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 UNITED
STATES
 SECURITIES
AND EXCHANGE
COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-KSB/A
 
 (Mark
One)
 x
              ANNUAL REPORT UNDER SECTION 13 OR
      15(d) OF THE ECURITIES EXCHANGE ACT OF
  1934
  For
the fiscal period ended December 31, 2005
 
  ̈
              TRANSITION REPORT UNDER SECTION
      13 OR 15(d) OF THE EXCHANGE
ACT
  For the
transition period from________to _______
 
 Commission
File Number: 000-30516
   CHINA
GRANITE
CORPORATION
 (Name of
small business issuer in its charter)
 
 Nevada
              
              880448920(State
      of other jurisdiction of incorporation or organization)
              
              (I.R.S.
      Employer I.D. No.)2642 Collins Avenue,
      Suite 305, Miami, Florida
              
              33140(Address
      of principal executive offices)
              
              (Zip
      Code)
 
 Issuer's telephone numberTelephone:
(305) 667 5540
  Securities
Registered under Section 12(b) of the Exchange Act: None
  Securities
Registered pursuant to Section 12(g) of the Act:
  Title
      of each class
              Name
      of each exchange on which registeredCommon
      Stock
              N/A
  Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act o
  Check
whether the Registrant (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.
  o Yes   x No
  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.
  o Yes   x No
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
  o Yes   x No
  State
Registrant's revenues for its most recent fiscal year: $520,769
   1
  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:
  15,461,663
shares held by non-affiliates had an aggregate value of $4,174,649 as at March
31, 2006 ($0.27 per share).
  (ISSUERS
INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS)
  Check
whether the Registrant has filed all documents and reports required to be filed
by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. N/A
  Yes  ̈  No  ̈
  (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.
  24,678,839
common shares issued and outstanding as of March 31, 2006
   DOCUMENTS
INCORPORATED BY REFERENCE
  None.
  Transitional
Small Business Disclosure Format (Check one):
  Yes  ̈  No x
   
  
  2
   TABLE
OF CONTENTS
  PART I
                1Item
      1.    Description of Business.
                1Overview
                1Introduction
                1The Brazil Project
                1The Laizhou China Project
                1The
      Chinese Granite Industry
                2Laizhou
      and Laizhou China
                2Mining
      Rights
                5Mining
      Equipment
                5Customers
                5Competition
                5Granite
      Production and Prices
                6Reserves
                6Employees
                6Cautionary
      Statements Regarding Future Results of Operations
                7Risk
      Factors
                7Item
      2.    Description of Property
                11Principal
      Offices
                11Item
      3.    Legal Proceedings
                11Item
      4.    Submission of Matters to a Vote of Security
      Holders
                11PART
      II
                12Item
      5.    Market for Common Equity and Related Stockholder
      Matters
                12General
                12Dividend
      Policy
                12Equity
      Compensation Plan
                12Recent
      Sales of Unregistered Securities
                12Item
      6.    Management Discussion and Analysis or Plan of
      Operation
                14Announcements
                15Results
      of Operation for the years ended December 31, 2005 and
    2004.
                15Liquidity
      and Capital Resources
                17Changes
      in cash from operations, investing and financing
activities
                19Critical
      Accounting Policies
                20Other
      Material Information
                20Item
      7.    Financial Statements
                20Item
      8.    Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosure
                20Item
      8A.   Controls and Procedures
                20PART III
                21Item 9.   
      Directors, Executive Officers, Promoters and Control Persons; Compliance
      with Section 16 (a) of the Exchange Act
                21Identification of Directors and
      Executive Officers
                21Background of Officers and
      Directors
                21Family Relationships
                22Involvement in Certain Legal
      Proceedings
                22Committees of the Board of
      Directors
                22Audit Committee Financial Expert
                22Compensation Committee
                23Compliance with Section 16(a) of
      the Securities Exchange Act of 1934
                23Code of Ethics
                23Item 10.   Executive
      Compensation
                23Executive Compensation Summary
                23Stock Options/SAR Grants
                25Employment Contracts and
      Termination of Employment or Change of Control
                25Director Compensation
                25Item 11.  Security Ownership
      of Certain Beneficial Owners and Management and Related Stockholder
      Matters
                25Security Ownership of Certain
      Beneficial Owners and Management.
                25Item 12.  Certain
      Relationships and Related Transactions
                26
   i
  
 Conflicts Related to Other
      Business Activities
              26Item 13. Exhibits and Reports on
      Form 8-K
              26(a) Exhibits
              26(b) Reports of Form 8-K
              27Item 14. Principal Accountant
      Fees and Services
              27SIGNATURES
              29AUDITED FINANCIAL STATEMENTS
              30
             
  ii




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
"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 was held in trust and
was 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 31st, 2005,
with the balance of $200,000 paid on June 30th, 2005.
The two directors had personally guaranteed these payments.
  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.
   1
  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.
  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.
  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.
  2
  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
   3
  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.
   4
  For the
year ended December 31, 2005, Laizhou China processed approximately 21,749
square meters of granite slab and cladding. 4,561 square meters of these granite
slabs, cladding and processed granite was produced in house and 17,188 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. The Mining Rights License No. 3706830310003
specifically allows the mining of granite only, using open-pit mining techniques
and indicates a production scale of 20,000 cubic meters per annum. The mining
area is identified by coordinates of 0.017 square kilometers in area, which
encompass 328m to 390m of hillside above sea level within those
coordinates.
  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. The Mining Rights
License No. 3706839840133, issued to the previous owner including the rights
purchased, specifically allows the mining of granite only, using open-pit mining
techniques and indicates a production scale of 5,000 tons per annum. On May 11,
2005, Mining Rights License No. 3706000511029 was issued to Laizhou China, which
allows the mining of granite only, using open-pit mining techniques and
indicates a production scale of 8,000 cubic meters per annum. The mining area is
identified by coordinates of 0.003 square kilometers in area, which encompasses
203.2m to 211.2m of hillside above sea level within those
coordinates.
  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 2005,
approximately 36% of Laizhou China's revenue came from Chinese government
projects, approximately 10% came from commercial pavers, approximately 12% came
from commercial cladding, and the remainder came from other projects. In 2005,
the granite products of Laizhou China were sold in the following markets: (i)
the local Chinese region (Harerbin) 35.64%; (ii) exports to Korea 26.66%; (iii)
exports to USA 21.4%; and (iv) 11.54% 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%).
   5
  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.
  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 2005,
Group 14 Quarry yielded approximately 3,007 cubic meters of granite blocks. The
average size of the granite blocks was approximately one and a half to two cubic
meters. The average price for mined blocks is $66 per cubic meter based on a
price range of $51 to $81, depending on the quality and demand for a particular
stone color.
  In 2005,
No. 1 Quarry yielded approximately 447 cubic meters of granite blocks. The
average size of the granite blocks was approximately two and a half to three
cubic meters. The average price for mined blocks is $105 per cubic meter based
on a price range of $60 to $150, 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
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. The recoverable granite of 1,000,000 cubic meters at Group
14 Quarry and No.1 Group Quarry respectively are used as a basis for
amortization. . The units of production method has been used for amortizing
these mining concessions and after taking into account wastage and production
the stated reserves are currently 213,443 cubic meters and 238,410 cubic meters
for Group 14 and No.1 Quarries respectively. The annual production at Group 14
Quarry is estimated in the coming years to be about 7,000 cubic meters per
annum, whereas the annual production at No.1 Group Quarry is estimated in the
coming years to be about 10,000 cubic meters per annum. The cost of stripping
has also been amortized using the units of production method . 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 reconciliation.
  Group 14 quarry
              
              No. 1 quarry2005
              
              2004
              
              2005
              
              2004Material
      mined (cu.m.)
              
              10,023
              
              29,406
              
              2,794
              
              38,850Mining
      recovery (cu.m. and %)
              
              3,007
      (30%)
              
              9,410
      (32%)
              
              447
      (16%)
              
              6,993
      (18%)Transferred
      to Processing (cu.m.)
              
              4
              
              186
              
              -
              
              21Production
      (sq.m. and US$)
              
              114
      ($1,253)
              
              3,348
      ($29,958)
              
              -
              
              420
      ($6,381)Stripping
      Costs (US$)
              
              $35,859
              
              $157,005
              
              $12,151
              
              $118,357
  Employees
  As of
December 31, 2005, our parent company, China Granite, had no employees other
than officers. As of December 31, 2005, Laizhou China had 74 employees. Of
those, 32 are in mining, 25 are in the processing yard, and 17 are in sales and
administration. Laizhou China does not expect to hire any additional employees
in 2006. 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.
  We have a
detailed and comprehensive set of health and safety regulations for all our
facilities (the mines and processing yard). These documents have been filed with
the Local and Provincial authorities, who in turn have approved them as part of
the issuance of our mining rights licenses. We are pleased to note that there
have been no accidents or health hazards to any of our employees at our
facilities. These regulations are extensive but in particular deal with dust and
noise as follows:
 6
  Production.
 ·
              Workers
      must maintain a working discipline and strictly carry out the safety
      operation rules carefully.
 ·
              Worker
      must wear work clothes while working including safety helmets, protective
      boots and dustproof respirators.
 ·
              The
      working field shall be kept clean during working
  time.
 
 Mining.
 ·
              Workers
      must maintain a working discipline and strictly carry out the safety
      operation rules carefully.
 ·
              Workers
      must wear work clothes while working including safety helmets, protective
      boots and dustproof respirators.
 ·
              After
      blasting, remove and get rid of the dust and gas produced by blasting. The
      workers can enter into working area only after the dust and gas have been
      vanished.
 ·
              The
      mining field should be 10 kilometers away from village residents so as to
      prevent the people from being hurt by the working
  noise.
  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.
  Risk
Factors
  Risks Related 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.
  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 Reserve 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.
  7
  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.
  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.
  8
  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.
  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 or 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.
  Government Control of
Currency Conversion and the Fluctuation of the Renminbi May Materially and
Adversely Affect Our Operation 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.
  9
  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.
  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 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.
  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.
  10
  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.
  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.
   11
  PART
II
  Item
      5.
              Market
      for 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
              
              
              Low20054th
      Quarter
              
              $
              0.51
              
              
              $
              0.183rd
      Quarter
              
              $
              0.90
              
              
              $
              0.372nd
      Quarter
              
              $
              1.30
              
              
              $
              0.651st
      Quarter
              
              $
              1.49
              
              
              $
              0.7220044th
      Quarter
              
              $
              2.40
              
              
              $
              1.253rd
      Quarter
              
              $
              3.85
              
              
              $
              1.502nd
      Quarter
              
              $
              6.25
              
              
              $
              3.501st
      Quarter
              
              $
              5.35
              
              
              $
              3.30
  As of
December 31, 2005, the shareholders' list for our common stock showed 43
registered shareholders of record and 14,498,000 common shares issued and
outstanding. We believe that there are approximately 400 beneficial holders of
our common stock. On December 31, 2005, the closing price of our common stock on
the OTCBB was $0.20.
  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.
  Equity
Compensation Plan
  We do not
have any securities authorized for issuance under any equity compensation
plans.
  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, 2005, there are no outstanding options.
  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.
   12
  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 accrued interest
at 8% per year and all outstanding principal and unpaid interest was due on
September 30, 2007. We were required to make quarterly interest-only payments of
$13,000 to the investors until the Senior Convertible Note was either paid in
full or was 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, were originally 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 had 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.  In 2005, we became 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 Notes were converted into shares in January 2006
(see paragraph below). The Senior Convertible Notes and the Warrants 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.
  On
January 30, 2006, we sold 9,180,839 shares of our common stock for an aggregate
purchase price of $918,083.90. The Purchase Price was paid by the subscribers by
the settlement of $918,083.90 of indebtedness owed by us to these individual
subscribers. No underwriting discounts or commission were paid in connection
with this offering. The issuance of shares in the offering was completed
pursuant to Rule 903 of Regulation S of the Act on the basis that the sale of
the shares was completed in an offshore transaction, as defined in Rule 902(h)
of Regulation S. We did not engage in any directed selling efforts, as defined
in Regulation S, in the United States in connection with the sale of the shares.
The investors each individually represented to us that they were not a U.S.
person, as defined in Regulation S, and were not acquiring the shares for the
account or benefit of a U.S. person. The subscription agreement executed between
us and each investor included statements that the securities had not been
registered pursuant to the Securities Act of 1933 and
that the securities may not be offered or sold in the United States unless the
securities are registered under the Securities Act of 1933 or
pursuant to an exemption from the Securities Act of 1933. The
investors each agreed by execution of the subscription agreement for the shares:
(i) to resell the securities purchased only in accordance with the provisions of
Regulation S, pursuant to registration under the Securities Act of 1933 or
pursuant to an exemption from registration under the Securities Act of 1933; (ii)
that we are required to refuse to register any sale of the securities purchased
unless the transfer is in accordance with the provisions of Regulation S,
pursuant to registration under the Securities Act of 1933 or
pursuant to an exemption from registration under the Securities Act of 1933; and
(iii) not to engage in hedging transactions with regards to the securities
purchased unless in compliance with the Securities Act of 1933. All
securities issued were endorsed with a restrictive legend confirming that the
securities had been issued pursuant to Regulation S of the Securities Act of 1933 and
could not be resold without registration under the Securities Act of 1933 or an
applicable exemption from the registration requirements of the Securities Act of
1933.
   13
  On
January 30, 2006, we sold 10,180,839 shares of our common stock for an aggregate
purchase price of $1,018,083.90 in cash consideration. No underwriting discounts
or commission were paid in connection with this offering. The issuance of shares
was completed pursuant to Rule 506 of Regulation D of the Securities Act of 1933 on the
basis that the sole investor is an accredited investor, as defined under Rule
501 of Regulation D of the Securities Act of 1933. All
securities issued were issued as restricted securities and were endorsed with a
restrictive legend confirming that the securities could not be resold without
registration under the Securities Act of 1933 or an
applicable exemption from the registration requirements of the Securities Act of 1933. No
general solicitation or general advertising was conducted in connection with the
sales of the shares.
  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 31st, 2005, with the balance of $200,000
paid on June 30th, 2005. The two directors had
personally guaranteed these payments.
  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.
  14
  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.
  On May
10, 2005 an agreement was entered into where a subsidiary of China Granite
Corporation, Southern Rare Earth Metal Material Co., Ltd. ("SOREM") is to
participate in a Manufacturing and Licensing Agreement with Huizhou Southern
Rare Earth Metal Material Co., Ltd. ("Huizhou") as disclosed in our 8K filing of
May 20th, 2005.
In pursuance of this, the subsidiary SOREM was incorporated in the Cayman
Islands on July 19, 2005. Furthermore, a Chinese company, Rither Rare Earth
Metal Material (Huizhou) Co., Ltd. ("REMCO") was formed and owned by our British
Virgin Islands subsidiary with a view to carrying on the business agreed. It is
planned that SOREM take over REMCO from its sister subsidiary (in an effort to
restructure and separate operations) and that REMCO change its name to that of
SOREM thereafter. Under the terms of the agreement Huizhou grants a worldwide,
exclusive license to SOREM to use certain plants and facilities of Huizhou and
certain intellectual property used in the operation of the extraction and
processing of rare earth metals and alloys. Once this has been completely
set-up, consideration for such license will require China Granite to issue
7,000,000 shares of its common stock to certain principals and officers of
Huizhou. We are still undertaking our due diligence under this agreement. The
parties are also currently considering changing the agreement from a
manufacturing and licensing agreement to an acquisition agreement. We expect our
due diligence to be completed shortly. If we enter into an acquisition agreement
to acquire Huizhou, the Manufacturing and Licensing Agreement between the
parties will be terminated.
  Announcements
  On March
20, 2005, the Mining Management office of Shangdong Province, PRC, instructed
its branch of Laizhou to close all the mines under its jurisdiction. This was
due to a landslide caused by unauthorized mining in the Laizhou area which
resulted in the deaths of 16 miners. Our mines are located in a different area
to that of the event but were closed nonetheless. On June 15th the
mines holding valid licenses (our licenses are in the name of our general
manager Ms. Juan Chen who in turn has assign all rights to the company),
including ourselves were informed that they could reopen only to be closed again
20 days later. It was announced that the Mining Management office, the Security
& Inspection office and the Environment Protection office would be coming to
Laizhou to inspect the area for safety before operations could
resume.
  On August
31, 2005 we announced that the Mining Management office, the Security &
Inspection office, and the Environment Protection office had inspected both of
China Granite's mines and had cleared the Company to resume its operations. In
conjunction with these safety inspections, the Provincial authorities are
attempting to close all illegal mines operating in the area. China Granite is
fully permitted and maintains corporate citizenship in the People's Republic of
China. China Granite also maintains a safety policy and is conscientious of its
responsibility to its employees. Safety inspections are carried out daily by the
quarry masters before work begins, and strict rules are in place to halt work
during inclement weather. To date, the Company is proud to confirm that it has
an accident free record at both mines.
  Results
of Operation for the years ended December 31, 2005 and 2004.
  Revenues:
  Total
revenues for the year ended December 31, 2005, were $520,769 compared to
$2,387,582 for the year ended December 31, 2004.
  Revenues
from granite mining operations for the year ended December 31, 2005, were
approximately $278,000 from the sale of approximately 3,700 cubic meters
compared to approximately $1,700,000 from the sale of approximately 14,800 cubic
meters for the year ended December 31, 2004. The decrease of approximately
$1,422,000 and reduced sales of approximately 10,100 cubic meters was due almost
entirely to the mines being closed (as announced above) during our high peak
sales period, the three months to September 30, 2005. The mines were open for
only 30 of those days, 5 days at the beginning of July and 25 days at the end of
September (see announcement). Other factors include reduced prices in an attempt
to win back customers lost to other regions. All these naturally led to a lack
and delay of orders during the most important time of the year.
   15
  Revenues
from processing operations decreased to approximately $242,000 for the year
ended December 31, 2005, from approximately $688,000 for the year ended December
31, 2004. The decrease is due to less orders being processed due to the lack of
availability of granite through the mine closures. Approximately 21,800 square
meters of slabs were sold during the year ended December 31, 2005 compared to
approximately 63,200 square meters for the year to December
31,2004.
  While the
large majority of orders processed to date have been for the domestic (Chinese)
market we currently are reviewing a plan of constructing a new processing plant
to target the processing of granite for export.
  There was
also interest income of $28,531 for the year to December 31, 2005, arising
entirely from a loan made to Huizhou Southern Rare Earth metal Material Co.
Ltd.. This compares to no other income for the year ended December 31,
2004.
  Stripping
costs:
  The table
below shows the stripping costs incurred during the year split into the major
components and attributable to the respective reserves that benefited from the
stripping activities:
  Stripping
                Costs Total
              
              
              Road
                Maintenance
              
              
              Removal of
                overburden$
              
              
              $
              
              
              $2005
              
              No.
      1 Quarry
              
              
              35,859
              
              
              
              0
              
              
              
              35,859Group
      14  Quarry
              
              
              12,151
              
              
              
              439
              
              
              
              11,71248,010
              
              
              
              439
              
              
              
              47,5712004
              
              No.
      1 Quarry
              
              
              157,005
              
              
              
              48,309
              
              
              
              108,696Group
      14 Quarry
              
              
              118,357
              
              
              
              13,285
              
              
              
              105,072275,362
              
              
              
              61,594
              
              
              
              213,768
  Costs of
sales includes attributable stripping costs of $11,770 (2004 - $39,031)
allocated to the years production.
  Mining
Plan:
  The table
below outlines our present mining plans for year 2006 the respective
quarries:
  Mine
      Plans for the reserves
              
              Group
      14 Quarry
              
              No.
      1 Quarryplanned
      annual mine production rate
              
              7,000
      cubic meters
              
              5,000
      cubic metersplanned
      mine life
              
              20
      years
              
              30
      yearsplanned
      mine operating costs
              
              $69.393
      per cu.m.
              
              $68.154
      per cu.m.Total
      costs
              
              $485,750
              
              $340,768planned
      processing & finishing costs
              
              -
              
              -planned
      administrative & sales costs
              
              $74,349
              
              $74,349planned
      sales volume and price
              
              $92.937
      per cu.m.
              
              $111.524
      per cu.m.Total
      sales
              
              $650,558
              
              $557,621future
      planned capital expenditures
              
              $160,000
              
              $160,000
  
   16
  General
and Administrative Expenses:
  General
and administrative expenses for the year ended December 31, 2005 were $1,217,494
compared to $1,135,188 for the year ended December 31, 2004. The majority of
these expenses are due to professional fees in connection with the license
agreement with Huizhou, audit, reporting, administration, the introduction of
international professional staff and consulting and advisory services . . For
the year ended December 31, 2005 and 2004 we spent $0 on obtaining permits for
our mines.
  Other
expenditure:
  During
the year to December 31, 2005 the company incurred interest costs and liquidated
damages on its Debentures and notes payable of $249,780 compared to $16,270 for
the year to December 31, 2004. The increase is due to firstly a full year of
interest on the debentures compared to only 3 months in the previous year, the
interest attributable to the 12% secured notes and liquidated damages under the
debenture agreement as we have not been able to file an SB2 registration as
required therein.
  During
the year ended December 31, 2005, we loaned Huizhou $110,000 directly and
$260,223 through our subsidiary Laizhou. These amounts are unsecured and accrue
interest at approximately 6.3% per year with all outstanding principal and
unpaid interest due six months from the date of advance. These loans are
renewable between the parties.
  Net Profit:
  As a
result of the foregoing factors, and $43,332 (2004 - $10,833) for amortization
of the Discount to Notes Payable, our net loss for the year ended December 31,
2005, totaled $1,497,203 compared to a profit of $351,726 for the year ended
December 31, 2004. Our loss per share for the year ended December 31, 2005 is
$0.09 compared to earnings of $0.03 for the year ended December 31, 2004. Such
loss was primarily due to the mining closures during the year.
  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. In 2005, we became 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.
 
 17
  On
September 30, 2005, we filed a Form 8-K with the SEC disclosing an Item 2.04
event. We disclosed two of the three investors holding Senior Convertible Notes
we issued in October of 2004, had sent us notice that they want to be paid back
their principal, plus interest at 8% per annum and any unpaid liquidated damages
by September 30, 2005. On October 5, 2005, we repaid $296,860.82 to one of the
three investors holding Senior Convertible Notes.
  On
October 5, 2005, we became obligated for repayment of $886,885 pursuant to a
general security agreement and a series of secured promissory notes, dated
October 5, 2005, in the principal amount of up to $886,885 entered into with
five purchasers.
  The
material terms of the general security agreement and promissory notes were as
follows:
  ·
              The
      interest rate is twelve percent (12%) per annum, unless we are in default
      of the note, in which event the interest rate is 16% per annum until the
      default is cured;
 ·
              Interest
      payments on the principal amount outstanding is to be paid quarterly
      (January 4, April 4, July 4 and
October4);
 ·
              All
      principal and unpaid interest is due on the earlier of (a) notice in
      writing from the holder to the company of default of the note, or (b)
      October 4, 2006; and
 ·
              The
      loan is secured by all of the assets of the company and is to rank senior
      in right of payment and priority to all existing and future obligations of
      the company except for two previously issued 8% convertible promissory
      notes with an aggregate principal amount of
  $400,000.
  On
January 30, 2006, we sold 9,180,839 shares of our common stock for an aggregate
purchase price of $918,083.90. The Purchase Price was paid by the subscribers by
the settlement of $9,180,839 of indebtedness of the Company to these individual
subscribers who previously held Senior Convertible Notes. No underwriting
discounts or commission were paid in connection with this offering. The issuance
of shares in the offering was completed pursuant to Rule 903 of Regulation S of
the Act on the basis that the sale of the shares was completed in an offshore
transaction, as defined in Rule 902(h) of Regulation S. The Company did not
engage in any directed selling efforts, as defined in Regulation S, in the
United States in connection with the sale of the shares. The investors each
individually represented to us that they were not a U.S. person, as defined in
Regulation S, and were not acquiring the shares for the account or benefit of a
U.S. person. The subscription agreement executed between us and each investor
included statements that the securities had not been registered pursuant to the
Securities Act of 1933 and that the securities may not be offered or sold in the
United States unless the securities are registered under the Securities Act of
1933 or pursuant to an exemption from the Securities Act of 1933. The investors
each agreed by execution of the subscription agreement for the shares: (i) to
resell the securities purchased only in accordance with the provisions of
Regulation S, pursuant to registration under the Securities Act of 1933 or
pursuant to an exemption from registration under the Securities Act of 1933;
(ii) that we are required to refuse to register any sale of the securities
purchased unless the transfer is in accordance with the provisions of Regulation
S, pursuant to registration under the Securities Act of 1933 or pursuant to an
exemption from registration under the Securities Act of 1933; and (iii) not to
engage in hedging transactions with regards to the securities purchased unless
in compliance with the Securities Act of 1933. All securities issued were
endorsed with a restrictive legend confirming that the securities had been
issued pursuant to Regulation S of the Securities Act of 1933 and could not be
resold without registration under the Securities Act of 1933 or an applicable
exemption from the registration requirements of the Securities Act of
1933.
  On
January 30, 2006, we sold 1,000,000 shares of common stock of the Company for an
aggregate purchase price of $100,000 in cash consideration. No underwriting
discounts or commission were paid in connection with this offering. The issuance
of shares was completed pursuant to Rule 506 of Regulation D of the Securities
Act of 1933 on the basis that the sole investor is an accredited investor, as
defined under Rule 501 of Regulation D of the Securities Act of 1933. All
securities issued were issued as restricted securities and were endorsed with a
restrictive legend confirming that the securities could not be resold without
registration under the Securities Act of 1933 or an applicable exemption from
the registration requirements of the Securities Act of 1933. No general
solicitation or general advertising was conducted in connection with the sales
of the shares.
    18
  Changes in cash
from operations, investing and financing activities:
  Operations:
  The net
cash provided from operations for the year ended December 31, 2005, is a
negative of $462,225 compared to a negative of $307,043 for the year to December
31, 2004, a negative effect from one period to the other of approximately
$155,000. The primary cause of the decrease has been been caused by the loss
incurred from operations of $1,497,203 for the year ended December 31, 2005
compared to a profit of $351,726 for the year to December 31, 2004. Other
significant activities include an increase in the provision for depreciation of
plant and equipment of $50,149 (to $290,756) due to new purchases during the
year to December 31, 2005; an increased provision for doubtful debts of $170,005
for the year to December 31, 2004 compared to $12,992 for the year to December
31, 2004 due to older debts; an increase in accounts receivable of $185,359 for
the year to December 31, 2005 compared to a reduction of $259,726 for the year
to December 31, 2004; a reduction in Deposits, prepayments and other receivables
of $199,438 for the year to December 31, 2005 compared to a larger reduction of
$571,696 for the year to December 31, 2004; an increase in inventory of $86,564
for the year to December 31, 2005 compared to a reduction of $59,008 for the
year to December 31, 2004; an increase in Accruals and other payables of
$496,077 for the year to December 31, 2005 compared to a smaller increase of
$125,833 for the year to December 31, 2004; a reduction in Business and resource
tax and government surcharge payable of $24,876 for the year to December 31,
2005 compared to an increase of $26,569 for the year to December 31, 2004; and a
reduced amount of stripping costs capitalized during the year ended December 31,
2005 of $46,793 compared to $275,362 for the year to December 31,
2004.
  Investing:
  For the
year ended December 31, 2005, $510,611 was used in investing activities compared
to $1,326,715 for the year to December 31, 2004. Fixed Assets of $510,611 were
purchased in 2005 compared to $1,973,368 for 2004 and assets were effectively
acquired on recapitalization of $646,653 upon the merger of the Company with the
Chinese operations during the year to December 31, 2004.
  Financing:
  During
the year to December 31, 2005, $886,885 was raised through a 12% debenture and
$400,000 was collected from the Brazil Project. $250,000 was used to reduce
Notes payable under the secured promissory note and $163,884 and $3,623 were
repaid to a shareholder and a director respectively. It should be noted that the
amount repaid to the shareholder is almost entirely due to the repayment of the
loan on the excavators. In the year to December 31, 2004, the effect of the
merger in February 2004 provided $1,495,000 to cash flow and a further $250,000
was provided through notes payable over receivable. $650,000 was received by the
Company through a Senior Secured Promissory note discussed previously and
$400,000 is due from the sale of the Brazilian project as at December 31, 2004.
These factors were set off by repayment of $115,036 of an advance from a
director and an apparent advance from a shareholder of $172,405 (this was caused
by the loan for an equipment purchase having to be in a name of a individual
rather than the company in China).
  Overall:
  Given the
above together with a currency translation adjustment of $2,181 in 2005 ($1,853
in 2004) caused a decrease in actual cash of $105,639 (compared to an increase
of $76,178 in 2004). This taken with the effect of the exchange rate on the
opening balance of $320 ($0 in 2004) leaves us with cash and cash equivalents of
$12,574 ($117,893 in 2004).
   19
  We
estimate that after giving effect to the October debenture and January
Placement, 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.
  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.
  Other
Material Information
  The
Securities and Exchange Commission is still in the process of reviewing our Form
10-KSB for years ended December 31, 2003, December 31, 2004 and the financial
statements we filed on Form 8-K on April 19, 2004. We may be required to file
further amendments to these financial statements should the Securities and
Exchange Commission have further comments.
  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
on October 4, 2004, Moores Rowland Mazars ("Moores") resigned as the principal
accountant engaged to audit the financial statements of the Company. Moores
reviewed the Company's financial statements for the fiscal quarter ended June
30, 2004. During this period, and the subsequent interim period prior to their
resignation, 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 is defined in Item 304(a)(1)(iv) of Regulation S-B,
promulgated under the Securities Exchange Act of 1934, as amended ("Regulation
S-B").
  Moores
was engaged by the Company from July 15, 2004 until October 4, 2004. In
addition, Moores was also the auditor of the financial statements of Laizhou
which are the historical financial statements of the Company, since the
Company's February 5, 2004 reorganization with Laizhou. Neither Moores or
Braverman, the Company's previous independent public accountant, audit reports
for the Company's fiscal year ended December 31, 2003 contained any adverse
opinion, or a disclaimer of opinion, or qualification or modification as to
uncertainty, audit scope, or accounting principles. Further during our most
recent fiscal year and any subsequent interim period before Moores resigned, we
did not have any disagreements with Moores on any matter of accounting principle
or practice, financial statement disclosure, or auditing scope or
procedure.
  Effective
on October 5, 2004, we engaged Rotenberg 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.
  20
  Item
      8A.
              Controls
      and Procedures
  On
December 31, 2005, 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
  Identification
of Directors and Executive Officers
  The
following table sets forth the names of all of our current directors and
executive officers as of December 31, 2005. 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 DirectorPiguo
      Man
              
              45
              
              Manager
      and DirectorMaria
      Camilla Maz
              
              36
              
              TreasurerMichael
      Miller
              
              50
              
              Vice-President
      of Investor RelationsCostas
      Takkas
              
              48
              
              Chief
      Financial Officer and Director
  Background
of Officers and Directors
  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.
  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.
  Maria 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.
   21
  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.
  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
  Other
than as disclosed below, during the past five years, none of our directors,
officers, promoters or control persons have been:
  ·
              a
      general partner or executive officer of any business against which any
      bankruptcy petition was filed, either at the time of the bankruptcy or two
      years prior to that time;
 ·
              convicted
      in a criminal proceeding or named subject to a pending criminal proceeding
      (excluding traffic violations and other minor
  offenses);
 ·
              subject
      to any order, judgment or decree, not subsequently reversed, suspended or
      vacated, of any court of competent jurisdiction, permanently or
      temporarily enjoining, barring, suspending or otherwise limiting his
      involvement in any type of business, securities or banking activities;
      or
 ·
              found
      by a court of competent jurisdiction (in a civil action), the Securities
      and Exchange Commission or the Commodity Futures Trading Commission to
      have violated a federal or state securities or commodities law, and the
      judgment has not been reversed, suspended or
  vacated.
  Mr.
Robert Miller, our former Treasurer and Vice President of Investor Relations,
the husband of Maria 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 met on three occasions during the fiscal year ended December 31, 2005.
Each of the members of the Audit Committee attended each of the meetings held by
the Audit Committee in person.
  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 2005 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 2005
fiscal year, except that: with respect to Mr. with respect to Mr. Costas Takkas
two Form 4's were filed late concerning the disposition 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.
  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, 2005, 2004 and 2003, and all other of our executive officers receiving total
salary and bonus in excess of $100,000 during the years ended December 31, 2005,
2004 and 2003 (collectively, the "Named Executive Officers"):
   Continued
on next page ...
   23
  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)
              
              2005
              
              0
              
              0
              
              $
      24,000
              
              0
              
              0
              
              0
              
              0President
              
              2004
              
              0
              
              0
              
              $
      24,000
              
              0
              
              0
              
              0
              
              02003
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0Juan
      Chen(2)
              
              2005
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0CFO
              
              2004
              
              0
              
              0
              
              $
      4,000
              
              0
              
              0
              
              0
              
              02003
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0Costas
      Takkas(3)
              
              2005
              
              0
              
              0
              
              $100,000
              
              0
              
              0
              
              0
              
              0CEO
      & President
              
              2004
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0
              
              02003
              
              0
              
              0
              
              $
      18,000
              
              0
              
              0
              
              0
              
              0Stephen
      Spoonamore(4)
              
              2005
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0CFO
      & Secretary
              
              2004
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0
              
              02003
              
              0
              
              0
              
              $
      27,000
              
              0
              
              0
              
              0
              
              0Robert
      Miller(5)
              
              2005
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0Treasurer
      &
              
              2004
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0VP
      Investor Relations
              
              2003
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0Camilla
      Maz(6)
              
              2005
              
              0
              
              0
              
              $
      36,000
              
              0
              
              0
              
              0
              
              0Treasurer
              
              2004
              
              0
              
              0
              
              $
      36,000
              
              0
              
              0
              
              0
              
              02003
              
              0
              
              0
              
              $
      36,000
              
              0
              
              0
              
              0
              
              0Michael
      Miller(7)
              
              2005
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0VP
      Investor Relations
              
              2004
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0
              
              02003
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0Joginder
      Brar(8)
              
              2003
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0
              
              0CEO
      & President
 
 Notes:
              (1)
              Effective February 4, 2004
      pursuant to the reorganization with Laizhou, Mr. Chen's salary is $2,000
      per month.
 (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 providedmanagement 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.
  24
  Stock
Options/SAR Grants
  During
2005, no grants of stock options or stock appreciation rights have been made to
our named executive officers or any other parties. 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
  No cash
compensation was paid to any of our directors for services as a director during
the fiscal year ended December 31, 2005. 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 March 31, 2006 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 OWNED(2)Dong
      Chen, Chief Executive Officer, President and Director
              
              2,941,976
              (3)
              11.92%Piguo
      Man, Manager and Director
              
              403,074
              
              1.63%Maria
      C. Maz, Treasurer
              
              43,450
              
              0.18%Michael
      Miller, Vice-President of Investor Relations
              
              105,000
              
              0.43%Costas
      Takkas, Director
              
              525,000
              
              2.12%Ricardo
      Requeno, Stockholder25 De Mayo 444, Piso 2, 1100, Montevideo,
      Uruguay
              
              2,999,976
              
              12.16%Lucky
      Ocean Group Ltd.
              
              2,198,700
              
              8.91%Officers
      and directors as a group (five persons)
              
              4,018,500
              
              16.28%
 
 Notes:
              (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.
 (2)
              Based on 24,678,839 shares of
      common stock issued and outstanding as of March 31, 2006. Except as
      otherwise indicated, we believe that the beneficial owners of the common
      stock listed above, based on information furnished by such owners, have
      sole investment and voting power with respect to such shares, subject to
      community property laws where applicable. Beneficial ownership is
      determined in accordance with the rules of the SEC and generally includes
      voting or investment power with respect to securities. Shares of common
      stock subject to options or warrants currently exercisable, or exercisable
      within 60 days, are deemed outstanding for purposes of computing the
      percentage ownership of the person holding such option or warrants, but
      are not deemed outstanding for purposes of computing the percentage
      ownership of any other
person.
 
   25
  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.
  During
the year ended December 31, 2005, 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. The loan
was repaid by the Company in October, 2005.
  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).10.1*
              12%
      Secured Note Purchase Agreement dated October 5, 2005 (incorporated by
      reference to exhibit 10.1 to our current report on Form 8-K filed on
      October 5, 2005).10.2*
              Form
      of 12% Senior Secured Note dated October 5, 2005 (incorporated by
      reference to exhibit 10.2 to our current report on Form 8-K filed on
      October 5, 2005).10.3*
              Form
      of General Security Agreement dated October 5, 2005 (incorporated by
      reference to exhibit 10.3 to our current report on Form 8-K filed on
      October 5, 2005).
 
  26
 
 31.1
              Certification
      of President 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 President 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
  (b)
Reports of Form 8-K
  Date of
      Report
              
              Date of
      Event
              
              Item
      ReportedOct.
      19, 2005
              
              Oct.
      5, 2005
              
              Items
      1.01, 2.03, 8.01and 9.01 - Entered into a general security agreement and a
      series of secured promissory notes, dated October 5, 2005, in the
      principal amount of up to $886,885 with five
purchasers.Oct.
      7, 2005
              
              Sept.
      22, 2005
              
              Items
      2.04, 4.02, and 9.01 - Form 8-K/A - Holders of Senior Convertible notified
      company they want to be paid back by September 30, 2005; and notice of
      non-reliance of previously issued financial statements.Sept.
      30, 2005
              
              Sept.
      22, 2005
              
              Items
      2.04, 4.02, and 9.01 - Holders of Senior Convertible notified company they
      want to be paid back by September 30, 2005; and notice of non-reliance of
      previously issued financial statements.Sept.
      6, 2005
              
              Aug.
      31, 2005
              
              Items
      8.01 and 9.01 - China Granite's mines cleared by Mining Management office
      of Shangdong Province, PRC, to resume operations.Aug.
      15, 2005
              
              Aug.
      15, 2005
              
              Item
      8.01 - Disclose Mining Management office of Shangdong Province, PRC,
      instructed its branch of Laizhou to close all the mines under its
      jurisdiction.Aug.
      3 2005
              
              Aug.
      3, 2005
              
              Items
      4.02 and 9.01 - Form 8-K/A - Non reliance of previously issued financial
      statements.May
      20, 2005
              
              May
      10, 2005
              
              Item
      1.01 - A Manufacturing and Licensing Agreement entered into by a
      subsidiary of Company with Huizhou Southern Rare Metal Material Co.,
      LtdApril
      7, 2005
              
              Jan.
      19, 2005
              
              Items
      5.02 and 9.01 - Resignation of Stephen Spoonamore as
    director.
  Item
      14.
              Principal
      Accountant Fees and Services
  The
following table shows the aggregate fees billed us for professional services by
Braverman and Company (January 1, 2004 to July 14, 2004), Moores Rowland Mazars
(from July 15, 2004 until October 4, 2004) and Rotenberg and Co. our independent
auditor, for fiscal years 2005 and 2004:
  FISCAL 2005
              
              
              FISCAL 2004Audit
      Fees
              
              $
              127,500
              
              
              $
              119,985Audit-Related
      Fees
              
              $
              8,700
              
              
              $
              0Tax
      Fees
              
              $
              0
              
              
              $
              750All
      Other Fees
              
              $
              0
              
              
              $
              0Total
              
              $
              136,200
              
              
              $
              120,735
  Audit
Fees. This category includes the aggregate fees billed for professional services
rendered for the audits of our consolidated financial statements for fiscal
years 2005 and 2004, for the reviews of the financial statements included in our
quarterly reports on Form 10-QSB during fiscal 2005 and 2004, 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.
   27
  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.
  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 (i) Braverman and Company, (ii) Moores Rowland
Mazars, and (iii) Rotenberg and Co. in the proposed non-audit-related services
and proposed fees for 2005 and 2004 and determined that such services and fees
are compatible with the independence of such auditors. During 2005, Rotenberg
and us did not utilize any leased personnel in connection with the
audits.
                 28
  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/ Costas
Takkas
 Costas
Takkas, President and Chief Financial Officer
 March 26,
2008
   In
accordance with the Securities Exchange Act of 1934, this Annual Report on Form
10-KSB has been signed below by the following person on behalf of the registrant
and in the capacities and on the dates indicated.
  SIGNATURE
              
              TITLE
              
              DATE/s/ Costas
      Takkas
              
              President
      and Chief Financial Officer
              
              March
      26, 2008Costas
      Takkas
  
   
   
   
   
   29
   
   
   
   AUDITED
FINANCIAL STATEMENTS
   
   CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
   CHINA
GRANITE CORPORATION
   DECEMBER
31, 2005  
   
   
  30
  REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors and Stockholders of
 China
Granite Corporation and Subsidiary
 (A Nevada
Corporation)
  Miami
Beach, FL
   We have
audited the accompanying consolidated balance sheets of China Granite
Corporation and Subsidiary as of December 31, 2005 and 2004, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.
  We
conducted our audit in accordance with The Public Company Accounting Oversight
Board Standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of China Granite Corporation
and Subsidiary, as of December 31, 2005 and 2004, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accounting principles accepted in the United States of
America.
  /s/ Rotenberg & Co.,
LLP
  Rotenberg
& Co., LLP
 Rochester,
New York
 March 28,
2006
    31
  CHINA
GRANITE CORPORATION
 CONSOLIDATED
BALANCE SHEETS
 DECEMBER
31
 2005
& 2004
  2005
              
              
              2004US$
              
              
              US$ASSETSCurrent
      assetsCash
      and cash equivalents
              
              
              12,574
              
              
              
              117,893Accounts
      receivable, net of $187,759 and $12,992 respectively
              
              
              156,947
              
              
              
              489,547Note
      receivable (Note 13)
              
              
              0
              
              
              
              400,000Inventories
      (Note 3)
              
              
              89,112
              
              
              
              173,416Deposits,
      prepayments and other receivables
              
              
              792,428
              
              
              
              572,892Total
      current assets
              
              
              1,051,061
              
              
              
              1,753,748Plant
      and equipment, net (Note 4)
              
              
              4,613,135
              
              
              
              4,391,014Mineral
      interests, net (Note 5)
              
              
              1,590,280
              
              
              
              1,452,464Deferred
      stripping costs, net (Note 6)
              
              
              1,221,566
              
              
              
              1,163,525Discount
      on Notes Payable
              
              
              75,835
              
              
              
              119,167Total
      assets
              
              
              8,551,877
              
              
              
              8,879,918LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilitiesAccruals
      and other payables (Note 7)
              
              
              723,753
              
              
              
              245,310Business
      and resource tax and government surcharges payable
              
              
              206,530
              
              
              
              226,168Due
      to shareholder (Note 13)
              
              
              8,743
              
              
              
              172,405Due
      to directors (Note 13)
              
              
              2,169
              
              
              
              5,737Income
      tax payable
              
              
              741,048
              
              
              
              715,333Secured
      senior promissory note
              
              
              400,000
              
              
              
              650,00012%
      Secured debentures
              
              
              886,885
              
              
              
              0Total
      current liabilities
              
              
              2,969,128
              
              
              
              2,014,953Total
      liabilities
              
              
              2,969,128
              
              
              
              2,014,953Stockholders'
      equityCommon
      stock: par value $0.001, 25,000,000 shares authorized, 14,498,000 issued
      and outstanding
              
              
              14,498
              
              
              
              14,498Additional
      paid-in capital
              
              
              5,049,019
              
              
              
              5,049,019Dedicated
      reserves
              
              
              493,587
              
              
              
              348,084Accumulated
      other comprehensive income (loss)
              
              
              182,374
              
              
              
              (2,620
              )Retained
      earnings (loss)
              
              
              (156,729
              )
              
              
              1,455,984Total
      stockholders' equity
              
              
              5,582,749
              
              
              
              6,864,965Total
      liabilities and stockholders' equity
              
              
              8,551,877
              
              
              
              8,879,918
    The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  32
  CHINA
GRANITE CORPORATION
  CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
  Three
      months ended
                December
      31,2005
              
              
              2004US$
              
              
              US$Net
      sales
              
              
              152,790
              
              
              
              931,048Cost
      of sales
              
              
              (172,175
              )
              
              
              (530,196
              )Gross
      (loss)/profit
              
              
              (19,385
              )
              
              
              400,852Selling,
      general and administrative expenses
              
              
              (410,053
              )
              
              
              (396,446
              )Operating
      (loss) income
              
              
              (429,438
              )
              
              
              4,406Other
      income or expense:Interest
      income
              
              
              541
              
              
              
              -Interest
      expense
              
              
              (74,823
              )
              
              
              (27,081
              )–Amortization
      of Discount on Note Payable
              
              
              (10,833
              )
              
              
              (10,833
              )Income
      (loss) before income taxes
              
              
              (514,553
              )
              
              
              (33,508
              )Provision
      for taxes
              
              
              -
              
              
              
              -Net
      (loss) income
              
              
              (514,553
              )
              
              
              (33,508
              )Other
      comprehensive income (loss)Foreign
      currency translation
              
              
              18,283
              
              
              
              -Comprehensive
      income (loss)
              
              
              (496,270
              )
              
              
              -Basic
      and diluted earnings per share
              
              
              (0.034
              )
              
              
              (0.002
              )Weighted
      average number of shares outstanding
              
              
              14,498,000
              
              
              
              14,498,000
    The
accompanying notes are an integral part of these condensed consolidated
financial statements
  33
  CHINA
GRANITE CORPORATION
  CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
 Twelve months ended
                  December 31,2005
                
                
                2004US$
                
                
                US$Net
      sales
                
                
                520,769
                
                
                
                2,387,582Cost
      of sales
                
                
                (535,897
                )
                
                
                (873,565
                )Gross
      (loss) profit
                
                
                (15,128
                )
                
                
                1,514,017Selling,
      general and administrative expenses
                
                
                (1,217,494
                )
                
                
                (1,135,188
                )Operating
      (loss) income
                
                
                (1,232,622
                )
                
                
                378,829Other
      income or expense:Interest
      income
                
                
                28,531
                
                
                
                -Interest
      expense
                
                
                (249,780
                )
                
                
                (16,270
                )Amortization
      of Discount to Notes Payable
                
                
                (43,332
                )
                
                
                (10,833
                )(Loss)
      income before income taxes
                
                
                (1,497,203
                )
                
                
                351,726Provision
      for income taxes
                
                
                -
                
                
                
                -Net
      (loss) income
                
                
                (1,497,203
                )
                
                
                351,726Other
      comprehensive income (loss)Foreign
      currency translation
                
                
                184,994
                
                
                
                -Comprehensive
      income (loss)
                
                
                (1,312,209
                )
                
                
                -Basic
      and diluted earnings per share
                
                
                (0.09
                )
                
                
                0.03Weighted
      average number of shares outstanding - basic
                
                
                14,498,000
                
                
                
                13,481,366Weighted
      average number of shares outstanding - diluted
                
                
                14,498,000
                
                
                
                13,672,880
     The
accompanying notes are an integral part of these condensed consolidated
financial statements
  34
  CHINA
GRANITE CORPORATION
  CONSOLIDATED
STATEMENTS OF CASH FLOWS
  Twelve
      months ended
                December
      31,2005
              
              
              2004US$
              
              
              US$Cash
      flows from operating activitiesNet
      (loss) income
              
              
              (1,497,203
              )
              
              
              351,726Adjustments
      to reconcile net income to net cash provided by operating
      activities:Affect
      of change in exchange rates
              
              
              5,739
              
              
              
              -Depreciation
      of plant and equipment
              
              
              290,756
              
              
              
              240,607Amortization
      of mineral interests
                Amortization
      of deferred stripping costs
              
              
              12,212
      16,041
              
              
              
              51,158
      39,031Provision
      for doubtful debt
                –Amortization
      of Discount on Note Payable
              
              
              170,005
      43,332
              
              
              
              12,992
      10,833Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              185,359
              
              
              
              (259,726
              )Deposits,
      prepayments and other receivables
              
              
              (199,438
              )
              
              
              (571,696
              )Inventories
              
              
              86,564
              
              
              
              (59,008
              )Accruals
      & other payables
              
              
              496,077
              
              
              
              125,833Business
      and resource tax and government surcharge payable
              
              
              (24,876
              )
              
              
              26,569Deferred
      stripping and other charges
              
              
              (46,793
              )
              
              
              (275,362
              )Net
      cash (used in) provided by operating activities
              
              
              (462,225
              )
              
              
              (307,043
              )Cash
      flows from investing activitiesAcquisition
      of fixed assets
              
              
              (510,611
              )
              
              
              (1,973,368
              )Assets
      received in a recapitalization of the Company
              
              
              -
              
              
              
              646,653Net
      cash used in investing activities
              
              
              (510,611
              )
              
              
              (1,326,715
              )Cash
      flows from financing activitiesProceeds
      from issuance of common stock
              
              
              -
              
              
              
              1,495,000Proceeds
      from issuance of 12% debentures
              
              
              886,885
              
              
              
              -Proceeds
      from Secured Senior promissory note
              
              
              
              
              
              
              650,000Repayment
      of  Secured Senior promissory note
              
              
              (250,000
              )
              
              
              -Shareholders
      advances
              
              
              -
              
              
              
              172,405Repayment
      to a shareholder
              
              
              (163,884
              )
              
              
              (90,580
              )Repayments
      to a director
              
              
              (3,623
              )
              
              
              (115,036
              )Notes
      Receivable acquired
              
              
              
              
              
              
              (400,000
              )Proceeds
      from Notes Receivable
              
              
              400,000Net
      cash provided by financing activities
              
              
              869,378
              
              
              
              1,711,789Other
      comprehensive income & dedicated reserve adjustment
              
              
              (2,181
              )
              
              
              (1,853
              )Net
      increase in cash and cash equivalents
              
              
              (105,639
              )
              
              
              76,178Cash
      and cash equivalents, beginning of period
              
              
              117,893
              
              
              
              41,715Affect
      of change in exchange rates on opening balance
              
              
              12,254
              
              
              
              117,893320
              
              
              
              -Cash
      and cash equivalents, end of period
              
              
              12,574
              
              
              
              117,893
  The
accompanying notes are an integral part of these condensed consolidated
financial statements.
   35
  CHINA
GRANITE CORPORATION
  CONSOLIDATED
STATEMENTS OF CASH FLOWS
  Non-cash
      investing and financing activities:Issuance
      of common stock for recapitalization
              
              
              0
              
              
              
              0Income
      taxes paid
              
              
              -
              
              
              
              -Interest
      and liquidated damages paid
              
              
              249,780
              
              
              
              16,270
                      The
accompanying notes are an integral part of these condensed consolidated
financial statements
   36
 CHINA
GRANITE CORPORATION
  CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
  Common
      stock
              
              
              Additional

                paid-in
              
              
              Dedicated
              
              
              Accumulated
      other comprehensive income
              
              
              RetainedShares
              
              
              Amount
              
              
              capital
              
              
              reserves
              
              
              (loss)
              
              
              earnings
              
              
              TotalUS$
              
              
              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
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,495,000Beneficial
      conversion option
              
              
              -
              
              
              
              -
              
              
              
              130,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              130,000Net
      loss for the year to December 31, 2004
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,853
              )
              
              
              351,726
              
              
              
              349,873Transfer
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              136,837
              
              
              
              -
              
              
              
              (136,837
              )
              
              
              -Balances,
      December 31, 2004
              
              
              14,498,000
              
              
              
              14,498
              
              
              
              5,049,019
              
              
              
              348,084
              
              
              
              (2,620
              )
              
              
              1,455,984
              
              
              
              6,864,965Prior
      Year Adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              146,207
              
              
              
              (1,819
              )
              
              
              (115,510
              )
              
              
              28,878Net
      loss for the 3 months to March, 2005
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,329
              )
              
              
              (232,191
              )
              
              
              (233,520
              )Balances,
      March 31, 2005
              
              
              14,498,000
              
              
              
              14,498
              
              
              
              5,049,019
              
              
              
              494,291
              
              
              
              (5,768
              )
              
              
              1,108,283
              
              
              
              6,660,323Net
      loss for the 3 months to June 2005
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (704
              )
              
              
              (634
              )
              
              
              (327,263
              )
              
              
              (328,601
              )Balances,
      June 30, 2005
              
              
              14,498,000
              
              
              
              14,498
              
              
              
              5,049,019
              
              
              
              493,587
              
              
              
              (6,402
              )
              
              
              781,020
              
              
              
              6,331,722Net
      loss for the 3 months to September 30, 2005
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (423,196
              )
              
              
              (423,196
              )Net
      loss for the 3 months to December 31, 2005
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (514,553
              )
              
              
              (514,553
              )Other
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              188,776
              
              
              
              
              
              
              
              188,776Balances,
      December 31, 2005
              
              
              14,498,000
              
              
              
              14,498
              
              
              
              5,049,019
              
              
              
              493,587
              
              
              
              182,374
              
              
              
              (156,729
              )
              
              
              5,582,749
  The accompanying notes are an
integral part of these condensed consolidated financial
statements
 37
  CHINA
GRANITE CORPORATION
  NOTES TO
CONSOLIDATED 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
Bay"). The operating company, of the same name, Laizhou Bay Mining International
Corporation ("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 has also entered into an agreement
to acquire another mineral concession in the Laiyang district 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, incorporated in the British Virgin Islands and its
wholly owned subsidiary China Laizhou Bay Mining International Corporation,
organized under the laws of PRC. All significant inter-company 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.
  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.
  38
  2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
  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 of $187,759 (2004 - $12,992), which is based
upon a review of outstanding receivables, historical collection information and
existing economic conditions.  Accounts past due more than 120 days are all
provided for.  Receivables that become delinquent of 0 (2004 - 0) based on
individual credit evaluation and the specific circumstances of the customer are
written off.
  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. The
Company does not expect to maintain a material line of inventory as it only
extracts granite once an order is received.
  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 production method over the terms of mineral rights, which are 20 and 30
years for the Company's two mineral interests. The 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%
at December 31, 2005 and 2004 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 relevant governmental 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.
  39
  2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
  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. The last
correspondence received from the authorities was December 8, 2004, stating that
it generally handles mining certificates once every two years. The Company
expects to receive the official certificate by August 2006. The lack of
certificate and delay in obtaining the certificate are common for mining
companies in the PRC. The Company believes it is conforming to normal
expectations and rules of the region.
  Deferred
stripping costs
  The costs
of removing overburden and other waste materials during the 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. During the years ended December 31, 2005 and 2004, the Company
capitalized all thestripping 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$48,010
in 2005 and US$275,362 in 2004, respectively. These stripping costs are
attributed to specific identified reserves and the units of production method is
being used to recognize the costs as a component of cost of sales in the same
period as the related revenue.
  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.
  The
Company has reviewed the Mining Resource Law of the PRC, specifically Chapter 4,
which deals with the reclamation of mining properties and Environmental
Pollution. The relevant law regarding this in Clause 32 states: "With
exploitation of mining resources, companies must obey relatively legal
prescribes of environmental protection, preventing pollution of environment. . .
.. any farmland, grassland, woodland which are destroyed by exploitation of mines
or mining business should adopt re-mining utilization, plantation or other using
step which are adjusted measures to local conditions." Our Group 14 Quarry and
Number 1 Quarry are located in dry rocky areas with very little vegetation, and
are not considered "farmland, grassland or woodland".
  To our
knowledge none of the granite mines which have been closed by other granite
mining companies which were operating in the Laizhou area have performed any
reclamation and remediation of any type, including but not limited to,
replanting trees and grassland. However, even if some sort of replanting was
necessary, the Company believes that the cost for such reclamation and
remediation would be minimal. Furthermore, since granite mining does not use any
toxic materials like cyanide nor has problems with acid discharges as happened
in some other types of mining, the Company believes there is no need to have a
reserve for environmental pollution.
  Mining
Rights License in China can only be issued once an Environmental “inspection”
has been completed by the provincial authorities. As part of this process the
Company has filed appropriate studies and environmental plans which have been
approved. These include plans that 1. The wastes produced during the course of
exploitation be stacked in the specially established waste disposal site. This
site is to have a retaining wall constructed around the stacking field. And
2.The dust produced during the course of exploitation and transportation meet
with the requirements regulated in the National Standard: General Effluent
Discharge Standard of Atmospheric Pollutant (GB16297-1996).  In any
case, our neighbors are other granite mining operations and no cultivated lands
or homes are near enough to be effected. Flooding is not a factor at the
location of our mines.
  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 determined by
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.
  40
  2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
  Stock
options and warrants
  The
Company has elected to follow Accounting Principles Board Opinion (APBO) No. 25
and related interpretations in accounting for its stock and warrant based
compensation made to its employees. APBO No.25 requires recognition of
compensation expense for variable awards over the vesting periods based upon the
then current market values of the underlying stock. Stock options and awards
made to consultants are subject to the provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation",
as amended by SFAS no. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB statement No. 123", which
requires the recognition of compensation expenses for grants of stock, stock
options, and other equity instruments, over the vesting periods of such grants,
based on the estimated grant-date fair values of those grants. The fair market
value is calculated using the Black Schoels model and the Company uses the
straight-line method of amortization for stock-based compensation.
  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. In accordance with the provisions of Staff Accounting Bulletin No.
101, revenue is recognized when product is shipped, title passes to the
customer. The price is fixed or determinable and collectability is reasonably
assured. That is, the company recognizes the revenue when the granite or granite
slabs are shipped to the customer, resulting in the title of the granite passing
to the customer, the price of the granite has been agreed to by the customer or
determinable by the market, and the collectability of the payment is reasonably
assured based on the credit worthiness of the customer regularly reviewed by the
company.
  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.
  Shipping
and handling costs
  Shipping
and handling costs are classified as selling expenses and are expensed as
incurred.
  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 non-functional 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. There was no
translation adjustment in 2004 due to translations into our reporting currency
as the Renminbi had been fixed against the United States dollar for the past 10
years. A translation gain of US$188,290 has been applied to reserves during 2005
as the Chinese government adjusted its policy of being fixed against the United
States dollar to a package of currencies on July 21, 2005 and we expect such
translation adjustments to continue to occur in future reports.
  Translation
of amounts from Renminbi into United States dollars ("US$") 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, 2005 of US$1.00 =
Rmb8.07 (2004 - 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.
  41
  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").
  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 management of the
Company does not expect that SFAS 153 will have a material effect on its
consolidated financial statements.
  42
  2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
  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 March 31, 2006.
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.
  In May
2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections -
a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS 154"). SFAS
154 changes the requirements for the accounting for and reporting of a change in
accounting principle. These requirements apply to all voluntary changes and
changes required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. SFAS 154 is
effective for fiscal years beginning after December 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 154 on its consolidated financial statements.
  3.
INVENTORIES
  Inventories
consisted of:
  As of December 31,2005
              
              
              2004Raw
      materials
              
              
              72,052
              
              
              
              72,240Work-in-progress
              
              
              0
              
              
              
              18,323Finished
      goods
              
              
              106,604
              
              
              
              82,853178,656
              
              
              
              173,416Less:
      Provision for slow moving stock
              
              
              (89,544
              )
              
              
              0Net
      Inventory
              
              
              89,112
              
              
              
              173,416
    43
  4.
PLANT AND EQUIPMENT, NET
  Plant and
equipment consisted of:
  As of December 31,2005
                
                
                2004Leasehold
      land
                
                
                584,648
                
                
                
                569,820Buildings
                
                
                769,386
                
                
                
                749,874Furniture
      and equipment
                
                
                2,337,153
                
                
                
                2,271,448Motor
      vehicles
                
                
                115,018
                
                
                
                112,101Construction-in-progress
                
                
                1,408,399
                
                
                
                1,001,399Leasehold
      Improvements
                
                
                64,605
                
                
                
                44,797Cost
                
                
                5,279,209
                
                
                
                4,749,439Less:
      Accumulated depreciation
                
                
                (666,074
                )
                
                
                (358,425
                )Plant
      and equipment, net
                
                
                4,613,135
                
                
                
                4,391,014
 Depreciation
expense amounted to $290,756 for the year ended December 31, 2005 and $240,607
for the year ended December 31, 2004. Differences may have occurred in Asset
value and Depreciation due to translation.
  5.
MINERAL INTERESTS, NET
  Mineral
interests represented:
  As of December 31,2005
              
              
              2004Gross
      carrying amount
              
              
              1,728,624
              
              
              
              1,570,048Accumulated
      amortization
              
              
              (138,344
              )
              
              
              (117,584
              )Net
      book value
              
              
              1,590,280
              
              
              
              1,452,464
  All the
mineral interests are in the production stage and amortization expense amounted
to $12,212 and $51,159 for the years ended December 31, 2005 and December 31,
2004, respectively. Differences may have occurred in Asset value and
Depreciation due to translation.
  Based
upon the estimated production for our mines we expect amortization of mineral
interest to be a total of $40,930 for each of the next five years.
  6.
DEFERRED STRIPPING COSTS, NET
  Deferred
stripping costs represented:
  As of December 31,2005
              
              
              2004Gross
      carrying amount
              
              
              1,321,864
              
              
              
              1,241,546Accumulated
      amortization
              
              
              (100,298
              )
              
              
              (78,021
              )Net
      book value
              
              
              1,221,566
              
              
              
              1,163,525
  Amortization
expense amounted to $16,041 and $39,031 for the years ended December 31, 2005
and December 31, 2004, respectively. Differences may have occurred in Asset
value and Depreciation due to translation.
  Based
upon the estimated production for our mines we expect amortization of deferred
stripping costs to total of $35,577 for each of the next five
years.
  44
  7.
ACCRUALS AND OTHER PAYABLES
  Accruals
and other payables consisted of:
  As of December 31,2005
              
              
              2004Wages
      and bonus
              
              
              12,301
              
              
              
              15,590Accrued
      interest
              
              
              57,401
              
              
              
              13,000Others
              
              
              654,051
              
              
              
              216,720723,753
              
              
              
              245,310
  8.
NOTES 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.  In the event
that the Note Holders do not get Registration Rights in the agreed amount of
time then they will receive Liquidation Damages of 2% per month until either the
Registration Rights are obtained or the Notes are paid back.
  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. The calculation of
theoriginal entry
was based on the Black Schoels model as follows; FMV of conversion premium on
Note Payable $229,125 (406,250 shares   0.564) (3 years) and FMV of
warrants on Note Payable $277,062 (406,250   0.682) (5 years). The
valuation of the warrants was based on the following assumptions; Share
price; 0.90, dividend; 0, maturity; 5 years., strike price; 2.00, interest rate;
3.50 and volatility; 120 . Per paragraph 19 (issue 6) of EITF 00-27, the
discount from beneficial conversion on notes payable are amortized from the date
of issuance to the stated date of redemption of the convertible
instrument.
  We have
used the intrinsic value method to recalculate the conversion option based on
EITF Issues 00-27 and 98-05.  The prior journal entries on deferred
conversion premium on convertible note – common stock of $229,000 and conversion
premium payable on warrants of $277,000have been reversed and a
new adjusting entry for Discount on Note Payable of $130,000 has been reflected
in the revised financial statements.
  45
  8.
NOTES PAYABLE (CONTINUED)
  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.
  On
September 30, 2005, we filed a Form 8-K with the SEC disclosing an Item 2.04
event. We disclosed two of the three investors holding Senior Convertible Notes
we issued in October of 2004, had sent us notice that they want to be paid
back their
principal, plus interest at 8% per annum and any unpaid liquidated damages by
September 30, 2005. On October 5, 2005, we paid the balance owing of $296,860.82
to one of the three investors holding Senior Convertible
Notes.
  As of December 31, 2005 we
owed the two remaining investors a total of $432,034.06.
  From  January 24,
2006 to May 3, 2006 we paid the balance owing of $176,844.39 to the second of
the three investors holding Senior Convertible Notes.
  As of March 24, 2008 we owed
the remaining investor $367,027.40
  We are
currently trying to arrange the necessary financing to repay the remaining
Senior Convertible Note holder. We will attempt to raise this additional capital
through the private placement of our securities. There is no guarantee, however,
that we will be able to successfully raise the required funds for this purpose
or that such funds will be available on terms satisfactory to us. Any inability
to raise additional funds may seriously jeopardize our future
operations.
  On
October 5, 2005, we became obligated for repayment of $886,885 pursuant to a
general security agreement and a series of secured promissory notes, dated
October 5, 2005, in the principal amount of up to $886,885 entered into with
five purchasers.
  The
material terms of the general security agreement and promissory notes are as
follows:
  ·
              The
      interest rate is twelve percent (12%) per annum, unless we are in default
      of the note, in which event the interest rate is 16% per annum until the
      default is cured;
 ·
              Interest
      payments on the principal amount outstanding is to be paid quarterly
      (January 4, April 4, July 4 and
October4).
 ·
              All
      principal and unpaid interest is due on the earlier of (a) notice in
      writing from the holder to the company of default of the note, or (b)
      October 4, 2006; and
 ·
              The
      loan is secured by all of the assets of the company and is to rank senior
      in right of payment and priority to all existing and future obligations of
      the company except for two previously issued 8% convertible promissory
      notes with an aggregate principal amount of
  $400,000.
  The
promissory notes did not contain a conversion feature.
  On
January 30, 2006, the noteholders agreed to convert the outstanding promissory
notes and accumulated interest  ($886,885 principal +  $31,198
interest = $918,083.90) .  The interest calculation was based on the number
of days the loan was outstanding to the date the parties agreed the promissory
notes would be converted into shares of the Company which was approximately 3.52
months.  No liquidated damages, penalties or other amounts were due to
these noteholders.   The Company has no remaining obligations to these
noteholders at this time.
  9.
INCOME TAXES
  The
Company was subject to the PRC income tax at a rate of 33% in 2003.
  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:
  Years
      to
                December
      31,2005
                and
                December
      31,2004%PRC
      income tax rate
              33Effective
      income tax rate
              33
  46
  9.
INCOME TAXES (CONTINUED)
  The
following is a geographical breakdown of income before the provision for income
taxes:
  Year
      to
                December
      31,
              
              
              Year
      to
                December
      31,(in
      thousands)
              
              2005
              
              
              2004Domestic
              
              
              0
              
              
              
              0Foreign
              
              
              0
              
              
              
              343Total
              
              
              0
              
              
              
              343
  The
provision for income taxes consists of the following:
  Year
      to
                December
      31,
              
              
              Year
      to
                December
      31,(in
      thousands)
              
              2005
              
              
              2004Current
      provision:Federal
              
              
              0
              
              
              
              0State
              
              
              0
              
              
              
              0Foreign
              
              
              0
              
              
              
              0Total current
      provision
              
              
              0
              
              
              
              0Deferred
      provision (benefit):Federal
              
              
              0
              
              
              
              0State
              
              
              0
              
              
              
              0Foreign
              
              
              0
              
              
              
              0Total deferred
      provision
              
              
              0
              
              
              
              0Total
      provision for income taxes
              
              
              0
              
              
              
              0Effective
      income tax rate
              
              
              0
              
              
              
              0
  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.
   47
  10.
STOCKHOLDERS' EQUITY (CONTINUED)
  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
  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. As $25,000 was paid on
execution of the agreement, the remaining balance of note receivable of $400,000
is presented in the current assets section. The two directors have personally
guaranteed the following payments: $200,000 due on March 31 and the balance of
$200,000 due on June 30th, which
have since been paid.
  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.
   48
  13.
RELATED PARTY TRANSACTIONS (CONTINUED)
  (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. The loan was repaid by the
Company in October, 2005.
  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.
  As
disclosed in note 10, 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
Rmb 6,000,000 (US$724,638), which was transferred at cost.
  (3)
Balances with related parties are as follows:
  As of December 31,2005
              
              
              2004Due
      to shareholder
              
              
              8,743
              
              
              
              172,405
  The
amount due to shareholder represents the unsettled balance of the
acquisition of a Car.
  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 31,2005
              
              
              2004Due
      to director
              
              
              2,169
              
              
              
              5,737
  The
amount due to director, who is also a shareholder of the Company, represents the
balance due on the purchase of a car.
  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:
  49
  14.
SEGMENT INFORMATION (CONTINUED)
  a.
              Net
      sale:
  Year to December 31,2005
              
              
              2004Granite
      mining
              
              
              278,476
              
              
              
              1,699,922Production
      of granite slabs
              
              
              242,293
              
              
              
              687,660520,769
              
              
              
              2,387,582
  b.
              Net
      income / (loss):
  Year to December 31,2005
              
              
              2004Granite
      mining
              
              
              (77,433
              )
              
              
              1,393,964Production
      of granite slabs
              
              
              62,305
              
              
              
              127,299(15,128
              )
              
              
              1,521,263Reconciliation:Net
      income for reportable segments
              
              
              (15,128
              )
              
              
              1,521,263OthersUnallocated
      corporate income and expenses (see below)
              
              
              (1,515,075
              )
              
              
              (1,177,787
              )(1,530,203
              )
              
              
              343,476Unallocated
      corporate income and expenses includes the following in
      US$1,000's:Public
      Relations
              
              
              32
              
              
              
              205Consulting
      fees
              
              
              224
              
              
              
              186Legal
      Fees
              
              
              79
              
              
              
              160Notes
      payable costs/Interest
              
              
              250
              
              
              
              93Accounting
              
              
              128
              
              
              
              76US
      Administration
              
              
              30
              
              
              
              35Compensation
      expense
              
              
              76
              
              
              
              19Sundry
              
              
              51
              
              
              
              26China
      - General, Administration and other operating costs
              
              
              645
              
              
              
              378Total
              
              
              1,515
              
              
              
              1,178
   50
  14.
SEGMENT INFORMATION (CONTINUED)
  (c)
Assets:
  As of December 31,2005
              
              
              2004Granite
      mining
              
              
              4,391,277
              
              
              
              4,619,570Production
      of granite slabs
              
              
              2,151,057
              
              
              
              2,077,4436,542,334
              
              
              
              6,697,013Reconciliation:Total
      assets for reportable segments
              
              
              6,542,334
              
              
              
              6,697,013Other
      corporate assets *
              
              
              2,344,293
              
              
              
              2,550,6558,886,627
              
              
              
              9,247,668
  * Other
corporate assets mainly includes; Office Buildings, Office Furniture and
Equipment and Motor Vehicles.
  All of
the Company's identifiable assets are located in the PRC
  (d) Other
items:
  Year to December 31,2005
              
              
              2004Depreciation
      of fixed assets:Granite
      mining
              
              
              163,495
              
              
              
              157,633Production
      of granite slabs
              
              
              72,254
              
              
              
              35,541Unallocated
      corporate assets
              
              
              55,007
              
              
              
              47,433290,756
              
              
              
              240,607Capital
      expenditures for fixed assets:Granite
      mining
              
              
              120,686
              
              
              
              1,419,986Production
      of granite slabs
              
              
              371,280
              
              
              
              438,519Unallocated
      corporate assets
              
              
              18,645
              
              
              
              114,863510,611
              
              
              
              1,973,368Amortization
      of mineral interests:Granite
      mining
              
              
              12,212
              
              
              
              51,159
  (e) Major
customers
  Major
customers, for the period, which accounted for more than 10% of total revenues
are as follows:
  Years
      to December 31, 2005 and 2004Granite
      mining
              
              In
      2005, 1 customer accounted for 10.13% of the total revenues. In 2004, no
      customers accounted for more than 10% of total
revenues.Production
      of granite slabs
              
              In
      2005, 3 customers accounted for 10.23%, 17.04% and 12.75% respectively of
      the total revenues. In 2004, no customers accounted for more than 10% of
      total revenues.
   51
  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, 2005, three customers had accounts receivable balances representing
19.38%, 19.54% and 16.48% respectively. As of December 31, 2004, two customers
had accounts receivable balances representing 16.35% and 14.91% of total
accounts balance receivable, 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 to December 31, 2004, 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.
  Under the
Senior Purchase Agreement (Note 8), 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
  Under the
same 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.
  52
  17.
SUBSEQUENT EVENTS
  On
January 30, 2006 the Company sold 9,180,839 shares of common stock of the
Company for an aggregate purchase price of $918,083.90. The Purchase Price was
paid by the subscribers by the settlement of $918,083.90 of indebtedness of the
Company to these individual subscribers. No underwriting discounts or commission
were paid in connection with this offering. The issuance of shares in the
offering was completed pursuant to Rule 903 of Regulation S of the Act on the
basis that the sale of the shares was completed in an offshore transaction, as
defined in Rule 902(h) of Regulation S. The Company did not engage in any
directed selling efforts, as defined in Regulation S, in the United States in
connection with the sale of the shares. The investors each individually
represented to us that they were not a U.S. person, as defined in Regulation S,
and were not acquiring the shares for the account or benefit of a U.S. person.
The subscription agreement executed between us and each investor included
statements that the securities had not been registered pursuant to the
Securities Act of 1933 and that the securities may not be offered or sold in the
United States unless the securities are registered under the Securities Act of
1933 or pursuant to an exemption from the Securities Act of 1933. The investors
each agreed by execution of the subscription agreement for the shares: (i) to
resell the securities purchased only in accordance with the provisions of
Regulation S, pursuant to registration under the Securities Act of 1933 or
pursuant to an exemption from registration under the Securities Act of
1933;
  (ii) that
we are required to refuse to register any sale of the securities purchased
unless the transfer is in accordance with the provisions of Regulation S,
pursuant to registration under the Securities Act of 1933 or pursuant to an
exemption from registration under the Securities Act of 1933; and (iii) not to
engage in hedging transactions with regards to the securities purchased unless
in compliance with the Securities Act of 1933. All securities issued were
endorsed with a restrictive legend confirming that the securities had been
issued pursuant to Regulation S of the Securities Act of 1933 and could not be
resold without registration under the Securities Act of 1933 or an applicable
exemption from the registration requirements of the Securities Act of
1933.
  On
January 30, 2006 the Company sold 1,000,000 shares of common stock of the
Company for an aggregate purchase price of $100,000 in cash consideration. No
underwriting discounts or commission were paid in connection with this offering.
The issuance of shares was completed pursuant to Rule 506 of Regulation D of the
Securities Act of 1933 on the basis that the sole investor is an accredited
investor, as defined under Rule 501 of Regulation D of the Securities Act of
1933. All securities issued were issued as restricted securities and were
endorsed with a restrictive legend confirming that the securities could not be
resold without registration under the Securities Act of 1933 or an applicable
exemption from the registration requirements of the Securities Act of 1933. No
general solicitation or general advertising was conducted in connection with the
sales of the shares.
  
 53