**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 Washington,
D.C. 20549
 
 **FORM
10-KSB**
 
 (Mark
One)
 x
    Annual
      report under Section 13 or 15(d) of the Securities Exchange Act of 1934
      for the fiscal year ended December 31, 2004
 Transition
report under Section 13 or 15(d) of the Securities Exchange Act of
1934
 
 For the
transition period from ____ to______.
 
 Commission
file number: 000-30516
 
 **CHINA
      GRANITE CORPORATION**(Exact
      name of small business issuer as specified in its
  charter)
  Nevada
    
    880448920(State
      of Other Jurisdiction
    
    (I.R.S.
      Employer I.D. No.)incorporation
      or organization)
 
 
 2642
      Collins Avenue, Suite 305, Miami, FL
    
    33140(Address
      of principal executive offices)
    
    (Zip
      Code)
 
 
 Issuer's
      telephone number
    (305)
      534-1684
 
 
 N/A(Former
      name, former address and former fiscal year, if changed since last
      report)
 
 
 Securities
Registered under Section 12(b) of the Exchange Act: None
 
 Securities
Registered pursuant to Section 12(g) of the Act:
 Common
      Stock, par value $0.001 per share(Title
      of class)
 
 
 Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 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
  
 
 Check if
there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (229.405 of this chapter) contained herein, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.    Yes x No o
  State
Registrant's revenues for its most recent fiscal year: $2,387,582
 
 State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked prices of such common equity, as of a
specified date within the past 60 days: 12,091,812 shares held by non-affiliates
had an aggregate market value of $10,882,630 as at March 30, 2005.
 
 (APPLICABLE
ONLY TO CORPORATE REGISTRANTS)
 
 State the
number of shares outstanding of each of the Registrant's classes of common
stock, as of the latest practicable date.
 
 14,498,000
common shares issued and outstanding as of March 30, 2005.
  DOCUMENTS
INCORPORATED BY REFERENCE
 
 None.
 
 Transitional
Small Business Disclosure Format (Check one):
 
 Yeso      No x
  
 
 TABLE OF
CONTENTS
 
  PART
      I
    PageItem
      1.
    Description of Business
    1Item
      2.
    Description of Property
    14Item
      3.
    Legal Proceedings
    14Item
      4.
    Submission of Matters to a Vote of Security
      Holders
    14PART
      IIItem
      5.
    Market for Common Equity and Related Stockholder
      Matters
    15Item
      6.
    Management Discussion and Analysis or Plan of
      Operation
    16Item
      7.
    Financial Statements
    F-1Item
      8.
    Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosure
    19Item
      8A.
    Controls and Procedures
    20PART
      IIIItem
      9.
    Directors, Executive Officers, Promoters and Control
      Persons; Compliance with Section 16 (a) of the Exchange
      Act
    20Item
      10.
    Executive Compensation
    24Item
      11.
    Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
    26Item
      12.
    Certain Relationships and Related
      Transactions
    27Item
      13.
    Exhibits and Reports on Form 8-K
    28Item
      14.
    Principal Accountant Fees and
    Services
    29SIGNATURESFINANCIAL
      STATEMENTS
    F-1EXHIBITS
 
 
  PART
I
  Item
1.    Description of
Business.
 
 Overview
 
 China
Granite Corporation conducts granite mining and processing operations in the
People's Republic of China (the "PRC") through the wholly-owned subsidiary of
its subsidiary, China Laizhou Bay Mining International Corporation, a
corporation organized under the laws of the British Virgin Islands ("Laizhou").
This operating company, Laizhou Jia Sheng Stone Company ("Laizhou China"), is a
limited liability company organized under the laws of the People's Republic of
China.
 
 Unless
otherwise specified or the context OTHERWISE requires, in this Form 10-KSB the
terms the "Company", "China Granite", "we", and "our" shall mean the operations
or business of China Granite Corporation, a Nevada corporation, and its
subsidiaries. Unless otherwise specified or the context otherwise requires, in
this Form 10-KSB the term "Arbor" shall refer to our operations prior to the
reorganization with Laizhou.
 
 Introduction
 
 We were
incorporated in the State of Nevada as E Investments, Inc., on February 25,
1999, and subsequently changed our name to Arbor, Inc. on December 16, 1999. We
originally intended to engage in the business of manufacturing, selling and
distributing fence posts to be used by government parks, highway departments,
ranchers and farmers throughout North America. Due to a lack of capital, we were
forced to abandon our original business and examine other business
options.
 
 In
October 2002, we appointed a new director, Mr. Costas Takkas, to assist us with
our strategic planning and in forming a new direction for our business. Mr.
Takkas was responsible for the management of our new business direction in 2003
and helped to focus our efforts on real estate development projects in
Brazil.
 
 The
Brazil Project
 
 In
October and November 2003 (the "November Placement"), we received $500,000
($250,000 of which came from Mr. Takkas) through a private placement of 600,000
shares of our restricted common stock to fund a real estate development project
between CPL Construcoes e Comercio, Inc. ("CPL") and China Granite in Brazil. To
this end a Brazilian corporation was formed to carry on the venture, namely CPL
Arbor do Brasil Construtora Limitada ("CPL Arbor"), which is owned in equal
parts by CPL and us. An aggregate of $425,000 of the funds raised in the
November Placement have been committed to CPL Arbor. Of this aggregate amount,
$325,000 is a loan to CPL Arbor and was repayable on October 31, 2004, with an
interest rate of 4% above LIBOR. The remaining $100,000 is held in trust and
will be released to CPL Arbor upon the completion of the infrastructure work for
the project. As a result of the acquisition of Laizhou, we determined in
February 2004 that we would no longer pursue the Brazil Project and we sought to
sell our interest in CPL Arbor. In the interest of continuing the project until
such time a buyer could be found, two of our directors, Messrs. Chen and Takkas,
lent us further funds during the fourth quarter of 2004, totaling $170,000,
specifically for use on this real estate development project. On December 31,
2004, we entered into an agreement with a consortium, that included the two
directors, to sell our interest in CPL Arbor. Under the agreement the buyer has
accepted the interest in CPL Arbor and the responsibility to repay the notes
totaling $595,000 set off against notes payable by us to our two directors,
Messrs. Chen and Takkas, totaling $170,000 requiring a net payment to us of
$425,000. $25,000 was paid on execution of the agreement and $200,000 was paid
on March 31 st , 2005,
with the balance of $200,000 due on June 30 th , 2005.
The two directors have personally guaranteed these payments.
  1
 
 The
Laizhou China Project
 
 On
February 5, 2004, we completed a reorganization with Laizhou pursuant to a Stock
Exchange Agreement and Plan of Reorganization (the "Agreement"). We intend on
continuing the business operations of Laizhou, which conducts granite mining and
processing operations in the PRC through its wholly owned subsidiary, Laizhou
China. Laizhou China's operations consist of extracting granite blocks, measured
in cubic meters, from quarries and processing granite blocks into finished
pieces measured in square meters: granite slabs, used in (i) construction, (ii)
cladding, (iii) tile, and (iv) carved, decorative features such as statues,
pedestals and ornaments.
  The
Chinese Granite Industry
 
 According
to the China Stone Materials Industry Association (the "CSMIA"), the past 20
years have seen the Chinese stone market grow at an average annual rate of 20%.
As data in the China Home Decoration Materials Market Report (published in June
2001) indicates, in the past decade the Chinese decorative stone market has
expanded rapidly. In 1990, a total of 25.13 million square meters of stone was
produced. By 2000, a total of 120 million square meters was produced,
representing a 477% increase over the decade. Breakdown into various groups
indicates that some stones have become more popular than others: whereas in 1990
only 7.05 million square meters of marble were produced, this number went up to
20.8 million square meters by 2000, an annual growth rate of 11%. The most
remarkable growth came from granite, 5.73 million square meters of which were
produced in 1990 and 87 million square meters in 2000 - an annual growth rate
exceeding 31%.
 
 The Hong
Kong-based online trade marketplace Alibaba.com estimates raw material output of
Chinese stone in 2000 at 15 million tons, which does not include numerous small
rural production bases. The same report estimates total output value of Chinese
stone in 2001 at 100 billion RMB ($12 billion). The Italian Institute gives the
same figure for Foreign Trade. The Italian report estimates block production at
6 million cubic meters, which equals roughly 16.8 million tons. Slab production
is gauged in the report at 140 million square meters, of which granite makes up
80 million square meters and marble makes up 40 million square
meters.
  2
 
 On the
other hand, consumption of stone in China was reported to be 60 million square
meters of slabs in 2000, which rose to 100 million square meters in 2001,
according to Alibaba.com. A 2002 report by the Shenzhen-based online B2B trade
marketplace China Building Material Commercial Net put Chinese consumption at
61.30 million square meters, making the country the largest consumer of natural
stone on the planet. Other large consumers and their levels of consumption in
2002 of decorative stone include Italy (56 million square meters), Germany (44
million), the United States (42 million), and Spain (40 million). The China
Stone Materials Industry Association puts the total value of consumed stone
products in 2001 at 45-50 billion RMB ($5.4-6 billion).
 
 The
growth in Chinese consumption of stone is expected to continue this growth.
Compared to many players on the global stage, per capita consumption of stone in
China is extremely low at 0.05 square meters. Greece leads the world in per
capita stone consumption with 1.5 square meters, followed by Saudi Arabia and
Switzerland (1.32 square meters), Italy (1.01 square meters), and Germany (0.55
square meters). This indicates that there may be much more room for growth,
provided that Chinese consumers' taste develops the same partiality to marble
and granite pillars and bathrooms and other decorative features that are typical
of European countries.
 
 In
addition, China is currently engaged in a significant expansion of new
construction. The China Academy of Building Research, has forecast for the time
span of 2001-2010, construction of new houses in rural areas covering 5 billion
square meters, public construction covering 1 billion square meters, and urban
housing covering 3.35 billion square meters. Given the low per capita
consumption and the ongoing construction boom in China, the China Stone Material
Industry Association expects decorative stone consumption to rise to 200 billion
RMB ($24 billion) by 2010, translating into a compound annual growth rate of
nearly 17%. Per capita consumption will be raised from the current 0.05 square
meters to 0.15 square meters in 2010.
 
 Laizhou
and Laizhou China
 
 Laizhou
was incorporated on January 6, 2004, in the territory of the British Virgin
Islands. On January 20, 2004, Laizhou acquired 100% of Laizhou China. Laizhou
has no other assets or operations other than its ownership of Laizhou China.
Laizhou China was organized on January 9, 2003 when it acquired a business
license issued by the Laizhou Administration for Industry and
Commerce.
 
 Laizhou
China is located in the Shandong Province on the East Coast of the PRC. Laizhou
China owns and operates two granite quarries, Shangjiashan Granite No. 1 Quarry
("No. 1 Quarry") and Laizhou Zuocun Town West Jiangjia Village Granite Quarry
Group 14 ("Group 14 Quarry"). Laizhou China purchased all of the land-use
rights, buildings and stone product processing equipment for the Group 14 Quarry
on February 15, 2003, and purchased mining equipment used at the No. 1 Quarry on
July 7, 2003.
  3
 
 No. 1
Quarry is an open-pit quarry located in Zuocon Town Laizhou City in the Shandong
Province of the PRC. No. 1 Quarry is located on the northern side of a valley
that runs East-West. It is accessed via 25 kilometers of road running east of
Laizhou. No. 1 Quarry currently has three main operative fronts from which
granite is extracted. Power for the property is obtained from the nearby village
and generators. The following is a list of equipment currently located and used
at No. 1 Quarry:
 
 Category
    QuantitiesBeijing
      Forton truck
    1Excavator
    1Loader
    1Fork
      lift
    1Press
      modifier assembly
    1Vertical
      linear driller
    2Special
      horizontal linear driller
    2Portable
      stone driller
    24Pneumatic
      driven miller
    2Hydraulic
      lifting device
    2Fork
      lift
    1
 
 
 Group 14
Quarry is an open-pit quarry located several hundred meters from No. 1 Quarry on
the opposite side of the valley. The rock mineralization found at Group 14
Quarry is a medium grained granite. The rock appears to be mainly composed by
whitish feldspar (approximately 60% of the total) and a light grey quartz
(approximately 25-30%), with limited amount of smaller dark minerals (Fe/Mg
silicates, 5% or even less of the total). The average hue of granite is light
grey. The morphology is favorable for quarrying operations, because of the slope
gradient which, is not too steep for access, but inclined enough to gradually
open, in a prospective program of development. The rock mineralization found at
No. 1 Quarry is a medium to coarse grained granite. The rock appears mainly
composed by whitish to pale grey feldspars (approximately 55-65 %) and grey
quartz (approximately 30%), with a limited amount of dark minerals (Fe/Mg
silicates, 5% or slightly more) scattered in the groundmass. The morphology of
the deposit is favorable for quarrying operations because of the dome shaped
outcrops, both at the present quarry site and behind the site.
 
 We are
conducting no geologic exploration at any of our mines. Both Group 14 Quarry and
No. 1 Quarry had previous production before we acquired the property, and our
decision to acquire the property was on an evaluation of the opened mining
fronts from previous mining.
 
 Power for
the property is obtained from the nearby village and generators. We use diesel
generators at each mining site. We have a total of three large and twelve small
generators for all of our operations.
 
 The
following is a list of equipment currently located and used at Group 14
Quarry:
 
 Category
    QuantitiesSubmerged
      driller
    1Air
      compressor
    3Truck
    1Excavator
    1Vertical
      linear driller
    2Special
      horizontal linear driller
    3Portable
      stone driller
    36Pneumatic
      driven miler
    2Hydraulic
      lifting device
    2Wind
      pipes
    1000Excavator
    150
      loader
    1Crane
    1Air
      reservoir
    1
  The mines
are located on two parcels of land that are leased by Laizhou China from the
local PRC government body. The mines consist of approximately 0.27 square
kilometers containing granite reserves in two marketable varieties or distinct
colors. The approximate locations of our mines are set forth below:
 
  
 
  Laizhou
China has two stone processing factories: the yet-to-be completed 20,000 square
meter facility (the "New Yard") and the old 18,000 square meter factory (the
"Old Yard"). The New Yard is located in the Laizhou City Economic Development
Zone and its products developed for export are exempt from the domestic value
added tax ("VAT"). The majority of our blocks that are processed at the stone
processing factory are first cut into slabs and checked for quality. These slabs
are then polished and cut into tiles or cladding.
 
 For the
year ended December 31, 2004, Laizhou China processed approximately 63,527
square meters of granite slab and cladding. 21,243 square meters of these
granite slabs, cladding and processed granite was produced in house and 42,284
square meters was produced for us.
 
 Mining
Rights
 
 Pursuant
to the Mineral Resources Law of the People's Republic of China (1996), mineral
resources are owned by the national government. Shandong Province, where Laizhou
China's operations are located, has autonomy in mining concessions from the
national government. The mining concessions are negotiated and signed with the
city government in Laizhou and filed with the Shandong Province governmental
authority.
 
 Pursuant
to the Shandong Province Contract for Selling Mining Rights between Laizhou
China and the Laizhou Administration of State Land and Resources (the "ASLR")
and the PRC Mining Rights License issued by the ASLR, Laizhou China owns the
mining rights of the No. 1 Quarry from November 2003 to November 2008 with
options to extend its mining rights through 2033. On November 8, 2002, one of
the stockholders of Laizhou China purchased the mining rights to No. 1 Quarry
for approximately $725,000 (6,000,000 Yuan). On March 10, 2003 that stockholder
assigned the No. 1 Quarry mining rights to Laizhou China for a payment of
approximately $725,000 (6,000,000 Yuan), the same amount that the stockholder
originally paid for those rights.
 
 Laizhou
China also operates the Group 14 Quarry. Laizhou China is currently in the
application process with the ASLR for the mining rights to the Group 14 Quarry.
The ASLR issued the PRC Mining Rights License for the Group 14 Quarry (the
"Group 14 Mining Rights") on August 29, 1998 to West Jiangjia Village (a legal
collective organization). On January 10, 2003, one of the stockholders of
Laizhou China signed a mining rights lease contract with the Villager Committee
of West Jiangjia Village and purchased the Group 14 Mining Rights for $845,000
(7,000,000 Yuan). On March 3, 2003, that stockholder assigned the Group 14
Mining Rights to Laizhou China for a payment of $845,000 (7,000,000 Yuan), the
same amount that the stockholder originally paid for the rights. The Group 14
Quarry was in full operation on April 1, 2004.
  4
 
 Mining
Equipment
 
 Laizhou
China has two thirty three ton excavators, one twenty ton excavator, one front
end loader, 60 mining drills, three large generators and six air compressors,
vehicles, tools and 11 buildings for processing, selling and managing the
operations. During 2003 and 2004, Laizhou China contracted with outside vendors
for all other trucking services.
 
 During
the first quarter of 2004, Laizhou China completed both a geological site survey
and a development plan to determine what modern extraction equipment is needed
at Laizhou China's two mines. The survey and development plan is intended to
increase the rate of extraction of blocks for the manufacture of slabs, tiles
and sheets for cladding and to improve both the regularity of the stone and the
sizes of stone Laizhou China is able to produce and distribute. Laizhou China's
facilities are not equipped to process cladding in large sheets.
 
 Customers
 
 In 2004,
approximately 23% of Laizhou China's revenue came from Chinese government
projects, approximately 10% came from commercial pavers, approximately 14% came
from commercial cladding, and the remainder came from other projects. In 2004,
the granite products of Laizhou China were sold in the following markets: (i)
the local Chinese region (Beijing) 5.2%; (ii) exports to Korea 30%; and (iii)
62.8% to other regions in China.
 
 Competition
 
 Competition
in the Chinese granite market is extremely fragmented. The Laizhou area contains
approximately 300 quarries and 2,000 stone processing factories. In the Fujian
Province of southern China, there are several larger scale granite mining and
processing operations.
 
 Major
stone quarrying and production bases are numerous throughout China. According to
the China Home Decoration Materials Market Report, Fujian Province is the
largest geographic producer of granite, with a 46% share of the Chinese market.
Other granite producing provinces include Guangdong (19% share of the Chinese
market) and Shandong (12%).
 
 The four
most notable quality stone processing (as opposed to quarrying) bases in China
are: Nan'an in Fujian province, Yunfu in Guangdong province, Ya'an in Sichuan
province, and Laizhou in Shandong province.
  5
 According
to the Italian Institute for Foreign Trade (as reported in "Building Sector
Series 05: Chinese Decorative Stone Market," March 2003), there are
approximately 30,000 companies in China engaged in the stone business, employing
a total workforce of about 6 million workers. Quarries employ roughly 1.5
million workers, processing facilities 4 million, and machinery manufacturing
about 500,000.
 
 With
economic reforms rippling through the Chinese market, a large number of private
companies have formed, and are competing for, market share. Due to early
economic reforms in Guangdong province, a number of well known processing
companies were formed and are currently operating, including Yongguang Xiongdi,
Ronghuafu, and Jinshan Stone Material Company.
 
 There are
two major foreign-funded stone block and slab companies in the Chinese market,
both of which are larger than Laizhou China. One is the Hong Kong-funded
Universal Marble & Granite Group Ltd., which produces approximately 50,000
square meters of marble and granite slabs. The other is Spanish-funded Jinan
Blue Star. According to the Chinese Markets Yearbook 2003, Jinan Blue Star had
revenue of more than 86 million RMB (approximately US$10.4m) in 2001, with a
profit of 6.7 million RMB (approximately US$900,000). The company produces only
rough granite material, whereas Universal Marble & Granite produces
high-quality finished products. There are approximately 400 foreign funded firms
active on the Chinese decorative stone market.
 
 Granite
Production and Prices
 
 In 2004,
Group 14 Quarry yielded approximately 9,410 cubic meters of granite blocks. The
average size of the granite blocks was approximately three to four cubic meters.
The average price for mined blocks is $78 per cubic meter based on a price range
of $57 to $100, depending on the quality and demand for a particular stone
color.
 
 In 2004,
No. 1 Quarry yielded approximately 6,993 cubic meters of granite blocks. The
average size of the granite blocks was approximately three to four cubic meters.
The average price for mined blocks is $154 per cubic meter based on a price
range of $126 to $183, depending on the quality and demand for a particular
stone color.
 
 Reserves
 
 According
to Industry Guide 7 ("Industry Guide 7") promulgated by the SEC pursuant to the
Securities Act of 1933, as amended, a "reserve" is defined as "[t]hat part of a
mineral deposit which could be economically and legally extracted or produced at
the time of the reserve determination." Further, Industry Guide 7 defines two
types of reserves, "proven (measured) reserves" and "probable (indicated)
reserves." Our determination of our reserves, proven and probable, is based
solely upon a report from an Italian consulting geologist hired by us to
evaluate our quarrying operations. This geologist based his report solely upon
visual inspection and rough measurements. We have not engaged in any topographic
mapping, site surveys or sample analysis in order to determine our reserves.
Based solely upon this geologist's visual determinations that Group 14 Quarry is
approximately 12 hectares and that the upper outcrops of granite extend at least
150 meters above the base of the valley, we believe that Group 14 Quarry's
probable reserves are in excess of 1,000,000 cubic meters of recoverable
granite. Based solely upon this geologist's visual determinations that No. 1
Group Quarry is approximately 15 hectares and that the upper outcrops of granite
extend at least 130 meters above the base of the valley, we believe that Group 1
Quarry's probable reserves are in excess of 1,000,000 cubic meters of
recoverable granite. Currently, we are assessing whether we will refine the
estimate of our reserves with any surveys, geologic mapping, professional
consultants, sampling, geologic mapping or topographic reconciliations.
 
 Employees
 
 As of
December 31, 2004, our parent company, China Granite, had no employees other
than officers. As of December 31, 2004, Laizhou China has 110 employees. Of
those, 60 are in mining, 30 are in the processing yard, and 20 are in sales and
administration. Laizhou China expects to hire approximately 20 additional mining
employees in 2005. We also retain consultants on a contract basis to meet
internal corporate needs and develop business. We believe that relations with
employees are good. None of our employees belong to any unions or organized
labor groups.
  6
 
 CAUTIONARY
STATEMENTS REGARDING FUTURE RESULTS OF OPERATIONS
 
 You
should read the following cautionary statements in conjunction with the factors
discussed elsewhere in this Annual Report and other of our filings with the
Securities and Exchange Commission. These cautionary statements are intended to
highlight certain factors that may affect our financial condition and results of
operations and are not meant to be an exhaustive discussion of risks that apply
to companies such as us. Like other businesses, we are susceptible to
macroeconomic downturns in the PRC and other economies that may affect the
general economic climate and performance of our customers or us. Similarly, the
price of our securities is subject to volatility due to fluctuations in general
market conditions, differences in results of operations from estimates and
projections generated by the investment community and other factors beyond our
control.
 
 RISKS
RELATING TO OUR OPERATIONS:
 
 WE MAY
NEED FURTHER CAPITAL.
 
 Based on
current reserves and anticipated cash flow from operations, we currently
anticipate that the available funds will be sufficient to meet our anticipated
needs for working capital, capital expenditures and business expansion for six
months. Thereafter, we will need to raise additional funds. If any of our
assumptions are incorrect, we may need to raise capital before the end of six
months. If additional funds are raised through the issuance of equity or
convertible debt securities, the percentage ownership of our stockholders will
be reduced, stockholders may experience additional dilution and such securities
may have rights, preferences and privileges senior to those of our common stock.
There can be no assurance that additional financing will be available on terms
favorable to us or at all. If adequate funds are not available or are not
available on acceptable terms, we may not be able to fund expansion, take
advantage of unanticipated acquisition opportunities, develop or enhance
services or products or respond to competitive pressures. Such inability could
have a material adverse effect on our business, results of operations and
financial condition.
 
 WE ARE
THE PRODUCT OF A RECENT MERGER, AND HAVE A LIMITED OPERATING HISTORY ON WHICH TO
EVALUATE OUR POTENTIAL FOR FUTURE SUCCESS.
 
 On
February 5, 2004, we completed a reorganization with Laizhou pursuant to the
Agreement. We intend on continuing the business operations of Laizhou, which
conducts granite mining and processing operations in the PRC through its
wholly-owned subsidiary, Laizhou China. We have only a limited operating history
as a combined company upon which you can evaluate our business and prospects,
and we have yet to develop sufficient experience regarding actual revenues to be
received from our combined operations.
  7
 
 You must
consider the risks and uncertainties frequently encountered by companies in
situations such as ours, including but not limited to the ability to grow and
prosper and finance such growth. If we are unsuccessful in addressing these
risks and uncertainties, our business, results of operations and financial
condition will be materially and adversely affected.
 
 OUR
RESERVES ESTIMATES ARE BASED ON VISUAL OBSERVATIONS ONLY AND MAY BE
INCORRECT.
 
 In March
2004 we hired an Italian consulting geologist, Giacomo Porro, to survey our
quarries. The purpose of Mr. Porro's work was to assist us with our operations
and provide advice on increasing productivity and efficiency. Mr. Porro did not
perform any topographic mapping, sample analysis or test work on our quarries in
order to make his recommendations and his estimations of our reserves. The
imprecise nature of Mr. Porro's work and the lack of detailed studies performed
on our quarries may diminish the quality of any volumetric
estimates.
 
 WE MAY
FACE STRONG COMPETITION FROM OTHER MINING COMPANIES FOR THE ACQUISITION OF NEW
PROPERTIES.
 
 Mines
have limited lives and as a result, we may seek to replace and expand our
reserves through the acquisition of new properties. In addition, there is a
limited supply of desirable mineral lands available in the PRC and other areas
where we would consider conducting exploration and/or production activities.
Because we may face strong competition for new properties from other mining
companies, some of whom may have greater financial resources than we do, we may
be unable to acquire attractive new mining properties on terms that we consider
acceptable.
 
 RISKS
RELATED TO DOING BUSINESS IN THE PRC:
 
 Laizhou
operates from facilities that are located in the People's Republic of China.
Accordingly, its operations must conform to the governmental regulations and
rules of China.
 
 THE PRC
LEGAL SYSTEM HAS INHERENT UNCERTAINTIES THAT COULD LIMIT THE LEGAL PROTECTIONS
AVAILABLE TO YOU.
 
 The
practical effect of the PRC's legal system on our business operations in China
can be viewed from two separate but intertwined considerations. First, as a
matter of substantive law, the Foreign Invested Enterprise laws provide
significant protection from government interference. In addition, these laws
guarantee the full enjoyment of the benefits of corporate Articles and contracts
to Foreign Invested Enterprise participants. These laws, however, do impose
standards concerning corporate formation and governance, which are not
qualitatively different from the corporation laws found in the United States.
Similarly, PRC accounting laws mandate accounting practices, which may not be
consistent with US Generally Accepted Accounting Principles. The China
accounting laws require that an annual "statutory audit" be performed in
accordance with People's Republic of China accounting standards and that the
books of account of Foreign Invested Enterprises are maintained in accordance
with Chinese accounting laws. Article 14 of the PRC Wholly Foreign-Owned
Enterprise Law requires a Wholly Foreign-Owned Enterprise to submit certain
periodic fiscal reports and statements to designate financial and tax
authorities, at the risk of business license revocation.
  8
 
 Second,
while the enforcement of substantive rights may appear less clear than United
States procedures, Foreign Invested Enterprises and Wholly Foreign- Owned
Enterprises are Chinese registered companies that enjoy the same status as other
Chinese registered companies in business-to-business dispute resolution. The
Chinese legal infrastructure is significantly different in operation from its
United States counterpart, and may present a significant impediment to the
operation of Foreign Invested Enterprises.
 
 Laizhou
China is organized under the laws of the PRC and is governed by its articles of
association. The Chinese legal system is based on written statutes. Prior court
decisions may be cited for reference but are not binding on subsequent cases and
have limited precedential value. Since 1979, the Chinese legislative bodies have
promulgated laws and regulations dealing with such economic matters as foreign
investment, corporate organization and governance, commerce, taxation and trade.
However, because these laws and regulations are relatively new, and because of
the limited volume of published decisions and their non-binding nature, the
interpretation and enforcement of these laws and regulations involve
uncertainties.
 
 NEGATIVE
IMPACT UPON ECONOMIC REFORM POLICIES OR NATIONALIZATION COULD RESULT IN A TOTAL
INVESTMENT LOSS IN OUR COMMON STOCK.
 
 Since
1979, the Chinese government has reformed its economic systems. Because many
reforms are unprecedented or experimental, they are expected to be refined and
improved. Other political, economic and social factors, such as political
changes, changes in the rates of economic growth, unemployment or inflation, or
in the disparities in per capita wealth between regions within China, could lead
to further readjustment of the reform measures. This refining and readjustment
process may negatively affect our operations.
 
 Although
the Chinese government owns the majority of productive assets in China,
including mines and quarrying sites, in the past several years the government
has implemented economic reform measures that emphasize decentralization and
encourage private economic activity. Because these economic reform measures may
be inconsistent or ineffectual, there are no assurances that:
 ·
    We
      will be able to capitalize on economic
reforms;
 ·
    The
      Chinese government will continue its pursuit of economic reform
      policies;
 ·
    The
      economic policies, even if pursued, will be
successful;
 ·
    Economic
      policies will not be significantly altered from time to time;
      and
 ·
    Business
      operations in China will not become subject to the risk of
      nationalization.
 Over the
last few years, China's economy has registered a high growth rate. Recently,
there have been indications that rates of inflation have increased. In response,
the Chinese government recently has taken measures to curb this excessively
expansive economy. These measures have included restrictions on the availability
of domestic credit, reducing the purchasing capability of certain of its
customers, and limited re-centralization of the approval process for purchases
of some foreign products. These austerity measures alone may not succeed in
slowing down the economy's excessive expansion or control inflation, and may
result in severe dislocations in the Chinese economy. The Chinese government may
adopt additional measures to further combat inflation, including the
establishment of freezes or restraints on certain projects or markets. These
measures may adversely affect our operations.
  9
 
 To date
reforms to China's economic system have not adversely impacted our operations
and are not expected to adversely impact operations in the foreseeable future;
however, there can be no assurance that the reforms to China's economic system
will continue or that we will not be adversely affected by changes in China's
political, economic, and social conditions and by changes in policies of the
Chinese government, such as changes in laws and regulations, measures which may
be introduced to control inflation, changes in the rate or method of taxation,
imposition of additional restrictions on currency conversion and remittance
abroad, and reduction in tariff protection and other import
restrictions.
 
 OUR
MINING RIGHTS ARE SUBJECT TO GOVERNMENTAL CONTROL AND RENEWAL.
 
 Our
mining rights are subject to renewals by the relevant governmental authority. We
are awaiting final approval of its mining rights to the Group 14 Quarry. Despite
our having received written confirmation from the governmental authority, there
is no guarantee that we will be granted the renewals.
 
 YOU MAY
EXPERIENCE DIFFICULTIES IN EFFECTING SERVICE OF LEGAL PROCESS, ENFORCING FOREIGN
JUDGMENTS OR BRINGING ORIGINAL ACTIONS IN THE PRC BASED ON U.S. OR OTHER FOREIGN
LAW AGAINST OUR MANAGEMENT AND US.
 
 Laizhou
China, our operating company, is incorporated under the laws of the PRC, and
substantially all of our assets are located in the PRC. In addition, many of our
directors, managers, and executive officers reside within the PRC, and
substantially all of the assets of these persons are located within the PRC. As
a result, it may not be possible to effect service of process within the United
States or elsewhere outside the PRC upon certain directors, supervisors or
executive officers, including with respect to matters arising under U.S. federal
securities laws or applicable state securities laws. Moreover, the PRC does not
have treaties providing for the reciprocal recognition and enforcement of
judgments of courts with the United States, the United Kingdom, Japan or many
other countries. As a result, recognition and enforcement in the PRC of
judgments of a court in the United States and any of the other jurisdictions
mentioned above in relation to any matter may be difficult or impossible.
Furthermore, an original action may be brought in the PRC against us, our
directors, managers, or executive officers only if the actions are not required
to be arbitrated by PRC law and Laizhou China's articles of association, and
only if the facts alleged in the complaint give rise to a cause of action under
PRC law. In connection with any such original action, a PRC court may award
civil liability, including monetary damages.
  10
 
 GOVERNMENT
CONTROL OF CURRENCY CONVERSION AND THE FLUCTUATION OF THE RENMINBI MAY
MATERIALLY AND ADVERSELY AFFECT OUR OPERATIONS AND FINANCIAL
RESULTS.
 
 We
receive substantially all of our revenues in Renminbi, which currently is not a
freely convertible currency. The Chinese government may, at its discretion,
restrict access in the future to foreign currencies for current account
transactions. If this were to occur, we may not be able to pay dividends in
foreign currencies to our shareholders.
 
 The value
of the Renminbi against the U.S. dollar and other currencies fluctuates and is
affected by, among other things, changes in the PRC's political and economic
conditions. Since 1994, the conversion of Renminbi into foreign currencies,
including Hong Kong and U.S. dollars, has been based on rates set by the
People's Bank of China, which are set daily based on the previous day's
interbank foreign exchange market rates and current exchange rates on the world
financial markets. Since 1994, the official exchange rate for the conversion of
Renminbi to U.S. dollars generally has been stable. Any devaluation of the
Renminbi, however, may materially and adversely affect the value of, and any
dividends payable on, our shares in foreign currency terms, since we will
receive substantially all of our revenues, and express our profits, in Renminbi.
Our financial condition and results of operations also may be affected by
changes in the value of certain currencies other than the Renminbi. Our results
may be adversely affected by changes in the political and social conditions in
the PRC, and 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.
 
 RISKS
RELATED TO THE GRANITE MINING INDUSTRY:
 
 WE
OPERATE IN A SPECIALIZED INDUSTRY THAT REQUIRES MODERN FACILITIES AND
EQUIPMENT.
 
 We
operate in business segments that require the use of specialized facilities and
technology. We currently rely on older equipment, such as drills, excavators and
loaders, and facilities to process the raw granite blocks to maintain our
production level. There is no guarantee that we will be able to upgrade our
equipment, facilities and technology to increase production and make operations
more efficient.
  11
 
 OUR CASH
FLOW DEPENDS HEAVILY ON THE MARKET PRICE FOR GRANITE.
 
 The cash
flow and profitability of our current operations are significantly affected by
the market price of granite that is affected by numerous factors beyond our
control. Specifically, the prices for granite slabs and cladding depend heavily
on the type and amount of commercial and residential construction in the
PRC.
 
 Factors
that could cause such volatility may include, among other
things:
 ·
    actual
      or anticipated fluctuations in our quarterly operating
      results;
 ·
    conditions
      or trends in the mining industries and governmental regulations that
      affect such industries;
 ·
    changes
      in the market valuations of other mining companies, especially our
      partners and competitors;
 ·
    general
      market conditions; and political events, including actions by the PRC
      government.
 OUR
COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE.
 
 Our
common stock price is likely to be highly volatile. The market price of our
common stock has been, and is likely to continue to be, highly volatile as the
stock market in general, and the market for mining companies in particular, has
been highly volatile. Investors may not be able to resell their shares of our
common stock following periods of volatility because of the market's adverse
reaction to volatility. The trading prices of many mining companies' stocks have
been highly volatile, and we cannot assure you that our stock will trade at the
same levels of other mining stocks or that mining stocks in general will sustain
their current market prices.
 
 ENVIRONMENTAL
AND GOVERNMENTAL REGULATIONS.
 
 Our
operations are subject to and affected by national, provincial and local laws
and regulations relating to the environment, health and safety, and other
regulatory matters. Certain of our operations may from time to time involve the
use of substances that are classified as toxic or hazardous substances within
the meaning of these laws and regulations. Environmental operating permits are,
or may be, required for certain of our operations and such permits are subject
to modification, renewal, and revocation. We regularly monitor and review our
operations, procedures, and policies for compliance with these laws and
regulations. Despite these compliance efforts, risk of environmental liability
is inherent in the operation of our businesses, as it is with other companies
engaged in similar businesses, and there can be no assurance that environmental
liabilities will not have a material adverse effect on us in the
future.
 
 We
believe that our operations and facilities, both owned and leased, are in
substantial compliance with applicable laws and regulations and that any
noncompliance is not likely to have a material adverse effect on our operations
or financial condition. See "Legal Proceedings" on page 14 of this Form 10-KSB.
However, future events, such as changes in or modified interpretations of
existing laws and regulations or enforcement policies, or further investigation
or evaluation of the potential health hazards of certain products or business
activities, may give rise to additional compliance and other costs that could
have a material adverse effect on our operations and business. We, through
safety information sheets and other means, communicate what we believe to be
appropriate warnings and cautions to employees about the risks associated with
granite mining and processing.
  12
 
 ENVIRONMENTAL
LIABILITY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS; POTENTIAL
LITIGATION ARISING FROM OUR OPERATIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR FINANCIAL CONDITION
 
 From time
to time claims of various types may be asserted against us arising out of our
operations in the normal course of business, including claims relating to land
use and permits, safety, health and environmental matters. Such matters are
subject to many uncertainties and it is not possible to determine the probable
outcome of, or the amount of liability, if any, from these matters. In the
opinion of our management (which opinion is based in part upon consideration of
the opinion of counsel), it is unlikely that the outcome of these claims will
have a material adverse effect on our operations or financial condition.
However, there can be no assurance that an adverse outcome in any of such
litigation would not have a material adverse effect on us or our operating
segments.
 
 SOME OF
THE INFORMATION IN THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS FORWARD-LOOKING
STATEMENTS.
 
 Some of
the information in this Annual Report on Form 10-KSB contains forward-looking
statements that involve risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue" or similar words. You should
read statements that contain these words carefully because
they:
 ·
    discuss
      our expectations about our future
performance;
 ·
    contain
      projections of our future operating results or of our future financial
      condition; or
 ·
    state
      other "forward-looking" information.
 We
believe it is important to communicate our expectations to our stockholders.
There may be events in the future, however, that we are not able to predict
accurately or over which we have no control. The risk factors listed in this
section, as well as any cautionary language in this Annual Report, provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward-looking
statements. You should be aware that the occurrence of any of the events
described in these risk factors and elsewhere in this Annual Report could have a
material and adverse effect on our business, results of operations and financial
condition.
  13
 
 Item
2.    Description of Property
 
 Principal
Offices
 
 Laizhou
China is located in the Shandong Province of China, and our mining properties
are described above. Our principal executive offices are located at 2642 Collins
Avenue, Suite 305, Miami, Florida 33140. We currently utilize this space from
one of our directors for no charge. This space is suitable for our current uses
and it is easily replaceable in the event that we decide to
relocate.
  
 Item
3.    Legal Proceedings
 
 We have
no pending legal proceedings. From time to time, we may be involved in various
claims, lawsuits, disputes with third parties, actions involving allegations of
discrimination or breach of contract actions incidental to the normal operations
of the business. We are currently not involved in any such
litigation.
 
 Granite
mining and processing entails an inherent risk of workers' compensation and
environmental liability. We may be named as a defendant in such lawsuits and
thus become subject to the attendant risk of substantial damage awards. We
believe that we have adequate insurance coverage. There can be no assurance,
however, we will not be sued, that any such lawsuit will not exceed our
insurance coverage, or that we will be able to maintain such coverage at
acceptable costs and on favorable terms.
 
  Item
4.    Submission of Matters to a Vote
of Security Holders
 
 An
information statement on Schedule 14C was filed with the SEC and mailed to
shareholders on March 11, 2004. The information statement informed shareholders
that, pursuant to majority written consent of our shareholders, we (i) amended
and restated our articles of incorporation to, among other things, change our
name to China Granite Corporation, (ii) amended and restated our bylaws, (iii)
adopted a stock option plan, and (iv) appointed three new members to our Board
of Directors.
  14
 
 PART
II
 
  Item
5.    Marketfor Common Equity and
Related Stockholder Matters
 
 General
 
 We trade
on the Over The Counter Bulletin Board ("OTCBB") under the symbol "CGNT". The
following quotations reflect the high and low bids for our common stock based on
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. The high and low bid prices for our common shares
for each full financial quarter for the two most recent full fiscal years were
as follows:
  Quarter
      Ended
    High
    Low20044th
      Quarter
    $2.40
    $1.253rd
      Quarter
    $3.85
    $1.502nd
      Quarter
    $6.25
    $3.501st
      Quarter
    $5.35
    $3.3020034th
      Quarter
    $3.30
    $0.703rd
      Quarter
    $1.01
    $0.752nd
      Quarter
    $1.03
    $0.301st
      Quarter
    $1.05
    $0.40
 
 
 As of
December 31, 2004, the shareholders' list for our common stock showed 49
registered shareholders of record and 14,498,000 common shares issued and
outstanding. We believe that there are approximately 500 beneficial holders of
our common stock. On December 31, 2004, the closing price of our common stock on
the OTCBB was $1.38.
 
 Dividend
Policy
 
 We have
never declared a dividend on our common stock. We have not paid, nor declared,
any dividends since our inception and we do not intend to declare any such
dividends in the foreseeable future. Our ability to pay dividends is subject to
limitations imposed by Nevada law. Under Nevada law, dividends may be paid to
the extent that a corporation's assets exceed its liabilities and it is able to
pay its debts as they become due in the usual course of business.
 
 On
February 4, 2004, we adopted the 2004 Stock Option Plan (the "Plan"). Under the
Plan, One Million Four Hundred Thousand (1,400,000)
shares of our common stock are reserved for issuance to selected officers and
key employees. The purpose of the Plan is to encourage selected officers and key
employees to accept or continue employment with us or our Affiliates; and
increase the interest of selected officers, directors, key employees and
consultants in our welfare through participation in the growth in value of our
common stock. As of December 31, 2004, there are no outstanding options.
  15
 
 Recent
Sales of Unregistered Securities
 
 In
October and November 2003, we completed the November Placement. We sold 600,000
shares of our restricted common stock for $500,000. A Director and the then
President, Costas Takkas, purchased 300,000 of these shares. The November
Placement was made only to accredited investors without general solicitation in
compliance with Regulation D of the Securities Act of 1933, as amended. There
were no finders' fees or brokerage commissions paid for the November
Placement.
 
 In
December 2003, we completed the December Placement, selling an aggregate of
550,000 shares of our restricted common stock for $1.00 per share. Mr. Takkas
purchased 50,000 of these shares and Stephen Spoonamore, at the time our
director and Secretary, purchased 30,000 of these shares. The December Placement
was made only to accredited investors without general solicitation in compliance
with Regulation D of the Securities Act of 1933, as amended. There were no
finders' fees or brokerage commissions paid for the December
Placement.
 
 In April
2004, we completed an additional private placement of 500,000 shares of
restricted common stock priced at $3.00 per share (the "April Placement"). Mr.
Takkas purchased 2,000 of these shares and Mr. Spoonamore purchased 10,000 of
theses shares. The April Placement was made only to accredited investors without
general solicitation in compliance with Regulation D of the Securities Act of
1933, as amended. There were no finders' fees or brokerage commissions paid for
the April Placement.
 
  On
October 6, 2004, we completed the sale of a $650,000 8% Senior Secured
Promissory Note to institutional and accredited investors pursuant to a Secured
Promissory Note Purchase Agreement (the "Senior Purchase Agreement") (the
“October Placement”). Under the Senior Purchase Agreement, we issued a Secured
Convertible Promissory Note (the "Senior Convertible Note") in the aggregate
principal amount of $650,000, convertible into our Common Stock at the option of
the investors at $1.60 per share. The Senior Convertible Note accrues interest
at 8% per year and all outstanding principal and unpaid interest is due on
September 30, 2007. We must make quarterly interest-only payments of $13,000 to
the investors until the Senior Convertible Note is either paid in full or is
converted into our common stock. Under the Senior Purchase Agreement, we also
issued warrants (the "Warrants") to purchase an aggregate of 406,250 shares of
our Common Stock at a per share exercise price of $2.00. The Warrants are
exercisable, in whole or in part, until September 30, 2009. Our obligations
under the Senior Purchase Agreement, the Senior Convertible Note and the
Warrants are secured by a security interest in all of our assets pursuant to a
general security agreement between us and the investors. In addition, pursuant
to a registration rights agreement between us and the investors, we have agreed
to file a registration statement with the Securities and Exchange Commission
("SEC")covering the resale of the subject shares of our common stock underlying
the Senior Convertible Note and the Warrant. We are
currently in default of the Senior Purchase Agreement, Secured Convertible Note
and Warrant, for among other things, not making payments on the note and not
having registered the underlying securities.The Senior
Convertible Note and the Warrant were issued to accredited investors in a
private placement transaction exempt from registration under the Securities Act
of 1933, as amended, pursuant to Rule 506 of Regulation D promulgated
thereunder. Duncan Capital LLC served as placement agent for the transaction.
The purchasers had access to all relevant information necessary to evaluate the
investment, and represented to us that the securities were being acquired for
investment purposes.
 
 The
Securities and Exchange Commission is still in the process of reviewing our Form
10-KSB for year ended December 31, 2003 and the financial statements we filed on
Form 8-K on April 19, 2004. We anticipate there will be further amendments to
our 2003 Form 10-KSB and financial statements we filed on Form 8-K on April 19,
2004.
 
 Item
6.    Management Discussion and Analysis
or Plan of Operation
 
 THIS
ANNUAL REPORT ON FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS
REGARDING OUR EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE
SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES", "INTENDS", "BELIEVES", OR
SIMILAR LANGUAGE. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS, UNCERTAINTIES
AND OTHER FACTORS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS
ARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE HEREOF AND SPEAK ONLY AS OF
THE DATE HEREOF. THE FACTORS DISCUSSED ABOVE UNDER "RISK FACTORS" AND ELSEWHERE
IN THIS ANNUAL REPORT ARE AMONG THOSE FACTORS THAT IN SOME CASES HAVE AFFECTED
OUR RESULTS AND COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS.
 
 We were
incorporated in the State of Nevada as E Investments, Inc., on February 25,
1999, and subsequently changed our name to Arbor, Inc. on December 16, 1999. We
originally intended to engage in the business of manufacturing, selling and
distributing fence posts to be used by government parks, highway departments,
ranchers and farmers throughout North America. Due to a lack of capital, we were
forced to abandon our original business and examine other business
options.
 
 On
February 5, 2004, we completed a reorganization with Laizhou pursuant to the
Agreement. We intend on continuing the business operations of Laizhou, which
conducts granite mining and processing operations in the PRC through its wholly
owned subsidiary, Laizhou China.
 
 In 2004,
we focused on the business operations of Laizhou China and making inquiries
regarding the acquisition of other granite mining properties in the PRC. As a
result of the acquisition of Laizhou, we no longer pursued the Brazil Project
and sold our interest in CPL Arbor on December 31, 2004. In the interest of
continuing the project until such time a buyer could be found, two of our
directors, Messrs. Chen and Takkas, lent us further funds during the fourth
quarter of 2004, totaling $170,000, specifically for use on this real estate
development project. On December 31, 2004, we entered into an agreement with a
consortium, that included the two directors, to sell our interest in CPL Arbor.
Under the agreement the buyer has accepted the interest in CPL Arbor and the
responsibility to repay the notes totaling $595,000 set off against notes
payable by us to our two directors, Messrs. Chen and Takkas, totaling $170,000
requiring a net payment to us of $425,000. $25,000 was paid on execution of the
agreement and $200,000 was paid on March 31 st , 2005,
with the balance of $200,000 due on June 30 th , 2005.
The two directors have personally guaranteed these payments.
  16
 
 In 2004,
we completed the site surveys needed to install modern extraction equipment at
our two quarries, No. 1 Quarry and Group 14 Quarry. While the newer equipment
(i) increased the rate of extraction of granite blocks for slabs and tiles, (ii)
improved both the regularity of the stone and the sizes of stone that we are
able to process and sell, it did not improve productivity to the extent we
believed that it would.
 
 During
2004, we added equipment to each mine in addition to reconfiguring how the
property is mined. Examples of equipment we purchased at the Group 14 Quarry
include: a 30-ton loader, a 33-ton excavator, a 30-ton off road dump truck, 16
manual rock drills and a horizontal rock drill. Examples of the type of
equipment planned for purchase at No. 1 Quarry includes: a 30-ton loader, a
33-ton excavator, 16 manual rock drills, a horizontal rock drill, and a diamond
wire cutting system.
 
 Our
operations prior to February 5, 2004, were the operations of Arbor, Inc. which
had no active business. Since Laizhou China has been treated as the accounting
acquirer, the following financial information for the year ended December 31,
2003 is the historical financial information of Laizhou China since it was
formed in January 9, 2003. Financial information for the year ended December 31,
2004 is the historical financial information of Arbor and Laizhou China
combined.
  As
discussed in Note 17, the financial statements for the year ended December 31,
2003 have been restated to give effect to a change in accounting for deferred
stripping costs and amortization of mineral interests.
 
 Results
of Operation for the year ended December 31, 2004 and the period ended December
31, 2003.
 
 Revenues:
 
 Total
revenues for the year ended December 31, 2004, were $2,387,582 compared to
$3,050,183 for the period ended December 31, 2003.
 
 Revenues
from granite mining operations for the year ended December 31, 2004, were
approximately $1,700,000 compared to approximately $2,443,000 for the year ended
December 31, 2003 year. The decrease of approximately $740,000 was primarily due
to the lack and delay of orders during the year. This was to a great extent
caused by the conditions imposed by the PRC on the banking community in China,
to slow down the economic growth rate, which in turn effected the funding
available to our prospective clients. Our clients therefore delayed orders until
such time as funding was assured. There was also a general slowdown for a period
due in part to the restructuring and design of our quarry operations in an
attempt to be more productive in the future. The arrival of our new drilling
equipment in September 2004 has also not improved productivity to the extent
that we would have liked due to the fuel and efficiency costs
involved.
 
 Revenues
from processing operations increased to approximately $688,000 for the year
ended December 31, 2004, from approximately $607,000 for the period ended
December 31, 2003. This increase is due to the increase in orders for processed
granite. While the large majority of orders processed to date have been for the
PRC domestic market we currently are reviewing a plan of constructing a new
processing plant to target the processing of granite for export.
 
 There was
no other income for the year ended December 31, 2004 compared to income of $483
for the period in 2003. Interest originally accrued on the loan to CPL Arbor in
Brazil was written off on the sale of the project.
 
 General
and Administrative Expenses:
 
 General
and administrative expenses for the year ended December 31, 2004 were $1,135,188
compared to approximately $161,780 for the period ended December 31, 2003. The
majority of the increase is due to professional fees in connection with the
audit, reporting and completion of the reorganization between Laizhou and Arbor
in February 2004, the introduction of international professional staff and
consulting and advisory services which alone cost approximately $202,000 and
funding costs of approximately $100,000 for the debenture raised in October
2004. A large number of the reorganization expenses are not considered to be of
a reoccurring nature, but we do expect our professional fees for legal and
accounting services to continue to be higher than Laizhou China’s were for
fiscal year 2003 due to the costs of being a publicly traded company. For the
year ended December 31, 2004 we spent $0 on obtaining permits for our mines
compared to $30,193 for the year ended December 31, 2003.
 
 Net
Profit:
 
 As a
result of the foregoing factors, and $506,000 allocated to our statement of
operations for the conversion premium on convertible debt and warrants issued by
us during the year, our net loss for the year ended December 31, 2004, totaled
$143,441 compared to a profit of $1,452,342 for the period ended December 31,
2003. Our loss per share for the year ended December 31, 2004 is $0.01 compared
to earnings of $0.29 for the period ended December 31, 2003. Such loss was
primarily due to an increase in expenses in 2004 and the conversion premium on
the convertible debt.
 Liquidity
and Capital Resources
 
 In
October and November 2003, we completed the November Placement. We sold 600,000
shares of our restricted common stock for $500,000. A director and the then
President, Costas Takkas, purchased 300,000 of these shares. The November
Placement was made only to accredited investors without general solicitation in
compliance with Regulation D of the Securities Act of 1933, as amended. There
were no finders' fees or brokerage commissions paid for the November
Placement.
 
 In
December 2003, we completed the December Placement, selling an aggregate of
550,000 shares of our restricted common stock for $1.00 per share. The December
Placement was made only to accredited investors without general solicitation in
compliance with Regulation D of the Securities Act of 1933, as amended. There
were no finders' fees or brokerage commissions paid for the December
Placement.
 
 In April
2004, we completed an additional private placement of 500,000 shares of
restricted common stock priced at $3.00 per share (the "April Placement"). The
April Placement was made only to accredited investors without general
solicitation in compliance with Regulation D of the Securities Act of 1933, as
amended. There were no finders' fees or brokerage commissions paid for the April
Placement.
 
 On
October 6, 2004, we completed the sale of a $650,000 8% Senior Secured
Promissory Note to institutional and accredited investors pursuant to a Secured
Promissory Note Purchase Agreement (the "Senior Purchase Agreement") (the
“October Placement”). Under the Senior Purchase Agreement, we issued a Secured
Convertible Promissory Note (the "Senior Convertible Note") in the aggregate
principal amount of $650,000, convertible into our Common Stock at the option of
the investors at $1.60 per share. The Senior Convertible Note accrues interest
at 8% per year and all outstanding principal and unpaid interest is due on
September 30, 2007. We must make quarterly interest-only payments of $13,000 to
the investors until the Senior Convertible Note is either paid in full or is
converted into our common stock. Under the Senior Purchase Agreement, we also
issued warrants (the "Warrants") to purchase an aggregate of 406,250 shares of
our Common Stock at a per share exercise price of $2.00. The Warrants are
exercisable, in whole or in part, until September 30, 2009. Our obligations
under the Senior Purchase Agreement, the Senior Convertible Note and the
Warrants are secured by a security interest in all of our assets pursuant to a
general security agreement between us and the investors. In addition, pursuant
to a registration rights agreement between us and the investors, we have agreed
to file a registration statement with the Securities and Exchange Commission
("SEC")covering the resale of the subject shares of our common stock underlying
the Senior Convertible Note and the Warrant. We are
currently in default of the Senior Purchase Agreement, Secured Convertible Note
and Warrant, for among other things, not making payments on the note and not
having registered the underlying securities. The Senior Convertible Note
and the Warrant were issued to accredited investors in a private placement
transaction exempt from registration under the Securities Act of 1933, as
amended, pursuant to Rule 506 of Regulation D promulgated thereunder. Duncan
Capital LLC served as placement agent for the transaction. The purchasers had
access to all relevant information necessary to evaluate the investment, and
represented to us that the securities were being acquired for investment
purposes.
 
 We
estimate that after giving effect to the November, December, April and October
Placements, the current capital reserves that result will allow us to operate
for at least six months without relying on additional financing. If additional
funds are raised through the issuance of equity or convertible debt securities,
the percentage ownership of our stockholders will be reduced, stockholders may
experience additional dilution and such securities may have rights, preferences
and privileges senior to those of our common stock. There can be no assurance
that additional financing will be available on terms favorable to us or at all.
If adequate funds are not available or are not available on acceptable terms, we
may not be able to fund expansion, take advantage of unanticipated acquisition
opportunities, develop or enhance services or products or respond to competitive
pressures. Such inability could harm our business, results of operations and
financial condition.
  18
 
 For the
next six months we expect the primary sources of liquidity to be funds generated
by operations, cash on hand and possible private placements.
 
 Critical
Accounting Policies
 
 The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States requires us to
make judgments, assumptions and estimates that affect the amounts reported.
Note 2 of Notes to our Financial Statements describes the significant
accounting policies used in the preparation of our financial
statements..
  
 Item
7.    Financial
Statements
 
 Our
Financial Statements can be found immediately following Item 14
below.
 
  Item
8.    Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
 
 Effective
July 15, 2004, Braverman and Company (“ **Braverman** ”) was
dismissed as our principal accountant. Braverman did not audit or review
any of our financial statements for the fiscal year 2004. Prior to their
dismissal, there were no disagreements with Braverman on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
Braverman would have caused them to make reference to this subject matter of the
disagreements in connection with their report, nor were there any "reportable
events" as such term as described in Item 304(a)(1)(iv) of Regulation S-B,
promulgated under the Securities Exchange Act of 1934, as amended (" **Regulation
S-B** ").
 
 Effective
October 4, 2004, Moores Rowland and Mazars. (" **Moores** ") was
dismissed as our principal accountant. Moores did not audit or review any
of our financial statements. Prior to their dismissal, there were no
disagreements with Moores on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Moores would have caused
them to make reference to this subject matter of the disagreements in connection
with their report, nor were there any "reportable events" as such term as
described in Item 304(a)(1)(iv) of Regulation S-B .
 
 Effective
on October 5, 2005, we engaged Rotenburg and Co. to audit our financial
statements. During our most recent fiscal year, and the subsequent period prior
to such appointment, we have not consulted the newly engaged accountant
regarding the application of accounting principals to a specified transaction or
the type of audit opinion that might be rendered on our financial statements,
nor on any matter that was either the subject of a disagreement or a reportable
event.
 
 Our Board
of Directors approved the aforementioned changes in accountants described
herein.
 19
 
 Item
8A.  Controls and Procedures
 
 On
December 31, 2004, our management concluded our evaluation of the effectiveness
of our disclosure controls and procedures. As of that date, our President and
Chief Financial Officer concluded that we maintain effective disclosure controls
and procedures that ensure information required to be disclosed in reports under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
Specifically, the disclosure controls and procedures assure that information is
accumulated and communicated to management, including the President and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. There have been no significant changes in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of management's evaluation.
  
 PART
III
 
  Item
9.    Directors, Executive Officers,
Promoters and Control Persons; Compliance with Section 16 (a) of the Exchange
Act
 
 The
following table sets forth the names of all of our current directors and
executive officers as of December 31, 2004. These persons will serve until the
next annual meeting of the stockholders or until their successors are elected or
appointed and qualified, or their prior resignation or termination.
 
 Name
    Age
    PositionDong
      Chen
    44
    President
      and DirectorJuan
      Chen (1)
    50Piguo
      Man
    45
    Manager
      and DirectorMaria
      C. Maz
    36
    TreasurerMichael
      Miller
    50
    Vice-President
      of Investor RelationsCostas
      Takkas
    48
    Chief
      Financial Officer and DirectorStephen
      Spoonamore (2)
    40
    Director
 
 Note:  (1) Juan
Chen resigned as Chief Financial Officer, Secretary and Director effective
October 2, 2004.
 (2)
Stephen Spoonamore resigned as Director on January 19, 2005.
 
 Dong
Chen: Mr. Chen has served as our President since the reorganization on February
5, 2004. Prior to the reorganization, from June 2001 until joining us, Mr. Chen
served as the Chief Executive Officer of Yantai Maple Leaf Beverage Company
Ltd., a company that bottles and distributes bottled water in the People's
Republic of China. From 1997 until May 2001, Mr. Chen was the Vice President of
Marketing for China New Hope Electronic Development Co., which manufactured and
sold digital videodisc players. Mr. Chen received a degree in Business
Administration from Jilin Normal University in the People's Republic of China.
Mr. Chen is the brother of Juan Chen, our Chief Financial Officer, Secretary and
a Director.
 
 Juan
Chen: Ms. Chen was our Vice General Manager, Chief Financial Officer, Secretary
and a member of the Board of Directors since the reorganization on February 5,
2004 until her resignation effective October 2, 2004. Prior to the
reorganization, from March 2003 until joining us, Ms. Chen served as the General
Manager of Laizhou Jia Sheng Stone Company. From January 2002 until February
2003, Ms. Chen was the Director of Operations of Yanbian Airblower Factory. From
June 2000 until December 2001, she served as the Head of Mining at Jilin Huadian
City San Dao Ling Gold Mine in Jilin, China. From 1998 until May 2000, Ms. Chen
was the General Manager of Jilin Ocean Hotel in Jilin, China. Ms. Chen is the
sister of Dong Chen, our President and a Director.
  20
 
 Piguo
Man: Mr. Man has been our Manager since the reorganization on February 5, 2004.
Mr. Man is also one of our Directors. Prior to the reorganization, from March
2003 until joining us, Mr. Man was Vice General Manager of Laizhou Jia Sheng
Stone Company. From November 2002 until February 2003, Mr. Man served as the
General Manager of the Laizhou Science and Technology Bureau, which consulted
with agriculture and stone processing companies. From August 1998 until October
2002, Mr. Man served as the General Manager of the Laizhou Science and
Technology Development Company.
 
 Camilla
Maz: Ms. Maz was appointed as Treasurer in October 2003. Prior to this position,
Ms. Maz worked for the past five years in the financial services industry as an
assistant and advisor for multiple small and medium size companies in the United
States and Canada through her consulting company Prosper Financial Inc. In 1993,
Ms. Maz played an important role in the financing, bid preparation to the
Colombian government and subsequent implementation of cellular communications,
in the northern region of Columbia; Ms. Maz has also been founder, owner and
operator of several companies in South America. Ms. Maz holds a Bachelors Degree
in Business Administration (BBA) with emphasis in Finance from Universidad de
Los Andes, Bogota, Colombia. Ms. Maz is the sister-in-law of Michael Miller, our
Vice-President of Investor Relations.
 
 Michael
Miller: Mr. Miller has served as our Vice President of Investor Relations since
October 2003. Since January 2000, Mr. Miller has been the President and 50%
shareholder of Candide Investments Ltd. which has offered consulting services to
a number of public companies, assisting them with corporate restructuring,
mergers and acquisitions, raising capital and investor relations. From 1997 to
1999, Mr. Miller was an account executive with Canaccord Capital Corp. Mr.
Miller is the brother-in-law of Camilla Maz, our Treasurer.
 
 Costas
Takkas: Mr. Takkas has served as a member of our Board of Directors since
October 2002. Since October 2, 2004 he has also served as our Chief Financial
Officer. He served as a director of the following Toronto Stock Exchange Venture
Exchange (formerly the "VSE") companies: Serena Resources Ltd. (now named
Capstone Gold Ltd.) (1998-2001) and Emerald Mining Corp. (1998-1999). He was
also a director of Ourominas Minerals Inc. (1996-1997, now named Thistle Mining
Ltd.) which is listed on the Toronto Stock Exchange. Mr. Takkas has been a
member of the Institute of Chartered Accountants in England & Wales since
1982. He graduated with a B.Sc. (Honors) and Associate to the Royal College of
Science in Physics from the Imperial College of Science and Technology,
University of London in 1978.
  21
 
 Stephen
Spoonamore: Mr. Spoonamore served as a member of our Board of Directors from
March 2003 until his resignation on January 19, 2005. Since September 2003 he
has served as the Director of Strategic Relationships for SendWordNow Inc., a
firm that provides high-speed, high-volume disaster recovery communications. In
January 2001, he founded and currently acts as the CEO of DVDojo that provides
digital videodisc shooting, editing and production training and equipment in New
York City. In January 1999 he co-founded RSW Management, a construction
management firm that he sold later in 1999. In 1997 he founded CPR-Group that
provided studio and show design services until its sale in 2002.
 
 Family
Relationships
 
 Other
than as set forth above, there are no familial relationships between members of
our Board of Directors or our executive officers.
 
 Involvement
in Certain Legal Proceedings
 
 Mr.
Robert Miller, our former Treasurer and Vice President of Investor Relations,
the husband of Camilla Maz, our Treasurer and the brother of Michael Miller, our
Vice President of Investor Relations, was a director of Nanovation Technologies
Inc. ("Nanovation") from 1996 to 1999. Nanovation made switches and circuits for
fiber optics networks and it filed for Chapter 11 bankruptcy protection in July
2001.
 
 Committees
of the Board of Directors
 
 Our Audit
Committee is chaired by Costas Takkas. Dong Chen serves as the other members of
the Audit Committee. The Audit Committee oversees our financial reporting
processes and is responsible for reviewing our financial condition. The Audit
Committee did not meet in 2004 since we were primarily focused on searching for
new business opportunities.
 
 Audit
Committee Financial Expert
 
 Our Board
of Directors has determined that we have at least one audit committee financial
expert serving on our audit committee, namely Costas Takkas. Mr. Takkas would
not be considered independent, as that term is defined by the NASD because he
was one of our officers within the past three years. Under the applicable
Securities and Exchange Commission standard, an audit committee financial expert
means a person who has the following attributes:
 ·
    An
      understanding of generally accepted accounting principles and financial
      statements;
 ·
    The
      ability to assess the general application of such principles in connection
      with the accounting for estimates, accruals and
  reserves;
 22
 ·
    Experience
      preparing, auditing, analyzing or evaluating financial statements that
      present a breadth and level of complexity of accounting issues that are
      generally comparable to the breadth and complexity of issues that can
      reasonably be expected to be raised by the registrant's financial
      statements, or experience actively supervising one or more persons engaged
      in such activities;
 ·
    An
      understanding of internal controls and procedures for financial reporting;
      and
 ·
    An
      understanding of audit committee
functions.
  Mr.
Takkas received his designation as a chartered accountant from the Institute of
Chartered Accountants in England and Wales in 1982. Early in his career he
worked as a chartered accountant and auditor. He is now self-employed, investing
his time and money in speculative projects.
 
 Compensation
Committee
 
 Our
Compensation Committee is chaired by Mr. Costas Takkas. Costas Takkas and Piguo
Man serve as the other members of the Compensation Committee. The Compensation
Committee oversees the compensation of our executive officers and directors. Our
Compensation Committee did not meet in 2004 since we were primarily focused on
searching for new business opportunities and did not have
operations.
 
 Compliance
with Section 16(a) of the Securities Exchange Act of 1934
 
 Section
16(a) of the Exchange Act requires our officers and directors, and persons who
own more than 10% of the our common stock, to file reports of ownership and
changes of ownership of such securities with the United States Securities and
Exchange Commission. Based on a review of the our records, management believes
that all filing requirements applicable to the our officers, directors and
holders of more than 10% of our common stock were complied with during the 2004
fiscal year, except that: with respect to Mr. Chen, a Form 3 was filed late;
with respect to Ms. Chen, a Form 3 was filed late; with respect to Mr. Miller, a
Form 3 was filed late; with respect to Ms. Maz a Form 3 was filed late, with
respect to Mr. Stephen Spoonamore a Form 3 was filed late, and; with respect to
Mr. Costas Takkas a Form 4 was filed late concerning the purchase of
shares.
 
 Code of
Ethics
 
 We do not
yet have a Code of Ethics. Due to the recent completion of the reorganization
with Laizhou, the Board of Directors had decided to postpone the adoption of a
code of ethics until we are able to focus our business plan and develop a
greater infrastructure. Once we have adopted a Code of Ethics, a copy may be
obtained by sending a written request to the Secretary of Company.
  23
 
 Item
10.   Executive Compensation
 
 EXECUTIVE
COMPENSATION SUMMARY
 
 The
following table provides compensation information for the period indicated with
respect to the persons who served as our President for the years ended December
31, 2004, 2003 and 2002, and all other of our executive officers receiving total
salary and bonus in excess of $100,000 during the years ended December 31, 2004,
2003 and 2002 (collectively, the "Named Executive Officers"):
 
 SUMMARY
COMPENSATION TABLE
 
 Long
      Term CompensationAnnual
      Compensation
    Awards
    Payouts(a)
    (b)
    (c)
    (d)
    (e)
    (f)
    (g)
    (h)
    (i)Name
      and Principal Position
    Year
    Salary
      ($)
    Bonus($)
    Other
      Annual Compensation
    Restricted
      Stock Awards ($)
    Securities
      Under-lying Options/ SarS(#)
    LTIP
      Payouts ($)
    All
      Other Compensation
      ($)Dong
      Chen (1)
    2004
    0
    0
    $
      24,000
    0
    0
    0
    0President
    2003
    0
    0
    0
    0
    0
    0
    0Juan
      Chen (2)
    2004
    0
    0
    $
      4,000
    0
    0
    0
    0CFO
    2003
    0
    0
    0
    0
    0
    0
    0Costas
      Takkas (3)
    2004
    0
    0
    0
    0
    0
    0
    0CEO
      & President
    2003
    0
    0
    $
      18,000
    0
    0
    0
    02002
    0
    0
    0
    0
    0
    0
    0Stephen
      Spoonamore (4)
    2004
    0
    0
    0
    0
    0
    0
    0CFO
      & Secretary
    2003
    0
    0
    $
      27,000
    0
    0
    0
    0Robert
      Miller (5)
    2004
    0
    0
    0
    0
    0
    0
    0Treasurer
      & VP Investor Relations
    2003
    0
    0
    0
    0
    0
    0
    0Camilla
      Maz (6)
    2004
    0
    0
    $
      36,000
    0
    0
    0
    0Treasurer
    2003
    0
    0
    $
      36,000
    0
    0
    0
    0Michael
      Miller (7)
    2004
    0
    0
    0
    0
    0
    0
    0VP
      Investor Relations
    2003
    0
    0
    0
    0
    0
    0
    0Joginder
      Brar (8)
    2003
    0
    0
    0
    0
    0
    0
    0CEO
      & President
    2002
    0
    0
    0
    0
    0
    0
    0
 
 
 (1) 
Effective February 4, 2004 pursuant to the reorganization with Laizhou, Mr.
Chen's salary is $2,000 per month.
  24
 
 (2) 
Effective February 4, 2004 pursuant to the reorganization with Laizhou, Ms.
Chen's salary was $500 per month until she resigned effective October 2,
2004.
 (3) 
Mr. Takkas was our President, Chief Executive Officer and Director from October
2002 until February 5, 2004 when he resigned as an officer but remained as a
Director. Effective October 2, 2004 Mr. Takkas was hired as our Chief Financial
Officer. Prior to the reorganization with Laizhou, Mr. Takkas was paid $3,000
per month pursuant to a consulting agreement under which he provided management
services to us.
 (4) 
Mr. Spoonamore was our Chief Financial Officer, Secretary and director from
March 2003 until February 5, 2004 when he resigned as an officer but remained as
a director until January 19, 2005. Prior to the reorganization with Laizhou, Mr.
Spoonamore was paid $3,000 per month pursuant to a consulting agreement under
which he provided management services to us.
 (5) 
Mr. Robert Miller was our Treasurer and Vice President of Investor Relations
from March 2003 until October 2003.
 (6) 
Ms. Maz was appointed Treasurer in October 2003.
 (7) 
Mr. Michael Miller was appointed Vice President of Investor Relations in October
2003.
 (8) 
Mr. Brar resigned as our President and a Director in March 2003.
 (9) 
The total value of the services rendered by Mr. Brar was $60,000. The services
rendered included administrative duties, board duties, contract negotiations,
financing services, production and distribution research, shareholder
communication and organizational duties.
 
 Stock
Options/SAR Grants
 
 During
2004, we issued options to purchase 960,000 shares of our common stock to
certain directors, officers and employees. The parties later terminated such
options.
 
 Employment
Contracts and Termination of Employment or Change of Control
 
 We have
no plans or arrangements in respect of remuneration received or that may be
received by our executive officers to compensate such officers in the event of
termination of employment (as a result of resignation, retirement, change of
control) or a change of responsibilities following a change of control, where
the value of such compensation exceeds $60,000 per executive
officer.
 
 Director
Compensation
  25
 
 No cash
compensation was paid to any of our directors for services as a director during
the fiscal year ended December 31, 2004. We have no standard arrangement
pursuant to which our Board of Directors are compensated for their services in
their capacity as directors except for the granting from time to time of
incentive stock options. The Board of Directors may award special remuneration
to any director undertaking any special services on behalf of our company other
than services ordinarily required of a director. All authorized out-of-pocket
expenses incurred by a director on our behalf will be subject to reimbursement
upon our receipt of required supporting document of such expenses. No director
received and/or accrued any compensation for his services as a director,
including committee participation and/or special assignments.
  
 Item
11.  Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
 
 Security
Ownership of Certain Beneficial Owners and Management.
 
 The
following table sets forth certain information known to us with respect to the
beneficial ownership of our common stock as of December 31, 2004 and (i) all
persons who are known to us to be beneficial owners of five percent or more of
the common shares, (ii) each of our directors, (iii) the Named Executive
Officers named in the "Executive Compensation" section of this Annual Report and
(iv) all current directors and executive officers as a group.
 NAME
      AND ADDRESS OF BENEFICIAL OWNER (1)
    
    SHARES
      BENEFICIALLY OWNED
    
    %
      OF CLASS OWNEDDong
      Chen
    
    
    698,396
    
    
    4.82
    %Juan
      Chen
    
    
    667,268
    
    
    4.60
    %Piguo
      Man
    
    
    403,074
    
    
    2.78
    %Costas
      Takkas
    
    
    452,000
    
    
    3.11
    %Stephen
      Spoonamore
    
    
    115,000
    
    
    **Camilla
      Maz
    
    
    40,450
    
    
    **Michael
      Miller
    
    
    30,000
    
    
    **Officers
      and directors as a group (seven persons)
    
    
    2,406,188
    
    
    16.60
    %
 (1)
    Unless
      otherwise stated, the address of all persons in the table is c/o China
      Granite Corporation, 2642 Collins Avenue, Suite 305, Miami Beach, Florida
      33140.
 
 **
    Indicates
      less than 1%
  26
 
 Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and includes voting or investment power with respect to the
securities. Shares of Common stock subject to options or warrants that are
currently exercisable or exercisable within 60 days of December 31, 2004 are
deemed to be outstanding and to be beneficially owned by the person or group
holding such options or warrants for the purpose of computing the percentage
ownership of such person or group but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person or group.
Unless otherwise indicated, the address for each of the individuals listed in
the table is care of China Granite Corporation., 2642 Collins Avenue, Suite 305,
Miami Beach, Florida 33140. Unless otherwise indicated by footnote, the persons
named in the table have sole voting and sole investment power with respect to
all shares of common stock shown as beneficially owned by them, subject to
applicable community property laws. Percentage of beneficial ownership is based
on 14,498,000 shares of our common stock outstanding as of December 31,
2004.
 
  Item
12.  Certain Relationships and Related
Transactions
 
 In 2002,
we retained a consultant, Auron 2000, to assist our management. The services to
be rendered include administrative duties, contract negotiations, financing
services and shareholder communication. Auron 2000 received compensation of
$3,000 per month plus expenses. Auron 2000 was wholly owned by Robert H. Miller,
who was our Treasurer and Vice-President of Investor Relations, up until January
2003, when he sold his interest in Auron 2000. We entered into an agreement with
Prosper Financial Inc. to provide the services Auron 2000 formerly provided to
us under the same terms as our engagement with Auron 2000. Maria C. Maz, our
Treasurer and the wife of Robert H. Miller, owns Prosper Financial
Inc.
 
 Mr.
Costas Takkas, one or our directors, has a pre-existing relationship with CPL
Construcoes e Comercio Inc. Mr. Takkas is owed $2,000,000 from CPL for loans
made by Mr. Takkas to CPL for registration and taxes on the land owned by CPL in
Tocantins, Brazil, working capital, legal opinions from various attorneys and
other costs relating to financing sought for the project. Mr. Takkas has agreed
to assign $1,000,000 of his interest in this debt to Arbor would occur if Arbor
funded $3,000,000 to the Brazil Project. This did not occur and there is no
obligation.
  On
December 31, 2004, Mr. Takkas and Mr. Chen were part of the consortium which
purchased our interests of CPL Arbor in the Brazil Project.
 27
 
 Conflicts
Related to Other Business Activities.
 
 The
persons serving as our officers and directors have existing responsibilities
and, in the future, may have additional responsibilities, to provide management
and services to other entities in addition to us. As a result, conflicts of
interest between us and the other activities of those persons may occur from
time to time.
 
 We will
attempt to resolve any such conflicts of interest in our favor. Our officers and
directors are accountable to us and our shareholders as fiduciaries, which
requires that such officers and directors exercise good faith and integrity in
handling our affairs. A shareholder may be able to institute legal action on our
behalf or on behalf of that shareholder and all other similarly situated
shareholders to recover damages or for other relief in cases of the resolution
of conflicts in any manner prejudicial to us.
 
  Item 13.
Exhibits and Reports on Form 8-K
 
 (a)
Exhibits
 
 3.1*
    Amended
      and Restated Articles of Incorporation (incorporated by reference to
      exhibit 3.1 to our current report on Form 8-K filed on February 20,
      2004).3.2*
    Amended
      and Restated Bylaws (incorporated by reference to exhibit 3.1 to our
      current report on Form 8-K filed on February 20, 2004).4.2*
    Form
      of Subscription Agreement10.3*
    Consulting
      Agreement10.4*
    Stockholder
      Transfer Agreement10.5**
    Secured
      Promissory Note Purchase Agreement dated October 6,
200410.6**
    8%
      Senior Secured Promissory Note dated October 6, 200410.7**
    Warrant
      Agreement dated October 6, 200431.1
    Certification
      of Chairman and Chief Executive Officer Pursuant to Section 302of the
      Sarbanes-Oxley Act of 2002 (18 U.S.C. Sec. 1350) (transmitted
      herewith).31.2
    Certification
      of Vice Chairman and Chief Financial Officer Pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002 (18 U.S.C. Sec. 1350) (transmitted
      herewith).32.1
    Written
      Statement of Chairman and Chief Executive Officer Pursuant to Section 906
      of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (transmitted
      herewith).32.2
    Written
      Statement of Vice Chairman and Chief Financial Officer Pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
      (transmitted herewith).
 
 *
previously filed
 ** to be
filed at a later date
  28
 
 (b)
Reports of Form 8-K
 
 On
October 12, 2004 we filed a current report on Form 8-K to announce the October
Placement.
 
 On
October 14, 2004 we filed a current report on Form 8-K to announce a change in
auditors.
 
  Item 14.
Principal Accountant Fees and Services
 
 The
following table shows the aggregate fees billed us for professional services by
Braverman and Company (2003 to July 14, 2004), Moores Rowland Mazars (from July
15, 2004 until October 4, 2004) and Rotenburg and Co. our independent auditor,
for fiscal years 2004 and 2003:
 FISCAL
      2004
    
    FISCAL
      2003Audit
      Fees
    
    $
    119,985
    
    $
    8,247Audit-Related
      Fees
    
    $
    0
    
    $
    0Tax
      Fees
    
    $
    750
    
    $
    750All
      Other Fees
    
    $
    0
    
    $
    0Total
    
    $
    120,735
    
    $
    8,997
 
 
 Audit
Fees. This category includes the aggregate fees billed for professional services
rendered for the audits of our consolidated financial statements for fiscal
years 2004 and 2003, for the reviews of the financial statements included in our
quarterly reports on Form 10-QSB during fiscal 2004 and 2003, and for services
that are normally provided by the independent auditors in connection with
statutory and regulatory filings or engagements for the relevant fiscal
years.
 
 Audit-Related
Fees. This category includes the aggregate fees billed in each of the last two
fiscal years for assurance and related services by the independent auditors that
are reasonably related to the performance of the audits or reviews of the
financial statements and are not reported above under "Audit Fees," and
generally consist of fees for other attest engagements under professional
auditing standards, accounting and reporting consultations, internal
control-related matters, and audits of employee benefit plans.
 
 Tax Fees.
This category includes the aggregate fees billed in each of the last two fiscal
years for professional services rendered by the independent auditors for tax
compliance, tax planning and tax advice.
 
 29
 
 All Other
Fees. This category includes the aggregate fees billed in each of the last two
fiscal years for products and services provided by the independent auditors that
are not reported above under "Audit Fees," "Audit-Related Fees," or "Tax
Fees."
 
 The Audit
Committee considered the compatibility of the non-audit-related services
performed by and fees paid to Braverman and Company in 2003 and to (i) Braverman
and Company, (ii) Moores Rowland Mazars, and (iii) Rotenburg and Co. in the
proposed non-audit-related services and proposed fees for 2004 and determined
that such services and fees are compatible with the independence of such
auditors. During 2004, Braverman and Company, Moores Rowland Mazars, Rotenburg
and CoBraverm and us did not utilize any leased personnel in connection with the
audits.
  
 SIGNATURES
 
 In
accordance with section 13 and 15 (d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
 
 China
Granite Corporation
 
 /s/
Dong Chen,
President
and CEO/Director
  April 14,
2005
 
 In
accordance with the Securities Exchange Act of 1934, this Annual Report on Form
10-KSB has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
 
 SIGNATURE
    
    TITLE
    
    DATE/s/
      Dong Chen
    
    President
      and Director
    
    April
      14, 2005Dong
      Chen/s/
      Costas Takkas
    
    Chief
      Financial Officer
    
    April
      14, 2005Costas
      Takkas
    
    and
      Director/s/
      Piguo Man
    
    Director
    
    April
      14, 2005Piguo
      Man
  30
  Report
of Independent Accountants
   To the
Stockholders and the Board of Directors of
 
 **China
Granite Corporation**
 
 We have
audited the accompanying consolidated balance sheets of China Granite
Corporation (the “Company”) as of December 31, 2004, and the related
consolidated statements of operations, stockholders’ equity and cash flows for
the year then ended.  The
financial statements for the year ended December 31, 2003 were audited by other
advisors whose report dated March 25, 2004 expressed an unqualified opinion on
those financial statements.These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
 
 We
conducted our audits in accordance with Public Company Accounting Oversight
Board Standards (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company as
of December 31, 2004 and the results of their operations and its cash flows
for the year ended December 31, 2004 in conformity with accounting
principles generally accepted in the United States of America.
  As
discussed in Note 17, the financial statements for the year ended December 31,
2003 have been restated to give effect to a change in accounting for deferred
stripping costs and amortization of mineral interests.
  */s/Rotenberg
& Co. LLP*
 
 March 16,
2005
 Rochester,
New York
  F-1
 China
Granite Corporation




**Consolidated
Balance Sheets**

Expressed
in US$
**As
      of December 31,****ASSETS**
    
    
    *2004*
    **
    **
    *2003***Current
      assets**Cash
      and cash equivalents
    
    
    117,893
    
    
    41,715Accounts
      receivable, net
    
    
    489,547
    
    
    242,813Notes
      Receivable (Note 12)
    
    
    400,000
    
    
    —Inventories
      (Note 3)
    
    
    173,416
    
    
    114,408Deposits,
      prepayments and other receivables
    
    
    572,892
    
    
    1,196**Total
      current assets**
    
    
    1,753,748
    
    
    400,132Plant
      and equipment, net (Note 4)
    
    
    4,391,014
    
    
    2,658,253Mineral
      interests, net (Note 5)
    
    
    1,452,464
    
    
    1,503,622Deferred
      stripping costs, net (Note 6)
    
    
    1,163,525
    
    
    927,194**Total
      assets**
    
    
    8,760,751
    
    
    5,489,201**LIABILITIES
      AND SHAREHOLDERS’ EQUITY****Current
      liabilities**Accruals
      and other payables (Note 7)
    
    
    245,310
    
    
    119,477Business
      and resource tax and government surcharges payable
    
    
    1,098
    
    
    199,599Due
      to a shareholder (Note 12)
    
    
    178,142
    
    
    90,580Due
      to a director (Note 12)
    
    
    —
    
    
    120,773Income
      tax payable
    
    
    940,403
    
    
    715,333**Total
      current liabilities**
    
    
    1,364,953
    
    
    1,245,762**Long
      term liabilities**Secured
      Senior Promissory Note (Note 8)
    
    
    650,000
    
    
    —**Total
      long term liabilities**
    
    
    650,000
    
    
    —**Total
      liabilities**
    
    
    2,014,953
    
    
    1,245,762**Stockholders’
      equity**Common
      Stock: par value $0.001, 25,000,000 shares authorized,
      14,498,000 and 5,000,000 issued and outstanding at December
      31,
      2004 and 2003 respectively
    
    
    14,498
    
    
    603,865Additional
      paid-in capital
    
    
    5,425,019
    
    
    2,187,199Dedicated
      reserves
    
    
    348,084
    
    
    211,247Currency
      translation adjustment
    
    
    (2,620
    )
    
    (767
    )Retained
      earnings
    
    
    960,817
    
    
    1,241,095**Total
      stockholders’ equity**
    
    
    6,745,798
    
    
    4,243,439**Total
      liabilities and stockholders’ equity**
    
    
    8,760,751
    
    
    5,489,201


F-2

China Granite Corporation
Consolidated Statement of Operations

**Year
      to December 31, 2004 and**
      **Period
      from January 9, 2003**
      **(date
      of incorporation)**
      **to
      December 31, 2003****
    *2004*
    **
    *2003*Net
      sales
    
    
    2,387,582
    
    
    3,050,183Cost
      of sales
    
    
    (873,565
    )
    
    (721,211
    )Gross
      profit
    
    
    1,514,017
    
    
    2,328,972Conversion
      premium on convertible debt and warrants
    
    
    (506,000
    )Selling,
      general and administrative expenses
    
    
    (1,135,188
    )
    
    (161,780
    )**Operating
      loss**
    
    
    (127,171
    )
    
    2,167,192Other
      (loss) or income:Interest
      (expense) or income
    
    
    (16,270
    )
    
    483**Income
      before income taxes**
    
    
    (143,441
    )
    
    2,167,675Provision
      for income taxes (Note 9)
    
    
    —
    
    
    (715,333
    )**Net
      loss**
    
    
    (143,441
    )
    
    1,452,342**Basic
      and diluted earnings per share**
    
    
    —
    
    
    0.29**Weighted
      average number of shares outstanding - basic**
    
    
    13,481,366
    
    
    5,000,000**Weighted
      average number of shares outstanding - diluted**
    
    
    13,672,880
    
    
    5,000,000

F-3

China Granite Corporation

Statement of Stockholders' Equity
****
****
**Common
      stock****Shares**
    
    **Amount**
    
    **Additional**
      **paid-in**
      **capital**
    
    **Dedicated**
      **reserves**
    
    **Currency**
      **Translation**
      **adjustment**
    
    **Retained**
      **earnings**
    
    **Total****
    
    
    
    
    
    *US*$**
    
    
    *US*$**
    
    
    *US*$**
    
    
    *US*$**
    
    **
    *US*$**
    
    **
    *US*$**Balance,
      at inceptionIssuance of stock
    for:Cash of $603,865
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Plant and equipment,
      $1,145,822Inventories, $317,285Mineral interests,
$724,892
    
    
    5,000,000
    
    
    603,865
    
    
    2,187,999
    
    
    
    
    
    
    
    
    
    
    
    2,791,864Net income for the period to December 31, 2003
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (767
    )
    
    1,452,342
    
    
    1,451,575Transfer
    
    
    —
    
    
    —
    
    
    —
    
    
    211,247
    
    
    —
    
    
    (211,247
    )
    
    —Balances,
      December 31, 2003
    
    
    5,000,000
    
    
    603,865
    
    
    2,187,999
    
    
    211,247
    
    
    (767
    )
    
    1,241.095
    
    
    4,243,439Recapitalization on February 5,
      2004
    
    
    8,998,000
    
    
    (589,867
    )
    
    1,236,520
    
    
    —
    
    
    —
    
    
    —
    
    
    646,653Stock subscribed in private
      placement, net
    
    
    500,000
    
    
    500
    
    
    1,494,500
    
    
    —
    
    
    —
    
    
    —
    
    
    1,495,000Conversion
      premium on convertible debt and warrants
    
    
    —
    
    
    —
    
    
    506,000
    
    
    —
    
    
    —
    
    
    —
    
    
    506,000Net
      loss for the year to December 31, 2004
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (1,853
    )
    
    (143,441
    )
    
    (145,294
    )Transfer
    
    
    —
    
    
    —
    
    
    —
    
    
    136,837
    
    
    —
    
    
    (136,837
    )
    
    —Balances,
      December 31, 2004
    
    
    14,498,000
    
    
    14,498
    
    
    5,425,019
    
    
    348,084
    
    
    (2,620
    )
    
    960,817
    
    
    6,745,798

F-4

China
Granite Corporation

Statements
of Cash Flow


**For
      the year to December 31, 2004**
      **and
      the Period from January 9, 2003**
      **(date
      of incorporation)**
      **to
      December 31, 2003***2004*
    **
    *2003***Cash
      flows from operating activities**Net
      loss
    
    
    (143,441
    )
    
    1,452,342Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Conversion
      premium on convertible debt and warrants
    
    
    506,000
    
    
    —Depreciation
      of plant and equipment
    
    
    240,607
    
    
    117,818Amortization
      of mineral interests
    
    
    51,158
    
    
    66,426Amortization
      of deferred stripping costs
    
    
    39,031
    
    
    38,990Changes
      in operating assets and liabilities:Accounts
    receivable
    
    
    (246,734
    )
    
    (242,813
    )Deposits, prepayments and other
      receivables
    
    
    (571,696
    )
    
    (1,196
    )Inventories
    
    
    (59,008
    )
    
    202,765Deferred stripping costs
    
    
    (275,362
    )
    
    (966,184
    )Accruals and other
      payables
    
    
    125,833
    
    
    119,477Business and resource tax and
      government surcharge payable
    
    
    (198,501
    )
    
    199,599Income taxes
    payable
    
    
    225,070
    
    
    715,333**Net
      cash provided by operating activities**
    
    
    (307,043
    )
    
    1,702,557**Cash
      flows****from investing activities**Acquisition
      of plant and equipment
    
    
    (1,973,368
    )
    
    (1,630,650
    )Acquisition
      of mineral interests
    
    
    —
    
    
    (845,410
    )Assets
      received in recapitalization of the Company
    
    
    646,653
    
    
    —**Net
      cash used in investing activities**
    
    
    (1,326,715
    )
    
    (2,476,060
    )**Cash
      flows****from financing activities**Net
      proceeds from issuance of registered capital
    
    
    1,495,000
    
    
    603,865Net
      (Repayment)/Advance from a shareholder
    
    
    87,562
    
    
    90,580Notes
      Payable/Receivable
    
    
    250,000
    
    
    —(Repayment)/Advance
      from a director
    
    
    (120,773
    )
    
    120,773**Net
      cash provided by financing activities**
    
    
    1,711,789
    
    
    815,218**Currency
      translation adjustment**
    
    
    (1,853
    )
    
    —Cash
      at beginning of period
    
    
    41,715
    
    
    —Net
      increase in cash and cash equivalents
    
    
    76,178
    
    
    41,715**Cash
      and cash equivalents, end of period**
    
    
    117,893
    
    
    41,715**Non-cash
      investing and financing activities:**Common
      stock issued in exchange for plant and equipment
    
    
    —
    
    
    1,145,421Common
      stock issued in exchange for Inventories
    
    
    —
    
    
    317,173Common
      stock issued in exchange for mineral interest
    
    
    —
    
    
    724,638**Supplementary
      Information**Income
      taxes paid
    
    
    —
    
    
    —Interest
      paid
    
    
    —
    
    
    —

****
F-5
****
**China
Granite Corporation******




**Notes
to and forming part of the Financial Statements**







**1.**
    **ORGANIZATION
      AND PRINCIPAL ACTIVITIES**





China
Granite Corporation conducts granite mining and processing operations in the
People's Republic of China (the "PRC") through the wholly-owned subsidiary of
its subsidiary, China Laizhou Bay Mining International Corporation, a
corporation organized under the laws of the British Virgin Islands ("Laizhou").
This operating company, Laizhou Jia Sheng Stone Company  ("Laizhou
China"), is a limited liability company organized under the laws of the People's
Republic of China.





China
Granite Corporation, formerly known as Arbor Inc. a United States Corporation,
acquired 100% of the shares of Laizhou Bay in a restricted share exchange. In
this transaction China Granite received all of the shares of Laizhou Bay and
issued treasury shares to the shareholders of Laizhou Bay. As a result of the
transaction, China Granite Corporation was effectively established in February
2004.





China
Granite (CGNT: OTCBB) was initially a company dedicated to the construction of
concrete buildings, fencing and walls for major ranches, public parks, and
government installations throughout North and South America. Currently, the
Company only engages in granite operations.





Laizhou
Bay, a holding company incorporated in the British Virgin Islands, owns 100% of
Laizhou China a limited liability company organized under the laws of PRC on
January 9, 2003. Most of the raw granites mined are sold to the domestic market.
The Company also acquires other kinds of raw granite other than those from its
own mines for further processing into slabs and tiles to meet specific orders
for processed stone.





The
Company now owns mineral interests of granite reserves in two locations in
Laizhou City, Shandong Province. The Company also owns another mineral
concession in the Laiyang district just to the East of Laizhou
City.





**2.**
    **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**





**Basis
of accounting**


The
      consolidated financial statements have been prepared in accordance with
      accounting principles generally accepted in the United States of America.
      The financial statements are presented in United States
      Dollars.





**Principles
of Consolidation**


The
      Consolidated financial statements include the accounts of China Granite
      Corporation and its wholly owned subsidiary China Laizhou Bay Mining
      International Corporation, and Laizhou Jia Sheng Stone Company. All
      significant intercompany accounts have been
eliminated.





**Cash
and cash equivalents**


The
Company considers all cash and highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.





F-6





**China
Granite Corporation**


****


**Notes
to and forming part of the Financial Statements**








**2.**
    **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)**





**Leasehold
Land, Plant and equipment and depreciation**


Leasehold
land is recorded at cost less accumulated amortization. Amortization is provided
over the term of the land use right certificate on a straight-line basis.
Leasehold land located in the PRC is subject to lease term specified in the land
use right certificate granted by the governmental authority. An initial lump-sum
payment is paid to the government to acquire the right to use the land over a
specified period. During the lease term, the leasehold land is transferable.
After the expiration of the


lease
term, the leasehold land is required to be returned to the government unless
further renewal is made with the governmental authority.





Other
Plant and equipment are stated at cost. Significant renewals and additions are
capitalized at cost. Maintenance and repairs, and minor renewals and betterments
are charged to operations as incurred.





Mineral
exploration costs are expensed as incurred. When it has been determined that a
mineral property can be economically developed as a result of establishing
proven and probable reserves, costs incurred prospectively to develop the
property are capitalized as incurred and are amortized. Major development costs
incurred after the commencement of production are capitalized and amortized.
Ongoing development expenditures to maintain production are charged to
operations as incurred. No exploration and development costs have been
capitalized for the period.





The
existing terms of the mineral rights (mining right periods) are not sufficient
to recover all identified and valued proven and probable reserves and/or
undeveloped mineral interests in respect of the two mineral rights currently
owned by the Company. Therefore the Company depreciates and amortizes its
mining-related plant and equipment and mining development costs on a
straight-line basis over the estimated useful lives of the plant and equipment.





Depreciation
      is calculated to write off the cost of plant and equipment over their
      estimated useful lives from the date on which they become fully
      operational and after taking into account their estimated residual values,
      using the straight line method, at the following annual
    rates:


Leasehold
      land
    Over
      the unexpired term of leaseBuildings
    10
      - 20 yearsMotor
      vehicles
    2 -
      10 yearsFurniture
      and equipment
    1 -
      20 years


**Accounts
receivable**


Accounts
receivable are stated at the amount billed to customers.  The Company
provides an allowance for doubtful accounts, which is based upon a review of
outstanding receivables, historical collection information and existing economic
conditions.  Accounts past due more than 120 days are considered
delinquent.  Delinquent receivables are written off based on individual
credit evaluation and specific circumstances of the customer.





**Inventories**


Inventories
are valued at the lower of cost or market using weighted average cost method of
accounting.





Raw
materials represent purchased raw granite for use in further processing into
granite slabs. Work-in-progress represents materials that are currently in the
process of being converted to granite slabs. Finished goods represent granite
blocks (raw granite) held for sale from mining and processed granite
slabs.





F-7




**China
Granite Corporation**
 ****
 **Notes
to and forming part of the Financial Statements**





**2.**
    **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)**





Mineral
interests


Mineral
interests represent acquired mineral rights for parcels of land not owned by the
Company. These mineral interests are currently in the production stage which
contains proven and probable reserves. Mineral interests are amortized
using the units of productionmethod over the terms of mineral rights,
which are 20 and 30 years for the Company's two mineral interests. Units of
production method of amortization is used because the production level may vary
from period to period. In accordance with SFAS 151 we have applied waste factors
of 60% and 50% respectively in determining the reserves from which the units of
production were applied.












The
Company was issued a mining right certificate in respect of one of its two
mineral interests from the relevant governmental authority. The initial
application and registration fee of applying a mining right certificate from
relevant governmental authority
amounted to Rmb250,000 (US$30,193). The mining right certificate is to be
renewed every five years. The management of the Company considers the renewal
fee would be minimal and the chance of renewals not being granted by the
relevantgovernmental authority is remote. The Company further received a
confirmation from the governmental authority confirming that the mining right
certificate can be renewed every five years. With respect to the remaining
mineral interest, the Company has submitted an application for a mining right
certificate for which an acknowledgment of application-in-progress was received
from the relevant governmental authority.





The
Company has received another written confirmation from the relevant governmental
authority that the Company has valid mining rights in its two mineral interests
since the commencement of mining business throughout the terms of respective
mineral interests, despite the fact that official mining right certificates have
not been issued at the time of commencement of mining business.





**Deferred
stripping costs**


In
general, mining costs are charged to operations as incurred. The costs of
removing overburden and other waste materials during mine development stage to
access mineral deposits at open pit mines are capitalized and
amortized.  These
costs of removing waste materials and road construction are referred to as
stripping costs. Stripping costs during post-production phase are expensed as
incurred. However, industry practice does vary for post-production phase
stripping costs incurred. Some mining companies defer the costs in the
post-production phase and expensing stripping costs may result in the reporting
of greater volatility in period to period results of operations. Full amount of
post-production stripping costs incurred will not be expensed until the end of
mine life.





During
the year ended December 31, 2004 and the period ended December 31, 2003, the
Company capitalized all the stripping costs in the statement of operations as
the company believed that that these costs can benefit the exploration and
production of minerals in subsequent periods. Such costs amounted to US$275,362
in 2004 and US$966,184 in 2003, respectively. These stripping costs are
amortized over their useful lives using units of production method, consistent
with the method used in mineral interests amortization.





**Reclamation
and remediation costs**


Estimated
future reclamation and abandonment costs are based principally on legal and
regulatory requirements and are accounted for in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 143, "Accounting for Asset
Retirement Obligations". At the balance sheet date, such costs have not been
provided because the costs involved are insignificant under the current legal
and regulatory requirements in the PRC.





F-8





China Granite Corporation





**Notes
to and forming part of the Financial Statements**








**2.**
    **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)**





**Impairment
of long-lived assets**


Long-lived
assets are evaluated for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable in
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”. An asset is considered impaired if its carrying amount
exceeds the future net cash flow the asset is expected to generate. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset exceeds its
fair market value. The recoverability of long-lived assets is assessed by
determining whether the unamortized balances can be recovered through
undiscounted future net cash flows of the related assets. The amount of
impairment, if any, is
measured based on projected discounted future net cash flows using a discount
rate reflecting the Company’s average cost of capital.





**Net
sales**


The
Company recognizes revenue when there is persuasive evidence of an agreement
with customers, with a fixed fee that is collectible and when delivery has
occurred.





**Cost
      of sales**


Costs
classified as cost of sales relate to the mining of minerals and production of
granite slabs and include such items as material cost, depreciation of fixed
assets, amortization of mineral interests, direct labor costs and other
production costs.





**Income
taxes**


Income
taxes are provided under the provisions of SFAS No. 109, which requires
recognition of the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and net operating loss carry-forwards
under the liability method. Deferred tax assets and liabilities are measured
using expected tax rates in effect for the period, in which those temporary
differences, are expected to be recovered or settled.





**Comprehensive
      income**


The
Company has adopted SFAS No. 130 “Reporting Comprehensive Income”, which
requires the disclosure of comprehensive income, which includes net income
(loss), unrealized gains and losses on marketable securities classified as
available-for-sale and foreign currency translation adjustments. Comprehensive
income for the period only consisted of net income for the period.





**Foreign
      currency translation**


Transactions
in currencies during the period are translated into the functional currency at
the applicable rates of exchange prevailing at the time of the transactions.
Monetary assets and liabilities denominated in currencies other than functional
currency are translated into the functional currency at the applicable rates of
exchange in effect at the balance sheet date. Exchange gains and losses are
recorded in the statement of operations.





Translation
of amounts from Renminbi into United States dollars ("US$") is for the
convenience of readers and has been made at the noon buying rate in New York
City for cable transfers in foreign currencies as certified for customs purposes
by the Federal Reserve Bank of New York on December 31, 2003 of US$1.00 =
Rmb8.28. No representation is made that the Renminbi amounts could have been, or
could be, converted into United States dollars at that rate or at any other
rate.





F-9





**China
Granite Corporation**
 ****
 **Notes
to and forming part of the Financial Statements**







**2.**
    **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)**





**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 the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Such estimates include provisions for doubtful
accounts, sales returns and allowances, long-lived assets and deferred income
taxes. Actual results could differ from those estimates.





**Fair
value of financial instruments**


The
estimated fair values for financial instruments under SFAS No. 107, “Disclosures
about Fair Value of Financial Instruments”, are determined at discrete points in
time based on relevant market information. These estimates involve uncertainties
and cannot be determined with precision. The estimated fair values of the
Company’s financial instruments, which includes cash, accounts receivable and
other payables, approximates their carrying values in the consolidated financial
statements.





**Net
Income (Loss) Per Common Share**


Net
income (loss) per common share is computed in accordance with SFAS No. 128,
“Earnings Per Share”. Basic earnings per common share is calculated by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for each period. Diluted earnings per common share is
calculated by adjusting the weighted-average shares outstanding assuming
conversion of all potentially dilutive stock options, warrants and convertible
securities (common stock equivalents). Diluted earnings per share is the same as
basic earnings per share for all of the periods presented as the effect of
common stock equivalents resulting from the convertible notes and warrants were
anti-dilutive.





**Recent
accounting pronouncements**


In
November 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard (“SFAS”) No. 151 "Inventory Costs -
an amendment of ARB No. 43, Chapter 4" (“SFAS 151”). This statement amends the
guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). SFAS 151 requires that those items be
recognized as current-period charges. In addition, this Statement requires that
allocation of fixed production overheads to costs of conversion be based upon
the normal capacity of the production facilities. The provisions of SFAS 151 are
effective for fiscal years beginning after June 15, 2005. As such, the Company
is required to adopt these provisions at the beginning of the fiscal year ended
December 31, 2006. The Company is currently evaluating the impact of SFAS 151 on
its consolidated financial statements, but management does not expect that it
will have a material effect.





In
December 2004, the FASB issued SFAS No. 152 "Accounting for Real Estate
Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67"
(“SFAS 152”). This statement amends FASB Statement No. 66 “Accounting for Sales
of Real Estate” to reference the financial accounting and reporting guidance for
real estate time-sharing transactions that is provided in AICPA Statement of
Position 04-2 “Accounting for Real Estate Time-Sharing Transactions” (“SOP
04-2”).




F-10




**China
Granite Corporation**


****
 **Notes
to and forming part of the Financial Statements**







**2.**
    **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)**





**Recent
accounting pronouncements (continued)**





SFAS 152
also amends FASB Statement No. 67 “Accounting for Costs and Initial Rental
operations of Real Estate Projects” to state that the guidance for incidental
operations and costs incurred to sell real estate projects does not apply to
real estate time-sharing transactions, with the accounting for those operations
and costs being subject to the guidance in SOP 04-2. The provisions of SFAS 152
are effective in fiscal years beginning after June 15, 2005. As such, the
Company is required to adopt these provisions at the beginning of the fiscal
year ended December 31, 2006. The Company is currently evaluating the impact of
SFAS 152 on its consolidated financial statements, but management does not
expect that it will have a material effect.





In
December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets -
an amendment of APB Opinion No. 29" (“SFAS 153”). SFAS 153 replaces the
exception from fair value measurement in APB Opinion No. 29 for nonmonetary
exchanges of similar productive assets with a general exception from fair value
measurement for exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the
exchange. SFAS 153 is effective for all interim periods beginning after June 15,
2005. As such, the Company is required to adopt these provisions at the
beginning of the fiscal quarter ended September 30, 2005. The Company is
currently evaluating the impact of SFAS 153 on its consolidated financial
statements, but management does not expect that it will have a material
effect.





In
December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" (“SFAS
123R”). SFAS 123R revises FASB Statement No. 123 “Accounting for Stock-Based
Compensation” and supersedes APB Opinion No. 25 “Accounting for Stock Issued to
Employees”. SFAS 123R requires all public and non-public companies to measure
and recognize compensation expense for all stock-based payments for services
received at the grant-date fair value, with the cost recognized over the vesting
period (or the requisite service period). SFAS 123R is effective for non-small
business issuers for all interim periods beginning after June 15, 2005. SFAS
123R is effective for small business issuers for all interim periods beginning
after December 15, 2005. As such, the Company is required to adopt these
provisions at the beginning of the fiscal quarter ended September 30, 2005.
Retroactive application of the provisions of SFAS 123R to the beginning of the
fiscal year that includes the effective date is permitted, but not required. The
Company is currently evaluating the impact of SFAS 123R on its consolidated
financial statements, but management does not expect that it will have a
material effect.





**3.**
    **INVENTORIES**





Inventories
consisted of:





**As
      of December 31,***2004*
    
    *2003*Raw
      materials
    
    
    72,240
    
    
    82,882Work-in-progress
    
    
    18,323
    
    
    19,109Finished
      goods
    
    
    82,853
    
    
    12,417173,416
    
    
    114,408





F-11
  **China
Granite Corporation**
 ****
 **Notes
to and forming part of the Financial
Statements**


**4.**
    **PLANT
      AND EQUIPMENT, NET**


Plant and
equipment consisted of:


**As
      of December 31,***2004*
    
    
    *2003*Leasehold
      land
    
    
    569,820
    
    
    569,820Buildings
    
    
    749,874
    
    
    708,316Furniture
      and equipment
    
    
    2,271,448
    
    
    877,872Motor
      vehicles
    
    
    112,101
    
    
    23,978Construction-in-progress
    
    
    1,001,399
    
    
    596,085Leasehold
      Improvements
    
    
    44,797
    
    
    —Cost
    
    
    4,749,439
    
    
    2,776,071Less:
      Accumulated depreciation
    
    
    (358,425
    )
    
    (117,818
    )Plant
      and equipment, net
    
    
    4,391,014
    
    
    2,658,253





Depreciation
expense amounted to US$240,607 for the year ended December 31, 2004 and
US$117,818 for the period ended December 31, 2003.





**5.**
    **MINERAL
      INTERESTS, NET**





Mineral
interests represented:


**As
      of December 31,***2004*
    
    
    *2003*Gross
      carrying amount
    
    
    1,570,048
    
    
    1,570,048Accumulated
      amortization
    
    
    (117,584
    )
    
    (66,425
    )Net
      book value
    
    
    1,452,464
    
    
    1,503,623





All the
mineral interests are in the production stage and amortization expense amounted
to US$51,159 and $66,425 for the year ended December 31, 2004 and the period
ended December 31, 2003, respectively.





**6.**
    **DEFERRED
      STRIPPING COSTS, NET**





Deferred
stripping costs represented:


**As
      of December 31,***2004*
    
    
    *2003*Gross
      carrying amount
    
    
    1,241,546
    
    
    966,184Accumulated
      amortization
    
    
    (78,021
    )
    
    (38,990
    )Net
      book value
    
    
    1,163,525
    
    
    927,194





F-12





**China
Granite Corporation**
 ****
 **Notes
to and forming part of the Financial Statements**





**7.**
    **ACCRUALS
      AND OTHER PAYABLES**





Accruals
and other payables consisted of:





**As
      of December 31,***2004*
    
    *2003*Wages
      and bonus
    
    
    15,590
    
    
    25,983Accrued
      interest
    
    
    13,000
    
    
    0Others
    
    
    216,720
    
    
    93,494245,310
    
    
    119,477








**8.**
    **NOTE
      PAYABLE**




On
October 6, 2004, China Granite Corporation (the "Company") completed the sale of
a $650,000 8% Senior Secured Promissory Note to institutional and accredited
investors pursuant to a Secured Promissory Note Purchase Agreement (the "Senior
Purchase Agreement").




Under the
Senior Purchase Agreement, the Company issued a Secured Convertible Promissory
Note (the "Senior Convertible Note") in the aggregate principal amount of
$650,000, convertible into Common Stock of the Company at the option of the
investors at $1.60 per share. The Senior Convertible Note accrues interest at 8%
per year and all outstanding principal and unpaid interest is due on September
30, 2007. The Company must make quarterly interest-only payments of $13,000 to
the investors until the Senior Convertible Note is either paid in full or is
converted into the Company's common stock. At December 31, 2004, $13,000 due for
interest was accrued.




Under the
Senior Purchase Agreement, the Company also issued warrants (the "Warrants") to
purchase an aggregate of 406,250 shares of the Common Stock at a per share
exercise price of $2.00. The Warrants are exercisable, in whole or in part,
until September 30, 2009.




The
Company's obligations under the Senior Purchase Agreement, the Senior
Convertible Note and the Warrants are secured by a security interest in all of
the Company's assets pursuant to a general security agreement between the
Company and the investors. In addition, pursuant to a registration rights
agreement between the Company and the investors, the Company has agreed to file
a registration statement with the Securities and Exchange Commission ("SEC")
covering the resale of the subject shares of the Company's common stock
underlying the Senior Convertible Note and the Warrant.




The
excess fair value of the common stock into which the notes can convert at the
conversion date over the proceeds is recorded as conversion premium and is
limited to the amount of the proceeds of the debentures. Accordingly, $2,395,093
and $1,252,000 was recorded in 2000 and 1999, respectively, as a charge to
conversion premium and a credit to additional paid-in capital in the
accompanying financial statements.




**9.**
    **INCOME
      TAXES**


The
Company was subject to the PRC income tax at a rate of 33% in 2003.


****


**9.**
    **INCOME
      TAXES (CONTINUED)**




F-13





****China
Granite Corporation**
****
**Notes
to and forming part of the Financial
Statements****








For a
period of two years commencing 2004, the operations in China will not incur
income taxes and for three years following that period the income tax rate will
be reduced 50 percent in accordance with the regulations relating to foreign
companies. In addition, the accrual for income taxes for 2003 of approximately
$715,000 may eventually be eliminated if pending approvals are
finalized.


The
reconciliation of the PRC income tax rate to the effective income tax rate based
on income before income taxes is as follows:





**Year
      to December 31, 2004**
      **and
      the Period from January 9, 2003**
      **(date
      of incorporation)**
      **to
      December 31, 2003**%PRC
      income tax rate
    33Effective
      income tax rate
    33





Deferred
tax assets and liabilities have not been provided as there are no temporary
differences existed during the period and at the balance sheet
date.





**10.**
    **STOCKHOLDERS’
      EQUITY**





On
incorporation, the shareholders of the Company contributed a total of
Rmb5,000,000 (US$603,865) to the Company as registered capital. In addition to
cash, the Company's shareholders also contributed Rmb18,110,284 (US$2,187,232)
in value of fixed assets, inventories and mineral interest to the Company which
is recorded as additional paid-in capital.





The
Company's income is distributable to its shareholders after transfer to
dedicated reserves as required under relevant PRC laws and regulations and the
Company's Articles of Association. Dedicated reserves include statutory surplus
reserve and statutory public welfare fund.





Statutory
surplus reserve represents the appropriation of 10% of income after taxation
calculated in accordance with PRC accounting standards and regulations and the
Articles of Association of the Company. The appropriation may cease to apply if
the balance of the statutory surplus reserve has reached 50% of the Company's
registered capital. In addition, the Company's Articles of Association also
allows the Company to transfer certain amounts of income after taxation and
after appropriations to the statutory surplus reserve and statutory public
welfare fund, subject to shareholders' approval, to a discretionary surplus
reserve. According to the Company's Articles of Association, statutory surplus
reserve can be used to make up prior year losses, to expand production operation
or to increase registered capital.





Statutory
public welfare fund represents the appropriation of income after taxation
according to the requirements of the Company's Articles of Association and the
PRC laws and regulations. According to the requirements, the Company transfers
5% to 10%, at the discretion of directors, of income after taxation calculated
in accordance with PRC accounting standards and regulations. The fund can only
be utilized for capital expenditure on employees' collective welfare facilities
and cannot be used in staff welfare expenses. The statutory public welfare fund
is not distributable to shareholders other than in liquidation.





**11.**
    **COMMITMENTS
      AND CONTINGENCIES**




F-14




**China
Granite Corporation**
 ****
 **Notes
to and forming part of the Financial Statements**







At
      the balance sheet date, the Company had capital expenditure commitments in
      respect of granite slabs production facilities contracted for, but not
      provided for, net of deposits paid, amounting to US$Nil in 2004 (2003 -
      US$274,155).





The
Company has made full tax provision in accordance with relevant national and
local laws and regulations of the PRC. However, the local tax authority granted
the Company certain tax allowances and exemption and collected less than the
full amount from the Company. This is not in compliance with national laws and
regulations. Accordingly, despite the fact that the Company has made full tax
provision in the financial statements, the Company may be subject to penalty
ranging from 50% to 500% of the underpaid tax amount, plus a default interest on
the unpaid amount calculated on a daily basis. The exact amount of penalty
cannot be estimated with any reasonable degree of certainty. The board of
directors considers it is not probable that the tax penalty will be imposed as a
result of tax concession/exemption, which may not be in compliance with relevant
national laws and regulations, provided by the local tax authority.





**12.**
    **RETIREMENT
      PLAN AND POST-EMPLOYMENT BENEFITS**





The
Company has no retirement plan or post-employment benefits for its
employees.





**13.**
    **RELATED
      PARTY TRANSACTIONS**




During
the period, the Company had the following transactions with related
parties.


(1)
    Brazil
      Project





In
October and November 2003 (the "November Placement"), we received $500,000
($250,000 of which came from one of our Directors) through a private placement
of 600,000 shares of our restricted common stock to fund a real estate
development project between CPL Construcoes e Comercio, Inc. ("CPL") and China
Granite in Brazil. To this end a Brazilian corporation was formed to carry on
the venture, namely CPLArbor do Brasil Construtora Limitada ("CPLArbor"), which
is owned in equal parts by CPL and the Company. An aggregate of $425,000 of the
funds raised in the November Placement were committed to CPLArbor. During 2004
two of the Company’s Directors lent funds to the Company totaling $170,000
specifically for use by this project.





On
December 31, 2004, the Company entered into an agreement with a consortium that
included the two directors to sell its interest in the Brazil Project. Under the
agreement the buyer has accepted the interest in the Brazilian corporation and
the responsibility to repay the notes due there from totaling $595,000 set off
against notes payable by China Granite to its two Directors totaling $170,000
requiring a net payment to China Granite of $425,000. $25,000 was paid on
execution of the agreement and $200,000 is due on March 31 st with the
balance of $200,000 due on June 30 th . The two
directors have personally guaranteed these payments .








**13.**
    **RELATED
      PARTY TRANSACTIONS (CONTINUED)**








It has
always been the intent (as disclosed in our filings) since the merger of Arbor
Limited (now China Granite) and Laizhou Bay on February 5, 2004, to convert the
interest in the Brazilian development project into working capital for its
granite operations.





F-15
  **China
Granite Corporation**
 ****
 **Notes
to and forming part of the Financial
Statements**





****        
      (2)
    Other Related party transactions during the period are as
      follows:


During
the period the Company entered into an Agreement to purchase two excavators for
US$321,256 partly funded through a loan arrangement. Under the Laws of the PRC
such a loan cannot be extended to a company and it was therefore adopted on
behalf of the Company by one of its shareholders.






In 2003,
a car was purchased by the Company for US$16,780, under a similar funding
arrangement to that
noted above. In this case another shareholder, who is also a director adopted
the loan on behalf of the Company.





In 2003,
the Company acquired a mineral interest from one of its shareholders at a
consideration of Rmb7,000,000 (US$845,410), which was transferred at
cost.





As
disclosed in note 9, the shareholders contributed certain assets to the Company
in addition to the registered capital. Included in such assets is a mineral
interest acquired from one of the Company’s shareholders at a consideration of
Rmb6,000,000 (US$724,638), which was transferred at cost.





In 2003,
one of the Company’s bank accounts was in the name of one of its staff members,
who held the bank account in trust for the Company. Settlement received from
customers of the Company deposited into this bank account and payment for
expenditures of the Company withdrawn from this bank account during the period
amounted to Rmb23,780,260 (US$2,872,012). The Company had a bank account opened
in the name of the staff member because it was much easier to deposit and
withdraw funds for an individual than a corporation in the PRC. This bank
account was closed in December 2003 and the Company now only uses its own bank
account for funds deposits and withdrawals.





****     (3)
    Balances
      with related parties are as follows:





**As
      of December 31,***2004*
    
    
    *2003*Due
      to shareholder A
    
    
    172,405
    
    
    0Due
      to shareholder B
    
    
    0
    
    
    90,580








The
amount due to shareholder A represents the unsettled balance of the acquisition
of two excavators. In 2003 the balance due to shareholder B represents the
amount due from the acquisition of a mineral interest from that
shareholder.





F-16





**China
Granite Corporation**
 ****
 **Notes
to and forming part of the Financial
Statements**







**13.**
    **RELATED
      PARTY TRANSACTIONS (CONTINUED)**





(3)
    Balances
      with related parties
continued:





The
Company has committed itself to making the payments due under the funding
arrangement noted above. Nonetheless, the outstanding balance shown is
unsecured, interest-free and has no fixed repayment terms.





**As
      of December 31,***2004*
    
    *2003*Due
      to director A
    
    
    5,737
    
    
    11,679Due
      to director B
    
    
    0
    
    
    120,773





The
amount due to director A, who is also a shareholder of the Company, represents
the balance due on the purchase of a car. In 2003 another director B was owed
for short-term financing to the Company for operating purposes.





The
Company has committed itself to making the payments due under the funding
arrangement noted above. Nonetheless, the outstanding balance shown is
unsecured, interest-free and has no fixed repayment terms.




**14.**
    **SEGMENT
      INFORMATION**





The
      Company adopted SFAS No. 131 “Disclosures About Segments of an Enterprise
      and Related Information”, in respect of its operating segments. The
      Company’s reportable segments are granite mining (sale of granite blocks)
      and production of granite slabs.The
      majority of the Company’s operating activities and customers are located
      in the PRC.





These
      segments are managed separately because each business requires different
      technology and marketing strategies. The Company evaluates performance
      based on operating earnings of the respective business units. The
      accounting policies of the segments are the same as those described in the
      summary of significant accounting policies. The corporate assets primarily
      include cash and cash equivalents and deposits and other receivables.
      There were no significant inter-segment transactions during the period. In
      determining operating income/loss by reportable segment, general corporate
      expenses, other income and expense items of non-operating nature are not
      considered, as such items are not allocated to the Company’s segments.
      Segment information for the period are as
follows:




****
 F-17
 
 **China
Granite Corporation**
 ****
 **Notes
to and forming part of the Financial Statements**




**14.**
    **SEGMENT
      INFORMATION (CONTINUED)**





(a)
    Net
      sales:


**Year
      to December 31, 2004 and**
      **Period
      from January 9, 2003**
      **(date
      of incorporation) to**
      **December
      31, 2003***2004*
    
    
    *2003*Granite
      mining
    
    
    1,699,922
    
    
    2,443,327Production
      of granite slabs
    
    
    687,660
    
    
    606,8562,387,582
    
    
    3,050,183





(b)
    Net
      income / (loss):




**Year
      to December 31, 2004 and**
      **Period
      from January 9, 2003**
      **(date
      of incorporation) to**
      **December
      31, 2003***2004*
    
    
    *2003*Granite
      mining
    
    
    1,393,964
    
    
    1,882,444Production
      of granite slabs
    
    
    127,299
    
    
    132,9741,521,263
    
    
    2,015,418Reconciliation:Net
      income for reportable segments
    
    
    1,521,263
    
    
    2,015,418Others
    
    
    (1,279,778
    )
    
    —Unallocated
      corporate income and expenses
    
    
    (384,926
    )
    
    (563,076
    )(143,411
    )
    
    1,452,342





(c)
    Assets:





**As
      of****December
      31,***2004*
    **
    *2003*Granite
      mining
    
    
    4,619,570
    
    
    3,320,699Production
      of granite slabs
    
    
    2,077,443
    
    
    1,020,5866,697,013
    
    
    4,341,285Reconciliation:Total
      assets for reportable segments
    
    
    6,697,013
    
    
    4,341,285Other
      corporate assets
    
    
    2,063,738
    
    
    1,147,9168,760,751
    
    
    5,489,201




****
 F-18
 ****
 **China
Granite Corporation**
 ****
 **Notes
to and forming part of the Financial Statements**





**14.**
    **SEGMENT
      INFORMATION (CONTINUED)**





All of
the Company’s identifiable assets are located in the PRC





(d)
    Other
      items:





**Year
      to December 31, 2004 and**
      **Period
      from January 9, 2003**
      **(date
      of incorporation) to**
      **December
      31, 2003***2004*
    
    
    *2003*Depreciation
      of fixed assets:Granite
      mining
    
    
    157,633
    
    
    60,770Production
      of granite slabs
    
    
    35,541
    
    
    26,208Unallocated
      corporate assets
    
    
    47,433
    
    
    30,840240,607
    
    
    117,818Capital
      expenditures for fixed assets:Granite
      mining
    
    
    1,419,986
    
    
    946,114Production
      of granite slabs
    
    
    438,519
    
    
    694,112Unallocated
      corporate assets
    
    
    114,863
    
    
    1,135,8451,973,368
    
    
    2,776,071Amortization
      of mineral interests:Granite
      mining
    
    
    56,950
    
    
    71,891


(e)
    Major
      customers





Major
      customers, for the period, which accounted for more than 10% of total
      revenues are as follows:





**Year
      to December 31, 2004 and Period from January 9, 2003 (date of
      incorporation) to December 31, 2003**Granite
      mining
    In
      2004, no customers accounted for more than 10% of total revenues. In 2003,
      2 customers accounted for 10% and 13% of total revenues,
      respectivelyProduction
      of granite slabs
    In
      2004, no customers accounted for more than 10% of total revenues. In 2003,
      1 customer accounted for 12% of total
revenues




F-19





**China
Granite Corporation**
 ****
 **Notes
to and forming part of the Financial Statements**





**15.**
    **OPERATING
      RISK**


(a)
    Country
      risk
 
 The
Company’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the PRC economies.





The
Company’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company’s results may be adversely affected by changes in the political and
social conditions in the PRC, and 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.





(b)
    Industry
      risk





The
Company operates in business segments which requires the use of specialized
facilities and technology. The Company relies heavily on such facilities and
technology to maintain its production level. The cash flow and profitability of
the Company’s current operations are significantly affected by the market price
of granite which are affected by numerous factors beyond the Company’s control.
As mentioned in Note 2 to the financial statements, the Company's mining rights
are subject to renewals by the relevant governmental authority. Despite the fact
that the Company has received written confirmation from the governmental
authority, there is no guarantee that the Company will be granted the
renewals.





(c)
    Concentration
      of credit risk





As of
December 31, 2004, two customers had accounts receivable balances representing
16.35% and 14.91% of total accounts balance receivable, respectively. At
December 31, 2003, two customers had accounts receivable balances representing
85.55% and 14.44% of total accounts receivable balance, respectively. No other
customers had an accounts receivable balance that exceeded 10% of the total
accounts receivable balance.





The
Company performs ongoing credit evaluation of each customer's financial
condition. It maintains reserves for potential credit losses and such losses in
the aggregate have not exceeded management's projections.





**16.**
    **STOCK
      OPTIONS**





During
the year the Company approved the issuance of 960,000 non qualified stock
options to acquire 960,000 shares of the Company's common stock for certain
directors, officers and employees. The price per share for 840,000 shares was $4
per share and the balance of 120,000 shares was $5.20 per share. Subsequent to
the 2004 year end, the Company cancelled all options issued.


**17.**
    **RESTATEMENT**
 
 The
financial statements for the year ended December 31, 2003 have been restated to
give effect to a change in amortization methods from the straight line method to
the units of production method and to capitalize deferred stripping costs
previously expensed. The effect on income and stockholders’ equity at December
31, 2003 is summarized as follows:
 
 Net
      Income
    
    Stockholders’
      EquityAs
      previously reported
    
    $
    831,122
    
    $
    3,622,219Deferred
      stripping costs
    
    
    927,194
    
    
    927,194Amortization
      of Mineral interestsIncome
      taxes
    
    
    (305,974
    )
    
    (305,974
    )Restated
    
    $
    1,452,342
    
    $
    4,243,439


F-20
 
  Exhibits
 3.1*
    Amended
      and Restated Articles of Incorporation (incorporated by reference to
      exhibit 3.1 to our current report on Form 8-K filed on February 20,
      2004).3.2*
    Amended
      and Restated Bylaws (incorporated by reference to exhibit 3.1 to our
      current report on Form 8-K filed on February 20, 2004).4.2*
    Form
      of Subscription Agreement10.3*
    Consulting
      Agreement10.4*
    Stockholder
      Transfer Agreement10.5**
    Secured
      Promissory Note Purchase Agreement dated October 6,
200410.6**
    8%
      Senior Secured Promissory Note dated October 6, 200410.7**
    Warrant
      Agreement dated October 6, 200431.1
    Certification
      of Chairman and Chief Executive Officer Pursuant to Section 302of the
      Sarbanes-Oxley Act of 2002 (18 U.S.C. Sec. 1350) (transmitted
      herewith).31.2
    Certification
      of Vice Chairman and Chief Financial Officer Pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002 (18 U.S.C. Sec. 1350) (transmitted
      herewith).32.1
    Written
      Statement of Chairman and Chief Executive Officer Pursuant to Section 906
      of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (transmitted
      herewith).32.2
    Written
      Statement of Vice Chairman and Chief Financial Officer Pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
      (transmitted herewith).
 
 *
previously filed
 ** to be
filed at a later date
 
 31