from our statements of operations for
      the
      nine months and three months ended September 30, 2008 and 2007, in dollars
      and
      as a percentage of sales:


**Nine
                    months ended September 30,****2008**
                
                
                **2007****US
                    Dollars**
                
                **Percentage**
                
                
                **US
                    Dollars**
                
                **Percentage**Sales
                
                $
                21,160,851
                
                
                100.00
                %
                
                $
                18,799,732
                
                
                100.00
                %Cost
                    of sales
                
                
                15,567,633
                
                
                73.57
                %
                
                
                15,067,613
                
                
                80.15
                %Gross
                    margin
                
                
                5,593,218
                
                
                26.43
                %
                
                
                3,732,119
                
                
                19.85
                %Operating
                    expenses
                
                
                1,064,339
                
                
                5.03
                %
                
                
                664,285
                
                
                3.53
                %Income
                    from operations
                
                
                4,528,879
                
                
                21.40
                %
                
                
                3,067,834
                
                
                16.32
                %Other
                    income
                
                
                224,705
                
                
                1.06
                %
                
                
                286,779
                
                
                1.53
                %Interest
                    income
                
                
                910
                
                
                0.00
                %
                
                
                377
                
                
                0.00
                %Interest
                    expense
                
                
                (413,039
                )
                
                (1.95
                )%
                
                
                (393,540
                )
                
                (2.09
                )%Other
                    expense
                
                
                (11,431
                )
                
                (0.05
                )%
                
                
                (18,458
                )
                
                (0.10
                )%Income
                    before income tax expense
                
                
                4,330,024
                
                
                20.46
                %
                
                
                2,942,992
                
                
                15.65
                %Provision
                    for income taxes
                
                
                -
                
                
                0.00
                %
                
                
                -
                
                
                0.00
                %Net
                    income
                
                
                4,330,024
                
                
                20.46
                %
                
                
                2,942,992
                
                
                15.65
                %Other
                    comprehensive incomeForeign
                    currency translation adjustment
                
                
                2,064,524
                
                
                9.76
                %
                
                
                988,404
                
                
                5.26
                %Comprehensive
                    income
                
                $
                6,394,548
                
                
                30.22
                %
                
                $
                3,931,396
                
                
                20.91
                %




**Three
                  months ended September 30,****2008**
              
              
              **2007****US
                  Dollars**
              
              **Percentage**
              
              
              **US
                  Dollars**
              
              **Percentage**Sales
              
              $
              7,509,072
              
              
              100.00
              %
              
              $
              7,353,710
              
              
              100.00
              %Cost
                  of sales
              
              
              5,384,214
              
              
              71.70
              %
              
              
              5,967,498
              
              
              81.15
              %Gross
                  margin
              
              
              2,124,858
              
              
              28.30
              %
              
              
              1,386,212
              
              
              18.85
              %Operating
                  expenses
              
              
              464,693
              
              
              6.19
              %
              
              
              332,361
              
              
              4.52
              %Income
                  from operations
              
              
              1,660,165
              
              
              22.11
              %
              
              
              1,053,851
              
              
              14.33
              %Other
                  income
              
              
              11,032
              
              
              0.15
              %
              
              
              46,773
              
              
              0.64
              %Interest
                  income
              
              
              493
              
              
              0.01
              %
              
              
              233
              
              
              -
              %Interest
                  expense
              
              
              (143,482
              )
              
              (1.91
              )%
              
              
              (61,213
              )
              
              (0.83
              )%Other
                  expense
              
              
              (120
              )
              
              (0.00
              )%
              
              
              (10,792
              )
              
              (0.15
              )%Income
                  before income tax expense
              
              
              1,528,088
              
              
              20.35
              %
              
              
              1,028,852
              
              
              13.99
              %Provision
                  for income taxes
              
              
              -
              
              
              0.00
              %
              
              
              -
              
              
              0.00
              %Net
                  income
              
              
              1,528,088
              
              
              20.35
              %
              
              
              1,028,852
              
              
              13.99
              %Other
                  comprehensive incomeForeign
                  currency translation adjustment
              
              
              84,634
              
              
              1.13
              %
              
              
              363,683
              
              
              4.95
              %Comprehensive
                  income
              
              $
              1,612,722
              
              
              21.48
              %
              
              $
              1,392,535
              
              
              18.94
              %


*Sales.* During
      the nine months ended September 30, 2008, we had sales of $21.2 million, as
      compared to sales of $18.8 million for the nine months ended September 30,
      2007,
      an increase of $2.4 million, or approximately 12.8%. Net sales for the three
      months ended September 30, 2008 were $7.5 million compared to $7.4 million
      for
      the three months ended September 30, 2007, an increase of $0.1 million or 1.4%.
      This increase resulted from our marketing efforts both to develop new customers
      and make follow-on sales to existing customers.





21


*Cost
      of sales; gross margin* .
      During
      the nine months ended September 30, 2008, our cost of sales was $15.6 million,
      as compared to cost of sales of $15 million during the nine months ended
      September 30, 2007, an increase of $0.6 million, or approximately 4 %. The
      sales
      increased 12.8% while the cost of sales increased 4%. As a result, our gross
      profit increased by $1.9 million, or approximately 49.9%, and our gross margin
      increased from 19.9% in the nine months ended September 30, 2007 to 26.4% in
      the
      nine months ended September 30, 2008.




Cost
      of
      sales for the three months ended on September 30, 2008 totaled $5.4 million
      compared to $6.0 million for the three months ended on September 30, 2007,
      a
      decrease of $0.6 million or 10%. As a result, our gross profit increased by
      $0.74 million, or approximately 53.3%, our gross margin increased from 18.9
      % in
      the three months ended September 30, 2007 to 28.3 % in the three months ended
      September 30, 2008.





The
      increase in gross profit resulted from a shift of our production focus from
      low
      margin graphite electrodes to fine grain graphite and high purity graphite
      which, although these electrodes have a higher cost, generate a higher gross
      margin.





*Operating
      expenses.* Operating
      expenses increased $400,054 or 60.2% from $664,285 in the nine months ended
      September 30, 2007 to approximate $1,064,339 in the nine months ended September
      30, 2008. The change was due to increase of depreciation and amortization
      expense of $36,223, increase of selling expense of $328,954 and increase of
      general and administrative expense of $34,877.





Operating
      expenses increased $132,332 or 39.8% from $332,361 in the three months ended
      September 30, 2007 to $464,693 in the three months ended September 30, 2008.
      The
      change was due to increase of depreciation and amortization expense of $6,947,
      increase of selling expense of $249,968 and decrease of general and
      administrative expense of $124,583.





Increase
      of operating expenses was primarily due to increase of professional expenses
      related to the costs of being a public reporting as well as higher selling
      expenses incurred in relation to sale of higher margin products fine grain
      graphite and high purity graphite.





*Income
      from operations.* For
      the
      nine months ended September 30, 2008, income from operations amounted to $4.5
      million as compared to $3.1 million for the nine months ended September 30,
      2007, an increase of $1.4 million or approximately 45.2%. For the three months
      ended September 30, 2008, income from operations amounted to $1.7 million as
      compared to $1.1 million for the three months ended September 30, 2007, an
      increase of $0.6 million or approximately 54.5%. The increase was primarily
      due
      to shift of production focus to fine grain graphite and high purity graphite
      which has higher gross profit margin.





*Other
      income* .
      For the
      nine months ended September 30, 2008, other income amounted to $224,705 as
      compared to $286,779 for the nine months ended September 30, 2007. Other income
      includes government grant received from the PRC government for the recognition
      of high technology and science companies in the amount of $212,086 and $238,681
      for the nine months ended September 30, 2008 and 2007, respectively. These
      grants were received in the first quarter of 2008 and 2007. For the three months
      ended September 30, 2008, other income amounted to $11,032 as compared to
      $46,773 for the three months ended September 30, 2007.




*Interest
      income and expenses.* During
      the nine months ended September 30, 2008 and 2007, interest expense amounted
      $413,039 and $393,540, respectively and interest income of $910 and $377,
      respectively. During the three months ended September 30, 2008 and 2007,
      interest expense amounted $143,482 and $61,213, respectively and interest income
      of $493 and $233, respectively.





*Deemed
      preferred stock dividend.*





Upon
      filing of our amended and restated articles of incorporation on January 22,
      2008, our 3% convertible notes were automatically converted into 1,200,499
      shares of series A convertible preferred stock and warrants to purchase
      3,000,000 shares of the common stock at $1.20 per share and 3,000,000 shares
      of
      common stock at $2.00 per share. As a result of the issuance of the warrants
      to
      the holders of the series A preferred stock, we computed the effective preferred
      stock conversion price to be $0.24 per share, with the result that the intrinsic
      value of the conversion feature was $854,300. The deemed preferred stock
      dividend is a non-cash charge which does not affect our operations or cash
      flow.





22


*Net
      income.* As a
      result of the factors described above, our net income available to common
      shareholders is $3,475,724, or $0.27 per share (basic) and $0.18 per share
      (diluted) for the nine months ended September 30, 2008, as compared with
      $2,942,992, or $0.28 per share (basic and diluted) for the nine months ended
      September 30, 2007.





*Comprehensive
      income.* For
      the
      nine months ended September 30, 2008, comprehensive income of $6,394,548
      reflects of our net income of $4,330,024 (before deduction of the deemed
      preferred stock dividend) and foreign currency translation gains of $2,064,524.
      For the nine months ended September 30, 2007, comprehensive income of $3,931,396
      reflects the sum of our net income of $2,942,992 and foreign currency
      translation gains of $988,404.





**Liquidity
      and Capital Resources**




Liquidity
      is the ability of a company to generate funds to support its current and future
      operations, satisfy its obligations and otherwise operate on an ongoing basis.
      At September 30, 2008, we had a cash balance of $52,102 as compared to


$4,497
      on
      December 31, 2007. These funds are on deposit with financial institutions
      located in the PRC.




Our
      working capital position increased $3.7 million to $9.5 million at September
      30,
      2008 from a working capital of $5.8 million at December 31, 2007. The increase
      in working capital reflects an increase in inventories ($2,536,715), as well
      as
      advances to suppliers ($249,045) and accounts receivable ($986,466), and a
      decrease in current liabilities ($396,947), partially offset by a decrease
      in
      other receivables ($275,800) and notes receivable ($243,426). We generated
      cash
      from operations of $4,778,346 for the nine months ended September 30, 2008,
      as
      compared with $2,361,730 for the comparable period of 2007.





Net
      cash
      used in investing activities was $3,411,620 for the nine months ended September
      30, 2008 as compared to $1,684,847 provided in the nine months ended September
      30, 2007. For both periods, the cash used in investing activities related to
      the
      acquisition of property and land use rights.





Net
      cash
      used in financing activities was $1,534,809 in the nine months ended September
      30, 2008 as compared to $731,287 for the nine months ended September 30, 2007.
      For the nine months ended September 30, 2008, we repaid advances from related
      parties $28,353 and notes payable $1,506,456. For the nine months ended
      September 30, 2007, we repaid advances from related parties of $639,055 and
      advances on notes payable of $92,232.





We
      have
      financed our operations principally through short term bank loans and, to a
      lesser extent, loans from Mr. Jin, our chief executive officer. At September
      30,
      2008, we had a bank loan in the total amount of $4,886,873, of which $656,446
      is
      due on May 6, 2009, three installments of $1,167,014 are due on May 25, 2009,
      June 15, 2009 and July 1, 2009 and $729,385 due on July 13, 2009. The bank
      loans
      bore interest at 9.711% per annum and were secured by a security interest on
      our
      fixed assets and land use rights. Although we believe that we will be able
      to
      obtain further extensions of these loans when they mature, we cannot assure
      you
      that such extensions will be granted.




At
      September 30, 2008, Mr. Jin has advances to us in the amount of $4.8 million,
      as
      compared with $4.5 million at December 31, 2007. The change in the amount is
      caused by a change in the exchange rate of RMB to United States dollars. The
      amount of the loan in RMB is unchanged. These advances do not bear interest
      and
      are due on demand.





We
      require funds for working capital for our operations. We believe that our
      working capital, together with the cash flow from our ongoing business will
      be
      sufficient to enable us to meet our cash requirements for the next 12 months
      with our present business. However, plan to develop an enhanced product which
      may have use in the nuclear power industry, and this development effort will
      require substantial additional funding. We cannot assure you that we will be
      able to obtain the necessary funding and, even if we have sufficient financing,
      we will be able to develop a product acceptable to the nuclear power
      industry.





23


Although
      we do not have any current plans to make any acquisitions, it is possible that
      we may seek to acquire one or more businesses in a related field, and we may
      require financing for that purpose. We cannot assure you that funding will
      be
      available if and when we require funding.




**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 table summarizes our contractual obligations as of September 30,
      2008.




**Payments
                Due by Period****Total**
            
            **Less than 1**
              **year**
            
            **1-3**
              **Years**
            
            **3-5**
              **Years**
            
            **5 Years**
              **+**Contractual
                Obligations :Bank
                indebtedness
            
            $
            4,886,873
            
            $
            4,886,873
            
            $
            —
            
            $
            —
            
            $
            —Total
                Contractual Obligations:
            
            $
            4,886,873
            
            $
            4,886,873
            
            $
            —
            
            $
            —
            
            $
            —





**Off
      Balance Sheet Arrangements**





We
      have
      no off-balance sheet arrangements.





**Foreign
      Currency Exchange Rate Risk**





Our
      sales
      are primarily through distributors in China and we are paid in RMB. Thus, most
      of our revenues and operating results is not impacted by exchange rate
      fluctuations between RMB and US dollars. However, our reporting currency is
      the
      U.S. dollar and the functional currency of the Company is the RMB. Therefore,
      translation adjustments arise from the process of translating the local currency
      financial statements into U.S. dollars. For the three months ended September
      30,
      2008, we had foreign currency translation gain of $1,979,890 due to the
      fluctuation in the foreign exchange rate.




**ITEM
      4. CONTROLS AND PROCEDURES**




**Evaluation
      of Disclosure Controls and Procedures**





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 of 1934, as amended, 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, our chief executive and financial officers 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 September 30, 2008.




24


**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.





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.





We
      became
      a reporting company in December 2007.  Prior to December 2007, our
      operations were conducted by Xingyong, which is a company organized under the
      laws of the PRC and owned by our chief executive officer. We began preparing
      to
      be in compliance with the internal control obligations, including Section 404,
      for our fiscal year ending December 31, 2007. During almost all of 2007 our
      internal accounting staff was primarily engaged in ensuring compliance with
      PRC
      accounting and reporting requirements for our operating affiliates and was
      not
      required to meet or apply U.S. GAAP requirements.  As a result, with the
      exception of certain additional persons hired at the end of 2007 to address
      these deficiencies, our current internal accounting department responsible
      for
      financial reporting of the Company, on a consolidated basis, is relatively
      new
      to U.S. GAAP and the related internal control procedures required of U.S. public
      companies. Although our accounting staff is professional and experienced in
      accounting requirements and procedures generally accepted in the PRC, management
      has determined that they require additional training and assistance in U.S.
      GAAP
      matters.  Management has determined that our internal audit function is
      also significantly deficient due to insufficient qualified resources to perform
      internal audit functions.  Finally, management determined that the lack of
      an Audit Committee of the board of directors of the Company also contributed
      to
      insufficient oversight of our accounting and audit functions.





In
      order
      to correct the foregoing deficiencies, we are seeking to engage an experienced
      accountant or firm to assist us in establishing procedures that will enable
      us
      to have, on an ongoing basis, personnel who understand US GAAP and the
      disclosure obligations under the Securities Exchange Act. We are committed
      to
      the establishment of effective internal audit functions, however, due to the
      scarcity of qualified candidates with extensive experience in U.S. GAAP
      reporting and accounting in the region, we were not able to hire sufficient
      internal audit resources in order to enable us to have such procedures and
      controls established by the end of September 30, 2008.





We
      also
      intend to elect additional directors, who will be independent and one of whom
      could serve as the audit committee financial expert. We believe that the
      appointment of such directors will strongly influence our management in
      establishing the necessary controls.





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





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





The
      certification of our chief executive and chief financial officer, which is
      included as Exhibits 31.1 and 31.2 to this quarterly report on Form 10-Q,
      include, in paragraph 4 of such certifications, information concerning our
      disclosure controls and procedures and internal control over financial
      reporting. Such certifications should be read in conjunction with the
      information contained in this Item 4 - Controls and Procedures for a more
      complete understanding of the matters covered by such
      certification.





25


**PART
      II. OTHER INFORMATION**





**Item
      6.**  **Exhibits**





31.1
            Certification
                by Chief Executive Officer pursuant to Sarbanes Oxley Act of 2002
                Section
                302.31.2
            Certification
                by Chief Financial Officer pursuant to Sarbanes Oxley Act of 2002
                Section
                302.32.1
            Certification
                by chief executive officer and chief financial officer pursuant to
                Sarbanes-Oxley Act of 2002 Section
                906.




26


**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
                CARBON GRAPHITE GROUP, INC.
              (Registrant)November
              13, 2008
            By:
            /s/ Dengyong
              JinDengyong
              Jin, Chief Executive
              Officer  November
                13, 2008
              By:
              /s/ Donghai
                YuDonghai
                Yu, Chief Financial
                Officer
 27