China Carbon Graphite Group, Inc. - Quarterly Report (10-Q)

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

CHINA CARBON GRAPHITE GROUP, INC.

(Exact name of registrant as specified in its charter)

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

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 offices)

(86) 474-7209723

(Issuer’s telephone number)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 of 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 x No o

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, see definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of Exchange Act. Check one:

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

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

On August 14, 2008, the Registrant had 12,218,412 shares of common stock, par value $.001 per share, outstanding.

Transitional Small Business Disclosure Format: Yes o No x

CHINA CARBON GRAPHITE GROUP, INC.

	Page
Part I. Financial Information

Item 1. Consolidated Financial Statements

Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and December 31, 2007		3

Consolidated Statements of Operations for the six months ended June 30, 2008 and 2007 (Unaudited)		4

Consolidated Statements of Operations for the three months ended June 30, 2008 and 2007 (Unaudited)		5

Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007 (Unaudited)		6

Notes to Consolidated Financial Statements (Unaudited)		7

Item 2. Management’s Discussion and Analysis or Plan of Operation		20

Item 3. Controls and Procedures		26

Part II. Other Information

Item 4. Exhibits		28

China Carbon Graphite Group, Inc.

Consolidated Balance Sheets

	(US Dollars)
	Unaudited		Audited
	June 30,2008		December 31, 2007
ASSETS

Current Assets
Cash and cash equivalents	$	162,612	$	4,497
Trade accounts receivable		5,174,774		4,868,263
Notes receivable		36,381		243,426
Other receivables		513,184		766,945
Advance to suppliers		1,239,179		636,660
Inventories		17,691,170		14,626,927
Total current assets		24,817,300		21,146,718

Property and equipment, net		20,329,334		19,621,611

Land use rights, net		3,536,048		2,841,954
	$	48,682,682	$	43,610,283

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Accounts payable and accrued expenses	$	1,155,096	$	988,470
Advance from suppliers		2,007,495		2,466,810
Taxes payable		187,372		232,234
Notes payable		5,675,369		6,715,778
Convertible note payable		-		400,000
Loan from shareholder		4,893,296		4,543,648
Other payables		518,885		-
Total current liabilities		14,437,513		15,346,940


Stockholders' Equity
Convertible preferred stock, par value $0.001 per share,
authorized 20,000,000 shares, issued and outstanding 1,200,499
shares at June 30, 2008; none authorized
at December 31, 2007	$	1,200	$	-
Common stock authorized 100,000,000 shares, $0.001 par
value; issued and outstanding 12,218,412 shares and 13,218,412 shares
at June 30, 2008 and December 31, 2007, respectively		12,218		13,218
Additional paid-in capital		8,690,426		6,637,326
Accumulated other comprehensive income		4,928,134		2,948,244
Retained earnings		20,613,190		18,814,255
Treasury Stock-common at cost - none at June 30,2008
and 1,000,000 shares at December 31, 2007		-		(149,700	)
		34,245,169		28,263,343
	$	48,682,682	$	43,610,283

See notes to consolidated financial statements

China Carbon Graphite Group, Inc

Consolidated Statements of Operations (Unaudited)

	(US Dollars)
	Six months ended June 30,
	2008			2007

Sales	$	13,651,779		$	11,446,022

Cost of Goods Sold		10,183,419			9,100,115
Gross Margin		3,468,360			2,345,907

Operating Expenses
Selling expenses		170,002			91,016
General and administrative		398,917			239,457
Depreciation and amortization		30,727			1,451
		599,646			331,924
Operating Income Before Other Income (Expense)
and Income Tax Expense		2,868,714			2,013,983

Other Income (Expense)
Other income		213,673			240,006
Interest income		417			144
Interest expense		(269,557	)		(332,327	)
Other expense		(11,312	)		(7,666	)
		(66,779	)		(99,843	)

Income Before Income Tax Expense		2,801,935			1,914,140

Income tax expense		-			-

Net income		2,801,935			1,914,140

Deemed preferred stock dividend		(854,300	)		-

Net income available to common shareholders	$	1,947,635		$	1,914,140

Other comprehensive income
Foreign currency translation gain		1,979,890			624,721
Comprehensive Income	$	4,781,825		$	2,538,861

Share data

Basic earnings per share	$	0.15		$	0.18

Diluted earnings per share	$	0.10		$	0.18

Weighted average common shares outstanding,
basic		13,040,061			10,388,172

Weighted average common shares outstanding,
diluted		19,444,924			10,388,172

See notes to consolidated financial statements

China Carbon Graphite Group, Inc

Consolidated Statements of Operations (Unaudited)

	(US Dollars)
	Three months ended June 30,
	2008			2007

Sales	$	7,923,777		$	6,073,316

Cost of Goods Sold		5,817,126			4,600,350
Gross Margin		2,106,651			1,472,966

Operating Expenses
Selling expenses		149,668			77,487
General and administrative		249,712			140,195
Depreciation and amortization		15,587			-
		414,967			217,682
Operating Income Before Other Income (Expense)
and Income Tax Expense		1,691,684			1,255,284

Other Income (Expense)
Other income		14,477			2,684
Interest income		239			-
Interest expense		(136,334	)		(173,151	)
Other expense		(11,311	)		(7,666	)
		(132,929	)		(178,133	)

Net income		1,558,755			1,077,151

Other comprehensive income
Foreign currency translation gain		727,747			193,111
Comprehensive Income	$	2,286,502		$	1,270,262

Share data

Basic earnings per share	$	0.12		$	0.10

Diluted earnings per share	$	0.08		$	0.10

Weighted average common shares outstanding,
basic		12,718,412			10,388,172

Weighted average common shares outstanding,
diluted		19,918,911			10,388,172

See notes to consolidated financial statements

China Carbon Graphite Group, Inc

Consolidated Statements of Cash Flows (Unaudited)

	(US Dollars)
	Six months ended June 30,
	2008			2007
Cash flows from operating activities
Net Income	$	2,801,935		$	1,914,140
Adjustments to reconcile net cash provided by
operating activities
Depreciation and amortization		633,447			337,369
Change in operating assets and liabilities
Trade accounts receivable		6,811			1,014,118
Notes receivable		222,712			(15,656	)
Prepaid expenses		-			(17,807	)
Other receivables		303,122			68,761
Advance to suppliers		(561,544	)		-
Inventory		(2,122,854	)		(178,619	)
Accounts payable and accrued expenses		209,444			(1,917,110	)
Advance from customers		(618,078	)		-
Taxes payable		(59,809	)		(41,705	)
Other payables		518,884			-
Net cash provided by operating activities		1,334,070			1,163,492

Cash flows from investing activities
Acquisition of property and equipment and
land use rights		(589,509	)		(281,843	)
Net cash used in investing activities		(589,509	)		(281,843	)

Cash flows from financing activities
Advance from (repayment to) related parties		57,220			(297,884	)
Repayment on notes payable		(727,585	)		(616,411	)
Net cash used in financing activities		(670,365	)		(914,294	)
Effect of exchange rate changes on cash		83,919			27,551

Net increase (decrease) in cash and cash equivalents		158,115			(5,094	)

Cash and cash equivalents at beginning of period		4,497			45,460

Cash and cash equivalents at end of period	$	162,612		$	40,366

Supplemental disclosure of cash flow information
Interest paid	$	269,557		$	332,327
Income taxes paid	$	-		$	-

Non-cash financing activities:
Deemed preferred dividend reflected in paid-in capital	$	854,300		$	-

See notes to consolidated financial statements

China Carbon Graphite Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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. In connection with the reverse acquisition transaction described below, the Company’s corporate name was changed to China Carbon Graphite Group, Inc. on January 30, 2008.

On December 17, 2007, the Company completed a share exchange pursuant to a share exchange agreement, dated as of December 14, 2007, with Sincere Investment (PTC), Ltd. (“Sincere”), a British Virgin Islands corporation, which 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”). Pursuant to the share exchange agreement, the Company, then known as Achievers Magazine, Inc., issued 9,388,172 shares of common stock to Sincere in exchange for all of the outstanding common stock of Talent, and Talent became the Company’s wholly-owned subsidiary. From and after December 17, 2007, the Company’s sole business became the business of Talent, its subsidiaries and its affiliated variable interest entities.

In connection with the acquisition of Talent, on December 17, 2007:

(a)

The Company entered into a buy-back agreement dated December 14, 2007, with Arto Tavukciyan and Lyndon Grove pursuant to which the Company purchased 5,344,000 shares of common stock of the Company from them, of which 1,000,000 share were placed in escrow. Mr. Tavukciyan and Mr. Grove were, at the time of the agreement, the holders of 65.4% of the Company’s outstanding common stock. Pursuant to the buy-back agreement:

The Company agreed to pay a purchase price of $700,000 for the shares, for which the Company issued its promissory note in the principal amount of $700,000, payable in installments of $350,000 on each of March 31, 2008 and June 30, 2008. These payments have been made.

The Company agreed to pay a finders’ fee of $100,000 to Ventana Capital Partners, payable in installments of $50,000 on each of March 31, 2008 and June 30, 2008. These payments have been made.

	·	As a result of the payments described above, the 1,000,000 shares held in escrow were delivered to the Company and cancelled during the six months ended June 30, 2008.
(b)			The Company transferred all of the stock of its wholly-owned subsidiary, Achievers Publishing Inc., a British Columbia corporation, to Mr. Tavukciyan

(c)

The Company entered into a securities purchase agreement dated December 14, 2007 with XingGuang Investment Corporation Limited (“XingGuang”) pursuant to which XingGuang purchased, the Company’s 3% promissory note in the principal amount of $1,200,000, which, upon the filing on January 22, 2008, of a restated certificate of incorporation and a statement of designation for a newly created series of preferred stock designated as the series A convertible preferred stock automatically became converted into 1,200,499 shares of series A convertible 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.

The purchase price of the note is payable in installments. At the closing, XingGuang paid $183,000 to cover closing costs. Prior to the closing, XingGuang had paid at least $217,000 of expenses relating to the reverse acquisition on the Company’s behalf. XingGuang is to pay a total of $800,000 in two installments of $400,000 each, the first being due on March 31, 2008 and the second being due on June 30, 2008. The payments due March 31, 2008 and June 30, 2008 have both been made.

(d)	Pursuant to the securities purchase agreement:

Our directors approved a restatement of our articles of incorporation which would change our corporate name to China Carbon Graphite Group, Inc., change our authorized capital stock to 120,000,000 shares of capital stock, of which 20,000,000 shares would be shares of preferred stock, par value $.001 per share, and 100,000,000 shares would be shares of common stock, par value $.001 per share, and include a statement of designations of the rights of the holders of the series A preferred stock. The restated articles were filed on January 22, 2008.

The Company agreed that, within 90 days after the closing on December 17, 2007, it would have appointed such number of independent directors that would result in a majority of our directors being independent directors and we would have an audit committee composed solely of at least three independent directors and a compensation committee would have a majority of independent directors. The Company is required to pay liquidated damages (i) if the Company fails to have a majority of independent directors 90 days after the closing or (ii) thereafter, if the Company subsequently fails to meet these requirements for a period of 60 days for an excused reason, as defined in the purchase agreement, or 75 days for a reason which is not an excused reason. Liquidated damages are payable in cash or additional shares of series A preferred stock, with the series A preferred stock being valued at the market price of the shares of common stock issuable upon conversion of the series A preferred stock. The liquidated damages are computed in an amount equal to 12% per annum of the purchase price, with a maximum of $144,000. The company received a waiver from XingGuang as to the failure to have independent directors.

The Company and XingGuang entered into a registration rights agreement pursuant to which we are required to have a registration statement filed with the SEC by March 16, 2008 (subsequently extended to September 16, 2008) and declared effective by the SEC not later than August 13, 2008 (subsequently extended to December 16, 2008). We are required to pay liquidated damages at the rate of 200 shares of series A preferred stock for each day after August 13, 2008 (subsequently extended to December 16, 2008) that the registration statement is not declared effective or for any period that we fail 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.

XingGuang has a right of refusal on future financings.

Contemporaneously with the transactions described above, seven investors purchased 2,803,040 shares of common stock from a group of our stockholders in a private purchase. This purchase, while separate from the reverse acquisition, was a condition to the Company’s consummation of the exchange agreement.

In December 2007, the Company was recapitalized to give effect to the share exchange agreement discussed above. Under generally accepted accounting principles, the acquisition by the Company of Talent is considered to be capital transactions in substance, rather than a business combination. That is, the acquisition is equivalent, to the acquisition by Talent of the Company, with the issuance of stock by Talent for the net monetary assets of the Company. This transaction is reflected as a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the acquisition is identical to that resulting from a reverse acquisition. Under reverse takeover accounting, the comparative historical financial statements of the Company, as the legal acquirer, are those of the accounting acquirer, Talent. Since Talent and Yongle did not have any business activities, the Company’s financial statements prior to the closing on the reverse acquisition, reflect only business of Xingyong. The accompanying financial statements reflect the recapitalization of the stockholders’ equity as if the transactions occurred as of the beginning of the first period presented. Thus, the 9,388,172 shares of common stock issued to Sincere and the 2,803,040 shares purchased by other investors are deemed to be outstanding for all periods reported prior to the date of the reverse acquisition. The remaining shares are treated as issued at the closing, other than the 1,000,000 shares which were held in escrow, all of which had been returned to the Company and cancelled as of June 30, 2008.

Talent owns 100% of the stock of Yongle, which is a wholly foreign-owned enterprise under the laws of 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, and its sole stockholder. 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:

China Carbon Graphite Group, Inc.

ß (100% Equity ownership)

Talent International Investment Limited

ß (100% Equity ownership)

Xinghe Yongle Carbon Co., Ltd.

ß (Contractual arrangements)

Xinghe Xingyong Carbon Co., Ltd.

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

Share Distribution

On January 22, 2008, the Company affected 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 consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the results of its operations for the interim period presented. These consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company’s Form 10-KSB annual report for the year ended December 31, 2007.

The accompanying unaudited consolidated financial statements for China Carbon Graphite Group, Inc., its subsidiaries and variable interest entities, 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.

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”).

Under generally accepted accounting principles, the acquisition by the Company of Talent is considered to be a capital transaction in substance, rather than a business combination. That is, the acquisition is equivalent, in the acquisition by Talent of the Company, then known as Achievers Magazine, Inc., with the issuance of stock by Talent for the net monetary assets of the Company. This transaction is accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the acquisition is identical to that resulting from a reverse acquisition, except that no goodwill is recorded. Under reverse takeover accounting, the comparative historical financial statements of the Company, as the legal acquirer, are those of the accounting acquirer, Talent. Since Talent and Yongle did not have any business activities, the Company’s financial statements prior to the closing on the reverse acquisition, reflect the only business of Xingyong. The accompanying financial statements reflect the recapitalization of the stockholders’ equity as if the transactions occurred as of the beginning of the first period presented. Thus, the 9,388,172 shares of common stock issued to Sincere and the 2,803,040 shares purchased by other investors are deemed to be outstanding for all period covered by these financial statements.

The Company’s consolidated financial statements include the financial statements of its wholly owned subsidiaries, Talent and Yongle, as well as Xingyong, which is a variable interest entity whose financial statements are consolidated with those of the Company pursuant to FASB Interpretation No. 46R “Consolidation of Variable Interest Entities” (“FIN 46R”), an Interpretation of Accounting Research Bulletin No. 51. All significant intercompany accounts and transactions have been eliminated in the combination.

FIN 46R requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss for the variable interest entity or is entitled to receive a majority of the variable interest entity’s residual returns. Variable interest entities are those entities in which the Company, through contractual arrangements, bears the risks of, and enjoys the rewards normally associated with ownership of the entities, and therefore the Company is the primary beneficiary of these entities.

Yongle is a party to a series of contractual arrangements with Xingyong. These agreements include a management agreement pursuant to which all net income after deduction of necessary expenses, if any, generated by Xingyong is paid to Yongle and Yongle is responsible for paying Xingyong’s obligations incurred in connection with its business. In addition, 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 is also 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.

3.	Summary of Significant Accounting Policies

Use of estimates - The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America 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. Substantially all of the Company’s cash is held in bank accounts in The People’s Republic of China and is not protected by FDIC insurance or any other similar 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 - The Company uses the allowance method to account for uncollectible accounts receivable. As of June 30, 2008 all accounts receivable, advances to suppliers and other receivables were considered collectible and there was no allowance for bad debts required.

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:

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 Operations.

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, 2008 and 2007.

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 right has a term of 50 years, commencing in the year 2002. 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. There were no impairments recorded during the six months ended June 30, 2008 or 2007.

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, taking into account the average principal amounts outstanding and the interest rates applicable

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.

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. However, 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, 2008 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, 2008, 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

Under the Provisional Regulations of The People’s Republic of China Concerning Income Tax on Enterprises promulgated by the PRC, income tax is payable by enterprises at a rate of 33% of their taxable income. Preferential tax treatment may, however, be granted pursuant to any law or regulations from time to time promulgated by the State Council.

The Company has been granted a tax holiday from 100% of the Enterprises Income Tax from the Xing He District Local Tax Authority in the Nei Mongol province for the five years 2003 through 2007.

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 and new technology 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 People’s Republic of China. Therefore, Xing He District Local Tax Authority in the Nei Mongol province granted tax holiday from 100% of Enterprises Income Tax for additional three years 2008 through 2010. Afterwards, based on the present tax law, the Company will be subject to a corporation income tax rate of 15% effective in 2011.

The enterprise income tax is calculated on the basis of the statutory profit for financial reporting purposes, adjusted for income and expense items that are not assessable or deductible for income tax purposes.

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 People’s Republic of China 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 People’s Republic of China 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.

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.

Related companies - A related company is a company in which a director or an officer has beneficial interests in and in which the Company has significant influence.

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 balance contribution of 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.

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, 2008 and December 31, 2007 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, 2008 and the year ended December 31, 2007 are $1,979,890 and $1,794,923, respectively. The cumulative translation adjustment and effect of exchange rate changes on cash for the six months ended June 30, 2008 and 2007 was $83,919 and $27,551, 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, 2008 and December 31, 2007 were translated at 6.8718 RMB to $1.00 USD and at 7.3141 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, 2008 and 2007 were 7.0726 RMB and 7.72999 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.

Income per share

Basic income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted income per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive shares of common stock consist of the common stock issuable upon the conversion of convertible debt, preferred stock and warrants (using the if-converted method). The following table presents a reconciliation of basic and diluted earnings per share

	For the six months ended June 30,
	2008		2007
Net income available to common shareholders for basic and diluted earnings per share	$	1,947,635	$	1,914,140
Weighted average shares outstanding - basic		13,040,061		10,388,172
Weighted average shares outstanding - diluted		19,444,924		10,388,172
Earnings per share - basic		0.15		0.18
Earnings per share - diluted	$	0.10	$	0.18

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, 2008 and 2007 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.

4.	Concentrations of Business and Credit Risk

Substantially all 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 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 periods ended June 30, 2008 and 2007 no single customer accounted for 10% or more of sales revenues.

As of June 30, 2008 and 2007, the Company had insurance expense of $5,717 and $0 respectively. Accrual for losses is not recognized until such time a loss has occurred.

5.	Income Taxes

The Company has been granted a 100% tax holiday from Enterprises Income Tax Policy from the Xing He District Local Tax Authority for the eight years 2003 through 2010. 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 periods ended June 30, 2008 and 2007, the enterprise income tax at the statutory rates would have been approximately $924,639 and $ 631,674, 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:

	2008			2007
Computed tax at the PRC statutory rate of 33%	$	924,639		$	631,674
Benefit of tax holiday		(924,639	)		(631,674	)
Income tax expenses per books	$	-		$	-

6.	Inventories

As of June 30, 2008 and December 31, 2007, inventory consisted of the following:

	2008		2007
Raw materials	$	1,796,890	$	1,198,174
Work in process		13,032,162		10,119,774
Finished goods		2,819,719		3,270,125
Repair Parts		42,399		38,854
	$	17,691,170	$	14,626,927

7.	Property and Equipment; Land Use Rights

As of June 30, 2008 and December 31, 2007, property and equipment consist of the following:

	2008		2007
Building	$	6,727,231	$	6,320,420
Machinery and equipment		19,454,553		18,234,302
Motor vehicles		40,746		38,282
		26,222,530		24,593,004
Less: Accumulated depreciation		5,893,196		4,971,393
	$	20,329,334	$	19,621,611

For the six months ended June 30, 2008 and 2007, depreciation expense was $601,822 and $335,898.

As of June 30, 2008 and December 31, 2007, land use rights consist of the following:

	2008		2007
Land Use Right	$	3,705,034	$	2,971,009
Less: Accumulated amortization		168,986		129,055
	$	3,536,048	$	2,841,954

For the six months ended June 30, 2008 and 2007, amortization expenses were $30,727 and $1,444 respectively.

8. Stockholders’ equity

(a)	Restated Certificate 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 certificate of incorporation included a statement of designations of the rights, preferences, privileges and limitation of the holders of the series A preferred stock. The terms of the statement of designations is set forth under “Conversion of Convertible Notes.”

(b)	Conversion of Convertible Notes.

On January 22, 2008, upon the filing of a restated certificate of incorporation and a statement of designation for a newly created series of preferred stock designated as the series A convertible preferred stock, outstanding convertible notes in the principal amount of $1,200,000 were automatically converted into 1,200,499 shares of series A convertible 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. 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 then 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

(c)

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 prior to December 17, 2008 and thereafter the holders may make a cashless exercise only if the underlying shares are not covered by an effective registration statement.

(d)	Securities Purchase Agreement

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

On January 22, 2008, we restates our articles of incorporation to change our corporate name to China Carbon Graphite Group, Inc., change our authorized capital stock to 120,000,000 shares of capital stock, of which 20,000,000 shares are shares of preferred stock, par value $.001 per share, and 100,000,000 shares are shares of common stock, par value $.001 per share. The restated articles included a statement of designations of the rights, preferences, privileges and limitations of the holders of the series A preferred stock.

The Company agreed that, within 90 days after the closing on December 17, 2007, it would have appointed such number of independent directors that would result in a majority of the directors being independent directors and the Company would have an audit committee composed solely of at least three independent directors and a compensation committee would have a majority of independent directors. The Company is required to pay liquidated damages (i) if the Company fails to have a majority of independent directors 90 days after the closing or (ii) thereafter, if the Company subsequently fails to meet these requirements for a period of 60 days for an excused reason, as defined in the purchase agreement, or 75 days for a reason which is not an excused reason. Liquidated damages are payable in cash or additional shares of series A preferred stock, with the series A preferred stock being valued at the market price of the shares of common stock issuable upon conversion of the series A preferred stock. The liquidated damages are computed in an amount equal to 12% per annum of the purchase price, with a maximum of $144,000. Liquidated damages through June 30, 2008 have been waived.

The Company and XingGuang entered into a registration rights agreement pursuant to which the Company is required to have a registration statement filed with the SEC by March 16, 2008 (subsequently extended to September 16, 2008 ) and declared effective by the SEC not later than August 13, 2008 (subsequently extended to December 16, 2008). We are required to pay liquidated damages at the rate of 200 shares of series A preferred stock for each day after August 13, 2008 (subsequently extended to December 16, 2008) that the registration statement is not declared effective or for any period that we fail 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.

·	XingGuang has a right of refusal on future financings.

(e)	Cancellation of common stock

In connection with the acquisition of Talent, the Company entered buy-back agreement, see Note 1 (a). The Company agreed to pay a purchase price of $700,000 for the shares, payable in installments of $350,000 on each of March 31, 2008 and June 30, 2008. The Company placed 1,000,000 of the shares of common stock in escrow, and the shares are subject to release from escrow. The payments were made in the six months ended June 30, 2008, and the 1,000,000 shares were returned to the Company and cancelled.

(f)	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 to 1,200,499 shares of preferred stock convertible into 1,200,499 shares of common stock at a conversion price of $1.00 per share and included detachable 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 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 during the three months ended March 31, 2008. The deemed preferred stock dividend of $854,300 has been recorded as additional paid-in capital and a reduction to retained earnings.

9. Notes Payable

As of June 30, 2008 and December 31, 2007, notes payable consist of the following:

	2008		2007
Bank loans dated June 12, 2007, due June 10, 2008 with an interest rate of 8.541% was extended to July 17, 2008 with an interest rate of 9.711%, interest payable monthly, secured by property and equipment and land use rights	$	5,675,369	$	-
Bank loans dated June 12, 2007, due June 10, 2008 with an interest rate of 8.541%, interest payable monthly, secured by property and equipment and land use rights				5,332,167
Other loan dated June 22, 2007, due June 20, 2008 with an interest rate of 7.227%, interest payable quarterly, secured by equipment and land use rights	$			683,611
Notes payable to former principal shareholders pursuant to buy-back agreements in relation to the reverse acquisition, see Note 1.				700,000
	$	5,675,369	$	6,715,778

10. Loans from Shareholder

On June 30, 2008 and December 31, 2007, the Company had loans from a shareholder amounting to $4,893,296 and $4,543,648, respectively. The advances do not bear interest and are due on demand.

11. Subsequent Event

On June 30, 2008, the Company had a bank loan of $5,675,369 dated June 12, 2007, due June 10, 2008 with an interest rate of 8.541%. The bank loan was extended to July 17, 2008 with an interest rate of 9.711%, interest payable monthly, secured by property and equipment and land use rights. See Note 9.

On July 17, 2008, the Company paid $800,373 of the notes payable mentioned above and renewed the remaining balance of $4,874,996 with due dates as follows:

	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	$	727,612
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		1,164,178
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		1,164,178
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		1,164,178
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		654,850
	$	4,874,996

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

Forward Looking Statements

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. Statements contained in this Form 10-Q include forward-looking statements that are subject to risks and uncertainties. In particular, statements in this Form 10-Q that state our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions are “forward-looking statements.” Forward-looking statements are subject to risks, uncertainties and other factors, including, but not limited to, those identified under “Risk Factors,” in our Form 10-KSB for the year ended December 31, 2007 and those described in “Management's Discussion and Analysis of Financial Conditions and Results of Operations” in the Form 10-KSB and this Form 10-Q, and those described in any other filings by us with the Securities and Exchange Commission, as well as general economic conditions and economic conditions affecting the electronics and consumer electronics industry, any one or more of which could cause actual results to differ materially from those stated in such statements. In addition, such statements could be affected by risks and uncertainties related to the ability to conduct business in China, product demand, our ability to develop products using the most current technology, our ability to raise any financing which we may require for our operations, competition, government regulations and requirements, pricing and development difficulties, as well as general industry and market conditions and growth rates, and general economic conditions. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q.

Overview

Reference in this Form 10-Q to “we,” “us,” “our” and words of like import refer to the Company, its subsidiaries and its variable interest entity, Xinghe Xingyong Carbon Co., Ltd. (“Xingyong”). For periods prior to December 17, 2007, these terms refer to Xingyong.

Prior to December 17, 2007, we were a pubic reporting blind pool company. On December 17, 2007, we executed and completed the transactions contemplated by the agreement with Sincere Investment (PTC) Ltd. whereby Talent International Investment Limited (“Talent”), a British Virgin Islands corporation, became our wholly-owned subsidiary. Talent is the sole stockholder of Xinghe Yongle Carbon Co., Ltd. (“Yongle”), a company organized under the laws of the PRC. Yongle is a party to a series of contractual arrangements with Xingyong, as described below.

Xingyong was organized under the laws of the PRC in 2002. Xingyong’s business was formerly operated as a state-owned enterprise. The business was reorganized under the laws of the PRC as a limited liability company named Xinghe Xingye Carbon Co., Ltd. In December 2001, Mr. Dengyong Jin organized Xingyong to acquire the business of Xinghe Xingye Carbon Co., Ltd. by paying RMB 55,600,000 (approximately US$7,900,000). Mr. Jin funded RMB 33,750,000 (approximately US$4,800,000) and the company obtained bank loans in the amount of RMB 21,950,000 (approximately US$3,100,000).

From December 2001 until the reverse acquisition on December 17, 2007, our business was conducted by Xingyong, and this discussion relates to the business, financial condition and results of operations of Xingyong for all periods prior to December 17, 2007, and thereafter reflect the financial condition of the Company, its subsidiaries and Xingyong, which is a variable interest entity whose financial statements are consolidated with ours pursuant to FIN 46. 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 in both the domestic Chinese market and the international market. We also sell graphite electrodes directly to domestic 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.

In accordance with the relevant Chinese rules and regulations on management of foreign exchange, the foreign currency generated from sales of our products outside of China is brought into China and sold to designated banks instead of depositing it in banks out of the PRC without authorization. In addition, we have to buy foreign currency from designated banks upon the strength of commercial bills when paying current expenditures with foreign currency. All of our transactions undertaken in the PRC are denominated in RMB, which must be converted into other currencies before remittance out of China. Both the conversion of RMB into foreign currencies and the remittance of foreign currencies abroad require the approval of the Chinese government.

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. 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.

The transaction whereby we acquired Talent is accounted for as a reverse acquisition. The exchange of our stock for the stock of Talent is considered to be capital transactions in substance, rather than a business combination. That is, the acquisition is equivalent to the acquisition by Talent of us, with the issuance of stock by Talent for the net monetary assets of Achievers. This transaction is accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the acquisition is identical to that resulting from a reverse acquisition. Under reverse takeover accounting, our historical financial statements are those of Talent, which is treated as the acquiring party for accounting purposes. Since Talent and Yongle were not engaged in any business activities, our financial statements for periods prior to the closing of the reverse acquisition reflect only business of Xingyong. The financial statements reflect the recapitalization of the stockholders’ equity as if the transactions occurred as of the beginning of the first period presented.

Prior to December 17, 2007, we did not have the expenses of a public company. As a result, since December 17, 2007 we have incurred, and we are continuing to incur, significantly greater legal, accounting and other professional expenses relating to our status as a public company and compliance with SEC rules, including the development and implementation of internal controls.

For the five years from 2003 through 2007, we received a 100% tax holiday from the regional government for enterprise income tax. As a result, we paid no enterprise income tax for those years. In 2008, Xing He District Local Tax Authority in the Nei Monggol province granted tax holiday from 100% of Enterprises Income Tax for additional three years - from 2008 through 2010. Following expiration of that period, based on the present tax law, we will be subject to a corporation income tax rate of 15% effective in 2011 .

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.

Critical Accounting Policies and Estimates

Use of Estimates

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.

Variable Interest Entity

Pursuant to Financial Accounting Standards Board Interpretation No. 46 (Revised), “Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51” (“FIN 46R”) we are required to include in our consolidated financial statements the financial statements of variable interest entities. FIN 46R requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss for the variable interest entity or is entitled to receive a majority of the variable interest entity’s residual returns. Variable interest entities are those entities in which we, through contractual arrangements, bear the risk of, and enjoy the rewards normally associated with ownership of the entity, and therefore we are the primary beneficiary of the entity.

Xingyong is considered a variable interest entity (“VIE”), and we are the primary beneficiary. On December 17, 2007, we entered into agreements with the Xingyong pursuant to which we shall receive the benefit of the Xingyong’s net income. In accordance with these agreements, Xingyong shall pay consulting fees equal to 80% to 100% of its net income to our wholly-owned foreign subsidiary, Yongle, and Yongle shall supply the technology and administrative services needed to service Xingyong. Xingyong is owned by Mr. Jin, who is Yongle’s and our chief executive officer.

The accounts of Xingyong are consolidated in the accompanying financial statements pursuant to FIN 46R. As a VIE, Xingyong’s sales are included in our total sales, its income from operations is consolidated with our, and our net income includes all of Xingyong net income. We do not have any non-controlling interest and accordingly, did not subtract any net income in calculating the net income attributable to us. Because of the contractual arrangements, we have pecuniary interest in Xingyong that require consolidation of our financial statements and Xingyong’s financial statements.

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. 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”). 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.

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. With the approvals of the Xinghe County Government, we received a 100% tax holiday from enterprise income taxes from 2003 through and including 2007.

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 percent except a 15 percent corporate income tax rate for qualified high and new technology 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 become 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 People’s Republic of China. Therefore, Xing He District Local Tax Authority in the Nei Monggol province granted tax holiday from 100% of Enterprises Income Tax for additional three years 2008 through 2010. Following expiration of the three year period, based on the present tax law, we will be subject to a corporation income tax rate of 15% effective in 2011.

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, 2008.

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.

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 2,356,209 square 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 in 2002. We record the property subject to land use rights as intangible property.

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 total research and development expense through June 30, 2008 has not been significant.

Value added tax

Enterprises or individuals who sell products, engage in repair and maintenance or import and export goods in the PRC are subject to a value added tax in accordance with Chinese laws. The value added tax standard rate is 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products, raw materials used in the production of the Company’s finished products, and payment of freight expenses can be used to offset the VAT due on sales of the finished product. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT paid on purchases made with the relevant supporting invoices (input VAT). Under the commercial practice of the PRC, the Company paid VAT 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.

RESULTS OF OPERATIONS

The following tables set forth information from our statements of operations for the six months and three months ended June 30, 2008 and 2007, in dollars and as a percentage of sales:

	Six months ended June 30,
	2008						2007
	US Dollars			Percentage			US Dollars			Percentage
Sales	$	13,651,779			100.00	%	$	11,446,022			100.00	%
Cost of sales		10,183,419			74.59	%		9,100,115			79.50	%
Gross margin		3,468,360			25.41	%		2,345,907			20.50	%
Operating expenses		599,646			4.40	%		331,924			2.90	%
Income from operations		2,868,714			21.01	%		2,013,983			17.60	%
Other income		213,673			1.57	%		240,006			2.10	%
Interest income		417			0.00	%		144			0.00	%
Interest expense		(269,557	)		(1.98	)%		(332,327	)		(2.90	)%
Other expense		(11,311	)		(0.08	)%		(7,666	)		(0.07	)%
Income before income tax expense		2,801,935			20.52	%		1,914,140			16.73	%
Provision for income taxes		-			0.00	%		-			0.00	%
Net income		2,801,935			20.52	%		1,914,140			16.73	%
Other comprehensive income
Foreign currency translation adjustment		1,979,890			14.50	%		624,721			5.46	%
Comprehensive income	$	4,781,825			35.02	%	$	2,538,861			22.19	%

	Three months ended June 30,
	2008						2007
	US Dollars			Percentage			US Dollars			Percentage
Sales	$	7,923,777			100.00	%	$	6,073,316			100.00	%
Cost of sales		5,817,126			73.41	%		4,600,350			75.75	%
Gross margin		2,106,651			26.59	%		1,472,966			24.25	%
Operating expenses		414,967			5.24	%		217,682			3.58	%
Income from operations		1,691,684			21.35	%		1,255,284			20.67	%
Other income		14,477			0.18	%		2,684			0.04	%
Interest income		239			0.00	%		-			-	%
Interest expense		(136,334	)		(1.72	)%		(173,151	)		(2.85	)%
Other expense		(11,312	)		(0.14	)%		(7,666	)		(0.13	)%
Income before income tax expense		1,558,754			19.67	%		1,077,151			17.74	%
Provision for income taxes		-			0.00	%		-			0.00	%
Net income		1,558,754			19.67	%		1,077,151			17.74	%
Other comprehensive income
Foreign currency translation adjustment		727,747			9.18	%		193,111			3.18	%
Comprehensive income	$	2,286,502			28.86	%	$	1,270,262			20.92	%

Sales. During the six months ended June 30, 2008, we had sales of $13.7 million, as compared to sales of $11.4 million for the six months ended June 30, 2007, an increase of $2.2 million, or approximately 19.3%. Net sales for the three months ended June 30, 2008 were $7.9 million compared to $6.1 million for the three months ended June 30, 2007, an increase of $1.8 million or 29.5%. This increase resulted from our marketing efforts both to develop new customers and make follow-on sales to existing customers.

Cost of sales; gross margin . During the six months ended June 30, 2008, our cost of sales was $10.2 million, as compared to cost of sales of $9.1 million during the six months ended June 30, 2007, an increase of $1.1 million, or approximately 12.1 %. The sales increased 19.3% while the cost of sales increased 12.1%. As a result, our gross profit increased by $1.1 million, or approximately 47.8%, and our gross margin increased from 20.5% in the six months ended June 30, 2007 to 25.4% in the six months ended June 30, 2008.

Cost of sales for the three months ended on June 30, 2008 totaled $5.8 million compared to $4.6 million for the three months ended on June 30, 2007, an increase of $1.2 million or 26.4%. As a result, our gross profit increased by $0.6 million, or approximately 43%, our gross margin increased from 24.25 % in the three months ended June 30, 2007 to 26.59 % in the three months ended June 30, 2008.

The increase in gross profit resulted from a shift of our production focus from low margin graphite electrodes to fine grain graphite and high purity graphite which, although these electrodes have a higher cost, generate a higher gross margin.

Operating expenses.

Operating expenses increased $267,722 or 80.7% from $331,924 in the six months ended June 30, 2007 to $599,622 in the six months ended June 30, 2008. The change was due to increase of depreciation and amortization expense of $29,276, increase of selling expense of $78,986 and increase of general administrative expense of $159,460.

Operating expenses increased $197,285 or 90.6% from $217,682 in the three months ended June 30, 2007 to $414,967 in the three months ended June 30, 2008. The change was due to increase of depreciation and amortization expense of $15,587, increase of selling expense of $72,181 and increase of general administrative expense of $109,517.

Increase of operating expenses was primarily due to increase of professional expenses related to the costs of being a public reporting as well as higher selling expenses incurred in relation to sale of higher margin products fine grain graphite and high purity graphite.

Income from operations. For six months ended June 30, 2008, income from operations amounted to $2,868,714 as compared to $2,013,983 for the six months ended June 30, 2007, an increase of $854,731 or approximately 42.4%. For three months ended June 30, 2008, income from operations amounted to $1,691,684 as compared to $1,255,284 for the three months ended June 30, 2007, an increase of $436,400 or approximately 34.8%. The increase was primarily due to shift of production focus to fine grain graphite and high purity graphite which has higher gross profit margin.

Other income . For the six months ended June 30, 2008, other income amounted to $213,673 as compared to $240,006 for the six months ended June 30, 2007. Other income includes government grant received from the PRC government for the recognition of high technology and science companies in the amount of $212,086 and $238,681 for the six months ended June 30, 2008 and 2007, respectively. These grants were received in the first quarter of 2008 and 2007. For the three months ended June 30, 2008, other income amounted to $14,477 as compared to $2,684 for the three months ended June 30, 2007.

Interest income and expenses. During the six months ended June 30, 2008 and 2007, interest expense amounted $269,557 and $332,327, respectively and interest income of $417 and $144, respectively. During the three months ended June 30, 2008 and 2007, interest expense amounted $136,334 and $173,151, respectively and interest income of $239 and $0, respectively.

Deemed preferred stock dividend.

Upon filing of our amended and restated articles of incorporation on January 22, 2008, our 3% convertible notes were automatically converted into 1,200,499 shares of series A convertible preferred stock and warrants to purchase 3,000,000 shares of the common stock at $1.20 per share and 3,000,000 shares of common stock at $2.00 per share. As a result of the issuance of the warrants to the holders of the series A preferred stock, we computed the effective preferred stock conversion price to be $0.24 per share, with the result that the intrinsic value of the conversion feature was $854,300. The deemed preferred stock dividend is a non-cash charge which does not affect our operations or cash flow.

Net income. As a result of the factors described above, our net income available to common shareholders is $1,947,635, or $0.15 per share (basic) and $0.10 per share (diluted) for the six months ended June 30, 2008, as compared with $1,914,140, or $0.18 per share (basic and diluted) for the six months ended June 30, 2007.

Comprehensive income. For the six months ended June 30, 2008, comprehensive income of $4,781,825 reflects of our net income of $2,801,935 (before deduction of the deemed preferred stock dividend) and foreign currency translation gains of $1,979,890. For the six months ended June 30, 2007, comprehensive income of $2,538,861 reflects the sum of our net income of $1,914,140 and foreign currency translation gains of $624,721.

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, 2008, we had a cash balance of $162,612 as compared to $ 4,497 on December 31, 2007. These funds are on deposit with financial institutions located in the PRC.

Our working capital position increased $4.6 million to $10.4 million at June 30, 2008 from a working capital of $5.8 million at December 31, 2007. The increase in working capital reflects an increase in inventories ($3,064,243), as well as advances to suppliers ($602,519) and accounts receivable ($306,511), and a decrease in current liabilities ($909,427), partially offset by a decrease in other receivables ($253,761) and notes receivable ($207,045). We generated cash from operations of $1,334,070 for the six months ended June 30, 2008, as compared with $1,163,492 for the comparable period of 2007.

Net cash used in investing activities was $589,509 for the six months ended June 30, 2008 as compared to $281,843 provided in the six months ended June 30, 2007. For both periods, the cash used in investing activities related to the acquisition of property and land use rights.

Net cash used in financing activities was $670,365 in the six months ended June 30, 2008 as compared to $914,294 for the six months ended June 30, 2007. For the six months ended June 30, 2008, we received advances from related parties $57,220 and repaid notes payable $727,585. For the six months ended June 30, 2007, we repaid advances from related parties of $297,884 and advances on notes payable of $616,411.

We have financed our operations principally through short term bank loans and, to a lesser extent, loans from Mr. Jin, our chief executive officer. At June 30, 2008, we had a bank loan in the amount of $5,675,369 which was due on June 10, 2009 and which bore interest at 9.711% per annum and was secured by a security interest on our fixed assets and land use rights. On July 17, we paid $800,373 of the note and renewed the remaining balance of $4,874,996 with varying maturing dates in May, June and July 2009. Although we believe that we will be able to obtain further extensions of these loans when they mature, we cannot assure you that such extensions will be granted.

At June 30, 2008, Mr. Jin has advances to us in the amount of $4.9 million, as compared with $4.5 million at December 31, 2007. The change in the amount is caused by a change in the exchange rate of RMB to United States dollars. The amount of the loan in RMB is unchanged. These advances do not bear interest and are due on demand.

In December 2007, in connection with the reverse acquisition, we issued a 3% convertible note in the principal amount of $1,200,000 to the investor. This note was automatically converted into 1,200,499 shares of series A convertible 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, when we filed restated articles of incorporation that authorized the creation of preferred stock and included a statement of designation for the series A convertible preferred stock. The purchase price of the note was payable in installments, and the full purchase price was paid at June 30, 2008. At the closing, XingGuang paid $183,000 to cover closing costs. Prior to the closing, the investor had paid at least $217,000 of expenses relating to the reverse acquisition on our behalf. The investor paid a total of $800,000 in two installments of $400,000 each, the first being due on March 31, 2008 and the second being due on June 30, 2008. These payments were made during the six months ended June 30, 2008.

In connection with the reverse acquisition, we issued our promissory note for $700,000 and we owe a $100,000 finders’ fee in connection with the reverse acquisition. These payments are due in two installments totaling $400,000 each, which are due on March 31, 2008 and June 30, 2008. These payments are secured by 1,000,000 of the share of common stock that we purchased from the former principal stockholders of Achievers. These shares were held in escrow, and were released from escrow and cancelled when we paid these obligations.

We require funds for working capital for our operations. We believe that our working capital, together with the cash flow from our ongoing business will be sufficient to enable us to meet our cash requirements for the next 12 months with our present business. However, plan to develop an enhanced product which may have use in the nuclear power industry, and this development effort will require substantial additional funding. We cannot assure you that we will be able to obtain the necessary funding and, even if we have sufficient financing, we will be able to develop a product acceptable to the nuclear power industry.

Although we do not have any current plans to make any acquisitions, it is possible that we may seek to acquire one or more businesses in a related field, and we may require financing for that purpose. We cannot assure you that funding will be available if and when we require funding.

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 table summarizes our contractual obligations as of June 30, 2008.

	Payments Due by Period
	Total		Less than 1 year		1-3 Years		3-5 Years		5 Years +
Contractual Obligations :
Bank indebtedness	$	5,675,369	$	5,675,369	$	—	$	—	$	—
Total Contractual Obligations:	$	5,675,369	$	5,675,369	$	—	$	—	$	—

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Foreign Currency Exchange Rate Risk

Our sales are primarily through distributors in China and we are paid in RMB. Thus, most of our revenues and operating results is not impacted by exchange rate fluctuations between RMB and US dollars. However, our reporting currency is the U.S. dollar and the functional currency of the Company is the RMB. Therefore, translation adjustments arise from the process of translating the local currency financial statements into U.S. dollars. For the three months ended June 30, 2008, we had foreign currency translation gain of $1,979,890 due to the fluctuation in the foreign exchange rate.

Item 3. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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, 2008.

Management’s Report on 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, 2007. 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, 2007, 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.

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 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 U.S. 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 U.S. 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 the end of June 30, 2008.

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.

The certification of our chief executive and chief financial officer, which is included as Exhibits 31.1 and 31.2 to this quarterly report on Form 10-Q, include, in paragraph 4 of such certifications, information concerning our disclosure controls and procedures and internal control over financial reporting. Such certifications should be read in conjunction with the information contained in this Item 4 - Controls and Procedures for a more complete understanding of the matters covered by such certification.

PART II. OTHER INFORMATION

Item 6. Exhibits

31.1	Certification by Chief Executive Officer pursuant to Sarbanes Oxley Act of 2002 Section 302.

31.2	Certification by Chief Financial Officer pursuant to Sarbanes Oxley Act of 2002 Section 302.

32.1	Certification by chief executive officer and chief financial officer pursuant to Sarbanes-Oxley Act of 2002 Section 906.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	China Carbon Graphite Group, Inc. (Registrant)

August 14, 2008	By:	/s/ Dengyong Jin
		Dengyong Jin, Chief Executive Officer



August 14, 2008	By:	/s/ Donghai Yu
		Donghai Yu, Chief Financial Officer

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