UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)





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





For the
quarterly period ended June 30, 2009





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





For the
transition period from 
to





Commission
File Number:  333-114564





CHINA
CARBON GRAPHITE GROUP, INC.


(Name
of Registrant as specified in its charter)




Nevada
                  
                  98-0550699(State
      or other jurisdiction of incorporation of 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 office)





(86)
474-7209723


(Registrant’s
telephone number)





Copies
to:


Asher
S. Levitsky PC


Sichenzia
Ross Friedman Ference LLP


61
Broadway, 32nd
Floor


New
York, New York 10006


Phone:
(212) 981-6767


Fax:
(212) 930 - 9725


E-mail:
alevitsky@srff.com





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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every


Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).


Yes o No o





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





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





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




Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.  14,876,411 shares of common
stock are issued and outstanding as of August 14th, 2009.

















CHINA
CARBON GRAPHITE GROUP, INC. AND SUBSIDIARIES


FORM
10-Q


June
30, 2009





TABLE
OF CONTENTS






Page
      No.PART I.
      - FINANCIAL INFORMATIONItem
      1.
                      Financial Statements:
                      1Condensed Consolidated Balance Sheets at June 30, 2009
      (unaudited) and December 31, 2008
                      1Condensed Consolidated Statements of Income and Comprehensive
      Income for the six months ended June 30, 2009 and 2008
      (unaudited)
                      2Condensed Consolidated Statements of Income and Comprehensive
      Income for the three months ended June 30, 2009 and 2008
      (unaudited)
                      3Condensed Consolidated Statements of Cash Flows for the six
      months ended June 30, 2009 and 2008 (unaudited)
                      4Notes to Condensed Consolidated Financial
      Statements
                      5Item
      2.
                      Management's Discussion and Analysis of Financial Condition and
      Results of Operations.
                      18Item
      3.
                      Quantitative and Qualitative Disclosure About Market
      Risk
                      28Item
      4
                      Controls and Procedures.
                      28PART
      II - OTHER INFORMATIONItem
      2.
                      Unregistered Sales of Equity Securities and Use of
      Proceeds.
                      29Item
      6.
                      Exhibits.
                      30













FORWARD
LOOKING STATEMENTS




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




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




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












PART
1 - FINANCIAL INFORMATION





Item 1.Financial Statements.







China
      Carbon Graphite Group, Inc. and SubsidiariesCondensed
      Consolidated Balance SheetsJune
      30, 2009
                                              
                                              
                                              December
      31, 2008(Unaudited)
                                              
                                              
                                              (Audited)ASSETSCurrent
      AssetsCash
      and cash equivalents
                                              
                                              $
                                              6,325,505
                                              
                                              
                                              $
                                              51,799Trade
      accounts receivable, net
                                              
                                              
                                              4,766,036
                                              
                                              
                                              
                                              4,224,410Notes
      receivable
                                              
                                              
                                              121,260
                                              
                                              
                                              
                                              27,720Other
      receivables
                                              
                                              
                                              867,137
                                              
                                              
                                              
                                              150,694Advance
      to related party
                                              
                                              
                                              -
                                              
                                              
                                              
                                              290,409Advance
      to suppliers, net
                                              
                                              
                                              1,296,674
                                              
                                              
                                              
                                              1,017,088Inventories
                                              
                                              
                                              16,382,381
                                              
                                              
                                              
                                              15,889,549Prepaid
      expenses
                                              
                                              
                                              10,725
                                              
                                              
                                              
                                              -Total
      current assets
                                              
                                              
                                              29,769,718
                                              
                                              
                                              
                                              21,651,669Property
      and equipment, net
                                              
                                              
                                              22,026,082
                                              
                                              
                                              
                                              21,003,607Construction
      in progress
                                              
                                              
                                              3,732,995
                                              
                                              
                                              
                                              2,029,777Land
      use rights, net
                                              
                                              
                                              3,571,104
                                              
                                              
                                              
                                              3,604,324$
                                              59,099,899
                                              
                                              
                                              $
                                              48,289,377LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesAccounts
      payable and accrued expenses
                                              
                                              $
                                              1,808,430
                                              
                                              
                                              $
                                              1,253,265Advance
      from customers
                                              
                                              
                                              1,091,291
                                              
                                              
                                              
                                              640,346Trade
      notes payable
                                              
                                              
                                              5,843,852
                                              
                                              
                                              
                                              -Short
      term bank loans
                                              
                                              
                                              8,539,329
                                              
                                              
                                              
                                              4,887,514Long
      term bank loan - current portion
                                              
                                              
                                              1,607,059
                                              
                                              
                                              
                                              1,896,647Taxes
      payable
                                              
                                              
                                              7,867
                                              
                                              
                                              
                                              362,298Other
      payables
                                              
                                              
                                              621,184
                                              
                                              
                                              
                                              551,096Total
      current liabilities
                                              
                                              
                                              19,519,012
                                              
                                              
                                              
                                              9,591,166Long
      Term LiabilitiesLong
      term bank loan - non-current portion
                                              
                                              
                                              2,629,734
                                              
                                              
                                              
                                              3,209,711Other
      payable - non-current portion
                                              
                                              
                                              275,198
                                              
                                              
                                              
                                              -Total
      long-term liabilities
                                              
                                              
                                              2,904,932
                                              
                                              
                                              
                                              3,209,711Total
      liabilities
                                              
                                              $
                                              22,423,944
                                              
                                              
                                              $
                                              12,800,877Contingencies
      and commitments (Note 15)Stockholders'
      EquityConvertible
      preferred stock, par value $0.001 per share,authorized
      20,000,000 shares, issued and outstanding 250,000 and1,200,499
      shares at June 30, 2009 and December 31, 2008,
respectively
                                              
                                              $
                                              250
                                              
                                              
                                              $
                                              1,200Common
      stock authorized 100,000,000 shares $0.001 parvalue;
      issued and outstanding 13,988,911 and 12,218,412 sharesat
      June 30, 2009 and December 31, 2008, respectively
                                              
                                              
                                              13,988
                                              
                                              
                                              
                                              12,218Additional
      paid-in capital
                                              
                                              
                                              8,827,726
                                              
                                              
                                              
                                              8,690,426Accumulated
      other comprehensive income
                                              
                                              
                                              5,039,858
                                              
                                              
                                              
                                              4,991,113Retained
      earnings
                                              
                                              
                                              22,794,133
                                              
                                              
                                              
                                              21,793,543Total
      stockholders' equity
                                              
                                              
                                              36,675,955
                                              
                                              
                                              
                                              35,488,500Total
      liabilities and stockholders' equity
                                              
                                              $
                                              59,099,899
                                              
                                              
                                              $
                                              48,289,377






The
accompanying notes are an integral part of these financial
statements
 -1-




China
      Carbon Graphite Group, Inc and subsidiariesCondensed
      Consolidated Statements of Incomeand Comprehensive
      Income (Unaudited)Six
      months ended June 30,2009
                                        
                                        
                                        2008Sales
                                        
                                        $
                                        6,551,162
                                        
                                        
                                        $
                                        13,651,779Cost
      of Goods Sold
                                        
                                        
                                        4,856,982
                                        
                                        
                                        
                                        10,183,419Gross
      Profit
                                        
                                        
                                        1,694,180
                                        
                                        
                                        
                                        3,468,360Operating
      ExpensesSelling
      expenses
                                        
                                        
                                        317,914
                                        
                                        
                                        
                                        170,002General
      and administrative
                                        
                                        
                                        457,410
                                        
                                        
                                        
                                        398,917Depreciation
      and amortization
                                        
                                        
                                        38,179
                                        
                                        
                                        
                                        30,727813,503
                                        
                                        
                                        
                                        599,646Operating
      Income Before Other Income (Expense)and
      Income Tax Expense
                                        
                                        
                                        880,677
                                        
                                        
                                        
                                        2,868,715Other
      Income (Expense)Other
      income
                                        
                                        
                                        526,069
                                        
                                        
                                        
                                        213,673Other
      expenses
                                        
                                        
                                        (1,461
                                        )
                                        
                                        
                                        (11,311
                                        )Interest
      income
                                        
                                        
                                        94
                                        
                                        
                                        
                                        417Interest
      expense
                                        
                                        
                                        (404,789
                                        )
                                        
                                        
                                        (269,557
                                        )119,913
                                        
                                        
                                        
                                        (66,779
                                        )Income
      Before Income Tax Expense
                                        
                                        
                                        1,000,590
                                        
                                        
                                        
                                        2,801,936Income
      tax expense
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Net
      income
                                        
                                        
                                        1,000,590
                                        
                                        
                                        
                                        2,801,936Deemed
      preferred stock dividend
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (854,300
                                        )Net
      income available to common shareholders
                                        
                                        
                                        1,000,590
                                        
                                        
                                        
                                        1,947,636Comprehensive
      incomeNet
      income
                                        
                                        
                                        1,000,590
                                        
                                        
                                        
                                        2,801,936Other
      comprehensive incomeForeign
      currency translation gain
                                        
                                        
                                        48,745
                                        
                                        
                                        
                                        1,979,890Total
      Comprehensive Income
                                        
                                        $
                                        1,049,335
                                        
                                        
                                        $
                                        4,781,826Share
      dataBasic
      earnings per share
                                        
                                        $
                                        0.08
                                        
                                        
                                        $
                                        0.15Diluted
      earnings per share
                                        
                                        $
                                        0.07
                                        
                                        
                                        $
                                        0.10Weighted
      average common shares outstanding,basic
                                        
                                        
                                        13,279,617
                                        
                                        
                                        
                                        13,040,061Weighted
      average common shares outstanding,diluted
                                        
                                        
                                        14,044,160
                                        
                                        
                                        
                                        19,444,924






The
accompanying notes are an integral part of these financial
statements
 -2-




China
      Carbon Graphite Group, Inc and subsidiariesCondensed
      Consolidated Statements of Incomeand Comprehensive
      Income (Unaudited)Three
      months ended June 30,2009
                          
                          
                          2008Sales
                          
                          $
                          3,657,515
                          
                          
                          $
                          7,923,777Cost
      of Goods Sold
                          
                          
                          2,804,230
                          
                          
                          
                          5,817,126Gross
      Profit
                          
                          
                          853,285
                          
                          
                          
                          2,106,652Operating
      ExpensesSelling
      expenses
                          
                          
                          9,269
                          
                          
                          
                          149,668General
      and administrative
                          
                          
                          321,415
                          
                          
                          
                          249,713Depreciation
      and amortization
                          
                          
                          19,099
                          
                          
                          
                          15,587349,783
                          
                          
                          
                          414,968Operating
      Income Before Other Income (Expense)and
      Income Tax Expense
                          
                          
                          503,502
                          
                          
                          
                          1,691,684Other
      Income (Expense)Other
      income
                          
                          
                          233,953
                          
                          
                          
                          14,477Other
      expenses
                          
                          
                          (1,461
                          )
                          
                          
                          (11,311
                          )Interest
      income
                          
                          
                          -
                          
                          
                          
                          239Interest
      expense
                          
                          
                          (206,444
                          )
                          
                          
                          (136,334
                          )26,048
                          
                          
                          
                          (132,930
                          )Income
      Before Income Tax Expense
                          
                          
                          529,550
                          
                          
                          
                          1,558,754Income
      tax expense
                          
                          
                          -
                          
                          
                          
                          -Net
      income
                          
                          
                          529,550
                          
                          
                          
                          1,558,754Comprehensive
      incomeNet
      income
                          
                          
                          529,550
                          
                          
                          
                          1,558,754Other
      comprehensive incomeForeign
      currency translation gain
                          
                          
                          3,831
                          
                          
                          
                          727,747Total
      Comprehensive Income
                          
                          $
                          533,381
                          
                          
                          $
                          2,286,501Share
      dataBasic
      earnings per share
                          
                          $
                          0.04
                          
                          
                          $
                          0.12Diluted
      earnings per share
                          
                          $
                          0.04
                          
                          
                          $
                          0.08Weighted
      average common shares outstanding,basic
                          
                          
                          13,785,470
                          
                          
                          
                          13,218,412Weighted
      average common shares outstanding,diluted
                          
                          
                          14,238,911
                          
                          
                          
                          19,918,911






The
accompanying notes are an integral part of these financial
statements
 -3-





China
      Carbon Graphite Group, Inc and SubsidiariesCondensed
      Consolidated Statements of Cash Flows
      (Unaudited)Six
      months ended June 30,2009
                          
                          
                          2008Cash
      flows from operating activitiesNet Income
                          
                          $
                          1,000,590
                          
                          
                          $
                          2,801,935Adjustments
      to reconcile net cash provided byoperating
      activitiesDepreciation
      and amortization
                          
                          
                          673,508
                          
                          
                          
                          633,447Share
      based compensation
                          
                          
                          70,220
                          
                          
                          
                          -Change
      in operating assets and liabilitiesAccounts
      receivable
                          
                          
                          (535,950
                          )
                          
                          
                          6,811Notes
      receivable
                          
                          
                          (93,524
                          )
                          
                          
                          222,712Other
      receivables
                          
                          
                          (716,403
                          )
                          
                          
                          303,122Advance
      to suppliers
                          
                          
                          (278,255
                          )
                          
                          
                          (561,544
                          )Inventories
                          
                          
                          (471,121
                          )
                          
                          
                          (2,122,854
                          )Prepaid
      expenses
                          
                          
                          (10,725
                          )
                          
                          
                          -Accounts
      payable and accrued expenses
                          
                          
                          553,844
                          
                          
                          
                          209,444Non-current
      accounts payable
                          
                          
                          275,263
                          
                          
                          
                          -Advance
      from customers
                          
                          
                          450,170
                          
                          
                          
                          (618,078
                          )Trade
      notes payable
                          
                          
                          5,845,219
                          
                          
                          
                          -Taxes
      payable
                          
                          
                          (355,011
                          )
                          
                          
                          (59,809
                          )Other
      payables
                          
                          
                          69,348
                          
                          
                          
                          518,884Net
      cash provided by operating activities
                          
                          
                          6,477,173
                          
                          
                          
                          1,334,070Cash
      flows from investing activitiesAcquisition
      of property and equipment
                          
                          
                          (1,629,192
                          )
                          
                          
                          (589,509
                          )Construction
      in progress
                          
                          
                          (1,700,828
                          )
                          
                          
                          -Net
      cash used in investing activities
                          
                          
                          (3,330,020
                          )
                          
                          
                          (589,509
                          )Cash
      flows from financing activitiesIssuance
      of common stock for cash
                          
                          
                          67,900
                          
                          
                          
                          -Repayment
      of bank loans
                          
                          
                          (2,345,394
                          )
                          
                          
                          (727,585
                          )Proceeds
      from bank loans
                          
                          
                          5,114,566
                          
                          
                          
                          -Repayment
      from related party
                          
                          
                          290,876
                          
                          
                          
                          57,220Net
      cash provided by (used in) financing activities
                          
                          
                          3,127,948
                          
                          
                          
                          (670,365
                          )Effect
      of exchange rate fluctuation
                          
                          
                          (1,395
                          )
                          
                          
                          83,919Net
      increase in cash
                          
                          
                          6,273,706
                          
                          
                          
                          158,115Cash
      and cash equivalents at beginning of period
                          
                          
                          51,799
                          
                          
                          
                          4,497Cash
      and cash equivalents at end of period
                          
                          $
                          6,325,505
                          
                          
                          $
                          162,612Supplemental
      disclosure of cash flow informationInterest
      paid
                          
                          $
                          404,789
                          
                          
                          $
                          269,557Income
      taxes paid
                          
                          $
                          -
                          
                          
                          $
                          -Non-cash
      financing and investing activities:Deemed
      preferred stock dividend
                          
                          $
                          -
                          
                          
                          $
                          854,300Issuance
      of common stock for consulting fee
                          
                          $
                          70,220
                          
                          
                          $
                          -






The
accompanying notes are an integral part of these financial
statements
 -4-








China
Carbon Graphite Group, Inc. and Subsidiaries


Notes to CondensedConsolidated Financial Statements


For
the three months and six months ended June 30, 2009








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.  The Company’s corporate name was changed to China Carbon
Graphite Group, Inc. on January 30, 2008.





The
Company 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”).




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.  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
distribution





On
January 22, 2008, the Company effected a 1.6-for-one stock distribution 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 distribution.





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 condensed 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 consolidated financial
statements included in the Company’s Form 10-K annual report for the year ended
December 31, 2008.





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.








-5-





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”).





Yongle is
a party to a series of contractual arrangements with Xingyong. These agreements
include a management agreement pursuant to which80% to 100% of
Xingyong’s net income after deduction of necessary expenses, if any, is paid to
Yongle and Yongle is responsible for paying Xingyong’s obligations incurred in
connection with its business. For the years ended December 31, 2008 and 2007,
Xingyong paid 100% of net income to Yongle.,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
was, at the time of the transaction, 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.





According
to PRC rules and regulations, Talent is required to pay 20% of its capital
investment in Yongle, or $800,000, within three months and the remaining 80%, or
$3,200,000, within two years from the date of issuance of business
license.  The business license was issued on September 13, 2007 and
accordingly, Talent was required to pay $800,000 on or before December 12, 2007
and is required to pay $3,200,000 on or before September 12, 2009.  Talent
has not paid the initial 20% or $800,000 nor applied for an extension of time to
effect this payment.  However, the Government issued a new business license
for Yongle expiring December 31, 2009.  Management assumes that the
Government will take no action, and the investment can be paid, up on or before
December 31, 2009, the expiration date of the new business
license.





On May
21, 2009 the Company's Board of Directors approved the reduction of Yongle's
registered capital from $4,000,000 to $100,000 and has submitted the reduction
to the PRC government for approval. These actions effectively reduce the
intercompany investment obligations owed to Yongle from $4,000,000 to $100,000
and eliminate possible fines or penalties by the PRC business bureau that could
result from the Company’s failure to pay the registered capital when
required.  The Company expects to pay the $100,000 investment to
Yongle in full before September 12, 2009.





3.
Summary of Significant Accounting Policies





Use of estimates - The
preparation of these financial statements in conformity with US GAAP 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.





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. Most of the Company’s cash is held in bank
accounts in the PRC and is not protected by FDIC insurance or any other similar
insurance. The Company’s bank account in the US is protected by FDIC
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 -Trade
receivables are recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. An estimate for doubtful accounts is
made when collection of the full amount is no longer probable. Bad debts are
written off as incurred.




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:







-6-






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 six months ended at June 30, 2009 and
2008.





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 rights have terms of 50 years, with the land use right
relating to 1,207,388 square feet expiring in 2050 and the land use right with
respect to 1,148,821 square feet expiring in 2057. 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.





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.





Interest
income is recognized when earned.





Advertising - The Company
expenses all advertising costs as incurred. There was no advertising expense for
the six months ended June 30, 2009.





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 six months ended June
30, 2009 and 2008, shipping and handling costs were $308,737 and $152,476,
respectively.




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 and is in only one business segment.





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.







-7-






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. 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 June 30, 2009 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
June 30, 2009, 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 - 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 technology
and science 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.





The
Company has been recognized as a high technology and science company by the
Ministry of Science and Technology of the PRC. Therefore, Xing He District Local
Tax Authority in the Nei Mongol province granted tax holiday from 100% of
enterprises income tax for 10 years from 2008 through 2018. Afterwards, based on
the present tax law and the Company’s status as a high technology and science
company, the Company will be subject to a corporation income tax rate of 15%
effective in 2019.





The
enterprise income tax is calculated on the basis of the statutory profit as
defined in the PRC tax laws. This statutory profit computed differently from the
Company’s net income under U.S. GAAP.





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 PRC 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 PRC 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.






-8-







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
remaining 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.





In
addition, the Company is required by Chinese laws to cover employees in China
with various types of social insurance. The Company believes that it is in
material compliance with the relevant PRC laws.




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.





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 June 30, 2009 and December
31, 2008 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 six months
ended June 30, 2009 and 2008 are $48,745 and $1,979,890, respectively. The
cumulative translation adjustment and effect of exchange rate changes on cash
for the six months ended June 30, 2009 and 2008 was ($1,395) and $83,919,
respectively. Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred.





Asset and
liability accounts at June 30, 2009 and December 31, 2008 were translated at
6.8448 RMB to $1.00 USD and at 6.8542 RMB to $1.00 USD, respectively. Equity
accounts were stated at their historical rate. The average translation rates
applied to income statements for the six months ended June 30, 2009 and 2008
were 6.8432 RMB and 7.0726 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. The Company has outstanding
warrants to purchase 3,000,000 shares of common stock at an exercise price of
$1.20 per share and 3,000,000 shares of common stock at an exercise price of
$2.00 per share. The Company uses if-converted method to calculate the dilutive
preferred stock and treasury stock method to calculate the dilutive shares
issuable upon exercise of warrants






-9-







The
following table sets forth the computation of the number of net income per share
for the six months ended June 30, 2009 and 2008.





Six
      Months Ended June 30,2009
                      
                      
                      2008Weighted
      average shares of common stock outstanding (basic)
                      
                      
                      13,279,617
                      
                      
                      
                      13,040,061Shares
      issuable upon conversion of series A preferred stock
                      
                      
                      950,499
                      
                      
                      
                      1,200,499Shares
      issuable upon exercise of warrants
                      
                      
                      0
                      
                      
                      
                      6,000,000Weighted
      average shares of common stock outstanding (diluted)
                      
                      
                      14,044,160
                      
                      
                      
                      19,444,924Net
      income available to common shareholders
                      
                      $
                      .08
                      
                      
                      $
                      .15Net
      income per shares of common stock (diluted)
                      
                      $
                      .07
                      
                      
                      $
                      .10





For the
six months ended June 30, 2009, the Company did not include any shares of common
stock issuable upon exercise of warrants, since such issuance would be
antidilutive.





Accumulated other comprehensive
income- The Company follows Statement of Financial Accounting Standards
No. 130 (SFAS 130) “Reporting Comprehensive
Income” to recognize the elements of comprehensive income. Comprehensive
income is comprised of net income and all changes to the statements of
stockholders' equity, except those due to investments by stockholders, changes
in paid-in capital and distributions to stockholders. For the Company,
comprehensive income for the six months ended June 30, 2009 and 2008 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. Transactions with related parties are disclosed in the
financial statements.




Subsequent events - For
purposes of determining whether a post-balance sheet event should be evaluated
to determine whether it has an effect on the financial statements for the period
ending June 30, 2009, subsequent events were evaluated by the Company as of
August 13, 2009, the date on which the unaudited condensed consolidated
financial statements at and for the quarter ended June 30, 2009, were available
to be issued.




Recent
accounting pronouncements




In
December, 2007, the FASB issued SFAS No. 141(R), “Business Combinations”, and
SFAS No. 160, “Accounting and Reporting of Noncontrolling interest in
Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS No. 160).
These new standards will significantly change the financial accounting and
reporting of business combination transactions and noncontrolling (or minority)
interests in consolidated financial statements. SFAS No. 141(R) and SFAS No. 160
are effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008 (that is, the year ended December 31,
2009 for the Company). The adoption of SFAS 141(R) and 160 does not have a
material effect on the Company’s condensed consolidated financial
statements.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51” (“SFAS No.
160”), which establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. SFAS No. 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008 (that is, the year ended December 31,
2009 for the Company). This Statement does not have an effect on the Company’s
condensed consolidated financial statements.




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – An Amendment of FASB Statement No. 133” (“SFAS No.
161”), which changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. This statement will be effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008 (that is, the
year ended December 31, 2009 for the Company). This Statement does not have an
effect on the Company’s condensed consolidated financial
statements.




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






-10-






In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. This Statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This Statement is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. Management does not expect that this
Statement will have an effect on the Company’s condensed consolidated financial
statements as this statement will be replaced by SFAS NO. 168, which is
effective for financial statements issued for interim and annual period ending
after September 15, 2009.




In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60”. This Statement
interprets Statement 60, “Accounting and Reporting by Insurance Enterprises” and
amends existing accounting pronouncements to clarify their application to the
financial guarantee insurance contracts included within the scope of this
Statement. This Statement requires that an insurance enterprise recognize a
claim liability prior to an event of default (insured event) when there is
evidence that credit deterioration has occurred in an insured financial
obligation. This Statement also clarifies how Statement 60 applies to financial
guarantee insurance contracts, including the recognition and measurement to be
used to account for premium revenue and claim liabilities. This Statement is
effective for financial statements issued for fiscal years beginning after
December 15, 2008 (that is, fiscal 2009 for the Company), and all interim
periods within those fiscal years. This Statement does not have an effect on the
Company’s condensed consolidated financial statements.




On June
16, 2008, the FASB issued final Staff Position (FSP) No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities,” to address the question of whether instruments granted in
share-based payment transactions are participating securities prior to vesting.
As provided in the FSP, unvested share-based payment awards that contain rights
to dividend payments should be included in earnings per share calculations. The
guidance will be effective commencing in the year ended December 31, 2009. The
FSP does not have an effect on the Company’s condensed consolidated
financial statements.




In June
2008, the FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to
Issue No. 98-5.” The objective of EITF 08-4 is to provide transition guidance
for conforming changes made to EITF 98-5, “Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios”, that result from EITF 00-27 “Application of Issue No. 98-5 to Certain
Convertible Instruments”, and SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity”. This Issue is
effective for financial statements issued for fiscal years ending after December
15, 2008 and has no effect on the Company’s financial statements.




In
June 2008, the FASB ratified Emerging Issues Task Force Issue
No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 mandates a two-step
process for evaluating whether an equity-linked financial instrument or embedded
feature is indexed to the entity’s own stock.  Warrants that a company
issues that contain a strike price adjustment feature, upon the adoption of EITF
07-5, are no longer being considered indexed to the company’s own stock.
Accordingly, adoption of EITF 07-5 will change the current classification (from
equity to liability) and the related accounting for such warrants outstanding at
that date. EITF 07-5 is effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The
application of EITF 07-5 does not have an effect on the Company’s condensed
financial statements.




In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset in a Market That Is Not Active” (FSP 157-3), which clarifies the
application of SFAS 157 when the market for a financial asset is inactive.
Specifically, FSP 157-3 clarifies how (1) management’s internal assumptions
should be considered in measuring fair value when observable data are not
present, (2) observable market information from an inactive market should be
taken into account, and (3) the use of broker quotes or pricing services should
be considered in assessing the relevance of observable and unobservable data to
measure fair value. The Company adopted the provisions of FSP 157-3, which did
not impact the Company’s financial position or results of
operations.




In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by
Public Entities (Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4
and FIN 46(R)-8 amends FAS 140 and FIN 46(R) to require additional disclosures
regarding transfers of financial assets and interest in variable interest
entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for interim or annual
reporting periods ending after December 15, 2008. FSP FAS 140-4 and FIN 46(R)-8
did not have any impact on the Company’s financial statements.






-11-






In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets”. FSP EITF 99-20-1 changes the impairment model
included within EITF 99-20 to be more consistent with the impairment model of
SFAS 115. FSP EITF 99-20-1 achieves this by amending the impairment model in
EITF 99-20 to remove its exclusive reliance on “market participant” estimates of
future cash flows used in determining fair value. Changing the cash flows used
to analyze other-than-temporary impairment from the “market participant” view to
a holder’s estimate of whether there has been a “probable” adverse change in
estimated cash flows allows companies to apply reasonable judgment in assessing
whether an other-than-temporary impairment has occurred. The adoption of FSP
EITF 99-20-1, which is effective for annual reporting periods ending after
December 15, 2008, does not have a material impact on the Company’s condensed
consolidated financial statements.




In May
2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165
is intended to establish general standards of accounting for and disclosures of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for
selecting that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued. SFAS 165 is
effective for interim or annual financial periods ending after June 15, 2009.
The Company adopted this statement for the financial statements for the period
ended June 30, 2009.





In June
2009, the FASB issued SFAS No. 166, a revision to SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
and will require more information about transfers of financial assets and where
companies have continuing exposure to the risks related to transferred financial
assets. SFAS 166 is effective at the start of a company’s first fiscal year
beginning after November 15, 2009, or January 1, 2010 for companies reporting
earnings on a calendar-year basis. The adoption of this statement is not
expected to have a material effect on the Company's financial
statements.





In June
2009, the FASB issued SFAS No. 167, a revision to FASB Interpretation No. 46(R),
Consolidation of Variable Interest Entities, and will change how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. Under SFAS
No. 167, determining whether a company is required to consolidate an entity will
be based on, among other things, an entity's purpose and design and a company's
ability to direct the activities of the entity that most significantly impact
the entity's economic performance. SFAS 167 is effective at the start of a
company’s first fiscal year beginning after November 15, 2009, or January 1,
2010 for companies reporting earnings on a calendar-year basis. The Company is
in the process of evaluating the effect, if any, the adoption of SFAS No. 167
will have on the Company’s financial statements





In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting. SFAS 168 represents the last
numbered standard to be issued by FASB under the old (pre-Codification)
numbering system, and amends the GAAP hierarchy. On July 1, FASB will launch new
FASB’s Codification known as the FASB Accounting Standards Codification TM. The
Codification will supersede existing GAAP for nongovernmental entities;
governmental entities will continue to follow standards issued by FASB's sister
organization, the Governmental Accounting Standards Board (GASB). This statement
is effective for financial statements issued for interim and annual period
ending after September 15, 2009. The Company is in the process of evaluating the
effect of the adoption of SFAS No. 168 will have on the Company’s financial
statements.





4. Concentrations
of Business and Credit Risk





Most 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’s bank account in US is covered by FDIC
insurance.




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.





For the
six months ended June 30, 2009, three customers accounted for 10% or more of
sales revenues, representing 33%, 12% and 10%, respectively of the total sales.
No customer accounted for 10% or more of the Company’s revenue during the three
months ended June 30, 2008.  As of June 30, 2009, there were four
customers that constitute 15.7%, 15.2%, 12.3%, and 11.4% respectively of the
accounts receivable. As of December 31, 2008, there were three customers that
accounted for 22.7%, 14.8%, and 12.5% respectively of the accounts
receivable.





For the
six months ended June 30, 2009 and 2008, the Company had insurance expense of
$418 and $5,717 respectively. Accrual for losses is not recognized until such
time a loss has occurred.






-12-







5. Income
Taxes





Under the
Provisional Regulations of The People’s Republic of China Concerning Income Tax
on Enterprises promulgated by the PRC, which took effect on January 1, 2008,
domestic and foreign companies pay a unified corporate income tax of 25% except
a 15% corporation income tax rate for qualified high technology and science
enterprises.





The
Company has been granted a 100% tax holiday from enterprises income tax from the
Xing He District Local Tax Authority for the ten years 2008 through 2018. 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 six months
ended June 30, 2009 and 2008, the enterprise income tax at the statutory rates
would have been approximately $172,257 and $292,145, respectively, and for the
three months ended June 30, 2009 and 2008, the enterprise income tax at the
statutory rates would have been approximately $79,432 and $233,813,
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:




Six
      months ended June 30,2009
                                
                                
                                2008Computed
      tax at the PRC statutory rate of 15%
                                
                                $
                                172,257
                                
                                
                                $
                                292,145Benefit
      of tax holiday
                                
                                
                                (172,257
                                )
                                
                                
                                (292,145
                                )Income
      tax expenses per books
                                
                                $
                                -
                                
                                
                                $
                                -





Three
      months ended June 30,2009
                              
                              
                              2008Computed
      tax at the PRC statutory rate of 15%
                              
                              $
                              79,432
                              
                              
                              $
                              233,813Benefit
      of tax holiday
                              
                              
                              (79,432
                              )
                              
                              
                              (233,813
                              )Income
      tax expenses per books
                              
                              $
                              -
                              
                              
                              $
                              -





6. Trade
Accounts Receivable - net





As of
June 30, 2009 and December 31, 2008, trade accounts receivable consisted of the
following:





June
      30,2009
                                      
                                      
                                      December
      31, 2008Amount
      outstanding
                                      
                                      $
                                      5,444,143
                                      
                                      
                                      $
                                      4,928,354Bad
      debt provision
                                      
                                      
                                      (678,107
                                      )
                                      
                                      
                                      (703,944
                                      )Net
      amount
                                      
                                      $
                                      4,766,036
                                      
                                      
                                      $
                                      4,224,410




For the
six months ended June 30, 2009, bad debt provision of $26,810 was recovered. For
the three and six months ended June 30, 2008, no bad debt provision was
provided.





7. Advance
to suppliers, net





As of
June 30, 2009 and December 31, 2008, advance to suppliers consisted of the
following:





June
      30, 2009
                          
                          
                          December
      31, 2008Amount
      outstanding
                          
                          $
                          1,466,460
                          
                          
                          $
                          1,186,640Bad
      debt provision
                          
                          
                          (169,786
                          )
                          
                          
                          (169,552
                          )Net
      amount
                          
                          $
                          1,296,674
                          
                          
                          $
                          1,017,088





For the
three and six months ended June 30, 2009 and 2008, no additional bad debt
provision on advance to suppliers was charged to expenses.




8.   Inventories




As of
June 30, 2009 and December 31, 2008, inventories consisted of the
following:






-13-







June
      30, 2009
                    
                    
                    December
      31, 2008Raw
      materials
                    
                    $
                    1,237,829
                    
                    
                    $
                    820,250Work
      in process
                    
                    
                    13,192,553
                    
                    
                    
                    13,193,750Finished
      goods
                    
                    
                    1,898,095
                    
                    
                    
                    1,821,719Repair
      Parts
                    
                    
                    53,904
                    
                    
                    
                    53,830$
                    16,382,381
                    
                    
                    $
                    15,889,549




Raw
materials consist primarily of asphalt, petroleum coke, needle coke and other
materials used in production. Finished goods consist of 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 are also included in the cost of inventory.





9. Property
and Equipment, net





As of
June 30, 2009 and December 31, 2008, property and equipment consist of the
following:





June
      30, 2009
                                      
                                      
                                      December
      31, 2008Building
                                      
                                      $
                                      8,267,194
                                      
                                      
                                      $
                                      7,956,770Machinery
      and equipment
                                      
                                      
                                      20,871,799
                                      
                                      
                                      
                                      19,515,684Motor
      vehicles
                                      
                                      
                                      40,907
                                      
                                      
                                      
                                      40,85129,179,900
                                      
                                      
                                      
                                      27,513,305Less:
      Accumulated depreciation
                                      
                                      
                                      7,153,818
                                      
                                      
                                      
                                      6,509,698$
                                      22,026,082
                                      
                                      
                                      $
                                      21,003,607





For the
six months ended June 30, 2009 and 2008, depreciation expense amounted to
$635,329 and $601,822 was charged to cost of goods sold.For the three months ended
June 30, 2009 and 2008, depreciation expense amounted to $326,054 and $294,373
was charged to cost of goods sold.





10. Land
Use Right





As of
June 30, 2009 and December 31, 2008, land use rights consist of the
following:





June
      30, 2009
                              
                              
                              December
      31, 2008Land
      Use Right
                              
                              $
                              3,816,774
                              
                              
                              $
                              3,811,539Less:
      Accumulated amortization
                              
                              
                              245,670
                              
                              
                              
                              207,215$
                              3,571,104
                              
                              
                              $
                              3,604,324




For the
six months ended June 30, 2009 and 2008, amortization expenses were $38,179 and
$30,727, respectively. For the three months ended June 30, 2009 and 2008,
amortization expenses were $19,099 and $15,587, respectively.





Future
amortization of the land use rights is as follows:





12-month
      periodendedJune
      30,2010
                        
                        $
                        76,3582011
                        
                        
                        76,3582012
                        
                        
                        76,3582013
                        
                        
                        76,3582014
                        
                        
                        76,3582015
      and thereafter
                        
                        
                        3,189,314Total
                        
                        $
                        3,571,104






-14-





11. Stockholders’
equity




(a)
            Restated
      Articles 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 articles of
incorporation give the directors the authority to issue one or more series of
preferred stock and to designate the rights, preferences, privileges and
limitation of the holders of each set. The board of directors has designated the
rights, preferences, privileges and limitation of one series of preferred stock
-- the series A convertible preferred stock (“series A preferred
stock”).





On
December 17, 2007, the Company issued its 3% promissory note in the amount of
$1,200,000. Pursuant to the agreement pursuant to which the note was issued,
upon the filing of a restated certificate of incorporation which provided for
the creation of a series of preferred stock and the filing of a certificate of
designation which created the series A preferred stock, the note would
automatically be converted into 1,200,499 shares of series A 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. On January 22, 2008, upon
the filing of a restated articles of incorporation and a statement of
designation for the series A convertible preferred stock, and the outstanding
convertible note was converted into such series A preferred stock and
warrants.





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.





            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




(b)
            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 only if the underlying shares are not covered by an
effective registration statement.




(c)
            Securities
      Purchase Agreement





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





            The
      Company and the investor entered into a registration rights agreement
      pursuant to which we are required to have a registration statement filed
      with the SEC by December 31, 2010 and declared effective by the SEC not
      later than December 31, 2010. The Company is required to pay liquidated
      damages at the rate of 200 shares of series A preferred stock for each day
      after December 31, 2010 that the registration statement is not declared
      effective or for any period that the Company fails 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.The registration obligation does not apply to shares that can
      be sold pursuant to Rule 144 of the Securities and Exchange
      Commission.






-15-







            The
      investor has a right of refusal on future financings until December
      2010.




(d)
            Cancellation
      of common stock





In
connection with the acquisition of Talent, the Company purchased 1,000,000
shares of common stock from the then principal shareholder for $1,000,000. The
purchase price was paid in installments, with the final installment due on June
30, 2008. The Company placed 1,000,000 of the shares of common stock in escrow,
and, upon payment of the  balance of the purchase price, the shares
were released from escrow and cancelled.





(e)
            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
into (i) 1,200,499 shares of preferred stock, with each share of series A
preferred stock being convertible into one share of common stock and (ii)
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 deemed
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. The deemed preferred stock dividend of $854,300 has been recorded as
additional paid-in capital and a reduction to retained earnings in
2008.





12. Short-term
bank loans




As of
June 30, 2009 and December 31, 2008, short term loans consisted of the
following:








June
      30, 2009
                                                                
                                                                
                                                                December
      31, 2008Bank
      loans dated July 17, 2008, due May 6, 2009 with an interest rate of
      9.711%, interest payable monthly, secured by property and equipment and
      land use rights
                                                                
                                                                $
                                                                
                                                                
                                                                
                                                                $
                                                                656,532Bank
      loans dated July 17, 2008, due May 25, 2009 with an interest rate of
      9.711%, interest payable monthly, secured by property and equipment and
      land use rights
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                1,167,167Bank
      loans dated July 17, 2008, due June 15, 2009 with an interest rate of
      9.711%, interest payable monthly, secured by property and equipment and
      land use rights
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                1,167,167Bank
      loans dated July 17, 2008, due July 1, 2009 with an interest rate of
      9.711%, interest payable monthly, secured by property and equipment and
      land use rights
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                1,167,167Bank
      loans dated July 17, 2008, due July 13, 2009 with an interest rate of
      9.711%, interest payable monthly, secured by property and equipment and
      land use rights
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                729,481Bank
      loans dated June 17, 2009, due June 15, 2010 with an interest rate of
      9.711%, interest payable monthly, secured by property and equipment and
      land use rights
                                                                
                                                                
                                                                3,425,958
                                                                
                                                                
                                                                
                                                                -Bank
      loan dated June 16, 2009, due June 1, 2010 with an interest rate of
      7.434%, interest payable quarterly, secured by equipment and land use
      rights
                                                                
                                                                
                                                                5,113,371
                                                                
                                                                
                                                                
                                                                -$
                                                                8,539,329
                                                                
                                                                
                                                                $
                                                                4,887,514






-16-







13. Long-term
bank loan





June
      30, 2009
                            
                            
                            December
      31, 2008Bank
      loans dated October 10, 2008, due October 9, 2011 with an interest rate of
      6.75%, interest payable monthly.
                            
                            $
                            4,236,793
                            
                            
                            $
                            5,106,358Less:
      current portion
                            
                            
                            (1,607,059
                            )
                            
                            
                            (1,896,647
                            )Non-current
      portion
                            
                            $
                            2,629,734
                            
                            
                            $
                            3,209,711




14. Trade
notes payable





As of
June 30, 2009 trade notes payable were $5,843,852.  There were no
trade notes payable at December 31, 2008.. The Company was requested by certain
of its suppliers to settle trade liabilities incurred in the ordinary course of
business by issuance of notes guaranteed by a bank acceptable to the supplier.
The notes are interest-free with maturity of six months from date of issuance.





15. Contingencies
and commitments




As stated
in Note 2, as Talent failed to effect the initial 20% or $800,000 investment in
Yongle by December 12, 2007 or obtain an extension to effect such payment, the
Government can give notice to Talent to cancel the business license of Yongle
and cancel the investment.  As such, Yongle would cease to be a subsidiary
and thus the VIE, Xingyong, would be detached.




On May
21, 2009 the Company's Board of Directors approved the reduction of Yongle's
registered capital from $4,000,000 to $100,000 and has submitted the reduction
to the PRC government for approval. These actions will effectively reduce the
intercompany investment obligations owed to Yongle from $4,000,000 to $100,000
and eliminate possible fines or penalties by the PRC business bureau as
previously described in the Company's 10Q filing.  The Company expects
to pay for the $100,000 investment to Yongle in full on or before September 12,
2009.





16. Subsequent
event





On July
29, 2009, the Company retired outstanding warrants to purchase 5,875,000 shares
of common stock through the issuance of 887,500 shares of common
stock.  Warrants to purchase 3,000,000 shares of common stock at $1.20
were converted to 600,000 shares of common stock, and warrants to purchase
2,875,000 shares of common stock at $2.00 were converted to 287,500 shares of
common stock. There remain outstanding warrants to purchase 125,000 shares at
$2.00 per share.








-17-






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





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 in this
report. The following discussion includes forward-looking statements. For a
discussion ofimportant factors that could cause
actual results to differ from results discussed in the forward-looking
statements, see “Forward Looking
Statements.”





Overview





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 of
in both the domestic Chinese market and the international market. We also sell
graphite electrodes directly to the 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.





Our sales
have suffered during 2009 as a result of the worldwide economic downturn, with
sales in both the six and three months ended June 30, 2009 being less than half
of the sales for the comparable period of 2008.  The sales decrease
reflects the effects of the negative global economic situation as well as the
closure of Xingyong’s plant facilities for almost two months for the Olympics in
August 2008 as part of the Chinese government’s program to reduce air pollution
during that period.  This shutdown reduced our sales in the first
quarter of 2009 because it takes about three months to six months to
produce graphite products. During the second quarter 2009, sales decreased
primarily due to weaker graphite electrode demand.  Steel
manufacturers delayed purchasing new graphite electrodes because the global
steel demand had not improved markedly. We believe that most of the steel
manufacturers are not running full capacity.





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 increase in prices of raw material will affect the price at which
we can sell our product. If we are not able to raise our prices to pass on
increased costs, we would be unable to maintain our margins. 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 such as coal, gas, oil, electricity and/or water 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
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.




Under PRC
rules and regulations, Talent, as the sole stockholder of Yongle, is required to
make payments totaling the amount of its initial capital, which was set at
$4,000,000 at the time of Yongle’s organization, and has since been reduced to
$100,000, We are required to pay 20% of the registered capital within three
months form the issuance of the business license and the remaining 80% within
two year of the issuance.  The business license was issued September
13, 2007, and, based on the initial registered capital, we were to have paid
$800,000 by December 13, 2007 and the balance by September 13,
2009.  We did not make either of these payments.  The
government issued a new business license on Yongle expiring December 31,
2009.  Management assumes that the Government will take no action
before December 31, 2009, the expiration date of the new business license, and
we believe that our obligations with respect to Yongle’s registered capital will
be satisfied by payment of $100,000, the reduced amount of registered capital,
which we plan to make in September 2009.








-18-






Variable
Interest Entity




Our
relationships with Xingyong and its stockholders are governed by a series of
contractual arrangements between Yongle and Xingyong, the operating company in
the PRC. Under PRC laws, each of Yongle and Xingyong is an independent legal
person and is not exposed to liabilities incurred by the other
parties.   Yongle has a series of agreements with Xingyong
pursuant to which it manages the business of Xingyong and 80% to 100% of the
profit of Xingyong is paid to Yongle.  For 2007 and 2008, Xingyong
paid 100% of the profit to Yongle.  Xingyong is owned by Mr. Jin, who
is Yongle’s controlling stockholder and was our chief executive officer at the
time of we entered into our agreements with Xingyong.  Xingyong is
treated as a variable interest entity and its financial statements are included
as part of our consolidated financial statements under FASB Interpretation No.
46(R), “Consolidation of Variable Interest Entities,” referred to as FIN
46.




Significant
Accounting Estimates and Policies




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.




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.





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.





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% except a 15% corporate income tax rate for qualified high technology and
science 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 gradually becomes 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 PRC. The Xing He District Local Tax Authority in
the Nei Mongol province granted us a 100% tax holiday with respect to enterprise
income tax for ten years 2008 through 2018. Afterwards, based on the present tax
law and our status as a qualified high technology and science company, we will
be subject to a corporation income tax rate of 15% effective in 2019.




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 June 30, 2009 or December 31, 2008.






-19-





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.




Land
Use Rights





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 2,356,209square feet, of which
290,626 square is occupied by our facilities, for a term of 50 years, beginning
from issuance date of the certificates granting the land use right. We record
the property subject to land use rights as intangible asset.




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 research and development expense for the six months ended June 30,
2009 and 2008 has not been significant.





Value
added tax





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”). Under the commercial practice of the
PRC, the Company paidVAT 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. 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.  We have 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.







-20-






Recent
accounting pronouncements




In
December, 2007, the FASB issued SFAS No. 141(R), “Business Combinations”, and
SFAS No. 160, “Accounting and Reporting of Noncontrolling interest in
Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS No. 160).
These new standards will significantly change the financial accounting and
reporting of business combination transactions and noncontrolling (or minority)
interests in consolidated financial statements. SFAS No. 141(R) and SFAS No. 160
are effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008 (that is, the year ended December 31,
2009 for the Company). The adoption of SFAS 141(R) and 160 does not have a
material effect on the Company’s condensed consolidated financial
statements.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51” (“SFAS No.
160”), which establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. SFAS No. 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008 (that is, the year ended December 31,
2009 for the Company). This Statement does not have an effect on the Company’s
condensed consolidated financial statements.




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – An Amendment of FASB Statement No. 133” (“SFAS No.
161”), which changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. This statement will be effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008 (that is, the
year ended December 31, 2009 for the Company). This Statement does not have an
effect on the Company’s condensed consolidated financial
statements.




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




In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. This Statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This Statement is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. Management does not expect that this
Statement will have an effect on the Company’s condensed consolidated financial
statements as this statement will be replaced by SFAS NO. 168, which is
effective for financial statements issued for interim and annual period ending
after September 15, 2009.




In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60”. This Statement
interprets Statement 60, “Accounting and Reporting by Insurance Enterprises” and
amends existing accounting pronouncements to clarify their application to the
financial guarantee insurance contracts included within the scope of this
Statement. This Statement requires that an insurance enterprise recognize a
claim liability prior to an event of default (insured event) when there is
evidence that credit deterioration has occurred in an insured financial
obligation. This Statement also clarifies how Statement 60 applies to financial
guarantee insurance contracts, including the recognition and measurement to be
used to account for premium revenue and claim liabilities. This Statement is
effective for financial statements issued for fiscal years beginning after
December 15, 2008 (that is, fiscal 2009 for the Company), and all interim
periods within those fiscal years. This Statement does not have an effect on the
Company’s condensed consolidated financial statements.




On June
16, 2008, the FASB issued final Staff Position (FSP) No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities,” to address the question of whether instruments granted in
share-based payment transactions are participating securities prior to vesting.
As provided in the FSP, unvested share-based payment awards that contain rights
to dividend payments should be included in earnings per share calculations. The
guidance will be effective commencing in the year ended December 31, 2009. The
FSP does not have an effect on the Company’s condensed consolidated
financial statements.






-21-






In June
2008, the FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to
Issue No. 98-5.” The objective of EITF 08-4 is to provide transition guidance
for conforming changes made to EITF 98-5, “Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios”, that result from EITF 00-27 “Application of Issue No. 98-5 to Certain
Convertible Instruments”, and SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity”. This Issue is
effective for financial statements issued for fiscal years ending after December
15, 2008 and has no effect on the Company’s financial statements.




In
June 2008, the FASB ratified Emerging Issues Task Force Issue
No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 mandates a two-step
process for evaluating whether an equity-linked financial instrument or embedded
feature is indexed to the entity’s own stock.  Warrants that a company
issues that contain a strike price adjustment feature, upon the adoption of EITF
07-5, are no longer being considered indexed to the company’s own stock.
Accordingly, adoption of EITF 07-5 will change the current classification (from
equity to liability) and the related accounting for such warrants outstanding at
that date. EITF 07-5 is effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The
application of EITF 07-5 does not have an effect on the Company’s condensed
financial statements.




In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset in a Market That Is Not Active” (FSP 157-3), which clarifies the
application of SFAS 157 when the market for a financial asset is inactive.
Specifically, FSP 157-3 clarifies how (1) management’s internal assumptions
should be considered in measuring fair value when observable data are not
present, (2) observable market information from an inactive market should be
taken into account, and (3) the use of broker quotes or pricing services should
be considered in assessing the relevance of observable and unobservable data to
measure fair value. The Company adopted the provisions of FSP 157-3, which did
not impact the Company’s financial position or results of
operations.




In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by
Public Entities (Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4
and FIN 46(R)-8 amends FAS 140 and FIN 46(R) to require additional disclosures
regarding transfers of financial assets and interest in variable interest
entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for interim or annual
reporting periods ending after December 15, 2008. FSP FAS 140-4 and FIN 46(R)-8
did not have any impact on the Company’s financial statements.




In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets”. FSP EITF 99-20-1 changes the impairment model
included within EITF 99-20 to be more consistent with the impairment model of
SFAS 115. FSP EITF 99-20-1 achieves this by amending the impairment model in
EITF 99-20 to remove its exclusive reliance on “market participant” estimates of
future cash flows used in determining fair value. Changing the cash flows used
to analyze other-than-temporary impairment from the “market participant” view to
a holder’s estimate of whether there has been a “probable” adverse change in
estimated cash flows allows companies to apply reasonable judgment in assessing
whether an other-than-temporary impairment has occurred. The adoption of FSP
EITF 99-20-1, which is effective for annual reporting periods ending after
December 15, 2008, does not have a material impact on the Company’s condensed
consolidated financial statements.




In May
2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165
is intended to establish general standards of accounting for and disclosures of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for
selecting that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued. SFAS 165 is
effective for interim or annual financial periods ending after June 15, 2009.
The Company adopted this statement with the financial statements for the period
ended June 30, 2009.





In June
2009, the FASB issued SFAS No. 166, a revision to SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
and will require more information about transfers of financial assets and where
companies have continuing exposure to the risks related to transferred financial
assets. SFAS 166 is effective at the start of a company’s first fiscal year
beginning after November 15, 2009, or January 1, 2010 for companies reporting
earnings on a calendar-year basis. The adoption of this statement is not
expected to have a material effect on the Company's financial
statements.





In June
2009, the FASB issued SFAS No. 167, a revision to FASB Interpretation No. 46(R),
Consolidation of Variable Interest Entities, and will change how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. Under SFAS
No. 167, determining whether a company is required to consolidate an entity will
be based on, among other things, an entity's purpose and design and a company's
ability to direct the activities of the entity that most significantly impact
the entity's economic performance. SFAS 167 is effective at the start of a
company’s first fiscal year beginning after November 15, 2009, or January 1,
2010 for companies reporting earnings on a calendar-year basis. The Company is
in the process of evaluating the effect, if any, the adoption of SFAS No. 167
will have on the Company’s financial statements






-22-





In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting. SFAS 168 represents the last
numbered standard to be issued by FASB under the old (pre-Codification)
numbering system, and amends the GAAP hierarchy. On July 1, FASB will launch new
FASB’s Codification known as the FASB Accounting Standards Codification TM. The
Codification will supersede existing GAAP for nongovernmental entities;
governmental entities will continue to follow standards issued by FASB's sister
organization, the Governmental Accounting Standards Board (GASB). This statement
is effective for financial statements issued for interim and annual period
ending after September 15, 2009. The Company is in the process of evaluating the
effect of the adoption of SFAS No. 168 will have on the Company’s financial
statements.





RESULTS
OF OPERATIONS





The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales (dollars in thousands):




Six
      Months Ended June 30,2009
                                                                        
                                                                        
                                                                        2008US
      Dollars
                                                                        
                                                                        
                                                                        Percentage
                                                                        
                                                                        
                                                                        US
      Dollars
                                                                        
                                                                        
                                                                        PercentageSales
                                                                        
                                                                        
                                                                        $
                                                                        6,551
                                                                        
                                                                        
                                                                        
                                                                        100.00%
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        $
                                                                        13,652
                                                                        
                                                                        
                                                                        
                                                                        100.00%Cost
      of sales
                                                                        
                                                                        
                                                                        
                                                                        4,857
                                                                        
                                                                        
                                                                        
                                                                        74.14%
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        10,184
                                                                        
                                                                        
                                                                        
                                                                        74.59%Gross
      profit
                                                                        
                                                                        
                                                                        
                                                                        1,694
                                                                        
                                                                        
                                                                        
                                                                        25.86
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        3,468
                                                                        
                                                                        
                                                                        
                                                                        25.41%Operating
      expenses
                                                                        
                                                                        
                                                                        
                                                                        (814
                                                                        )
                                                                        
                                                                        
                                                                        (12.42)%
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        (600
                                                                        )
                                                                        
                                                                        
                                                                        (4.40)%Income
      from operations
                                                                        
                                                                        
                                                                        
                                                                        880
                                                                        
                                                                        
                                                                        
                                                                        13.44%
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        2,869
                                                                        
                                                                        
                                                                        
                                                                        21.01%Other
      income
                                                                        
                                                                        
                                                                        
                                                                        526
                                                                        
                                                                        
                                                                        
                                                                        8.03%
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        214
                                                                        
                                                                        
                                                                        
                                                                        1.57%Other
      expenses
                                                                        
                                                                        
                                                                        
                                                                        (1
                                                                        )
                                                                        
                                                                        
                                                                        (0.02)%
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        (11
                                                                        )
                                                                        
                                                                        
                                                                        (0.08)%Interest
      income
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -%
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -%Interest
      expense
                                                                        
                                                                        
                                                                        
                                                                        (405
                                                                        )
                                                                        
                                                                        
                                                                        (6.18)%
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        (270
                                                                        )
                                                                        
                                                                        
                                                                        (1.98)%Income
      before income tax expense
                                                                        
                                                                        
                                                                        
                                                                        1,000
                                                                        
                                                                        
                                                                        
                                                                        15.27%
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        2,802
                                                                        
                                                                        
                                                                        
                                                                        20.52%Provision
      for income taxes
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -%
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -%Net
      income
                                                                        
                                                                        
                                                                        
                                                                        1,000
                                                                        
                                                                        
                                                                        
                                                                        15.27%
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        2,802
                                                                        
                                                                        
                                                                        
                                                                        20.52%Deemed
      preferred stock dividend
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -%
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        (854
                                                                        )
                                                                        
                                                                        
                                                                        (6.25)%Net
      income available to common shareholders
                                                                        
                                                                        
                                                                        
                                                                        1,000
                                                                        
                                                                        
                                                                        
                                                                        15.27%
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        1,948
                                                                        
                                                                        
                                                                        
                                                                        14.27%Foreign
      currency translation adjustment
                                                                        
                                                                        
                                                                        
                                                                        49
                                                                        
                                                                        
                                                                        
                                                                        0.75%
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        1,980
                                                                        
                                                                        
                                                                        
                                                                        14.50%Total
      comprehensive income
                                                                        
                                                                        
                                                                        $
                                                                        1,049
                                                                        
                                                                        
                                                                        
                                                                        16.02%
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        $
                                                                        4,782
                                                                        
                                                                        
                                                                        
                                                                        35.03%






-23-





Three
      Months Ended June 30,2009
                                                          
                                                          
                                                          2008US
      Dollars
                                                          
                                                          
                                                          Percentage
                                                          
                                                          
                                                          US
      Dollars
                                                          
                                                          
                                                          PercentageSales
                                                          
                                                          
                                                          $
                                                          3,658
                                                          
                                                          
                                                          
                                                          100.0%
                                                          
                                                          
                                                          
                                                          
                                                          $
                                                          7,924
                                                          
                                                          
                                                          
                                                          100.0%Cost
      of sales
                                                          
                                                          
                                                          
                                                          2,804
                                                          
                                                          
                                                          
                                                          76.65%
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          5,817
                                                          
                                                          
                                                          
                                                          73.41%Gross
      profit
                                                          
                                                          
                                                          
                                                          854
                                                          
                                                          
                                                          
                                                          23.35%
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          2,107
                                                          
                                                          
                                                          
                                                          26.59%Operating
      expenses
                                                          
                                                          
                                                          
                                                          (350
                                                          )
                                                          
                                                          
                                                          (9.57)%
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (415
                                                          )
                                                          
                                                          
                                                          (5.24)%Income
      from operations
                                                          
                                                          
                                                          
                                                          504
                                                          
                                                          
                                                          
                                                          13.78%
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          1,692
                                                          
                                                          
                                                          
                                                          21.35%Other
      income
                                                          
                                                          
                                                          
                                                          234
                                                          
                                                          
                                                          
                                                          6.40%
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          14
                                                          
                                                          
                                                          
                                                          0.18Other
      expenses
                                                          
                                                          
                                                          
                                                          (1
                                                          )
                                                          
                                                          
                                                          (0.03)%
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (11
                                                          )
                                                          
                                                          
                                                          (0.14)%Interest
      expense
                                                          
                                                          
                                                          
                                                          (206
                                                          )
                                                          
                                                          
                                                          (5.64)%
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (136
                                                          )
                                                          
                                                          
                                                          (1.72)%Income
      before income tax expense
                                                          
                                                          
                                                          
                                                          530
                                                          
                                                          
                                                          
                                                          14.49%
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          1,559
                                                          
                                                          
                                                          
                                                          19.67%Provision
      for income taxes
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -%
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -%Net
      income
                                                          
                                                          
                                                          
                                                          530
                                                          
                                                          
                                                          
                                                          14.49%
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          1,559
                                                          
                                                          
                                                          
                                                          19.67%Foreign
      currency translation adjustment
                                                          
                                                          
                                                          
                                                          4
                                                          
                                                          
                                                          
                                                          0.10%
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          728
                                                          
                                                          
                                                          
                                                          9.18%Total
      comprehensive income
                                                          
                                                          
                                                          $
                                                          534
                                                          
                                                          
                                                          
                                                          14.59%
                                                          
                                                          
                                                          
                                                          
                                                          $
                                                          2,287
                                                          
                                                          
                                                          
                                                          28.86%




Sales. During the six
months ended June 30, 2009, we had sales of $6,551,000, as compared to sales of
$13,652,000 for the six months ended June 30, 2008, a decrease of
$7,101,000, or approximately 52.01%.  During the three months ended
June 30, 2009, we had sales of $3,658,000, as compared to sales of
$7,924,000 for the three months ended June 30, 2008, a decrease of
$4,266,000, or approximately 53.84%.  The sales decrease reflects the
effects of the negative global economic situation as well as the closure of
Xingyong’s plant facilities for almost two months for the Olympics in August
2008 as part of the Chinese government’s program to reduce air pollution during
that period.  This shutdown reduced our sales in the first quarter of
2009 because it takes about three months to six months to produce graphite
products. During the second quarter of 2009, sales decreased primarily due to
weaker graphite electrode demand. Steel manufacturers delayed purchasing new
graphite electrodes because the global steel demand hasn’t improved markedly.
Most of the steel manufacturers are not running full capacity.





Cost of sales; gross margin.
During the six months ended June 30, 2009, our cost of sales was $4,857,000, as
compared to $10,184,000 during the six months ended June 30, 2008, a decrease of
$5,327,000, or 52.31%. During the three months ended June 30, 2009, our cost of
sales was $2,804,000, as compared to $5,817,000 during the three months
ended June 30, 2008, a decrease of $3,013,000, or 51.79%. The decrease in cost
of sales was directly associated with the decrease in sales. As a result,
our gross profit decreased $1,774,000 and $1,253,000, or 51.17% and 59.47%
respectively for the six and three months ended June 30, 2009. Our gross margin
increased slightly from 25.41% for the six months ended June 30, 2008 to
25.86% the six months ended June 30, 2009.Our gross margin
reflects our product mix.  Graphite electrodes have a lower margin
than other products, such as fine grain graphite and high purity
graphite.  The increase was due to the relatively low volume of
graphite electrodes in the first quarter of 2009, in which our gross margin
was 29.1%.  In the second quarter of 2009, the sales of graphite
electrodes started to pick up, which resulted in a lower gross
margin.





Selling,
general and administrative expenses.





Selling,
general and administrative expenses totaled $814,000 for the six months ended
June 30, 2009, as compared to $600,000 for the six months ended June 30, 2008,
an increase of $214,000 or approximately 35.67%.  Selling, general and
administrative expenses totaled $350,000 for the three months ended June
30, 2009, as compared to $415,000 for the three months ended June 30, 2008, a
decrease of $65,000 or approximately 15.66%.





Selling
expenses increased from $170,000 for the six months ended June 30, 2008 to
$318,000 for the six months ended June 30, 2009, or 87.06%. The increase was due
to the effort to market our high margin products – fine grain graphite and high
purity graphite. Selling expenses decreased from $150,000 for the three
months ended June 30, 2008 to $9,000 for the three months ended June 30, 2009,
or 94.0%.  The decrease was directly associated with the decrease in
sales during the second quarter 2009.




General
and administrative expense was $457,000 for the six months ended June 30, 2009,
compared to $399,000 for the six months ended June 30, 2008. General and
administrative expense was $321,000 for the three months ended June 30, 2009,
compared to $250,000 for the three months ended June 30, 2008.  The
increase in general administrative expense was primarily due to the increase in
public company expenses.





Depreciation and amortization
expense. Depreciation and amortization were generally constant for both
the six and three months ended June 30, 2009 and 2008.  Depreciation
and amortization amounted to$673,000 for the six months ended June 30, 2009 and
$633,000 for the six months ended June 30, 2008, of which $635,000 for 2009 and
$602,000 for 2008 were included in cost of sales and $38,000 for
2009 and $31,000 for 2008 were included in operating
expenses. Depreciation and amortization amounted to $345,000 for
the three months ended June 30, 2009 and $323,000 for the three months
ended June 30, 2008, of which $326,000 for 2009 and $308,000 for 2008
were included in cost of sales and $19,000 for 2009 and $15,000 for
2008 were included in operating expenses.






-24-





Income from
operations. As a result of the factors described above, income from
operations amounted to $881,000 for the six months ended June 30, 2009, as
compared to $2,869,000 for the six months ended June 30, 2008, a decrease of
approximately $1,988,000, or 69.29%.  Incomefrom operations
amounted to $504,000 for the three months ended June 30, 2009, as compared
to $1,692,000 for the three months ended June 30, 2008, a decrease of
approximately $1,188,000, or 70.21%.





Other income
(expenses). Interest expense was $405,000 and $206,000 for the
six and three months ended June 30, 2009, as compared with $270,000 and $136,000
for the six and three months ended June 30, 2008. reflecting both increased
borrowings and an increase in the interest rate.  We had nominal
interest income during the six and three months ended June 30, 2009 and 2008.
Other income, which consisted of government grants, was $526,000 and $234,000
for the six and three months ended June 30, 2009 and 2008, respectively, as
compared with $214,000 and $14,000 for the six and three months ended June
30, 2008. Other expense was $1,000 and $11,000 for the six months ended June 30,
2009 and 2008, respectively.





Net income. As a result of
the factors described above and the fact that we were granted a 100% tax holiday
from thePRC enterprise tax, our net income for the six months ended June
30, 2009 was $ 1,000,000, as compared to $2,802,000 for the six months
ended June 30, 2008, a decrease of $1,802,000. Our net income for the three
months ended June 30, 2009 was $530,000, as compared to $1,559,000 for the
three months ended June 30, 2008, a decrease of $1,029,000  or 66.00%
..





Deemed preferred dividend. As
a result of the automatic conversion of our 3% convertible notes into shares of
series A preferred stock and warrants in January 2008, we incurred a preferred
stock deemed dividend of $854,300, representing the intrinsic value of the
beneficial conversion feature of the series A preferred stock resulting from the
warrant issuance. The deemed preferred stock dividend was a non-cash charge
which did not affect our operations or cash flow for the six months ended June
30, 2008.  There was no comparable item in the three or six months
ended June 30, 2009 or the three months ended June 30, 2008.





Net income available to common
shareholders.  Net income available for common shareholders was
$1,000,000, or $0.08 per share (basic) and $0.07 per share (diluted) for
the six months ended June 30, 2009 and $1,948,000, or $0.15 per share (basic)
and $0.10 per share (diluted), for the six months ended June 30,
2008. Net income available for common shareholders was $530,000, or $0.04
per share (basic and diluted), for the three months ended June 30, 2009 and
$1,559,000, or $0.12 per share (basic) and $0.08 per share (diluted). for
the three months ended June 30, 2008.





Liquidity
and Capital Resources





Liquidity
is the ability of a company to generate funds to support its current and future
operations, satisfy its obligations and otherwise operate on an ongoing
basis.  At June 30, 2009, we had a cash balance of $6,325,505, almost
all of which was located in banks in China.





The
following table sets forth information as to the principal changes in the
components of our working capital from December 31, 2008 to June 30,
2009





All
amounts, other than percentages, in thousands of U.S. dollars




-25-






Category
                      
                      June
      30, 2009
                      
                      
                      December
      31, 2008
                      
                      
                      Change
                      
                      
                      Percent
      ChangeCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      6,326
                      
                      
                      $
                      52
                      
                      
                      $
                      6,274
                      
                      
                      
                      12,065.4
                      %Trade
      accounts receivable
                      
                      
                      4,766
                      
                      
                      
                      4,224
                      
                      
                      
                      542
                      
                      
                      
                      12.83
                      %Notes
      receivable
                      
                      
                      121
                      
                      
                      
                      28
                      
                      
                      
                      93
                      
                      
                      
                      332.14
                      %Other
      receivables
                      
                      
                      867
                      
                      
                      
                      151
                      
                      
                      
                      716
                      
                      
                      
                      474.17
                      %Advances
      to suppliers
                      
                      
                      1,297
                      
                      
                      
                      1,017
                      
                      
                      
                      280
                      
                      
                      
                      27.53
                      %Advances
      to related party
                      
                      
                      -
                      
                      
                      
                      291
                      
                      
                      
                      (291
                      )
                      
                      
                      (100
                      )%Prepaid
      expenses
                      
                      
                      11
                      
                      
                      
                      -
                      
                      
                      
                      11
                      
                      
                      
                      *Inventories
                      
                      
                      16,382
                      
                      
                      
                      15,890
                      
                      
                      
                      492
                      
                      
                      
                      3.10
                      %Current
      liabilities:Accounts
      payable and accrued expenses
                      
                      
                      1,808
                      
                      
                      
                      1,253
                      
                      
                      
                      555
                      
                      
                      
                      44.29
                      %Advances
      from customers
                      
                      
                      1,091
                      
                      
                      
                      640
                      
                      
                      
                      451
                      
                      
                      
                      70.47
                      %Taxes
      payable
                      
                      
                      8
                      
                      
                      
                      362
                      
                      
                      
                      (354
                      )
                      
                      
                      (97.79
                      )%Trade
      notes payable
                      
                      
                      5,844
                      
                      
                      
                      0
                      
                      
                      
                      5,844
                      
                      
                      
                      100.00
                      %Short
      term bank loan
                      
                      
                      8,539
                      
                      
                      
                      4,888
                      
                      
                      
                      3,651
                      
                      
                      
                      74.69
                      %Long
      term bank loan – current portion
                      
                      
                      1,607
                      
                      
                      
                      1,897
                      
                      
                      
                      (290
                      )
                      
                      
                      (15.29
                      )%Other
      payables
                      
                      
                      621
                      
                      
                      
                      551
                      
                      
                      
                      70
                      
                      
                      
                      12.70
                      %Working
      capital:Total
      current assets
                      
                      
                      29,770
                      
                      
                      
                      21,652
                      
                      
                      
                      8,118
                      
                      
                      
                      37.49
                      %Total
      current liabilities
                      
                      
                      19,519
                      
                      
                      
                      9,591
                      
                      
                      
                      9,928
                      
                      
                      
                      103.51
                      %Working
      capital
                      
                      
                      10,251
                      
                      
                      
                      12,061
                      
                      
                      
                      (1,810
                      )
                      
                      
                      (15.01
                      )%





Our
working capital position decreased $1,810,000 to $10,251,000 at June
30, 2009 from a working capital of $12,061,000 at December 31,
2008.  Although our cash position increased significantly, by
$6,274,000 from December 31, 2008 to June 30, 2009, the increase was more than
offset by increases in current bank debt of $3,261,000, and trade notes payable,
which increased from zero to $5,844,000.   During the six months
ended June 30, 2009, we were requested by certain of our suppliers to settle
trade liabilities incurred in the ordinary course of business by the issuance of
notes guaranteed by a bank.  We had no comparable obligations at
December 31, 2008.





We have
financed our operations principally through bank loans. At June 30, 2009, we
have short-term bank loans totaling $8,539,000 and long-term bank loan of
$4,237,000 outstanding, of which short term bank loan of $3,426,000 are due
June 15, 2010, bear interest at 9.711% per annum and  $5,113,000 are
due June 1, 2010, bear interest at 7.434% per annum. The short term bank loans
are secured by a security interest on our fixed assets and land use
rights.  A long-term bank loan, in the amount of $4,237,000 is due
October 9, 2011, and bears interest at 6.75% per annum. The current portion of
the long term bank loan is $1,607,000. Although we believe that we will be able
to obtain extensions of these loans when they mature, we cannot assure you that
such extensions will be granted.




Although
our sales have decreased significantly in 2009, we believe that our working
capital, together with the cash flow from our ongoing business and our bank
financing will be sufficient to enable us to meet our normal cash requirements
for the next twelve months provided that:




•        We
generate sufficient business so that we are able to generate a profit, which
cannot be assured;




•        Our
banks continue to provide us with the necessary working capital
financing;




•        We
are able to generate savings by improving the efficiency of our
operations.




We will
require additional working capital if we are going to make any acquisitions or
to purchase equipment to expand our production capacity. Further, we expect that
both revenue and the results of our operations will continue to decline from the
comparable period of 2008 as a result of the effects of the global economic
downturn as discussed under “Overview.”  We cannot assure you that
funding will be available if and when we require funding.





Net cash
flow provided by operating activities was $6,477,000 for the six
months ended June 30, 2009 as compared to $1,334,000 for the six months
ended June 30, 2008, an increase of $5,143,000. Net cash flow provided by
operating activities in the six months ended June 30, 2009 was mainly due to our
net income of $1,000,000, an increase in trade notes payable of $5,845,000, an
increase in accounts payable and accrued expenses of $554,000 and an increase in
advance from customers of $450,000, offset by an increase of accounts receivable
of $536,000, other receivable of $716,000 and a decrease in taxes payable of
$355,000.





Net cash
flow provided by operating activities is sensitive to many factors, including
our operating results, inventory management, ability to collect accounts
receivable and timing of cash receipts and payments. For the six months ended
June 30, 2009, the inventory turnover remained flat compared to December 31,
2008, and we did not experience significant uncollectible accounts
receivable.




Net cash
flow used in investing activities was $3,330,000 for the six months ended June
30, 2009, of which $1,629,000 was used to purchase properties and equipments and
$1,701,000 was used in constructing new buildings.   Cash flow
use in investing activities for the six months ended June 30, 2008 was
$590,000.





Net cash
flow provided by financing activities was $3,128,000 for the six months ended
June 30, 2009 as compared to net cash used in financing activities of $670,000
for the six months ended June 30, 2008. We received $68,000 from investor by
issuing 70,000 shares of common stock pursuant to a share purchase agreement. We
received $5,115,000 proceeds from bank loan and repaid $2,345,000 bank loan. In
addition, we received repayment of $291,000 from our former chief executive
officer, Dengyong Jin.






-26-





Contractual
Obligations and Off-Balance Sheet Arrangements




Contractual
Obligations




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





The
following tables summarize our contractual obligations as of June 30, 2009, and
the effect these obligations are expected to have on our liquidity and cash
flows in future periods.





Payments
      Due by PeriodTotal
                  
                  Less
      than 1 year
                  
                  1-3
      Years
                  
                  3-5
                    Years
                  
                  5
      Years
                    +Contractual
      Obligations :Bank
      indebtedness (1)
                  
                  $
                  12,776,122
                  
                  
                  $
                  10,146,388
                  
                  
                  $
                  2,629,734
                  
                  
                  $
                  -
                  
                  
                  $
                  -Notes
      payable
                  
                  
                  5,843,852
                  
                  
                  
                  5,843,852
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      Contractual Obligations:
                  
                  $
                  18,619,974
                  
                  
                  $
                  15,990,240
                  
                  
                  $
                  2,629,734
                  
                  
                  $
                  -
                  
                  
                  $
                  -




(1)       A
bank loan in the amount of $3,425,958 dated June 17, 2009, due June 15,
2010 with an interest rate of 9.711%, interest payable monthly, secured by
property and equipment and land use rights. A bank loan in the amount
of $5,113,371 dated June 16, 2009, due June 1, 2010 with an interest rate
of 7.434%, interest payable quarterly, secured by equipment and land use rights.
Another loan, in the amount of $4,236,793 is due October 9, 2011, and bears
interest at 6.75% per annum. The current portion of this bank loan is $
1,607,059.




Off-balance
Sheet Arrangements




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





We do not
use derivative financial instruments in our investment portfolio and we have no
foreign exchange contracts. Our financial instruments consist of cash and cash
equivalents, trade accounts receivable, accounts payable and long-term
obligations. We consider investments in highly liquid instruments purchased with
a remaining maturity of 90 days or less at the date of purchase to be cash
equivalents. However, in order to manage the foreign exchange risks, we may
engage in hedging activities to manage our financial exposure related to
currency exchange fluctuation. In these hedging activities, we might use
fixed-price, forward, futures, financial swaps and option contracts traded in
the over-the-counter markets or on exchanges, as well as long-term structured
transactions when feasible.




Interest Rates. Our exposure
to market risk for changes in interest rates relates primarily to our short-term
investments and short-term obligations; thus, fluctuations in interest rates
would not have a material impact on the fair value of these securities. At June
30, 2009, we had $6,325,505 in cash and cash equivalents. A hypothetical 2%
increase or decrease in interest rates would not have a material impact on our
earnings or loss, or the fair market value or cash flows of these
instruments.






-27-






Foreign Exchange Rates. All
of our sales are denominated in Renminbi (“RMB”). As a result, changes in the
relative values of U.S. Dollars and RMB affect our reported levels of revenues
and profitability as the results are translated into U.S. Dollars for reporting
purposes. In particular, fluctuations in currency exchange rates could have a
significant impact on our financial stability due to a mismatch among various
foreign currency-denominated sales and costs. Fluctuations in exchange rates
between the U.S. dollar and RMB affect our gross and net profit margins and
could result in foreign exchange and operating losses.





Our
exposure to foreign exchange risk primarily relates to currency gains or losses
resulting from timing differences between signing of sales contracts and
settling of these contracts. Furthermore, we translate monetary assets and
liabilities denominated in other currencies into RMB, the functional currency of
our operating business. Our results of operations and cash flow are translated
at average exchange rates during the period, and assets and liabilities are
translated at the unified exchange rate as quoted by the People’s Bank of China
at the end of the period. Translation adjustments resulting from this process
are included in accumulated other comprehensive income in our statement of
shareholders’ equity. We have not used any forward contracts, currency options
or borrowings to hedge our exposure to foreign currency exchange risk. We cannot
predict the impact of future exchange rate fluctuations on our results of
operations and may incur net foreign currency losses in the future. As our sales
denominated in foreign currencies, such as RMB and Euros, continue to grow, we
will consider using arrangements to hedge our exposure to foreign currency
exchange risk.





Our
financial statements are expressed in U.S. dollars but the functional
currency of our operating subsidiary is RMB. The value of your investment in our
stock will be affected by the foreign exchange rate between U.S. dollars
and RMB. To the extent we hold assets denominated in U.S. dollars,
including the net proceeds to us from this offering, any appreciation of
the RMB against the U.S. dollar could result in a change to our statement
of operations and a reduction in the value of our U.S. dollar denominated
assets. On the other hand, a decline in the value of RMB against the
U.S. dollar could reduce the U.S. dollar equivalent amounts of our
financial results, the value of your investment in our company and the dividends
we may pay in the future, if any, all of which may have a material adverse
effect on the price of our stock.





Item 3. Quantitative and Qualitative Disclosures About
Market Risk





Not
applicable to smaller reporting companies.





Item 4.  Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





Our
management, including Donghai Yu, our chief executive officer, and Ting Chen,
our chief financial officer, evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of June 30,
2009.




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 June 30, 2009.




Management’s
Report of 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, 2008.  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, 2008,
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. However, management believes that these deficiencies do not
amount to a material weakness. Therefore, our internal control over financial
reporting were effective as of June 30, 2009.






-28-






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 former 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 US 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 US 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 June 30, 2009.





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.




Changes
in Internal Control over Financial Reporting





No
changes in the internal control over our financial reporting have come to
management's attention during our last fiscal quarter that have materially
affected, or are likely to materially affect, our internal control over
financial reporting.





Limitations
on Controls





Management
does not expect that our disclosure controls and procedures or our internal
control over financial reporting will prevent or detect all error and fraud. Any
control system, no matter how well designed and operated, is based upon certain
assumptions and can provide only reasonable, not absolute, assurance that its
objectives will be met. Further, no evaluation of controls can provide absolute
assurance that misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, within the Company have been
detected.





PART
II – OTHER INFORMATION





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





Pursuant
to a share purchase agreement dated March 10, 2009, we sold 70,000 shares of
common stock to one investor at a purchase price of $1.00 per share, for a total
of $70,000.  The Company paid $2,100 as a commission to the finder.
The shares were issued to the purchaser, who is a Chinese citizen and resident,
pursuant to Regulation S of the Securities and Exchange Commission under the
Securities Act of 1933, as amended.





In March
2009, the Company issued 747,058 shares of common stock upon the conversion of
747,058 shares of series A preferred stock.  The Company did not
receive any additional consideration for the issuance of the
shares.  The transaction is exempt from registration pursuant to
Section 3(a)(9) of the Securities Act.






-29-






Item 6. Exhibits





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


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


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


















-30-








SIGNATURES





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




CHINA
      CARBON GRAPHITE GROUP, INC.Date:
      August     , 2009
            By:
            /s/ Donghai
      YuDonghai
      YuChief
      Executive Officer





Date:
      August     , 2009
            By:
            /s/ Ting
      ChenTing
      ChenChief
      Financial Officer













-31-