Securities
        and Exchange Commission
 Washington,
        D.C. 20549
 
 FORM
        10-Q
 **x** QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES
        EXCHANGE ACT OF 1934
 
 For
        the
        quarterly period ended June 30, 2008
 
 **CHINA
        CARBON GRAPHITE GROUP, INC.**
 (Exact
        name of registrant as specified in its charter)
 Nevada
                
                98-0550699(State
                    or other jurisdiction of
                
                (I.R.S.
                    Employer Identification No.)incorporation
                    or organization)
 **China
        Carbon Graphite Group, Inc.**
 **c/o
        Xinghe Yongle Carbon Co., Ltd.**
 **787
        Xicheng Wai**
 **Chengguantown**
 **Xinghe
        County**
 **Inner
        Mongolia, China**
 (Address
        of principal executive offices)
  (86)
        474-7209723
 (Issuer’s
        telephone number)
 
 Indicate
        by check mark whether the Registrant (1) has filed all reports required to
        be
        filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days Yes x No
o
 
 Indicate
        by a check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer, see definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of Exchange Act. Check
        one:
 
 Large
                  accelerated filer
              o
              Accelerated
                  filer
              oNon-accelerated
                  filer
                (Do
                  not check if smaller reporting company)
              o
              Smaller
                  reporting company
              x
 
 Indicate
        by a check mark whether the registrant is a shell company (as defined in
        Rule
        12b-2 of the Act). Yes o
        No x
 
 On
        August
        14, 2008, the Registrant had 12,218,412 shares of common stock, par value
        $.001
        per share, outstanding.
 
 Transitional
        Small Business Disclosure Format: Yes o No x
  1
  **CHINA
        CARBON GRAPHITE GROUP, INC.**
 
 PagePart
                  I. Financial InformationItem
                  1. Consolidated Financial StatementsConsolidated
                  Balance Sheets as of June 30, 2008 (Unaudited) and December 31,
                  2007
              
              
              3Consolidated
                  Statements of Operations for the six months ended June 30, 2008
                  and 2007
                  (Unaudited)
              
              
              4Consolidated
                  Statements of Operations for the three months ended June 30, 2008
                  and 2007
                  (Unaudited)
              
              
              5Consolidated
                  Statements of Cash Flows for the six months ended June 30, 2008
                  and 2007
                  (Unaudited)
              
              
              6Notes
                  to Consolidated Financial Statements (Unaudited)
              
              
              7Item
                  2. Management’s Discussion and Analysis or Plan of
                  Operation
              
              
              20Item
                  3. Controls and Procedures
              
              
              26Part
                  II. Other InformationItem
                  4. Exhibits
              
              
              28
 
  2
 **China
          Carbon Graphite Group, Inc.**
 **Consolidated
          Balance Sheets**
 **(US
                    Dollars)****Unaudited**
                
                **Audited****June
                    30,2008**
                
                **December
                    31, 2007****ASSETS****Current
                    Assets**Cash
                    and cash equivalents
                
                $
                162,612
                
                $
                4,497Trade
                    accounts receivable
                
                
                5,174,774
                
                
                4,868,263Notes
                    receivable
                
                
                36,381
                
                
                243,426Other
                    receivables
                
                
                513,184
                
                
                766,945Advance
                    to suppliers
                
                
                1,239,179
                
                
                636,660Inventories
                
                
                17,691,170
                
                
                14,626,927**Total
                    current assets**
                
                
                24,817,300
                
                
                21,146,718**Property
                    and equipment, net**
                
                
                20,329,334
                
                
                19,621,611**Land
                    use rights, net**
                
                
                3,536,048
                
                
                2,841,954$
                48,682,682
                
                $
                43,610,283**LIABILITIES
                    AND STOCKHOLDERS' EQUITY****Current
                    Liabilities**Accounts
                    payable and accrued expenses
                
                $
                1,155,096
                
                $
                988,470Advance
                    from suppliers
                
                
                2,007,495
                
                
                2,466,810Taxes
                    payable
                
                
                187,372
                
                
                232,234Notes
                    payable
                
                
                5,675,369
                
                
                6,715,778Convertible
                    note payable
                
                
                -
                
                
                400,000Loan
                    from shareholder
                
                
                4,893,296
                
                
                4,543,648Other
                    payables
                
                
                518,885
                
                
                -**Total
                    current liabilities**
                
                
                14,437,513
                
                
                15,346,940**Stockholders'
                    Equity**Convertible
                    preferred stock, par value $0.001 per share,authorized
                    20,000,000 shares, issued and outstanding 1,200,499shares
                    at June 30, 2008; none authorizedat
                    December 31, 2007
                
                $
                1,200
                
                $
                -Common
                    stock authorized 100,000,000 shares, $0.001 parvalue;
                    issued and outstanding 12,218,412 shares and 13,218,412
                    sharesat
                    June 30, 2008 and December 31, 2007, respectively
                
                
                12,218
                
                
                13,218Additional
                    paid-in capital
                
                
                8,690,426
                
                
                6,637,326Accumulated
                    other comprehensive income
                
                
                4,928,134
                
                
                2,948,244Retained
                    earnings
                
                
                20,613,190
                
                
                18,814,255Treasury
                    Stock-common at cost - none at June 30,2008and
                    1,000,000 shares at December 31, 2007
                
                
                -
                
                
                (149,700
                )34,245,169
                
                
                28,263,343**$**
                **48,682,682**
                
                **$**
                **43,610,283**
  See
        notes
        to consolidated financial statements
  3
 **China
          Carbon Graphite Group, Inc**
 **Consolidated
          Statements of Operations (Unaudited)**
 **(US
                    Dollars)****Six
                    months ended June 30,****2008**
                
                **2007****Sales**
                
                $
                13,651,779
                
                $
                11,446,022**Cost
                    of Goods Sold**
                
                
                10,183,419
                
                
                9,100,115**Gross
                    Margin**
                
                
                3,468,360
                
                
                2,345,907**Operating
                    Expenses**Selling
                    expenses
                
                
                170,002
                
                
                91,016General
                    and administrative
                
                
                398,917
                
                
                239,457Depreciation
                    and amortization
                
                
                30,727
                
                
                1,451599,646
                
                
                331,924**Operating
                    Income Before Other Income (Expense)****and
                    Income Tax Expense**
                
                
                2,868,714
                
                
                2,013,983**Other
                    Income (Expense)**Other
                    income
                
                
                213,673
                
                
                240,006Interest
                    income
                
                
                417
                
                
                144Interest
                    expense
                
                
                (269,557
                )
                
                (332,327
                )Other
                    expense
                
                
                (11,312
                )
                
                (7,666
                )(66,779
                )
                
                (99,843
                )**Income
                    Before Income Tax Expense**
                
                
                2,801,935
                
                
                1,914,140**Income
                    tax expense**
                
                
                -
                
                
                -**Net
                    income**
                
                
                2,801,935
                
                
                1,914,140**Deemed
                    preferred stock dividend**
                
                
                (854,300
                )
                
                -**Net
                    income available to common shareholders**
                
                $
                1,947,635
                
                $
                1,914,140**Other
                    comprehensive income**Foreign
                    currency translation gain
                
                
                1,979,890
                
                
                624,721**Comprehensive
                    Income**
                
                $
                4,781,825
                
                $
                2,538,861**Share
                    data**Basic
                    earnings per share
                
                $
                0.15
                
                $
                0.18Diluted
                    earnings per share
                
                $
                0.10
                
                $
                0.18Weighted
                    average common shares outstanding,basic
                
                
                13,040,061
                
                
                10,388,172Weighted
                    average common shares outstanding,diluted
                
                
                19,444,924
                
                
                10,388,172
  See
        notes to consolidated financial
        statements
  4
 **China
          Carbon Graphite Group, Inc**
 **Consolidated
          Statements of Operations (Unaudited)**
 **(US
                    Dollars)****Three
                    months ended June 30,****2008**
                
                **2007****Sales**
                
                $
                7,923,777
                
                $
                6,073,316**Cost
                    of Goods Sold**
                
                
                5,817,126
                
                
                4,600,350**Gross
                    Margin**
                
                
                2,106,651
                
                
                1,472,966**Operating
                    Expenses**Selling
                    expenses
                
                
                149,668
                
                
                77,487General
                    and administrative
                
                
                249,712
                
                
                140,195Depreciation
                    and amortization
                
                
                15,587
                
                
                -414,967
                
                
                217,682**Operating
                    Income Before Other Income (Expense)****and
                    Income Tax Expense**
                
                
                1,691,684
                
                
                1,255,284**Other
                    Income (Expense)**Other
                    income
                
                
                14,477
                
                
                2,684Interest
                    income
                
                
                239
                
                
                -Interest
                    expense
                
                
                (136,334
                )
                
                (173,151
                )Other
                    expense
                
                
                (11,311
                )
                
                (7,666
                )(132,929
                )
                
                (178,133
                )**Net
                    income**
                
                
                1,558,755
                
                
                1,077,151**Other
                    comprehensive income**Foreign
                    currency translation gain
                
                
                727,747
                
                
                193,111**Comprehensive
                    Income**
                
                $
                2,286,502
                
                $
                1,270,262**Share
                    data**Basic
                    earnings per share
                
                $
                0.12
                
                $
                0.10Diluted
                    earnings per share
                
                $
                0.08
                
                $
                0.10Weighted
                    average common shares outstanding,basic
                
                
                12,718,412
                
                
                10,388,172Weighted
                    average common shares outstanding,diluted
                
                
                19,918,911
                
                
                10,388,172
  See
          notes to consolidated financial
          statements
  5
 **China
            Carbon Graphite Group, Inc**
 **Consolidated
            Statements of Cash Flows (Unaudited)**
 **(US
                      Dollars)****Six
                      months ended June 30,****2008**
                  
                  **2007****Cash
                      flows from operating activities****Net
                      Income**
                  
                  $
                  2,801,935
                  
                  $
                  1,914,140**Adjustments
                      to reconcile net cash provided by****operating
                      activities**Depreciation
                      and amortization
                  
                  
                  633,447
                  
                  
                  337,369**Change
                      in operating assets and liabilities**Trade
                      accounts receivable
                  
                  
                  6,811
                  
                  
                  1,014,118Notes
                      receivable
                  
                  
                  222,712
                  
                  
                  (15,656
                  )Prepaid
                      expenses
                  
                  
                  -
                  
                  
                  (17,807
                  )Other
                      receivables
                  
                  
                  303,122
                  
                  
                  68,761Advance
                      to suppliers
                  
                  
                  (561,544
                  )
                  
                  -Inventory
                  
                  
                  (2,122,854
                  )
                  
                  (178,619
                  )Accounts
                      payable and accrued expenses
                  
                  
                  209,444
                  
                  
                  (1,917,110
                  )Advance
                      from customers
                  
                  
                  (618,078
                  )
                  
                  -Taxes
                      payable
                  
                  
                  (59,809
                  )
                  
                  (41,705
                  )Other
                      payables
                  
                  
                  518,884
                  
                  
                  -**Net
                      cash provided by operating activities**
                  
                  
                  1,334,070
                  
                  
                  1,163,492**Cash
                      flows from investing activities**Acquisition
                      of property and equipment andland
                      use rights
                  
                  
                  (589,509
                  )
                  
                  (281,843
                  )**Net
                      cash used in investing activities**
                  
                  
                  (589,509
                  )
                  
                  (281,843
                  )**Cash
                      flows from financing activities**Advance
                      from (repayment to) related parties
                  
                  
                  57,220
                  
                  
                  (297,884
                  )Repayment
                      on notes payable
                  
                  
                  (727,585
                  )
                  
                  (616,411
                  )**Net
                      cash used in financing activities**
                  
                  
                  (670,365
                  )
                  
                  (914,294
                  )**Effect
                      of exchange rate changes on cash**
                  
                  
                  83,919
                  
                  
                  27,551**Net
                      increase (decrease) in cash and cash equivalents**
                  
                  
                  158,115
                  
                  
                  (5,094
                  )**Cash
                      and cash equivalents at beginning of period**
                  
                  
                  4,497
                  
                  
                  45,460**Cash
                      and cash equivalents at end of period**
                  
                  $
                  162,612
                  
                  $
                  40,366**Supplemental
                      disclosure of cash flow information**Interest
                      paid
                  
                  $
                  269,557
                  
                  $
                  332,327Income
                      taxes paid
                  
                  $
                  -
                  
                  $
                  -**Non-cash
                      financing activities:**Deemed
                      preferred dividend reflected in paid-in capital
                  
                  $
                  854,300
                  
                  $
                  -
  See
          notes to consolidated financial
          statements
 6
  **China
        Carbon Graphite Group, Inc.**
 **Notes
        to Consolidated Financial Statements (Unaudited)**
 
 **1.**
              **Organization
                  and Business**
 
 China
        Carbon Graphite Group, Inc., (the “Company”), is a Nevada corporation,
        incorporated on February 13, 2003 under the name Achievers Magazine Inc.
        In
        connection with the reverse acquisition transaction described below, the
        Company’s corporate name was changed to China Carbon Graphite Group, Inc. on
        January 30, 2008.
 
 On
        December 17, 2007, the Company completed a share exchange pursuant to a share
        exchange agreement, dated as of December 14, 2007, with Sincere Investment
        (PTC), Ltd. (“Sincere”), a British Virgin Islands corporation, which is the sole
        stockholder of Talent International Investment Limited (“Talent”), a British
        Virgin Islands corporation, which is the sole stockholder of Xinghe Yongle
        Carbon Co., Ltd. (“Yongle”), a company organized under the laws of the People’s
        Republic of China (the “PRC”). Pursuant to the share exchange agreement, the
        Company, then known as Achievers Magazine, Inc., issued 9,388,172 shares
        of
        common stock to Sincere in exchange for all of the outstanding common stock
        of
        Talent, and Talent became the Company’s wholly-owned subsidiary. From and after
        December 17, 2007, the Company’s sole business became the business of Talent,
        its subsidiaries and its affiliated variable interest entities.
  In
        connection with the acquisition of Talent, on December 17, 2007:
  (a)
              The
                  Company entered into a buy-back agreement dated December 14, 2007,
                  with
                  Arto Tavukciyan and Lyndon Grove pursuant to which the Company
                  purchased
                  5,344,000 shares of common stock of the Company from them, of which
                  1,000,000 share were placed in escrow. Mr. Tavukciyan and Mr. Grove
                  were,
                  at the time of the agreement, the holders of 65.4% of the Company’s
                  outstanding common stock. Pursuant to the buy-back
                  agreement:
  ·
              The
                  Company agreed to pay a purchase price of $700,000 for the shares,
                  for
                  which the Company issued its promissory note in the principal amount
                  of
                  $700,000, payable in installments of $350,000 on each of March
                  31, 2008
                  and June 30, 2008. These payments have been made.
  ·
              The
                  Company agreed to pay a finders’ fee of $100,000 to Ventana Capital
                  Partners, payable in installments of $50,000 on each of March 31,
                  2008 and
                  June 30, 2008. These payments have been
                  made.
  ·
              As
                  a result of the payments described above, the 1,000,000 shares
                  held in
                  escrow were delivered to the Company and cancelled during the six
                  months
                  ended June 30, 2008.(b)
              The
                  Company transferred all of the stock of its wholly-owned subsidiary,
                  Achievers Publishing Inc., a British Columbia corporation, to Mr.
                  Tavukciyan
 
 (c)
              The
                  Company entered into a securities purchase agreement dated December
                  14,
                  2007 with XingGuang Investment Corporation Limited (“XingGuang”) pursuant
                  to which XingGuang purchased, the Company’s 3% promissory note in the
                  principal amount of $1,200,000, which, upon the filing on January
                  22,
                  2008, of a restated certificate of incorporation and a statement
                  of
                  designation for a newly created series of preferred stock designated
                  as
                  the series A convertible preferred stock automatically became converted
                  into 1,200,499 shares of series A convertible preferred stock and
                  warrants
                  to purchase 3,000,000 shares of common stock at $1.20 per share
                  and
                  3,000,000 shares of common stock at $2.00 per share.
  The
        purchase price of the note is payable in installments. At the closing, XingGuang
        paid $183,000 to cover closing costs. Prior to the closing, XingGuang had
        paid
        at least $217,000 of expenses relating to the reverse acquisition on the
        Company’s behalf. XingGuang is to pay a total of $800,000 in two installments of
        $400,000 each, the first being due on March 31, 2008 and the second being
        due on
        June 30, 2008. The payments due March 31, 2008 and June 30, 2008 have both
        been
        made.
  (d)
              Pursuant
                  to the securities purchase
                  agreement:
  ·
              Our
                  directors approved a restatement of our articles of incorporation
                  which
                  would change our corporate name to China Carbon Graphite Group,
                  Inc.,
                  change our authorized capital stock to 120,000,000 shares of capital
                  stock, of which 20,000,000 shares would be shares of preferred
                  stock, par
                  value $.001 per share, and 100,000,000 shares would be shares of
                  common
                  stock, par value $.001 per share, and include a statement of designations
                  of the rights of the holders of the series A preferred stock. The
                  restated
                  articles were filed on January 22, 2008.
  7
  ·
              The
                  Company agreed that, within 90 days after the closing on December
                  17,
                  2007, it would have appointed such number of independent directors
                  that
                  would result in a majority of our directors being independent directors
                  and we would have an audit committee composed solely of at least
                  three
                  independent directors and a compensation committee would have a
                  majority
                  of independent directors. The Company is required to pay liquidated
                  damages (i) if the Company fails to have a majority of independent
                  directors 90 days after the closing or (ii) thereafter, if the
                  Company
                  subsequently fails to meet these requirements for a period of 60
                  days for
                  an excused reason, as defined in the purchase agreement, or 75
                  days for a
                  reason which is not an excused reason. Liquidated damages are payable
                  in
                  cash or additional shares of series A preferred stock, with the
                  series A
                  preferred stock being valued at the market price of the shares
                  of common
                  stock issuable upon conversion of the series A preferred stock.
                  The
                  liquidated damages are computed in an amount equal to 12% per annum
                  of the
                  purchase price, with a maximum of $144,000. The company received
                  a waiver
                  from XingGuang as to the failure to have independent
                  directors.
  ·
              The
                  Company and XingGuang entered into a registration rights agreement
                  pursuant to which we are required to have a registration statement
                  filed
                  with the SEC by March 16, 2008 (subsequently extended to September
                  16,
                  2008) and declared effective by the SEC not later than August 13,
                  2008
                  (subsequently extended to December 16, 2008). We are required to
                  pay
                  liquidated damages at the rate of 200 shares of series A preferred
                  stock
                  for each day after August 13, 2008 (subsequently extended to December
                  16,
                  2008) that the registration statement is not declared effective
                  or for any
                  period that we fail to keep the registration statement effective,
                  up to a
                  maximum of 100,000 shares. The number of shares of series A preferred
                  stock issuable pursuant to the liquidated damages provision is
                  subject to
                  reduction based on the maximum number of shares that can be registered
                  under the applicable SEC
                  guidelines.
  ·
              XingGuang
                  has a right of refusal on future
                  financings.
  Contemporaneously
        with the transactions described above, seven investors purchased 2,803,040
        shares of common stock from a group of our stockholders in a private purchase.
        This purchase, while separate from the reverse acquisition, was a condition
        to
        the Company’s consummation of the exchange agreement.
  In
        December 2007, the Company was recapitalized to give effect to the share
        exchange agreement discussed above. Under generally accepted accounting
        principles, the acquisition by the Company of Talent is considered to be
        capital
        transactions in substance, rather than a business combination. That is, the
        acquisition is equivalent, to the acquisition by Talent of the Company, with
        the
        issuance of stock by Talent for the net monetary assets of the Company. This
        transaction is reflected as a recapitalization, and is accounted for as a
        change
        in capital structure. Accordingly, the accounting for the acquisition is
        identical to that resulting from a reverse acquisition. Under reverse takeover
        accounting, the comparative historical financial statements of the Company,
        as
        the legal acquirer, are those of the accounting acquirer, Talent. Since Talent
        and Yongle did not have any business activities, the Company’s financial
        statements prior to the closing on the reverse acquisition, reflect only
        business of Xingyong. The accompanying financial statements reflect the
        recapitalization of the stockholders’ equity as if the transactions occurred as
        of the beginning of the first period presented. Thus, the 9,388,172 shares
        of
        common stock issued to Sincere and the 2,803,040 shares purchased by other
        investors are deemed to be outstanding for all periods reported prior to
        the
        date of the reverse acquisition. The remaining shares are treated as issued
        at
        the closing, other than the 1,000,000 shares which were held in escrow, all
        of
        which had been returned to the Company and cancelled as of June 30, 2008.
 
 Talent
        owns 100% of the stock of Yongle, which is a wholly foreign-owned enterprise
        under the laws of the PRC. Yongle is a party to a series of contractual
        arrangements with Xinghe Xingyong Carbon Co., Ltd. (“Xingyong”), a corporation
        organized under the laws of the PRC, and its sole stockholder. 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:
 
 8
 
 China
                  Carbon Graphite Group, Inc.
 ß (100%
        Equity ownership)
 Talent
                  International Investment Limited
 ß (100%
        Equity ownership)
 Xinghe
                  Yongle Carbon Co., Ltd.
 ß (Contractual
        arrangements)
 Xinghe
                  Xingyong Carbon Co., Ltd.
 
 
 The
        Company manufactures graphite electrodes, fine grain graphite, high purity
        graphite and other carbon derived products.
 
 **Share
        Distribution**
 
 On
        January 22, 2008, the Company affected 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
        consolidated financial statements which reflect all adjustments, consisting
        of
        normal recurring adjustments, considered necessary in its opinion for a fair
        statement of its consolidated financial position and the results of its
        operations for the interim period presented. These consolidated financial
        statements should be read in conjunction with the summary of significant
        accounting policies and notes to consolidated financial statements included
        in
        the Company’s Form 10-KSB annual report for the year ended December 31, 2007.
 
 The
        accompanying unaudited consolidated financial statements for China Carbon
        Graphite Group, Inc., its subsidiaries and variable interest entities, have
        been
        prepared in accordance with accounting principles generally accepted in the
        United States of America for interim financial information and with the
        instructions to Form 10-Q and Article 8-03 of Regulation S-X. Operating results
        for interim periods are not necessarily indicative of results that may be
        expected for the fiscal year as a whole.
 
 The
        Company maintains its books and accounting records in Renminbi (“RMB”), and its
        reporting currency is United States dollars.
 
 The
        financial statements have been prepared in order to present the financial
        position and results of operations of the Company, its subsidiaries and
        Xingyong, which is an affiliated company whose financial condition is
        consolidated with the Company pursuant to FIN 46R, in accordance with accounting
        principles generally accepted in the United States of America (“US
        GAAP”).
 
 Under
        generally accepted accounting principles, the acquisition by the Company
        of
        Talent is considered to be a capital transaction in substance, rather than
        a
        business combination. That is, the acquisition is equivalent, in the acquisition
        by Talent of the Company, then known as Achievers Magazine, Inc., with the
        issuance of stock by Talent for the net monetary assets of the Company. This
        transaction is accompanied by a recapitalization, and is accounted for as
        a
        change in capital structure. Accordingly, the accounting for the acquisition
        is
        identical to that resulting from a reverse acquisition, except that no goodwill
        is recorded. Under reverse takeover accounting, the comparative historical
        financial statements of the Company, as the legal acquirer, are those of
        the
        accounting acquirer, Talent. Since Talent and Yongle did not have any business
        activities, the Company’s financial statements prior to the closing on the
        reverse acquisition, reflect the only business of Xingyong. The accompanying
        financial statements reflect the recapitalization of the stockholders’ equity as
        if the transactions occurred as of the beginning of the first period presented.
        Thus, the 9,388,172 shares of common stock issued to Sincere and the 2,803,040
        shares purchased by other investors are deemed to be outstanding for all
        period
        covered by these financial statements.
 
 9
 The
        Company’s consolidated financial statements include the financial statements of
        its wholly owned subsidiaries, Talent and Yongle, as well as Xingyong, which
        is
        a variable interest entity whose financial statements are consolidated with
        those of the Company pursuant to FASB Interpretation No. 46R “Consolidation of
        Variable Interest Entities” (“FIN 46R”), an Interpretation of Accounting
        Research Bulletin No. 51. All significant intercompany accounts and transactions
        have been eliminated in the combination.
 
 FIN
        46R
        requires a variable interest entity to be consolidated by a company if that
        company is subject to a majority of the risk of loss for the variable interest
        entity or is entitled to receive a majority of the variable interest entity’s
        residual returns. Variable interest entities are those entities in which
        the
        Company, through contractual arrangements, bears the risks of, and enjoys
        the
        rewards normally associated with ownership of the entities, and therefore
        the
        Company is the primary beneficiary of these entities.
 
 Yongle
        is
        a party to a series of contractual arrangements with Xingyong. These agreements
        include a management agreement pursuant to which all net income after deduction
        of necessary expenses, if any, generated by Xingyong is paid to Yongle and
        Yongle is responsible for paying Xingyong’s obligations incurred in connection
        with its business. In addition, Yongle manages and controls all of the funds
        of
        Xingyong. Yongle also has the right to purchase Xingyong’s equipment and patents
        and lease its manufacturing plants, land and remaining equipment. This agreement
        is designed so that Yongle can conduct its business in China. Pursuant to
        two
        other agreements, the sole stockholder of Xingyong, who is also the Company’s
        chief executive officer, has pledged all of his equity in Xingyong as security
        for performance of Xingyong’s obligations to Yongle. As a result, Xingyong is
        considered a variable interest entity.
 
 **3.**
              **Summary
                  of Significant Accounting
                  Policies**
 
 **Use
        of estimates** - The
        preparation of these financial statements in conformity with accounting
        principles generally accepted in the United States of America requires
        management to make estimates and assumptions that affected the reported amounts
        of assets and liabilities and disclosure of contingent assets and liabilities
        at
        the dates of the financial statements and the reported amounts of net sales
        and
        expenses during the reported periods.
 
 Significant
        estimates included values and lives assigned to acquired property, equipment
        and
        intangible assets, reserves for customer returns and allowances, uncollectible
        accounts receivable, slow moving, obsolete and/or damaged inventory and stock
        warrant valuation. Actual results may differ from these estimates.
 
 **Cash
        and cash equivalents -** The
        Company considers all highly liquid debt instruments purchased with maturity
        period of three months or less to be cash equivalents. The carrying amounts
        reported in the accompanying balance sheet for cash and cash equivalents
        approximate their fair value. Substantially all of the Company’s cash is held in
        bank accounts in The People’s Republic of China and is not protected by FDIC
        insurance or any other similar insurance.
 
 **Inventory
        -** Inventory
        is stated at the lower of cost or market. Cost is determined using the weighted
        average method. Market value represents the estimated selling price in the
        ordinary course of business less the estimated costs necessary to complete
        the
        sale.
 
 The
        cost
        of inventories comprises all costs of purchases, costs of conversion and
        other
        costs incurred in bringing the inventories to their present location and
        condition. The costs of conversion of inventories include fixed and variable
        production overhead, taking into account the stage of completion.
 
 **Accounts
        receivable -** The
        Company uses the allowance method to account for uncollectible accounts
        receivable. As of June 30, 2008 all accounts receivable, advances to suppliers
        and other receivables were considered collectible and there was no allowance
        for
        bad debts required.
  **Property
        and equipment** -
        Property and equipment is stated at the historical cost, less accumulated
        depreciation. Land use rights are being amortized to expense on a straight
        line
        basis over the life of the rights. Depreciation on property, plant and equipment
        is provided using the straight-line method over the estimated useful lives
        of
        the assets for both financial and income tax reporting purposes as
        follows:
 
 Buildings
              
              
              25
                  - 40 yearsMachinery
                  and equipment
              
              
              10
                  - 20 yearsMotor
                  vehicles
              
              
              5
                  years
  10
  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
        Operations.
 
 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, 2008 and 2007.
 
 **Land
        Use Rights** -
        There
        is no private ownership of land in the PRC. The Company has acquired land
        use
        rights to a total of 2,356,209 square feet, on which a 290,626 square feet
        facility is located. The land use right has a term of 50 years, commencing
        in
        the year 2002. The cost of the land use rights is amortized over the 50-year
        term of the land use right. The Company evaluates the carrying value of
        intangible assets during the fourth quarter of each year and between annual
        evaluations if events occur or circumstances change that would more likely
        than
        not reduce the fair value of the intangible asset below its carrying amount.
        There were no impairments recorded during the six months ended June 30, 2008
        or
        2007.
 
 **Income
        recognition** -
        Revenue
        is recognized in accordance with Staff Accounting Bulletin No. 104, Revenue
        Recognition, which states that revenue should be recognized when the following
        criteria are met: (1) persuasive evidence of an arrangement exists; (2) the
        service has been rendered; (3) the selling price is fixed or determinable;
        and
        (4) collection of the resulting receivable is reasonably assured. The Company
        believes that these criteria are satisfied when the goods are shipped pursuant
        to a purchase order.
 
 Interest
        income is recognized when earned, taking into account the average principal
        amounts outstanding and the interest rates applicable
 
 **Taxation
        -** Taxation
        on profits earned in the PRC has been calculated on the estimated assessable
        profits for the year at the rates of taxation prevailing in the PRC where
        the
        Company operates after taking into effect the benefits from any special tax
        credits or “tax holidays” allowed in the county of operations.
 
 The
        Company does not accrue United States income tax since it has no significant
        operating income in the United States. Its operating subsidiaries are organized
        and located in the PRC and do not conduct any business in the United States.
 
 In
        2006,
        the Financial Accounting Standards Board (FASB) issued FIN 48, which clarifies
        the application of SFAS 109 by defining a criterion that an individual income
        tax position must meet for any part of the benefit of that position to be
        recognized in an enterprise’s financial statements and provides guidance on
        measurement, recognition, classification, accounting for interest and penalties,
        accounting in interim periods, disclosure and transition. In accordance with
        the
        transition provisions, the Company adopted FIN 48 effective January 1,
        2007.
 
 The
        Company recognizes that virtually all tax positions in the PRC are not free
        of
        some degree of uncertainty due to tax law and policy changes by the state.
        However, the Company cannot reasonably quantify political risk factors and
        thus
        must depend on guidance issued by current government officials.
 
 Based
        on
        all known facts and circumstances and current tax law, the Company believes
        that
        the total amount of unrecognized tax benefits as of June 30, 2008 is not
        material to its results of operations, financial condition or cash flows.
        The
        Company also believes that the total amount of unrecognized tax benefits
        as of
        June 30, 2008, if recognized, would not have a material effect on its effective
        tax rate. The Company further believes that there are no tax positions for
        which
        it is reasonably possible, based on current Chinese tax law and policy, that
        the
        unrecognized tax benefits will significantly increase or decrease over the
        next
        12 months producing, individually or in the aggregate, a material effect
        on the
        Company’s results of operations, financial condition or cash flows.
 
 11
 **Enterprise
        income tax**
 
 Under
        the
        Provisional Regulations of The People’s Republic of China Concerning Income Tax
        on Enterprises promulgated by the PRC, income tax is payable by enterprises
        at a
        rate of 33% of their taxable income. Preferential tax treatment may, however,
        be
        granted pursuant to any law or regulations from time to time promulgated
        by the
        State Council.
 
 The
        Company has been granted a tax holiday from 100% of the Enterprises Income
        Tax
        from the Xing He District Local Tax Authority in the Nei Mongol province
        for the
        five years 2003 through 2007.
 
 On
        March
        16, 2007, the PRC’s parliament, the National People’s Congress, adopted the
        Enterprise Income Tax Law, which took effect on January 1, 2008. The new
        income
        tax law sets unified income tax rate for domestic and foreign companies at
        25%
        except a 15% corporation income tax rate for qualified high and new technology
        enterprises. In accordance with this new income tax law, low preferential
        tax
        rate in accordance with both the tax laws and administrative regulations
        prior
        to the promulgation of this Law shall gradually transit to the new tax rate
        within five years after the implementation of this law.
 
 The
        Company has been recognized as a high technology and science company by the
        Ministry of Science and Technology of the People’s Republic of China. Therefore,
        Xing He District Local Tax Authority in the Nei Mongol province granted tax
        holiday from 100% of Enterprises Income Tax for additional three years 2008
        through 2010. Afterwards, based on the present tax law, the Company will
        be
        subject to a corporation income tax rate of 15% effective in 2011.
 
 The
        enterprise income tax is calculated on the basis of the statutory profit
        for
        financial reporting purposes, adjusted for income and expense items that
        are not
        assessable or deductible for income tax purposes.
 
 Deferred
        tax assets and liabilities are recognized for the future tax consequences
        attributable to differences between the financial statement carrying amounts
        of
        existing assets and liabilities and their respective tax basis. Deferred
        tax
        assets, including tax loss and credit carry forwards, and liabilities are
        measured using enacted tax rates expected to apply to taxable income in the
        years in which those temporary differences are expected to be recovered or
        settled. The effect of deferred tax assets and liabilities of a change in
        tax
        rates is recognized in income in the period that includes the enactment date.
        Deferred income tax expense represents the change during the period in the
        deferred tax assets and deferred tax liabilities. The components of the deferred
        tax assets and liabilities are individually classified as current and
        non-current based on their characteristics. Deferred tax assets are reduced
        by a
        valuation allowance when, in the opinion of management, it is more likely
        than
        not that some portion or all of the deferred tax assets will not be
        realized.
 
 **Value
        added tax**
 
 The
        Provisional Regulations of The People’s Republic of China Concerning Value Added
        Tax promulgated by the State Council came into effect on January 1, 1994.
        Under
        these regulations and the Implementing Rules of the Provisional Regulations
        of
        the PRC Concerning Value Added Tax, value added tax (“VAT”) is imposed on goods
        sold in or imported into the PRC and on processing, repair and replacement
        services provided within the PRC.
  VAT
        payable in The People’s Republic of China is charged on an aggregated basis at a
        rate of 13% or 17% (depending on the type of goods involved) on the full
        price
        collected for the goods sold or, in the case of taxable services provided,
        at a
        rate of 17% on the charges for the taxable services provided, but excluding,
        in
        respect of both goods and services, any amount paid in respect of VAT included
        in the price or charges, and less any deductible value added tax already
        paid by
        the taxpayer on purchases of goods and services in the same financial
        year.
 
 The
        Company has been granted an exemption from VAT by the Xing He County People’s
        Government and Xing He Tax Authority on some products in which an exchange
        agreement is in place for raw materials and fuel.
 
 **Contingent
        liabilities and contingent assets -** A
        contingent liability is a possible obligation that arises from past events
        and
        whose existence will only be confirmed by the occurrence or non-occurrence
        of
        one or more uncertain future events not wholly within the control of the
        Company. It can also be a present obligation arising from past events that
        is
        not recognized because it is not probable that the Company will incur a
        liability or obligations as a result. A contingent liability, which might
        occur
        but is not probable, is not recorded but is disclosed in the notes to the
        financial statements. The Company will recognize a liability or obligation
        when
        it is probable that the Company will incur it.
 
 12
 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.
 
 **Related
        companies -** A
        related
        company is a company in which a director or an officer has beneficial interests
        in and in which the Company has significant influence.
 
 **Retirement
        benefit costs** -
        According to PRC regulations on pensions, the Company contributes to a defined
        contribution retirement program organized by the municipal government in
        the
        province in which the Company was registered and all qualified employees
        are
        eligible to participate in the program. Contributions to the program are
        calculated at 23.5% of the employees’ salaries above a fixed threshold amount
        and the employees contribute 2% to 8% while the Company contributes the balance
        contribution of 15.5% to 21.5%. The Company has no other material obligation
        for
        the payment of retirement benefits beyond the annual contributions under
        this
        program.
  **Fair
        value of financial instruments**
  In
        September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS
        157”). SFAS No. 157 defines fair value, establishes a framework for measuring
        fair value in accordance with generally accepted accounting principles, and
        expands disclosures about fair value measurements. This statement does not
        require any new fair value measurements; rather, it applies under other
        accounting pronouncements that require or permit fair value measurements.
        The
        provisions of this statement are to be applied prospectively as of the beginning
        of the fiscal year in which this statement is initially applied, with any
        transition adjustment recognized as a cumulative-effect adjustment to the
        opening balance of retained earnings. The provisions of SFAS 157 are effective
        for the fiscal years beginning after November 15, 2007.
 
 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, 2008 and December
        31, 2007 because of the relatively short-term maturity of these
        instruments.
 
 **Foreign
        currency translation**
 
 The
        reporting currency of the Company is the U.S. dollar. The functional currency
        of
        the Company is the local currency, the Chinese Renminbi (“RMB”). Results of
        operations and cash flows are translated at average exchange rates during
        the
        period, assets and liabilities are translated at the unified exchange rate
        at
        the end of the period, and equity is translated at historical exchange rates.
        Translation adjustments resulting from the process of translating the local
        currency financial statements into U.S. dollars are included in determining
        comprehensive income. Translation adjustments for the six months ended June
        30,
        2008 and the year ended December 31, 2007 are $1,979,890 and $1,794,923,
        respectively. The cumulative translation adjustment and effect of exchange
        rate
        changes on cash for the six months ended June 30, 2008 and 2007 was $83,919
        and
        $27,551, respectively. Transaction gains and losses that arise from exchange
        rate fluctuations on transactions denominated in a currency other than the
        functional currency are included in the results of operations as incurred.
 
 Asset
        and
        liability accounts at June 30, 2008 and December 31, 2007 were translated
        at
        6.8718 RMB to $1.00 USD and at 7.3141 RMB to $1.00 USD, respectively. Equity
        accounts were stated at their historical rate. The average translation rates
        applied to income statements for the six months ended June 30, 2008 and 2007
        were 7.0726 RMB and 7.72999 RMB to $1.00 USD, respectively. In accordance
        with
        Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows,"
        cash flows from the Company's operations are calculated based upon the local
        currencies using the average translation rate. As a result, amounts related
        to
        assets and liabilities reported on the statement of cash flows will not
        necessarily agree with changes in the corresponding balances on the balance
        sheet.
 
 **Income
        per share**
 
 13
 Basic
        income per share is computed by dividing net income by the weighted average
        number of shares of common stock outstanding during the period. Diluted income
        per share is computed by dividing net income by the weighted average number
        of
        shares of common stock, common stock equivalents and potentially dilutive
        securities outstanding during each period. Potentially dilutive shares of
        common
        stock consist of the common stock issuable upon the conversion of convertible
        debt, preferred stock and warrants (using the if-converted method). The
        following table presents a reconciliation of basic and diluted earnings per
        share
  
 For
                  the six months ended June 30,2008
              
              2007Net
                  income available to common shareholders for basic and diluted earnings
                  per
                  share
              
              $
              1,947,635
              
              $
              1,914,140Weighted
                  average shares outstanding - basic
              
              
              13,040,061
              
              
              10,388,172Weighted
                  average shares outstanding - diluted
              
              
              19,444,924
              
              
              10,388,172Earnings
                  per share - basic
              
              
              0.15
              
              
              0.18Earnings
                  per share - diluted
              
              $
              0.10
              
              $
              0.18
  **Accumulated
        other comprehensive income**
 
 The
        Company follows Statement of Financial Accounting Standards No. 130 (SFAS
        130) " *Reporting
        Comprehensive Income* "
        to
        recognize the elements of comprehensive income. Comprehensive income is
        comprised of net income and all changes to the statements of stockholders'
        equity, except those due to investments by stockholders, changes in paid-in
        capital and distributions to stockholders. For the Company, comprehensive
        income
        for the six months ended June 30, 2008 and 2007 included net income and foreign
        currency translation adjustments,
 
 **Related
        parties**
 
 Parties
        are considered to be related to the Company if the parties that, directly
        or
        indirectly, through one or more intermediaries, control, are controlled by,
        or
        are under common control with the Company. Related parties also include
        principal owners of the Company, its management, members of the immediate
        families of principal owners of the Company and its management and other
        parties
        with which the Company may deal if one party controls or can significantly
        influence the management or operating policies of the other to an extent
        that
        one of the transacting parties might be prevented from fully pursuing its
        own
        separate interests.
 
 **4.**
              **Concentrations
                  of Business and Credit
                  Risk**
 
 Substantially
        all of the Company’s bank accounts are in banks located in the PRC and are not
        covered by any type of protection similar to that provided by the FDIC on
        funds
        held in U.S. banks.
  The
        Company is operating in the PRC, which may give rise to significant foreign
        currency risks from fluctuations and the degree of volatility of foreign
        exchange rates between U.S. dollars and the Chinese RMB.
 
 Financial
        instruments that potentially subject the Company to concentration of credit
        risk
        consist principally of cash, trade accounts receivables and inventories,
        the
        balances of which are stated on the balance sheet. The Company places its
        cash
        in banks located in China. Concentration of credit risk with respect to trade
        accounts receivables is limited due to the Company's large number of diverse
        customers in different locations in China. The Company does not require
        collateral or other security to support financial instruments subject to
        credit
        risk.
 
 For
        the
        periods ended June 30, 2008 and 2007 no single customer accounted for 10%
        or
        more of sales revenues.
 
 As
        of
        June 30, 2008 and 2007, the Company had insurance expense of $5,717 and $0
        respectively. Accrual for losses is not recognized until such time a loss
        has
        occurred.
 
 14
 **5.**
              **Income
                  Taxes**
 
 Under
        the
        Provisional Regulations of The People’s Republic of China Concerning Income Tax
        on Enterprises promulgated by the PRC, income tax is payable by enterprises
        at a
        rate of 33% of their taxable income. Preferential tax treatment may, however,
        be
        granted pursuant to any law or regulations from time to time promulgated
        by the
        State Council.
 
 The
        Company has been granted a 100% tax holiday from Enterprises Income Tax Policy
        from the Xing He District Local Tax Authority for the eight years 2003 through
        2010. This tax holiday could be challenged by higher taxing authorities in
        the
        PRC, which could result in taxes and penalties owed for those years. For
        the
        periods ended June 30, 2008 and 2007, the enterprise income tax at the statutory
        rates would have been approximately $924,639 and $ 631,674,
        respectively.
  A
        reconciliation of the provision for income taxes with amounts determined
        by the
        PRC statutory income tax rate to income before income taxes is as
        follows:
 2008
              
              2007Computed
                  tax at the PRC statutory rate of 33%
              
              $
              924,639
              
              $
              631,674Benefit
                  of tax holiday
              
              
              (924,639
              )
              
              (631,674
              )Income
                  tax expenses per books
              
              $
              -
              
              $
              -
 
 **6.**
              **Inventories**
 
 As
        of
        June 30, 2008 and December 31, 2007, inventory consisted of the
        following:
 
 2008
              
              2007Raw
                  materials
              
              $
              1,796,890
              
              $
              1,198,174Work
                  in process
              
              
              13,032,162
              
              
              10,119,774Finished
                  goods
              
              
              2,819,719
              
              
              3,270,125Repair
                  Parts
              
              
              42,399
              
              
              38,854$
              17,691,170
              
              $
              14,626,927
 
 **7.**
              **Property
                  and Equipment; Land Use Rights**
 
 As
        of
        June 30, 2008 and December 31, 2007, property and equipment consist of the
        following:
 
 2008
              
              2007Building
              
              $
              6,727,231
              
              $
              6,320,420Machinery
                  and equipment
              
              
              19,454,553
              
              
              18,234,302Motor
                  vehicles
              
              
              40,746
              
              
              38,28226,222,530
              
              
              24,593,004Less:
                  Accumulated depreciation
              
              
              5,893,196
              
              
              4,971,393$
              20,329,334
              
              $
              19,621,611
 
 For
        the
        six months ended June 30, 2008 and 2007, depreciation expense was $601,822
        and
        $335,898.
 
 As
        of
        June 30, 2008 and December 31, 2007, land use rights consist of the
        following:
  15
  2008
              
              2007Land
                  Use Right
              
              $
              3,705,034
              
              $
              2,971,009Less:
                  Accumulated amortization
              
              
              168,986
              
              
              129,055$
              3,536,048
              
              $
              2,841,954
  For
        the
        six months ended June 30, 2008 and 2007, amortization expenses were $30,727
        and
        $1,444 respectively.
 
 **8.
        Stockholders’ equity**
 
 (a)
              Restated
                  Certificate of Incorporation
 
 On
        January 22, 2008, the Company changed its authorized capital stock to
        120,000,000 shares of capital stock, of which 20,000,000 shares are shares
        of
        preferred stock, par value $0.001 per share, and 100,000,000 shares are shares
        of common stock, par value $0.001 per share. The restated certificate of
        incorporation included a statement of designations of the rights, preferences,
        privileges and limitation of the holders of the series A preferred stock.
        The
        terms of the statement of designations is set forth under “Conversion of
        Convertible Notes.”
 
 (b)
              Conversion
                  of Convertible Notes.
 
 On
        January 22, 2008, upon the filing of a restated certificate of incorporation
        and
        a statement of designation for a newly created series of preferred stock
        designated as the series A convertible preferred stock, outstanding convertible
        notes in the principal amount of $1,200,000 were automatically converted
        into
        1,200,499 shares of series A convertible preferred stock and warrants to
        purchase 3,000,000 shares of common stock at $1.20 per share and 3,000,000
        shares of common stock at $2.00 per share. The statement of designation for
        the
        series A preferred stock provides the following:
  ·
              Each
                  share of series A preferred stock is convertible into one share
                  of common
                  stock, at a conversion price of $1.00, subject to
                  adjustment.
  ·
              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 then 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
  16
 
 (c)
              Warrants
 
 The
        warrants have terms of five years, and expire December 3, 2012. The warrants
        provide a cashless exercise feature; however, the holders of the warrants
        may
        not make a cashless exercise prior to December 17, 2008 and thereafter the
        holders may make a cashless exercise only if the underlying shares are not
        covered by an effective registration statement.
  (d)
              Securities
                  Purchase Agreement
 
 Pursuant
        to the securities purchase agreement relating to the issuance of the 3%
        convertible notes, in addition to the foregoing:
  ·
              On
                  January 22, 2008, we restates our articles of incorporation to
                  change our
                  corporate name to China Carbon Graphite Group, Inc., change our
                  authorized
                  capital stock to 120,000,000 shares of capital stock, of which
                  20,000,000
                  shares are shares of preferred stock, par value $.001 per share,
                  and
                  100,000,000 shares are shares of common stock, par value $.001
                  per share.
                  The restated articles included a statement of designations of the
                  rights,
                  preferences, privileges and limitations of the holders of the series
                  A
                  preferred stock.
  ·
              The
                  Company agreed that, within 90 days after the closing on December
                  17,
                  2007, it would have appointed such number of independent directors
                  that
                  would result in a majority of the directors being independent directors
                  and the Company would have an audit committee composed solely of
                  at least
                  three independent directors and a compensation committee would
                  have a
                  majority of independent directors. The Company is required to pay
                  liquidated damages (i) if the Company fails to have a majority
                  of
                  independent directors 90 days after the closing or (ii) thereafter,
                  if the
                  Company subsequently fails to meet these requirements for a period
                  of 60
                  days for an excused reason, as defined in the purchase agreement,
                  or 75
                  days for a reason which is not an excused reason. Liquidated damages
                  are
                  payable in cash or additional shares of series A preferred stock,
                  with the
                  series A preferred stock being valued at the market price of the
                  shares of
                  common stock issuable upon conversion of the series A preferred
                  stock. The
                  liquidated damages are computed in an amount equal to 12% per annum
                  of the
                  purchase price, with a maximum of $144,000. Liquidated damages
                  through
                  June 30, 2008 have been waived.
  ·
              The
                  Company and XingGuang entered into a registration rights agreement
                  pursuant to which the Company is required to have a registration
                  statement
                  filed with the SEC by March 16, 2008 (subsequently extended to
                  September
                  16, 2008)
                  and declared effective by the SEC not later than August 13, 2008
                  (subsequently extended to December 16, 2008). We are required to
                  pay
                  liquidated damages at the rate of 200 shares of series A preferred
                  stock
                  for each day after August 13, 2008 (subsequently extended to December
                  16,
                  2008) that the registration statement is not declared effective
                  or for any
                  period that we fail to keep the registration statement effective,
                  up to a
                  maximum of 100,000 shares. The number of shares of series A preferred
                  stock issuable pursuant to the liquidated damages provision is
                  subject to
                  reduction based on the maximum number of shares that can be registered
                  under the applicable SEC
                  guidelines.
  ·
              XingGuang
                  has a right of refusal on future
                  financings.
 
 (e)
              Cancellation
                  of common stock
 
 In
        connection with the acquisition of Talent, the Company entered buy-back
        agreement, see Note 1 (a). The Company agreed to pay a purchase price of
        $700,000 for the shares, payable in installments of $350,000 on each of March
        31, 2008 and June 30, 2008. The Company placed 1,000,000 of the shares of
        common
        stock in escrow, and the shares are subject to release from escrow. The payments
        were made in the six months ended June 30, 2008, and the 1,000,000 shares
        were
        returned to the Company and cancelled.
 (f)
              Deemed
                  Preferred Stock Dividend
  Upon
        filing of the Company’s amended and restated articles of incorporation on
        January 22, 2008, $1,200,000 of convertible notes were automatically converted
        to 1,200,499 shares of preferred stock convertible into 1,200,499 shares
        of
        common stock at a conversion price of $1.00 per share and included detachable
        warrants to purchase 3,000,000 shares of the common stock at $1.20 and 3,000,000
        shares at $2.00 per share. At December 17, 2007, the fair value of the warrants
        used to calculate the intrinsic value of the conversion option was estimated
        at
        $3,831,900 and was computed using the Black-Scholes option-pricing model
        based
        on the assumed issuance of the warrants on the date the notes were issued.
        Variables used in the option-pricing model include (1) risk-free interest
        rate at the date of grant (3.5%), (2) expected warrant life of
        5 years, (3) expected volatility of 100%, and (4) 0% expected
        dividend.   The Company used the market price of its common stock at
        December 17, 2007, $0.95 per share, and computed the effective preferred
        stock
        conversion price to be $0.24 per share.   The resulting intrinsic
        value of the conversion feature was $854,300 reported as a dividend.
  17
 As
        the
        series A preferred stock does not provide for redemption by the Company or
        have
        a finite life, upon the conversion to preferred stock, a one-time preferred
        stock deemed dividend of $854,300 was recognized immediately as a non-cash
        charge during the three months ended March 31, 2008. The deemed preferred
        stock
        dividend of $854,300 has been recorded as additional paid-in capital and
        a
        reduction to retained earnings.
  **9.
        Notes Payable**
 
 As
        of
        June 30, 2008 and December 31, 2007, notes payable consist of the
        following:
  2008
              
              2007Bank
                  loans dated June 12, 2007, due June 10, 2008 with an interest rate
                  of
                  8.541% was extended to July 17, 2008 with an interest rate of 9.711%,
                  interest payable monthly, secured by property and equipment and
                  land use
                  rights
              
              $
              5,675,369
              
              $
              -Bank
                  loans dated June 12, 2007, due June 10, 2008 with an interest rate
                  of
                  8.541%, interest payable monthly, secured by property and equipment
                  and
                  land use rights
              
              
              
              
              
              5,332,167Other
                  loan dated June 22, 2007, due June 20, 2008 with an interest rate
                  of
                  7.227%, interest payable quarterly, secured by equipment and land
                  use
                  rights
              
              $
              
              
              
              683,611Notes
                  payable to former principal shareholders pursuant to buy-back agreements
                  in relation to the reverse acquisition, see Note 1.
              
              
              
              
              
              700,000$
              5,675,369
              
              $
              6,715,778
 
 
 **10.
        Loans from Shareholder**
 
 On
        June
        30, 2008 and December 31, 2007, the Company had loans from a shareholder
        amounting to $4,893,296 and $4,543,648, respectively. The advances do not
        bear
        interest and are due on demand.
 
 **11.
        Subsequent Event**
 
 On
        June
        30, 2008, the Company had a bank loan of $5,675,369 dated June 12, 2007,
        due
        June 10, 2008 with an interest rate of 8.541%. The bank loan was extended
        to
        July 17, 2008 with an interest rate of 9.711%, interest payable monthly,
        secured
        by property and equipment and land use rights. See Note 9.
  On
        July
        17, 2008, the Company paid $800,373 of the notes payable mentioned above
        and
        renewed the remaining balance of $4,874,996 with due dates as
        follows:
  18
 
 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
              
              $
              727,612Bank
                  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
              
              
              1,164,178Bank
                  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
              
              
              1,164,178Bank
                  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
              
              
              1,164,178Bank
                  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
              
              
              654,850$
              4,874,996
  19
  **Item
        2. Management’s Discussion and Analysis of Financial Condition and Results of
        Operations**
 
 **Forward
        Looking Statements**
 
 The
        following discussion of the results of our operations and financial condition
        should be read in conjunction with our financial statements and the related
        notes, which appear elsewhere. Statements contained in this Form 10-Q include
        forward-looking statements that are subject to risks and uncertainties. In
        particular, statements in this Form 10-Q that state our intentions, beliefs,
        expectations, strategies, predictions or any other statements relating to
        our
        future activities or other future events or conditions are “forward-looking
        statements.” Forward-looking statements are subject to risks, uncertainties and
        other factors, including, but not limited to, those identified under “Risk
        Factors,” in our Form 10-KSB for the year ended December 31, 2007 and those
        described in “Management's Discussion and Analysis of Financial Conditions and
        Results of Operations” in the Form 10-KSB and this Form 10-Q, and those
        described in any other filings by us with the Securities and Exchange
        Commission, as well as general economic conditions and economic conditions
        affecting the electronics and consumer electronics industry, any one or more
        of
        which could cause actual results to differ materially from those stated in
        such
        statements. In addition, such statements could be affected by risks and
        uncertainties related to the ability to conduct business in China, product
        demand, our ability to develop products using the most current technology,
        our
        ability to raise any financing which we may require for our operations,
        competition, government regulations and requirements, pricing and development
        difficulties, as well as general industry and market conditions and growth
        rates, and general economic conditions. Any forward-looking statements speak
        only as of the date on which they are made, and we do not undertake any
        obligation to update any forward-looking statement to reflect events or
        circumstances after the date of this Form 10-Q.
 
 **Overview**
 
 Reference
        in this Form 10-Q to “we,” “us,” “our” and words of like import refer to the
        Company, its subsidiaries and its variable interest entity, Xinghe Xingyong
        Carbon Co., Ltd. (“Xingyong”). For periods prior to December 17, 2007, these
        terms refer to Xingyong.
 
 Prior
        to
        December 17, 2007, we were a pubic reporting blind pool company. On December
        17,
        2007, we executed and completed the transactions contemplated by the agreement
        with Sincere Investment (PTC) Ltd. whereby Talent International Investment
        Limited (“Talent”), a British Virgin Islands corporation, became our
        wholly-owned subsidiary. Talent is the sole stockholder of Xinghe Yongle
        Carbon
        Co., Ltd. (“Yongle”), a company organized under the laws of the PRC. Yongle is a
        party to a series of contractual arrangements with Xingyong, as described
        below.
  Xingyong
        was organized under the laws of the PRC in 2002. Xingyong’s business was
        formerly operated as a state-owned enterprise. The business was reorganized
        under the laws of the PRC as a limited liability company named Xinghe Xingye
        Carbon Co., Ltd. In December 2001, Mr. Dengyong Jin organized Xingyong to
        acquire the business of Xinghe Xingye Carbon Co., Ltd. by paying RMB 55,600,000
        (approximately US$7,900,000). Mr. Jin funded RMB 33,750,000 (approximately
        US$4,800,000) and the company obtained bank loans in the amount of RMB
        21,950,000 (approximately US$3,100,000).
  From
        December 2001 until the reverse acquisition on December 17, 2007, our business
        was conducted by Xingyong, and this discussion relates to the business,
        financial condition and results of operations of Xingyong for all periods
        prior
        to December 17, 2007, and thereafter reflect the financial condition of the
        Company, its subsidiaries and Xingyong, which is a variable interest entity
        whose financial statements are consolidated with ours pursuant to FIN 46.
        We
        develop, manufacture and market graphite products. Our main products include
        graphite electrode, fine grain graphite and high purity graphite. We produce
        all
        of our products in China. Our products are generally used either as a component
        in other products, as an element of a facility or in the manufacturing process
        of other products. We sell our products to distributors who sell to producers
        in
        both the domestic Chinese market and the international market. We also sell
        graphite electrodes directly to domestic end users.
  Although
        our products are sold in the international market, substantially all of our
        sales are to Chinese firms that may, in turn, sell the products in the
        international market. We believe that our products are not subject to export
        restrictions.
  In
        accordance with the relevant Chinese rules and regulations on management
        of
        foreign exchange, the foreign currency generated from sales of our products
        outside of China is brought into China and sold to designated banks instead
        of
        depositing it in banks out of the PRC without authorization. In addition,
        we
        have to buy foreign currency from designated banks upon the strength of
        commercial bills when paying current expenditures with foreign currency.
        All of
        our transactions undertaken in the PRC are denominated in RMB, which must
        be
        converted into other currencies before remittance out of China. Both the
        conversion of RMB into foreign currencies and the remittance of foreign
        currencies abroad require the approval of the Chinese government.
  20
 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. 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.
  The
        transaction whereby we acquired Talent is accounted for as a reverse
        acquisition. The exchange of our stock for the stock of Talent is considered
        to
        be capital transactions in substance, rather than a business combination.
        That
        is, the acquisition is equivalent to the acquisition by Talent of us, with
        the
        issuance of stock by Talent for the net monetary assets of Achievers. This
        transaction is accompanied by a recapitalization, and is accounted for as
        a
        change in capital structure. Accordingly, the accounting for the acquisition
        is
        identical to that resulting from a reverse acquisition. Under reverse takeover
        accounting, our historical financial statements are those of Talent, which
        is
        treated as the acquiring party for accounting purposes. Since Talent and
        Yongle
        were not engaged in any business activities, our financial statements for
        periods prior to the closing of the reverse acquisition reflect only business
        of
        Xingyong. The financial statements reflect the recapitalization of the
        stockholders’ equity as if the transactions occurred as of the beginning of the
        first period presented.
 
 Prior
        to
        December 17, 2007, we did not have the expenses of a public company. As a
        result, since December 17, 2007 we have incurred, and we are continuing to
        incur, significantly greater legal, accounting and other professional expenses
        relating to our status as a public company and compliance with SEC rules,
        including the development and implementation of internal controls.
  For
        the
        five years from 2003 through 2007, we received a 100% tax holiday from the
        regional government for enterprise income tax. As a result, we paid no
        enterprise income tax for those years. In 2008, Xing He District Local Tax
        Authority in the Nei Monggol province granted tax holiday from 100% of
        Enterprises Income Tax for additional three years - from 2008 through 2010.
        Following expiration of that period, based on the present tax law, we will
        be
        subject to a corporation income tax rate of 15% effective in 2011 .
  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.
 
 **Critical
        Accounting Policies and Estimates**
 
 *Use
        of Estimates*
 
 The
        discussion and analysis of our financial condition and results of operations
        is
        based upon our financial statements that have been prepared in accordance
        with
        accounting principles generally accepted in the United States of America.
        The
        preparation of these financial statements requires us to make estimates and
        judgments that affect the reported amounts of assets and liabilities. On
        an
        on-going basis, we evaluate our estimates including the allowance for doubtful
        accounts, the salability and recoverability of our products, income taxes
        and
        contingencies. We base our estimates on historical experience and on other
        assumptions that we believe to be reasonable under the circumstances, the
        results of which form our basis for making judgments about the carrying values
        of assets and liabilities that are not readily apparent from other sources.
        Actual results may differ from these estimates under different assumptions
        or
        conditions.
  *Variable
        Interest Entity*
 
 Pursuant
        to Financial Accounting Standards Board Interpretation No. 46 (Revised),
        “Consolidation of Variable Interest Entities - an Interpretation of ARB No.
        51”
(“FIN 46R”) we are required to include in our consolidated financial statements
        the financial statements of variable interest entities. FIN 46R requires
        a
        variable interest entity to be consolidated by a company if that company
        is
        subject to a majority of the risk of loss for the variable interest entity
        or is
        entitled to receive a majority of the variable interest entity’s residual
        returns. Variable interest entities are those entities in which we, through
        contractual arrangements, bear the risk of, and enjoy the rewards normally
        associated with ownership of the entity, and therefore we are the primary
        beneficiary of the entity.
 
 21
 Xingyong
        is considered a variable interest entity (“VIE”), and we are the primary
        beneficiary. On December 17, 2007, we entered into agreements with the Xingyong
        pursuant to which we shall receive the benefit of the Xingyong’s net income. In
        accordance with these agreements, Xingyong shall pay consulting fees equal
        to
        80% to 100% of its net income to our wholly-owned foreign subsidiary, Yongle,
        and Yongle shall supply the technology and administrative services needed
        to
        service Xingyong.  Xingyong is owned by Mr. Jin, who is Yongle’s and our
        chief executive officer.
  The
        accounts of Xingyong are consolidated in the accompanying financial statements
        pursuant to FIN 46R. As a VIE, Xingyong’s sales are included in our total sales,
        its income from operations is consolidated with our, and our net income includes
        all of Xingyong net income. We do not have any non-controlling interest and
        accordingly, did not subtract any net income in calculating the net income
        attributable to us. Because of the contractual arrangements, we have pecuniary
        interest in Xingyong that require consolidation of our financial statements
        and
        Xingyong’s financial statements.
  *Revenue
        Recognition*
  We
        recognize revenue in accordance with Staff Accounting Bulletin No. 104,
        Revenue Recognition, which states that revenue should be recognized when
        the
        following criteria are met: (1) persuasive evidence of an arrangement
        exists; (2) the service has been rendered; (3) the selling price is
        fixed or determinable; and (4) collection of the resulting receivable is
        reasonably assured. Sales represent the invoiced value of goods, net of value
        added tax (“VAT”), if any, and are recognized upon delivery of goods and passage
        of title. Pursuant to China’s VAT rules and regulations, as an ordinary VAT
        taxpayer we are subject to a tax rate of 17% (“output VAT”). The output VAT is
        payable after offsetting VAT paid by us on purchases (“input VAT”). We have been
        granted an exemption from VAT by the Xinghe County People’s Government and
        Xinghe Tax Authority on some products for which an exchange agreement is
        in
        place for raw materials and fuel.
 
 *Comprehensive
        Income*
 
 We
        have
        adopted Statements of Financial Accounting Standards (“SFAS”) No. 130,
“Reporting Comprehensive Income,” which establishes standards for reporting and
        presentation of comprehensive income (loss) and its components in a full
        set of
        general-purpose financial statements. We have chosen to report comprehensive
        income (loss) in the statements of operations and comprehensive
        income.
  *Income
        Taxes*
 
 We
        account for income taxes under the provisions of SFAS No. 109, “Accounting for
        Income Taxes,” which requires recognition of deferred tax assets and liabilities
        for the expected future tax consequences of events that have been included
        in
        the consolidated financial statements or tax returns. Deferred tax assets
        and
        liabilities are recognized for the future tax consequence attributable to
        the
        difference between the tax bases of assets and liabilities and their reported
        amounts in the financial statements. Deferred tax assets and liabilities
        are
        measured using the enacted tax rate expected to apply to taxable income in
        the
        years in which those temporary differences are expected to be recovered or
        settled. The effect on deferred tax assets and liabilities of a change in
        tax
        rates is recognized in income in the period that includes the enactment date.
        With the approvals of the Xinghe County Government, we received a 100% tax
        holiday from enterprise income taxes from 2003 through and including 2007.
  On
        March
        16, 2007, China’s parliament, the National People’s Congress, adopted the
        Enterprise Income Tax Law, which will take effect on January 1, 2008. The
        new
        income tax law sets unified income tax rate for domestic and foreign companies
        at 25 percent except a 15 percent corporate income tax rate for qualified
        high
        and new technology enterprises. In accordance with this new income tax law,
        low
        preferential tax rate in accordance with both the tax laws and administrative
        regulations prior to the promulgation of this Law shall gradually become
        subject
        to the new tax rate within five years after the implementation of this
        law.
 
 We
        have
        been recognized as a high technology and science company by the Ministry
        of
        Science and Technology of the People’s Republic of China. Therefore, Xing He
        District Local Tax Authority in the Nei Monggol province granted tax holiday
        from 100% of Enterprises Income Tax for additional three years 2008 through
        2010. Following expiration of the three year period, based on the present
        tax
        law, we will be subject to a corporation income tax rate of 15% effective
        in
        2011.
  *Inventories*
 
 Inventories
        are stated at the lower of cost, determined on a weighted average basis,
        and net
        realizable value. Work in progress and finished goods are composed of direct
        material, direct labor and a portion of manufacturing overhead. Net realizable
        value is the estimated selling price, in the ordinary course of business,
        less
        estimated costs to complete and dispose. Management believes that there was
        no
        obsolete inventory as of June 30, 2008.
  22
 *Property,
        Plant and Equipment*
 
 Property,
        plant and equipment are stated at cost. Major expenditures for betterments
        and
        renewals are capitalized while ordinary repairs and maintenance costs are
        expensed as incurred. Depreciation and amortization is provided using the
        straight-line method over the estimated useful life of the assets after taking
        into account the estimated residual value.
  There
        is
        no private ownership of land in China. All land ownership is held by the
        government of China, its agencies and collectives. Land use rights are obtained
        from government, and are typically renewable. Land use rights can be transferred
        upon approval by the land administrative authorities of China (State Land
        Administration Bureau) upon payment of the required transfer fee. We own
        the
        land use right for 2,356,209 **** square
        feet, of which 290,626 square is occupied by our facilities, for a term of
        50
        years, beginning from issuance date of the certificates granting the land
        use
        right in 2002. We record the property subject to land use rights as intangible
        property.
  Each
        intangible asset is reviewed periodically or more often if circumstances
        dictate, to determine whether its carrying value has become impaired. We
        consider assets to be impaired if the carrying value exceeds the future
        projected cash flows from related operations. We also re-evaluate the
        amortization periods to determine whether subsequent events and circumstances
        warrant revised estimates of useful lives.
 
 *Research
        and development*
  Research
        and development costs are expensed as incurred, and are included in general
        and
        administrative expenses. These costs primarily consist of cost of material
        used
        and salaries paid for the development of our products and fees paid to third
        parties. Our total research and development expense through June 30, 2008
        has
        not been significant.
 
 *Value
        added tax*
 
 Enterprises
        or individuals who sell products, engage in repair and maintenance or import
        and
        export goods in the PRC are subject to a value added tax in accordance with
        Chinese laws. The value added tax standard rate is 17% of the gross sales
        price.
        A credit is available whereby VAT paid on the purchases of semi-finished
        products, raw materials used in the production of the Company’s finished
        products, and payment of freight expenses can be used to offset the VAT due
        on
        sales of the finished product. The amount of VAT liability is determined
        by
        applying the applicable tax rate to the invoiced amount of goods sold (output
        VAT) less VAT paid on purchases made with the relevant supporting invoices
        (input VAT). Under the commercial practice of the PRC, the Company
        paid **** VAT
        and
        business tax based on tax invoices issued. The tax invoices may be issued
        subsequent to the date on which revenue is recognized, and there may be a
        considerable delay between the date on which the revenue is recognized and
        the
        date on which the tax invoice is issued. In the event that the PRC tax
        authorities dispute the date of which revenue is recognized for tax purposes,
        the PRC tax office has the right to assess a penalty, which can range from
        zero
        to five times the amount of the taxes that are determined to be late or
        deficient. In the event that a tax penalty is assessed on late or deficient
        payments, the penalty will be expensed as a period expense if and when a
        determination has been made by the taxing authorities that a penalty is
        due.
 
 **RESULTS
        OF OPERATIONS**
 
 The
        following tables set forth information from our statements of operations
        for the
        six months and three months ended June 30, 2008 and 2007, in dollars and
        as a
        percentage of sales:
  23
  **Six
                    months ended June 30,****2008**
                
                **2007****US
                    Dollars**
                
                **Percentage**
                
                **US
                    Dollars**
                
                **Percentage**Sales
                
                $
                13,651,779
                
                
                100.00
                %
                $
                11,446,022
                
                
                100.00
                %Cost
                    of sales
                
                
                10,183,419
                
                
                74.59
                %
                
                9,100,115
                
                
                79.50
                %Gross
                    margin
                
                
                3,468,360
                
                
                25.41
                %
                
                2,345,907
                
                
                20.50
                %Operating
                    expenses
                
                
                599,646
                
                
                4.40
                %
                
                331,924
                
                
                2.90
                %Income
                    from operations
                
                
                2,868,714
                
                
                21.01
                %
                
                2,013,983
                
                
                17.60
                %Other
                    income
                
                
                213,673
                
                
                1.57
                %
                
                240,006
                
                
                2.10
                %Interest
                    income
                
                
                417
                
                
                0.00
                %
                
                144
                
                
                0.00
                %Interest
                    expense
                
                
                (269,557
                )
                
                (1.98
                )%
                
                (332,327
                )
                
                (2.90
                )%Other
                    expense
                
                
                (11,311
                )
                
                (0.08
                )%
                
                (7,666
                )
                
                (0.07
                )%Income
                    before income tax expense
                
                
                2,801,935
                
                
                20.52
                %
                
                1,914,140
                
                
                16.73
                %Provision
                    for income taxes
                
                
                -
                
                
                0.00
                %
                
                -
                
                
                0.00
                %Net
                    income
                
                
                2,801,935
                
                
                20.52
                %
                
                1,914,140
                
                
                16.73
                %Other
                    comprehensive incomeForeign
                    currency translation adjustment
                
                
                1,979,890
                
                
                14.50
                %
                
                624,721
                
                
                5.46
                %Comprehensive
                    income
                
                $
                4,781,825
                
                
                35.02
                %
                $
                2,538,861
                
                
                22.19
                %
 
 **Three
                    months ended June 30,****2008**
                
                **2007****US
                    Dollars**
                
                **Percentage**
                
                **US
                    Dollars**
                
                **Percentage**Sales
                
                $
                7,923,777
                
                
                100.00
                %
                $
                6,073,316
                
                
                100.00
                %Cost
                    of sales
                
                
                5,817,126
                
                
                73.41
                %
                
                4,600,350
                
                
                75.75
                %Gross
                    margin
                
                
                2,106,651
                
                
                26.59
                %
                
                1,472,966
                
                
                24.25
                %Operating
                    expenses
                
                
                414,967
                
                
                5.24
                %
                
                217,682
                
                
                3.58
                %Income
                    from operations
                
                
                1,691,684
                
                
                21.35
                %
                
                1,255,284
                
                
                20.67
                %Other
                    income
                
                
                14,477
                
                
                0.18
                %
                
                2,684
                
                
                0.04
                %Interest
                    income
                
                
                239
                
                
                0.00
                %
                
                -
                
                
                -
                %Interest
                    expense
                
                
                (136,334
                )
                
                (1.72
                )%
                
                (173,151
                )
                
                (2.85
                )%Other
                    expense
                
                
                (11,312
                )
                
                (0.14
                )%
                
                (7,666
                )
                
                (0.13
                )%Income
                    before income tax expense
                
                
                1,558,754
                
                
                19.67
                %
                
                1,077,151
                
                
                17.74
                %Provision
                    for income taxes
                
                
                -
                
                
                0.00
                %
                
                -
                
                
                0.00
                %Net
                    income
                
                
                1,558,754
                
                
                19.67
                %
                
                1,077,151
                
                
                17.74
                %Other
                    comprehensive incomeForeign
                    currency translation adjustment
                
                
                727,747
                
                
                9.18
                %
                
                193,111
                
                
                3.18
                %Comprehensive
                    income
                
                $
                2,286,502
                
                
                28.86
                %
                $
                1,270,262
                
                
                20.92
                %
  
 *Sales.* During
        the six months ended June 30, 2008, we had sales of $13.7 million, as compared
        to sales of $11.4 million for the six months ended June 30, 2007, an increase
        of
        $2.2 million, or approximately 19.3%. Net sales for the three months ended
        June
        30, 2008 were $7.9 million compared to $6.1 million for the three months
        ended
        June 30, 2007, an increase of $1.8 million or 29.5%. This increase resulted
        from
        our marketing efforts both to develop new customers and make follow-on sales
        to
        existing customers.
 
 *Cost
        of sales; gross margin* .
        During
        the six months ended June 30, 2008, our cost of sales was $10.2 million,
        as
        compared to cost of sales of $9.1 million during the six months ended June
        30,
        2007, an increase of $1.1 million, or approximately 12.1 %. The sales increased
        19.3% while the cost of sales increased 12.1%. As a result, our gross profit
        increased by $1.1 million, or approximately 47.8%, and our gross margin
        increased from 20.5% in the six months ended June 30, 2007 to 25.4% in the
        six
        months ended June 30, 2008.
 Cost
        of
        sales for the three months ended on June 30, 2008 totaled $5.8 million compared
        to $4.6 million for the three months ended on June 30, 2007, an increase
        of $1.2
        million or 26.4%. As a result, our gross profit increased by $0.6 million,
        or
        approximately 43%, our gross margin increased from 24.25 % in the three months
        ended June 30, 2007 to 26.59 % in the three months ended June 30, 2008.
 The
        increase in gross profit resulted from a shift of our production focus from
        low
        margin graphite electrodes to fine grain graphite and high purity graphite
        which, although these electrodes have a higher cost, generate a higher gross
        margin.
 
 *Operating
        expenses.*
 Operating
        expenses increased $267,722 or 80.7% from $331,924 in the six months ended
        June
        30, 2007 to $599,622 in the six months ended June 30, 2008. The change was
        due
        to increase of depreciation and amortization expense of $29,276, increase
        of
        selling expense of $78,986 and increase of general administrative expense
        of
        $159,460.
 Operating
        expenses increased $197,285 or 90.6% from $217,682 in the three months ended
        June 30, 2007 to $414,967 in the three months ended June 30, 2008. The change
        was due to increase of depreciation and amortization expense of $15,587,
        increase of selling expense of $72,181 and increase of general administrative
        expense of $109,517.
 Increase
        of operating expenses was primarily due to increase of professional expenses
        related to the costs of being a public reporting as well as higher selling
        expenses incurred in relation to sale of higher margin products fine grain
        graphite and high purity graphite.
 
 24
 *Income
        from operations.* For
        six
        months ended June 30, 2008, income from operations amounted to $2,868,714
        as
        compared to $2,013,983 for the six months ended June 30, 2007, an increase
        of
        $854,731 or approximately 42.4%. For three months ended June 30, 2008, income
        from operations amounted to $1,691,684 as compared to $1,255,284 for the
        three
        months ended June 30, 2007, an increase of $436,400 or approximately 34.8%.
        The
        increase was primarily due to shift of production focus to fine grain graphite
        and high purity graphite which has higher gross profit margin.
 
 *Other
        income* .
        For the
        six months ended June 30, 2008, other income amounted to $213,673 as compared
        to
        $240,006 for the six months ended June 30, 2007. Other income includes
        government grant received from the PRC government for the recognition of
        high
        technology and science companies in the amount of $212,086 and $238,681 for
        the
        six months ended June 30, 2008 and 2007, respectively. These grants were
        received in the first quarter of 2008 and 2007. For the three months ended
        June
        30, 2008, other income amounted to $14,477 as compared to $2,684 for the
        three
        months ended June 30, 2007.
  *Interest
        income and expenses.* During
        the six months ended June 30, 2008 and 2007, interest expense amounted $269,557
        and $332,327, respectively and interest income of $417 and $144, respectively.
        During the three months ended June 30, 2008 and 2007, interest expense amounted
        $136,334 and $173,151, respectively and interest income of $239 and $0,
        respectively.
 
 *Deemed
        preferred stock dividend.*
 
 Upon
        filing of our amended and restated articles of incorporation on January 22,
        2008, our 3% convertible notes were automatically converted into 1,200,499
        shares of series A convertible preferred stock and warrants to purchase
        3,000,000 shares of the common stock at $1.20 per share and 3,000,000 shares
        of
        common stock at $2.00 per share. As a result of the issuance of the warrants
        to
        the holders of the series A preferred stock, we computed the effective preferred
        stock conversion price to be $0.24 per share, with the result that the intrinsic
        value of the conversion feature was $854,300. The deemed preferred stock
        dividend is a non-cash charge which does not affect our operations or cash
        flow.
 
 *Net
        income.* As a
        result of the factors described above, our net income available to common
        shareholders is $1,947,635, or $0.15 per share (basic) and $0.10 per share
        (diluted) for the six months ended June 30, 2008, as compared with $1,914,140,
        or $0.18 per share (basic and diluted) for the six months ended June 30,
        2007.
 
 *Comprehensive
        income.* For
        the
        six months ended June 30, 2008, comprehensive income of $4,781,825 reflects
        of
        our net income of $2,801,935 (before deduction of the deemed preferred stock
        dividend) and foreign currency translation gains of $1,979,890. For the six
        months ended June 30, 2007, comprehensive income of $2,538,861 reflects the
        sum
        of our net income of $1,914,140 and foreign currency translation gains of
        $624,721.
 
 **Liquidity
        and Capital Resources**
  Liquidity
        is the ability of a company to generate funds to support its current and
        future
        operations, satisfy its obligations and otherwise operate on an ongoing basis.
        At June 30, 2008, we had a cash balance of $162,612 as compared to $ 4,497
        on
        December 31, 2007. These funds are on deposit with financial institutions
        located in the PRC.
  Our
        working capital position increased $4.6 million to $10.4 million at June
        30,
        2008 from a working capital of $5.8 million at December 31, 2007. The increase
        in working capital reflects an increase in inventories ($3,064,243), as well
        as
        advances to suppliers ($602,519) and accounts receivable ($306,511), and
        a
        decrease in current liabilities ($909,427), partially offset by a decrease
        in
        other receivables ($253,761) and notes receivable ($207,045). We generated
        cash
        from operations of $1,334,070 for the six months ended June 30, 2008, as
        compared with $1,163,492 for the comparable period of 2007.
 
 25
 Net
        cash
        used in investing activities was $589,509 for the six months ended June 30,
        2008
        as compared to $281,843 provided in the six months ended June 30, 2007. For
        both
        periods, the cash used in investing activities related to the acquisition
        of
        property and land use rights.
 
 Net
        cash
        used in financing activities was $670,365 in the six months ended June 30,
        2008
        as compared to $914,294 for the six months ended June 30, 2007. For the six
        months ended June 30, 2008, we received advances from related parties $57,220
        and repaid notes payable $727,585. For the six months ended June 30, 2007,
        we
        repaid advances from related parties of $297,884 and advances on notes payable
        of $616,411.
 
 We
        have
        financed our operations principally through short term bank loans and, to
        a
        lesser extent, loans from Mr. Jin, our chief executive officer. At June 30,
        2008, we had a bank loan in the amount of $5,675,369 which was due on June
        10,
        2009 and which bore interest at 9.711% per annum and was secured by a security
        interest on our fixed assets and land use rights. On July 17, we paid $800,373
        of the note and renewed the remaining balance of $4,874,996 with varying
        maturing dates in May, June and July 2009. Although we believe that we will
        be
        able to obtain further extensions of these loans when they mature, we cannot
        assure you that such extensions will be granted.
  At
        June
        30, 2008, Mr. Jin has advances to us in the amount of $4.9 million, as compared
        with $4.5 million at December 31, 2007. The change in the amount is caused
        by a
        change in the exchange rate of RMB to United States dollars. The amount of
        the
        loan in RMB is unchanged. These advances do not bear interest and are due
        on
        demand.
  In
        December 2007, in connection with the reverse acquisition, we issued a 3%
        convertible note in the principal amount of $1,200,000 to the investor. This
        note was automatically converted into 1,200,499 shares of series A convertible
        preferred stock and warrants to purchase 3,000,000 shares of common stock
        at
        $1.20 per share and 3,000,000 shares of common stock at $2.00 per share on
        January 22, 2008, when we filed restated articles of incorporation that
        authorized the creation of preferred stock and included a statement of
        designation for the series A convertible preferred stock. The purchase price
        of
        the note was payable in installments, and the full purchase price was paid
        at
        June 30, 2008. At the closing, XingGuang paid $183,000 to cover closing costs.
        Prior to the closing, the investor had paid at least $217,000 of expenses
        relating to the reverse acquisition on our behalf. The investor paid a total
        of
        $800,000 in two installments of $400,000 each, the first being due on March
        31,
        2008 and the second being due on June 30, 2008. These payments were made
        during
        the six months ended June 30, 2008.
 
 In
        connection with the reverse acquisition, we issued our promissory note for
        $700,000 and we owe a $100,000 finders’ fee in connection with the reverse
        acquisition. These payments are due in two installments totaling $400,000
        each,
        which are due on March 31, 2008 and June 30, 2008. These payments are secured
        by
        1,000,000 of the share of common stock that we purchased from the former
        principal stockholders of Achievers. These shares were held in escrow, and
        were
        released from escrow and cancelled when we paid these obligations.
 
 We
        require funds for working capital for our operations. We believe that our
        working capital, together with the cash flow from our ongoing business will
        be
        sufficient to enable us to meet our cash requirements for the next 12 months
        with our present business. However, plan to develop an enhanced product which
        may have use in the nuclear power industry, and this development effort will
        require substantial additional funding. We cannot assure you that we will
        be
        able to obtain the necessary funding and, even if we have sufficient financing,
        we will be able to develop a product acceptable to the nuclear power
        industry.
 
 Although
        we do not have any current plans to make any acquisitions, it is possible
        that
        we may seek to acquire one or more businesses in a related field, and we
        may
        require financing for that purpose. We cannot assure you that funding will
        be
        available if and when we require funding.
 
 **Contractual
        Obligations and Off-Balance Sheet Arrangements**
  ***Contractual
        Obligations***
  We
        have
        certain fixed contractual obligations and commitments that include future
        estimated payments. Changes in our business needs, cancellation provisions,
        changing interest rates, and other factors may result in actual payments
        differing from the estimates. We cannot provide certainty regarding the timing
        and amounts of payments. We have presented below a summary of the most
        significant assumptions used in our determination of amounts presented in
        the
        tables, in order to assist in the review of this information within the context
        of our consolidated financial position, results of operations, and cash
        flows.
 
 26
 The
        following table summarizes our contractual obligations as of June 30,
        2008.
  **Payments
                  Due by Period****Total**
              
              **Less than 1**
                **year**
              
              **1-3**
                **Years**
              
              **3-5**
                **Years**
              
              **5 Years**
                **+**Contractual
                  Obligations :Bank
                  indebtedness
              
              $
              5,675,369
              
              $
              5,675,369
              
              $
              —
              
              $
              —
              
              $
              —Total
                  Contractual Obligations:
              
              $
              5,675,369
              
              $
              5,675,369
              
              $
              —
              
              $
              —
              
              $
              —
 
 **Off
        Balance Sheet Arrangements**
 
 We
        have
        no off-balance sheet arrangements.
 
 **Foreign
        Currency Exchange Rate Risk**
 
 Our
        sales
        are primarily through distributors in China and we are paid in RMB. Thus,
        most
        of our revenues and operating results is not impacted by exchange rate
        fluctuations between RMB and US dollars. However, our reporting currency
        is the
        U.S. dollar and the functional currency of the Company is the RMB. Therefore,
        translation adjustments arise from the process of translating the local currency
        financial statements into U.S. dollars. For the three months ended June 30,
        2008, we had foreign currency translation gain of $1,979,890 due to the
        fluctuation in the foreign exchange rate.
 **Item
          3. Controls and Procedures**
  Evaluation
        of Disclosure Controls and Procedures
 
 Disclosure
        controls and procedures refer to controls and other procedures designed to
        ensure that information required to be disclosed in the reports we file or
        submit under the Securities Exchange Act of 1934, as amended, is recorded,
        processed, summarized and reported within the time periods specified in the
        rules and forms of the SEC and that such information is accumulated and
        communicated to our management, including our chief executive officer and
        chief
        financial officer, as appropriate, to allow timely decisions regarding required
        disclosure. In designing and evaluating our disclosure controls and procedures,
        management recognizes that any controls and procedures, no matter how well
        designed and operated, can provide only reasonable assurance of achieving
        the
        desired control objectives, and management is required to apply its judgment
        in
        evaluating and implementing possible controls and procedures.
  Management
        conducted its evaluation of disclosure controls and procedures under the
        supervision of our chief executive officer and our chief financial officer.
        Based on that evaluation, our chief executive and financial officers concluded
        that because of the significant deficiencies in internal control over financial
        reporting described below, our disclosure controls and procedures were not
        effective as of June 30, 2008.
  **Management’s
        Report on Internal Control over Financial Reporting**
 
 Our
        management is responsible for establishing and maintaining adequate internal
        control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
        under the Securities Exchange Act.  Our management is also required to
        assess and report on the effectiveness of our internal control over financial
        reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002
        (“Section 404”).   Management assessed the effectiveness of our
        internal control over financial reporting as of December 31, 2007.  In
        making this assessment, we used the criteria set forth  by
        the
        Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
        Internal Control - Integrated Framework.  During our assessment of the
        effectiveness of internal control over financial reporting as of
        December 31, 2007, management identified significant deficiencies related
        to (i) the U.S. GAAP expertise of our internal accounting staff, (ii) our
        internal audit functions and, and (iii) a lack of segregation of duties within
        accounting functions.
 
 A
        material weakness (within the meaning of PCAOB Auditing Standard No. 5) is
        a
        deficiency, or a combination of deficiencies, in internal control over financial
        reporting, such that there is a reasonable possibility that a material
        misstatement of our annual or interim financial statements will not be prevented
        or detected on a timely basis. A significant deficiency is a deficiency,
        or a
        combination of deficiencies, in internal control over financial reporting
        that
        is less severe than a material weakness, yet important enough to merit attention
        by those responsible for oversight of the company's financial
        reporting.
 
 We
        became
        a reporting company in December 2007.  Prior to December 2007, our
        operations were conducted by Xingyong, which is a company organized under
        the
        laws of the PRC and owned by our chief executive officer. We began preparing
        to
        be in compliance with the internal control obligations, including Section
        404,
        for our fiscal year ending December 31, 2007. During almost all of 2007 our
        internal accounting staff was primarily engaged in ensuring compliance with
        PRC
        accounting and reporting requirements for our operating affiliates and was
        not
        required to meet or apply U.S. GAAP requirements.  As a result, with the
        exception of certain additional persons hired at the end of 2007 to address
        these deficiencies, our current internal accounting department responsible
        for
        financial reporting of the Company, on a consolidated basis, is relatively
        new
        to U.S. GAAP and the related internal control procedures required of U.S.
        public
        companies. Although our accounting staff is professional and experienced
        in
        accounting requirements and procedures generally accepted in the PRC, management
        has determined that they require additional training and assistance in U.S.
        GAAP
        matters.  Management has determined that our internal audit function is
        also significantly deficient due to insufficient qualified resources to perform
        internal audit functions.  Finally, management determined that the lack of
        an Audit Committee of the board of directors of the Company also contributed
        to
        insufficient oversight of our accounting and audit functions.
 
 27
 In
        order
        to correct the foregoing deficiencies, we are seeking to engage an experienced
        accountant or firm to assist us in establishing procedures that will enable
        us
        to have, on an ongoing basis, personnel who understand US GAAP and the
        disclosure obligations under the Securities Exchange Act. We are committed
        to
        the establishment of effective internal audit functions, however, due to
        the
        scarcity of qualified candidates with extensive experience in U.S. GAAP
        reporting and accounting in the region, we were not able to hire sufficient
        internal audit resources in order to enable us to have such procedures and
        controls established by the end of June 30, 2008.
 
 We
        also
        intend to elect additional directors, who will be independent and one of
        whom
        could serve as the audit committee financial expert. We believe that the
        appointment of such directors will strongly influence our management in
        establishing the necessary controls.
 
 However,
        due to our size and nature, the segregation of all conflicting duties may
        not
        always be possible and may not be economically feasible.  However, to
        the extent possible, we will implement procedures to assure that the initiation
        of transactions, the custody of assets and the recording of transactions
        will be
        performed by separate individuals.
 
 We
        believe that the foregoing steps will remediate the significant deficiency
        identified above, and we will continue to monitor the effectiveness of these
        steps and make any changes that our management deems appropriate.
 
 The
        certification of our chief executive and chief financial officer, which is
        included as Exhibits 31.1 and 31.2 to this quarterly report on Form 10-Q,
        include, in paragraph 4 of such certifications, information concerning our
        disclosure controls and procedures and internal control over financial
        reporting. Such certifications should be read in conjunction with the
        information contained in this Item 4 - Controls and Procedures for a more
        complete understanding of the matters covered by such
        certification.
  **PART
          II. OTHER INFORMATION**
 Item
        6.Exhibits
 
 31.1
              Certification
                  by Chief Executive Officer pursuant to Sarbanes Oxley Act of 2002
                  Section
                  302.31.2
              Certification
                  by Chief Financial Officer pursuant to Sarbanes Oxley Act of 2002
                  Section
                  302.32.1
              Certification
                  by chief executive officer and chief financial officer pursuant
                  to
                  Sarbanes-Oxley Act of 2002 Section
                  906.
  28
   **SIGNATURES**
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
  China
                  Carbon Graphite Group, Inc.
                (Registrant)August
                14, 2008
              By:
              /s/ Dengyong
                JinDengyong
                Jin, Chief Executive
                Officer August
                14, 2008
              By:
              /s/ Donghai
                YuDonghai
                Yu, Chief Financial
                Officer
 29