Summary of CHINA CARBON GRAPHITE GROUP, INC.

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

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

Overview

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

Our sales have suffered during 2009 as a result of the worldwide economic downturn, with sales in the nine and three months ended September 30, 2009 declining by 42.67% and 25.68%, respectively, from the comparable periods of 2008 although sales in the third quarter reflected an increase from sale of the prior two quarters. The sales decrease reflects the effects of the negative global economic situation as well as the closure of Xingyong's plant facilities for almost two months during the third quarter of 2008 as part of the Chinese government's program to reduce air pollution during and in anticipation of the August 2008 Olympics. This shutdown reduced our sales in the first quarter of 2009 because it takes about three months to six months to produce graphite products.

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

During the nine months ended September 30, 2009, our declining margin reflected changes in our product mix, with an increasing percentage of sales being sales of graphite electrodes. We plan to seek to increase our marketing effort for fine grain graphite and high purity graphite products which generate a better margin, but we cannot assure you that we will be successful in these efforts.

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.

Variable Interest Entity

Our relationships with Xingyong and its stockholders are governed by a series of contractual arrangements between Yongle and Xingyong, the operating company in the PRC. Under PRC laws, each of Yongle and Xingyong is an independent legal person and is not exposed to liabilities incurred by the other parties. Yongle has a series of agreements with Xingyong pursuant to which it manages the business of Xingyong and 80% to 100% of the profit of Xingyong is paid to Yongle. For 2007 and 2008, Xingyong paid 100% of the profit to Yongle. Xingyong is owned by Mr. Jin, who is Yongle's controlling stockholder and was our chief executive officer at the time of we entered into our agreements with Xingyong. Xingyong is treated as a variable interest entity and its financial statements are included as part of our consolidated financial statements under Accounting Standard Codification (ASC) Topic 810-10, formerly known as FIN
46(R), "Consolidation of Variable Interest Entities," referred to as FIN 46.

Significant Accounting Estimates and Policies

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

Revenue Recognition

We recognize revenue in accordance with ASC 605-25, Revenue Recognition of Financial Statements, formerly known as Staff Accounting Bulletin No. 104, Revenue Recognition, which states that revenue should be recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists;
(2) the service has been rendered; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. Sales represent the invoiced value of goods, net of value added tax ("VAT"), if any, and are recognized upon delivery of goods and passage of title.

Comprehensive Income

We have adopted Statements of ASC 220, Comprehensive Income, formerly known as 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 ASC 740 Income Tax, formerly known as SFAS No. 109, Accounting for Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are recognized for the future tax consequence attributable to the difference between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are measured using the enacted tax rate expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

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

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

Inventories

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

Land Use Rights

There is no private ownership of land in China. All land ownership is held by the government of China, its agencies and collectives. Land use rights are obtained from government, and are typically renewable. Land use rights can be transferred upon approval by the land administrative authorities of China (State Land Administration Bureau) upon payment of the required transfer fee. We own the land use right for 2,356,209 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. We record the property subject to land use rights as intangible asset.

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

Research and development

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

Value added tax

Pursuant to China's VAT rules and regulations, as an ordinary VAT taxpayer we are subject to a tax rate of 17% ("output VAT"). The output VAT is payable after offsetting VAT paid by us on purchases ("input VAT"). Under the commercial practice of the PRC, the Company 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. We have been granted an exemption from VAT by the Xinghe County People's Government and Xinghe Tax Authority on some products for which an exchange agreement is in place for raw materials and fuel. We have been granted an exemption from VAT by the Xing He County People's Government and Xing He Tax Authority on some products in which an exchange agreement is in place for raw materials and fuel.

Recent accounting pronouncements

In December, 2007, the FASB issued ASC 805 "Business Combinations", formerly known as SFAS No. 141(R) "Business Combinations". SFAS No. 141(R) requires an acquiring entity to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions, and applies to a wider range of transactions or events. SFAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008 and early adoption and retrospective application is prohibited. Effective January 1, 2009. ASC 805 revised SFAS No. 141(R) and addresses the accounting and disclosure for identifiable assets acquired, liabilities assumed, and noncontrolling interests in a business combination. The adoption of SFAS 141(R) does not have a material effect on the Company's condensed consolidated financial statements.

In December 2007, the FASB issued ASC 810, "Consolidation", formerly known as SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements
- An Amendment of ARB No. 51", which establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent's equity. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (that is, the year ended December 31, 2009 for the Company). This Statement does not have an effect on the Company's condensed consolidated financial statements.

In March 2008, the FASB issued ASC 815, "Derivatives and Hedging", formerly known as SFAS No. 161 "Disclosures about Derivative Instruments and Hedging Activities - An Amendment of FASB Statement No. 133", which changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. This statement will be effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 (that is, the year ended December 31, 2009 for the Company). This Statement does not have an effect on the Company's condensed consolidated financial statements.

In May 2008, the FASB issued ASC 470-20, "Debt with conversion and other options", formerly known as FASB Staff Position ("FSP") APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)". FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon either mandatory or optional conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants. Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's non-convertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company adopted FSP APB 14-1 beginning in the first quarter of 2009, and this standard must be applied on a retroactive basis. This Statement does not have an effect on the Company's condensed consolidated financial statements.

In October 2008, the FASB issued FSP FAS 157-3, "Determining the Fair Value of a Financial Asset in a Market That Is Not Active" (FSP 157-3), which clarifies the application of ASC 820, "Fair Value Measurement Disclosures", formerly known as SFAS No. 57, when the market for a financial asset is inactive. Specifically, FSP 157-3 clarifies how (1) management's internal assumptions should be considered in measuring fair value when observable data are not present, (2) observable market information from an inactive market should be taken into account, and (3) the use of broker quotes or pricing services should be considered in assessing the relevance of observable and unobservable data to measure fair value. The Company adopted the provisions of FSP 157-3, which did not impact the Company's financial position or results of operations.

In May 2009, the FASB issued ASC 855, "Subsequent Events", formerly known as SFAS No. 165. SFAS No. 165 is intended to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. SFAS 165 No. is effective for interim or annual financial periods ending after June 15, 2009. The Company adopted this statement for the financial statements since the quarter ended June 30, 2009.

In June 2009, the FASB issued ASC 860, "Transfers and servicing", formerly known as SFAS No. 166, a revision to SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", and will require more information about transfers of financial assets and where companies have continuing exposure to the risks related to transferred financial assets. SFAS 166 is effective at the start of a company's first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis. The adoption of this statement is not expected to have a material effect on the Company's financial statements.

In June 2009, the FASB issued ASC 810, "Consolidation", formerly known as SFAS No. 167, a revision to FASB Interpretation No. 46(R), "Consolidation of Variable Interest Entities", and will change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. Under SFAS No. 167, determining whether a company is required to consolidate an entity will be based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. SFAS No. 167 is effective at the start of a company's first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis. The Company is in the process of evaluating the effect, if any, the adoption of SFAS No. 167 will have on the Company's financial statements

In June 2009, the FASB issued SFAS No. 168, "The Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) and the Hierarchy of Generally Accepted Accounting Principles (GAAP) - a replacement of SFAS No. 162" , which establishes the FASB ASC as the source of authoritative U.S. GAAP recognized by the FASB to be applied by non-governmental entities. As a result of the adoption of SFAS 168, the majority of references to historically issued accounting pronouncements are now superseded by references to the FASB ASC, with no financial impact.

RESULTS OF OPERATIONS

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

                                                           Nine months ended September 30,
                                                       2009                               2008
                                            US Dollars       Percentage        US Dollars       Percentage
Sales                                      $     12,132              100 %    $     21,161           100.00 %
Cost of sales                                     9,013            74.29 %          15,568            73.57 %
Gross profit                                      3,119            25.71 %           5,593            26.43 %
Operating expenses                                1,065             8.78 %           1,064             5.03 %
Income from operations                            2,054            16.93 %           4,529            21.40 %
Other income                                        545             4.49 %             225             1.06 %
Other expense                                        (1 )          (0.01 )%            (11 )          (0.05 )%
Interest income                                       -                - %               1                - %
Interest expense                                   (762 )          (6.28 )%           (413 )          (1.95 )%
Income before income tax expense                  1,836            15.13 %           4,330            20.46 %
Provision for income taxes                            -                - %               -                - %
Net income                                 $      1,836            15.13 %    $      4,330            20.46 %
Foreign currency translation adjustment             125             1.03 %           2,065             9.76 %
Comprehensive income                       $      1,961            16.16 %    $      6,395            30.22 %

                                                           Three months ended September 30,
                                                       2009                               2008
                                            US Dollars       Percentage        US Dollars       Percentage
Sales                                      $      5,581           100.00 %    $      7,509              100 %
Cost of sales                                     4,056            72.68 %           5,384            71.70 %
Gross profit                                      1,525            27.32 %           2,125            28.30 %
Operating expenses                                  252             4.51 %             465             6.19 %
Income from operations                            1,273            22.81 %           1,660            22.11 %
Other income                                         19             0.34 %              11             0.15 %
Interest income                                       -                - %             493             0.01 %
Interest expense                                   (357 )          (6.40 )%           (143 )          (1.91 )%
Income before income tax expense                    935            16.75 %           1,528            20.35 %
Provision for income taxes                            -                - %               -                - %
Net income                                 $        935            16.75 %    $      1,528            20.35 %
Foreign currency translation adjustment              76             1.36 %              85             1.13 %
Comprehensive income                       $      1,011            18.11 %    $      1,613            21.48 %

Sales. During the nine months ended September 30, 2009, we had sales of $12,132,000 as compared to sales of $21,161,000 for the nine months ended September 30, 2008, a decrease of $9,029,000, or approximately 42.67%. During the three months ended September 30, 2009, we had sales of $5,581,000, as compared to sales of $7,509,000 for the three months ended September 30, 2008, a decrease of $1,928,000, or approximately 25.68%. The sales decrease reflects the effects of the negative global economic situation as well as the closure of Xingyong's plant facilities for almost two months during the third quarter of 2009 as part of the Chinese government's program to reduce air pollution during and in anticipation of the August 2008 Olympics. This shutdown reduced our sales in the first quarter of 2009 because it takes about three months to six months to produce graphite products. During the nine and three months ended September 30, 2009, sales decreased primarily due to weaker demand of graphite products, graphite electrode in particular. Sales for the third quarter of 2009 improved modestly from the level of the second quarter, but reflected a decline of 25.68% from sales of the third quarter of 2008.

Cost of sales; gross margin. During the nine months ended September 30, 2009, our cost of sales was $9,013,000, as compared to $15,568,000 during the nine months ended September 30, 2008, a decrease of $6,555, or 42.11%. During the three months ended September 30, 2009, our cost of sales was $4,056,000, as compared to $5,384,000 during the three months ended September 30, 2008, a decrease of $1,328,000, or 24.67%. The decrease in cost of sales was directly associated with the decrease in sales. As a result, our gross profit decreased $2,474,000 and $600,000, or 44.23% and 28.24%, respectively for the nine and three months ended September 30, 2009. Our gross margin decreased slightly from 26.43% and 28.30% for the nine and three months ended September 30, 2008 to 25.71% and 27.32% for the nine and three months ended September 30, 2009. The decrease reflects the variance in production mix as the percentage of our sales of graphite electrodes, a lower margin product, increased.

Selling, general and administrative expenses.

Selling, general and administrative expenses totaled $1,065,000 for the nine months ended September 30, 2009, as compared to $1,064,000 for the nine months ended September 30, 2008. Selling, general and administrative expenses totaled $251,000 for the three months ended September 30, 2009, as compared to $465,000 for the three months ended September 30, 2008, an increase of $18,000, or approximately 3.87%.

Selling expenses decreased from $439,000 for the nine months ended September 30, 2008 to $332,000 for the nine months ended September 30, 2009, or 24.37%. The decrease reflected a decline in shipping and handling expenses as a result of lower sales in 2009. Selling expenses decreased from $269,000 for the three months ended September 30, 2008 to $14,000 for the three months ended September 30, 2009, or 94.80%. The decrease was a result of lower marketing expenses of fine grain graphite and high purity graphite products in the third quarter 2009 . . .