China Carbon Graphite (CHGI) 10-Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009

o TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE EXCHANGE ACT

For the transition period from to 

Commission File Number:  333-114564

CHINA CARBON GRAPHITE GROUP, INC.

 (Name of Registrant as specified in its charter)

Nevada	98-0550699
(State or other jurisdiction of incorporation of organization)	(I.R.S. Employer Identification No.)

China Carbon Graphite Group, Inc.

c/o Xinghe Yongle Carbon Co., Ltd.

787 Xicheng Wai

Chengguantown

Xinghe County

Inner Mongolia, China

 (Address of principal executive office)

(86) 474-7209723

 (Registrant’s telephone number)

Copies to:

Asher S. Levitsky PC

Sichenzia Ross Friedman Ference LLP

61 Broadway, 32nd Floor

New York, New York 10006

Phone: (212) 981-6767

Fax: (212) 930 - 9725

E-mail: alevitsky@srff.com

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every

Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer (Do not check if smaller reporting company)	o	Smaller reporting company	þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No þ

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.  14,876,411 shares of common stock are issued and outstanding as of August 14th, 2009.

CHINA CARBON GRAPHITE GROUP, INC. AND SUBSIDIARIES

FORM 10-Q

June 30, 2009

TABLE OF CONTENTS

		Page No.
PART I. - FINANCIAL INFORMATION
Item 1.	Financial Statements:	1
	Condensed Consolidated Balance Sheets at June 30, 2009 (unaudited) and December 31, 2008	1
	Condensed Consolidated Statements of Income and Comprehensive Income for the six months ended June 30, 2009 and 2008 (unaudited)	2
	Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended June 30, 2009 and 2008 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008 (unaudited)	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	18
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	28
Item 4	Controls and Procedures.	28
PART II - OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	29
Item 6.	Exhibits.	30

FORWARD LOOKING STATEMENTS

This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.

Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and in other reports that we file with the SEC.   You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

PART 1 - FINANCIAL INFORMATION

Item 1.  Financial Statements.

China Carbon Graphite Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
	June 30, 2009		December 31, 2008
	(Unaudited)		(Audited)
ASSETS
Current Assets
Cash and cash equivalents	$	6,325,505	$	51,799
Trade accounts receivable, net		4,766,036		4,224,410
Notes receivable		121,260		27,720
Other receivables		867,137		150,694
Advance to related party		-		290,409
Advance to suppliers, net		1,296,674		1,017,088
Inventories		16,382,381		15,889,549
Prepaid expenses		10,725		-
Total current assets		29,769,718		21,651,669
Property and equipment, net		22,026,082		21,003,607
Construction in progress		3,732,995		2,029,777
Land use rights, net		3,571,104		3,604,324
	$	59,099,899	$	48,289,377
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses	$	1,808,430	$	1,253,265
Advance from customers		1,091,291		640,346
Trade notes payable		5,843,852		-
Short term bank loans		8,539,329		4,887,514
Long term bank loan - current portion		1,607,059		1,896,647
Taxes payable		7,867		362,298
Other payables		621,184		551,096
Total current liabilities		19,519,012		9,591,166
Long Term Liabilities
Long term bank loan - non-current portion		2,629,734		3,209,711
Other payable - non-current portion		275,198		-
Total long-term liabilities		2,904,932		3,209,711
Total liabilities	$	22,423,944	$	12,800,877
Contingencies and commitments (Note 15)
Stockholders' Equity
Convertible preferred stock, par value $0.001 per share,
authorized 20,000,000 shares, issued and outstanding 250,000 and
1,200,499 shares at June 30, 2009 and December 31, 2008, respectively	$	250	$	1,200
Common stock authorized 100,000,000 shares $0.001 par
value; issued and outstanding 13,988,911 and 12,218,412 shares
at June 30, 2009 and December 31, 2008, respectively		13,988		12,218
Additional paid-in capital		8,827,726		8,690,426
Accumulated other comprehensive income		5,039,858		4,991,113
Retained earnings		22,794,133		21,793,543
Total stockholders' equity		36,675,955		35,488,500
Total liabilities and stockholders' equity	$	59,099,899	$	48,289,377

The accompanying notes are an integral part of these financial statements

-1-

China Carbon Graphite Group, Inc and subsidiaries
Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)
	Six months ended June 30,
	2009			2008
Sales	$	6,551,162		$	13,651,779
Cost of Goods Sold		4,856,982			10,183,419
Gross Profit		1,694,180			3,468,360
Operating Expenses
Selling expenses		317,914			170,002
General and administrative		457,410			398,917
Depreciation and amortization		38,179			30,727
		813,503			599,646
Operating Income Before Other Income (Expense)
and Income Tax Expense		880,677			2,868,715
Other Income (Expense)
Other income		526,069			213,673
Other expenses		(1,461	)		(11,311	)
Interest income		94			417
Interest expense		(404,789	)		(269,557	)
		119,913			(66,779	)
Income Before Income Tax Expense		1,000,590			2,801,936
Income tax expense		-			-
Net income		1,000,590			2,801,936
Deemed preferred stock dividend		-			(854,300	)
Net income available to common shareholders		1,000,590			1,947,636
Comprehensive income
Net income		1,000,590			2,801,936
Other comprehensive income
Foreign currency translation gain		48,745			1,979,890
Total Comprehensive Income	$	1,049,335		$	4,781,826
Share data
Basic earnings per share	$	0.08		$	0.15
Diluted earnings per share	$	0.07		$	0.10
Weighted average common shares outstanding,
basic		13,279,617			13,040,061
Weighted average common shares outstanding,
diluted		14,044,160			19,444,924

The accompanying notes are an integral part of these financial statements

-2-

China Carbon Graphite Group, Inc and subsidiaries
Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)
	Three months ended June 30,
	2009			2008
Sales	$	3,657,515		$	7,923,777
Cost of Goods Sold		2,804,230			5,817,126
Gross Profit		853,285			2,106,652
Operating Expenses
Selling expenses		9,269			149,668
General and administrative		321,415			249,713
Depreciation and amortization		19,099			15,587
		349,783			414,968
Operating Income Before Other Income (Expense)
and Income Tax Expense		503,502			1,691,684
Other Income (Expense)
Other income		233,953			14,477
Other expenses		(1,461	)		(11,311	)
Interest income		-			239
Interest expense		(206,444	)		(136,334	)
		26,048			(132,930	)
Income Before Income Tax Expense		529,550			1,558,754
Income tax expense		-			-
Net income		529,550			1,558,754
Comprehensive income
Net income		529,550			1,558,754
Other comprehensive income
Foreign currency translation gain		3,831			727,747
Total Comprehensive Income	$	533,381		$	2,286,501
Share data
Basic earnings per share	$	0.04		$	0.12
Diluted earnings per share	$	0.04		$	0.08
Weighted average common shares outstanding,
basic		13,785,470			13,218,412
Weighted average common shares outstanding,
diluted		14,238,911			19,918,911

The accompanying notes are an integral part of these financial statements

-3-

China Carbon Graphite Group, Inc and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
	Six months ended June 30,
	2009			2008
Cash flows from operating activities
Net Income	$	1,000,590		$	2,801,935
Adjustments to reconcile net cash provided by
operating activities
Depreciation and amortization		673,508			633,447
Share based compensation		70,220			-
Change in operating assets and liabilities
Accounts receivable		(535,950	)		6,811
Notes receivable		(93,524	)		222,712
Other receivables		(716,403	)		303,122
Advance to suppliers		(278,255	)		(561,544	)
Inventories		(471,121	)		(2,122,854	)
Prepaid expenses		(10,725	)		-
Accounts payable and accrued expenses		553,844			209,444
Non-current accounts payable		275,263			-
Advance from customers		450,170			(618,078	)
Trade notes payable		5,845,219			-
Taxes payable		(355,011	)		(59,809	)
Other payables		69,348			518,884
Net cash provided by operating activities		6,477,173			1,334,070
Cash flows from investing activities
Acquisition of property and equipment		(1,629,192	)		(589,509	)
Construction in progress		(1,700,828	)		-
Net cash used in investing activities		(3,330,020	)		(589,509	)
Cash flows from financing activities
Issuance of common stock for cash		67,900			-
Repayment of bank loans		(2,345,394	)		(727,585	)
Proceeds from bank loans		5,114,566			-
Repayment from related party		290,876			57,220
Net cash provided by (used in) financing activities		3,127,948			(670,365	)
Effect of exchange rate fluctuation		(1,395	)		83,919
Net increase in cash		6,273,706			158,115
Cash and cash equivalents at beginning of period		51,799			4,497
Cash and cash equivalents at end of period	$	6,325,505		$	162,612
Supplemental disclosure of cash flow information
Interest paid	$	404,789		$	269,557
Income taxes paid	$	-		$	-
Non-cash financing and investing activities:
Deemed preferred stock dividend	$	-		$	854,300
Issuance of common stock for consulting fee	$	70,220		$	-

The accompanying notes are an integral part of these financial statements

-4-

China Carbon Graphite Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2009

1.  Organization and Business

China Carbon Graphite Group, Inc. (the “Company”), is a Nevada corporation, incorporated on February 13, 2003 under the name Achievers Magazine Inc.  The Company’s corporate name was changed to China Carbon Graphite Group, Inc. on January 30, 2008.

The Company is the sole stockholder of Talent International Investment Limited (“Talent”), a British Virgin Islands corporation, which is the sole stockholder of Xinghe Yongle Carbon Co., Ltd. (“Yongle”), a company organized under the laws of the People’s Republic of China (the “PRC”).

Yongle is a party to a series of contractual arrangements with Xinghe Xingyong Carbon Co., Ltd. (“Xingyong”), a corporation organized under the laws of the PRC.  These agreements give the Company the ability to operate and manage the business of Xingyong and to derive the profit (or sustain the loss) from Xingyong’s business. As a result, the operations of Xingyong are consolidated with those of the Company for financial reporting purposes. The relationship among the above companies as follows:

The Company manufactures graphite electrodes, fine grain graphite, high purity graphite and other carbon derived products.

Stock distribution

On January 22, 2008, the Company effected a 1.6-for-one stock distribution whereby each share of common stock became converted into 1.6 shares of common stock. All references to share and per share information in these financial statements reflect this stock distribution.

2.  Basis of Preparation of Financial Statements

Management acknowledges its responsibility for the preparation of the accompanying interim condensed consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its condensed consolidated financial position and the results of its operations for the interim period presented. These condensed consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company’s Form 10-K annual report for the year ended December 31, 2008. 

The accompanying unaudited condensed consolidated financial statements for China Carbon Graphite Group, Inc., its subsidiaries and variable interest entity, have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.

-5-

The Company maintains its books and accounting records in Renminbi (“RMB”), and its reporting currency is United States dollars.

The financial statements have been prepared in order to present the financial position and results of operations of the Company, its subsidiaries and Xingyong, which is an affiliated company whose financial condition is consolidated with the Company pursuant to FIN 46R, in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

Yongle is a party to a series of contractual arrangements with Xingyong. These agreements include a management agreement pursuant to which80% to 100% of Xingyong’s net income after deduction of necessary expenses, if any, is paid to Yongle and Yongle is responsible for paying Xingyong’s obligations incurred in connection with its business. For the years ended December 31, 2008 and 2007, Xingyong paid 100% of net income to Yongle.,Yongle manages and controls all of the funds of Xingyong. Yongle also has the right to purchase Xingyong’s equipment and patents and lease its manufacturing plants, land and remaining equipment. This agreement is designed so that Yongle can conduct its business in China. Pursuant to two other agreements, the sole stockholder of Xingyong, who was, at the time of the transaction, the Company’s chief executive officer, has pledged all of his equity in Xingyong as security for performance of Xingyong’s obligations to Yongle. As a result, Xingyong is considered a variable interest entity.

According to PRC rules and regulations, Talent is required to pay 20% of its capital investment in Yongle, or $800,000, within three months and the remaining 80%, or $3,200,000, within two years from the date of issuance of business license.  The business license was issued on September 13, 2007 and accordingly, Talent was required to pay $800,000 on or before December 12, 2007 and is required to pay $3,200,000 on or before September 12, 2009.  Talent has not paid the initial 20% or $800,000 nor applied for an extension of time to effect this payment.  However, the Government issued a new business license for Yongle expiring December 31, 2009.  Management assumes that the Government will take no action, and the investment can be paid, up on or before December 31, 2009, the expiration date of the new business license. 

On May 21, 2009 the Company's Board of Directors approved the reduction of Yongle's registered capital from $4,000,000 to $100,000 and has submitted the reduction to the PRC government for approval. These actions effectively reduce the intercompany investment obligations owed to Yongle from $4,000,000 to $100,000 and eliminate possible fines or penalties by the PRC business bureau that could result from the Company’s failure to pay the registered capital when required.  The Company expects to pay the $100,000 investment to Yongle in full before September 12, 2009.

3. Summary of Significant Accounting Policies

Use of estimates - The preparation of these financial statements in conformity with US GAAP requires management to make estimates and assumptions that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reported periods.

Significant estimates included values and lives assigned to acquired property, equipment and intangible assets, reserves for customer returns and allowances, uncollectible accounts receivable, slow moving, obsolete and/or damaged inventory and stock warrant valuation. Actual results may differ from these estimates.

Cash and cash equivalents - The Company considers all highly liquid debt instruments purchased with maturity period of three months or less to be cash equivalents. The carrying amounts reported in the accompanying balance sheet for cash and cash equivalents approximate their fair value. Most of the Company’s cash is held in bank accounts in the PRC and is not protected by FDIC insurance or any other similar insurance. The Company’s bank account in the US is protected by FDIC insurance

Inventory - Inventory is stated at the lower of cost or market. Cost is determined using the weighted average method. Market value represents the estimated selling price in the ordinary course of business less the estimated costs necessary to complete the sale.

The cost of inventories comprises all costs of purchases, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The costs of conversion of inventories include fixed and variable production overhead, taking into account the stage of completion.

Accounts receivable - Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An estimate for doubtful accounts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred.

Property and equipment - Property and equipment is stated at the historical cost, less accumulated depreciation. Land use rights are being amortized to expense on a straight line basis over the life of the rights. Depreciation on property, plant and equipment is provided using the straight-line method over the estimated useful lives of the assets for both financial and income tax reporting purposes as follows:

-6-

Buildings	25 - 40 years
Machinery and equipment	10 - 20 years
Motor vehicles	5 years

Expenditures for renewals and betterments were capitalized while repairs and maintenance costs are normally charged to the statement of operations in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalized as an additional cost of the asset.

Upon sale or disposal of an asset, the historical cost and related accumulated depreciation or amortization of such asset were removed from their respective accounts and any gain or loss is recorded in the statements of income.

The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on this assessment there was no impairment recorded during the six months ended at June 30, 2009 and 2008.

Construction in progress - Construction in progress represents the costs incurred in connection with the construction of buildings or additions to the Company’s plant facilities. No depreciation is provided for construction in progress until such time as the assets are completed and placed into service.

Land use rights - There is no private ownership of land in the PRC. The Company has acquired land use rights to a total of 2,356,209 square feet, on which a 290,626 square feet facility is located. The land use rights have terms of 50 years, with the land use right relating to 1,207,388 square feet expiring in 2050 and the land use right with respect to 1,148,821 square feet expiring in 2057. The cost of the land use rights is amortized over the 50-year term of the land use right. The Company evaluates the carrying value of intangible assets during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the intangible asset below its carrying amount.

Income recognition - Revenue is recognized in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition, which states that revenue should be recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the service has been rendered; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. The Company believes that these criteria are satisfied when the goods are shipped pursuant to a purchase order.

Interest income is recognized when earned.

Advertising - The Company expenses all advertising costs as incurred. There was no advertising expense for the six months ended June 30, 2009.

Shipping and handling costs - The Company follows Emerging Issues Task Force (“EITF”) No. 00-10, Accounting for Shipping and Handling Fees and Costs.  The Company does not charge its customers for shipping and handling. The Company classifies shipping and handling costs as part of the operating expenses. For the six months ended June 30, 2009 and 2008, shipping and handling costs were $308,737 and $152,476, respectively.

Segment reporting - Statement of Financial Accounting Standards No 131 (“SFAS 131”), “Disclosure about Segments of an Enterprise and Related Information,” requires use of the “management approach” model for segment reporting. Under this model, segment reporting is consistent with the manner that the Company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

The Company only sells carbon graphite products and sells only to Chinese distributors and end users and is in only one business segment.

Taxation - Taxation on profits earned in the PRC has been calculated on the estimated assessable profits for the year at the rates of taxation prevailing in the PRC where the Company operates after taking into effect the benefits from any special tax credits or “tax holidays” allowed in the county of operations.

-7-

The Company does not accrue United States income tax since it has no significant operating income in the United States. Its operating subsidiaries are organized and located in the PRC and do not conduct any business in the United States.

In 2006, the Financial Accounting Standards Board (FASB) issued FIN 48, which clarifies the application of SFAS 109 by defining a criterion that an individual income tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements and provides guidance on measurement, recognition, classification, accounting for interest and penalties, accounting in interim periods, disclosure and transition. In accordance with the transition provisions, the Company adopted FIN 48 effective January 1, 2007.

The Company recognizes that virtually all tax positions in the PRC are not free of some degree of uncertainty due to tax law and policy changes by the state. The Company cannot reasonably quantify political risk factors and thus must depend on guidance issued by current government officials.

Based on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of June 30, 2009 is not material to its results of operations, financial condition or cash flows. The Company also believes that the total amount of unrecognized tax benefits as of June 30, 2009, if recognized, would not have a material effect on its effective tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based on current Chinese tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next 12 months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows.

Enterprise income tax - On March 16, 2007, the PRC’s parliament, the National People’s Congress, adopted the Enterprise Income Tax Law, which took effect on January 1, 2008. The new income tax law sets unified income tax rate for domestic and foreign companies at 25% except a 15% corporation income tax rate for qualified high technology and science enterprises. In accordance with this new income tax law, low preferential tax rate in accordance with both the tax laws and administrative regulations prior to the promulgation of this Law shall gradually transit to the new tax rate within five years after the implementation of this law.

The Company has been recognized as a high technology and science company by the Ministry of Science and Technology of the PRC. Therefore, Xing He District Local Tax Authority in the Nei Mongol province granted tax holiday from 100% of enterprises income tax for 10 years from 2008 through 2018. Afterwards, based on the present tax law and the Company’s status as a high technology and science company, the Company will be subject to a corporation income tax rate of 15% effective in 2019.

The enterprise income tax is calculated on the basis of the statutory profit as defined in the PRC tax laws. This statutory profit computed differently from the Company’s net income under U.S. GAAP.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets, including tax loss and credit carry forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Value added tax  - The Provisional Regulations of the PRC Concerning Value Added Tax promulgated by the State Council came into effect on January 1, 1994. Under these regulations and the Implementing Rules of the Provisional Regulations of the PRC Concerning Value Added Tax, value added tax (“VAT”) is imposed on goods sold in or imported into the PRC and on processing, repair and replacement services provided within the PRC.

VAT payable in the PRC is charged on an aggregated basis at a rate of 13% or 17% (depending on the type of goods involved) on the full price collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for the taxable services provided, but excluding, in respect of both goods and services, any amount paid in respect of VAT included in the price or charges, and less any deductible value added tax already paid by the taxpayer on purchases of goods and services in the same financial year.

The Company has been granted an exemption from VAT by the Xing He County People’s Government and Xing He Tax Authority on some products in which an exchange agreement is in place for raw materials and fuel.

Contingent liabilities and contingent assets - A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Company. It can also be a present obligation arising from past events that is not recognized because it is not probable that the Company will incur a liability or obligations as a result. A contingent liability, which might occur but is not probable, is not recorded but is disclosed in the notes to the financial statements. The Company will recognize a liability or obligation when it is probable that the Company will incur it.

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A contingent asset is an asset, which could possibly arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain events not wholly within the control of the Company. Contingent assets are not recorded but are disclosed in the notes to the financial statements when it is likely that the Company will recognize an economic benefit. When the benefit is virtually certain, the asset is recognized.

Retirement benefit costs - According to PRC regulations on pensions, the Company contributes to a defined contribution retirement program organized by the municipal government in the province in which the Company was registered and all qualified employees are eligible to participate in the program. Contributions to the program are calculated at 23.5% of the employees’ salaries above a fixed threshold amount and the employees contribute 2% to 8% while the Company contributes the remaining 15.5% to 21.5%. The Company has no other material obligation for the payment of retirement benefits beyond the annual contributions under this program.

In addition, the Company is required by Chinese laws to cover employees in China with various types of social insurance. The Company believes that it is in material compliance with the relevant PRC laws.

Fair value of financial instruments - In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of this statement are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of SFAS 157 are effective for the fiscal years beginning after November 15, 2007.

Effective January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements (SFAS 157). The adoption of SFAS No. 157 did not have a material impact on the Company’s fair value measurements. The carrying amounts of certain financial instruments, including cash, accounts receivable, notes receivable, other receivables, accounts payable, commercial notes payable, accrued expenses, and other payables approximate their fair values as of June 30, 2009 and December 31, 2008 because of the relatively short-term maturity of these instruments.

Foreign currency translation - The reporting currency of the Company is the U.S. dollar. The functional currency of the Company is the local currency, the Chinese Renminbi (“RMB”). Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income. Translation adjustments for the six months ended June 30, 2009 and 2008 are $48,745 and $1,979,890, respectively. The cumulative translation adjustment and effect of exchange rate changes on cash for the six months ended June 30, 2009 and 2008 was ($1,395) and $83,919, respectively. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

Asset and liability accounts at June 30, 2009 and December 31, 2008 were translated at 6.8448 RMB to $1.00 USD and at 6.8542 RMB to $1.00 USD, respectively. Equity accounts were stated at their historical rate. The average translation rates applied to income statements for the six months ended June 30, 2009 and 2008 were 6.8432 RMB and 7.0726 RMB to $1.00 USD, respectively. In accordance with Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows,” cash flows from the Company's operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

Earnings per share - Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive shares of common stock consist of the common stock issuable upon the conversion of convertible debt, preferred stock and warrants. The Company has outstanding warrants to purchase 3,000,000 shares of common stock at an exercise price of $1.20 per share and 3,000,000 shares of common stock at an exercise price of $2.00 per share. The Company uses if-converted method to calculate the dilutive preferred stock and treasury stock method to calculate the dilutive shares issuable upon exercise of warrants

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The following table sets forth the computation of the number of net income per share for the six months ended June 30, 2009 and 2008.

	Six Months Ended June 30,
	2009		2008
Weighted average shares of common stock outstanding (basic)		13,279,617		13,040,061
Shares issuable upon conversion of series A preferred stock		950,499		1,200,499
Shares issuable upon exercise of warrants		0		6,000,000
Weighted average shares of common stock outstanding (diluted)		14,044,160		19,444,924
Net income available to common shareholders	$	.08	$	.15
Net income per shares of common stock (diluted)	$	.07	$	.10

For the six months ended June 30, 2009, the Company did not include any shares of common stock issuable upon exercise of warrants, since such issuance would be antidilutive.

Accumulated other comprehensive income - The Company follows Statement of Financial Accounting Standards No. 130 (SFAS 130) “Reporting Comprehensive Income” to recognize the elements of comprehensive income. Comprehensive income is comprised of net income and all changes to the statements of stockholders' equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive income for the six months ended June 30, 2009 and 2008 included net income and foreign currency translation adjustments.

Related parties - Parties are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. Transactions with related parties are disclosed in the financial statements.

Subsequent events - For purposes of determining whether a post-balance sheet event should be evaluated to determine whether it has an effect on the financial statements for the period ending June 30, 2009, subsequent events were evaluated by the Company as of August 13, 2009, the date on which the unaudited condensed consolidated financial statements at and for the quarter ended June 30, 2009, were available to be issued.

Recent accounting pronouncements

In December, 2007, the FASB issued SFAS No. 141(R), “Business Combinations”, and SFAS No. 160, “Accounting and Reporting of Noncontrolling interest in Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS No. 160). These new standards will significantly change the financial accounting and reporting of business combination transactions and noncontrolling (or minority) interests in consolidated financial statements. SFAS No. 141(R) and SFAS No. 160 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (that is, the year ended December 31, 2009 for the Company). The adoption of SFAS 141(R) and 160 does not have a material effect on the Company’s condensed consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51” (“SFAS No. 160”), which establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (that is, the year ended December 31, 2009 for the Company). This Statement does not have an effect on the Company’s condensed consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133” (“SFAS No. 161”), which changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement will be effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 (that is, the year ended December 31, 2009 for the Company). This Statement does not have an effect on the Company’s condensed consolidated financial statements.

In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon either mandatory or optional conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants. Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s non-convertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company adopted FSP APB 14-1 beginning in the first quarter of 2009, and this standard must be applied on a retroactive basis. This Statement does not have an effect on the Company’s condensed consolidated financial statements.

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In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. Management does not expect that this Statement will have an effect on the Company’s condensed consolidated financial statements as this statement will be replaced by SFAS NO. 168, which is effective for financial statements issued for interim and annual period ending after September 15, 2009.

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60”. This Statement interprets Statement 60, “Accounting and Reporting by Insurance Enterprises” and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of this Statement. This Statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2008 (that is, fiscal 2009 for the Company), and all interim periods within those fiscal years. This Statement does not have an effect on the Company’s condensed consolidated financial statements.

On June 16, 2008, the FASB issued final Staff Position (FSP) No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” to address the question of whether instruments granted in share-based payment transactions are participating securities prior to vesting. As provided in the FSP, unvested share-based payment awards that contain rights to dividend payments should be included in earnings per share calculations. The guidance will be effective commencing in the year ended December 31, 2009. The FSP does not have an effect on the Company’s condensed consolidated financial statements.

In June 2008, the FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to Issue No. 98-5.” The objective of EITF 08-4 is to provide transition guidance for conforming changes made to EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, that result from EITF 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This Issue is effective for financial statements issued for fiscal years ending after December 15, 2008 and has no effect on the Company’s financial statements.

In June 2008, the FASB ratified Emerging Issues Task Force Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 mandates a two-step process for evaluating whether an equity-linked financial instrument or embedded feature is indexed to the entity’s own stock.  Warrants that a company issues that contain a strike price adjustment feature, upon the adoption of EITF 07-5, are no longer being considered indexed to the company’s own stock. Accordingly, adoption of EITF 07-5 will change the current classification (from equity to liability) and the related accounting for such warrants outstanding at that date. EITF 07-5 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The application of EITF 07-5 does not have an effect on the Company’s condensed financial statements.

In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset in a Market That Is Not Active” (FSP 157-3), which clarifies the application of SFAS 157 when the market for a financial asset is inactive. Specifically, FSP 157-3 clarifies how (1) management’s internal assumptions should be considered in measuring fair value when observable data are not present, (2) observable market information from an inactive market should be taken into account, and (3) the use of broker quotes or pricing services should be considered in assessing the relevance of observable and unobservable data to measure fair value. The Company adopted the provisions of FSP 157-3, which did not impact the Company’s financial position or results of operations.

In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4 and FIN 46(R)-8 amends FAS 140 and FIN 46(R) to require additional disclosures regarding transfers of financial assets and interest in variable interest entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for interim or annual reporting periods ending after December 15, 2008. FSP FAS 140-4 and FIN 46(R)-8 did not have any impact on the Company’s financial statements.

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In January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets”. FSP EITF 99-20-1 changes the impairment model included within EITF 99-20 to be more consistent with the impairment model of SFAS 115. FSP EITF 99-20-1 achieves this by amending the impairment model in EITF 99-20 to remove its exclusive reliance on “market participant” estimates of future cash flows used in determining fair value. Changing the cash flows used to analyze other-than-temporary impairment from the “market participant” view to a holder’s estimate of whether there has been a “probable” adverse change in estimated cash flows allows companies to apply reasonable judgment in assessing whether an other-than-temporary impairment has occurred. The adoption of FSP EITF 99-20-1, which is effective for annual reporting periods ending after December 15, 2008, does not have a material impact on the Company’s condensed consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165 is intended to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. The Company adopted this statement for the financial statements for the period ended June 30, 2009.

In June 2009, the FASB issued SFAS No. 166, a revision to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and will require more information about transfers of financial assets and where companies have continuing exposure to the risks related to transferred financial assets. SFAS 166 is effective at the start of a company’s first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis. The adoption of this statement is not expected to have a material effect on the Company's financial statements.

In June 2009, the FASB issued SFAS No. 167, a revision to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, and will change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. Under SFAS No. 167, determining whether a company is required to consolidate an entity will be based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. SFAS 167 is effective at the start of a company’s first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis. The Company is in the process of evaluating the effect, if any, the adoption of SFAS No. 167 will have on the Company’s financial statements

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting. SFAS 168 represents the last numbered standard to be issued by FASB under the old (pre-Codification) numbering system, and amends the GAAP hierarchy. On July 1, FASB will launch new FASB’s Codification known as the FASB Accounting Standards Codification TM. The Codification will supersede existing GAAP for nongovernmental entities; governmental entities will continue to follow standards issued by FASB's sister organization, the Governmental Accounting Standards Board (GASB). This statement is effective for financial statements issued for interim and annual period ending after September 15, 2009. The Company is in the process of evaluating the effect of the adoption of SFAS No. 168 will have on the Company’s financial statements.

4.  Concentrations of Business and Credit Risk

Most of the Company’s bank accounts are in banks located in the PRC and are not covered by any type of protection similar to that provided by the FDIC on funds held in U.S. banks. The Company’s bank account in US is covered by FDIC insurance.

The Company is operating in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between U.S. dollars and the Chinese RMB.

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, trade accounts receivables and inventories, the balances of which are stated on the balance sheet. The Company places its cash in banks located in China. Concentration of credit risk with respect to trade accounts receivables is limited due to the Company's large number of diverse customers in different locations in China. The Company does not require collateral or other security to support financial instruments subject to credit risk.

For the six months ended June 30, 2009, three customers accounted for 10% or more of sales revenues, representing 33%, 12% and 10%, respectively of the total sales. No customer accounted for 10% or more of the Company’s revenue during the three months ended June 30, 2008.  As of June 30, 2009, there were four customers that constitute 15.7%, 15.2%, 12.3%, and 11.4% respectively of the accounts receivable. As of December 31, 2008, there were three customers that accounted for 22.7%, 14.8%, and 12.5% respectively of the accounts receivable.

For the six months ended June 30, 2009 and 2008, the Company had insurance expense of $418 and $5,717 respectively. Accrual for losses is not recognized until such time a loss has occurred.

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5.  Income Taxes

Under the Provisional Regulations of The People’s Republic of China Concerning Income Tax on Enterprises promulgated by the PRC, which took effect on January 1, 2008, domestic and foreign companies pay a unified corporate income tax of 25% except a 15% corporation income tax rate for qualified high technology and science enterprises.

The Company has been granted a 100% tax holiday from enterprises income tax from the Xing He District Local Tax Authority for the ten years 2008 through 2018. This tax holiday could be challenged by higher taxing authorities in the PRC, which could result in taxes and penalties owed for those years. For the six months ended June 30, 2009 and 2008, the enterprise income tax at the statutory rates would have been approximately $172,257 and $292,145, respectively, and for the three months ended June 30, 2009 and 2008, the enterprise income tax at the statutory rates would have been approximately $79,432 and $233,813, respectively.

A reconciliation of the provision for income taxes with amounts determined by the PRC statutory income tax rate to income before income taxes is as follows:

	Six months ended June 30,
	2009			2008
Computed tax at the PRC statutory rate of 15%	$	172,257		$	292,145
Benefit of tax holiday		(172,257	)		(292,145	)
Income tax expenses per books	$	-		$	-

	Three months ended June 30,
	2009			2008
Computed tax at the PRC statutory rate of 15%	$	79,432		$	233,813
Benefit of tax holiday		(79,432	)		(233,813	)
Income tax expenses per books	$	-		$	-

6.  Trade Accounts Receivable - net

As of June 30, 2009 and December 31, 2008, trade accounts receivable consisted of the following:

		June 30, 2009		December 31, 2008
Amount outstanding	$	5,444,143		$	4,928,354
Bad debt provision		(678,107	)		(703,944	)
Net amount	$	4,766,036		$	4,224,410

For the six months ended June 30, 2009, bad debt provision of $26,810 was recovered. For the three and six months ended June 30, 2008, no bad debt provision was provided.

7.  Advance to suppliers, net

As of June 30, 2009 and December 31, 2008, advance to suppliers consisted of the following:

		June 30, 2009		December 31, 2008
Amount outstanding	$	1,466,460		$	1,186,640
Bad debt provision		(169,786	)		(169,552	)
Net amount	$	1,296,674		$	1,017,088

For the three and six months ended June 30, 2009 and 2008, no additional bad debt provision on advance to suppliers was charged to expenses.

8.   Inventories

As of June 30, 2009 and December 31, 2008, inventories consisted of the following:

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	June 30, 2009		December 31, 2008
Raw materials	$	1,237,829	$	820,250
Work in process		13,192,553		13,193,750
Finished goods		1,898,095		1,821,719
Repair Parts		53,904		53,830
	$	16,382,381	$	15,889,549

Raw materials consist primarily of asphalt, petroleum coke, needle coke and other materials used in production. Finished goods consist of graphite electrodes, fine grain graphite and high purity graphite. The costs of finished goods include direct costs of raw materials as well as direct labor used in production. Indirect production costs such as utilities and indirect labor related to production are also included in the cost of inventory.

9.  Property and Equipment, net

As of June 30, 2009 and December 31, 2008, property and equipment consist of the following:

	June 30, 2009		December 31, 2008
Building	$	8,267,194	$	7,956,770
Machinery and equipment		20,871,799		19,515,684
Motor vehicles		40,907		40,851
		29,179,900		27,513,305
Less: Accumulated depreciation		7,153,818		6,509,698
	$	22,026,082	$	21,003,607

For the six months ended June 30, 2009 and 2008, depreciation expense amounted to $635,329 and $601,822 was charged to cost of goods sold. For the three months ended June 30, 2009 and 2008, depreciation expense amounted to $326,054 and $294,373 was charged to cost of goods sold.

10.  Land Use Right

As of June 30, 2009 and December 31, 2008, land use rights consist of the following:

	June 30, 2009		December 31, 2008
Land Use Right	$	3,816,774	$	3,811,539
Less: Accumulated amortization		245,670		207,215
	$	3,571,104	$	3,604,324

For the six months ended June 30, 2009 and 2008, amortization expenses were $38,179 and $30,727, respectively. For the three months ended June 30, 2009 and 2008, amortization expenses were $19,099 and $15,587, respectively.

Future amortization of the land use rights is as follows:

12-month period ended June 30,
2010	$	76,358
2011		76,358
2012		76,358
2013		76,358
2014		76,358
2015 and thereafter		3,189,314
Total	$	3,571,104

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11.   Stockholders’ equity

(a) Restated Articles of Incorporation

On January 22, 2008, the Company changed its authorized capital stock to 120,000,000 shares of capital stock, of which 20,000,000 shares are shares of preferred stock, par value $0.001 per share, and 100,000,000 shares are shares of common stock, par value $0.001 per share. The restated articles of incorporation give the directors the authority to issue one or more series of preferred stock and to designate the rights, preferences, privileges and limitation of the holders of each set. The board of directors has designated the rights, preferences, privileges and limitation of one series of preferred stock - -- the series A convertible preferred stock (“series A preferred stock”).

On December 17, 2007, the Company issued its 3% promissory note in the amount of $1,200,000. Pursuant to the agreement pursuant to which the note was issued, upon the filing of a restated certificate of incorporation which provided for the creation of a series of preferred stock and the filing of a certificate of designation which created the series A preferred stock, the note would automatically be converted into 1,200,499 shares of series A preferred stock and warrants to purchase 3,000,000 shares of common stock at $1.20 per share and 3,000,000 shares of common stock at $2.00 per share. On January 22, 2008, upon the filing of a restated articles of incorporation and a statement of designation for the series A convertible preferred stock, and the outstanding convertible note was converted into such series A preferred stock and warrants.

The statement of designation for the series A preferred stock provides the following:

 Each share of series A preferred stock is convertible into one share of common stock, at a conversion price of $1.00, subject to adjustment.

 While the series A preferred stock is outstanding, if the Company issues common stock at a price or warrants or other convertible securities at a conversion or exercise price which is less than the conversion price then in effect, the conversion price shall be adjusted on a formula basis.

 While the Series A Preferred Stock is outstanding, without the approval of the holders of 75% of the outstanding shares of Series A Preferred Stock, the Company may not pay cash dividends or other distributions of cash, property or evidences of indebtedness, nor redeem any shares of Common Stock.

 No dividends are payable with respect to the series A preferred stock.

 Upon any voluntary or involuntary liquidation, dissolution or winding-up, the holders of the series A preferred stock are entitled to a preference of $1.00 per share before any distributions or payments may be made with respect to the common stock or any other class or series of capital stock which is junior to the series A preferred stock upon voluntary or involuntary liquidation, dissolution or winding-up.

 The holders of the series A preferred stock have no voting rights. However, so long as any shares of series A preferred stock are outstanding, the Company shall not, without the affirmative approval of the holders of 75% of the outstanding shares of series A preferred stock then outstanding, (a) alter or change adversely the powers, preferences or rights given to the series A preferred stock or alter or amend the certificate of designation, (b) authorize or create any class of stock ranking as to dividends or distribution of assets upon liquidation senior to or otherwise pari passu with the series A preferred stock, or any of preferred stock possessing greater voting rights or the right to convert at a more favorable price than the series A preferred stock, (c) amend our articles of incorporation or other charter documents in breach of any of the provisions thereof, (d) increase the authorized number of shares of series A preferred stock, or (e) enter into any agreement with respect to the foregoing

(b) Warrants

The warrants have terms of five years, and expire December 3, 2012. The warrants provide a cashless exercise feature; however, the holders of the warrants may not make a cashless exercise only if the underlying shares are not covered by an effective registration statement.

(c) Securities Purchase Agreement

Pursuant to the securities purchase agreement, as amended, relating to the issuance of the 3% convertible notes, in addition to the foregoing:

 The Company and the investor entered into a registration rights agreement pursuant to which we are required to have a registration statement filed with the SEC by December 31, 2010 and declared effective by the SEC not later than December 31, 2010. The Company is required to pay liquidated damages at the rate of 200 shares of series A preferred stock for each day after December 31, 2010 that the registration statement is not declared effective or for any period that the Company fails to keep the registration statement effective, up to a maximum of 100,000 shares. The number of shares of series A preferred stock issuable pursuant to the liquidated damages provision is subject to reduction based on the maximum number of shares that can be registered under the applicable SEC guidelines.The registration obligation does not apply to shares that can be sold pursuant to Rule 144 of the Securities and Exchange Commission.

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 The investor has a right of refusal on future financings until December 2010.

(d) Cancellation of common stock

In connection with the acquisition of Talent, the Company purchased 1,000,000 shares of common stock from the then principal shareholder for $1,000,000. The purchase price was paid in installments, with the final installment due on June 30, 2008. The Company placed 1,000,000 of the shares of common stock in escrow, and, upon payment of the  balance of the purchase price, the shares were released from escrow and cancelled. 

(e) Deemed Preferred Stock Dividend

Upon filing of the Company’s amended and restated articles of incorporation on January 22, 2008, $1,200,000 of convertible notes were automatically converted into (i) 1,200,499 shares of preferred stock, with each share of series A preferred stock being convertible into one share of common stock and (ii) warrants to purchase 3,000,000 shares of the common stock at $1.20 and 3,000,000 shares at $2.00 per share. At December 17, 2007, the fair value of the warrants used to calculate the intrinsic value of the conversion option was estimated at $3,831,900 and was computed using the Black-Scholes option-pricing model based on the assumed issuance of the warrants on the date the notes were issued. Variables used in the option-pricing model include (1) risk-free interest rate at the date of grant (3.5%), (2) expected warrant life of 5 years, (3) expected volatility of 100%, and (4) 0% expected dividend.   The Company used the market price of its common stock at December 17, 2007, $0.95 per share, and computed the effective preferred stock conversion price to be $0.24 per share. The resulting intrinsic value of the conversion feature was $854,300 reported as a deemed dividend. 

As the series A preferred stock does not provide for redemption by the Company or have a finite life, upon the conversion to preferred stock, a one-time preferred stock deemed dividend of $854,300 was recognized immediately as a non-cash charge. The deemed preferred stock dividend of $854,300 has been recorded as additional paid-in capital and a reduction to retained earnings in 2008.

12.  Short-term bank loans

As of June 30, 2009 and December 31, 2008, short term loans consisted of the following:

	June 30, 2009		December 31, 2008
Bank loans dated July 17, 2008, due May 6, 2009 with an interest rate of 9.711%, interest payable monthly, secured by property and equipment and land use rights	$		$	656,532
Bank loans dated July 17, 2008, due May 25, 2009 with an interest rate of 9.711%, interest payable monthly, secured by property and equipment and land use rights				1,167,167
Bank loans dated July 17, 2008, due June 15, 2009 with an interest rate of 9.711%, interest payable monthly, secured by property and equipment and land use rights				1,167,167
Bank loans dated July 17, 2008, due July 1, 2009 with an interest rate of 9.711%, interest payable monthly, secured by property and equipment and land use rights				1,167,167
Bank loans dated July 17, 2008, due July 13, 2009 with an interest rate of 9.711%, interest payable monthly, secured by property and equipment and land use rights				729,481
Bank loans dated June 17, 2009, due June 15, 2010 with an interest rate of 9.711%, interest payable monthly, secured by property and equipment and land use rights		3,425,958		-
Bank loan dated June 16, 2009, due June 1, 2010 with an interest rate of 7.434%, interest payable quarterly, secured by equipment and land use rights		5,113,371		-
	$	8,539,329	$	4,887,514

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13.  Long-term bank loan

	June 30, 2009			December 31, 2008
Bank loans dated October 10, 2008, due October 9, 2011 with an interest rate of 6.75%, interest payable monthly.	$	4,236,793		$	5,106,358
Less: current portion		(1,607,059	)		(1,896,647	)
Non-current portion	$	2,629,734		$	3,209,711

14.  Trade notes payable

As of June 30, 2009 trade notes payable were $5,843,852.  There were no trade notes payable at December 31, 2008.. The Company was requested by certain of its suppliers to settle trade liabilities incurred in the ordinary course of business by issuance of notes guaranteed by a bank acceptable to the supplier. The notes are interest-free with maturity of six months from date of issuance.

15.  Contingencies and commitments

As stated in Note 2, as Talent failed to effect the initial 20% or $800,000 investment in Yongle by December 12, 2007 or obtain an extension to effect such payment, the Government can give notice to Talent to cancel the business license of Yongle and cancel the investment.  As such, Yongle would cease to be a subsidiary and thus the VIE, Xingyong, would be detached. 

On May 21, 2009 the Company's Board of Directors approved the reduction of Yongle's registered capital from $4,000,000 to $100,000 and has submitted the reduction to the PRC government for approval. These actions will effectively reduce the intercompany investment obligations owed to Yongle from $4,000,000 to $100,000 and eliminate possible fines or penalties by the PRC business bureau as previously described in the Company's 10Q filing.  The Company expects to pay for the $100,000 investment to Yongle in full on or before September 12, 2009.

16.  Subsequent event

On July 29, 2009, the Company retired outstanding warrants to purchase 5,875,000 shares of common stock through the issuance of 887,500 shares of common stock.  Warrants to purchase 3,000,000 shares of common stock at $1.20 were converted to 600,000 shares of common stock, and warrants to purchase 2,875,000 shares of common stock at $2.00 were converted to 287,500 shares of common stock. There remain outstanding warrants to purchase 125,000 shares at $2.00 per share.

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Item 2.         Management’s Discussion and Analysis Financial Condition and Results of Operations.

The following discussion of the results of our operations and financial condition should be read in conjunction with our financial statements and the related notes, which appear elsewhere in this report. The following discussion includes forward-looking statements. For a discussion of important factors that could cause actual results to differ from results discussed in the forward-looking statements, see “Forward Looking Statements.”

Overview

We develop, manufacture and market graphite products. Our main products include graphite electrode, fine grain graphite and high purity graphite. We produce all of our products in China. Our products are generally used either as a component in other products, as an element of a facility or in the manufacturing process of other products. We sell our products to distributors who sell to producers of in both the domestic Chinese market and the international market. We also sell graphite electrodes directly to the end users. Although our products are sold in the international market, substantially all of our sales are to Chinese firms that may, in turn, sell the products in the international market. We believe that our products are not subject to export restrictions.

Our sales have suffered during 2009 as a result of the worldwide economic downturn, with sales in both the six and three months ended June 30, 2009 being less than half of the sales for the comparable period of 2008.  The sales decrease reflects the effects of the negative global economic situation as well as the closure of Xingyong’s plant facilities for almost two months for the Olympics in August 2008 as part of the Chinese government’s program to reduce air pollution during that period.  This shutdown reduced our sales in the first quarter of 2009 because it takes about three months to six months to produce graphite products. During the second quarter 2009, sales decreased primarily due to weaker graphite electrode demand.  Steel manufacturers delayed purchasing new graphite electrodes because the global steel demand had not improved markedly. We believe that most of the steel manufacturers are not running full capacity.

Our principal raw materials are coal asphalt, asphalt coke, metallurgy coke, needle coke, metallurgy coke power, quartzose sand, coal, petroleum coke and calcined coke, all of which are carbon rich and used in manufacturing graphite with a high degree of purity. We purchase most of our raw materials from domestic Chinese suppliers. Because we do not have any long-term contracts for raw materials, any increase in prices of raw material will affect the price at which we can sell our product. If we are not able to raise our prices to pass on increased costs, we would be unable to maintain our margins. Similarly, in times of decreasing prices, we may have purchased raw materials at prices which are high in terms of the price at which we can sell our products, which also can impair our margins. The laws of the PRC give the government broad power to fix and adjust prices. Although the government has not imposed price controls on our raw materials such as coal, gas, oil, electricity and/or water or on our products, it is possible that such controls may be implemented in the future. Since most of our sales are made to domestic companies, our gross margins can be affected by any price controls imposed by the government of the PRC.

Our internal financial statements are maintained in RMB. The financial statements included in this Form 10-Q are expressed in United States dollars. The translation adjustments in expressing the financial statements in United States dollars is shown on the statements of operation as a translation adjustment, and the cumulative translation adjustment is shown as an element of stockholders’ equity.

Under PRC rules and regulations, Talent, as the sole stockholder of Yongle, is required to make payments totaling the amount of its initial capital, which was set at $4,000,000 at the time of Yongle’s organization, and has since been reduced to $100,000, We are required to pay 20% of the registered capital within three months form the issuance of the business license and the remaining 80% within two year of the issuance.  The business license was issued September 13, 2007, and, based on the initial registered capital, we were to have paid $800,000 by December 13, 2007 and the balance by September 13, 2009.  We did not make either of these payments.  The government issued a new business license on Yongle expiring December 31, 2009.  Management assumes that the Government will take no action before December 31, 2009, the expiration date of the new business license, and we believe that our obligations with respect to Yongle’s registered capital will be satisfied by payment of $100,000, the reduced amount of registered capital, which we plan to make in September 2009.

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Variable Interest Entity

 Our relationships with Xingyong and its stockholders are governed by a series of contractual arrangements between Yongle and Xingyong, the operating company in the PRC. Under PRC laws, each of Yongle and Xingyong is an independent legal person and is not exposed to liabilities incurred by the other parties.   Yongle has a series of agreements with Xingyong pursuant to which it manages the business of Xingyong and 80% to 100% of the profit of Xingyong is paid to Yongle.  For 2007 and 2008, Xingyong paid 100% of the profit to Yongle.  Xingyong is owned by Mr. Jin, who is Yongle’s controlling stockholder and was our chief executive officer at the time of we entered into our agreements with Xingyong.  Xingyong is treated as a variable interest entity and its financial statements are included as part of our consolidated financial statements under FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities,” referred to as FIN 46.

Significant Accounting Estimates and Policies

The discussion and analysis of our financial condition and results of operations is based upon our financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of our products, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

We recognize revenue in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition, which states that revenue should be recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the service has been rendered; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. Sales represent the invoiced value of goods, net of value added tax (“VAT”), if any, and are recognized upon delivery of goods and passage of title.

Comprehensive Income

We have adopted Statements of Financial Accounting Standards (“SFAS”) No. 130, “Reporting Comprehensive Income,” which establishes standards for reporting and presentation of comprehensive income (loss) and its components in a full set of general-purpose financial statements. We have chosen to report comprehensive income (loss) in the statements of operations and comprehensive income.

Income Taxes

We account for income taxes under the provisions of SFAS No. 109, “Accounting for Income Taxes,” which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are recognized for the future tax consequence attributable to the difference between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are measured using the enacted tax rate expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

On March 16, 2007, China’s parliament, the National People’s Congress, adopted the Enterprise Income Tax Law, which will take effect on January 1, 2008. The new income tax law sets unified income tax rate for domestic and foreign companies at 25% except a 15% corporate income tax rate for qualified high technology and science enterprises. In accordance with this new income tax law, low preferential tax rate in accordance with both the tax laws and administrative regulations prior to the promulgation of this Law gradually becomes subject to the new tax rate within five years after the implementation of this law.

We have been recognized as a high technology and science company by the Ministry of Science and Technology of the PRC. The Xing He District Local Tax Authority in the Nei Mongol province granted us a 100% tax holiday with respect to enterprise income tax for ten years 2008 through 2018. Afterwards, based on the present tax law and our status as a qualified high technology and science company, we will be subject to a corporation income tax rate of 15% effective in 2019.

Inventories

Inventories are stated at the lower of cost, determined on a weighted average basis, and net realizable value. Work in progress and finished goods are composed of direct material, direct labor and a portion of manufacturing overhead. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose. Management believes that there was no obsolete inventory as of June 30, 2009 or December 31, 2008.

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Property, Plant and Equipment

Property, plant and equipment are stated at cost. Major expenditures for betterments and renewals are capitalized while ordinary repairs and maintenance costs are expensed as incurred. Depreciation and amortization is provided using the straight-line method over the estimated useful life of the assets after taking into account the estimated residual value.

Land Use Rights

There is no private ownership of land in China. All land ownership is held by the government of China, its agencies and collectives. Land use rights are obtained from government, and are typically renewable. Land use rights can be transferred upon approval by the land administrative authorities of China (State Land Administration Bureau) upon payment of the required transfer fee. We own the land use right for 2,356,209square feet, of which 290,626 square is occupied by our facilities, for a term of 50 years, beginning from issuance date of the certificates granting the land use right. We record the property subject to land use rights as intangible asset.

Each intangible asset is reviewed periodically or more often if circumstances dictate, to determine whether its carrying value has become impaired. We consider assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. We also re-evaluate the amortization periods to determine whether subsequent events and circumstances warrant revised estimates of useful lives.

Research and development

Research and development costs are expensed as incurred, and are included in general and administrative expenses. These costs primarily consist of cost of material used and salaries paid for the development of our products and fees paid to third parties. Our research and development expense for the six months ended June 30, 2009 and 2008 has not been significant.

Value added tax

Pursuant to China’s VAT rules and regulations, as an ordinary VAT taxpayer we are subject to a tax rate of 17% (“output VAT”). The output VAT is payable after offsetting VAT paid by us on purchases (“input VAT”). Under the commercial practice of the PRC, the Company paidVAT and business tax based on tax invoices issued. The tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay between the date on which the revenue is recognized and the date on which the tax invoice is issued. In the event that the PRC tax authorities dispute the date of which revenue is recognized for tax purposes, the PRC tax office has the right to assess a penalty, which can range from zero to five times the amount of the taxes that are determined to be late or deficient. In the event that a tax penalty is assessed on late or deficient payments, the penalty will be expensed as a period expense if and when a determination has been made by the taxing authorities that a penalty is due. We have been granted an exemption from VAT by the Xinghe County People’s Government and Xinghe Tax Authority on some products for which an exchange agreement is in place for raw materials and fuel.  We have been granted an exemption from VAT by the Xing He County People’s Government and Xing He Tax Authority on some products in which an exchange agreement is in place for raw materials and fuel.

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Recent accounting pronouncements

In December, 2007, the FASB issued SFAS No. 141(R), “Business Combinations”, and SFAS No. 160, “Accounting and Reporting of Noncontrolling interest in Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS No. 160). These new standards will significantly change the financial accounting and reporting of business combination transactions and noncontrolling (or minority) interests in consolidated financial statements. SFAS No. 141(R) and SFAS No. 160 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (that is, the year ended December 31, 2009 for the Company). The adoption of SFAS 141(R) and 160 does not have a material effect on the Company’s condensed consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51” (“SFAS No. 160”), which establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (that is, the year ended December 31, 2009 for the Company). This Statement does not have an effect on the Company’s condensed consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133” (“SFAS No. 161”), which changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement will be effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 (that is, the year ended December 31, 2009 for the Company). This Statement does not have an effect on the Company’s condensed consolidated financial statements.

In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon either mandatory or optional conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants. Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s non-convertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company adopted FSP APB 14-1 beginning in the first quarter of 2009, and this standard must be applied on a retroactive basis. This Statement does not have an effect on the Company’s condensed consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. Management does not expect that this Statement will have an effect on the Company’s condensed consolidated financial statements as this statement will be replaced by SFAS NO. 168, which is effective for financial statements issued for interim and annual period ending after September 15, 2009.

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60”. This Statement interprets Statement 60, “Accounting and Reporting by Insurance Enterprises” and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of this Statement. This Statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2008 (that is, fiscal 2009 for the Company), and all interim periods within those fiscal years. This Statement does not have an effect on the Company’s condensed consolidated financial statements.

On June 16, 2008, the FASB issued final Staff Position (FSP) No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” to address the question of whether instruments granted in share-based payment transactions are participating securities prior to vesting. As provided in the FSP, unvested share-based payment awards that contain rights to dividend payments should be included in earnings per share calculations. The guidance will be effective commencing in the year ended December 31, 2009. The FSP does not have an effect on the Company’s condensed consolidated financial statements.

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In June 2008, the FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to Issue No. 98-5.” The objective of EITF 08-4 is to provide transition guidance for conforming changes made to EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, that result from EITF 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This Issue is effective for financial statements issued for fiscal years ending after December 15, 2008 and has no effect on the Company’s financial statements.

In June 2008, the FASB ratified Emerging Issues Task Force Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 mandates a two-step process for evaluating whether an equity-linked financial instrument or embedded feature is indexed to the entity’s own stock.  Warrants that a company issues that contain a strike price adjustment feature, upon the adoption of EITF 07-5, are no longer being considered indexed to the company’s own stock. Accordingly, adoption of EITF 07-5 will change the current classification (from equity to liability) and the related accounting for such warrants outstanding at that date. EITF 07-5 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The application of EITF 07-5 does not have an effect on the Company’s condensed financial statements.

In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset in a Market That Is Not Active” (FSP 157-3), which clarifies the application of SFAS 157 when the market for a financial asset is inactive. Specifically, FSP 157-3 clarifies how (1) management’s internal assumptions should be considered in measuring fair value when observable data are not present, (2) observable market information from an inactive market should be taken into account, and (3) the use of broker quotes or pricing services should be considered in assessing the relevance of observable and unobservable data to measure fair value. The Company adopted the provisions of FSP 157-3, which did not impact the Company’s financial position or results of operations.

In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4 and FIN 46(R)-8 amends FAS 140 and FIN 46(R) to require additional disclosures regarding transfers of financial assets and interest in variable interest entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for interim or annual reporting periods ending after December 15, 2008. FSP FAS 140-4 and FIN 46(R)-8 did not have any impact on the Company’s financial statements.

In January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets”. FSP EITF 99-20-1 changes the impairment model included within EITF 99-20 to be more consistent with the impairment model of SFAS 115. FSP EITF 99-20-1 achieves this by amending the impairment model in EITF 99-20 to remove its exclusive reliance on “market participant” estimates of future cash flows used in determining fair value. Changing the cash flows used to analyze other-than-temporary impairment from the “market participant” view to a holder’s estimate of whether there has been a “probable” adverse change in estimated cash flows allows companies to apply reasonable judgment in assessing whether an other-than-temporary impairment has occurred. The adoption of FSP EITF 99-20-1, which is effective for annual reporting periods ending after December 15, 2008, does not have a material impact on the Company’s condensed consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165 is intended to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. The Company adopted this statement with the financial statements for the period ended June 30, 2009.

In June 2009, the FASB issued SFAS No. 166, a revision to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and will require more information about transfers of financial assets and where companies have continuing exposure to the risks related to transferred financial assets. SFAS 166 is effective at the start of a company’s first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis. The adoption of this statement is not expected to have a material effect on the Company's financial statements.

In June 2009, the FASB issued SFAS No. 167, a revision to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, and will change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. Under SFAS No. 167, determining whether a company is required to consolidate an entity will be based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. SFAS 167 is effective at the start of a company’s first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis. The Company is in the process of evaluating the effect, if any, the adoption of SFAS No. 167 will have on the Company’s financial statements

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In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting. SFAS 168 represents the last numbered standard to be issued by FASB under the old (pre-Codification) numbering system, and amends the GAAP hierarchy. On July 1, FASB will launch new FASB’s Codification known as the FASB Accounting Standards Codification TM. The Codification will supersede existing GAAP for nongovernmental entities; governmental entities will continue to follow standards issued by FASB's sister organization, the Governmental Accounting Standards Board (GASB). This statement is effective for financial statements issued for interim and annual period ending after September 15, 2009. The Company is in the process of evaluating the effect of the adoption of SFAS No. 168 will have on the Company’s financial statements.

RESULTS OF OPERATIONS

The following table sets forth the results of our operations for the periods indicated as a percentage of net sales (dollars in thousands):

	Six Months Ended June 30,
	2009							2008
	US Dollars				Percentage			US Dollars				Percentage
Sales		$	6,551			100.00%			$	13,652			100.00%
Cost of sales			4,857			74.14%				10,184			74.59%
Gross profit			1,694			25.86				3,468			25.41%
Operating expenses			(814	)		(12.42)%				(600	)		(4.40)%
Income from operations			880			13.44%				2,869			21.01%
Other income			526			8.03%				214			1.57%
Other expenses			(1	)		(0.02)%				(11	)		(0.08)%
Interest income			-			-%				-			-%
Interest expense			(405	)		(6.18)%				(270	)		(1.98)%
Income before income tax expense			1,000			15.27%				2,802			20.52%
Provision for income taxes			-			-%				-			-%
Net income			1,000			15.27%				2,802			20.52%
Deemed preferred stock dividend			-			-%				(854	)		(6.25)%
Net income available to common shareholders			1,000			15.27%				1,948			14.27%
Foreign currency translation adjustment			49			0.75%				1,980			14.50%
Total comprehensive income		$	1,049			16.02%			$	4,782			35.03%

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	Three Months Ended June 30,
	2009							2008
	US Dollars				Percentage			US Dollars				Percentage
Sales		$	3,658			100.0%			$	7,924			100.0%
Cost of sales			2,804			76.65%				5,817			73.41%
Gross profit			854			23.35%				2,107			26.59%
Operating expenses			(350	)		(9.57)%				(415	)		(5.24)%
Income from operations			504			13.78%				1,692			21.35%
Other income			234			6.40%				14			0.18
Other expenses			(1	)		(0.03)%				(11	)		(0.14)%
Interest expense			(206	)		(5.64)%				(136	)		(1.72)%
Income before income tax expense			530			14.49%				1,559			19.67%
Provision for income taxes			-			-%				-			-%
Net income			530			14.49%				1,559			19.67%
Foreign currency translation adjustment			4			0.10%				728			9.18%
Total comprehensive income		$	534			14.59%			$	2,287			28.86%

Sales. During the six months ended June 30, 2009, we had sales of $6,551,000, as compared to sales of $13,652,000 for the six months ended June 30, 2008, a decrease of $7,101,000, or approximately 52.01%.  During the three months ended June 30, 2009, we had sales of $3,658,000, as compared to sales of $7,924,000 for the three months ended June 30, 2008, a decrease of $4,266,000, or approximately 53.84%.  The sales decrease reflects the effects of the negative global economic situation as well as the closure of Xingyong’s plant facilities for almost two months for the Olympics in August 2008 as part of the Chinese government’s program to reduce air pollution during that period.  This shutdown reduced our sales in the first quarter of 2009 because it takes about three months to six months to produce graphite products. During the second quarter of 2009, sales decreased primarily due to weaker graphite electrode demand. Steel manufacturers delayed purchasing new graphite electrodes because the global steel demand hasn’t improved markedly. Most of the steel manufacturers are not running full capacity.

Cost of sales; gross margin. During the six months ended June 30, 2009, our cost of sales was $4,857,000, as compared to $10,184,000 during the six months ended June 30, 2008, a decrease of $5,327,000, or 52.31%. During the three months ended June 30, 2009, our cost of sales was $2,804,000, as compared to $5,817,000 during the three months ended June 30, 2008, a decrease of $3,013,000, or 51.79%. The decrease in cost of sales was directly associated with the decrease in sales. As a result, our gross profit decreased $1,774,000 and $1,253,000, or 51.17% and 59.47% respectively for the six and three months ended June 30, 2009. Our gross margin increased slightly from 25.41% for the six months ended June 30, 2008 to 25.86% the six months ended June 30, 2009.Our gross margin reflects our product mix.  Graphite electrodes have a lower margin than other products, such as fine grain graphite and high purity graphite.  The increase was due to the relatively low volume of graphite electrodes in the first quarter of 2009, in which our gross margin was 29.1%.  In the second quarter of 2009, the sales of graphite electrodes started to pick up, which resulted in a lower gross margin.

Selling, general and administrative expenses.

Selling, general and administrative expenses totaled $814,000 for the six months ended June 30, 2009, as compared to $600,000 for the six months ended June 30, 2008, an increase of $214,000 or approximately 35.67%.  Selling, general and administrative expenses totaled $350,000 for the three months ended June 30, 2009, as compared to $415,000 for the three months ended June 30, 2008, a decrease of $65,000 or approximately 15.66%.

Selling expenses increased from $170,000 for the six months ended June 30, 2008 to $318,000 for the six months ended June 30, 2009, or 87.06%. The increase was due to the effort to market our high margin products – fine grain graphite and high purity graphite. Selling expenses decreased from $150,000 for the three months ended June 30, 2008 to $9,000 for the three months ended June 30, 2009, or 94.0%.  The decrease was directly associated with the decrease in sales during the second quarter 2009.

General and administrative expense was $457,000 for the six months ended June 30, 2009, compared to $399,000 for the six months ended June 30, 2008. General and administrative expense was $321,000 for the three months ended June 30, 2009, compared to $250,000 for the three months ended June 30, 2008.  The increase in general administrative expense was primarily due to the increase in public company expenses.

Depreciation and amortization expense. Depreciation and amortization were generally constant for both the six and three months ended June 30, 2009 and 2008.  Depreciation and amortization amounted to$673,000 for the six months ended June 30, 2009 and $633,000 for the six months ended June 30, 2008, of which $635,000 for 2009 and $602,000 for 2008 were included in cost of sales and $38,000 for 2009 and $31,000 for 2008 were included in operating expenses. Depreciation and amortization amounted to $345,000 for the three months ended June 30, 2009 and $323,000 for the three months ended June 30, 2008, of which $326,000 for 2009 and $308,000 for 2008 were included in cost of sales and $19,000 for 2009 and $15,000 for 2008 were included in operating expenses.

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Income from operations. As a result of the factors described above, income from operations amounted to $881,000 for the six months ended June 30, 2009, as compared to $2,869,000 for the six months ended June 30, 2008, a decrease of approximately $1,988,000, or 69.29%.  Incomefrom operations amounted to $504,000 for the three months ended June 30, 2009, as compared to $1,692,000 for the three months ended June 30, 2008, a decrease of approximately $1,188,000, or 70.21%.

Other income (expenses). Interest expense was $405,000 and $206,000 for the six and three months ended June 30, 2009, as compared with $270,000 and $136,000 for the six and three months ended June 30, 2008. reflecting both increased borrowings and an increase in the interest rate.  We had nominal interest income during the six and three months ended June 30, 2009 and 2008. Other income, which consisted of government grants, was $526,000 and $234,000 for the six and three months ended June 30, 2009 and 2008, respectively, as compared with $214,000 and $14,000 for the six and three months ended June 30, 2008. Other expense was $1,000 and $11,000 for the six months ended June 30, 2009 and 2008, respectively.

 Net income. As a result of the factors described above and the fact that we were granted a 100% tax holiday from thePRC enterprise tax, our net income for the six months ended June 30, 2009 was $ 1,000,000, as compared to $2,802,000 for the six months ended June 30, 2008, a decrease of $1,802,000. Our net income for the three months ended June 30, 2009 was $530,000, as compared to $1,559,000 for the three months ended June 30, 2008, a decrease of $1,029,000  or 66.00% ..

Deemed preferred dividend. As a result of the automatic conversion of our 3% convertible notes into shares of series A preferred stock and warrants in January 2008, we incurred a preferred stock deemed dividend of $854,300, representing the intrinsic value of the beneficial conversion feature of the series A preferred stock resulting from the warrant issuance. The deemed preferred stock dividend was a non-cash charge which did not affect our operations or cash flow for the six months ended June 30, 2008.  There was no comparable item in the three or six months ended June 30, 2009 or the three months ended June 30, 2008.

 Net income available to common shareholders.  Net income available for common shareholders was $1,000,000, or $0.08 per share (basic) and $0.07 per share (diluted) for the six months ended June 30, 2009 and $1,948,000, or $0.15 per share (basic) and $0.10 per share (diluted), for the six months ended June 30, 2008. Net income available for common shareholders was $530,000, or $0.04 per share (basic and diluted), for the three months ended June 30, 2009 and $1,559,000, or $0.12 per share (basic) and $0.08 per share (diluted). for the three months ended June 30, 2008.

Liquidity and Capital Resources

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis.  At June 30, 2009, we had a cash balance of $6,325,505, almost all of which was located in banks in China.

The following table sets forth information as to the principal changes in the components of our working capital from December 31, 2008 to June 30, 2009 

All amounts, other than percentages, in thousands of U.S. dollars 

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Category	June 30, 2009		December 31, 2008		Change			Percent Change
Current assets:
Cash and cash equivalents	$	6,326	$	52	$	6,274			12,065.4	%
Trade accounts receivable		4,766		4,224		542			12.83	%
Notes receivable		121		28		93			332.14	%
Other receivables		867		151		716			474.17	%
Advances to suppliers		1,297		1,017		280			27.53	%
Advances to related party		-		291		(291	)		(100	)%
Prepaid expenses		11		-		11			*
Inventories		16,382		15,890		492			3.10	%
Current liabilities:
Accounts payable and accrued expenses		1,808		1,253		555			44.29	%
Advances from customers		1,091		640		451			70.47	%
Taxes payable		8		362		(354	)		(97.79	)%
Trade notes payable		5,844		0		5,844			100.00	%
Short term bank loan		8,539		4,888		3,651			74.69	%
Long term bank loan – current portion		1,607		1,897		(290	)		(15.29	)%
Other payables		621		551		70			12.70	%
Working capital:
Total current assets		29,770		21,652		8,118			37.49	%
Total current liabilities		19,519		9,591		9,928			103.51	%
Working capital		10,251		12,061		(1,810	)		(15.01	)%

Our working capital position decreased $1,810,000 to $10,251,000 at June 30, 2009 from a working capital of $12,061,000 at December 31, 2008.  Although our cash position increased significantly, by $6,274,000 from December 31, 2008 to June 30, 2009, the increase was more than offset by increases in current bank debt of $3,261,000, and trade notes payable, which increased from zero to $5,844,000.   During the six months ended June 30, 2009, we were requested by certain of our suppliers to settle trade liabilities incurred in the ordinary course of business by the issuance of notes guaranteed by a bank.  We had no comparable obligations at December 31, 2008.

We have financed our operations principally through bank loans. At June 30, 2009, we have short-term bank loans totaling $8,539,000 and long-term bank loan of $4,237,000 outstanding, of which short term bank loan of $3,426,000 are due June 15, 2010, bear interest at 9.711% per annum and  $5,113,000 are due June 1, 2010, bear interest at 7.434% per annum. The short term bank loans are secured by a security interest on our fixed assets and land use rights.  A long-term bank loan, in the amount of $4,237,000 is due October 9, 2011, and bears interest at 6.75% per annum. The current portion of the long term bank loan is $1,607,000. Although we believe that we will be able to obtain extensions of these loans when they mature, we cannot assure you that such extensions will be granted. 

Although our sales have decreased significantly in 2009, we believe that our working capital, together with the cash flow from our ongoing business and our bank financing will be sufficient to enable us to meet our normal cash requirements for the next twelve months provided that:

•        We generate sufficient business so that we are able to generate a profit, which cannot be assured;

•        Our banks continue to provide us with the necessary working capital financing;

•        We are able to generate savings by improving the efficiency of our operations.

We will require additional working capital if we are going to make any acquisitions or to purchase equipment to expand our production capacity. Further, we expect that both revenue and the results of our operations will continue to decline from the comparable period of 2008 as a result of the effects of the global economic downturn as discussed under “Overview.”  We cannot assure you that funding will be available if and when we require funding.

Net cash flow provided by operating activities was $6,477,000 for the six months ended June 30, 2009 as compared to $1,334,000 for the six months ended June 30, 2008, an increase of $5,143,000. Net cash flow provided by operating activities in the six months ended June 30, 2009 was mainly due to our net income of $1,000,000, an increase in trade notes payable of $5,845,000, an increase in accounts payable and accrued expenses of $554,000 and an increase in advance from customers of $450,000, offset by an increase of accounts receivable of $536,000, other receivable of $716,000 and a decrease in taxes payable of $355,000.

Net cash flow provided by operating activities is sensitive to many factors, including our operating results, inventory management, ability to collect accounts receivable and timing of cash receipts and payments. For the six months ended June 30, 2009, the inventory turnover remained flat compared to December 31, 2008, and we did not experience significant uncollectible accounts receivable.

Net cash flow used in investing activities was $3,330,000 for the six months ended June 30, 2009, of which $1,629,000 was used to purchase properties and equipments and $1,701,000 was used in constructing new buildings.   Cash flow use in investing activities for the six months ended June 30, 2008 was $590,000.

Net cash flow provided by financing activities was $3,128,000 for the six months ended June 30, 2009 as compared to net cash used in financing activities of $670,000 for the six months ended June 30, 2008. We received $68,000 from investor by issuing 70,000 shares of common stock pursuant to a share purchase agreement. We received $5,115,000 proceeds from bank loan and repaid $2,345,000 bank loan. In addition, we received repayment of $291,000 from our former chief executive officer, Dengyong Jin.

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Contractual Obligations and Off-Balance Sheet Arrangements

Contractual Obligations

We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.

The following tables summarize our contractual obligations as of June 30, 2009, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

	Payments Due by Period
	Total			Less than 1 year			1-3 Years			3-5 Years			5 Years +
Contractual Obligations :
Bank indebtedness (1)		$	12,776,122		$	10,146,388		$	2,629,734		$	-		$	-
Notes payable			5,843,852			5,843,852			-			-			-
Total Contractual Obligations:		$	18,619,974		$	15,990,240		$	2,629,734		$	-		$	-

(1)       A bank loan in the amount of $3,425,958 dated June 17, 2009, due June 15, 2010 with an interest rate of 9.711%, interest payable monthly, secured by property and equipment and land use rights. A bank loan in the amount of $5,113,371 dated June 16, 2009, due June 1, 2010 with an interest rate of 7.434%, interest payable quarterly, secured by equipment and land use rights. Another loan, in the amount of $4,236,793 is due October 9, 2011, and bears interest at 6.75% per annum. The current portion of this bank loan is $ 1,607,059.

Off-balance Sheet Arrangements

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

We do not use derivative financial instruments in our investment portfolio and we have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, trade accounts receivable, accounts payable and long-term obligations. We consider investments in highly liquid instruments purchased with a remaining maturity of 90 days or less at the date of purchase to be cash equivalents. However, in order to manage the foreign exchange risks, we may engage in hedging activities to manage our financial exposure related to currency exchange fluctuation. In these hedging activities, we might use fixed-price, forward, futures, financial swaps and option contracts traded in the over-the-counter markets or on exchanges, as well as long-term structured transactions when feasible.

Interest Rates. Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term obligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities. At June 30, 2009, we had $6,325,505 in cash and cash equivalents. A hypothetical 2% increase or decrease in interest rates would not have a material impact on our earnings or loss, or the fair market value or cash flows of these instruments. 

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Foreign Exchange Rates. All of our sales are denominated in Renminbi (“RMB”). As a result, changes in the relative values of U.S. Dollars and RMB affect our reported levels of revenues and profitability as the results are translated into U.S. Dollars for reporting purposes. In particular, fluctuations in currency exchange rates could have a significant impact on our financial stability due to a mismatch among various foreign currency-denominated sales and costs. Fluctuations in exchange rates between the U.S. dollar and RMB affect our gross and net profit margins and could result in foreign exchange and operating losses.

Our exposure to foreign exchange risk primarily relates to currency gains or losses resulting from timing differences between signing of sales contracts and settling of these contracts. Furthermore, we translate monetary assets and liabilities denominated in other currencies into RMB, the functional currency of our operating business. Our results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in our statement of shareholders’ equity. We have not used any forward contracts, currency options or borrowings to hedge our exposure to foreign currency exchange risk. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign currency losses in the future. As our sales denominated in foreign currencies, such as RMB and Euros, continue to grow, we will consider using arrangements to hedge our exposure to foreign currency exchange risk.

Our financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. The value of your investment in our stock will be affected by the foreign exchange rate between U.S. dollars and RMB. To the extent we hold assets denominated in U.S. dollars, including the net proceeds to us from this offering, any appreciation of the RMB against the U.S. dollar could result in a change to our statement of operations and a reduction in the value of our U.S. dollar denominated assets. On the other hand, a decline in the value of RMB against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results, the value of your investment in our company and the dividends we may pay in the future, if any, all of which may have a material adverse effect on the price of our stock.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Not applicable to smaller reporting companies.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, including Donghai Yu, our chief executive officer, and Ting Chen, our chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2009.

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.

Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based on that evaluation, our chief executive and financial officers concluded that because of the significant deficiencies in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of June 30, 2009.

Management’s Report of Internal Control over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act.  Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”).  Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008.  In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework.  During our assessment of the effectiveness of internal control over financial reporting as of December 31, 2008, management identified significant deficiencies related to (i) the U.S. GAAP expertise of our internal accounting staff, (ii) our internal audit functions and, and (iii) a lack of segregation of duties within accounting functions. However, management believes that these deficiencies do not amount to a material weakness. Therefore, our internal control over financial reporting were effective as of June 30, 2009.

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A material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting.

We became a reporting company in December 2007.  Prior to December 2007, our operations were conducted by Xingyong, which is a company organized under the laws of the PRC and owned by our former chief executive officer. We began preparing to be in compliance with the internal control obligations, including Section 404, for our fiscal year ending December 31, 2007. During almost all of 2007 our internal accounting staff was primarily engaged in ensuring compliance with PRC accounting and reporting requirements for our operating affiliates and was not required to meet or apply U.S. GAAP requirements.  As a result, with the exception of certain additional persons hired at the end of 2007 to address these deficiencies, our current internal accounting department responsible for financial reporting of the Company, on a consolidated basis, is relatively new to U.S. GAAP and the related internal control procedures required of U.S. public companies. Although our accounting staff is professional and experienced in accounting requirements and procedures generally accepted in the PRC, management has determined that they require additional training and assistance in US GAAP matters.  Management has determined that our internal audit function is also significantly deficient due to insufficient qualified resources to perform internal audit functions.  Finally, management determined that the lack of an Audit Committee of the board of directors of the Company also contributed to insufficient oversight of our accounting and audit functions.   

In order to correct the foregoing deficiencies, we are seeking to engage an experienced accountant or firm to assist us in establishing procedures that will enable us to have, on an ongoing basis, personnel who understand US GAAP and the disclosure obligations under the Securities Exchange Act. We are committed to the establishment of effective internal audit functions, however, due to the scarcity of qualified candidates with extensive experience in US GAAP reporting and accounting in the region, we were not able to hire sufficient internal audit resources in order to enable us to have such procedures and controls established by June 30, 2009.

We also intend to elect additional directors, who will be independent and one of whom could serve as the audit committee financial expert. We believe that the appointment of such directors will strongly influence our management in establishing the necessary controls.

However, due to our size and nature, the segregation of all conflicting duties may not always be possible and may not be economically feasible.  However, to the extent possible, we will implement procedures to assure that the initiation of transactions, the custody of assets and the recording of transactions will be performed by separate individuals. 

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

Changes in Internal Control over Financial Reporting

No changes in the internal control over our financial reporting have come to management's attention during our last fiscal quarter that have materially affected, or are likely to materially affect, our internal control over financial reporting.

Limitations on Controls

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

PART II – OTHER INFORMATION

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

Pursuant to a share purchase agreement dated March 10, 2009, we sold 70,000 shares of common stock to one investor at a purchase price of $1.00 per share, for a total of $70,000.  The Company paid $2,100 as a commission to the finder. The shares were issued to the purchaser, who is a Chinese citizen and resident, pursuant to Regulation S of the Securities and Exchange Commission under the Securities Act of 1933, as amended.

In March 2009, the Company issued 747,058 shares of common stock upon the conversion of 747,058 shares of series A preferred stock.  The Company did not receive any additional consideration for the issuance of the shares.  The transaction is exempt from registration pursuant to Section 3(a)(9) of the Securities Act.

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Item 6. Exhibits

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

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

32.1      Section 1350 certification of Chief Executive Officer and Chief Financial Officer

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SIGNATURES

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

	CHINA CARBON GRAPHITE GROUP, INC.
Date: August     , 2009	By:	/s/ Donghai Yu
		Donghai Yu
		Chief Executive Officer

Date: August     , 2009	By:	/s/ Ting Chen
		Ting Chen
		Chief Financial Officer

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