**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**




**FORM
      10-Q**




(Mark
      One)




x
            **QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE OF
                1934**




**For
      the quarterly period ended September 30, 2008**




o
            **TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE OF
                1934**




**For
      the transition period from _______ to _________**




**Commission
      file number:** 000-21419




**CHINA
        DISPLAY TECHNOLOGIES, INC.**
 (Name
          of
          Issuer in Its Charter)




**Delaware**
            
            **23-2753988**(State
                or Other Jurisdiction of Incorporation or Organization)
            
            (I.R.S.
                Employer Identification No.)




**12A
                Block, Xinhe Road, Xinqiao No. 3**
              **Industrial
                Zone, Shajing District, Baoan Town, Shenzen, China
                150090**(Address
                of Principal Executive Offices and Zip Code)**86-0755-29758811**(Issuer's
                telephone number)





Indicate
      by a check mark whether the issuer (1) has filed all reports required to be
      filed by Section 13 or 15(d) of the Exchange Act 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 check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act.





Large
                accelerated filer o
            Accelerated
                filer oNon-accelerated
                filer o
            Smaller
                reporting company x





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


Yes o No x




Indicate
      the number of shares outstanding of each of the issuer's classes of common
      stock, as of the latest practicable date: 12,368,435 shares at November 12
      ,
      2008.










CHINA
      DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES


FORM
      10-Q


QUARTERLY
      PERIOD ENDED SEPTEMBER 30, 2008





INDEX




PagePART
                I - FINANCIAL INFORMATIONItem
                1.
            Consolidated
                Financial StatementsConsolidated
                Balance Sheet (Unaudited) at September 30, 2008 and December
                31,2007
            2Consolidated
                Statements of Operations (Unaudited)For
                the Three and Nine Months Ended September 30, 2008 and
                2007
            3Consolidated
                Statements of Cash Flows (Unaudited)For
                the Nine Months Ended September 30, 2008 and 2007
            4Notes
                to Unaudited Consolidated Financial Statements
            5Item
                2.
            Management's
                Discussion and Analysis or Plan of Operation
            19Item
                3.
            Quantitative
                and Qualitative Disclosure About Market Risks
            24Item
                4.
            Controls
                and Procedures
            24PART
                II - OTHER INFORMATIONItem
                6.
            Exhibits
            25




-1-


CHINA
        DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES
 CONSOLIDATED
        BALANCE SHEETS




September
                30,
              2008
            
            December
                31,
              2007(Unaudited)ASSETSCurrent
                AssetsCash
                and cash equivalents
            
            $
            728,835
            
            $
            2,949,356Restricted
                cash (Note 8 )
            
            
            1,895,336
            
            
            2,039,314Trade
                receivables, net of allowance for doubtful accounts (Note 4)
            
            
            6,762,788
            
            
            5,279,282Inventories,
                net (Note 5)
            
            
            5,374,729
            
            
            1,692,934Prepaid
                expenses and other receivables (Note 10 )
            
            
            559,249
            
            
            259,170Total
                Current Assets
            
            
            15,320,937
            
            
            12,220,056Property
                and equipment, net (Note 6)
            
            
            4,700,539
            
            
            2,441,264Other
                assets (Note 11)
            
            
            79,795
            
            
            1,059,222Advances
                to suppliers (Note 9 )
            
            
            2,656,897
            
            
            5,498,257Total
                Assets
            
            $
            22,758,168
            
            $
            21,218,799LIABILITIESCurrent
                LiabilitiesAccounts
                payables and accrued liabilities
            
            $
            610,203
            
            $
            2,132,499Short
                term bank loans (Notes 7)
            
            
            4,407,746
            
            
            5,600,896Taxes
                payable
            
            
            33,249
            
            
            383,397Wages
                payable
            
            
            131,718
            
            
            103,944Corporate
                taxes payable
            
            
            100,925
            
            
            432,532Accrued
                directors compensation
            
            
            116,591Total
                Current Liabilities
            
            
            5,400,432
            
            
            8,653,268Commitments
                and Contingencies (Note 14)
            
            
            —
            
            
            —Stockholders'
                Equity (Note 12)Series
                A convertible preferred stock, $.001 par value; 20,000,000
                sharesauthorized;
                issued and outstanding - 6,860,296 shares at September
              30,
                2008; 3,703,704 shares at December 31, 2007;liquidation
                preference –
                $7,409,120
                at September 30, 2008; $4,000,000
              at
                December 31, 2007
            
            
            6,861
            
            
            3,704Common
                stock. $.001 par value; 100,000,000 shares authorized;issued
                and outstanding –
                12,368,435
                shares at September 30,2008;
              11,600,000
                shares at December 31, 2007
            
            
            12,368
            
            
            11,600Additional
                paid-in capital
            
            
            6,922,348
            
            
            6,083,501Accumulated
                other comprehensive income
            
            
            1,574,015
            
            
            692,625Statutory
                reserves
            
            
            198,550
            
            
            198,550Retained
                earnings
            
            
            8,643,5934
            
            
            5,575,551Total
                Stockholders' Equity
            
            
            17,357,736
            
            
            12,565,531Total
                Liabilities and Stockholders' Equity
            
            $
            22,758,168
            
            $
            21,218,799





The
      accompanying notes are an integral part of these consolidated financial
      statements





-2-


**China
      Display Technologies Inc. and Subsidiaries**


**Consolidated
      Statements of Operations**


**(Unaudited)**




**For
                the Three Months Ended**
            
            **For
                the Nine Months Ended****September
                30,**
            
            **September
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Total
                Revenues
            
            $
            10,825,979
            
            $
            9,175,767
            
            $
            27,267,123
            
            $
            20,487,682Cost
                of Sales
            
            
            8,407,299
            
            
            6,985,054
            
            
            21,128,132
            
            
            15,705,834Gross
                Profit
            
            
            2,418,680
            
            
            2,190,713
            
            
            6,138,991
            
            
            4,781,848Operating
                Expenses:Selling
                expenses
            
            
            396,702
            
            
            275,439
            
            
            795,920
            
            
            415,472Research
                and development
            
            
            442,808
            
            
            165,957
            
            
            815,847
            
            
            391,833Other
                general and administrative
            
            
            378,519
            
            
            277,229
            
            
            805,612
            
            
            569,108Total
                Expenses
            
            
            1,218,029
            
            
            718,625
            
            
            2,417,379
            
            
            1,376,413Income
                from Operations
            
            
            1,200,651
            
            
            1,472,088
            
            
            3,721,612
            
            
            3,405,435Other
                Income (Expenses):Other
            
            
            (20
            )
            
            (475
            )
            
            (2,781
            )
            
            68Interest
                incomes
            
            
            317
            
            
            817
            
            
            15,934
            
            
            817Interest
                expenses
            
            
            (91,438
            )
            
            (81,874
            )
            
            (389,152
            )
            
            (96,292
            )Total
                Other Income (Expenses)
            
            
            (91,141
            )
            
            (81,532
            )
            
            (375,999
            )
            
            (95,407
            )Income
                Before Income Taxes
            
            
            1,109,510
            
            
            1,390,556
            
            
            3,345,613
            
            
            3,310,028Provision
                for Income Taxes
            
            
            100,153
            
            
            112,278
            
            
            277,570
            
            
            256,238Net
                Income
            
            $
            1,009,357
            
            $
            1,278,278
            
            $
            3,068,043
            
            $
            3,053,790Deemed
                preferred stock dividend
            
            $
            
            
            $
            (2,177,853
            )
            $
            
            
            $
            (2,177,853
            )Net
                Income (loss) available to common shareholders
            
            
            1,009,357
            
            
            (899,575
            )
            
            3,068,043
            
            
            875,937Net
                earnings per share of common stock, basic
            
            $
            0.08
            
            $
            (0.08
            )
            $
            0.25
            
            $
            0.08Weighted
                average number of shares outstanding, basic
            
            
            12,074,568
            
            
            11,553,348
            
            
            12,074,568
            
            
            11,545,824Net
                earnings per share of common stock, diluted
            
            $
            0.04
            
            $
            (0.08
            )
            $
            0.14
            
            $
            0.06Weighted
                average number of shares outstanding, diluted
            
            
            22,679,535
            
            
            11,553,348
            
            
            22,679,535
            
            
            15,249,528




The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements





-3-




CHINA
        DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 (Unaudited)




For
                the Nine Months Ended
              September
                30,2008
            
            2007Cash
                flows from operating activitiesNet
                income
            
            $
            3,068,043
            
            $
            3,053,790Adjustments
                to reconcile net income to cashprovided
                by (used in) operating activities:Depreciation
            
            
            488,584
            
            
            322,494Changes
                in operating assets and liabilities:Decrease
                (Increase) in assets:Accounts
                receivable, net
            
            
            (1,483,504
            )
            
            (1,304,822
            )Advances
                to suppliers
            
            
            2,841,360
            
            
            (2,966,863
            )Inventories,
                net
            
            
            (3,681,795
            )
            
            (605,438
            )Prepaid
                expenses and other receivables
            
            
            (300,079
            )
            
            (1,666,988
            )Other
                assets
            
            
            979,427
            
            
            —Increase
                (Decrease) in liabilities:Accounts
                payables and accrued liabilities
            
            
            (1,522,296
            )
            
            249,430Various
                tax payable
            
            
            (350,148
            )
            
            (7,619
            )Wage
                payable
            
            
            27,774
            
            
            18,780Corporate
                tax payable
            
            
            (331,607
            )
            
            256,237Net
                cash provided by (used in) operating activities
            
            
            (264,241
            )
            
            (2,650,999
            )Cash
                flows from investing activitiesRecapitalization
                costs
            
            
            —
            
            
            (625,000
            )Purchase
                of property and equipment
            
            
            (2,747,858
            )
            
            (934,319
            )Net
                cash used in investing activities
            
            
            (2,747,858
            )
            
            (1,559,319
            )Cash
                flows from financing activities(Decrease)
                /Increase in restricted cash
            
            
            143,978
            
            
            (779,048
            )Proceeds
                from loans payable
            
            
            
            
            
            3,477,734Net
                Proceeds from sale of preferred stock and warrants
            
            
            
            
            
            3,860,993Repayment
                of short term loan
            
            
            (1,193,150
            )
            
            —Net
                proceeds from warrant exercise
            
            
            748,595
            
            
            —Warrant
                issued for consultancy fee
            
            
            94,177Amount
                due to director
            
            
            116,590
            
            
            —Repayment
                of related party loans
            
            
            
            
            
            5,844Net
                cash provided by (used in) financing activities
            
            
            (89,810
            )
            
            6,565,523Effect
                of exchange rate changes on cash
            
            
            881,388
            
            
            54,648Net
                increase (decrease) in cash
            
            
            (2,220,521
            )
            
            2,409,853Cash,
                beginning of period
            
            
            2,949,356
            
            
            134,991Cash,
                end of period
            
            $
            728,835
            
            $
            2,544,844Supplemental
                disclosure information:Interest
                expense paid
            
            $
            389,152
            
            $
            96,292Income
                taxes paid
            
            $
            531,127
            
            $
            256,238The
                accompanying notes are an integral part of these consolidated financial
                statements




-4-


**1.**
            **Organization**




China
      Display Technologies, Inc. (the “Company”) was incorporated in Delaware on
      September 29, 2004 under the name Lincoln International Corporation (“Lincoln”).
      On September 21, 2007, its corporate name was changed to SUNY Display
      Technologies, Inc., and on October 11, 2007, its corporate name was changed
      to
      China Display Technologies, Inc. References to Lincoln relate to the Company
      prior to the reverse acquisition. At the time of the acquisition, Lincoln was
      not engaged in any active business.




On
      September 12, 2007, the Company executed a share exchange agreement (“Share
      Exchange Agreement”) with Lawrence Kwok-Yan
      Chan, the sole stockholder of Keep On Holdings, Limited, a British Virgin Island
      corporation incorporated on April 18, 2007 (“Keep On”) , whereby
      the Company acquired all of the outstanding common stock of Keep On in exchange
      for newly-issued stock of the Company.





Under
      the
      Share Exchange Agreement, on September 12, 2007, the Company issued
      11,376,000 shares of common stock to the Keep On Stockholder and his assignees
      in exchange for 100% of the stock of Keep On. Pursuant to a separate agreement,
      the Company acquired from the Company’s then principal stockholder and cancelled
      290,000 shares of the Company’s common stock he owned immediately prior to the
      closing for $340,133
      and the Company repaid obligations to the then principal stockholder due to
      him
      in the aggregate amount of $284,867. After
      giving effect to the cancellation of shares, the Company had 58,000 shares
      of
      common stock outstanding immediately prior to Closing. After the Closing, the
      Company had a total of 11,600,000 shares of common stock outstanding, with
      the
      Keep On stockholder and his assignees owning 98.1% of the total issued and
      outstanding shares of the Company's common stock.





The
      Company is the sole stockholder of Keep On and Keep On is the sole stockholder
      of Suny Electronics (Shenzhen) Company Limited (“Suny”), a corporation organized
      under the laws of the Peoples’ Republic of China. Suny was organized on November
      2, 2004 and commenced operations in 2005. On July 19, 2007, Keep On acquired
      all
      of the equity interest in Suny.




The
      Company’s business is the business of Suny. Suny designs, manufactures and
      markets small to medium-sized light emitting diode, known as “LEDs,” and cold
      cathode fluorescent lamp, known as “CCFL,” for various types of displays, such
      as amorphous
      silicon thin film liquid
      crystal displays, low
      temperature poly-silicon thin film liquid
      crystal displays, super-twisted liquid crystal display, colored super-twisted
      liquid crystal display, twisted liquid crystal display, and mono LCDs for liquid
      crystal displays. Suny’s products are used in a variety of products, such as
      mobile phones, PDA’s, GPS system, portable DVD/VCD players, MP3 and MP4, medical
      equipment, household appliances with displays. Its emphasis is on small to
      medium-size back-light unit manufacturing.




As
      a
      result of the Share Exchange Agreement, t he
      acquisition of Keep On by the Company was accounted for as a reverse acquisition
      because on a post-acquisition basis, the former stockholder of Keep On and
      his
      assignees held a majority of the outstanding common stock of the Company on
      a
      voting and fully-diluted basis. As a result, Keep On is deemed to be the
      acquirer for accounting purposes. Accordingly, the consolidated financial
      statement data presented are those of Keep On and its wholly-owned subsidiary,
      Suny, for all periods prior to the Company’s acquisition of Keep On on September
      12, 2007, and the financial statements of the consolidated companies from the
      acquisition date forward.





On
      November 8, 2007, the Company amended its certificate of incorporation which
      (i)
      effected a one-for-7.5 reverse split and (ii) changed the authorized capital
      stock to 20,000,000 shares of preferred stock, par value $.001 per share, and
      100,000,000 shares of common stock, par value $.001 per share. All share and
      per
      share information in these financial statements give retroactive effect to
      the
      reverse split and the change in par value.




**2.**
              SUMMARY
                  OF SIGNIFICANT ACCOUNTING
                  POLICIES





**a.**
              **Basis
                  of Preparation**





Management
      acknowledges its responsibility for the preparation of the accompanying interim
      consolidated financial statements which reflect all adjustments, consisting
      of
      normal recurring adjustments, considered necessary in its opinion for a fair
      statement of its consolidated financial position and the results of its
      operations for the interim period presented. These consolidated financial
      statements should be read in conjunction with the summary of significant
      accounting policies and notes to consolidated financial statements included
      in
      the Company’s Form 10-KSB annual report for the year ended December 31, 2007.





The
      accompanying unaudited condensed consolidated financial statements 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 .
      In the
      opinion of management, the condensed consolidated financial statements reflect
      all adjustments (consisting of normal recurring adjustments) considered
      necessary for a fair presentation of the results China Display Technologies,
      Inc. and its subsidiaries for the periods presented. Operating results for
      interim periods are not necessarily indicative of results that may be expected
      for the fiscal year as a whole. The preparation of the financial statements
      in
      conformity with accounting principles generally accepted in the U.S. requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets, liabilities, revenues, expenses, and the related disclosures at the
      date
      of the financial statements and during the reporting period. Actual results
      could materially differ from these estimates.




-5-





**b.**
              **Basis
                  of consolidation**





The
      consolidated financial statements include the accounts of the Company and its
      wholly-owned subsidiaries, Keep On and Suny. Intercompany transactions have
      been
      eliminated in consolidation.





**c.**
              **Use
                  of Estimates**




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities as well as
      the
      reported amounts of revenues and expenses. Actual results could differ from
      these estimates.




**d.**
              **Cash
                  and Cash Equivalents**





Cash
      and
      cash equivalents include cash on hand, demand deposits with banks and liquid
      investments with an original maturity of three months or less.





**e.**
              **Accounts
                  Receivable**





Accounts
      receivables are recognized and carried at original invoiced amount less an
      allowance for uncollectible accounts, as needed.





The
      Company uses the aging method to estimate the valuation allowance for
      anticipated uncollectible receivable balances. Under the aging method, bad
      debts
      percentages determined by management based on historical experience as well
      as
      current economic climate are applied to customers’ balances categorized by the
      number of months the underlying invoices have remained outstanding. The
      valuation allowance balance is adjusted to the amount computed as a result
      of
      the aging method. When facts subsequently become available to indicate that
      the
      amount provided as the allowance was incorrect, the Company makes an adjustment,
      which is classified as a change in estimate.





**f.**
              **Inventories**





Inventories
      are stated at the lower of cost, as determined on a weighted average basis,
      or
      market. Costs of inventories include purchase and related costs incurred in
      bringing the products to their present location and condition. Market value
      is
      determined by reference to selling prices after the balance sheet date or to
      management’s estimates based on prevailing market conditions. The management
      writes down the inventories to market value if market value is below cost.
      The
      management also regularly evaluates the composition of its inventories to
      identify slow-moving and obsolete inventories to determine if a valuation
      allowance is required.





**g.**
              **Property
                  and Equipment**





Property
      and equipment are initially recognized recorded at cost. Gains or losses on
      disposals are reflected as gain or loss in the period of disposal. The cost
      of
      improvements that extend the life of plant and equipment are capitalized. These
      capitalized costs may include structural improvements, equipment and fixtures.
      All ordinary repairs and maintenance costs are expensed as
      incurred.





Depreciation
      for financial reporting purposes is provided using the straight-line method
      over
      the estimated useful lives of the assets:





Production
                machinery and equipment
            
            
            8
                yearsLeasehold
                improvements
            
            
            10
                yearsOffice
                and other equipment
            
            
            5
                yearsAutomobiles
            
            
            5
                years




-6-





**h.**
              **Impairment
                  of Long-Lived Assets**





The
      Company accounts for impairment of plant and equipment and amortizable
      intangible assets in accordance with SFAS No. 144, “Accounting for Impairment of
      Long-Lived Assets and Long-Lived Assets to be Disposed Of”, which requires the
      Group to evaluate a long-lived asset for recoverability when there is event
      or
      circumstance that indicate the carrying value of the asset may not be
      recoverable. An impairment loss is recognized when the carrying amount of a
      long-lived asset or asset group is not recoverable (when carrying amount exceeds
      the gross, undiscounted cash flows from use and disposition) and is measured
      as
      the excess of the carrying amount over the asset’s (or asset group’s) fair
      value.





**i.**
              **Comprehensive
                  income**





SFAS
      No.130, “Reporting Comprehensive Income”, requires disclosure of all components
      of comprehensive income and loss on an annual and interim basis. Comprehensive
      income and loss is defined as the change in equity of a business enterprise
      during a period from transactions and other events and circumstances from
      non-owner sources. The comprehensive income arose from the effect of foreign
      currency translation adjustments.





**j.**
              **Segment
                  information**





SFAS
      No.131, “Disclosures about Segments of an Enterprise and Related Information”,
      requires certain financial and supplementary information to be disclosed on
      an
      annual and interim basis for each reportable segment of an enterprise. The
      Group
      believes that it operates in one business segment (research, development,
      production, marketing and sales of opto electronic products) and in one
      geographical region (China), as all of the Company’s current operations are
      carried out in China and most of its sales are made to companies in
      China.





**k.**
              **Revenue
                  recognition**





The
      Company generates revenues from the sales of LEDs and CCFLs. Sales are
      recognized when the following four revenue criteria are met: persuasive evidence
      of an arrangement exists, delivery has occurred, the selling price is fixed
      or
      determinable, and collectability is reasonably assured. Sales are presented
      net
      of value added tax (VAT). No return allowance is made as products returns are
      insignificant based on historical experience.





**l.**
              **Research
                  and development
                  costs**





Research
      and development costs are expensed to operations as incurred.





**m.**
              **Income
                  taxes**





The
      Company accounts for income taxes in accordance with SFAS No. 109, "Accounting
      for Income Taxes." SFAS No. 109 requires an asset and liability approach for
      financial accounting and reporting for income taxes and allows recognition
      and
      measurement of deferred tax assets based upon the likelihood of realization
      of
      tax benefits in future years. Under the asset and liability approach, deferred
      taxes are provided for the net tax effects of temporary differences between
      the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes. A valuation allowance is provided
      for
      deferred tax assets if it is more likely than not these items will either expire
      before the Group is able to realize their benefits, or that future deductibility
      is uncertain.





**n.**
              **Foreign
                  currency translation**





The
      reporting currency is the U.S. dollar. The functional currency of the Company
      is
      the local currency, the Chinese Renminbi (“RMB”). The financial statements of
      the Company are translated into United States dollars in accordance with
      Statement of Financial Accounts Standards (“SFAS”) No. 52, “Foreign Currency
      Translation”, using year-end rates of exchange for assets and liabilities, and
      average rates of exchange for the period for revenues, costs, and expenses
      and
      historical rates for the equity. Translation adjustments resulting from the
      process of translating the local currency financial statements into U.S. dollars
      are included in determining comprehensive income. At September 30, 2008, the
      cumulative translation adjustment of $1,574,015 was classified as an item of
      other comprehensive income in the stockholders’ equity section of the
      consolidated balance sheet. For
      the
      nine months ended September 30, 2008 and 2007, accumulated other comprehensive
      income was $1,574,015 and
      $692,625 respectively.




-7-





The
      exchange rates used to translate amounts in RMB into U.S. Dollars for the
      purposes of preparing the consolidated financial statements were as follows:
      As
      of September 30, 2008, the Company used the period-end rates of exchange for
      assets and liabilities of $0.14588 to RMB1.00. For the nine months ended
      September 30, 2008 and 2007, the Company used the period’s average rate of
      exchange to convert revenues, costs, and expenses of $0.14288 to RMB1.00 and
      $0.13028to RMB1.00, respectively, and the Company used historical rates for
      equity.




**o.**
              **Related
                  parties**





A
      party
      is considered to be related to the Company if the party directly or indirectly
      or through one or more intermediaries, controls, is controlled by, or is under
      common control with the Company or one of its subsidiaries. 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 or its subsidiaries 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. A party which can significantly
      influence the management or operating policies of the transacting parties or
      if
      it has an ownership interest in one of the transacting parties and can
      significantly influence the other to an extent that one or more of the
      transacting parties might be prevented from fully pursuing its own separate
      interests is also a related party.





**p.**
              Basic
                  earnings per share is computed by dividing net earnings by the
                  weighted
                  average number of shares of common stock outstanding during the
                  period.
                  Diluted income per share is computed by dividing net income by
                  the
                  weighted average number of shares of common stock, common stock
                  equivalents and potentially dilutive securities outstanding during
                  each
                  period. Potentially dilutive shares of common stock consist of
                  the common
                  stock issuable upon the exercise of stock warrants (using the treasury
                  stock method) and upon the conversion of convertible preferred
                  stock
                  (using the if-converted method). A reconciliation of the denominator
                  used
                  in the calculation of basic and diluted net income (loss) per share
                  is as
                  follows:





For
                the Three Months Ended
            
            For
                the Nine Months EndedSeptember
                30,
            
            September
                30,2008
            
            2007
            
            2008
            
            2007Numerator:Net
                income (loss) available to common shareholders
            
            $
            1,009,357
            
            $
            (899,575
            )
            $
            3,068,043
            
            $
            875,937Denominator:Weighted-average
                shares outstanding for basic earnings per share
            
            
            12,074,568
            
            
            11,553,348
            
            
            12,074,568
            
            
            11,545,824Effect
                of dilutive securities:Series
                A convertible preferred stock
            
            
            6,860,296
            
            
            
            
            
            6,860,296
            
            
            3,703,704Common
                stock purchase warrants
            
            
            3,744,671
            
            
            
            
            
            3,744,671Weighted-average
                shares outstanding for diluted earnings (loss) per share
            
            
            22,679,535
            
            
            11,553,348
            
            
            22,679,535
            
            
            15,249,528




The
      following were excluded from the computation of diluted shares outstanding
      as
      they would have had an anti-dilutive impact.




For
                the three Months Ended
            
            For
                the Nine Months EndedSeptember
                30,
            
            September
                30,2008
            
            2007
            
            2008
            
            2007Common
                stock purchase warrants
            
            
            —
            
            
            11,500,000
            
            
            —
            
            
            11,500,000Series
                A convertible preferred stock
            
            
            —
            
            
            3,703,704
            
            
            —
            
            
            —





**q.**
              **Recently
                  issued accounting
                  pronouncements**





In
      June
 2008, the Financial Accounting Standards Board (“FASB”) issued FSP
      No. EITF 03-6-1,*Determining
      Whether Instruments Granted in Share-Based Payment Transactions Are
      Participating Securities*(“FSP
      EITF 03-6-1”). FSP EITF 03-6-1 concludes that unvested share-based payment
      awards that contain rights to receive nonforfeitable dividends or dividend
      equivalents are participating securities, and thus, should be included in the
      two-class method of computing earnings per share (“EPS”). FSP EITF 03-6-1 is
      effective for fiscal years beginning after December 15, 2008, and interim
      periods within those years. Early application of EITF 03-6-1 is prohibited.
      It
      also requires that all prior-period EPS data be adjusted retrospectively. We
      have not yet determined the effect, if any, of the adoption of this statement
      on
      our financial condition or results of operations.




-8-





In
      April
      2008, the FASB issued Staff Position FAS 142-3, *Determination
      of the Useful Life of Intangible Assets* (“FSP
      FAS 142-3”) which amends the factors an entity should consider in developing
      renewal or extension assumptions used to determine the useful life of a
      recognized intangible asset under FAS No. 142, *Goodwill
      and Other Intangible Assets* (“FAS
      No. 142”). FSP FAS 142-3 applies to intangible assets that are acquired
      individually or with a group of assets and intangible assets acquired in both
      business combinations and asset acquisitions. It removes a provision under
      FAS
      No. 142, requiring an entity to consider whether a contractual renewal or
      extension clause can be accomplished without substantial cost or material
      modifications of the existing terms and conditions associated with the asset.
      Instead, FSP FAS 142-3 requires that an entity consider its own experience
      in
      renewing similar arrangements. An entity would consider market participant
      assumptions regarding renewal if no such relevant experience exists. FSP FAS
      142-3 is effective for year ends beginning after December 15, 2008 with early
      adoption prohibited. We have not yet determined the effect, if any, of the
      adoption of this statement on our financial condition or results of
      operations.




In
      March 2008, the FASB issued SFAS 161, “ *Disclosures
      about Derivative Instruments and Hedging Activities* ” *.* The new
      standard is intended to improve financial reporting about derivative instruments
      and hedging activities by requiring enhanced disclosures to enable investors
      to
      better understand their effects on an entity’s financial position, financial
      performance, and cash flows. It is effective for financial statements issued
      for
      fiscal years and interim periods beginning after November 15, 2008, with
      early application encouraged. The Company is currently evaluating the impact
      of
      adopting SFAS 161 on its consolidated financial statements.





On
      December 4, 2007, the Financial Accounting Standards Board (FASB) issued SFAS
      No. 160, *Noncontrolling
      interest in Consolidated Financial Statements* (SFAS
      No.
      160). SFAS No. 160 requires all entities to report noncontrolling (minority)
      interests in subsidiaries as equity in the consolidated financial statements.
      The statement establishes a single method of accounting for changes in a
      parent’s ownership interest in a subsidiary that do not result in
      deconsolidation and expands disclosures in the consolidated financial
      statements. SFAS No. 160 is effective for fiscal years beginning after December
      15, 2008 and interim periods within those fiscal years. We have not yet
      determined the impact of the adoption of SFAS No. 160 on our consolidated
      financial statements and footnote disclosures.




On
      December 4, 2007, the FASB issued SFAS No.141R, *Business
      Combinations (* SFAS
      No.
      141R). SFAS No. 141R requires the acquiring entity in a business combination
      to
      recognize all the assets acquired and liabilities assumed, establishes the
      acquisition date fair value as the measurement objective for all assets acquired
      and liabilities assumed, and requires the acquirer to expand disclosures about
      the nature and financial effect of the business combination. SFAS No. 141R
      is
      effective for business combinations for which the acquisition date is on or
      after the beginning of the first annual reporting period beginning on or after
      December 15, 2008. We have not yet determined the impact of the adoption of
      SFAS
      No. 141R on our consolidated financial statements and footnote disclosures.





**r.**
            **R****ecently
                adopted accounting
                pronouncements**





In
      September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
      ("SFAS 157"). SFAS 157 defines fair value, establishes a framework and
      gives guidance regarding the methods used for measuring fair value, and expands
      disclosures about fair value measurements. In February 2008, the FASB issued
      FASB Staff Position 157-1, "Application of FASB Statement No. 157 to FASB
      Statement No. 13 and Other Accounting Pronouncements That Address Fair
      Value Measurements for Purposes of Lease Classification or Measurement under
      Statement 13" ("FSP 157-1") and FASB Staff Position 157-2, "Effective Date
      of
      FASB Statement No. 157" ("FSP 157-2"). FSP 157-1 amends SFAS 157 to
      remove certain leasing transactions from its scope. FSP 157-2 delays the
      effective date of SFAS 157 for all non-financial assets and non-financial
      liabilities, except for items that are recognized or disclosed at fair value
      in
      the financial statements on a recurring basis (at least annually), until fiscal
      years beginning after November 15, 2008. SFAS 157 is effective for
      financial statements issued for fiscal years beginning after November 15,
      2007, and interim periods within those fiscal years. The Company adopted SFAS
      157 effective January 1, 2008 for all financial assets and liabilities as
      required. The adoption of SFAS 157 was not material to the
      Company's financial statements or results of operations.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities — Including an Amendment of FASB
      Statement No. 115,” (“SFAS 159”) which is effective for fiscal years
      beginning after November 15, 2007. SFAS 159 is an elective standard which
      permits an entity to choose to measure many financial instruments and certain
      other items at fair value at specified election dates. Subsequent unrealized
      gains and losses on items for which the fair value option has been elected will
      be reported in earnings. The Company has not elected the fair value option
      for
      any assets or liabilities under SFAS 159.




-9-




**3.**
              **CONCENTRATION
                  OF CREDIT RISK**





Financial
      instruments which potentially expose the Company to concentrations of credit
      risk, consist of cash, accounts and other receivables as of September 30, 2008
      and 2007. The Company performs ongoing evaluations of its cash position and
      credit evaluations to ensure collections and minimize losses.





As
      of
      September 30, 2008, all of the Company’s bank deposits were placed with banks in
      the PRC where there is no insurance to cover bank deposits in the event of
      bank
      failure.





For
      the
      nine months ended September 30, 2008, approximately 90% of the Company’s sales
      were made to customers located in the PRC. ** In
      addition, approximately 90% ** of
      accounts receivables as of September 30, 2008 also arose from customers located
      in the PRC.





The
      largest two customers accounted for approximately 11% and 10% of the Company’s
      total revenue for the three months ended September 30, 2008 and approximately
      11% and 19% of the Company’s total revenue for the nine months ended September
      30, 2008, respectively.





**4.**
              **ACCOUNTS
                  RECEIVABLE**





Accounts
      receivable consists of the following:




September
                302008
            
            December
                31, 2007Accounts
                receivable
            
            $
            6,939,324
            
            $
            5,445,193Less:
                Allowance for doubtful accounts
            
            
            (176,536
            )
            
            (165,911
            )Accounts
                receivable, net
            
            $
            6,762,788
            
            $
            5,279,282





The
      provision for bad debts increased by $10,625 and $31,740 in the nine months
      ended September 30, 2008 and the year ended December 31, 2007 as
      follows:




September
                30,
                2008
            
            December
                31. 2007Beginning
                of period
            
            $
            165,911
            
            $
            134,171Additions
            
            
            10,625
            
            
            31,740End
                of period
            
            $
            176,536
            
            $
            165,911




-10-




**5.**
              **INVENTORIES**





Inventories
      consist of the following:




September
                30,
                2008
            
            December
                31, 2007Raw
                materials
            
            $
            5,024,217
            
            $
            1,821,884Work-in-progress
            
            
            652,386
            
            
            155,880Finished
                goods
            
            
            -
            
            
            -Consumables
            
            
            6,543
            
            
            32,5595,683,146
            
            
            2,010,323Less:
                Allowance for obsolescence
            
            
            (308,417
            )
            
            (317,389
            )Total
            
            $
            5,374,729
            
            $
            1,692,934








At
      September 30, 2008, all finished goods had been shipped to
      customers.





The
      allowance for obsolescence decreased by $8,972 in the nine months ended
      September 30, 2008 and increased by $169,743 for the year ended December 31,
      2007 as follows:





September
                30
            
            December
                31Beginning
                of period
            
            $
            317,389
            
            $
            147,646Additions
            
            
            (8,972
            )
            
            169,743End
                of period
            
            $
            308,417
            
            $
            317,389





**6.**
              **PROPERTY
                  AND EQUIPMENT**





Property
      and equipment consist of the following:









September
                30,
                2008
            
            December
                31,2007Production
                machinery and equipment
            
            $
            5,033,890
            
            $
            2,680,413Leasehold
                improvements
            
            
            356,702
            
            
            329,812Office
                and other equipment
            
            
            484,847
            
            
            67,375Automobiles
            
            
            315,679
            
            
            296,6806,191,118
            
            
            3,374,280Less:
                Accumulated depreciation
            
            
            (1,490,579
            )
            
            (933,016
            )Total
            
            $
            4,700,539
            
            $
            2,441,264








Depreciation
      expense was $488,584 and $322,494 for the nine months ended September 30, 2008
      and 2007, and is broken down as follows:





For
                the Three Months Ended
            
            For
                the Nine Months EndedSeptember
                30,
            
            September
                30,2008
            
            2007
            
            2008
            
            2007Cost
                of sales
            
            $
            147,910
            
            $
            84,375
            
            
            411,615
            
            $
            284,908Operating
                expense
            
            
            37,029
            
            
            16,721
            
            
            76,969
            
            
            37,586Total
            
            $
            184,939
            
            $
            101,096
            
            
            488,584
            
            $
            322,494





-11-




**7.**
              **SHORT-TERM
                  BANK LOANS**





Short-term
      bank loans consist of the following:




September
                  30,
              
              
              December
                  31,2008
              
              
              2007Revolving
                  loans with ABN Amro, renewable on 90-days terms, interest at 6.44%-
                  8.2125% per annum due January to March 2008 and secured by restricted
                  cash
                  of approximately $822,582.
              
              
              
              
              $
              $4,005,240Revolving
                  loans with ABN Amro, renewable on 90-days terms, interest at 6.58%
                  -
                  8.2125% per annum due in November 2008 and secured by restricted
                  cash of
                  approximately $875,260.
              
              
              1,918,338Revolving
                  loans with Public Bank (Hong Kong) Limited, renewable on 90-day
                  terms,
                  interest rates ranging from 8.75% - 9.5%, due in February 2008
                  and secured
                  by restricted cash of approximately $137,097.
              
              
              
              
              
              273,968Revolving
                  loans with DBS Bank, renewable on 90-days terms, interest at 7.5%
                  -9% per
                  annum, due in July 2008 and secured by restricted cash of approximately
                  $253,707.
              
              
              —
              
              
              636,202China
                  Construction Bank, interest at 7.5% - 8.424% per annum, due in
                  January
                  2009 and secured by a personal guarantee of the Company’s chief executive
                  officer and restricted cash of approximately $145,877.
              
              
              303,911
              
              
              685,486NanYang
                  Commercial Bank, renewable on 120 days terms, interest at 7%-8%
                  per annum,
                  due in Nov 2008 and secured by restricted cash of approximately
                  $874,199.
              
              
              2,185,497Total
                  short-term loans
              
              $
              4,407,746
              
              $
              5,600,896





Interest
      expense from these loans for the nine months ended September 30, 2008 and 2007
      amounted to $389,152 and $96,292 respectively.





The
      Company is required to hold a portion of the loans as partial security for
      the
      loans. See Note 8.





**8.**
              **RESTRICTED
                  CASH**





The
      Company is required to hold a portion of borrowed money as security for payment
      of the loans (See Note 7). These amounts are reflected as restricted cash.
      Restricted cash consists of following:





September
                30,
            
            December
                31,2008
            
            2007ABN
                Amro
            
            $
            875,260
            
            $
            822,582Public
                Bank (Hong Kong) Limited
            
            
            
            
            
            137,097DBS
                Bank
            
            
            —
            
            
            257,052China
                Construction Bank
            
            
            145,877
            
            
            137,097East
                Asia Bank
            
            
            —
            
            
            685,486NanYang
                Commercial Bank
            
            
            874,199
            
            
            —Total
            
            $
            1,895,336
            
            $
            2,039,314




-12-


**9.**
            **ADVANCE
                TO SUPPLIERS**





The
      following table sets forth information as to advances to supplier at September
      30,2008 and December 31, 2007, based on the number of days the advances were
      outstanding as of the respective balance sheet dates.




September
                30,
            
            December
                31,2008
            
            20070-90
                days
            
            $
            2,420,782
            
            $
            4,068,70490-120
                days
            
            
            236,115
            
            
            1,392,674120-360
                days
            
            
            —
            
            
            36,879$
            2,656,897
            
            $
            5,498,257




Advance
      to suppliers represents primarily deposit for purchase of raw materials. No
      formal contract was signed. The raw materials are scheduled for delivery during
      the fourth quarter of 2008. Since
      there is no formal contracted delivery schedule, the advance is classified
      as
      non current.





**10.**
              **PREPAID
                  EXPENSES AND OTHER
                  RECEIVABLES**





Prepaid
      expenses and other receivables at September 30, 2008 and December 31, 2007
      consisted of the following:




September
                30,
            
            December
                31,2008
            
            2007Prepaid
                expense
            
            $
            10,301
            
            $
            129,498Customs
                duty deposit
            
            
            548,773
            
            
            125,403Other
            
            
            175
            
            
            4,269$
            559,249
            
            $
            259,170





**11.**
              **OTHER
                  ASSETS**





Other
      assets at September 30, 2008 and December 31, 2007 consisted of the
      following;





September
                30
            
            December
                31,2008
            
            2007Deposits
            
            $
            —
            
            $
            959,680Other
            
            
            79,795
            
            
            99,542$
            79,795
            
            $
            1,059,222








**12.**
              **STOCKHOLDERS’
                  EQUITY**





**Reverse
      Split**




See
      Note
      1 for information concerning a one-for-7.5 shares reverse split of the common
      stock. All stock and per share information has been retroactively restated
      to
      reflect the reverse split.





**Series
      A Convertible Preferred Stock**





On
      September 12, 2007, the Company entered into a securities purchase agreement
      with Barron Partners LP and EOS Holdings LLC pursuant to which the investors
      purchased, for $4,000,000, an aggregate of (i) 3,703,704 shares of series A
      convertible preferred stock, with each share of series A preferred stock being
      initially convertible into one of a share of common stock, (ii) warrants to
      purchase 5,500,000 shares of common stock at $1.30 per share, and (iii) warrants
      to purchase 6,000,000 shares of common stock at $1.50 per share.




-13-




Additionally,
      the Company entered into a registration rights agreement pursuant to which
      the
      Company agreed to register the shares of Common Stock issuable upon conversion
      of the series A preferred stock and exercise of the warrants and an escrow
      agreement pursuant to which the Company placed 3,700,000 shares of series A
      preferred stock in escrow. These shares are in addition to the 3,703,704 shares
      of series A preferred stock that were issued in the private placement. If the
      Company’s consolidated net income, as defined, for 2007 and 2008 do not reach
      the target numbers, on a per share, fully diluted basis, some or all of these
      shares are to be delivered to the investors and if the targets are met, the
      shares are to be returned to the Company and cancelled. The
      target number is stated in RMB. There was no adjustment for 2007. The target
      number for 2008 is approximately RMB1.569 (approximately $0.2223) per share.
      All
      of the shares held in escrow are delivered to the investors if the net income
      for 2008 is 50% or less than the target number for that year. If the shortfall
      is less than 50%, a ratable portion of the shares are delivered to the
      Investors. The dollar equivalents to referred to in this paragraph are based
      on
      the conversion rates on September 11, 2007, and are subject to change. On
      September 11, 2007, the exchange rate was RMB   7.5247 for
      $1.00. On September 30, 2008, the exchange rate was
      RMB  7.0502  for $1.00.




Net
      income, for the purposes of determining whether any shares are to be delivered
      to the investors, is defined to mean net income
      determined in accordance with GAAP plus (a) any charges relating to the
      transaction contemplated by the Purchase Agreement and the registration rights
      agreement, minus (b) the amount, if any, by which all non-recurring losses
      or
      expenses exceed all non-recurring items or income or gain .
      Net
      Income shall not be adjusted if all non-recurring items of income or gain exceed
      all non-recurring losses or expenses. Items shall be deemed to be non-recurring
      only if they qualify as non-recurring pursuant to GAAP. For determining net
      income per share, all shares which are outstanding or which may be issuable
      upon
      exercise or conversion of options, warrants and other convertible securities
      are
      deemed to be outstanding, regardless of whether the shares would be counted
      for
      purposes of computing diluted earnings per shares under GAAP.




The
      warrants have a term of five years, and expire on September 12, 2012. The
      warrants provide a cashless exercise feature which permits the conversion of
      the
      warrants into shares of Common Stock or Series A Preferred Stock if the
      underlying shares are not covered by an effective registration statement. As
      of
      November 1, 2008, none of the shares of common stock issuable upon exercise
      of
      warrants was covered by an effective registration statement.





The
      warrants provide that the exercise price of the warrants may be reduced by
      up to
      50% in each of 2007 and 2008 if the Company’s net income, as defined, per share
      of common stock, on a fully-diluted basis, is less than the Target Numbers
      described above for 2007 and 2008. An adjustment in the warrant exercise price
      does not affect the number of shares issuable upon exercise of the warrants.
      There was no adjustment for 2007.




In
      accordance with Emerging Issues Task Force (‘‘EITF’’) 98-5 and EITF 00-27, the
      Series A convertible preferred stock (“Series A Preferred”) were considered to
      have an embedded beneficial conversion feature (BCF) because the effective
      conversion price was less than the fair value of the Company’s common stock.
      This convertible preferred stock was fully convertible at the issuance date,
      therefore the portion of proceeds allocated to the Series A preferred of
      $1,088,927 was determined to be the value of the beneficial conversion feature
      and was recorded as a deemed preferred stock dividend.





The
      investors received warrants to purchase up to 5,500,000 shares of common stock
      of the Company at an exercise price of $1.30 per share and up to 6,000,000
      shares of common stock of the Company at an exercise price of $1.50 per share.
      The fair market value of each stock warrant was estimated on the date of grant
      using the Black-Scholes option-pricing model in accordance with SFAS No. 123R
      using the following weighted-average assumptions: expected dividend yield 0%;
      risk-free interest rate of 4.50%; volatility of 15% and an expected term of
      five
      years. The portion of proceeds allocated to the warrants of $1,088,926 was
      determined to be the value of the warrants and was recorded as a deemed
      preferred stock dividend.





The
      Purchase Agreement, the certificate of designation and the Warrants provide
      that
      those securities may not be exercised or converted if such conversion or
      exercise would result in the holder and its affiliates having beneficial
      ownership of more than 4.9% of the Company’s outstanding common stock.
      Beneficial ownership is determined in accordance with Section 13(d) of the
      Securities Exchange Act of 1934, as amended, and Rule 13d-3 thereunder. This
      limitation may not be waived.




The
      Purchase Agreement, the certificate of designation for the series A preferred
      stock and the Warrants also provide that, with certain exceptions, if the
      Company issues common stock at a price, or other warrants or other convertible
      securities with an exercise or conversion price which is less than the
      conversion price of the series A preferred stock or the exercise price of the
      warrants, as the case may be, the conversion price of the warrants or the
      exercise price of the warrants will be reduced to the sales price, exercise
      price or conversion price, as the case may be, of such other securities, except
      that, the exercise price of the $1.30 warrants has a formula
      adjustment.




-14-





Pursuant
      to the purchase agreement, in addition to the foregoing:





·
            The
                Company agreed to have appointed such number of independent directors
                that
                would result in a majority of its directors being independent directors,
                that the audit committee would be composed solely of independent
                directors
                and the compensation committee would have a majority of independent
                directors within 90 days after the closing. Failure to meet this
                date will
                result in liquidated damages commencing 90 days after the closing
                from the
                period from the end of the 90 day period until the date on which
                the
                requirement is satisfied. Thereafter, if the Company does not meet
                these
                requirements for a period of 60 days for an excused reason, as defined
                in
                the Purchase Agreement, or 75 days for a reason which is not an excused
                reason, this would result in the imposition of liquidated damages.
                On
                October 29, 2008, one of the Company’s independent directors resigned. As
                a result, the Company does not have a majority of independent directors.
                If the Company does not have a majority of independent directors
                by
                January 12, 2009, which is 75 days after the resignation of an independent
                director, the Company will be subject to liquidated
                damages.




·
            The
                Company agreed to hire a full-time qualified chief financial officer
                within 60 days after the closing date. Failure to meet this covenant
                would
                result in the imposition of liquidated
                damage.




·
            Liquidated
                damages for failure to comply with the preceding two covenants are
                computed in an amount equal to 12% per annum of the Purchase Price,
                up to
                a maximum of 15% of the Purchase Price, which is $600,000, which
                is
                payable in cash or series A preferred stock, at the election of the
                investors.




·
            The
                Company and the investors entered into a registration rights agreement
                pursuant to which the Company agreed to file, within 60 days after
                the
                closing, a registration statement covering the common stock issuable
                upon
                conversion of the series A preferred stock and exercise of the warrants.
                The failure of the Company to meet this schedule and other timetables
                provided in the registration rights agreement would result in the
                imposition of liquidated damages, which are payable through the issuance
                of additional shares of series A preferred stock at the rate of 1,217
                shares of series A preferred stock for each day, based on the proposed
                registration of all of the underlying shares of common stock, with
                a
                maximum of 550,000 shares. The registration rights agreement also
                provides
                for additional demand registration rights in the event that the investors
                are not able to register all of the shares in the initial registration
                statement.




·
            The
                investors have a right of first refusal on future
                financings.




·
            The
                Company is restricted from issuing convertible debt or preferred
                stock or
                from having debt in an amount greater than twice the Company’s earnings
                before interest, taxes, depreciation and
                amortization.




·
            The
                Company’s debt cannot exceed twice the preceding four quarters earnings
                before interest, taxes, depreciation and
                amortization.




·
            The
                Company’s officers and directors agreed, with certain limited exceptions,
                not to publicly sell shares of common stock for 27 months or such
                earlier
                date as all of the convertible securities and warrants have been
                converted
                or exercised and the underlying shares of common stock have been
                sold.




· ****
            The
                Company paid Barron Partners $50,000 for its due diligence
                expenses.




On
      March
      28, 2008, the Company entered into an agreement with the investors in the
      September 2007 private placement pursuant to which:




·
            The
                Company issued a total of 3,349,185 shares of series A preferred
                stock in
                exchange for warrants to purchase a total of 7,179,487 shares of
                common
                stock that had been issued in the September 2007 private placement.
                The
                warrants were cancelled.




·
            The
                3,700,000 shares of series A preferred stock held in escrow pursuant
                to
                the securities purchase agreement were returned to the Company and
                cancelled. These shares had been held in escrow, with all or a portion
                of
                the shares to be delivered to the Investors if certain earnings targets
                were not met for 2007 and 2008 and all of the shares to be delivered
                to
                the Company for cancellation if the earnings targets are
                met.




·
            The
                remaining warrants, pursuant to which a total of 4,070,200 shares
                of
                common stock are issuable as of March 31, 2008, were amended to eliminate
                the provisions which provided for a reduction in the warrant exercise
                price if the earnings targets were not met for 2007 and 2008.




-15-




**Common
      Stock**




On
      September 12, 2007, in connection with Purchase Agreement, the Company issued
      166,000 shares of its common stock as professional fees.




During
      the nine months ended September 30, 2008, the Company issued 575,842 shares
      of
      common stock upon exercise of warrants, and 192,593 shares of common stock
      upon
      conversion of series A preferred stock.




During
      the three months ended September 30, 2008, the Company issued 52,029 shares
      of
      common stock upon exercise of warrants




**Warrants
      and Options**




A
      summary
      of the status of the Company's outstanding stock warrants as of September 30,
      2008 and changes during the periods then ended is as follows:




WeightedNumber
                of
            
            AverageWarrants
            
            Exercise
                PriceBalance
                at December 31, 2007
            
            
            11,500,000
            
            $
            1.40Exercised
                1.30 Warrants
            
            
            (575,842
            )
            
            1.30Cancelled
                $1.30 Warrants
            
            
            (1,179,487
            )
            
            1.30Cancelled
                $1.50 Warrants
            
            
            (6,000,000
            )
            
            1.50Balance
                at September 30, 2008
            
            
            3,744,671
            
            $
            1.30





Warrants
                Outstanding
            
            Warrants
                ExercisableWeightedAverage
            
            Weighted
            
            
            
            WeightedRemaining
            
            Average
            
            
            
            AverageContractual
            
            Exercise
            
            
            
            ExerciseRange
                of Exercise Prices
            
            Shares
            
            Life
                (Years)
            
            Price
            
            Shares
            
            Price$1.30
            
            
            3,744,671
            
            
            4.
            
            $
            1.30
            
            
            3,744,671
            
            $
            1.303,744,671
            
            
            
            
            $
            1.30
            
            
            3,744,671
            
            $
            1.30





Following
      the Model of EITF 00-19, “Accounting for Derivative Financial Instruments
      Indexed to, and Potentially Settled in, a Company’s Own Stock,” the Warrants,
      are considered freestanding instruments and are classified as equity instruments
      and included in additional paid-in capital.





As
      of
      September 30, 2008, the Company did not have an equity-based incentive plan
      and
      no options were outstanding.





**13.**
              **CURRENT
                  VULNERABILITY DUE TO CERTAIN
                  CONCENTRATIONS**





The
      Company’s operations are all carried out in the PRC. Accordingly, the Company’s
      business, financial condition and results of operations may be influenced by
      the
      political, economic and legal environments in the PRC, and by the general state
      of the PRC’s economy.





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




-16-





**14.**
              **COMMITMENTS
                  AND CONTINGENCIES**





(a)
            Operating
                lease commitments





The
      Company has entered into five-year leases for factory premises and staff dorms.
      These leases can be renewed for an additional five-year term. The Company’s
      commitments for minimum lease payments under these non-cancelable operating
      leases for the next five years and thereafter are as follows: Rent expense
      for
      the nine months ended September 30, 2008 and 2007 was $229,992 and $137,769,
      respectively.





The
      following table sets for our minimum lease commitments through
      2010:





Three
                months ended December 31, 2008
            
            $
            74,958Year
                ended December 31, 2009
            
            
            299,833Year
                ended December 31, 2010
            
            
            80,343$
            455,134








(b)
            Social
                insurances of Suny’s employees





According
      to the laws and regulations of the PRC, Suny is required to cover its employees
      with medical, retirement and unemployment insurance programs. Management
      believes that due to the transient nature of its employees, Suny does not need
      to provide all employees with such social insurances, and has paid the social
      insurances for those of its employees who have completed three months’
continuous employment.





In
      the
      event that any current or former employee files a complaint with the PRC
      government and the complaint is upheld, Suny may be subject to making up the
      social insurances as well as administrative fines. The Company does not believe
      that any liability it may incur if it is held to be in violation of these laws
      would be material, and, accordingly, no provision has been made for any possible
      liability.





(c)
            Statutory
                Reserves





Based
      on
      the legal formation of the entities, Suny is required to set aside 10% of its
      net income as reported in its statutory accounts on an annual basis to the
      Statutory Surplus Reserve Fund. Once the total Statutory Surplus Reserve reaches
      50% of the registered capital of Suny, further appropriations are discretionary.
      The Statutory Surplus Reserve can be used to increase the registered capital
      and
      eliminate future losses of the respective companies under PRC GAAP. The
      Statutory Surplus Reserve is not distributable to shareholders except in the
      event of liquidation.





Before
      January 1, 2006, Suny was also required on an annual basis to set aside at
      least
      5% of after-tax profit, calculated in accordance with PRC accounting standards
      and regulations, to the Statutory Surplus Welfare Fund, which can be used for
      staff welfare.





Effective
      from January 1, 2006, the appropriation to the Statutory Surplus Welfare Fund
      is
      no longer required. If Suny provide the Statutory Surplus Welfare Fund, such
      amount shall be determined at the discretion of its board of
      directors.





The
      Reserve Fund can be used to increase the registered capital upon approval by
      relevant government authorities and eliminate future losses of the respective
      companies upon a resolution by the board of directors.





Appropriations
      to the above statutory reserves are accounted for as a transfer from retained
      earnings to statutory reserves and are performed once a year at the fiscal
      year-end.





There
      are
      no legal requirements in the PRC to fund these statutory reserves by transfer
      of
      cash to any restricted accounts, and the Group does not do so. These reserves
      are not distributable as cash dividends.





**15.**
              **INCOME
                  TAXES**





-17-




The
      Company is registered in the PRC as a wholly-foreign owned enterprise. Under
      the
      tax laws of the PRC, the Company is entitled to a preferential Enterprise Income
      Tax (“EIT”) rate of 15%, which a full exemption for the first two profitable
      years, followed by a 50% reduction on EIT for the following three consecutive
      years.





The
      provision for taxes on earnings consisted of:




September
                30,2008
            
            2007Current
                income tax expenses:PRC
                Enterprise Income Tax
            
            $
            277,570
            
            $
            256,238United
                States Federal Income Tax
            
            
            —
            
            
            —Total
            
            $
            277,570
            
            $
            256,238





A
      reconciliation between the income tax computed at the U.S. statutory rate and
      The Group’s provision for income tax is as follows:




September30,2008
            
            2007U.S.
                statutory rate
            
            
            34
            %
            
            34
            %Foreign
                income not recognized in the U.S.
            
            
            (34
            %)
            
            (34
            %)PRC
                preferential Enterprise Income Tax rate
            
            
            15
            %
            
            0
            %Tax
                holiday and relief granted to the Subsidiary
            
            
            (7.5
            %)
            
            (0
            %)Provision
                for income tax
            
            
            7.5
            %
            
            0
            %




No
      material deferred tax liabilities or assets existed as of either September
      30, 2008 or 2007.




The
      tax
      authority of the PRC Government conducts periodic and ad hoc tax filing reviews
      on business enterprises operating in the PRC after those enterprises had
      completed their relevant tax filings, hence the Company’s tax filings may not be
      finalized. It is therefore uncertain as to whether the PRC tax authority may
      take different views about the Company’s tax filings which may lead to
      additional tax liabilities.





The
      Company has no United States corporate income tax liability for 2008 or
      2007.





**16.**
            **RELATED
                PARTY TRANSACTION**





The
      Company rents office space in Hong Kong from a director’s wife .  The
      relevant rent expenses consist of following for the nine months
      ended:




September
              30,Location
            
            Landlord
            
            2008
            
            2007No.
                10, 6 /F., Hewlett Centre, No. 52-54 Hoi Yuen Road , Kwun Tong, Hong
                Kong
            
            Mdm
                Ting Yuen Chung
            
            8,077
            
            —




-18-





ITEM
      2.
      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





**Forward
      Looking Statements**





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, the costs of raw materials, 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, our ability to make
      acquisitions and successfully integrate those acquisitions with our business,
      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**




When
      used
      in this quarterly report, the terms "we," and "us" and words of like import
      refer to China Display Technologies, Inc. and our wholly-owned
      subsidiaries.




The
      financial statements reflect the operations of Suny prior to September 12,
      1007,
      the date of the reverse acquisition, and the consolidated operations of the
      Company and its subsidiaries subsequent to September 12, 2007.




We
      design, manufacture and market small to medium-sized LEDs and cold cathode
      fluorescent lamp for various types of displays. Our emphasis is on small to
      medium-size back lighting unit manufacturing, and we are now developing the
      large size back lighting unit.




We
      sell
      our products to manufacturers of electronic products and not to end users.
      Our
      customers generally do not provide us with any long-term commitments. As a
      result it is necessary for us to estimate the requirements for our products
      based in part on non-binding estimates by our customers and potential customers
      rather than firm orders. In addition, in some instances, we develop products
      based on anticipated customer demand with no assurance that we will get the
      anticipated orders. To the extent that we do not receive the anticipated orders
      or that our customers require products in greater quantities than we anticipated
      or require products other than those we anticipated, our revenue and margins
      will be affected.




A
      small
      number of customers account for a very significant percentage of our revenue.
      During the nine months ended September 30, 2008, we had two customers that
      generated revenue of more than 10%. These customers accounted for 11% and 10%
      of
      our revenue during the nine months ended September 30, 2008. For the year ended
      December 31, 2007, we had two customers that generated revenue of more than
      10%
      These customers accounted for 19% and 11% of our revenue during the year ended
      December 30, 2007. The 10% customers for the nine months ended September 30,
      2008 and the year ended December 31, 2007 are different customers. Unless we
      replace a customer, the loss of any of these customers could have a material
      adverse effect upon our revenue and net income. Although we market to customers
      both within China and outside of China, our largest customers are Chinese
      manufacturers, many of whom manufacture products for sale in the international
      market. As a result, we are dependent upon the international market acceptance
      of Chinese made products, and the market for our products is dependent upon
      the
      global demand for products which use components manufactured by us. The
      international economy has recently experienced a significant downturn. Although
      this downturn did not have an effect on our sales, margins and net income for
      the three and nine months ended September 30, 2008, it is possible that our
      business may be impacted by any downturn in the market consumer market for
      the
      products which use light-emitting devices. To the extent that the economic
      slowdown affects our customers and their customers, we anticipate that our
      operations would be affected as well.




We
      do not
      have long term supply contracts. While this practice reduces our risk, it also
      subjects us to price changes and, if our suppliers have a larger than
      anticipated demand for its products, our allocation may be reduced. We may
      not
      be able to obtain the components from alternate suppliers in a timely manner
      if
      at all, which would affect our relationship with our customers.




-19-




Prior
      to
      September 2007, we were a privately-owned company and we did not have the legal,
      accounting and other expenses that are associated with our being a public
      company. Commencing in the third quarter of 2007, our general and administrative
      expenses have increased as a result of these factors.




**Critical
      Accounting Policies and Estimates**




The
      discussion and analysis of our financial condition and results of operations
      is
      based upon our financial statements which have been prepared in accordance
      with
      accounting principles generally accepted in the United States. 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 inventory, income taxes and contingencies.
      We
      base our estimates on historical experience and on other assumptions that we
      believes 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.




In
      estimating the collectability of accounts receivable we analyze historical
      write-offs, changes in our internal credit policies and customer concentrations
      when evaluating the adequacy of our allowance for doubtful accounts. Differences
      may result in the amount and timing of expenses for any period if we make
      different judgments or uses difference estimates. Our accounts receivable
      represent a significant portion of our current assets and total assets. Our
      realization on accounts receivable, expressed in terms of United States dollars
      may be affected by fluctuations in currency rates since the customer’s currency
      is frequently a currency other than United States dollars.




Inventories
      comprise raw materials work on process, finished goods and low value consumable
      articles are stated at the lower of cost or market. Substantially all inventory
      costs are determined using the weighted average basis. Costs of finished goods
      include direct labor, direct materials, and production overhead before the
      goods
      are ready for sale. Inventory costs do not exceed net realizable
      value.




Property,
      equipment are stated at cost. Depreciation is provided principally by use of
      the
      straight-line method over the useful lives of the related assets. Expenditures
      for maintenance and repairs, which do not improve or extend the expected useful
      life of the assets, are expensed to operations while major repairs are
      capitalized. The gain or loss on disposal of property, plant and equipment
      is
      the difference between the net sales proceeds and the carrying amount of the
      relevant assets, and, if any, is recognized in the statements of
      operations.




Under
      the
      tax laws of the PRC, we received a 100% tax holiday for 2005 and 2006 for the
      enterprise income tax. For 2007, 2008 and 2009, under present law, we will
      be
      entitled to a 50% tax holiday from this tax. As a result, we did not pay income
      tax for 2005 and 2006. The tax provision for 2007 and 2008 is 7.5% of taxable
      income.




We
      cannot
      predict what future laws and regulations might be passed that could have a
      material effect on our results of operations. We assess the impact of
      significant changes in laws and regulations on a regular basis and update the
      assumptions and estimates used to prepare our financial statements when we
      deem
      it necessary.




We
      recognize product sales generally at the time the product is shipped. Shipping
      and handling costs are included in cost of goods sold. Revenue is presented
      net
      of any sales tax and value added tax.




Our
      functional currency is the RMB, which is the currency of the PRC, and our
      reporting currency is United States dollars. Our balance sheet accounts are
      translated into United States dollars at the year-end exchange rates prevailing
      during the periods in which these items arise. Translation gains and losses
      are
      deferred and accumulated as a component of other comprehensive income in owners’
equity. Transaction gains and losses that arise from exchange rate fluctuations
      from transactions denominated in a currency other than the functional currency
      are included in the statement of operations as incurred. The translation and
      transaction gains and losses were immaterial in the statement of operations
      as
      incurred. The translation and transaction gains and losses were immaterial
      for
      the three months ended September 30, 2008 and 2007.




The
      PRC
      government imposes significant exchange restrictions on fund transfers out
      of
      the PRC that are not related to business operations. These restrictions have
      not
      had a material impact on our operations because we have not previously engaged
      in any significant transactions that are subject to the
      restrictions.




**Reverse
      Acquisition**




On
      September 12, 2007, we acquired Keep On Holdings and its wholly-owned
      subsidiary, Suny, in a transaction which is accounted for as a reverse
      acquisition. Although we are the company that made the acquisition, for
      accounting purposes, Suny is treated as the acquiring company. As a result
      our
      financial statements reflect the financial position, results of operations
      and cash flows of Suny prior to September 12, 2007 and the consolidated
      operations of the Company its subsidiaries, including Suny, from and after
      September 12, 2007. From Suny’s organization until the completion of the reverse
      acquisition, Lawrence Kwok-Yan Chan, was Suny’s sole stockholder. The 11,376,000
      shares issued to Mr. Chan and his designees are deemed to have been outstanding
      for all periods prior to September 12, 2007.




-20-




**Convertible
      Preferred Stock and Warrants**




In
      accordance with EITF 00-19, we determined that the convertible preferred stock
      and the accompanying warrants were equity instruments under SFAS 150 and 133.
      Although we had unconditional obligation to issue additional shares of common
      stock upon conversion of the series A preferred stock if our fully-diluted
      EBITDA per share were below the targeted levels, the certificate of designation
      relating to the series A preferred stock did not provide that we must issue
      shares that are registered pursuant to the Securities Act of 1933, with the
      result, pursuant to the certificate of designation, the additional shares need
      not be registered shares. Our series A preferred stock also met all other
      conditions for the classification as equity instruments. We had a sufficient
      number of authorized shares, the agreement contained an explicit limit on the
      number of shares to be delivered on conversion of the series A preferred stock
      unless we issue shares at a price below the conversion price of the series A
      preferred stock, there is no required cash payment or net cash settlement
      requirement, and the holders of the series A preferred stock had no right higher
      than the holders of the common stock.




Our
      warrants were excluded from derivative accounting because they were indexed
      to
      our common stock and were classified in stockholders’ equity section according
      to SFAS 133 paragraph 11(a).





**Results
      of Operations**





***Three
      Months ended September 30, 2008 and 2007***




The
      following table sets forth information from our statements of operations for
      the
      three months ended September 30, 2008 and 2007, in dollars and as a percentage
      of revenue (dollars in thousands):




Three
                Months Ended September 30,2008
            
            2007Sales
            
            $
            10,826
            
            
            100.0
            %
            $
            9,175
            
            
            100.0
            %Cost
                of sales
            
            
            8,407
            
            
            77.7
            %
            
            6,985
            
            
            76.1
            %Gross
                profit
            
            
            2,419
            
            
            22.3
            %
            
            2,191
            
            
            23.8
            %Selling
            
            
            397
            
            
            3.7
            %
            
            275
            
            
            3.0
            %Research
                and development
            
            
            443
            
            
            4.1
            %
            
            166
            
            
            1.8
            %General
                and administrative
            
            
            379
            
            
            3.5
            %
            
            277
            
            
            3.0
            %Income
                from operations
            
            
            1,201
            
            
            11.1
            %
            
            1,472
            
            
            16.0
            %Interest
                expense, net
            
            
            91
            
            
            0.8
            %
            
            81
            
            
            0.9
            %Income
                before income taxes
            
            
            1,110
            
            
            10.3
            %
            
            1,391
            
            
            15.2
            %Provision
                for (benefit from) income taxes
            
            
            100
            
            
            0.9
            %
            
            112
            
            
            1.2
            %Deemed
                preferred stock dividend
            
            
            —
            
            
            —
            
            
            2,178
            
            
            23.7
            %Net
                income
            
            
            1,010
            
            
            9.3
            %
            
            (900
            )
            
            (9.8
            %)




Sales
      were $10.83 million for the three months ended September 30, 2008 (the
“September 2008 Quarter”), an increase of $1.6 million, or 18%, from $9.18
      million for three months ended September 30, 2007 (the “September 2008
      Quarter”). The increase in revenue reflects an increase demand for our products
      from small screen liquid crystal display and LED manufacturers.




Cost
      of
      sales was $8.41 million for the September 2008 Quarter, an increase of $1.4
      million, or 20%, compared to $6.99 million for the September 2007 Quarter.
      The
      gross profit for the September 2008 Quarter was $2.42 million, an increase
      of
      $0.23 million, or 10.4%, from $2.19 million for the September 2007 Quarter.
      In
      general, the increase in cost of goods sold and gross profit resulted from
      and
      reflected the increase in revenue, although the gross margin for the September
      2008 Quarter was 22.3%, compared with 23.8% for the September 2007
      Quarter.




Selling
      expenses were $397,000 for September 2008 Quarter, an increase of $122,000,
      or
      44%, compared with $275,000 during the September 2007 Quarter. The increase
      was
      primarily attributed to our heightened efforts to expand our market share and
      promote our new products.


-21-




Research
      and development expenses were $443,000 for the September 2008 Quarter, an
      increase of $277,000, or 167%, from $166,000 for the September 2007 Quarter,
      as
      a result of research and development relating to large size BLU
      products.





General
      and administrative expenses were $379,000 for the September 2008 Quarter, an
      increase of $102,000, or 37%, from $277,000 for the September 2007 Quarter.
      The
      increase was in line with the increase in our scales of operation, and the
      additional legal, accounting, financial public relations and other costs that
      we
      incurred as a public company.




Income
      from operations was approximately $1.20 million for the September 2008 Quarter,
      compared with approximately $1.47 million for the September 2007 Quarter. The
      increase was primarily the result of factors described above.




Income
      tax provision for the September 2008 Quarter was approximately $100,000,
      compared with approximately $112,000 for the September 2007 Quarter. The
      effective tax rate for both the September 2008 Quarter and the September 2007
      Quarter was 7.5%, as a result of the 50% tax holiday that, under current law,
      applies to 2007, 2008 and 2009.





The
      beneficial effect of the conversion price is reflected as a deemed dividend
      of
      approximately $2.2 million to the holders of the series A preferred stock in
      the
      September 2007 Quarter. This deemed dividend is a non-cash
      transaction.





As
      a
      result of the foregoing, net income for the September 2008 Quarter was $1.01
      million, or $0.08 per share (basic) and $0.04 per share (diluted), as compared
      with net income of $1.28 million for the September 2007 Quarter. As a result
      of
      the deemed preferred stock dividend in the September 2007 quarter, net loss
      available to common stockholders for the September 2007 quarter was $0.9
      million, or $(0.08) per share (basic and diluted).





***Nine
      Months ended September 30, 2008 and 2007***




The
      following table sets forth information from our statements of operations for
      the
      Nine months ended September 30, 2008 and 2007, in dollars and as a percentage
      of
      revenue (dollars in thousands):




Nine
                Months Ended September 30,2008
            
            2007Sales
            
            $
            27,267
            
            
            100.0
            %
            $
            20,488
            
            
            100.0
            %Cost
                of sales
            
            
            21,128
            
            
            77.4
            %
            
            15,706
            
            
            76.7
            %Gross
                profit
            
            
            6,139
            
            
            22.6
            %
            
            4,782
            
            
            23.3
            %Selling
            
            
            796
            
            
            2.4
            %
            
            415
            
            
            2.0
            %Research
                and developments
            
            
            816
            
            
            2.3
            %
            
            392
            
            
            1.9
            %General
                and administrative
            
            
            806
            
            
            2.6
            %
            
            569
            
            
            2.8
            %Income
                from operations
            
            
            3,722
            
            
            15.3
            %
            
            3,405
            
            
            16.6
            %Interest
                expense, net
            
            
            373
            
            
            1.7
            %
            
            95
            
            
            0.5
            %Other
                income (expenses)
            
            
            (3
            )
            
            0.0
            %
            
            0
            
            
            0.0
            %Income
                before income taxes
            
            
            3,346
            
            
            13.6
            %
            
            3,310
            
            
            16.2
            %Provision
                for (benefit from) income taxes
            
            
            278
            
            
            1.1
            %
            
            256
            
            
            1.2
            %Deemed
                preferred stock dividend
            
            
            —
            
            
            —
            
            
            (2178
            )
            
            10.6
            %Net
                income
            
            
            3,068
            
            
            12.5
            %
            
            876
            
            
            4.3
            %




Sales
      were $27.7 million for the nine months ended September 30, 2008 (the “September
      2008 Period”), an increase of $6.8 million, or 33%, from $20.5 million for nine
      months ended September 30, 2007 (the “September 2007 Period”). The increase in
      revenue reflects an increased demand for our BLU products from small screen
      LCD
      manufacturers and the expansion of our market.




Cost
      of
      sales was $21.1 million for the September 2008 Period, an increase of $5.4
      million, or 35%, compared to $15.7 million for the September 2007 Period. The
      gross profit for the September 2008 Period was $6.1 million, an increase of
      $1.4
      million, or 28%, from $4.8 million for the September 2007 Period. In general,
      the increase in cost of goods sold and gross profit resulted from and reflected
      the increase in revenue, although the gross margin for the September 2008 Period
      was 22.6%, compared with 23.3% for the September 2007 Period.




Selling
      expenses were $796,000 for September 2008 Period, an increase of $381,000,
      or
      92%, compared with $415,000 during the September 2007 Period. The increase
      was
      attributable to the increase in sales commissions and marketing expenses as
      a
      result of and also in line with increase in our revenue.





-22-




Research
      and development expenses were $816,000 for the September 2008 Period, an
      increase of $424,000, or 108%, from $392,000 for the September 2007 Period,
      as a
      result of research and development relating to new projects including large
      BLU
      products.




General
      and administrative expenses were $806,000 for the September 2008 Period, an
      increase of $237,000, or 42% from $569,000 for the September 2007 Period. The
      increase was in line with the increase in our scales of operation, and the
      additional legal, accounting, financial public relations and other costs that
      we
      incurred as a public company.




Income
      from operations was approximately $3.7 million for the September 2008 Period,
      compared with approximately $3.4 million for the September 2007 Period. The
      increase was primarily the result of factors described above.




Income
      tax provision for the September 2008 Period was approximately $278,000, an
      increase of $22,000, or 8.6% from $256,000 for the September 2007 Period. The
      effective tax rate for the both the September 2008 Period and the September
      2007
      Period was 7.5%, as a result of the 50% tax holiday that, under current law,
      applies to 2007, 2008 and 2009.





For
      the
      September 2008 Period, we had net income of $3.07 million, or $ 0.25 per share
      (basic) and $0.14 per share (diluted), a modest increase from net income of
      $3.05 million for the September 2007 Period. As a result of the deemed preferred
      stock dividend in the third quarter of 2007, the net income available to common
      stockholders for the September 2007 Period was $0.87 million, or $ 0.08 per
      share (basic) and $0.06 per share (diluted).





**Liquidity
      and Capital Resources**




At
      September 30, 2008, we had a cash balance of $729,000. These funds are major
      located in financial institutions located in China. We also had restricted
      cash
      on $1.9 million, which was being held as security for short-term bank
      loans.





We
      are
      subject to the regulations of the PRC which restricts the transfer of cash
      from
      that country, except under certain specific circumstances. Accordingly, such
      funds may not be readily available to us to satisfy obligations which have
      been
      incurred outside the PRC.





As
      of
      September 30, 2008, we had working capital of approximately $9.9 million,
      compared to $8.0 million at September 30, 2007, of which cash and cash
      equivalents amounted to $729,000 million, compared to $2.5 million at September
      30, 2007. Our accounts receivable has been a significant portion of our current
      assets having increased by $1.5 million in the September 2008 Period. Accounts
      receivable at September 30, 2008 were $6.7 million, or 44% of current assets,
      compared to $5.3 million, or 43% of current assets at December 31, 2007.
      Inventories increased $3.7 million during the September 2008 Period, increasing
      to $5.4 million, compared to $1.7 million at December 31, 2007. The increase
      in
      inventories was substantially offset by a decrease of advance to suppliers
      $2.8
      million in the September 2008 Period, decreasing from $5.5 million at December
      31, 2007 to $2.7 million at September 30, 2008. Principally as a result of
      these
      factors, our cash flow used in operations amounted $264,000 in the September
      2008 Period, compared to net cash provided in operating activities of $2.65
      million in the September 2007 Period. As a result of the large percentage of
      our
      current assets that are reflected as accounts receivable, we require significant
      additional financing in order to expand our business. Our business may be
      impaired to the extent that we are not able obtain necessary financing, as
      well
      as by any effects on the current international economic condition. Furthermore,
      as described below, all of financing is short-term financing, and we cannot
      assure you that our lenders will continue to renew their loans as they mature.
      We have no financing commitments which may hinder our ability to generate new
      business.




For
      the
      September 2008 Period, we used cash for investing activities of $2.7 million
      as
      compared to $1.6 million for the September 2007 Period. For the September 2008
      Period, we used cash for the purchase of property and equipment of $2.7 million.
      For the September 2007 Period, we used cash for the purchase of property and
      equipment of $0.9 million.




We
      have
      entered into short-term revolving loan facilities, typically for 90-120day
      periods, with several banks pursuant which we have borrowed $4.4 million. At
      the
      end of each period, we are to repay these loans if they are not renewed. At
      September 30, 2008, there was $4,407,746 outstanding, all of which were due
      in
      the third quarter of 2008. These loans bear interest at rates ranging from
      6.58%
      to 9.50% and are secured by restricted cash of $1,895,336. In the past, these
      notes have been renewed for additional 90-day periods. Additionally, at
      September 30, 2008, we have a loan payable with a bank of $303,911 which is
      due
      on January 22, 2009 and is personally guarantee by our chief executive officer.
       During the September 2008 Period, we received gross proceeds of $748,595
      from the exercise of warrants and repayment of loan of $1.2m. During the
      September 2007 Period, our cash from financing activities consisted primarily
      from net proceed from preferred stock offering and from a loan of $6.5 million,
      which was offset by a decrease of restricted cash.




As
      we
      seek to expand our business, we require additional cash. This requirement is
      reflected in the $264,241 of cash used on our operations even though we
      increased revenue of $6.8 million, or 33%, from in the September 2008 Period
      from the September 2007 Period, and an increase in net income of $2.23 million,
      or 256%. The average ageing of our accounts receivables at September 30, 2008
      was 90 days at September 30, 2008, and 60 days at December 31, 2007.
      Historically, we have relied upon short term bank loans. We have registered
      shares of common stock for issuance upon exercise of outstanding warrants.
      As of
      September 30, 2008, we received $748,595 from the exercise of warrants. The
      warrants have an exercise price of $1.30. If all of the remaining warrants
      are
      exercised, we will receive proceeds of $4.9 million. However, we do not have
      a
      current registration statement covering any additional shares of common stock
      issuable upon exercise of the warrants have been registered under the Securities
      Act of 1933 and the market price of our common stock at November 7 was less
      than
      the exercise price of the warrants. As a result, we cannot assure you that
      any
      significant number of warrants will be exercised. We have no commitments from
      any source to provide financing. If the banks do not continue to extend the
      loans or if we are unable to obtain financing from other sources, including
      the
      exercise of warrants, our ability to continue our growth may be impaired.




-23-





*Off-balance
      Sheet Arrangements*





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





ITEM
      3.
      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.




Foreign
      Currency Exchange Rate Risk





We
      produce all our products in China and sell 90% of our products to companies
      in
      the PRC, many of which export our products in the international market. Our
      functional currency is RMB, and our financial statements are translated into
      United States dollars. Translation adjustments resulting from the translation
      of
      local currency financial statements into United States dollars are included
      in
      determining comprehensive income. Our financial statements are expressed in
      dollars. At September 30, 2008, the cumulative translation adjustment of
$1,574,015
      was classified as an item of other comprehensive income in the stockholders’
equity section of the consolidated balance sheet.




Most
      of
      our customers pay in a currency other than United States dollars. Our accounts
      receivable represent a significant portion of our current assets and total
      assets. As a result, our realization on accounts receivable, expressed in terms
      of United States dollars, may be affected by fluctuations in currency rates
      since the customer’s currency is frequently a currency other than United States
      dollars.




ITEM
      4.
      CONTROLS AND PROCEDURES





Under
      the
      supervision and with the participation of our management, including our
      principal executive officer and principal financial officer, we conducted an
      evaluation of our disclosure controls and procedures, as such term is defined
      under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934,
      as
      amended (the “Exchange Act”), within 90 days of the filing date of this report.
      In designing and evaluating the Company’s disclosure controls and procedures,
      management recognized that any controls and procedures, no matter how well
      designed and operated, can provide only reasonable assurance of achieving their
      objectives and management necessarily applied its judgment in evaluating the
      cost-benefit relationship of possible controls and procedures. Based on this
      evaluation, the Company’s chief executive officer and chief financial officer
      concluded that as of September 30, 2008, the Company’s disclosure controls and
      procedures were (1) designed to ensure that material information relating to
      the
      Company, including its consolidated subsidiaries, is made known to the Company’s
      chief executive officer and chief financial officer by others within those
      entities, particularly during the period in which this report was being prepared
      and (2) effective, in that they provide reasonable assurance that information
      required to be disclosed by the Company in the reports that it files or submits
      under the Exchange Act is recorded, processed summarized and reported within
      the
      time periods specified in the SEC’s rules and forms.




**Limitations
      on the Effectiveness of Internal Controls**





Management
      does not expect that our disclosure controls and procedures or our internal
      control over financial reporting will necessarily prevent all fraud and material
      errors. An internal control system, no matter how well conceived and operated,
      can provide only reasonable, not absolute, assurance that the objectives of
      the
      control system are met. Further, the design of a control system must reflect
      the
      fact that there are resource constraints, and the benefits of controls must
      be
      considered relative to their costs. Because of the inherent limitations on
      all
      internal control systems, no evaluation of controls can provide absolute
      assurance that all control issues and instances of fraud, if any, within the
      Company have been detected. These inherent limitations include the realities
      that judgments in decision-making can be faulty, and that breakdowns can occur
      because of simple error or mistake. The design of any system of internal control
      is also based in part upon certain assumptions about the likelihood of future
      events, and there can be no assurance that any design will succeed in achieving
      its stated goals under all potential future conditions. Over time, controls
      may
      become inadequate because of changes in circumstances, and/or the degree of
      compliance with the policies and procedures may deteriorate. Because of the
      inherent limitations in a cost effective internal control system, financial
      reporting misstatements due to error or fraud may occur and not be detected
      on a
      timely basis.




-24-





There
      have been no significant changes (including corrective actions with regard
      to
      significant deficiencies or material weaknesses) in our internal controls or
      in
      other factors that could significantly affect these controls subsequent to
      the
      date of the evaluation referenced in the above paragraph.




PART
      II -
      OTHER INFORMATION





Item
      6.
    Exhibits





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




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




32.1
        Section 1350 certification of Chief Executive and Chief Financial
      Officers




-25-


SIGNATURES




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


China
                Display Technologies, Inc.Date:
                November 13, 2008
            By:
            /s/
                Lawrence Kwok-Yan ChanLawrence
                Kwok-Yan Chan
              Chief
                  Executive Officer, Principal Executive
                  Officer




Date:
                  November 13, 2008
            By:
            /s/
                  Jason YeJason
                  Ye
                Chief
                  Financial Officer, Principal Financial
                  Officer




-26-