Convertible notes payable, net of discount, at the transaction date was $1,700,257.

~~China Filtration Technology, Inc.~~

~~Notes to Consolidated Financial Statements for the six months ended~~As of March 31, ~~2010~~

~~(Unaudited - - Expressed in US dollars)~~

~~15.~~

~~Accounting for Warrants~~

2011, after a note discount amortization of $2,287,197, net convertible notes payable was accreted to $3,887,453.

13. Accounting for Warrants

In conjunction with issuing the convertible notes, the Company agreed to issue common stock warrants to the convertible note investors in the debt financing transaction described in note 12. The warrants issued ~~in conjuction with the convertible notes~~ have the following material terms:

The warrants are exercisable at any time during a five-year period commencing on the closing of a “financing,” which means the first sale (or series of related sales) by us of stock (or debt or equity securities convertible into stock), in a capital raising transaction, occurring after the maturity date (or the date the notes become due pursuant to a default, if earlier) with aggregate gross proceeds of at least ~~$2,000,000.~~$20,000,000. The warrants cannot be exercised if no financing is consummated within a five-year period after the issue date and become void if the notes automatically convert into common stock.

Number of Shares: The warrants represent the right to purchase 8% of the total shares of common stock outstanding (on a fully-diluted basis) immediately after the closing of the financing.

Exercise Price: The warrants are exercisable at the price for which the shares of common stock (or common stock equivalent if derivative securities are sold) are sold in the financing. If the financing includes more than one type of security, the exercise price shall equal the lowest price per share of common stock or common stock equivalent included in the financing.

At the time of the notes issuance, the Company also issued non-conversion warrants to the placement agent to purchase 5% of the Company’s common stock underlying the warrants issued to the convertible notes investors, exercisable at the same price at which the investors’ warrants become exercisable.

The Company analyzed the warrants issued in connection with the issuance of the notes and the conversion features embedded in the notes to assess whether they meet the definition of a derivative under the guidance set forth by FASB ASC ~~Topic~~ 815 (SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”) and, thereof, the applicability of the accounting rules in accordance to FASB ASC ~~Topic~~ 815 to treat the conversion option and the warrants as derivative liabilities.

Under FASB ASC 815-10-15, a financial instrument is a derivative if it meets one of the following three criteria: i) it requires or permits net settlement; ii) there is a market mechanism for the net settlement; and iii) the net settlement can be fulfilled by delivery of assets that are readily convertible to cash. Management concluded that the conversion option embedded in the notes does not meet the above criteria and therefore is not a derivative.

Since the warrants permit the holder to perform a cashless exercise and receive a net number of shares of the Company’s common stock at the time of exercise, these warrants meet the definition of derivative instrument under ASC 815-10-15-83.

Management also evaluated whether the warrants meet the scope exception set forth by FASB ASC ~~Topic~~ 815-40 (“Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”), which is that contracts issued or held by the reporting entity that are both (1) indexed to its own stock and (2) classified in stockholders’ equity shall not be considered to be derivative instruments for purposes of FASB ASC ~~Topic~~ 815. The provisions in FASB ASC ~~Topic~~ 815-40 apply to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by FASB ASC ~~Topic~~ 815 and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.

~~Management concluded that~~Because the exercise price of the warrants ~~issued in conjunction with~~is not fixed and will be determined by the ~~private placement of convertible notes in February 2010~~price at which the Company completes a Financing prior to ~~certain accredited investors~~the time the warrants become exercisable, the warrants are not considered indexed to the Company’s common stock. The exceptions provided under FASB ASC 815-40-15 are not available; therefore, management determined the warrants should be ~~treated~~accounted for as a derivative ~~liability and the derivative accounting rules under ASC Topic 815-40 were adopted to record the warrants. Fair market value~~liability. The terms of the placement agent non-conversion warrants ~~were~~have terms identical to the investors’ warrants and are therefore accounted as a derivative liability.

Derivative instruments are initially measured ~~using the Black-Scholes pricing model at the issuance date~~ and recorded ~~as warrants liabilities. Change~~at their fair value and marked-to-market at each report date until they are exercised or expire, with any change in the fair value ~~of the warrants is recorded in other income~~charged or ~~loss in the statement of operations in the future reporting periods. Change in warrant value from February 2010~~credited to ~~March 31, 2010 were not material.~~income.

As a result of adopting accounting treatment ofaccording to ASC ~~Topic~~ 815-40, ~~$1,052,000 was~~investor and placement agent warrants are recorded as derivative liabilities and valued at $1,052,000 using a binomial option pricing model on the date of issuance. Because there was no trade market for the Company’s stock, management used substitute volatility in the initial and subsequent measuring of the fair market value of the warrants ~~liabilities~~issued. Management re-measured the fair market value based on ~~1,218,857 shares entitled under~~the adjusted volatility of publicly traded stock of three companies with business and financial size comparable to the Company’s and the remaining term of the warrants.

As of March 31, 2011, these warrants were re-valued at $592,276 based on revaluation of factors including the probability of the these warrants to be voided, the probability of the warrants to be in-the-money, changes in expected volatility, and the ~~valuation~~remaining life of these warrants. The revaluation inputs asare provided in the table as ~~follows.~~follows:

	As of
	March 31,
Attribute	2011
Warrants Outstanding		1,670,823	(*)
Stock Market Price	$	6
Exercise Price	$	6
Risk-free Interest Rate, Year 1		0.3	%
Risk-free Interest Rate, Year 2		0.8	%
Risk-free Interest Rate, Year 3		1.29	%
Risk-free Interest Rate, Year 4		2.4	%
Estimated Volatility		72	%
Expected Dividend Yield		0	%
Options Life (years)		3.87

February 2010 Financing Warrants - Valuation Inputs
February 12 and March 31,
Attribute 2010
Stock Price $ 2.45
Risk Free Interest Rate 2.25 %
Volatility 90.00 %
Exercise Price $ 2.45
Dividend Yield 0 %
Contractual Life (Years) 1

~~China Filtration Technology, Inc.~~

~~Notes to Consolidated Financial Statements for the six months ended~~(*) Warrants outstanding as of March 31, ~~2010~~

~~(Unaudited - - Expressed in US dollars)~~

2011 is based on 8% of the total outstanding common shares on fully diluted basis and warrants issued to placement agent equal to 5% of investors’ warrants :

~~16.~~Shares of common stock outstanding as of March 31, 2011	~~Recent accounting pronouncements~~	15,265,714
Shares of common stock to be issued in the public offerings		4,166,667
Anti-dilutive shares to be issued to placement agent		458,373
Total		19,890,754

8% of the fully-diluted shares outstanding immediately after IPO		8	%

Shares underlying the warrants		1,591,260

Placement agent’s non-conversion warrants (5% of investors’ warrants)		79,563

		1,670,823

14. Equity and stock option based compensation

2010 Stock Incentive Plan

In ~~June 2009~~September 2010, the ~~FASB established~~Board of Directors adopted the ~~Accounting Standards Codification~~2010 Stock Incentive Plan (“~~Codification”~~2010 Plan”) under which it may grant incentive and nonqualified stock options, restricted stock and stock appreciation rights to eligible employees, non-employee directors, or ~~“ASC”) as~~consultants. Stock options granted generally have a 5-year life and vest pursuant to terms set forth under employment agreement. Under the ~~source~~2010 Plan, stock options of ~~authoritative accounting principles recognized by~~400,000 were granted with exercise price equal to the ~~FASB to~~Company’s intended initial public offering price and will be ~~applied by nongovernmental entities in~~vested over a three year period. The vesting period starts at August 1, 2010 under the ~~preparation of financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). Rules and interpretive releases~~compensation terms of the ~~Securities and Exchange Commission (“SEC”) issued~~employment contract.

The Company accounts for stock-based compensation under ~~authority~~provisions of ~~federal securities laws are also sources~~FASB ASC 718 – Accounting for Stock Compensation which establishes standards for the accounting for equity instruments exchanged for employee services. Under the provisions of ~~GAAP for SEC registrants. Existing GAAP was not intended to be changed as a result~~FASB ASC 718, share-based compensation cost is measured at the grant date, based on the estimated fair value of the ~~Codification,~~award, and ~~accordingly~~is recognized as an expense over the ~~change did not impact our financial statements.~~ employee’s requisite service period (generally the vesting period of the equity grant), net of estimated forfeitures.

The ~~ASC does change~~fair value of the ~~way~~employee stock options granted is estimated using a binomial pricing model at the ~~guidance is organized and presented.~~grant date with input as follows:

~~Statement~~

	As of
	September 10,
Attribute	2010
Stock Market Price	$	6
Exercise Price	$	6
Risk-free Interest Rate		0.27	%
Estimated Volatility		75	%
Expected Dividend Yield		0
Options Life (years)		4.8

Total cost of ~~Financial Accounting Standards (“SFAS”) SFAS No. 165 (ASC Topic 855), “Subsequent Events”, SFAS No. 166 (ASC Topic 810), “Accounting for Transfers~~the share-based compensation from the grant of Financial Assets – an Amendment of FASB Statement No. 140”, SFAS No. 167 (ASC Topic 810), “Amendments to FASB Interpretation No. 46(R)”, and SFAS No. 168 (ASC Topic 105), “The FASB Accounting Standards Codification and the ~~Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” were recently issued. SFAS No. 165, 166, 167, and 168 have no current applicability to~~stock options was initially estimated at $1,351,000 at the ~~Company or their effect~~grant date based on the ~~financial statements would not have been significant.~~

Accounting Standards Update (“ASU”) ASU No. 2009-05 (ASC Topic 820), which amends Fair Value Measurements and Disclosures – Overall, ASU No. 2009-13 (ASC Topic 605), Multiple Deliverable Revenue Arrangements, ASU No. 2009-14 (ASC Topic 985), Certain Revenue Arrangements that include Software Elements, and Various other ASU’s No. 2009-2 through ASU No. 2010-19 which contain technical corrections to existing guidance or affect guidance to specialized industries or entities were recently issued. These updates have no current applicability tovaluation of the ~~Company or their effect~~options. The cost is recognized on the ~~financial statements would not have been significant.~~

~~Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on~~number of shares vested over the ~~accompanying financial statements.~~
vesting period.

The following table summarizes the activities for the 2010 Plan for the three month period ended March 31, 2011:

	Number				Remaining
	of Shares		Exercise Price		Contractual Life
Options outstanding as of September 30, 2010		400,000	$	6		4.8
Granted		-
Forfeiture		-
As of March 31, 2011		400,000	$	6		4.3
Requisite Service Periods Lapsed (months)		8
Vested and exercisable as of March 31, 2011		106,521	$	6		4.3

In addition, one of our independent directors was granted 30,000 shares of restricted common stock under the Company’s 2010 Plan, of which 20,000 shares vest over a period of two years. At the grant date, the fair value of these restricted shares issued was measured at estimated $6 per share. As of March 31, 2011, shares of 17,507 were not subject to forfeiture, of which 4,986 and 2,466 shares were recognized as shared-based compensation expense at an estimated fair market value of $6 per share for the six months and three months ended March 31, 2011.

Total stock-based expense was recorded for the six months and six months ended March 31, 2011 as follows:

	Three months ended		Six months ended
	March 31, 2011		March 31,2011
Vested options	$	136,206	$	320,480
Restricted stock	$	14,796	$	29,918
	$	151,002	$	350,398

15. Earnings Per Share

Basic earnings per share is computed by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated by dividing net income attributable to common shareholders as adjusted for the effect of dilutive common equivalent shares, if any, by the weighted average number of common and dilutive common equivalent shares outstanding during the year. Common equivalent shares consist of the common shares issuable upon the conversion of the convertible note (using the if-converted method) and common shares issuable upon the exercise of outstanding warrants (using the treasury stock method). Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. Using if-converted method, the Company’s earnings per share for the three months and six months ended March 31, 2011 is anti-dilutive.

	Three Months Ended					Six Months Ended
	March 31,			March 31,		March 31,			March 31,
	2011			2010		2011			2010
Net Income (Loss)
(numerator for basic net income (loss) per share)	$	(372,108	)	$	444,332	$	(314,745	)	$	1,739,680
Plus interest on convertible note		196,822			356,700		1,009,275			356,700
Net Income (loss) - assumed conversions
(numerator for diluted net income (loss) per share)	$	(175,286	)	$	801,032	$	694,530		$	2,096,380

Weighted average common shares
(denominator for basic net income (loss) per share)		15,265,714			14,897,143		15,265,714			14,701,547

Effect of dilutive securities:
Warrants - treasury stock method		-			-		-			-
Convertible notes as if-converted method		1,923,809			901,224		1,923,809			445,661
Weighted average common shares
(denominator for diluted income (loss) per share)		17,189,523			15,798,367		17,189,523			15,147,208

Basic net income (loss) per share	$	(0.02	)	$	0.03	$	(0.02	)	$	0.12
Diluted net income (loss) per share are the same as basic net income (loss) per share as results would be anti-dilutive	$	(0.02	)	$	0.03	$	(0.02	)	$	0.12

16 . Income Taxes

USA

The Company and its subsidiary and branch divisions are subject to income taxes on an entity basis on income arising in, or derived, from the tax jurisdiction in which they operate. As the Company had no income generated in the United States, there was no tax expense or tax liability due to the Internal Revenue Service of the United States as of March 31, 2011 and September 30, 2010.

BVI

Hong Hui is incorporated under the International Business Companies Act of the British Virgin Islands and accordingly, is exempted from payment of British Virgin Island’s income taxes.

PRC

Pursuant to the PRC Income Tax Laws, the prevailing statutory rate of enterprise income tax is 25% for Foshan. For 2008 and 2009, Foshan enjoyed a tax free holiday for two years. From January 2010 onwards, Foshan is taxed at 25% of net income except for the year 2010 and 2011 during which there is a 50% discount on income tax.

The tax provision was $3,398 and $92,001 for the three months and six months ended March 31, 2011, respectively, and $0 for the same periods ended March 31, 2010. The Company has recorded zero deferred tax assets or liabilities as of March 31, 2011 and March 31, 2010, net of tax allowance, because all other significant differences in tax basis and financial statement amounts are permanent differences.

We follow the guidance in FASB ASC 740 Accounting for Uncertainty in Income Taxes . We have not taken any uncertain tax positions on any of our open income tax returns filed through the period ended March 31, 2011. Our methods of accounting are based on established income tax principles and are properly calculated and reflected within our income tax returns. In addition, we have timely filed extension of income tax returns in all applicable jurisdictions in which we believe we are required to make an income tax return filing.

We re-assess the validity of our conclusions regarding uncertain tax positions on a quarterly basis to determine if facts or circumstances have arisen that might cause us to change our judgment regarding the likelihood of a tax position’s sustainability under audit. We have determined that there were no uncertain tax positions for the three months ended March 31, 2011 and 2010.

All of the Company’s income before income taxes is from PRC sources. Actual income tax expense reported in the consolidated statements of operations and comprehensive income differ from the amounts computed by applying the PRC statutory income tax rate of 12.5% (50% discount of 25%) to income before income taxes for the three months and six months ended March 31, 2011 for the followings reasons:

	Three Months					Six Months
	Ended March 31,					Ended March 31,
	2011			2010		2011			2010
Income (loss) before income taxes	$	(368,710	)		444,332	$	(222,744	)		1,739,680
Temporary difference:
Write-off for bad debt					-		(7,372	)		-
Permanent difference:
Undeductible interest expense		152,547			-		762,447			-
Undeductible expense from valuation adjustment for warrants		44,276			-		(146,724	)		-
Undeductible stock-based compensation		199,069			-		350,398			-
Adjusted taxable income	$	27,182			-	$	736,005			-
Income tax rate at 12.5% and zero in 2010 and 2009		12.5	%		-		12.5	%		-
Income tax expense	$	3,398			-	$	92,001			-

Our policy for recording interest and penalties associated with audits is to record such items as a component of income tax expense. There were no interest and penalties recorded for the three months ended March 31, 2011 and 2010.

17. Recent accounting pronouncements

Recently, the following accounting standards or amendments to existing standards have been issued and communicated through the following FASB Accounting Standards Updates (ASU):

ASU No. 2011-03 - Transfers and Servicing (ASC Topic 860): Reconsideration of Effective Control for Repurchase Agreements.

ASU No. 2011-02 - Receivables (ASC Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.

ASU No. 2011-01 – Receivables (ASC Topic 310): Deferral of the Effective Date of Disclosure about Troubled

Debt Restructurings in Update No. 2010-20.

ASU No. 2010-29 - Business Combinations (ASC Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations.

ASU No. 2010-28 - Intangibles—Goodwill and Other (ASC Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.

ASU No. 2010-26 - Financial Services—Insurance (ASC Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.

After evaluation of the above standards, management concluded they are not applicable to the Company’s financial accounting and reporting, and, if adopted, there would be no significant effect on the Company’s financial statements.

18. Subsequent Events

We have evaluated subsequent events from the balance sheet date up to when the financial statements are issued.

In April 2011, the Company completed its capital project to build a new manufacturing facility to make Polypheneyplene Sulfide (PPS) non-woven fabrics directly from PPS resin using spun-bonded and needle-punched method. This facility can make filament (long fiber) non-woven PPS fabrics 2.6 meter wide with an annual capacity of 1,200 tons. Addition of this production line marks a milestone to the Company as the sale of PPS products will have a significant impact on the Company’s revenue growth and profitability.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

Special Note Regarding ~~Forward Looking~~Forward-Looking Statements

This ~~Quarterly Report~~report contains some forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements involve risks and uncertainties. You can identify these statements by the fact that they do not relate strictly to historical or current facts. In some cases they are identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” or the negative of these words or other variations on ~~Form 10-Q, including the following~~these words or comparable terminology. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations,~~Operations.” ~~contains~~In particular, these include statements relating to future actions, future performance, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results.

Any or all of our forward-looking statements that are based on the beliefs of our management, and involve risks and uncertainties, as well as assumptions, that, if they ever materialize or prove incorrect, could cause actual results to differ materially from those expressed or implied by such forward-looking statements. The words “believe,” “expect,” “anticipate,” “project,” “targets,” “optimistic,” “intend,” “aim,” “will” or similar expressions are intended to identify forward-looking statements. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including statements regarding new and existing products, technologies and opportunities; statements regarding market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China; any statements of belief or intention; any of the factors and risks mentioned in the “Risk Factors” sections of our Current Report on Form 8-K filed with the Securities and Exchange Commission on February 12, 2010, and any statements of assumptions underlying any of the foregoing. All forward-looking statements included in this report ~~are based~~may turn out to be inaccurate. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially as a result of various factors. There can be no assurance that the forward-looking statements contained in this filing will in fact occur and you should not place undue reliance on ~~information available to us on the date of this report. We assume no obligation and do not intend to update~~ these forward-looking ~~statements, except as required by law.~~statements.

~~INTRODUCTION~~Introduction

This section discusses and analyzes the results of operations and financial condition of China SLP Filtration Technology, Inc., formerly known as Perpetual Technologies, Inc., (“we,” ~~“us”~~“us,” or the “Company”) which is the ultimate parent company of Foshan S.L.P. Special Materials Co., Ltd. (“Foshan”), a ~~PRC-based~~China-based operating company located in Foshan, Guangdong Province in the ~~PRC.~~People’s Republic of China.

On February 12, 2010, we acquired control of Foshan in a share exchange transaction which closed on that date.

In the share exchange or “reverse merger” we acquired control of Hong Hui Holdings Limited (“Hong Hui”), a British Virgin Islands company and the owner of all of the stock of Technic International Limited (“Technic”), a Hong Kong holding company which in turn is the owner of all of the equity of Foshan, by issuing to the Hong Hui stockholders an aggregate of 14,510,204 shares of our common stock in exchange for all of the outstanding capital stock of Hong Hui.

The transaction is accounted for as a reverse acquisition, except that no goodwill or other intangible has been recorded. The recapitalization is considered to be a capital transaction in substance, rather than a business combination. Beginning ~~with the quarter ended March 31,~~from February 12, 2010, the operating results of Foshan are consolidated in the Company’s ~~financials~~financial results for that period.

Foshan is engaged in the manufacture and sale ~~and research and development~~ of ~~advanced spun-bond PET, or polyester, non-wovens.~~nonwovens.

Nonwoven fabrics are broadly defined as sheet or web structures bonded together by entangling fiber or filaments (and by perforating films) mechanically, thermally or chemically. They are flat, porous sheets that are made directly from separate fibers or from molten plastic or plastic film. They are not made by weaving or knitting and do not require converting the fibers to yarn.

Our major market is the Chinese market. We sell products to industrial customers in China. In recent years, our products have been successfully launched in the European, North American and South East Asian markets.

Currently, our major products are spun-bond, thermal calendaring and needle-punched industrial non-woven PET (polyester) and PPPPS (polypropylene) fabrics. These products are used as filtration media and infrastructure engineering material, among other uses.

We currently operate three spun-bond production lines. Two lines are spun-bond, thermal calendaring production lines with a total annual capacity of 4,000 tons of spun-bond polyester filament thermal calendaring ~~nonwoven.~~non-woven. In February 2009, we added the third line, spun-bond needle-punching production line with an annual capacity of 4,000 tons of spun-bond polyester filament, needle-punched ~~nonwoven~~non-woven fabric.

We recently developed a continuous filament, spun-bond, needle-punched manufacturing process to manufacture ~~polyphenylene~~polyphenylene sulfide fiber, or PPS, a specialized type of high temperature resistant ~~nonwoven~~non-woven fabric and intend to begin commercial production of PPS using our proprietary manufacturing process in ~~2010.~~ 2011.

We have applied for a process patent in the PRC for this process (Patent No. PRC: 201010102660.2) and we intend to apply for a process patent in North America and Europe. In comparison to other ~~filtering~~filtration materials currently available, we believe that our ~~nonwoven~~non-woven fabric will be stronger, have lower production and operating costs, and will have higher filtration efficiency. ~~We have tested~~Although our PPS ~~material~~product has been tested in laboratories, prototype bag filters made of our product have not been tested on site by any potential end user and we do not expect to develop prototype products for testing by any potential end user prior to commencing commercial production of PPS products. Our new PPS nonwoven fabric ~~internally~~may never achieve broad market acceptance, due to any number of factors, including that the product may not be as effective as our initial testing indicates and ~~although a prototype using~~competitive material may be introduced which renders our material has not yet been deployed by any industrial end user, we believe that our material has the potential to replace the filtration materials and products currently available and become the most popular filtration material in high temperature environments such as coal-fired power plants, garbage incinerators and cement factories. PPS product too expensive or obsolete.

On March 24, 2010, the Company effected a 1 for 5 reverse stock split of its outstanding common stock. The effect of the reverse split is retrospectively shown in all periods presented.

On February 12, 2010, immediately following the reverse merger, the Company entered into a note purchase agreement with certain accredited investors for the sale of convertible notes in the aggregate principal amount of $4,140,000 and warrants (which are exercisable only in certain circumstances), with net proceeds of ~~$3.2~~$3.4 million after finance costs. The notes require quarterly interest payments at a rate of 10% per annum.

Recent Development

On January 31, 2011, we entered into note extension agreements with each holder of our outstanding convertible notes (except for Lumen Capital LP who holds a convertible note in the principal amount of $100,000) to extend the maturity date of the notes from February 12, 2011 to June 30, 2011. We repaid Lumen Capital the principal amount of $100,000 on February 11, 2011.

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. This discussion should be read in conjunction with our audited financial statements and accompanying notes as of September 30, ~~2009,~~2010, and for the year then ended, and the unaudited condensed consolidated interim financial statements for the three months and six ~~monhts~~months ended March 31, ~~2010.~~2011.

Results of Operations

Three ~~Month Period~~Months Ended March 31, ~~2010 compared~~2011 Compared to Three ~~Month Period~~Months Ended March 31, ~~2009~~2010

The following table shows, for the periods indicated, information derived from our consolidated statements of income in US dollars and as a percentage of net sales (percentages may not add due to rounding). See the financial statements of the Company and the related notes thereto and other financial information included elsewhere in this report.

	Three Months Ended
	March 31
	2011					2010
Net Sales	$	4,895,596		100	%	$	4,628,671		100	%
Cost of Sales		3,911,768		80	%		3,237,311		70	%
Gross Profit		983,828		20	%		1,391,360		30	%
Selling, General and Administration expenses		989,685		20	%		557,461		12	%
Income (Loss) from Operations		(5,857	)	0	%		833,899		18	%

Other income (expense)
Interest Income		7,658		0	%		292		0	%
Interest Expense		(326,235	)	-7	%		(390,355	)	-8	%
Gain (Loss) from Disposal of Fixed Assets		-		-			496		-
Changes in Fair Value of Warrants		(44,276	)	-1	%		-		0	%
Total other income (expenses)		(362,853	)	-7	%		(389,567	)	-8	%
Income (Loss) before Income Taxes		(368,710	)	-8	%		444,332		10	%
Income tax provision		3,398					-
Net Income (Loss)	$	(372,108	)	-8	%	$	444,332		10	%

Three months ended March 31
2010 2009
Amount % Amount %
Sales 4,628,671 100 % 2,214,940 100 %
Cost of Sales 3,237,311 70 % 1,373,921 62 %
Gross Profit 1,391,360 30 % 841,019 38 %
SG&A expense 407,461 9 % 275,526 12 %
Operating Income 983,899 21 % 565,493 26 %
Interest Income 292 0 % - 0 %
Interest Expenses (390,355 ) 8 % (76,286 ) 3 %
Gain on disposal of fixed assets 496 0 % 0 0 %
Net Income before taxes 594,332 13 % 489,207 22 %
Net Income 594,332 13 % 489,207 22 %

Net Sales

Net sales ~~revenue consists~~consisted of revenue from sales of needle punched ~~non woven fabric~~nonwoven product and thermal calendared ~~product. Net~~products. Our net sales for the three month period ended March 31, ~~2010~~2011 were ~~$4,628,671,~~$4,895,596, an increase of ~~$2,413,731,~~$266,925, or ~~109%~~6%, from $2,214,940 for the same period of prior year. In February 2009, we installed a new production line to manufacture needle punched non woven fabric. Sales of needle-punched products for the three month period ended March31, 2010 were $1,942,811 compared to $220,718$4,628,671 for the same period of the prior year. ~~In addition,~~The increase in revenue was primarily attributable to the appreciation of Renminbi, our transaction currency against the US dollars, our reporting currency. Reflected in the transaction currency, our net sales ~~of thermal calendared materials for~~increased by 2% from the quarter ended March 31, 2010.

For the three month period ended March 31, ~~2010 $2,308,801, as increase~~2011, sales of ~~$569,189 compared to $1,739,612 for~~thermal calendared products increased by $112,482, or 4%, from the same period of the prior year. An increase of $403,038 in thermal calendared products in domestic market was offset by a decrease of $290,556 in international sales.

~~Cost~~International sales of ~~Goods Sold~~needle-punched products increased by $156,673 and domestic sales slightly decreased by $2,230.

Cost of ~~goods sold~~Sales

Cost of sales principally consists of the cost of raw materials, labor and manufacturing overhead expenses.

Cost of ~~goods sold for the three month period ended March 31, 2010 was $3,237,311, an increase of $1,863,390, or 136%, from $1,373,921 for the same period in 2009.~~

~~Raw material expenses increased to 52% of the~~ sales for the three month period ended March 31, ~~2010,~~2011 was $3,911,768, an increase of $674,457, or 21%, from $3,237,311 for the same period in 2010.

Raw material cost increased to 70% of net sales for the three month period ended March 31, 2011, compared to ~~41%~~52% of net sales for the same period of the prior year, reflecting ~~a mix of~~ more expensive raw materials associated with ~~2010~~ sales. ~~98.7~~ %Over 98% percent of our raw materials ~~consists~~consist of polyester, the price of which fluctuates with the price of ~~oil~~

~~Labor expenses were 6%~~oil. Recent surge in the price of ~~sales for~~crude oil adversely affected the purchase price of polyester resin chips, our main raw material. During the three month period ended March 31, ~~2010 compared to 2% for~~2011, our cost of raw materials increased 20% from the same period of ~~year 2009.~~ ~~Beginning~~the prior year. The increase of our cost of sales was due principally from the increase in ~~February 2009 we hired 17 additional employees to work~~ the ~~new production line.~~ cost of raw materials.

Labor ~~costs also increased due to increased demand~~cost accounted for ~~labor.~~

~~Overhead expenses were 11%~~1% of net sales for the three month period ended March 31, ~~2010, compared to 19%~~2011, the same level as the same period in 2009.

Overhead expenses were 14% of net sales for ~~2009~~the three month period ended March 31, 2011, compared to 11% of net sales for the same period in 2010. As a percentage of net sales, overhead expenses increased due to lower capacity utilization and lower production volume, compared to the ~~increase of manufacturing capacity of the Company with the addition of the new production line~~same period in ~~February 2009.~~2010.

Gross Profit

Gross ~~profits~~profit represents net sales less cost of ~~goods sold.~~sales. Gross profit for the three month period ended March 31, ~~2010~~2011 was ~~$1,391,360, an increase~~$983,828, a decrease of ~~$550,341,~~$407,532, or ~~65%~~29%, from ~~$841,019~~$1,391,360 for the same period in ~~2009.~~2010. As a percentage of net sales, gross profit was ~~30%~~20% for the three month period ended March 31, ~~2010,~~2011, compared to ~~38%~~30% for the same period ~~last year. This was primarily due to increase of purchase of price~~ of the prior year. The decrease in our gross profit was due primarily to the increase in cost of raw materials ~~associated with 2010 sales, which price increase was caused by~~ ~~fluctuations in the price~~as a percentage of ~~oil.~~ net sales.

Selling, ~~Marketing~~General and Administrative Expenses

Selling expenses include salaries, advertising expenses, ~~cost of manufacturing,~~ rent, and all expenses ~~dirirectly~~directly related to ~~producing and~~ selling product. General expenses include general operating expenses that are directly related to the general operation of the ~~company but excluding selling and administrative expenses.~~Company. Administrative ~~expense includes~~expenses include executive salaries and other expenses related to the overall administration of the company.

Selling, general and administrative expenses for the three month period ended March 31, ~~2010~~2011 were ~~$407,461,~~$989,685, an increase of ~~$131,935~~$432,224, or 78%, compared to ~~$275,526~~$557,461 for the same period ~~1n 2009.~~in 2010. The increase ~~was~~ primarily ~~due~~consisted of $132,120 in legal counsel and documentation fees related to ~~increase~~the Company’s intended initial public offering, investor relation consulting fees of ~~$25,524~~$70,500, fees paid to our auditors of $89,545, and $151,329 in ~~export delivery expenses and~~ ~~$83,286~~ ~~additional professional expenses incurred~~stock-based employee compensation, offset by a decrease in ~~connection with the company’s planned financing.~~

administrative expenses.

Other Income and Expenses

Other expenses ~~solely consist~~primarily consisted of interest ~~expense.~~expense while other income was primarily interest income and change in fair value of warrants.

Interest expense for the three month period ended March 31, ~~2010~~2011 was ~~$390,355~~$326,235 compared to ~~$76,286~~$390,355 for the same period in 2009. Interest expense as a percentage of sales ~~increased~~decreased to 8%7% for the three month period ended March 31, ~~2010~~2011, from 3%8% for the same period of ~~last~~the prior year. The ~~increase in interest expense was principally due to interest on~~extension of the maturity date of the convertible notes inhelped reduce interest expense by decreasing accretion of the ~~aggregate~~notes discount to the principal amount at the notes maturity date.

At March 31, 2011, under the requirements of ~~$4,140,000. We accreted non-cash related interest~~FASB ASC 815, management re-measured the fair value of the warrants issued in connection with the sale of convertible notes to bridge loan creditors on February 12, 2010. This re-measurement resulted in an increase of the fair value of the warrants from December 31, 2010 and accordingly an increase of the value of the warrants liabilities and reported as other expense in ~~the~~ amount of ~~$304,950. Excluding the accretion of interest, our interest expense for this three-month period was the same as for the same period in 2009.~~$44,276.

~~Net~~

Income Tax

~~Net~~USA

BVI

Hong Hui is incorporated under the International Business Companies Act of the British Virgin Islands and accordingly is exempt from payment of British Virgin Island’s income taxes.

PRC

Pursuant to the PRC Income Tax Laws, the prevailing statutory rate of enterprise income tax is 25% for Foshan SLP. For 2008 and 2009, Foshan SLP enjoyed a tax free holiday for two years. From January 2010 onwards, Foshan SLP is taxed at 25% of net income except for the 2010 and 2011 years where there is a 50% discount on income tax.

The current year tax provision was $3,398 for the three months ended March 31, 2011. The Company has recorded zero deferred tax assets or liabilities as of March 31, 2011 and September 30, 2010 ~~increased by $105,125,~~net of tax allowance because all other significant difference in tax basis and financial statement amounts are permanent differences. Valuation allowance is applied to deferred tax assets derived from immaterial temporary difference in tax and financial basis financial statements.

Net (Loss) Income

Our operations resulted in net loss for the three months ended March 31, 2011 in amount of $372,108, compared with a net income of ~~$489,207~~$444,332 for the three ~~month period~~months ended March 31, ~~2009~~2010. The net loss was attributable to ~~net income~~a combination of ~~$594,332. The increase was largely due to an increase~~declining gross margin, high general and administrative expenses and high finance cost in ~~net sales due to~~connection with the ~~sales generated from new needle-punch products.~~Company’s intended initial public offering and bridge financing.

Six Month Period Ended March 31, ~~2010~~2011 compared to Six Month Period Ended March 31, ~~2009~~2010

Six months ended March 31
2010 2009
Amount % Amount %
Sales 9,847,025 100 % 4,540,833 100 %
Cost of Sales 6,843,833 70 % 2,906,402 64 %
Gross Profit 3,003,192 30 % 1,634,431 36 %
SG&A expense 662,138 7 % 758,442 17 %
Operating Income 2,341,054 24 % 875,989 19 %
Interest income 517 0 % - 0 %
Interest Expenses (452,387 ) 5 % (160,506 ) 4 %
Gain on disposal of fixed assets 496 0 % 16,263 0 %
Net Income before taxes 1,889,680 19 % 731,746 16 %
Net Income 1,889,680 19 % 731,746 16 %

	Six Months Ended
	March 31
	2011					2010
Net Sales	$	10,676,569		100	%	$	9,847,025		100	%
Cost of Sales		8,135,330		76	%		6,843,833		70	%
Gross Profit		2,541,239		24	%		3,003,192		30	%
Selling, General and Administration expenses		1,802,321		17	%		812,138		8	%
Income from Operations		738,918		7	%		2,191,054		22	%

Other income (expense)
Interest Income		12,988		0	%		517		0	%
Interest Expense		(1,103,932	)	-10	%		(452,387	)	-5	%
Gain (Loss) from Disposal of Fixed Assets		(23,575	)	0	%		496		0	%
Government subsidy		6,133		-			-		-
Changes in Fair Value of Warrants		146,724		1	%		-		0	%
Total other income (expenses)		(961,662	)	-9	%		(451,374	)	-5	%
Income (Loss) before Income Taxes		(222,744	)	-2	%		1,739,680		18	%
Income tax provision		92,001					-
Net Income (Loss)	$	(314,745	)	-3	%	$	1,739,680		18	%

Net Sales

~~Net sales revenue consists of revenue from sales of needle punched non woven fabric and thermal calendared product.~~ Net sales for the six month period ended March 31, ~~2010~~2011 were ~~$9.85 million,~~$10,676,569, an increase of ~~$5.30 million~~$829,544 or ~~116 %,~~8%, from ~~$4.55 million~~$9,847,025 for the same period of prior year. ~~In February 2009, we installed a new production line~~Sales of thermal calendared products for the six month period ended March 31, 2011 were $6,202,228, an increase of $642,863 compared to ~~manufacture needle punched non woven fabric.~~$5,559,365 for the same period of the prior year. Sales of needle-punched products for the six month period ended March 31, ~~2010~~2011 were $~~4,300,022~~$4,474,341 compared to ~~$220,718~~$4,300,022 for the same period of the prior year. ~~In addition,~~Appreciation of Renminbi, our transaction currency, against the US dollars, contributed 3% of the increase in net sales revenue for the six months ended March 31, 2011.

Cost of ~~therm~~al ~~calendared materials~~Sales

Cost of sales for the six month period ended March 31, ~~2010 were $5,559,365,~~ as2011 was $8,135,330, an increase of $~~1,228,361~~ ~~compared to~~ ~~$4,331,204~~ ~~for the same period of the prior year.~~

~~Cost of Goods Sold~~

~~Cost of goods sold principally consists of the cost of raw materials, labor, and manufacturing overhead expenses.~~

~~Cost of goods sold for the six month period ended March 31, 2010 was $6,843,833, an increased $3,937,431,~~$1,291,497, or ~~135%~~19%, from ~~$2,906,402~~$6,843,833 for the same period of the prior year. As a percentage of net sales, cost of ~~good sold~~ sales was ~~70 %~~76% for the six month period ended March 31, ~~2001~~2011 compared to 64%70% for the same period in 2009.

Raw material ~~expenses~~costs increased to ~~56%~~64% of the sales for the six month period ended March 31, ~~2010,~~2011, compared to ~~40%~~56% of sales for the same period in ~~2009,~~2010, reflecting ~~a mix of~~ more expensive raw materials associated with ~~2010~~2011 sales. ~~98.7%~~Over 98% of our raw materials ~~consists~~consist of polyester, the price of which fluctuates with the price of oil.

Labor costs were 1% of net sales for the six month period ended March 31, 2011, and remained the same percentage when compared to the percentage for the same period in 2010.

Overhead expenses were 6%14% of net sales for the six month period ended March 31, 2011, compared to 12% of net sales for the same period last year due to increase in utility cost and depreciation expense.

Gross Profit

Gross profit for the six month period ended March 31, 2011 was $2,541,239, a decrease of $461,953, or 15%, from $3,003,192 for the same period of the prior year. As a percentage of net sales, gross profit was 24% for the six month period ended March 31, 2010, compared to ~~2% for the same period in 2009.~~ ~~Beginning in February 2009 we hired 17 additional employees to work the new production line. Labor costs also increased due to increased demand for labor.~~

Overhead expenses were 12% of net sales for the six month period ended March 31, 2010, compared to 19% of net sales for the same period last year due to the increase of manufacturing capacity of the Company.

~~Gross Profit~~

Gross profits represents net sales less cost of goods sold. Gross profit for the six month period ended March 31, 2010 was $3,003,192 and increase of $1,368,761 or 83%, from $1,634,431 for the same period last year. As a percentage of net sales, gross profit was 30% ~~for the six month period ended March 31, 2010, compared to 36%~~ for the same period last year. This decrease was primarily due to ~~the~~ increase in the purchase price of the raw materials associated with ~~2010~~2011 sales. ~~This was primarily due to increase of purchase of price of the raw materials associated with 2010 sales, which price increase was caused by fluctuations in the price of oil.~~

Selling, ~~Marketing~~General and Administrative Expenses

Selling, general and administrative expenses for the six month period ended March 31, ~~2010~~2011 were ~~$662,138,~~$1,802,321, an ~~decrease~~increase of ~~$96,304~~$990,183, or 122%, compared to ~~$758,442~~$812,138 for the same period ~~last~~of the prior year. This isincrease was mainly due to ~~decreased stamp duty $18,394 from $21,301~~an increase in ~~2009 compare to $2,907 for the same period this year. Office~~audit fees of $115,824, legal counsel fees of $177,096, investor relation consulting fees of $141,000, $350,398 in equity-based compensation expense, ~~also decreased $77,327 from $147,221 in 2009 compared to $69,894 for the same period 2010.~~$18,449 SEC filing related expenses, and foreign currency exchange loss of $103,029.

Other Expenses

~~Other expenses consist solely of interest expenses.~~

Interest expense for the six month period ended March 31, 2010 was ~~$452,387~~$1,103,932 compared to ~~$160,506~~$452,387 for the same period ~~last~~of the prior year. Interest expense as a percentage of net sales increased to 5%10% for the six month period ended March 31, ~~2010~~2011 from 4%5% for the same period of ~~last~~the prior year. The increase in interest expense was principally due to record $4,140,000 of convertible notes. We accreted non-cash related interest expense, in the amount of $304,950. Excluding accretion on non-cash interest expense, interest expense for this six month period remained the same as last year, and, as a percentage of net sales, decreased to 1% from 4%.

~~Net Income~~

~~Net income~~ for the six months ended March 31, ~~2010 increased by $1,157,934 from~~2011 was principally due to the amortization of the convertible note discount.

Net (Loss) Income

Our operations resulted in net loss for the six months ended March 31, 2011 in amount of $314,745, compared with a net income of ~~$731,746~~$1,739,680 for the ~~same period~~six months ended March 31, 2010. The net loss was attributable to a combination of declining gross margin, high general and administrative expenses and high finance cost in ~~2009 to net income of $1,889,680. The increase was mainly due to~~connection with the ~~increase in sales due to the sales generated from new needle-punch products.~~Company’s intended initial public offering and bridge borrowings.

Liquidity and Capital Resources

The following table sets forth a summary of our net cash flow information for the periods indicated:

	Three Month Periods Ended December 31,
	2011			2010
	(Consolidated)			(Consolidated)
Net cash provided by (used in) operating activities	$	(126,527	)	$	1,553,423
Net cash (used in) investing activities	$	(1,250,614	)	$	(1,389,582	)
Net cash provided by (used in) financing activities	$	(362,554	)	$	2,636,263
Effect of currency exchange rate	$	(6,659	)	$	(5,418	)
Net cash inflow (outflow)	$	(1,746,354	)	$	2,794,686

We finance our legacy business with cash ~~flows~~generated from operations and use short-term bank loans ~~and we use shareholders’ equity investment and retained earnings~~ to fund capital expenditures.

Working capital consists mainly of cash, accounts receivable, advances to suppliers and inventory. Cash, inventory and accounts receivable account for the majority of our working capital.

Our working capital requirements may be influenced by many factors, including cash flow, competition, relationships with suppliers, and the availability of credit facilities and financing alternatives, none of which can be predicted with certainty.

Our investment in new production facilities to manufacture PPS filtration products consumed a large amount of the proceeds obtained from bank loans and the issuance of convertible notes. This capital expenditure to a large extent affected our liquidity.

The planned production of our new PPS products will require a large amount of working capital to purchase expensive raw materials from foreign suppliers. Our operating cash inflow will not be adequate to meet the new working capital needs. Therefore, we are actively seeking public and private financing to acquire additional capital in order to expand our business.

At March 31, ~~2010,~~2011, we had ~~several~~outstanding bank loans ~~for~~in the total amount of ~~$3.8~~$3.5 million ~~(RMB26~~(RMB 23 million) with ~~Agriculture~~Industrial and Commercial Bank of China, Foshan ~~Branch and these loans are~~branch office. The loan is repayable ~~in December 2010. We have the highest credit rating for that bank.~~on February 14, 2012.

On January 31, 2011, we entered into a note extension agreement with each holder (except for Lumen Capital LP who held a convertible note in the principal amount of $100,000) of our outstanding convertible notes to extend the maturity date of the notes from February 12, ~~2010~~2011 to June 30, 2011. On February 11, 2011, we ~~completed a financing transaction~~repaid the note held by Lumen Capital. The proceeds received from the sale of the notes were invested in ~~which we raised gross proceeds of $4,140,000 through a private placement of convertible notes and warrants~~the manufacturing facility to ~~certain accredited investors.~~make our new products.

Cash Flow from Operating Activities

~~Six month period ended March 31, 2010 compared with six month period ended March 31, 2009~~

Net cash ~~proved by~~used in operating activities for the six months ended March 31, ~~2010~~2011 was ~~approximately $1.55 million,~~$126,527, compared to ~~a cash flow of $3.59~~$1.5 million provided by operating activities for the same period of the prior year. The operating cash outflow resulted primarily from a decrease ~~was due primarily to~~in net income and an increase in ~~Non-cash interest charges, decrease~~accounts receivable, advances to suppliers, and inventory, which were offset by an increase in ~~advance to suppliers.~~accounts payable and accrued liabilities.

Cash inFlow from Investing Activities

~~Six month period ended March 31, 2010 compared with six month period ended March 31, 2009~~

Net cash ~~provided~~used by investing activities for the six months ended March 31, ~~2010 was negative cash flow $1.39~~2011was $1.25 million, compared to ~~a negative cash flow of $4.93~~$1.4 million used for the same period of the prior year. The ~~increased~~ cash used ~~from~~by investing activities ~~because there were no large capital expenditures~~ during the first six months of the year. Only deposits were made a new product assembly line project. The net cash used in investing activities for the same period of last year was due to the deposits for purchases of equipment and expenses relating to outfitting our facilities.

~~We satisfied this cash expenditure with cash reserves and cash generated from 2009 and 2010 operations.~~

~~Cash in Financing Activities~~

~~Six month period ended March 31, 2010 compared with six month period ended March 31, 2009~~

~~Net cash provided by financing activities for~~ the six month period ended March 31, ~~2010~~2011 was ~~approximately $2.64~~primarily for the capital project to build up a new PPS manufacturing facility.

Cash Flow from Financing Activities

Net cash used in financing activities for the six months ended March 31, 2011was $0.36 million, compared to ~~$0.19~~$2.64 million of net cash provided by financing activities for the same period of the prior year. ~~The increase was~~During the ~~result of cash received from the sale of the convertible notes.~~

~~Loans~~

~~The balance of our outstanding short-term bank loans on~~six months ended March 31, ~~2010~~2011, the Company repaid more than borrowed from banks. The new loan obtained from Industrial and Commercial Bank of China was ~~approximately $3.8 million, compared with $4.6 million on March 31, 2009~~

~~On February 12, 2010, immediately following~~mainly used to pay off the ~~reverse merger, we entered into a note purchase agreement with certain accredited investors for the sale~~loan from Agriculture Bank of convertible notes in the aggregate principal amount of $4,140,000 and warrants (which are exercisable only in certain circumstances), with net proceeds for $3.4 million after finance costs. The notes require quarterly interest payments at a rate of 10% per annum and interest for six month in amount of $204,464 to be held in an escrow account.

~~The warrants become void if the notes automatically convert into common stock.~~

The warrants are exercisable at any time during a five-year period commencing on the closing of a “financing,” which means the first sale (or series of related sales) by us of stock (or debt or equity securities convertible into stock), in a capital raising transaction, occurring after the maturity date (or the date the notes become due pursuant to a default, if earlier) with aggregate gross proceeds of at least $20,000,000. The warrants cannot be exercised if no financing is consummated within the five-year period after the issue date.China.

Future Cash Commitments

We have an ambitious ~~capital investment plans~~business expansion plan for our PPS products. The PPS projects ~~in 2010~~require significant capital expenditures. We financed the capital expenditures with short-term loans from banks and ~~which~~intended public equity offerings to raise additional capital to fund our capital projects. In addition, the planned launch of sales of PPS products will require a significant ~~investment capital. This demand for investment~~amount of working capital to purchase expensive raw materials. The new need of additional working capital will be met ~~by the proceeds from the February~~through private ~~placement,~~ and ~~by outside financing (including the~~ public ~~offering) that we intend to raise as needed to continue our expansion.~~equity financing.

Critical Accounting Policies and Estimates

~~Management's~~Management’s discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See Note 23 to our consolidated financial statements “Summary of Significant Accounting Policies.” We believe that the following paragraphs reflect the more critical accounting policies that currently affect our financial condition and results of operations:

Method of Accounting

We maintain our general ledger and journals with the accrual method of accounting for financial reporting purposes. Accounting policies adopted by us conform to generally accepted accounting principles in the United States and have been consistently applied in the presentation of financial statements, which are compiled on the accrual basis of accounting.

Use of estimates

The preparation of the financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates.

Economic and political risks

Our operations are conducted in the PRC. Accordingly, our business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.

Our 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 environment and foreign currency exchange. Our results may be adversely affected by changes in political and social conditions in the PRC and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.

Revenue recognition

Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, and the seller’s price to the buyer is fixed or determinable and collectible.

Land use rights

Land use rights are stated at cost less accumulated amortization. Amortization is provided over ~~the respective useful lives,~~a lease term of 50 years using the straight-line method. ~~Estimated useful lives range from 20 to 50 years.~~

Property, plant and equipment

Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of plant and equipment are as follows:

Buildings			~~15-35~~20 years
Machinery and equipment			10 years
Office equipment			~~6-10~~5 years
Motor vehicles			~~6-8~~10 years
~~Other assets~~			~~6-10 years~~

The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.

Accounting for the Impairment of Long-Lived Assets

The long-lived assets held and used by us are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes. Determination of recoverability of assets to be held and used is by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the assets.

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 assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonable likely to have a current or future effect on our financial condition.

2623

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

~~Not Applicable.~~Increases in the price of crude oil have a negative impact on the cost of our raw materials. Given the recent rise in the price of crude oil and the fact that the global economy is recovering, we expect that the price of our raw materials will stay at relatively high levels due to the relatively high price of crude oil which will adversely affect our gross margin for our PET products as our ability to pass on the increased material costs to customers is limited.

During 2010, all of our raw materials were purchased from suppliers located in the PRC. Because the raw materials for our new PPS products are expected to be sourced from the United States and Japan, we anticipate that, after introduction of our PPS products, a significant amount of our raw materials will be purchased from suppliers in the United States and Japan through their distributors in China. Accordingly, changes in the value of the RMB relative to the dollar and yen will affect our production costs and gross profit in 2011. However, we believe the RMB will continue to appreciate against the dollar based on the increasing pressure from the US government and so the impact of foreign currency conversion will be favorable to us.

ITEM 4.

CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures.

We maintain “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that ~~would be~~is required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15 under the Exchange Act, our management, including Mr. Jie Li, our Chief Executive Officer and ~~Ms. Sabrina Liang,~~Mr. Eric Gan our ~~Controller,~~Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, ~~2010.~~2011. Based on that evaluation, Mr. ~~Lie~~Li and ~~Ms. Liang~~Mr. Gan concluded that as of March 31, ~~2010,~~2011, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were not effective in that certain “significant deficiencies” existed related to (i) the U.S. GAAP expertise of our internal accounting staff, and (ii) our internal audit function.

C~~hanges~~Changes in Internal Control over Financial Reporting.

Under the supervision and with the participation of our management, including our chief executive officer and ~~controller,~~our chief financial officer, we identified a number of “significant deficiencies” in the process of preparing our financial statements for the quarter ended March 31, ~~2010~~2011 as described above.

During the quarter ended March 31, 2010, we began to take certain remedial measures as described below that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Because our current accounting department is relatively new to U.S. GAAP and the related internal control procedures required of U.S. public companies, our management has determined that they require additional training and assistance in U.S. GAAP ~~matters.~~matters and the SEC regulations. Management has determined that our internal audit function is also significantly deficient due to insufficient qualified resources to perform internal audit functions.

In order to correct the foregoing significant deficiencies, we ~~are taking~~have taken the following remediation measures:

We ~~are arranging~~have arranged for necessary training for our accounting department staff;

We plan to engage external professional accounting orand consultancy firms to assist us in the preparation of the US GAAP accounts; and

~~We do not currently have a chief financial officer but are currently searching for a qualified candidiate.~~ We remain committed to the establishment of effective internal audit functions; however, due to the scarcity of qualified candidates with extensive experience in U.S. GAAP reporting and accounting in the region, we were not able to hire sufficient internal audit resources before the end of our reporting period. However, we will increase our search for qualified candidates with assistance from recruiters and through referrals;

In addition, we have allocated significant financial and human resources to strengthen the internal control structure and we have been actively working with external consultants to assess our data collection, financial reporting, and control procedures and to strengthen our internal controls over financial reporting.functions.

We believe that the foregoing steps will remediate the significant deficiencies identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate.

2824

PART II

OTHER INFORMATION

~~ITEM 1.~~

~~LEGAL PROCEEDINGS.~~

~~We are not aware of any legal proceedings or claims that we expect will have a material adverse affect on our business, financial condition or operating results.~~

ITEM 6.

EXHIBITS.

The following exhibits are filed as part of this report or incorporated by reference:

Exhibit No.		Description

31.1		Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of Principal Executive Officer and Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

2925

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

~~Dated: May 26, 2010~~

	CHINA SLP FILTRATION TECHNOLOGY, INC.

Dated: May 18, 2011	By:	/s/ Jie Li
		Jie Li
		Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ ~~Jie Li~~Eric Gan
		~~Jie Li~~Eric Gan
		Chief ~~Executive~~Financial Officer
		~~(Principal Executive Officer)~~

	~~By:~~	~~/s/ Sabrina Liang~~
		~~Sabrina Liang~~
		~~Controller~~
		(Principal Financial and Accounting Officer)

3026

EXHIBIT INDEX

Exhibit No.		Description

31.1		Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certifications of Principal Executive Officer and Principal Accounting Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

3127

Delaware		~~90-0475058~~84-1465393
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

Large Accelerated Filer ¨	Accelerated Filer ¨
Non-Accelerated Filer ¨(Do not check if a smaller reporting company)	Smaller reporting company x

Class of Securities		Shares Outstanding
Common Stock, $0.001 par value		~~15,235,714~~15,265,714

	Page

Unaudited Condensed Consolidated Balance Sheets	4

Unaudited Condensed Consolidated Statements of Operations and Comprehensive ~~Loss~~Income (Loss)	5

Unaudited Condensed Consolidated Statements of Cash Flows	6

~~Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity~~	7

Notes to Unaudited Consolidated Financial Statements	87

	March 31,		September 30,
	2011		2010
	(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	3,548,947	$	5,295,301
Accounts receivable - Net		3,206,644		2,207,073
Advance to suppliers		461,237		-
Inventory		2,073,068		1,564,537
Prepaid taxes		472,665		-
Prepaid expenses and other current assets		830,357		585,385
Total Current Assets		10,592,918		9,652,296

Deposits		8,061		4,906,370
Property and equipment - Net		16,790,642		10,961,234
Receivable from related party		36,777		-
Land use rights - Net		540,524		535,480
Total Assets	$	27,968,922	$	26,055,380

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Short-term loan	$	3,511,397	$	3,796,053
Accounts payable and accrued liabilities		2,016,884		742,384
Customers’ deposits		158,710		286,700
Other payable - related party		164,134		160,673
Taxes payable		58,623		31,406
Warrants liabilities		592,276		739,000
Convertible notes payable, net of discount		3,887,453		3,225,007
Total Current Liabilities		10,389,477		8,981,223

Total Liabilities		10,389,477		8,981,223

Stockholders’ Equity
Preferred stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued and outstanding		-		-
Common stock, $0.001 par value, 200,000,000 shares authorized, 15,265,714 shares issued and outstanding at March 31, 2011 and September 30, 2010		15,266		15,266
Additional paid-in capital		8,726,258		8,375,860
Retained earnings		6,406,864		6,721,609
Accumulated other comprehensive income		2,431,057		1,961,422
Total Stockholders’ Equity		17,579,445		17,074,157

Total Liabilities and Stockholders’ Equity	$	27,968,922	$	26,055,380

PART I
FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS.	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	417
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	1624
ITEM 4.	CONTROLS AND PROCEDURES.	1624

PART II
OTHER INFORMATION

ITEM 1.	~~LEGAL PROCEEDINGS.~~	19
~~ITEM~~ 6.	EXHIBITS.	1925

	March 31,
	2010		September 30,
	(Unaudited)		2009
ASSETS

Current Assets
Cash and cash equivalents	$	6,092,334	$	3,297,648
Accounts receivable - Net		1,914,786		1,424,835
Advance to suppliers		1,341,121		685,551
Inventory		1,022,404		1,197,289
Prepaid expenses and other current assets		189,535		45,656
Total Current Assets		10,560,180		6,650,979

Deposits		1,946,280		-
Property and equipment - Net		10,130,508		10,711,865
Receivable from related party		213,035		773,672
Land use rights - Net		530,364		537,350
Total Assets	$	23,380,367	$	18,673,866

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short term loan	$	3,803,327	$	4,578,409
Accounts payable and accrued liabilities		371,247		410,114
Client's deposits		-		75,176
Taxes payable		17,154		726
Warrants liabilities		1,052,000
Convertible notes payable $4,140,000, net of discount -$2,134,793		2,005,207		-

Total Current Liabilities		7,248,935		5,064,425

Total Liabilities		7,248,935		5,064,425
Stockholder's Equity

Common stock, $0.001 par value, 40,000,000 shares authorized, 15,235,714 and 14,510,214 shares issued and outstanding at March 31, 2010 and September 30, 2009		15,236		14,510
Additional paid-in Capital		8,205,582		7,548,752
Retained earnings		6,390,212		4,500,532
Accumulated other comprehensive income		1,520,402		1,545,647
Total Stockholder's Equity		16,131,432		13,609,441

Total Liabilities and Stockholder's Equity	$	23,380,367	$	18,673,866

	Six Months Ended March 31
	2011			2010

Cash Flow from Operating Activities:
Net income (loss)	$	(314,745	)	$	1,739,680
Adjustments to reconcile net income (loss) to net cash flow provided by (used in) operating activities:
Depreciation		607,464			569,358
Amortization		6,420			6,217
Bad debt allowance		(7,425	)		-
Non-cash interest charges		762,447			304,950
Equity-based compensation expense		350,398			-
Change in warrants valuation		(146,724	)		-
Loss (gain) from disposal of fixed assets		23,576			(496	)

Change in operating assets and liabilities:
Accounts receivable		(934,606	)		(491,997	)
Advance to suppliers		(456,388	)		(656,586	)
Inventory		(469,846	)		173,173
Prepaid taxes		(467,695	)		-
Prepaid expenses and other current assets		(229,922	)		(143,956	)
Accounts payable & accrued liabilities		1,256,439			111,719
Customers deposits		(132,754	)		(75,069	)
Taxes payable		26,834			16,430
Net cash provided by (used in) operating activities		(126,527	)		1,553,423

Cash Flow from Investing Activities:
Addition-property and equipment, land use right		(1,218,056	)		(3,333	)
Deposits for purchase of equipment		-			(1,946,280	)
Proceeds from disposal of fixed assets		3,832			496
Proceeds from related party		-			559,535
Advance to related party		(36,390	)		-
Net cash (used in) provided by investing activities		(1,250,614	)		(1,389,582	)

Cash Flow from Financing Activities:
Repayment of loans		(7,764,702	)		(768,535	)
Proceeds from loans		7,402,148			3,404,798
Net cash provided by (used) in financing activities		(362,554	)		2,636,263

Effects of Exchange Rates on Cash		(6,659	)		(5,418	)
Net increase (decrease) in cash and cash equivalents		(1,746,354	)		2,794,686
Cash and cash equivalents, beginning of year		5,295,301			3,297,648

Cash and cash equivalents, end of year	$	3,548,947		$	6,092,334

Supplemental information of cash flows
Cash paid for interest	$	335,480		$	85,329
Cash paid for income taxes	$	52,166			-

																Accumulated
											Additional					Other			Total
	Common Stock						Preferred Stock				Paid-in			Retained		Comprehensive			Stockholders'
	Shares			Amount			Shares		Amount		Capital			Earnings (Deficit)		Income			Equity

BALANCE, September 30, 2008		14,510,204		$	14,510			-	$	-	$	7,548,752		$	2,054,880	$	1,602,725		$	11,220,867

Net Income		-			-			-		-		-			2,445,652		-			2,445,652

Currency translation adjustment		-			-			-		-					-		(57,078	)		(57,078	)

BALANCE, September 30, 2009		14,510,204		$	14,510			-	$	-	$	7,548,752		$	4,500,532	$	1,545,647		$	13,609,441

Shares effectively issued to former shareholders - 2/12/2010		2,600,000			2,600							(2,600	)							-

Cancellation of stock in recapitalization		(2,528,000	)		(2,528	)						2,528								-
																				-
Shares issued to placement agents in conjuction with convertible note		653,510			654			-		-		656,902					-			657,556

Net Income		-			-			-		-		-			1,889,680		(25,245	)		1,864,435

Currency translation adjustment		-			-			-		-		-			-		-			-

BALANCE, March 31, 2010		15,235,714		$	15,236			-	$	-	$	8,205,582		$	6,390,212	$	1,520,402		$	16,131,432

	March 31, 2010
Customers:	Amount		Percentage
Wu jiang jingshan	$	338,704		17	%
Dalian Ji er		440,766		23	%
Shang hai run dong		239,591		12	%
San Ya		210,877		11	%

	September 30,2009
Customers:	Amount		Percentage
Wu jiang jingshan	$	434,556		30	%
Shen zhen Ya ming water		185,625		13	%
Xiantao ruixin		181,260		13	%

Building and plant	20 years
Machinery	10 years
Office equipment and other equipment	5 years
Vehicles	10 years

As of						March 31, 2010
			Accumulated			Net book
	Cost		depreciation			value
Building and plant	$	2,958,252	$	592,938		$	2,365,314
Machinery		11,158,514		3,585,441	��	$	7,573,073
Office equipment and other equipment		770,547		669,760		$	100,787
Vehicles		139,553		48,219		$	91,334
	$	15,026,866	$	4,896,358		$	10,130,508

As of					September 30, 2009
			Accumulated		Net book
	Cost		depreciation		value
Building and plant	$	2,958,978	$	526,654	$	2,432,324
Machinery		11,174,517		3,096,112	$	8,078,405
Office equipment and other equipment		771,829		668,448	$	103,381
Vehicles		139,753		41,998	$	97,755
	$	15,045,077	$	4,333,212	$	10,711,865

As of	March 31 ,2010			September 30 ,2009
	USD			USD
Cost	$	621,817		$	622,578
Less: accumulated amortization		(91,453	)		(85,228	)
	$	530,364		$	537,350

Amount due from related parties	March 31,		September 30,
	2010		2009
Advance to former shareholders (a)	$	212,329	$	259,538
Advance to current shareholders (b)		706		1,413
Advance to director (c)		-		73,246
Subtotal		213,035		334,197
Receivable from related companies (d)		-		439,475
	$	213,035	$	773,672

Gross proceeds	$	4,140,000
Less:
Commission paid to placement agent		404,000
Legal fee		326,187
Net proceeds	$	3,409,813

Net proceeds were presented as follows:
Recorded warrants as derivative liability	$	1,052,000
Allocated remaining proceeds to :
Common stock issued to placement agents		657,556
Convertible Note		1,700,257

Warrants	$	1,052,000
Stock issued to placement agent		657,556
Cash paid for commission and legal fees		730,187
	$	2,439,743

	Three Months ended March 31, 2010		Three Months ended March 31, 2009
Numerator for basic and diluted EPS
- Net income from continuing operations		594,332		489,207
Denominator for basic and diluted EPS
Weighted average shares of common stock outstanding shares – basic		14,897,143		14,510,204
Weighted average shares of common stock outstanding shares – diluted		15,798,367		14,510,204
EPS– basic and diluted		0.04		0.03

	Six Months ended March 31, 2010		Six Months ended March 31, 2009
Numerator for basic and diluted EPS
- Net income from continuing operations		1,889,680		731,746
Denominator for basic and diluted EPS
Weighted average shares of common stock outstanding shares – basic		14,701,547		14,510,204
Weighted average shares of common stock outstanding shares – diluted		15,147,208		14,510,204
EPS– basic and diluted		0.13		0.05

February 2010 Financing Warrants - Valuation Inputs
	February 12 and March 31,
Attribute	2010
Stock Price	$	2.45
Risk Free Interest Rate		2.25	%
Volatility		90.00	%
Exercise Price	$	2.45
Dividend Yield		0	%
Contractual Life (Years)		1

	Three months ended March 31
	2010						2009
	Amount			%			Amount			%
Sales		4,628,671			100	%		2,214,940			100	%
Cost of Sales		3,237,311			70	%		1,373,921			62	%
Gross Profit		1,391,360			30	%		841,019			38	%
SG&A expense		407,461			9	%		275,526			12	%
Operating Income		983,899			21	%		565,493			26	%
Interest Income		292			0	%		-			0	%
Interest Expenses		(390,355	)		8	%		(76,286	)		3	%
Gain on disposal of fixed assets		496			0	%		0			0	%
Net Income before taxes		594,332			13	%		489,207			22	%
Net Income		594,332			13	%		489,207			22	%