UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10−Q
(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2011

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _____________

Commission File Number: 000-52843

CHINA FORESTRY INDUSTRY GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)

Nevada	20-5408832
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

Jun Yue Hua Ting, Building A
3rd Floor, Unit -1
#58 Xin Hua Road
Guiyang, Guizhou 550002
People’s Republic of China
(Address of principal executive offices, Zip Code)

(+86) 851-552-095
(Registrant’s telephone number, including area code)

____________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [ ]

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

Large accelerated filer [ ]	Accelerated filer [ ]

Non-accelerated filer [ ] (Do not check if a smaller reporting company)	Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

The number of shares outstanding of each of the issuer’s classes of common stock, as of August 22, 2011 is as follows:

Class of Securities	Shares Outstanding
Common Stock, $0.001 par value	30,000,000

CHINA FORESTRY INDUSTRY GROUP, INC.

Quarterly Report on Form 10-Q

Three and Six Months Ended June 30, 2011

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION

Item 1.	Financial Statements	2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32

PART II OTHER INFORMATION

Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	(Removed and Reserved)	34
Item 5.	Other Information	34
Item 6.	Exhibits	34

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CHINA FORESTRY INDUSTRY GROUP, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010

	Page(s)

Financial Statements

Condensed Consolidated Balance Sheets	3

Condensed Consolidated Statements of Income and Comprehensive Income	4

Condensed Consolidated Statements of Cash Flows	5

Notes to Condensed Consolidated Financial Statements	6-23

CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

		June 30,		December
				31,
		2011		2010
		(Unaudited)
ASSETS
Current assets:
Cash	$	2,183,418	$	2,334,910
Accounts receivable, net of allowance of $- and $27,252, respectively		9,413,487		5,423,123
Inventory		11,600,031		6,949,679
Deposits and prepaid expenses		9,343,552		10,557,660
Other receivables		1,308,066		777,236
Due from related party		1,451,047		-
Taxes recoverable (Note 14)		622,506		2,452,407
Total current assets		35,922,107		28,495,015
Property, plant and equipment, net		6,456,245		6,352,289
Intangible assets, net		9,194,488		6,666,591
Construction in progress		5,409,768		5,304,348
Prepayment for property, plant and equipment		7,207,505		1,833,096
Total assets	$	64,190,113	$	48,651,339

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short term loans	$	8,354,607	$	4,535,830
Accounts payable and bills payable		4,489,488		3,388,806
Customer deposits		1,577,277		1,936,733
Other payables and accrued expenses		1,308,973		1,829,363
Due to related party		-		1,527,080
Income tax payable		3,546,227		2,501,229
Total current liabilities		19,276,572		15,719,041
Long term loans		7,890,462		-
Total liabilities		27,167,034		15,719,041
Commitments and contingencies (Note 18)

Stockholders' equity
Preferred stock: 5,000,000 shares authorized of $0.001 par value none issued and outstanding		-		-
Common stock: 100,000,000 shares authorized of $0.001 par value 30,000,000 and 30,000,000 shares issued and outstanding as of June 30, 2011 and December 31, 2010, respectively		30,000		30,000
Additional paid in capital – Stock and stock equivalents		17,988,805		17,988,805
Accumulated other comprehensive income		2,938,831		2,291,124
Retained earnings		16,065,443		12,622,369
Total stockholders’ equity		37,023,079		32,932,298
Total liabilities and stockholders’ equity	$	64,190,113	$	48,651,339

The accompanying notes are an integral part of the condensed consolidated financial statements

CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
UNAUDITED

		Three months ended						Six months ended
		June 30,						June 30,
		2011			2010			2011			2010
Revenue	$	8,456,935		$	12,587,353		$	18,899,909		$	16,878,352
Cost of revenue		5,182,847			8,929,127			12,047,828			11,706,000
Gross profit		3,274,088			3,658,226			6,852,081			5,172,352

Operating expenses
Selling expenses		376,637			42,882			726,232			118,317
General and administrative expenses		531,146			483,122			904,770			702,075
Total operating expenses		907,783			526,004			1,631,002			820,392
Income from operations		2,366,305			3,132,222			5,221,079			4,351,960

Other income (expenses)
Interest income		14,576			-			23,575			-
Interest expenses		(414,989	)		(27,709	)		(635,012	)		(49,057	)
Other (expenses) income		(8,513	)		293			(30,364	)		43,860
Government grant		342			1,125,562			45,414			1,419,809
Total other income (expenses)		(408,584	)		1,098,146			(596,387	)		1,414,612

Income before income taxes		1,957,721			4,230,368			4,624,692			5,766,572
Less: Provision for income taxes		605,751			906,513			1,181,618			1,217,396
Net income		1,351,970			3,323,855			3,443,074			4,549,176
Other comprehensive income
Foreign currency translation gain		543,689			91,450			647,707			183,491
Total comprehensive income	$	1,895,659		$	3,415,305		$	4,090,781		$	4,732,667

Earnings per share
- Basic	$	0.05		$	0.16		$	0.11		$	0.22
- Diluted	$	0.05		$	0.16		$	0.11		$	0.22

Weighted average shares outstanding
- Basic		30,000,000			20,500,000			30,000,000			20,500,000
- Diluted		30,001,509			20,500,000			30,000,000			20,500,000

The accompanying notes are an integral part of the condensed consolidated financial statements

CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED

		Six months ended
		June 30,
		2011			2010
Cash flows from operating activities
Net income	$	3,443,074		$	4,549,176
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation		164,532			136,778
Amortization		118,792			108,477
Provision for bad debts		(27,469	)		-
Changes in operating assets and liabilities:
Accounts receivable		(3,809,756	)		(6,555,165	)
Inventory		(4,459,520	)		4,882,432
Deposits and prepaid expenses		1,393,044			2,865,996
Other receivables		(509,377	)		60,935
Taxes recoverable		1,856,694			(352,775	)
Accounts payable and bills payable		1,021,260			(7,989,168	)
Customer deposits		(393,299	)		344,012
Other payables and accrued expenses		121,583			6,144,349
Income tax payable		188,127			960,532

Net cash (used in) provided by operating activities		(892,315	)		5,155,579

Cash flows from investing activities
Acquisition of property, plant and equipment and construction in progress		(5,418,119	)		(799,815	)
Acquisition of intangible assets		(2,486,212	)		(5,892,000	)
Net cash used in investing activities		(7,904,331	)		(6,691,815	)

Cash flows from financing activities
Repayment of short term and long term debts		(3,058,151	)		(715,830	)
Proceeds from short term and long term debts		14,541,507			3,667,770
Repayment of due to related party		(2,877,296	)		-

Net cash provided by financing activities		8,606,060			2,951,940

Effect of exchange rate changes in cash and cash equivalents		39,094			183,548

Net (decrease) increase in cash and cash equivalents		(151,492	)		1,599,252
Cash and cash equivalents, beginning of period		2,334,910			1,471,729
Cash and cash equivalents, end of period	$	2,183,418		$	3,070,981

Supplemental Disclosures:
Cash paid during the period for:
Interest	$	635,012		$	49,057
Income taxes	$	197,957		$	1,217,396

The accompanying notes are an integral part of the condensed consolidated financial statements

CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION AND NATURE OF BUSINESS

China Forestry Industry Group, Inc. (formerly known as Exotacar, Inc. and Phoenix Energy Resource Corporation (“PNXE”) ( “the Company”, “we”, “us”, “our” or “CNFI”) was incorporated on June 3, 2005 in the State of Nevada. On June 25, 2008, the Company changed its business focus from the development of online exotic car sales and entered into the oil and natural gas industry towards identifying and pursuing options regarding the development of energy resources, and changed its name from Exotacar, Inc. to Phoenix Energy Resource Corporation. From June 25, 2008 through to the date of the reverse acquisition, the Company was a designated shell company with minimal operations. On January 7, 2011, the Company changed its name from Phoenix Energy Resource Corporation to China Forestry Industry Group, Inc. to more accurately reflect the new business operations.

On November 1, 2010, the Company completed a reverse acquisition transaction pursuant to a share exchange agreement among the Company, China Bingwu Forestry Group Limited (“CBF”) and CBF’s sole stockholder, Ms. RenPing Tu, whereby the Company acquired 100% of the issued and outstanding capital stock of CBF in exchange for 20,500,000 shares of the Company’s stock, which constituted 68.33% of the Company’s issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the reverse acquisition. As a result of the acquisition of CBF, the Company now owns all of the issued and outstanding capital stock of CBF, which in turn owns Qianxinan Aosen Forestry Co., Limited (“QAF”) and Qianxinan Silvan Touch Flooring Co., Limited (“QSTF”). For accounting purposes, the share exchange transaction with CBF was treated as a reverse acquisition and recapitalization of CNFI, with CBF as the acquirer and CNFI as the acquired party. Upon completion of the exchange, CBF, QAF and QSTF became wholly owned subsidiaries of CNFI.

China Bingwu Forestry Group Limited (“CBF”) was incorporated under the Companies laws of the Hong Kong Special Administrative Region of the People’s Republic of China on April 9, 2010. It was principally established to serve as an investment holding company and its operations are carried out in Hong Kong.

On May 18, 2010, CBF entered into an Equity Ownership Transfer Agreement (the “Transfer Agreement”) with the existing stockholders of QAF, namely Mr. YuLu Bai, to acquire 100% equity interest of QAF for $2,488,471. This business combination was accounted for as entities under common control because the majority shareholders of CBF and QAF are the same people.

QAF is a private corporation, incorporated under the laws of the People’s Republic of China (“PRC”) on November 22, 2004. QAF’s principal activities are manufacturing and wholesaling of fiber boards, wood flooring, carpentry boards, wood products, furniture, and timber.

On October 22, 2007, QAF formed Qianxinan Silvan Touch Flooring Co., Limited (“QSTF”) of which QAF owned a 55% equity interest. On May 8, 2009, QAF acquired the remaining 45% equity interest in QSTF from the existing stockholder and QSTF became 100% wholly owned by QAF. QSTF’s principal activities are manufacturing and wholesaling of wood flooring, furniture and decorations.

On March 29, 2011, QAF further invested $6,088,187 (RMB40,000,000) in QSTF. The registered capital of QSTF increased to $9,132,281 (RMB60,000,000). QSTF is 100% wholly owned by QAF.

As a result of the reverse acquisition of CBF, the Company entered into a new business. Through its Chinese subsidiaries, the Company is now engaged in the business of manufacturing and wholesaling of fiber boards, wood flooring, carpentry boards, wood products, furniture, timber and decorations.

On March 24, 2011, QSTF formed a wholly owned subsidiary, Guiyang Silvan Touch Flooring Co., Limited (“GSTF”) in the PRC. The total paid-in capital of GSTF was $3,044,094 (RMB 20 million). GSTF’s principal activities are manufacturing and wholesaling of wood flooring, furniture and decorations.

The Company is headquartered in the PRC, and the principal location of operation of the Company is at Hexing Village, Dingxiao Economic Development Zone, Xingyi City, Qianxinan, Guizhou Province, the People’s Republic of China.

CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The condensed consolidated financial statements are prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”). This basis differs from that used in the statutory accounts of our subsidiaries in the PRC, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in the PRC. All necessary adjustments have been made to present the condensed consolidated financial statements in accordance with US GAAP.

The interim condensed consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Group, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in condensed consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Group believes that the disclosures are adequate to make the information presented not misleading. These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim condensed consolidated financial statements be read in conjunction with the financial statements of the Group for the year ended December 31, 2010 and notes thereto included in the Form 10K of China Forestry Industry Group, Inc. filed on April 15, 2011. The Group follows the same accounting policies in the preparation of interim reports. Results of operations for the interim periods are not indicative of annual results.

Principle of consolidation

The condensed consolidated financial statements include the accounts of CNFI, CBF, QAF, QSTF and GSTF. All significant intercompany balances and transactions have been eliminated in the consolidation. The condensed consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission.

Reclassification

Prepayment for property, plant and equipment – Prepayment for property, plant and equipment of $1,833,096 as of December 31, 2010 has been reclassified from deposits and prepaid expenses to conform to current presentation.

Due to related party – Amount due to related party of $1,527,080 as of December 31, 2010 has been reclassified from other payables and accrued expenses to due to related party to conform to current presentation.

Other taxes payable – Other taxes payable of $789,252 as of December 31, 2010 has been reclassified from income tax payable to other payables and accrued expenses to conform to current presentation.

Use of estimates

In preparing financial statements in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported periods. Actual results could differ from those estimates.

Significant Estimates

These financial statements include some amounts that are based on management's best estimates and judgments. The most significant estimates relate to depreciation of property, plant and equipment, allowance for uncollectible accounts, and impairment testing of long-lived assets. It is reasonably possible that the above-mentioned estimates and others may be adjusted as more current information becomes available, and any adjustment could be significant in future reporting periods.

CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Revenue recognition

The Company’s revenue recognition policies are in compliance with ASC 605 “Revenue Recognition”. Sales revenue is recognized when all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) the ability to collect is reasonably assured. These criteria are generally satisfied at the time of shipment when risk of loss and title passes to the customer, including the distributor and the end user. No return allowance is made as products returns are insignificant based on historical experience.

The Company recognizes revenue upon shipment. Sales revenue represents the invoiced value of goods, net of a value-added tax (VAT). All of the Company’s products that are sold in the PRC are subject to a Chinese value-added tax at a rate of 17% of the gross sales price or at a rate approved by the Chinese local government. This VAT liability may be offset by the VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product.

Shipping and handling

Shipping and handling costs are included in cost of revenue and selling expenses which totaled $5,808 and $15,677 for the three months ended June 30, 2011 and 2010, respectively. Shipping and handling costs amounted to $28,316 and $62,963 for the six months ended June 30, 2011 and 2010, respectively.

Advertising

Advertising costs are included in selling expenses which totaled $45,436 and $24,947 for the three months ended June 30, 2011 and 2010, respectively. Advertising costs amounted to $104,470 and $54,285 for the six months ended June 30, 2011 and 2010, respectively.

Government grants

Government grants may represent local authority grants to the company for industry development and the revenue is recognized on cash basis when the local authority approves the grant to the Company. Government grant income may also consist of value added tax refunds or certain other reimbursements from the government.

Foreign currency translation

Assets and liabilities of the Company with a functional currency other than US$ are translated into US$ using period end exchange rates. Income and expense items are translated at the average exchange rates in effect during the period. Foreign currency translation differences are included as a component of Accumulated Other Comprehensive Income in Stockholders’ Equity.

The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the financial statements were as follows:

	6/30/2011	6/30/2010
Period end RMB : USD exchange rate	6.46	6.79
Six months average RMB : USD exchange rate	6.54	6.82

	12/31/2010
Year end RMB : USD exchange rate	6.59
Average yearly RMB : USD exchange rate	6.76

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.

CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Credit risk

The Company may be exposed to credit risk from its cash at bank. An allowance has been considered for estimated irrecoverable amounts determined by reference to past default experience and the current economic environment. No allowance is considered necessary for the period.

Accounts receivable

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.

The standard credit period for most of the Company’s clients is three months. Management evaluates the collectability of the receivables at least quarterly. The estimated average collection period was 90 days as of June 30, 2011 and December 31, 2010. Allowance for doubtful accounts as of June 30, 2011 and December 31, 2010 are $0 and $27,252, respectively.

Inventory

Inventory is valued at the lower of cost (determined on a weighted average method) and net realizable value.

Costs incurred in bringing each product to its location and conditions are accounted for as follows:

	-	raw materials – purchase cost on a weighted average basis;
	-	manufactured finished goods and work-in-progress – cost of direct materials and labor and a portion of manufacturing overhead based on normal operating capacity but excluding borrowing costs; and
	-	retail and wholesale merchandise finished goods – purchase cost on a weighted average basis.

Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses.

Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets.

Assets Classifications	Estimated Useful Lives
Buildings	30 years
Plant and machinery	3 to 50 years
Motor vehicles	5 to 10 years
Office equipment	3 to 10 years
Furniture and fixtures	4 to 30 years

An item of property and equipment is removed from the accounts upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on disposal of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the consolidated statements of income in the period the item is disposed. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. The Company reviews its property and equipment whenever events or changes in circumstances indicate that the carrying value of certain assets might not be recoverable. In these instances, the Company recognizes an impairment loss when it is probable that the estimated cash flows are less than the carrying value of the asset. To date, no such impairment losses have been recorded.

CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Construction in progress

Construction in progress represents the direct cost of construction and cost of plant and machinery installed as well as acquisition cost and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to property and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until construction in progress is completed and the asset is ready for its intended use.

Intangible assets

Intangible assets consist of land use rights which represent acquisition of land use rights of agriculture land from farmers and are amortized on the straight line basis over their respective lease periods. The lease period of agriculture land ranges from 30 years to 60 years.

Impairment of long – lived assets and intangible assets

In accordance with ASC 360, “Property, Plant and Equipment”, long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company reviews the carrying amount of its long-lived assets, including intangibles, for impairment, each reporting period. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is considered not recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flow. As of June 30, 2011 and December 31, 2010, the Company determined no impairment charges were necessary.

Income taxes

The Company accounts for income taxes under the provisions of ASC 740 "Accounting for Income Taxes". Under ASC 740, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.

The provision for income tax is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized.

Deferred income taxes are calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

ASC 740 also prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. ASC 740 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. Any interest and penalties accrued related to unrecognized tax benefits will be recorded in tax expense.

CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Trade and other payables

Trade payables and other payables are carried at cost and represent liabilities for goods and services provided to the Company prior to the end of the period that are unpaid and arise when the Company becomes obliged to make future payments in respect of the purchase of these goods and services. Trade payables are non-interest bearing and are normally settled on 7 to 60 day terms.

Product warranties

Substantially all of the Company’s products are covered by a standard warranty of 1 year for products. In the event of a failure of products covered by this warranty, the Company must repair or replace the products or, if those remedies are insufficient, and at the discretion of the Company, provide a refund. The Company provides warranty reserve for product warranties to reflect estimated material and labor costs of maintenance for potential or actual product issues but for which the Company expects to incur an obligation. The product warranty reserve was $0 as of June 30, 2011 and December 31, 2010.

Related parties

Parties are considered to be related to the Company if the related party has the ability, directly or indirectly, to control the party, or exercise significant influence over the party in making financial and operating decisions, or where the Company and the party are subject to common control. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities which are under the significant influence of related parties of the Company.

Comprehensive income

The Company follows the FASB’s accounting standard. Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes net income and foreign currency translation adjustments.

Retirement benefit costs

PRC state managed retirement benefit programs are defined contribution plans and the payments to the plans are charged as expenses when employees have rendered service entitling them to the contribution.

Accumulated other comprehensive income

ASC Topic 220 “Comprehensive Income” establishes standards for reporting and displaying comprehensive income and its components in financial statements. Comprehensive income is defined as the change in stockholders’ equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The comprehensive income for all periods presented includes both the reported net income and net change in cumulative translation adjustments.

Earnings per share (EPS)

Earnings per share is calculated in accordance with ASC 260-10 “Earnings per Share”, which requires the Company to calculate net income (loss) per share based on basic and diluted net income (loss) per share, as defined. Basic EPS excludes dilution and is computed by dividing net income (loss) by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Recent Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board (FASB) issued amended guidance to clarify the acquisition date that should be used for reporting pro-forma financial information for business combinations. If comparative financial statements are presented, the pro-forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been completed as of the beginning of the comparable prior annual reporting period. The amendments in this guidance became effective prospectively for business combinations for which the acquisition date is on or after January 1, 2011. The Company adopted this guidance on January 1, 2011 which had no impact in the consolidated financial results as the amendments relate only to additional disclosures.

In December 2010, the FASB issued amendments to the guidance on goodwill impairment testing. The amendments modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In making that determination, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The amendments were effective January 1, 2011 and the Company adopted this guidance on January 1, 2011 which did not have a material impact in the Consolidated Financial Statements.

In January 2010, the FASB issued additional disclosure requirements for fair value measurements which the company included in its interim and annual financial statements in 2010. Certain disclosure requirements relating to fair value measurements using significant unobservable inputs (Level 3) were deferred until January 1, 2011. These new requirements did not have an impact in the consolidated financial results as they relate only to additional disclosures.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The amendments change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about the fair value measurements. The amendments include the following:

	1.	Those that clarify the Board’s intent about the application of existing fair value measurement and disclosure requirements.

	2.	Those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.

The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011. Early application by public entities is not permitted. Nonpublic entities may apply the amendments in this Update early, but no earlier than for interim periods beginning after December 15, 2011.

The Company is currently evaluating the impact, if any, of ASU No. 2011-04 on the Company’s financial position and results of operations.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Under the amendments, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The presentation option under current GAAP to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity has been eliminated.

The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. Early adoption is permitted because compliance with amendments is already permitted. The Company already complies with this presentation.

CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3. ACCOUNTS RECEIVABLE

The Company has performed an analysis on all of its accounts receivable and determined that all amounts are probable of collection within one year. As such, all trade receivables are reflected as a current asset. Allowance for doubtful accounts as of June 30, 2011 and December 31, 2010 are $0 and $27,252, respectively. Bad debts written off for the three and six months ended June 30, 2011 and 2010 were $0.

4. INVENTORY

Inventory consists of:

		June 30,		December 31,
		2011		2010
Raw materials	$	9,318,641	$	6,297,151
Packaging materials and consumable		171,081		96,380
Finished goods		2,110,309		556,148
	$	11,600,031	$	6,949,679

There was no allowance made for obsolete or slow moving inventory as of June 30, 2011 and December 31, 2010.

5. DEPOSITS AND PREPAID EXPENSES

Deposits and prepaid expenses consist of:

		June 30,		December 31,
		2011		2010

Deposits for
Raw materials and goods supplies	$	8,430,068	$	9,424,358
Electricity		367		113,860
Shipping and handling		170,316		129,861
Prepayment for services		693,333		773,334
Others		49,468		116,247
	$	9,343,552	$	10,557,660

Trade deposits are paid to suppliers of raw materials and goods supplies, electricity and shipping and handling expense as deposits for inventory purchases and provision for services. The inventory is normally delivered within one to two months after the payments have been made. Prepayments for services were paid for financial advisory services and services in connection with the listing of the Company.

CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

6. OTHER RECEIVABLES

Other receivables consist of:

		June 30,		December 31,
		2011		2010

Guarantee deposits	$	946,943	$	682,711
Due from employees		212,449		73,066
Prepaid promotion and advertising expenses		75,993		-
Prepaid professional expenses		18,256		9,665
Others		54,425		11,794
	$	1,308,066	$	777,236

Guarantee deposits are provided to financial institutions in return for issuance of a corporate guarantee to financiers. Due from employees are amounts advanced to employees for business expenses on behalf of the Company and will be reconciled upon the employees submitting the business expenses receipts.

7. TAXES RECOVERABLE

Taxes recoverable consist of:

		June 30,		December 31,
		2011		2010

VAT	$	622,506	$	2,452,407

8. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net, consist of the following:

		June 30,			December 31,
		2011			2010

Buildings	$	3,034,227		$	2,975,099
Machinery and equipment		4,116,298			3,968,175
Motor vehicles		137,209			134,536
Office equipment		207,341			99,436
Furniture and fixtures		16,129			46,212
		7,511,204			7,223,458
Less: Accumulated depreciation		(1,054,959	)		(871,169	)
	$	6,456,245		$	6,352,289

During the three months ended June 30, 2011, depreciation expenses amounted to $84,904, of which $67,321 and $17,583 were recorded as cost of sales and general and administrative expenses, respectively.

During the three months ended June 30, 2010, depreciation expenses amounted to $68,427, of which $56,766 and $11,661 were recorded as cost of sales and general and administrative expenses, respectively.

During the six months ended June 30, 2011, depreciation expenses amounted to $164,532, of which $132,065 and $32,467 were recorded as cost of sales and general and administrative expenses, respectively.

During the six months ended June 30, 2010, depreciation expenses amounted to $136,778, of which $114,309 and $22,469 were recorded as cost of sales and general and administrative expenses, respectively.

CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

9. INTANGIBLE ASSETS, NET

Net intangible assets at June 30, 2011 were as follows:

		At Cost		Accumulated Amortization		Net Book Value

Land use rights	$	3,105,119	$	71,691	$	3,033,428
Forest right		6,188,598		299,446		5,889,152
Software		277,693		5,785		271,908
	$	9,571,410	$	376,922	$	9,194,488

Net intangible assets at December 31, 2010 were as follows:

		At Cost		Accumulated Amortization		Net Book Value

Land use rights	$	847,752	$	53,421	$	794,331
Forest right		6,068,000		195,740		5,872,260
	$	6,915,752	$	$249,161	$	6,666,591

Private ownership of land is not permitted in the PRC. Instead, the Company has leased three lots of land. The cost of the first and second lots land use rights acquired in 2007 and 2008 were $320,426 (RMB2,105,232) and $532,716 (RMB3,500,000), respectively and these lots were located at Hexing Village, Dingxiao Economic Development Zone, Xingyi City, Qianxinan, Guizhou Province, the People’s Republic of China. The cost of the third lot of land is forest land, acquired in 2010 was $6,088,187 (RMB40,000,000) and was located at Liping County, Qiandongnan, Guizhou Province, the People’s Republic of China.

Land use rights are amortized on the straight line basis over their respective lease periods. The lease period of agriculture land is 30 years.

During the three months ended June 30, 2011 and 2010, amortization expenses amounted to $62,680 and $54,238 respectively which was recorded under general and administrative expenses.

During the six months ended June 30, 2011 and 2010, amortization expenses amounted to $118,792 and $108,477, respectively which was recorded under general and administrative expenses.

Estimated amortization for the next five years and thereafter is as follows:

Remainder of 2011	$	154,147
2012		308,293
2013		308,293
2014		308,293
2015		308,293
Thereafter		7,807,169
Total	$	9,194,488

10. CONSTRUCTION IN PROGRESS

		June 30,		December 31,
		2011		2010
Wooden fiber manufacturing factory	$	5,355,426	$	5,251,065
Wooden floor manufacturing factory		54,342		53,283
Total	$	5,409,768	$	5,304,348

CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

11. SHORT TERM AND LONG TERM LOANS

There are no provisions in the Company’s bank borrowings that would accelerate repayment of loan as a result of a change in credit ratings or a material adverse change in the Company’s business. Under certain agreements, the Company has the option to retire the loans prior to maturity, either at par or at a premium over par.

(a) Short term loans

Short-term loans represent the borrowings from commercial banks that are due within one year. These loans consisted of the following:

			Interest		June 30,		December 31,
Bank	Term	Notes	rate		2011		2010
					(unaudited)
Xingyi City Rural Cooperative Bank	March 26, 2010 to March 25, 2011		7.965%	$	-	$	743,330

Bank of Chongqing	June 21, 2010 to June 20, 2011	(i)	5.31%		-		3,034,000

Xingyi City Rural Cooperative Bank	July 17, 2009 to July 16, 2011	(ii)	8.10%		773,575		758,500

China Merchant Bank	March 8, 2011 to March 7, 2012	(iii)	6.06%		3,867,874		-

Xingyi City Rural Cooperative Bank	April 30, 2011 to April 29, 2012	(ii)	8.72%		1,547,149		-

Xingyi City Rural Cooperative Bank	May 6, 2011 to April 29, 2012	(ii)	8.72%		2,166,009		-

				$	8,354,607	$	4,535,830

CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

11. SHORT TERM AND LONG TERM LOANS - CONTINUED

(b) Long term loans

Long term loans consist of the following:

			Interest		June 30,		December 31,
Bank	Term	Notes	rate		2011		2010
					(unaudited)

Guiyang City Nanming	January 24, 2011 to	(iii)	8.775%

Rural Credit Cooperative Bank	November 18, 2012			$	3,867,874	$	-

Guiyang City Nanming Rural Credit Cooperative Bank	January 24, 2011 to January 18, 2013	(iii)	8.775%		4,022,588		-

				$	7,890,462	$	-

Notes:

(i) The loan is secured by forestry land use right of the Company. The net book value of the forestry land use right is $1,349,965 as of December 31, 2010.

(ii) The loan has a corporate guarantee by Zhong Ruixin Investment Guarantee Co., Ltd in which our director, Mr. Yi Zeng also serves as their general manager. The Company paid a guarantee fee of $225,393 to Zhong Ruixin Investment Guarantee Co., Ltd.

(iii) The loans are secured by the real estate properties of Guizhou Huacheng Group in which our director, Mr. Yudong Ji also serves as their chairman.

Interest expenses on the loans for the three months ended June 30, 2011 and 2010 amounted to $415,141 and $29,957, respectively. Interest expenses on the loans for the six months ended June 30, 2011 and 2010 amounted to $635,164 and $55,905, respectively.

CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

12. CUSTOMER DEPOSITS

Customer deposits represent amounts advanced by customers for orders of product. The products normally are shipped within three months after receipt of the advance payment and the related sale is recognized in accordance with the Company’s revenue recognition policy. As of June 30, 2011 and December 31, 2010, customer deposits amounted to $1,577,277 and $1,936,733, respectively.

13. OTHER PAYABLES AND ACCRUED EXPENSES

		June 30,		December 31,
		2011		2010
		(unaudited)
Other taxes payable	$	497,551	$	789,252
Due to third parties		-		775,187
Due to employees		664,965		151,700
Accrued wages		146,457		113,224
Total	$	1,308,973	$	1,829,363

Other taxes payable include VAT tax, city maintenance and construction levies, stamp duty, education levies and other miscellaneous taxes.

14. INCOME TAXES

The Company is incorporated in the State of Nevada in the U.S. and is subject to a gradual U.S. federal corporate income tax of 15% to 35%. The State of Nevada does not impose any corporate state income tax.

No Hong Kong profits tax has been provided in the financial statements, as the Company did not have any assessable profits for the three and six months ended June 30, 2011 and 2010.

Beginning January 1, 2008, China unified the corporate income tax rule on foreign invested enterprises and domestic enterprises. The unified corporate income tax rate is 25%.

Under Guizhou Province preferential tax policy, QAF and QSTF are entitled to certain tax exemptions and reductions available to all companies in Guizhou Province, the People’s Republic of China.

Under these “tax holidays”, QAF is entitled to exemption from EIT for 3 years and reduced tax rates for 2 years after that, effective as of 2006 and 2009, respectively. Under Chinese tax law, enterprise income tax is charged and collected first and refunded later. Provisions for income tax were made at 25% on yearly reported profits less the amounts of income tax refunded for the fiscal years 2010 and 2009. QAF is subject to the uniform corporate income tax rate of 25% beginning in 2011.

Further, QSTF incurred income tax expenses during fiscal years 2010 and 2009, but QSTF was entitled to a claim for refund of these payments. Provision for income tax is made at EIT rate of 25% on yearly reported profits less the amounts of income tax refunded for the fiscal years 2010 and 2009.

CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

14. INCOME TAXES – CONTINUED

Provision for income taxes is as follows:

		For the Three Months Ended				For the Six Months Ended
		June 30,		June 30,		June 30,		June 30,
		2011		2010		2011		2010
Income tax

CNFI - U.S. corporate tax
	$	-	$	-	$	-	$	-
CBF - Hong Kong profits tax
		-		-		-		-
QAF - China EIT		137,744		434,413		277,821		624,792
QSTF - China EIT		467,267		472,100		903,057		592,604
GSTF - China EIT		740		-		740		-
Deferred tax		-		-		-		-
	$	605,751	$	906,513	$	1,181,618	$	1,217,396

The Company did not recognize any interest or penalties related to unrecognized tax benefits in the three and six months ended June 30, 2011 and 2010. The Company had no uncertain positions that would necessitate recording of tax related liability. The Company is subject to examination by the respective tax authorities.

15. STOCK OPTIONS AND WARRANTS

The Company accounts for its stock options and warrants in accordance with ASC Topic 718, “Compensation – Stock Compensation” and ASC Topic 505-50 “Equity – Based Payments to Non-Employees” which were adopted by the Company on December 15, 2010. The Company issued a warrant to a third party for the purchase of 60,000 shares of the Company’s common stock at an exercise price of $4.00 per share. The warrant expires on December 15, 2015.

The Company determines the estimated fair value of share-based awards using the Black-Scholes option-pricing model. The Black-Scholes model is affected by the Company’s stock price as well as by assumptions regarding certain complex and subjective variables. These variables include, but are not limited to; the Company’s expected stock price volatility over the term of the awards and the actual and projected option exercise behaviors.

	Number of shares
	entitled to		Exercise	Expiration date
	purchase		Price
Balance as of December 31, 2010	60,000	$	4.00
Warrants exercised	-		-
Warrants expired	-		-
Total outstanding as of June 30, 2011	60,000	$	4.00	December 15, 2015

There was no share based compensation expense for the three and six months ended June 30, 2011 and 2010.

CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

16. CONCENTRATION, RISKS, AND UNCERTAINTIES

The Company has the following concentrations of business with customers constituting 10% or greater of the Company’s revenues for the three and six months ended June 30, 2011 and 2010:

	For the Three Months Ended		For the Six Months Ended
	June 30,	June 30,	June 30,	June 30,
	2011	2010	2011	2010

Customer A	67.74%	40.72%	70.01%	32.34%
Customer B	24.87%	34.68%	26.21%	33.31%

As of June 30, 2011, amount due from customer A and customer B were $3,428,567 and $4,640,576, respectively.

The Company has not experienced any significant difficulty in collecting its accounts receivable in the past and is not aware of any financial difficulties of its major customers.

The Company has the following concentrations of business with suppliers constituting 10% or greater of the Company’s purchases for the three and six months ended June 30, 2011 and 2010:

For the Three Months Ended

For the Six Months Ended

June 30,

2011

2010

2011

2010

(unaudited)

Supplier A

59.00%

76.72%

62.53%

48.82%

Supplier B

17.60%

Supplier C

13.46%

Supplier D

12.68%

* Constitute less than 10% of the Company’s total purchases.

As of June 30, 2011, amount due to supplier A, B, C and D were $0, $1,399,187, $0 and $0, respectively.

17. ECONOMIC AND POLITICAL RISK

The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

18. COMMITMENTS AND CONTINGENCIES

Operating Leases

There was no lease expense for the three and six months ended June 30, 2011 and 2010. The leases of the stores were signed under GST, our former joint venture partner, and other non GST parties and lease payments were paid by these parties. As of June 30, 2011, two of the store leases have been transferred under QSTF and QSTF will be responsible for the lease payment starting from July 2011.

As of June 30, 2011, the Company entered into two lease agreements for its stores and warehouses at two locations which expire in 2013. The lease payments commence in July 2011 and will be recorded as lease expense by QSTF. The future minimum lease payments as of June 30, 2011 are as follow:

For the year ending December 31,

Purchase of Property for a total consideration of $9,695,281 (RMB62,665,450)

On August 25, 2006, the Company signed a contract for property under construction, totaling $9,695,281 (RMB62,665,450). As of June 30, 2011, the Company paid $6,575,385 (RMB42,500,000) was recorded in prepayment for property, plant and equipment. The remainder $3,119,896 (RMB20,165,450) will be paid by the end of 2011.

From time to time and in the ordinary course of business, the Company may be subject to various claims, charges, and litigation. As of June 30, 2011 and December 31, 2010, the Company did not have any pending claims, charges, or litigation that it would have a material adverse effect on its consolidated balance sheets, consolidated statements of income and comprehensive income or cash flows.

19. OBLIGATIONS UNDER MATERIAL CONTRACTS

(i)	The Company entered into a financial advisory agreement dated February 2, 2010 to appoint Asia Regal Financial Capital Group Co., Ltd. and Shenzhen Junwei Investment and Development Co., Ltd. as financial advisors. Pursuant to the agreement, the Company is obligated to issue 100,000 of common shares at $0.10 per share to them prior to December 31 of every year within 5 years from the Company listing on OTCBB. The agreement contains an exclusivity provision whereby the Company has agreed to engage them as the Company’s sole financial advisor and its related company within 2 years since the date of the Company’s listed on OTCBB and also contains a $1 million liquidated damages provision for breach of such exclusivity.

(ii)	CCG Investor Relations Partners LLC, CCG, an investor relations firm was issued a warrant to purchase up to 60,000 shares of the Company’s stock, at a price of $4.00 per share, pursuant to the terms and conditions of a letter agreement, dated December 15, 2010, between the Company and CCG. The warrant shall have a term of 5 years and expires on December 15, 2015, CCG had not exercised the warrant and had not purchased any shares of the Company’s stock.

CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

20. EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share reflects the potential dilution of securities by including other potential common stock, including convertible preferred stock, stock options and warrants, in the weighted average number of common shares outstanding for the year, if dilutive. The numerators and denominators used in the computations of basic and dilutive earnings per share are presented in the following table:

		For the three months ended				For the six months ended
		June 30,				June 30,
		2011		2010		2011		2010
BASIC
Numerator for basic earnings per share attributable to the Company’s common stockholders:
Net income	$	1,351,970	$	3,323,855	$	3,443,074	$	4,549,176
Net income used in computing basic earnings per share	$	1,351,970	$	3,323,855	$	3,443,074	$	4,549,176
Basic earnings per share	$	0.05	$	0.16	$	0.11	$	0.22

Basic weighted average shares outstanding		30,000,000		20,500,000		30,000,000		20,500,000

		For the three months ended				For the six months ended
		June 30,				June 30,
		2011		2010		2011		2010
DILUTED
Numerator for diluted earnings per share attributable to the Company’s common stockholders:
Net income	$	1,351,970	$	3,323,855	$	3,443,074	$	4,549,176
Net income used in computing diluted earnings per share	$	1,351,970	$	3,323,855	$	3,443,074	$	4,549,176
Diluted earnings per share	$	0.05	$	0.16	$	0.11	$	0.22

Weighted average outstanding shares of common stock		30,000,000		20,500,000		30,000,000		20,500,000
Warrants and contingently issuable shares		1,509		-		-		-
Options and contingently issuable shares		-		-		-		-

Diluted weighted average shares outstanding		30,001,509		20,500,000		30,000,000		20,500,000

For the three months ended June 30, 2011, 60,000 warrants, were not included in the diluted earnings per share because the average stock price was lower than the strike price of these warrants. There were no potentially dilutive securities during the three months ended June 30, 2011 and 2010.

	For the three months ended		For the six months ended
	June 30,		June 30,
	2011	2010	2011	2010
Potential common shares outstanding as of June 30,
Warrant outstanding (shares)	60,000	-	-	-

CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

21. PRODUCT LINE INFORMATION

The Company sells wooden fiber sheets and wooden floors which are used by customers in various industries. The production process, class of customer, selling practice and distribution process are the same for all wooden fiber sheets and wooden floors. The Company’s chief operating decision-makers (i.e. chief executive officer and his direct reports) review financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by product lines for purposes of allocating resources and evaluating financial performance. There are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated unit level. The Company considers itself to be operating within one reportable segment. The Company does not have long-lived assets located in foreign countries. The Company's net revenue from external customers by main product lines is as follows:

		For the Three Months Ended				For the Six Months Ended
		June 30,		June 30,		June 30,		June 30,
		2011		2010		2011		2010
		(unaudited)		(unaudited)		(unaudited)		(unaudited)
Domestic sales
Wooden fiber sheet	$	618,212	$	6,970,666	$	2,065,828	$	9,727,338
Wooden floor		7,838,723		5,616,687		16,834,081		7,151,014
	$	8,456,935	$	12,587,353	$	18,899,909	$	16,878,352

22. RELATED PARTIES TRANSACTIONS

As of June 30, 2011 and 2010, the Company had the following significant related party transactions:

Name of related party	Nature of transactions

Mr. YuLu Bai, Chief Executive Officer	There are due from Mr. YuLu Bai totaled $1,451,047 and $0 as of June 30, 2011 and 2010 and included in Due from Related Party. Due to Mr. YuLu Bai was $1,527,080 as of December 31, 2010. The amounts are unsecured, interest free and have no fixed term of repayment.

	The amount due from Mr. Bai relates to proceeds from the share exchange agreement which was deposited to Mr. Bai’s account. At December 31, 2010, the Company had payable to Mr. Bai for forestry right that Mr. Bai paid on behalf of the Company; therefore, the amount due from Mr. Bai was netted with the amount due to Mr. Bai, resulted in a net due to related party balance of $1,527,080. During the six months ended June 30, 2011, the Company paid off the amount due to Mr. Bai, resulted in a net due from related party balance of $1,451,047 as of June 30, 2011.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Special Note Regarding Forward Looking Statements

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those identified in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2010, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

Use of Terms

Except where the context otherwise requires and for the purposes of this report only:

the “Company,” “we,” “us,” and “our” refer to the combined businesses of China Forestry Industry Group, Inc. and its subsidiaries, Bingwu Forestry, Aosen Forestry, Silvan Flooring and Guiyang Silvan Touch;
“CNFI” refers to China Forestry Industry Group, Inc., a Nevada corporation;
“Bingwu Forestry” refers to China Bingwu Forestry Group Limited, a Hong Kong company;
“Aosen Forestry” refers to Qian Xi Nan Aosen Forestry Company, Limited, a PRC company;
“Silvan Flooring” refers to Qian Xi Nan Silvan Flooring Company, Limited, a PRC company;
“Guiyang Silvan Touch” refers to Guiyang Silvan Touch Flooring Co., Limited, a PRC company;
“Hong Kong” refers to the Hong Kong Special Administrative Region of the People’s Republic of China;
“PRC” and “China” refer to the People’s Republic of China;
“SEC” refers to the Securities and Exchange Commission;
“Exchange Act” refers the Securities Exchange Act of 1934, as amended;
“Securities Act” refers to the Securities Act of 1933, as amended;
“Renminbi” and “RMB” refer to the legal currency of China; and
“U.S. dollars,” “dollars” and “$” refer to the legal currency of the United States.

Overview of our Business

We are engaged in the production and sale of floor materials and related products to residential and commercial customers in China. Our product lines include laminate flooring and fiber floor boards that are manufactured in a variety of colors, dimensions and designs.

The primary raw material used in our products is wood, which we currently procure from third party suppliers. We expect that commencing in late 2012, we will be able to procure approximately 20% of our wood from our 2,250 hectares (approximately, 22.5 km²) of eucalyptus forest in Guizhou province.

Our manufacturing facility in Qianxinan, Guizhou province has an annual production capacity of six million square meters of laminate flooring and 75,000 cubic meters of industrial fiber boards. We are constructing two new manufacturing facilities next to our current facility to expand our laminate flooring production line and industrial fiber board production line. We expect this expansion will increase our overall capacity to 200,000 cubic meters of fiber boards and 12 million square meters of laminate floor.

We market and sell our products through five branch offices and approximately several hundred specialty retail flooring stores, concentrated mostly in southwestern China. We also sell some of our products through eight retail stores which we refer to as “flagship” stores because they are generally larger and better equipped with samples, promotional material and product inventory, as compared to regular retail stores, and as a result, they better promote our image and the quality of our products. We are also seeking commercial arrangements for the sale of our products through home supply stores, such as our recent agreement to sell our products at Red Star Macalline Furniture Mall’s Guiyang store. Red Star Macalline Furniture Mall is a large home products supply store chain in China, similar to Home Depot and Lowe’s in the U.S., with over 30 malls and stores across China. We believe that home supply stores are an important channel for the sale of building/home renovation materials and we plan to increase our efforts to work with more home supply stores in the future.

In March 2011, we established Guiyang Silvan Touch in order to expand our sales channels. Guiyang Silvan Touch’s principal activities will be manufacturing and wholesaling of wood flooring, furniture and decorations. Guiyang Silvan Touch has started operations on March 24, 2011.

Second Quarter Financial Performance Highlights

The following summarizes certain key financial information for the second quarter of 2011:

Revenue: Revenue was $8.5 million for the three months ended June 30, 2011, a decrease of $4.1 million, or 32.8%, from $12.6 million for the same period last year.
Gross Profit and Margin: Gross profit was $3.3 million for the three months ended June 30, 2011, a decrease of $384,138, or 10.5%, from $3.7 million for the same period last year. Gross margin was 38.7% for the three months ended June 30, 2011, as compared to 29.1% for the same period last year.
Net Income: Net income was $1.4 million for the three months ended June 30, 2011, a decrease of $1.9 million, or 59.3%, from $3.3 million for the same period last year.
Fully diluted net income per share: Fully diluted net income per share for the three months ended June 30, 2011 was $0.05, as compared to $0.16 for the same period last year.

As of June 30, 2011, the total of our contract backlog was approximately $7.7 million.

Results of Operations

Comparison of Three Months Ended June 30, 2011 and June 30, 2010

The following table shows key components of our results of operations during the three months ended June 30, 2011 and 2010, in both dollars and as a percentage of our revenues.

(All amount, other than percentage, in U.S. dollars)
	Three Months Ended			Three Months Ended
	June 30, 2011			June 30, 2010			Increase/(Decrease)
			As a			As a
			percentage of			percentage of
	Dollar ($)		Revenue	Dollar ($)		Revenue	Dollar ($)		Percentage

Revenue	8,456,935		100.00%	12,587,353		100.00%	(4,130,418	)	-32.81%
Cost of revenue	5,182,847		61.29%	8,929,127		70.94%	(3,746,280	)	-41.96%
Gross profit	3,274,088		38.71%	3,658,226		29.06%	(384,138	)	-10.50%
Operating expenses
Selling expenses	(376,637	)	4.45%	(42,882	)	0.34%	333,755		778.31%
General and administrative expenses	(531,146	)	6.28%	(483,122	)	3.84%	48,024		9.94%
Total operating expenses	(907,783	)	10.73%	(526,004	)	4.18%	381,779		72.58%
Income from operations	2,366,305		27.98%	3,132,222		24.88%	(765,917	)	-24.45%
Other income (expense)
Interest income	14,576		0.17%	-		-	14,576		-
Interest expense	(414,989	)	-4.91%	(27,709	)	-0.22%	387,280		1397.67%
Other (expenses) income	(8,513	)	-0.10%	293		0.00%	(8,806	)	3005.46%
Government grant	342		0.00%	1,125,562		8.94%	(1,125,220	)	-99.97%

Total other income (expenses)	(408,584	)	-4.83%	1,098,146		8.72%	(1,506,730	)	-137.21%

Income before income taxes	1,957,721		23.15%	4,230,368		33.61%	(2,272,647	)	-53.72%

Provision for income taxes	(605,751	)	7.16%	(906,513	)	7.20%	(300,762	)	-33.18%
Net income	1,351,970		15.99%	3,323,855		26.41%	(1,971,885	)	-59.33%

Revenue. We generate revenues from the sales of our industrial fiber boards, laminate flooring, wooden flooring, and related flooring products. Our revenue decreased to $8.5 million for the three months ended June 30, 2011, from $12.6 million for the same period in 2010, representing a 32.8% decrease. The decrease in revenue was mainly due to decrease in sales volume and average sales price of our fiber board products resulting from intense competition in the market for similar products.

In terms of product lines, sales of our laminate flooring and fiber board products accounted for approximately 63.0% and 37.0% of our revenue, respectively, for the three months ended June 30, 2011, as compared to approximately 38.0% and 62.0%, respectively, for the same period in 2010. We did not sell any hard wood flooring products in the second quarter because we are still developing this new product market.

Both sales volume and average sales price of our laminate flooring products increased in this quarter. Average unit sales price of laminate flooring products increased slightly by approximately 0.2% for the three months ended June 30, 2011. We sold approximately 0.9 million square meters of laminate flooring products during the three months ended June 30, 2011, as compared to approximately 0.7 million square meters of laminate flooring products for the same period in 2010. The increase was mainly due to our continued promotion and market expansion efforts for this product line.

Sales volume and average sales price of our fiber board products decreased during the three months ended June 30, 2011. We sold approximately 0.6 million pieces of fiber boards during the three months ended June 30, 2011, as compared to approximately 1.2 million pieces of fiber boards for the same period in 2010. The decrease in sales volume was mainly

because we received two big one-time orders for fiber boards in the second quarter last year. With the expansion of our new facility, we are actively developing long-term customers. Average sales price of our fiber board products decreased approximately 1.8% in the second quarter of 2011 as compared to the same period last year. A larger portion of our products sold in this quarter was 12mm fiber board which generally has a lower sales price than our 15mm fiber board which was the major products sold in the same quarter last year.

Cost of Revenue. Our cost of revenue is primarily comprised of the costs of our raw materials, labor and overhead. Our cost of revenue decreased $3.7 million, or 42.0%, to $5.2 million for the three months ended June 30, 2011, from $8.9 million for the same period in 2010. The decrease was generally in line with the decrease in sales volume. The cost of revenue as a percentage of revenue decreased from 70.9% for the three months ended June 30, 2010 to 61.3% for the three months ended June 30, 2011. Such percentage decrease was primarily due to the increased gross margin of our fiber board product line. As a percentage of revenue, cost of sales for our fiber board product line was 70.3% for the three months ended June 30, 2011 as compared to 75.6% for the same period in 2010. Due to our continuing research and development efforts, we improved the manufacturing technology of this product line which led to less consumption of raw material and improved gross margin.

Gross profit and gross margin. Our gross profit is equal to the difference between our revenue and our cost of revenue. Our gross profit decreased $384,138, or 10.5%, to $3.3 million for the three months ended June 30, 2011, from $3.7 million for the same period in 2010. Gross profit as a percentage of revenue (gross margin) was 38.7% and 29.1% for the three months ended June 30, 2011 and 2010, respectively. The increase in the gross margin was primarily driven by the increased gross margin of our fiber board products as described above. The respective gross margins for our laminate flooring and fiber board products were 29.8% and 29.7% for the three months ended June 30, 2011, as compared to 36.6% and 24.4% for the same period in 2010. The drop in laminate flooring’s gross margin was mainly attributable to a greater percentage increase in average cost than the percentage increase in average sales price.

Selling expenses. Our selling expenses are comprised primarily of sales commissions, the cost of advertising and promotional materials, salaries and fringe benefits of sales personnel, travel expense, consulting fees and other sales related costs. Our selling expenses increased by $333,755, or 778.3%, to $376,637 for the three months ended June 30, 2011, from $42,882 for the same period in 2010. The increase was primarily a result of the expansion of our sales network leading to increased salary, welfare expenses and advertisement and exhibition expenses. Our salary expenses for the three months ended June 30, 2011 amounted to approximately $248,618, compared to approximately $123,995 for the same period in 2010. Our welfare expenses for the three months ended June 30, 2011 amounted to approximately $38,569, compared to approximately $2,059 for the same period in 2010. Our advertisement and exhibition expenses for the three months ended June 30, 2011 amounted to approximately $138,357, compared to approximately $24,887 for the same period in 2010. Due to continued efforts to promote our brand recognition and marketing in the PRC, our travel and consultation expenses also increased and contributed to the increase of selling and marketing expenses. Our travel expenses for the three months ended June 30, 2011 amounted to approximately $20,715, compared to approximately $5,648 for the same period in 2010. We also incurred approximately $23,233 in consultation expenses for the three months ended June 30, 2011 and we had no such expense in the same quarter in 2010.

General and administrative expenses. General and administrative expenses consist primarily of compensation and benefits to our management, finance and administrative staff, professional advisor fees, audit fees and other expenses incurred in connection with general operations. Our general and administrative expenses increased $48,000, or 9.9%, to $531,000 for the three months ended June 30, 2011, from $483,000 for the same period in 2010. This increase was mainly due to the hiring of additional staff to manage our expanding business, particularly in our finance department, to assist with the increased administrative duties associated with being a public company. This also led to increases of related welfare expenses.

Other income (expense). Our total other expenses for the three months ended June 30, 2011 was $408,584, as compared to other income of $1.1 million for the same period in 2010. We incurred more expenses in this quarter mainly because of a higher interest expense of $415,000 resulting from increased bank borrowings during the three months ended June 30, 2011. In addition, we received a one-time government grant of $1.1 million in the second quarter 2010.

Income before income taxes. Our income before income taxes decreased by $2.2 million, or 53.7%, to $2.0 million for the three months ended June 30, 2011, from $4.2 million for the same period in 2010. As a percentage of revenue, our income before income taxes decreased from 33.6% for the three months ended June 30, 2010 to 23.2% for the three months ended June 30, 2011. The amount and percentage decrease mainly a result of lower gross profit, higher selling expenses and higher interest expenses due to increase of loan for purchasing raw materials in 2011.

Government grant. We received $342 in government grant income for the three months ended June 30, 2011, as compared to $1.1 million for the same period in 2010. Government grant income received for the three months ended June 30, 2010 consisted entirely of the value added tax refund.

Income taxes. Our income taxes decreased by $300,000, or 33.2%, to $606,000 for the three months ended June 30, 2011, from $906,000 for the same period in 2010. The decrease was due to our decrease in our taxable income.

Net Income. For the three months ended June 30, 2011, we generated a net income of $1.4 million, a decrease of $1.9 million, or 57.3%, from $3.3 million for the same period in 2010, as a result of the cumulative effect of the foregoing factors.

Comparison of Six Months Ended June 30, 2011 and June 30, 2010

The following table shows key components of our results of operations during the six months ended June 30, 2011 and 2010, in both dollars and as a percentage of our revenues.

	Six Months Ended			Six Months Ended
	June 30, 2011			June 30, 2010			Increase/(Decrease)
			As a			As a
			percentage of			percentage
	Dollar ($)		Revenue	Dollar ($)		of Revenue	Dollar ($)		Percentage
Revenue	18,899,909		100.00%	16,878,352		100.00%	2,021,557		11.98%
Cost of revenue	12,047,828		63.75%	11,706,000		69.36%	341,828		2.92%
Gross profit	6,852,081		36.25%	5,172,352		27.37%	1,679,729		32.48%
Operating expenses

Selling expenses	726,232		3.84%	118,317		0.70%	607,915		513.80%
General and administrative expenses	904,770		4.79%	702,075		4.16%	202,695		28.87%
Total operating expenses	1,631,002		8.63%	820,392		4.86%	810,610		98.81%
Income from operations	5,221,079		27.62%	4,351,960		25.78%	869,119		19.97%
Other income (expense)
Interest income	23,575		0.12%	-		0.00%	23,575		100.00%
Interest expense	(635,012	)	-3.36%	(49,057	)	-0.29%	585,955		1194.44%
Other expenses	(30,364	)	-0.16%	43,860		0.00%	(74,224	)	-169.22%
Government grant	45,414		0.24%	1,419,809		8.41%	(1,374,395	)	-96.80%
Total other income (expenses)	(596,387	)	-3.16%	1,414,612		8.38%	(2,010,999	)	-142.16%
Income before income taxes	4,624,692		24.47%	5,766,572		34.17%	(1,141,880	)	-19.80%
Provision for income taxes	(1,181,618	)	-6.25%	(1,217,396	)	-7.21%	(35,778	)	-2.94%
Net income	3,443,074		18.22%	4,549,176		26.95%	(1,106,102	)	-24.31%

Revenue. Our revenue increased to $18.9 million for the six months ended June 30, 2011, from $16.9 million for the same period in 2010, representing a 12.0% increase. The increase in revenue was mainly due to higher sales volume in the first quarter of 2011 after the expansion of our sales and distribution network. During the six months ended June 30, 2011, we sold approximately 2.0 million square meters of laminate flooring products and approximately 1.1 million pieces of fiber boards, as compared to approximately 0.9 million square meters of laminate flooring products and approximately 1.7 million pieces of fiber boards for the same period in 2010. In addition, we started selling hard wood flooring products in the market in the first quarter of 2011 and sold approximately 0.05 million square meters of hard wood flooring products in the six months ended June 30, 2011. Our respective sales of laminate flooring products, fiber board products and hard wood flooring products accounted for approximately 65.3%, 34.1% and 0.6% of our revenue for the six months ended June 30, 2011, as compared to 34.9%, 65.1% and 0% for the same period in 2010.

Cost of revenue. Our cost of revenue increased $341,828, or 2.9%, to $12.0 million for the six months ended June 30, 2011, from $11.7 million for the same period in 2010. The increase was generally in line with the increase in sales volume. The cost of revenue as a percentage of revenue decreased from 69.4% for the six months ended June 30, 2010 to 63.8% for the six months ended June 30, 2011. The percentage decrease was primarily due to improved gross margin of our fiber board products as discussed in the immediate paragraph below.

Gross profit and gross margin. Our gross profit increased $1.7 million, or 32.5%, to $6.9 million for the six months ended June 30, 2011, from $5.2 million for the same period in 2010. Such increase in overall gross profit was mainly due to an approximately 59% increase in gross profit generated from sales of laminate flooring products which more than offset an approximately 29.6% decrease of gross profit from sales of fiber boards. Gross margin was 36.3% and 30.6% for the six months ended June 30, 2011 and 2010, respectively. The increase in gross margin was primarily driven by the difference between the percentage increase in cost of sales (2.9%) and the increase in revenues (12.0%) . Gross margins for our laminate flooring products and fiber board products were 26.1% and 27.0%, respectively, for the six months ended June 30, 2011, as compared to 37.0% and 24.0%, respectively, for the same period in 2010. Gross margin of our new hard wood flooring products was 24.8% for the six months ended June 30, 2011. Gross margin of fiber board products improved in the first six months of 2011 mainly due our continuing research and development efforts, which led to improvement in manufacturing technology and less consumption of raw material. The drop in gross margin of laminate flooring products was mainly attributable to a combined effect of decrease in their unit sales price and increase in unit cost. The average sales price of laminate flooring products per square meter dropped approximately 4.2% from the six months ended June 30, 2010 as a result of intense competition in the market for similar products.

Selling expenses. Our selling expenses increased by $608,000, or 513.8%, to $726,000 for the six months ended June 30, 2011, from $118,000 for the same period in 2010. The increase was primarily a result of the expansion of our sales network leading to increased salary, welfare expenses and advertisement and exhibition expenses. Our salary expenses for the six months ended June 30, 2011 amounted to approximately $501,178, compared to approximately $213,293 for the same period in 2010. Our welfare expenses for the six months ended June 30, 2011 amounted to approximately $94,852, compared to approximately $4,390 for the same period in 2010. Our advertisement and exhibition expenses for the six months ended June 30, 2011 amounted to approximately $203,232, compared to approximately $54,144 for the same period in 2010. Due to continued efforts to promote our brand recognition and marketing in the PRC, we also incurred more travel and consultation expenses. Our travel expenses for the six months ended June 30, 2011 amounted to approximately $49,708, compared to approximately $7,797 for the same period in 2010. Our consultation expenses for the six months ended June 30, 2011 amounted to approximately $86,534, compared to $0 for the same period in 2010.

General and administrative expenses. Our general and administrative expenses increased $203,000, or 28.87%, to $905,000 for the six months ended June 30, 2011, from $702,000 for the same period in 2010. This increase was mainly due to the hiring of additional staff to manage our expanding business, particularly in our finance department, to assist with the increased administrative duties associated with being a public company.

Other income (expense). We had $596,000 in net other expenses for the six months ended June 30, 2011, as compared to net other income of $1.4 million for the same period in 2010. The $2.0 million decrease in other income (expense) was primarily due to a one time government grant of $1.4 million received in the six months ended June 30, 2010 and higher interest expense of $635,000 resulting from increased bank borrowings during the six months ended June 30, 2011.

Income before income taxes. Our income before income taxes decreased by $1.1 million, or 19.8%, to $4.6 million for the six months ended June 30, 2011, from $5.8 million for the same period in 2010. As a percentage of revenue, our income before income taxes decreased from 34.2% for the six months ended June 30, 2010 to 24.5% for the six months ended June 30, 2011. The dollar and percentage decrease was primarily a result of the higher selling, general and administrative expenses and factors causing the fluctuation in other income (expense) discussed above.

Government grant. We received government grant of $45,000 for the six months ended June 30, 2011, as compared to $1.4 million for the same period in 2010.

Income taxes. Our income taxes decreased by $36,000, or 2.9%, to $1.2 million for the six months ended June 30, 2011, from $1.2 million for the same period in 2010. The decrease was primarily due to decrease in taxable income resulting from the increase in operating expenses and other expenses discussed above.

Net Income. For the six months ended June 30, 2011, we generated a net income of $3.4 million, a decrease of $1.1 million, or 24.31%, from $4.5 million for the same period in 2010, as a result of the cumulative effect of the foregoing factors.

Liquidity and Capital Resources

As of June 30, 2011, we had cash and cash equivalents of $2.1 million. The following table summarizes the key cash flow metrics from our condensed consolidated statements of cash flows for the six months ended June 30, 2011 and 2010.

Cash Flow

		Six Months Ended June 30,
		2011			2010
Net cash (used in) provided by operating activities	$	(892,315	)	$	5,155,579
Net cash (used in) investing activities		(7,904,331	)		(6,691,815	)
Net cash provided by financing activities		8,606,060			2,951,940
Effects of exchange rate changes in cash		39,094			183,548
Net (decrease) increase in cash and cash equivalents		(151,492	)		1,599,252
Cash and cash equivalents at beginning of the period		2,334,910			1,471,729
Cash and cash equivalent at end of the period	$	2,183,418		$	3,070,981

Operating Activities

Net cash used in operating activities was $892,315 on for the six months ended June 30, 2011, as compared to net cash provided by operating activities of $5.2 million for the same period in 2010. The drop in net cash from operating activities was primarily due to a decrease of $1.0 million in net income, an approximately $4.5 million cash outflow in inventory purchases and a $3.8 million outflow in accounts receivable, which more than offset a cash inflow of $1.9 million in taxes recoverable and $1.4 million in deposits and prepaid expenses. The significant increase in inventory during the six months ended June 30, 2011 was attributable to increased inventory and raw materials purchases in anticipation of the development of our sales network in some selected markets in China.

Investing Activities

Net cash used in investing activities for the six months ended June 30, 2011 was $7.9 million, as compared to $6.7 million for the same period in 2010. The net cash used in investing activities was primarily due to our purchase of land use rights for approximately $2.3 million during the six months ended June 30, 2011. In addition, we paid approximately $5.4 million as prepayment for properties under construction for the expansion of the Company facilities.

Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2011 was $8.6 million, as compared to $3.0 for the same period in 2010. The increase in net cash provided by financing activities was primarily due to a $3.9 million loan from China Merchant Bank, a loan from Bank of Chongqing for $2.2 million and two loans from the Guiyang City Nanming Rural Credit Cooperative Bank for $3.8 million and $4.0 million, respectively. Such increase was offset by repayment of a short term bank loan of $3 million that matured in June 2011. In addition, we paid off $2.9 million payable to Mr. Yulu Bai for the purchase cost of the forestry land use right that Mr. Bai had paid on behalf of the Company.

Loan Commitments

As of June 30, 2011, the amount, maturity date and term of each of our bank loans were as follows:

		Interest
Bank	Amount*	Rate	Maturity Date	Duration
Xingyi City Rural Cooperative Bank	$1,547,149	8.72%	April 29, 2012	1 year
China Merchant Bank	3,867,874	6.06%	March 7, 2012	1 year
Xingyi City Rural Cooperative Bank	773,575	8.10%	July 16, 2011	1 year
Xingyi City Rural Cooperative Bank	2,166,009	8.72%	April 29, 2012	1 year
Guiyang City Nanming Rural Credit Cooperative Bank	3,867,873	8.78%	November 18, 2012	22 months
Guiyang City Nanming Rural Credit Cooperative Bank	4,022,588	8.78%	January 18, 2013	2 years
Total	16,245,069

* Calculated based on the exchange rate of $1 = RMB 6.4635

We believe that our cash on hand and cash flow from operations will meet part of our present cash needs and we will require additional cash resources, including loans, to meet our expected capital expenditure and working capital for the next 12 months. We may require additional cash resources in the future due to changed business conditions, implementation of our strategy to ramp up our marketing efforts and increase brand awareness, or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.

Obligations Under Material Contracts

In addition to the loan obligations disclosed above, we have the following material contractual obligations:

On February 2, 2010, we entered into a financial advisory agreement to appoint Asia Regal Financial Capital Group Co., Ltd. and Shenzhen Junwei Investment and Development Co., Ltd. as financial advisors. Pursuant to the agreement, we are obligated to issue to the financial advisors 100,000 shares of common stock at $0.10 per share prior to December 31 of every year within 5 years from the quotation of our stock in the OTC markets. The agreement contains an exclusivity provision whereby we have agreed to engage them as our sole financial advisors for a 2-year period following such stock quotation and contains a $1 million liquidated damages provision for breach of such exclusivity.
On August 25, 2006, we entered into a contract for property under construction, requiring payments totaling $9,695,281 (RMB62,665,450). As of June 30, 2011, we had paid $6,575,385 (RMB42,500,000). These payments were recorded in deposits and prepaid expenses. The remaining $3,119,896 (RMB20,165,450) will be paid by the end of 2011.

The table below sets forth our contractual obligations as of June 30, 2011.

Payment due by period

Contractual Obligations		Total		Less than 1 year		1-3 years		3-5 years		More than 5 years

Long-Term Debt Obligations	$	16,245,069	$	8,354,607	$	7,890,462		-		-
Due to Related Companies		-		-		-		-		-
Operating Lease Obligations		148,432		60,877		57,305		30,249		-
Capital Lease Obligations		-		-		-		-		-
Capital Expenditures		3,119,896		3,119,896		-		-		-
Purchase Obligations		3,599,151		3,599,151		-		-		-
Total	$	23,112,548	$	15,134,531	$	7,947,767	$	30,250	$	-

Seasonality

Our operating results and operating cash flows historically have not been subject to seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introduction

Inflation

Inflation and changing prices have not had a material effect on our business, and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor price changes in the Chinese economy and our industry and continually maintain effective cost controls in operations.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity or capital expenditures, or capital resources that are material to an investment in our securities.

Critical Accounting Policies

Critical accounting policies are those we believe are most important to portraying our financial conditions and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Recent Accounting Pronouncements

See Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). 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 Exchange Act 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.

As required by Rule 13a-15(e), our management has carried out an evaluation, with the participation and under the supervision of our Chief Executive Officer, Mr. Yulu Bai, and Chief Financial Officer, Mr. Jiyong He, of the effectiveness of the design and operation of our disclosure controls and procedures, as of June 30, 2011. Based upon, and as of the date of this evaluation, Messrs. Bai and He, determined that, because of the material weaknesses described in Item 9A “Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2010, which we are still in the process of remediating as of June 30, 2011, our disclosure controls and procedures were not effective. Investors are directed to Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2010 for the description of these weaknesses.

Changes in Internal Control over Financial Reporting

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2010, management concluded that we need to increase our qualified accounting personnel and enhance the supervision, monitoring and reviewing of financial statements preparation processes. We have already taken measures to remediate these material weaknesses by seeking an additional financial reporting and accounting staff member. The Company is currently seeking additional seasoned finance and accounting professionals and experienced financial reporting personnel with relevant knowledge in the preparation of financial statements in accordance with U.S. GAAP and financial reporting disclosure requirements under SEC rules to strengthen the accounting department. In addition, the Company is actively seeking a new CFO who is knowledgeable and experienced in US GAAP and SEC reporting matters. The Company has been interviewing potential candidates to seek for these qualified accounting staff and CFO.

In the meantime, the Company has hired an external consultant to assist with the preparation of US GAAP financial statements and assisting with the Form 10K and 10Q preparation.

Other than the foregoing changes, there were no changes in our internal controls over financial reporting during the second quarter of 2011 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.

ITEM 1A. RISK FACTORS.

Not Applicable.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. (REMOVED AND RESERVED).

ITEM 5. OTHER INFORMATION.

We have no information to disclose that was required to be in a report on Form 8-K during the period covered by this report, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.

ITEM 6. EXHIBITS.

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

Exhibit No.		Description

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

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

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

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

101		Interactive data files pursuant to Rule 405 of Regulation S-T*

* Furnished herewith

SIGNATURES

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

Date: August 22, 2011	CHINA FORESTRY INDUSTRY GROUP, INC.

	By:	/s/ Yulu Bai
		Yulu Bai, Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Jiyong He
		Jiyong He, Chief Financial Officer
		(Principal Financial Officer and Principal
		Accounting Officer)

Remainder of 2011

China Forestry Industry Group, Inc. 10-Q