SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  FORM 20-F/A  oREGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR  xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008   OR  oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ______   OR   ÿSHELL COMPANY REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  Commission file number 000-51625  China Linen Textile Industry, Ltd. (Exact name of Registrant as specified in its charter)  N/A (Translation of Registrants name into English)  The Cayman Islands, B.W.I (Jurisdiction of incorporation or organization)  Chengdong Street, Lanxi County, Heilongjiang Province_____ (Address of principal executive offices)  Zhao Chunfu, 86-455-5636079 , 86-451-82309970,   email:   ZCFZZZ@163.COM, fax no.:86-451-82309971, Chengdong Street, Lanxi County, Heilongjiang Province. (Name, Telephone, E-Mail and/or Facsimile number and Address of Company Contact Person)  Securities registered or to be registered pursuant to Section 12(b) of the Act.   Title of each class
NoneName of each exchange on which registered
None  Securities registered or to be registered pursuant to Section 12(g) of the Act.  Common stock, no par value (Title of Class)  1    Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.  None (Title of Class)  Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report.  20,100,003 shares of $0.002 par value Common Stock outstanding as of December 31, 2008  Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. oYesxNo  If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 oYesxNo  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. xYesoNo  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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Not Applicable  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. oLarge Accelerated FileroAccelerated FilerxNon-accelerated filer  Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:  xUS GAAPoInternational Financial Reporting Standards oOther as issued by the International Accounting Standards Board  If this is an annual report, indicate by check mark whether the company is a shell company (as defined in Rule 12b-2 of the Exchange Act). oYesxNo    2      TABLE OF CONTENTS  SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 5 ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 5 ITEM 2.   OFFER STATISTICS AND EXPECTED TIMETABLE 6 ITEM 3.  KEY INFORMATION 6 ITEM 4.  INFORMATION ON THE COMPANY 13 ITEM 4A.  UNRESOLVED STAFF COMMENTS 17 ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS 17 ITEM 6.   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 20 ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 23 ITEM 8.  FINANCIAL INFORMATION 25 ITEM 9.  THE OFFER AND LISTING 26 ITEM 10.  ADDITIONAL INFORMATION 26 ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 34 ITEM 12.   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES. 35 ITEM 13.   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES. 35 ITEM 14.   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.35 ITEM 15.   CONTROLS AND PROCEDURES. 35 ITEM 16A.  AUDIT COMMITTEE FINANCIAL EXPERT. 36 ITEM 16B.   CODE OF ETHICS. 36 ITEM 16C.  PRINCIPAL ACCOUNTANT FEES AND SERVICES. 36 ITEM 16D.  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES. 36 ITEM 16E.  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS. 37 ITEM 17.  FINANCIAL STATEMENTS 37 ITEM 18.  FINANCIAL STATEMENTS 69 ITEM 19.  EXHIBITS 69   3   EXPLANATORY NOTE  China Linen Textile Industry, Ltd., a corporation incorporated under the laws of the Cayman Islands B.W.I., (hereinafter referred to as we, us, our, or the Company)  is filing this Amendment No. 1 on Form 20-F/A (this "Amendment") to its Annual Report on Form 20-F for the fiscal year ended December 31, 2008, which was filed with the Securities and Exchange Commission on July 14, 2009 (the "Original Filing") to amend the information contained in Item 15 of the Original Filing and update the Audit Report contained in the Original Filing.  Except as described above, no other changes have been made to the Original Filing, and this Amendment No. 1 on Form 20-F/A does not amend, update or change any other information in the financial statements or any other items or disclosures in the Original Filing. This Amendment No. 1 on Form 20-F/A does not reflect events occurring after the filing of the Original Filing or modify or update those disclosures, including any exhibits to the Original Filing affected by subsequent events. Information not affected by the changes described above is unchanged and reflects the disclosures made at the time of the Original Filing.  Accordingly, this Amendment No. 1 on Form 20-F/A should be read in conjunction with our filings made with the Securities and Exchange Commission subsequent to the filing of the Original Filing, including any amendments to those filings.  INTRODUCTION  The Company was incorporated under the laws of the Cayman Islands B.W.I. on February 3, 2000 as Aquasol Envirotech, Ltd.  The Company was formed to engage in the business of developing, acquiring and marketing water and waste water technology solutions.  The Company built a pilot facility in Squamish, British Columbia, Canada in 2001 and conducted limited operations to test its Bio Trap system for wastewater treatment and reuse. The pilot facility was closed in 2001 after completion of the test, and since that time, the Company has had no operations.  On July 9, 2008,the Company acquired 100 shares of the issued and outstanding capital stock of Bright International Group Co., Ltd., a Republic of Vanuatu corporation (Bright), constituting all of the issued and outstanding capital stock of Bright. The 100 shares of Bright were acquired from the individual shareholders of Bright in a share exchange transaction in return for the issuance of 18,963,005 shares of the Companys common stock. As a result of the transaction, Bright became a wholly owned subsidiary of the Company.  Bright is the registered beneficial owner of  95% of Heilongjiang Lanxi Sunrise Linen Textile Industry Co, Ltd., (Lanxi Sunrise).  Lanxi Sunrise is a corporation incorporated in the Peoples Republic of China (PRC or China) which is engaged in research,  production and sales of linen textile products.  On June 9, 2008, three persons designated by Lanxi Sunrise purchased a total of 900,000 shares, or approximately 39.58% of the Companys issued and outstanding common stock, from seven previous shareholders.  The purchase price was $310,000, or approximately $0.34 per share.  On June 9, 2008, in anticipation of completion of the Reverse Acquisition, the Company changed its named to China Linen Textile Industry, Ltd.  On June 30, 2008, prior to completion of the Share Exchange transaction, the Company completed a 1:2 reverse split of its issued and outstanding common stock, thereby reducing the number of issued and outstanding shares from 2,273,995 to approximately 1,136,998  Completion of the stock purchase transaction and the share exchange transaction described above (together the Reverse Acquisition) resulted in a change of control of the Company.  References to the Company with respect to periods prior to the date of the Reverse Acquisition relate to Lanxi Sunrise, unless otherwise specifically indicated. References to we, us, and our similarly refer to the Company. All currency below is in United States Dollars ($ or Dollars), unless otherwise indicated. References to Renminbi or RMB mean Yuan Renminbi of the Peoples Republic of China.    4   SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS  This document contains forward-looking statements reflecting the Companys views with respect to future events and financial performance. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from the statements. These forward-looking statements are identified by, among other things, the words anticipates, believes, estimates, expects, plans, projects, targets and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statements were made. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Important factors that may cause actual results to differ from those projected include the risk factors specified below.  ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS  Directors and Senior Management  The name, age and position of each of the Companys directors and senior management is as set forth below.  The business address of each such person is the address of the Company, which is Chengdong Street, Lanxi County, Heilongjiang Province  NAMEAGEPOSITIONGao Ren46President and Chairman of the BoardMa Yongfeng48General ManagerTeng Yunhai48Vice President and DirectorZhao Chunfu46Secretary and DirectorLi Songyun38Chief Marketing OfficerHuang Xiaofang43Chief Financial Officer  The Company does not currently have standing audit, nominating or compensation committees. Currently, our entire board of directors is responsible for the functions that would otherwise be handled by these committees. The Company intends to establish an audit committee, a governance and nominating committee and a compensation committee of the board of directors as soon as is practicable. We envision that the audit committee will be primarily responsible for retaining our independent auditor and reviewing the services performed by our independent auditors, evaluating our accounting policies and our system of internal controls. The governance and nominating committee will be responsible for nominating directors to our board and will also be generally responsible for overseeing our corporate governance policies and practices. The compensation committee will be primarily responsible for reviewing and approving our salary and benefits policies (including stock options) and other compensation of our executive officers.  The board of directors has not made a determination as to whether any member of the board of directors is an audit committee financial expert.  Each of the directors named above were elected or appointed to serve until the next annual meeting of the Companys stockholders or until their successors have been appointed or duly elected and qualified. Thereafter, directors will be elected for one-year terms at the annual stockholders meeting.  Officers hold their positions at the pleasure of the board of directors.  There is no arrangement or understanding between any of the directors or officers of the Company and any other person pursuant to which any director or officer was or is to be selected as a director or officer, and there is no arrangement, plan or understanding as to whether non-management shareholders will exercise their voting rights to continue to elect the current directors to the Companys board. There are also no arrangements, agreements, or understandings between non-management shareholders and management under which non-management shareholders may directly or indirectly participate in or influence the management of the Companys affairs.  Advisers   5   The Companys legal advisers are Frascona, Joiner, Goodman and Greenstein, P.C., 4750 Table Mesa Drive, Boulder, CO 80305  Auditors  The Companys independent registered public accounting firm is UHY Vocation HK CPA Limited (UHY), 3/F, Malaysia Building, 50 Gloucester Road, Wanchai District, Hong Kong.  ITEM 2.   OFFER STATISTICS AND EXPECTED TIMETABLE  Not applicable.  ITEM 3.  KEY INFORMATION  A. Selected Financial Data  Selected financial data for the Company for the twelve month periods ended December 31, 2007 and 2008, below, is derived from the audited financial statements of the Company.  The selected financial data for the twelve month period ended December 31, 2006 is derived from the audited financial statements of Lanxi Sunrise.  The  selected financial data for the twelve-month periods ended December 31, 2005 and 2004 below, is derived from unaudited financial statements of Lanxi Sunrise for the specified periods.  All currency referenced in this report refers to United States dollars unless otherwise indicated.  20042005200620072008Revenues8,369,73013,166,62014,518,39320,782,80422,945,122Income from Operations549,490982,3453,535,2824,354,7803,955,381Net Income363,659834,1912,713,0903,376,8713,700,969Total Assets15,357,34817,515,49226,389,32331,482, 20336,224,260Total Current Liabilities12,966,87714,035,88818,902,67118,701,69218,168,708Net  Current Assets2,390,4713,479,603612,2483,503,8446,192,533Stockholders Equity2,390,4713,479,6036,939,63911,137,26115,603,140  Exchange Rate Information  We prepare our financial statements in Renminbi. This report contains translations of Renminbi amounts into U.S. dollars, and U.S. dollars into Renminbi. You should not assume that Renminbi amounts could actually be converted into U.S. dollars at these rates or at all.  Until July 20, 2005, the Peoples Bank of China had set and published daily a base exchange rate with reference primarily to the supply and demand of Renminbi against the U.S. dollar in the market during the prior day. The Peoples Bank of China also took into account other factors, such as the general conditions existing in the international foreign exchange markets. From 1994 to July 20, 2005, the official exchange rate for the conversion of Renminbi to U.S. dollars was generally stable. On July 21, 2005, the PRC government introduced a managed floating exchange rate system to allow the value of the Renminbi to fluctuate within a regulated band based on market supply and demand and by reference to a basket of currencies. On the same day, the value of the Renminbi appreciated by 2.0% against the U.S. dollar. Since then, the PRC government has made, and may in the future make, further adjustments to the exchange rate system. The Peoples Bank of  6   China announces the closing price of a foreign currency traded against the Renminbi in the inter-bank foreign exchange market after the closing of the market on each working day, and makes it the central parity for the trading against the Renminbi on the following working day.  Although PRC governmental policies were introduced in 1996 to reduce restrictions on the convertibility of Renminbi into foreign currency for current account items, conversion of Renminbi into foreign exchange for capital items, such as foreign direct investments, loans or securities, requires the approval of the State Administration for Foreign Exchange and other relevant authorities.  The interbank bid rates were US$1.00 to RMB 6.8383 on June 1, 2009. The following table sets forth the high and low interbank bid rates between Renminbi and U.S. dollars for each of the periods shown:  Interbank Bid RatePeriodRMB per US$HighLowJuly, 20086.82556.8172August, 20086.83476.8204September, 20086.83516.8351October, 20086.82826.8182November, 20086.82856.8159December, 20086.83866.8133   The following table sets forth the period-end noon buying rates and the average noon buying rates between Renminbi and U.S. dollars for each of 2003, 2004, 2005, 2006, 2007 and 2008 (calculated by averaging the noon buying rates on the last day of each month of the periods shown):  PeriodPeriod-end Interbank Bid RateAverage Interbank Bid RateRMB per US$RMB per US$20048.286508.2872320058.073408.2032920067.817507.9818920077.314107.6172020086.854206.96230  B. Capitalization and Indebtedness  Below is a statement of the capitalization and indebtedness (including indirect and contingent indebtedness) of the Company as of December 31, 2008, showing the companys capitalization as of that date:  LiabilitiesGuaranteed0Secured4,041,291Unsecured16,579,829Total20,621,120Shareholders EquityCommon Stock, par value $0.002; 500,000,000 sharesauthorized,      20,100,003 shares issued and outstanding40,200Additional paid-in capital2,204,186Statutory Reserves1,019,595Retained earnings10,747,649Accumulated Other Comprehensive Income1,591,510Total Stockholders Equity15,603,140Total Liabilities and Stockholders Equity36,224,260   7   C. Reasons for the Offer and Use of Proceeds  Not applicable.  D. Risk Factors  An investment in the Common Stock of the Company involves a high degree of risk, related to our business, our industry, doing business in China and the market for our common stock. Any of the following risks could materially adversely affect the business, operating results and financial condition of the Company. You should consider these factors in conjunction with the other information contained in this report and the documents filed as exhibits hereto.  Risks Related to our Business  In order to produce high quality products we must be able to purchase sufficient quantities of high quality flax. If we are unable to source a sufficient quantity of high quality flax it will adversely affect our ability to satisfy orders from our current customers and expand our business to attract new customers.  Our ability to source and purchase a sufficient quantity of high quality flax is a significant risk factor for our business.  Lower quality flax is more widely available than high quality flax, and most of the flax currently grown in China is lower quality because of recent dry climate conditions.  Yarn produced from high quality flax is stronger than yarn produced from lower quality flax and as a result may be longer and thinner than yarn made from lower quality flax.  Use of thinner yarn in the weaving process results in higher quality fabric because the fabric has more threads per inch.  We currently import flax primarily from France, Belgium and Egypt and rely on Harbin Sunshine Linen Textile Co., Ltd., an affiliated company controlled by our President, to source and import flax on our behalf.   There is no assurance that we will be able to continue to rely on contacts and business relationships established by Harbin Sunshine Linen Textile Co, Ltd., to source and acquire high quality flax on our behalf, and there is no assurance that we will continue to be able to source and purchase sufficient quantities of high quality flax for use in the production process.  In the event we are unable to acquire sufficient quantities of high quality flax our production process will be adversely affected and we may be unable to produce products which meet specifications established by our customers.  In such an event, our profitability would be adversely affected and our business could fail.  In order to grow at the pace expected by management, we will require additional capital to support our long-term business plan.  If we are unable to obtain additional capital in future years, we may be unable to proceed with our long-term business plan and we may be forced to limit or curtail our future operations.  We will require additional working capital to support our long-term business plan, which includes expanding our current production capacity, establishing a yarn-dyed fabric factory and identifying suitable targets such as a semi-bleaching factory, for horizontal or vertical mergers or acquisitions.   Our working capital requirements and the cash flow provided by future operating activities, if any, will vary greatly from quarter to quarter, depending on the volume of business during the period and payment terms with our customers.  We may not be able to obtain adequate levels of additional financing, whether through equity financing, debt financing or other sources.  Additional financings could result in significant dilution to our existing stockholders or the issuance of securities with superior rights to our current outstanding securities.  In addition, we may grant registration rights to investors purchasing future equity or debt securities.  If we are unable to raise additional financing, we may be unable to grow or to implement our long-term business plan, develop or enhance our products and services, take advantage of future opportunities or respond to competitive pressures on a timely basis, if at all.  In addition, a lack of additional financing could force us to substantially curtail or cease operations.  Our future success depends in part on attracting and retaining key senior management and qualified technical and sales personnel. We also face certain risks as a result of the recent changes to our management team.  Our future success depends in part on the contributions of our management team and key technical and sales personnel and our ability to attract and retain qualified new personnel. In particular, our success depends on the continuing employment of our President, Mr. Gao Ren, our General Manager, Ma Yongfeng, our Vice President Mr. Teng Yunhai, our Chief Marketing Officer, Ms. Li Songyun, and our Chief Financial Officer, Ms. Huang Xiaofang. There is significant competition in our industry for qualified managerial, technical and sales personnel and we cannot assure you that we will be able to retain our key senior managerial, technical and sales personnel or that we will be able to attract, integrate and retain other such personnel that we may require in the future. We also cannot assure you that our employees will not leave and  8   subsequently compete against us. If we are unable to attract and retain key personnel in the future, our business, financial condition and results of operations could be adversely affected.  Our growth strategy includes making acquisitions in the future, which could subject us to significant risks, any of which could harm our business.  Our growth strategy includes identifying and acquiring or investing in suitable candidates on acceptable terms.  Over time, we may acquire or make investments in other providers of product offerings that complement our business and other companies in the linen textile industry.  Acquisitions involve a number of risks and present financial, managerial and operational challenges, including:  ·diversion of management’s attention from running our existing business;  ·increased expenses, including travel, legal, administrative and compensation expenses resulting from newly hired employees;  ·increased costs to integrate personnel, customer base and business practices of the acquired company with our own;   ·adverse effects on our reported operating results due to possible write-down of goodwill associated with acquisitions;  ·potential disputes with sellers of acquired businesses, technologies, services or products; and  ·dilution to stockholders if we issue securities in any acquisition.  Moreover, performance problems with an acquired business, technology, product or service could also have a material adverse impact on our reputation as a whole. In addition, any acquired business, technology, product or service could significantly under-perform relative to our expectations, and we may not achieve the benefits we expect from our acquisitions. For all these reasons, our pursuit of an acquisition and investment strategy or any individual acquisition or investment, could have a material adverse effect on our business, financial condition and results of operations.  We sometimes extend credit to our customers. Failure to collect the trade receivables or untimely collection could affect our liquidity.  We extend credit to a large number of our customers while generally requiring no collateral. Generally, our customers pay in installments, with a portion of the payment upfront; a portion of the payment upon receipt of our products by our customers and a portion of the payment upon satisfaction by our customer. We perform ongoing credit evaluations of our customers financial condition and generally have no difficulties in collecting our payments. But if we encounter future problems collecting amounts due from our clients or if we experience delays in the collection of amounts due from our clients, our liquidity could be negatively affected.  The Company is a Cayman Islands company, Bright is a Republic of Vanuatu company and Lanxi Sunrise  is a PRC company, and all of the Companys officers and directors reside outside the United States. Therefore, certain judgments obtained against the company by its shareholders may not be enforceable in the United States.  The Company is a Cayman Islands company, Bright is a Republic of Vanuatu company and Lanxi Sunrise is a PRC company. All of the Companys officers and directors reside outside of the United States. All or substantially all of its assets and the assets of these persons are located outside of the United States. As a result, it may not be possible for investors to effect service of process within the United States upon the Company or such persons or to enforce against it or these persons the United States federal securities laws, or to enforce judgments obtained in United States courts predicated upon the civil liability provisions of the federal securities laws of the United States, including the Securities Act of 1933 (the Securities Act) and the Exchange Act.  Risks Related to Our Industry  9    The linen textile industry is highly competitive and includes many competitors which are larger,  have more resources and more technological capability  than the Company.  There is no assurance that we will be able to effectively compete and to retain or expand our market share.  The global market for linen production is growing rapidly and includes many competitors both in China and in other parts of the world.  The Company has many large competitors in China which only make thread and do not also produce cloth.  The Company also has many competitors in China and in other parts of the world that produce cloth.  In addition, although the market for sale of linen products is expected to grow rapidly in China, consumers for linen textile products are currently mainly in foreign markets outside of China.   Therefore, in order to compete effectively the Company must establish and maintain connections with buyers in foreign markets.  There is no assurance that the Company will be able to continue to compete in this market and to maintain or increase its market share.  Risks Related to Doing Business in China  Economic, political, legal and social uncertainties in China could harm the Companys future interests in China.  All of the Companys future business operations are expected to be located in China. As a consequence, the economic, political, legal and social conditions in China could have an adverse effect on the Companys business, results of operations and financial condition. The legislative trend in China over the past decade has been to enhance the protection afforded to foreign investment and to allow for more active control by foreign parties of foreign invested enterprises. There can be no assurance, however, that legislation directed towards promoting foreign investment will continue. More restrictive rules on foreign investment could adversely affect the Companys ability to expand its operations into China or repatriate any profits earned there. Some of the changes that could adversely affect the Company, include:  Level of government involvement in the economy;  Control of foreign exchange;  Methods of allocating resources;  Balance of payments position;  International trade restrictions; and  International conflict.  The legal environment in China is uncertain and your ability to legally protect your investment could be limited.  The Chinese legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which precedents set in earlier legal cases are not generally used. The overall effect of legislation enacted over the past 20 years has been to enhance the protections afforded to foreign owned enterprises in China. However, these laws, regulations and legal requirements are relatively recent and are evolving rapidly, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to foreign investors, such as the right of foreign invested enterprises to hold licenses and permits such as requisite business licenses. In addition, all of our executive officers and our directors are residents of China and not of the U.S., and substantially all the assets of these persons are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons.  The Chinese government exerts substantial influence over the manner in which we must conduct our business activities.  China only recently has permitted provincial and local economic autonomy and private economic activities. The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of these jurisdictions may impose new, stricter  10   regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.  Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.  Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.  The majority of our revenues will be settled in Renminbi, and any future restrictions on currency exchanges may limit our ability to use revenue generated in Renminbi to fund any future business activities outside China or to make dividend or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the Renminbi for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in China authorized to conduct foreign exchange business. In addition, conversion of Renminbi for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the Renminbi.  The value of our securities will be affected by the foreign exchange rate between the United States Dollars and Renminbi.  The value of our common stock will be affected by the foreign exchange rate between U.S. dollars and Renminbi, and between those currencies and other currencies in which our sales may be denominated. For example, to the extent that we need to convert U.S. dollars into Renminbi for our operational needs and should the Renminbi appreciate against the U.S. dollar at that time, our financial position, the business of the company, and the price of our common stock may be harmed. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of declaring dividends on our common stock or for other business purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of our earnings from our subsidiaries in China would be reduced.  Risks Related to the Market for Our Stock  The Company, as a foreign private issuer, has limited reporting requirements under the Securities Exchange Act of 1934, which makes it less transparent than a United States issuer.  As a foreign private issuer, the rules and regulations under the Exchange Act provide the Company with certain exemptions from the reporting obligations of United States issuers. The Company is exempt from the rules prescribing the furnishing and content of proxy statements, and its officers, directors and principal stockholders are exempt from the reporting and short-swing profit recovery provisions. Also, the Company is not required to publish financial statements as frequently, as promptly or containing the same information as United States companies. The result is that the Company will be less transparent than a U.S. issuer.  Our common stock is quoted only on the OTC Bulletin Board, which may have an unfavorable impact on our stock price and liquidity.  Our common stock is quoted on the OTC Bulletin Board. The OTC Bulletin Board is a significantly more limited market than the New York Stock Exchange or NASDAQ system. The quotation of our shares on the OTC Bulletin Board may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future.  We are subject to penny stock regulations and restrictions.  The SEC has adopted regulations which generally define so-called penny stocks to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. As of June 30, 2008, the closing bid price for our common stock was $2.00 per share and our shares are considered to be a penny  11   stock.   As a penny stock, our common stock may become subject to Rule 15g-9 under the Exchange Act of 1934, or the Penny Stock Rule. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and accredited investors (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchasers written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market.  For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.  There can be no assurance that our common stock will qualify for exemption from the Penny Stock Rule. In any event, even if our common stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.  One of our stockholders holds a significant percentage of our outstanding voting securities.  Mr. Gao Ren, who is our President, Chief Executive Officer and a Director, directly or indirectly owns approximately 41% of our outstanding voting securities. As a result, he possesses significant influence, giving him the ability, among other things, to elect a majority of our Board of Directors and to authorize or prevent proposed significant corporate transactions. His ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer, all of which may prevent us from implementing our business strategies.  ITEM 4.  INFORMATION ON THE COMPANY  History and Development of the Company  The Company was incorporated under the laws of the Cayman Islands B.W.I. on February 3, 2000 to engage in the development, acquisition and marketing of water and wastewater treatment solutions including a two-stage water treatment system known as the MicroEntrap Mobilization System.  On March 26, 2000, the Company entered into a share exchange to acquire Aquasol Technologies, Inc., a Canadian corporation (Aquasol Alberta.  The Company purchased Aquasol Alberta in order to utilize its customer base to market the Companys wastewater technologies in Alberta. Aquasol Alberta engaged in a few small wastewater treatment projects in Alberta using unpatented technologies similar to those used by the Company.  Aquasol Alberta discontinued operations in 2001, as there was no market in Alberta for its products.  On April 1, 2002, Aquasol EnviroTech (Canada) Ltd., a British Columbia Corporation, became a wholly owned subsidiary of the Company. The major shareholders of the Company had incorporated Aquasol EnviroTech (Canada) Ltd. in order to have a local identity for the operations of the Company in Vancouver, British Columbia.  The Company loaned Aquasol EnviroTech (Canada) Ltd. $1,400,000 in 2000 for expenditures with respect to general and administrative expenses, consulting fees, and the purchase of equipment. There was no interest for the loan and the loan can be converted into equity of Aquasol EnviroTech (Canada) Ltd. anytime. It became a subsidiary of the Company on April 1, 2002 pursuant to the loan agreement with the Company.  In 2001, the Company built a pilot facility in Squamish, British Columbia, Canada to test its MicroEntrap water treatment system.  The facility was closed after the test was completed in 2001.   The Company stopped research, development, manufacturing and marketing activities in 2002, and since that time, has not had any active business operations.  Reverse Acquisition with Bright   12   On July 9, 2008, the Company acquired 100 shares of the issued and outstanding capital stock of Bright International Group Co., Ltd., a Republic of Vanuatu corporation (Bright), constituting all of the issued and outstanding capital stock of Bright. The 100 shares of Bright were acquired from the individual shareholders of Bright in a share exchange transaction in return for the issuance of 18,963,005 shares of the Companys common stock. As a result of the transaction, Bright became a wholly owned subsidiary of the Company.  Bright  is the registered beneficial owner of  95% of Heilongjiang Lanxi Sunrise Linen Textile Industry Co, Ltd., (Lanxi Sunrise).  Lanxi Sunrise is a corporation incorporated in the Peoples Republic of China (PRC or China) which is engaged in research, production and sales of linen textile products.  On June 9, 2008, three persons designated by Lanxi Sunrise purchased a total of 900,000 shares, or approximately 39.58% of the Companys issued and outstanding common stock, from seven previous shareholders.  The purchase price was $310,000, or approximately $0.34 per share.  On June 9, 2008, in anticipation of completion of the Reverse Acquisition, the Company changed its named to China Linen Textile Industry, Ltd.  Completion of the stock purchase transaction and the share exchange transaction described above (together the Reverse Acquisition) resulted in a change of control of the Company.  The Companys common stock is quoted on the Over-The-Counter Bulletin Board in the United States under the symbol CTXIF.OB.  Business Overview  The Company is principally engaged in the production and sale of linen yarn and various types of linen fabric. It is also involved in consultation, research and development related to of linen technology and linen products.  The Company carries on all of its business activities through its subsidiary, Heilongjiang Lanxi Sunrise Linen Textile Industry Co, Ltd (Lanxi Sunrise), which was established as a privately owned business enterprise in June, 2002.  Its manufacturing facility is located in Lanxi County, Heilongjiang Province in the northeast section of the PRC near the city of Harbin.   Prior to the establishment of Lanxi Sunrise at this location as a privately owned business in June, 2002, the manufacturing facility was operated as a government-owned business.  The linen industry chain involves a 5-step process including (i) raw material planting; (ii) fiber production; (iii) yarn spinning; (iv) fabric weaving and (v) dyeing and finishing.  The Companys current operations are focused on only two of the steps in this process, yarn spinning and fabric weaving.  In the future, the Company plans to expand its operations to include other aspects of the industry chain including particularly dyeing and finishing.  The Company imports high quality flax primarily from France, Belgium and Egypt.  The raw flax is put through a 5-step process at the Companys manufacturing facility to make yarn. A portion of the yarn is sold to customers and a portion is used by the Company to weave various types of linen cloth.   The Companys primary products include flax yarn, hemp linen fabric, gray linen fabric, linen/cotton interwoven fabric and linen/rayon interwoven fabric.  Currently, approximately 60% of the Companys finished products are exported to customers in Europe, North America, the Middle East and South America and approximately 40% are sold to customers in China.  Products and Services  The Company operates one yarn-spinning factory and two weaving factories at its facility in Lanxi County, PRC.  The main products it produces at this facility are flax yarn and gray linen fabric. It also designs and produces other linen fabrics in various specifications requested by its customers including hemp linen fabric, interwoven or blended fabrics including both a cotton/linen blend and a rayon/linen blend, semi-bleached fabric, piece-dyed fabric and jacquard fabric.  In its yarn-spinning factory, the Company processes raw flax into yarn through an automated multi-step process.  The annual production capacity of the Companys yarn-spinning factory is approximately 1,600 tons of pure semi-bleached linen yarn and gray yarn in various specifications.   13   The Companys two fabric-weaving factories have an annual production capacity of approximately 8 million meters of fabric including linen gray fabric, hemp linen fabric, blended or interwoven fabric such as cotton/linen and rayon/linen blends, and semi-bleached linen fabric.  Approximately 95% of the Companys annual yarn production is used by the Company for its own production of linen cloth. The remaining 5% of the yarn produced by the Company is sold to other producers of linen cloth in China and elsewhere.  The Company does not currently have its own yarn-dying facility.  The Company subcontracts this portion of the production process when required by client specifications.  Distribution and Marketing  The Company currently exports approximately 60% of its products to customers in Europe, North and South America and the Middle East.  Both the importation of raw materials and the export of finished goods are done through an Agency Agreement with Harbin Sunshine Linen Textile Co, Ltd. (Harbin Sunshine), an affiliated entity controlled by Gao Ren, the Companys President.   Under the terms of the Agency Agreement, Harbin Sunshine purchases and imports flax on the Companys behalf and resells it to the Company at a price equal to cost plus 6%.   Harbin Sunshine also acts as the Companys agent for export of finished goods, but does not charge a fee as part of the export process.  Accordingly, finished goods which are to be exported are sold to Harbin Sunshine at a price equal to the price to be paid by the overseas  buyer of the goods.  Harbin Sunshine was established in 1997 to engage in the import/export business and has special licenses from the central government of the PRC which allow it to take advantage of waivers of import/export taxes created to encourage business development in certain areas of northeast China.   By importing raw materials and exporting finished goods through Harbin Sunshine, the Company is able to benefit from the special licenses held by Harbin Sunshine.  In the process of distributing finished goods, the Company also benefits from its Agency Agreement with Harbin Sunshine by taking advantage of long-term customer contacts established by Harbin Sunshine.  Seasonality  The Company imports high quality flax primarily from France, Belgium and Egypt.  Summer is the growing season for flax, and the growing period is approximately 3-4 months.  Accordingly, the Company generally makes it most significant purchases of flax in October of each year to be used for production in the following months.  The Companys peak production period for linen cloth to be used in clothing is the fourth quarter of the year primarily because linen is a light-weight cloth generally used to produce summer clothing.  Customers  The Company currently exports approximately 60% of its products to Europe, North and South America and the Middle East and sells its remaining products in the domestic market in China.   The Companys main European customers are in Italy, France, Belgium and Greece.  It also has significant customers in the United States, Brazil, Egypt and India.  In the domestic market in China, the Companys customers are located primarily in the Yangtze River Delta area and include Zhejiang Huili Garments Co, Ltd., Shaoxing Yinxiang Cotton and Linen Textile Co., Ltd., Shaoxing Hongda Linen and Cotton Textile Co, Ltd., and Zhejiang Shaoxing Xinsanjiang Printing and Dyeing Co, Ltd.  Raw Materials  The Company imports flax primarily from France, Belgium and Egypt because it is of higher quality than the flax currently grown in China.  The ability to continue to source high quality flax is a significant risk factor faced by the Company.   While lower quality flax is more widely available, the use of high quality flax allows for the manufacture of yarn which is longer and stronger, and as a result may be made thinner, than yarn woven from lower quality flax.  Use of thinner thread in the weaving process results in fabric which has more threads per inch and is of higher quality than fabric woven from lower quality flax.   14   The Company currently relies on Harbin Sunshine Linen Textile Co., Ltd, (Harbin Sunshine)  an affiliated entity controlled by Gao Ren, the Companys President, to source and to import flax on its behalf.   The Company has an Agency Agreement with Harbin Sunshine pursuant to which Harbin Sunshine purchases and imports flax on the Companys behalf and resells it to the Company at a price equal to cost plus 6%.  The areas of China where flax is typically grown, including areas near the Companys factory in Lanxi County, Heilongjiang Province, have a climate which in recent years has been  dryer than the climate in areas of Europe where flax is grown.  This has caused the flax grown in China to generally be of lower quality than the flax available from Europe.  Competition  The linen textile industry is highly competitive, but Company management believes that, for various reasons, it is well positioned to maintain a competitive position within the industry.  The Company has many competitors, several of which are larger than it.  However, many of the large competitors only make thread and do not have the capability of also producing fabric.  These competitors sell their thread to smaller companies which weave the thread into cloth. The Company makes and sells thread to other companies, but is also one of the largest manufacturers of linen cloth in China.  In addition, the Companys production facility which operates on a continuous 24-hour per day basis, and which is capable of producing different grade and quality products in order to satisfy the specifications and meet the demands of clients.  Heilongjiang province is considered to be the base of the linen industry in China because it is the area of the country where flax has traditionally been grown.  As a result, the Company has been able to hire an experienced and capable management team.  In addition, it has a good supply of labor available at rates of pay which are lower than those typically paid to workers in southern China.  Finally, the Company has been able to take advantage of special laws established by the central government of the PRC which are designed to encourage and support growth of industry in northeast China.  These include a special waiver of tax on import of manufacturing equipment, and a waiver of import tax on raw materials imported by Companys which manufacture goods for export.  Intellectual Property  The Company has registered the trademark Fairy Deer which it intends to use to seek to establish a recognizable brand for its products.  The Company has established to technological center where is does research on processes related to linen production, including such projects as work in developing high count flax yarn, multi-fiber blended fabric and other functional products as well as research related to linen yarn dyeing techniques, linen fabric bleaching and dyeing technologies, development of linen yarn-dyed fabric and development of finished linen garments.  The Company seeks to use any technological advances it makes in its own production process but has not sought patent protection for any such advances.  OrganizationalStructure  The chart below depicts the corporate structure of the Company as of the date hereof.  As depicted below, the Company owns 100% of the capital stock of Bright and has no other subsidiaries.  Bright owns 95% of the capital stock of Lanxi Sunrise, the entity through which the Company conducts all of its business operations.  15   [f200820fa_final001.jpg] Property, Plant, and Equipment  The Company operates a production facility in Lanxi County, Heilongjiang Province, PRC.  It has a land space of 52,000 square meters and a production facility which is 28,000 square meters in size.  In the PRC all land is owned by the government, but the Company has a long-term lease from the government for the property where the production facility is located.  The production facility includes a flax-spinning factory and two fabric-weaving factories, office facilities and a dormitory facility for workers.  The equipment in the factories includes 7,680 wet-spinning spindles, 192 sets of rapier looms and more than 300 sets of other types of textile technological processing equipment.  The Company currently operates its factories on a 24-hour per day basis with three shifts of employees.  Operating at full capacity, the factories have an annual production capacity of 1,600 tons of pure semi-bleached linen yarn and gray yarn in various specifications, and approximately 8,000,000 meters of linen gray fabric  Legal Proceedings  From time to time, the Company has disputes that arise in the ordinary course of its business. Currently, there are no material legal proceedings to which the Company is a party, or to which any of their property is subject, that will have a material adverse effect on the Companys financial condition.  ITEM 4A.  UNRESOLVED STAFF COMMENTS  Not applicable.  ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS  Overview  A. Operating Results  Fiscal Years Ended December 31, 2008 and 2007   16   The following table summarizes the results of the Companys operations during the fiscal years ended December 31, 2008 and 2007 and provides information regarding the dollar and percentage increase or (decrease) from the 2007 fiscal period to the 2008 fiscal period:  Year Ended December 31,Item20082007Increase (Decrease)% Increase
(% Decrease)Revenue22,945,12220,782,8042,162,31810.40%Cost of Goods Sold17,648,85215,075,3102,573,54217.07%Gross Profit5,296,2705,707,494(411,224)7.20%Operating Expenses1,340,8891,352,714(11,825)0.88%Other Income(expense)952,502628,534323,96851.54%Provision for Taxes1,206,9141,606,443(399,529)24.87%Net income3,700,9693,376,871324,0989.60%  Revenue  Our revenue increased from $20,782,804 for the fiscal year ended December 31, 2007, to $22,945,122 for the fiscal year ended December 31, 2008, an increase of $2,162,318, or approximately 10.40%.  The increase in revenue was primarily attributable to appreciation of Chinese Renminbi (RMB) against the US dollar.  Cost of Goods Sold  Cost of goods sold increased from $15,075,310 for the fiscal year ended December 31, 2007, to $17,648,852 for the fiscal year ended December 31, 2008, an increase of $2,573,542 or approximately 17.07%.   The increase in cost of goods sold was mainly attributable to increases in costs of production during the year.  Gross Profit  Gross profit decreased from $5,707,494 for the fiscal year ended December 31, 2007, to $5,296,270 for the fiscal year ended December 31, 2008, a decrease of $411,224, or approximately 7.20%.  The decrease in gross profit was mainly attributable to increases in costs of production and decreases in the selling prices of linen products during the year. Gross profit for the fiscal year ended December 31, 2008, was approximately 23.08% of revenues as compared to gross profit of approximately 27.46% of revenue for the fiscal year ended December 31, 2007.  Operating Expenses  Operating expenses decreased by $11,825, or approximately 0.88%, in the fiscal year ended December 31, 2008 as compared to the fiscal year ended December 31, 2007.  The net decrease in operating expenses was attributable to a decrease of $99,751, or approximately 9.52% in general and administrative expenses which offset an increase of $87,926, or approximately 28.78% in selling expenses.   The increase in selling expenses was primarily attributable to an increase in transportation expenses during the year.  Other Income  Other income increased from $628,534 for the fiscal year ended December 31, 2007 to $952,502 for the fiscal year ended December 31, 2008, an increase of $323,968, or approximately 51.05%.  Other income consists of subsidy income and interest income offset by interest expense.  The increase in other income from 2007 to 2008 is primarily attributable to improvements in both interest income and expense.  Interest income increased from $74,447 in 2007 to $175,299 in 2008, and interest expense decreased from $817,596 in 2007 to $540,203 in 2008.  The improvements in interest income and expense were partially offset by a decrease of $83,742, or approximately 5.95% in subsidy income.  Provision for Taxes   17   Provision for taxes decreased from $1,606,443 for the fiscal year ended December 31, 2007, to $1,206,914 for the fiscal year ended December 31, 2008, a decrease of $399,529, or approximately 24.87%.   The decrease in provision for taxes is primarily attributable to the fact that for the fiscal year starting January 1, 2008, the enterprise income tax rate in the PRC was adjusted to 25% from the previous 33%.  Net income (profit after taxes)  Net income was $3,700,969 in 2008 as compared to $3,376,871 in 2007, an increase of $324,098, or approximately 9.6%.  This increase in net income is primarily attributable to the increase in other income and the decrease in taxes while operating expenses remained substantially unchanged.  Critical Accounting Policies  The critical accounting policies used by the Company in the preparation of its financial statements are summarized in the notes to the financial statements.  Inflation  The Company believes its operations have not been and will not be materially adversely affected by inflation or changing prices in the foreseeable future.  Foreign Currency Translation Gain  The Companys operating subsidiary is located in China.  Its functional and reporting currency is the Chinese Renminbi (RMB).  The Company does not engage in currency hedging.  We incurred a foreign currency translation gain of $764,910 for the year ended December 31, 2008 as compared with a foreign currency translation gain of $643,077 for the fiscal year ended December 31, 2007.   We used different exchange rates  in translating Renminbis into U.S. dollars in our financial statements for the two fiscal years.  Owners equity was translated at historic rates, assets and liabilities were translated at the applicable exchange rates on December 31, 2008 and 2007, respectively, and income and expenses during the year were translated at applicable average monthly end rates for 2008 and 2007, respectively.  Chinese Economic, Fiscal, Monetary and other Policy  The Companys operating subsidiary Lanxi Sunrise is located in China and the Company uses RMB as its functional currency, therefore, changes in Chinese economic, fiscal, monetary or political policies could materially affect our operations and investors. See Item 3 - Key Information - D. Risk Factors - Risks Related to Doing Business in China for more details.  B. Liquidity and Capital Resources  As of December 31, 2008, the Company had cash and cash equivalents of $10,674, and total current assets of $24,361,241.   Management believes the Company has sufficient cash and current assets to fund current operations for the next fiscal year.  C. Research and Development  In April, 2005, the Company established a technological center through which it conducts research and development activities related to production of linen products.  The current research and development projects include development of high-count flax yarn, multi-fiber blended fabrics, research related to linen yarn dyeing and linen fabric bleaching and dyeing technologies.  The research and development center includes approximately 25 research and technical staff including 5 staff members who are senior professionals.  The Companys technological center has established cooperative relationships with Tianjin Institute of Technology and Donghua University to take advantage of their research activities and the Companys advanced production equipment to seek to develop new varieties of linen spinning yarns, woven cloth, yarn-dyed fabrics and other printed and dyed products.   18   D. Trend Information  Not applicable  E. Off-Balance Sheet Arrangements   We currently do not engage in any off-balance sheet arrangements.  F. Tabular Disclosure of Contractual Obligations  Below is a brief summary of the payment obligations under materials contracts to which we are a party as of December 31, 2008:  Contractual ObligationsPayments due by periodLess than 1 year1-3 years3-5 yearsMore than 5 yearsLong-Term Debt Obligations4,041,291Capital (Finance) Lease ObligationsOperating Lease Obligations164,814Purchase Obligations1,289,00097,000Other Long-Term Liabilities Reflected on the Company's Balance Sheet under the GAAP of the primary financial statementsTotal5,495,10597,000  G.Safe Harbor  Please see Special Note Regarding Forward-Looking Statements.  ITEM 6.   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES  A. Directors and senior management.  The following table sets forth our current directors and executive officers, their ages and the positions they hold.  NAMEAGEPOSITIONGao Ren46President and ChairmanMa Yongfeng48General ManagerTeng Yunhai48Vice President and DirectorLi Songyun38Chief Marketing OfficerHuang Xiaofang43Chief Financial OfficerZhao Chunfu46Secretary and Director  Biographical Information  Mr. Gao Ren, born in 1963, is currently the President and Chairman of the Board of Directors of the Company.  Before serving as the president and general manager of the Company, he was workshop director and section manager of the quality management section of Heilongjiang Lanxi Linen Textile Industry United General Corporation, and manager in the marketing department of Harbin Import & Export Group Corp. He is a graduate of Heilongjiang Radio And Television University and also studied in the President Management Program of Tsing Hua University, Mr. Gao is a deputy to Heilongjiang Province People's Congress, and has been awarded as National Entrepreneur with Honesty in Business, China Enterprise New Man of the Year, Entrepreneur with Honesty in China Textile Industry Business and Model Worker of National Textile Industry.   19   Mr. Ma Yongfeng, born in 1960, is a general accountant and currently serves as General Manager of the Company.  He was previously accountant, vice section chief, general accountant, and financial officer of Heilongjiang Lanxi Linen Textile Industry United General Corporation. He is a graduate of CEO Class of Tsinghua University.   Mr. Teng Yunhai, born in 1961, is a senior engineer and currently serves as Vice President and as a Director of the Company.  He was previously director of the equipment department of linen processing branch factory, director of equipment repair branch factory, and director of processing branch factory of Heilongjiang Lanxi Linen Textile Industry United General Corporation, and equipment principal engineer of Xinlong Holding Group Co., Ltd. He is a graduate of Qiqihar Light Industry Institute.  Ms Li Songyun, born in 1971, is currently the chief marketing officer of the Company and was previously business manager of Harbin Import & Export Group Corp.  She is a graduate of Heilongjiang University.  Ms. Huang Xiaofang, born in 1966, is a registered accountant and now serves as the Chief Financial Officer of the Company.  She was previously financial manager of Harbin Wanjiabao Fresh Milk Co., Ltd and Financial Executive of Harbin Shuaizhi Decoration Co., Ltd.  She is a graduate of Financial & Accounting Department of Heilongjiang August First Land Reclamation University.  Mr. Zhao Chunfu,born in 1963, is a senior engineer and currently serves as the Secretary and as a Director of the Company.   He was previously Branch Factory Director, Technology Innovation Director and Manager of Import and Export Department of Heilongjiang Lanxi Linen Textile Industry United General Corporation, and Section Chief of Maintenance Operation Department of Xinlong Holding Group Co., Ltd. He is a graduate of North-East Heavy Machinery Institute.  Family Relationships  There are no family relationships among our directors or officers.  Understandings with Respect to Directors and Senior Management  There is no arrangement or understanding between any of the directors or officers of the Company and any other person pursuant to which any director or officer was or is to be selected as a director or officer, and there is no arrangement, plan or understanding as to whether non-management shareholders will exercise their voting rights to continue to elect the current directors to the Companys board. There are also no arrangements, agreements, or understandings between non-management shareholders and management under which non-management shareholders may directly or indirectly participate in or influence the management of the Companys affairs.  B. Compensation  Director Compensation  We have not paid our directors fees in the past for attending scheduled and special meetings of our board of directors. In the future, we may adopt a policy of paying independent directors a fee for their attendance at board and committee meetings. We do reimburse each director for reasonable expenses related to such directors attendance at board of directors and committee meetings.  Executive Compensation  During the fiscal year ended December 31, 2008, the amount of compensation paid to each of our officers and directors was as follows:  NAMEPOSITIONSALARYGao RenCEO and Director$150,000Ma YongfengGeneral Manager$60,000Teng YunhaiVice President and Director$60,000Zhao ChunfuSecretary and Director$60,000  20    Li SongyunChief Marketing Officer$60,000Huang XiaofangChief Financial Officer$60,000  During the fiscal year ended December 31, 2008, none of our officers or directors received compensation for services other than salary paid in cash.  C. Board Practices  Board Composition and Committees  The board of directors is currently composed of 3 members.  All Board action requires the approval of a majority of the directors in attendance at a meeting at which a quorum is present.  We do not currently have a standing audit, nominating or compensation committee. Currently, our entire board of directors is responsible for the functions that would otherwise be handled by these committees. The Company intends to establish an audit committee, a governance and nominating committee and a compensation committee of the board of directors as soon as is practicable. We envision that the audit committee will be primarily responsible for reviewing the services performed by our independent auditors, evaluating our accounting policies and our system of internal controls. The governance and nominating committee will be responsible for nominating directors to our board and will also be generally responsible for overseeing our corporate governance policies and practices. The compensation committee will be primarily responsible for reviewing and approving our salary and benefits policies (including stock options) and other compensation of our executive officers.  Our board of directors has not made a determination as to whether any member of our board is an audit committee financial expert. Upon the establishment of an audit committee, the board will determine whether any of the directors qualify as an audit committee financial expert.  Code of Ethics  We do not currently have a Code of Ethics, but intend to adopt one as soon as is practicable.  It is expected that the Code of Ethics, when adopted, will address, among other things, honesty and ethical conduct, conflicts of interest, compliance with laws, regulations and policies, including disclosure requirements under the federal securities laws, confidentiality, trading on inside information, and reporting of violations of the code.  D. Employees  We have approximately 1500 full-time employees, approximately 70 of them are administrative and accounting staff, 110  of them are research and development staff, 40 are sales staff,  and the remaining 1280 are production workers.  As required by applicable Chinese law, we have entered into employment contracts with all of our officers, managers and employees.  Our employees in China participate in a state pension plan organized by Chinese municipal and provincial governments.  We are required to contribute a percentage of their monthly salary to the plan.  E. Share Ownership  Several of our current and former directors and executive officers own shares of the Companys common stock, as set forth below. See below under the heading Major Shareholders and Related Party Transactions - Major Shareholders. Except as noted in such section, no such person has any options, warrant or other rights to acquire additional securities of the Company.   ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS  A. Major Shareholders  Current Holdings of Major Shareholders, Executive Officers and Directors   21   The following table sets forth, as of December 31, 2008, the stock ownership of each executive officer and director of the Company, of all the executive officers and directors of the Company as a group, and of each person known by the Company to be a beneficial owner of 5% or more of its Common Stock. Except as otherwise noted, each person listed below is the sole beneficial owner of the shares and has sole investment and voting power as to such shares. No person listed below has any options, warrant or other right to acquire additional securities of the Company, except as may be otherwise noted. All shares have identical voting rights. All of the above shareholders of the Company live and work outside of the United States.   Name and AddressNumber of Shares Beneficially OwnedPercent of ClassGao Ren  (1)
Building F, Hualige, Junyue Apartment, Hongxiang Road, Nangang District, Harbin City PRC8,188,88940.74%Ma Yongfeng  (1)
Room 302, Unit 1, Building 3, Dongshi Road, Tonghe Street, Xinhe Community, Lanxi, Heilongjiang, PRC--Teng Yunhai (1)
Room 502, Unit 3, Building 3, Dongshi Road, Tonghe Street, Xinhe, Lanxi County, Heilongjiang Province, PRC3,1890.02%Li Songyun (1)
No 21-2, Leyuan Street, Dongli District, Harbin City PRC143,8580.72%Huang Xiaofang (1)
Room 701, Unit 4, Building 31, Hongqixiaoqu, Daowai District, Harbin City, PRC6440.003%Zhao Chunfu (1)
Wufangchang, Xinlong, Laocheng Kaifaqu, Laocheng Town, Chengmai County, Hainan  Province502,5002.5All Directors and Officers as a Group (6in Number)8,839,08043.98%  (1) The person is an officer, a director or both.  Material Transactions in Common Stock  The Company has undergone a change of control in connection with closing of the Reverse Acquisition.  Pursuant to the terms of Share Transfer Agreements dated June 9, 2008, 3 persons designated by Lanxi Sunrise purchased 900,000 shares, or approximately 39.58%, of the Companys issued and outstanding common stock from 7 shareholders of the Company for a total purchase price of $310,000, or approximately $0.344 per share.  On June 30, 2008, the Company completed a 1:2 reverse stock split, thereby reducing its issued and outstanding shares from 2,273,996 to approximately 1,136,998.  Pursuant to the terms of an Agreement for Share Exchange dated April 11, 2008, on July 9, 2008, the Company issued 18,963,005 shares of common stock to acquire all of the outstanding shares of Bright from Brights shareholders.  Rather than retaining such shares, the shareholders of Bright transferred such shares to a total of 91 individuals designated by Lanxi Sunrise.  Immediately following these transactions, we had a total of 20,100,003 shares issued and outstanding, of which 19,413,005, or approximately 96.58%, were owned by persons designated by Lanxi Sunrise.  Our existing shareholders prior to the Reverse Acquisition retained ownership of 686,998 shares, or approximately 3.42% of our issued and outstanding stock.  The Company entered into an Advisory Agreement with Mid-Continental Securities Corp on March 30, 2007.  Pursuant to that agreement, Mid-Continental Securities Corp, or its designees, were entitled to receive a total of 804,000 shares as  22   compensation for services.  Such shares were transferred to Mid-Continental Securities or its designees, by other shareholders of the Company.  B. Related Party Transactions  During the last three fiscal years, the Company entered into the following transactions with certain related parties, in addition to the share transactions noted above.  On November 7, 2005, the Company entered into an Agency Agreement with Harbin Sunshine Linen Textile Co, Ltd., a Company which is controlled by Gao Ren, the Companys President.  Pursuant to the terms of the Agency Agreement, Harbin Sunshine Linen Textile Co., Ltd., acts as the Companys agent in importing flax and exporting linen yarn, linen fabric and other products. The Company pays Harbin Sunshine Linen Textile Co., Ltd, an import fee equal to 6% of the cost of flax imported on the Companys behalf.   The Company does not pay any fee for exporting services provided by Harbin Sunshine Linen Textile Co, Ltd.  The Company purchases raw materials from, sells finished goods to, and outsources some of its production to related parties who are under common control.  One such related parties is Harbin Zhongyi Sunshine Linen Co., Ltd, which is under common control with Mr. Gao Ren, the Companys CEO and principal shareholder.  In addition, due to China foreign currency control and export and import license requirements, the Company engages another related party, Harbin Sunshine Linen Textile Co, Ltd., as its agent in importing raw materials and exporting products on similar terms with unrelated parties.  Harbin Sunshine Linen Textile Co, Ltd., is also under common control of Mr. Gao Ren, the Companys CEO and principal shareholder.  Pursuant to these arrangements, the Company had amounts due to Harbin Zhongyi Sunshine Linen Co, Ltd., totaling $453,267 as of December 31, 2007 and $56,470 as of December 31, 2008.  In addition, the Company had amounts due to Harbin Sunshine Linen Textile Co, Ltd., totaling $1,130,912, as of December 31, 2007.  As of December 31, 2007, the Company had loans totaling $116,858 from Mr. Gao Ren, the Companys CEO and principal shareholder.  The following table summarizes related party transactions in the fiscal years ending December 31, 2008 and 2007 relating to selling finished goods, purchasing raw materials, processing products and selling linen yarn:


|                                                                          |   |                                 |  |                                         |   |            |  |                                        
|------------------------------------------------------------------------- | - | ------------------------------- |  | --------------------------------------- | - | ---------- |  | ---------------------------------------
|                                                                          |   | For the Year Ended December 31,
|                                                                          |   | 2008                            |  | 2007                                   
|Transactions                                                              |   | Amount                          |  | Percentage of
Total Similar
Transaction |   | Amount     |  | Percentage of
Total Similar
Transaction
|                                                                          |   |                                 |  |                                         |   |            |  |                                        
|(a) Selling finished goods to
    Harbin Sunshine Linen Textile Co., Ltd. | $ | 4,161,201                       |  | 18.9%                                   | $ | 7 ,126,297 |  | 34.3%                                  
|                                                                          |   |                                 |  |                                         |   |            |  |                                        
|Purchasing raw materials from
    Harbin Sunshine Linen Textile Co., Ltd. | $ | 1,444,461                       |  | 54.5%                                   | $ | 3,892,253  |  | 61.3%                                  
|                                                                          |   |                                 |  |                                         |   |            |  |                                        
|(b) Selling finished goods to
     Harbin Zhongyi Sunshine Linen Co., Ltd | $ | 1,554,289                       |  | 7.1%                                    | $ | 1,203,176  |  | 5.8%                                   
|                                                                          |   |                                 |  |                                         |   |            |  |                                        
|Purchasing raw materials from
     Harbin Zhongyi Sunshine Linen Co., Ltd | $ | 911,015                         |  | 34.4%                                   | $ | 1,522,890  |  | 24.0%                                  
|                                                                          |   |                                 |  |                                         |   |            |  |                                        
|(c) Processing products for
     Songyuan Qianan Sunshine Linen Co., Ltd. | $ | -                               |  | -                                       | $ | 96,223     |  | 0.5%                                   
|                                                                          |   |                                 |  |                                         |   |            |  |                                        

23    C. Interests of Experts and Counsel  Not applicable.   ITEM 8.  FINANCIAL INFORMATION  A. Consolidated Statements and Other Financial Information  The financial statements attached to this report were prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. U.S. GAAP differs from that used in the statutory financial statements of the Company, which were prepared in accordance with the relevant accounting principles and financial reporting regulations as established by the Ministry of Finance of the China. Certain accounting principles stipulated under U.S. GAAP are not applicable in China.  The Renminbi has been determined to be the functional currency of the Company. The translation adjustments which are included in foreign exchange adjustment to other comprehensive income as a component of shareholders equity amounted to $764,910 for the year ended December 31, 2008.  The financial statements filed herewith are found in Item 17.  B. Significant Changes  There are no significant changes since December 31, 2005.   ITEM 9.  THE OFFER AND LISTING  A. Listing Details  The Companys capitalization consists of 500,000,000 shares of $0.002 par value common stock of which 20,100,003 shares are issued and outstanding as of December 31, 2008.  The common stock is quoted on the over-the-counter NASD Electronic Bulletin Board under the symbol CTXIF.OB.  Prior to its name change to China Linen Textile Industry, Ltd., the common stock was quoted on the NASD Electronic Bulletin Board under the symbol AQEVF.OB. The CUSIP number is G21170 10 8.  There has never been an active trading market for the Companys shares, and accordingly, there are no meaningful historical bid and asked prices to report.  The number of holders of record for our common stock as of December 31, 2008 was approximately 123.  Restrictions on Transfer  Note that shares issued in the Reverse Acquisition are, unless registered for resale, subject to restrictions on transfer, in accordance with the securities laws of the United States.  The transfer agent of the Company is Island Stock Transfer, 100 2nd Avenue South, Suite 104N, St, Petersburg, Florida 33701.  Telephone: 727-289-0010.  Dividends   24   We have not paid any dividends on our Common Stock since our inception and do not intend to pay any cash dividends to our stockholders in the foreseeable future.  B. Plan of Distribution  Not applicable.  C. Markets  See Item 9.A. Listing Details.  D. Selling Stockholder  Not applicable.  E.Dilution  Not applicable.  F. Expenses of the Issue  Not applicable.   ITEM 10.  ADDITIONAL INFORMATION  Memorandum and Articles of Organization  Charter  Our charter documents consist of our Memorandum of Association and Articles of Association.  The Memorandum of Association loosely resembles the Articles of Incorporation of a United States corporation, and the Articles of Association loosely resembles the bylaws of a United States corporation. A brief description of our Memorandum of Association and Articles of Association follows. This description and summary does not purport to be complete and does not address all differences between United States and Cayman Islands corporate laws. Copies of our Memorandum of Association and Articles of Association have been filed as exhibits to this report and readers are urged to review these exhibits in their entirety for a complete understanding of the provisions of our charter documents.  Corporate Powers  We have been registered in the Cayman Islands B.W.I. since February 3, 2000, under the Companies Law.  The Memorandum of Association allows for the Company to carry on business for a broad variety of purposes, and the Company is not restricted from any business lawful business activity.  Common Shares  All issued and outstanding common shares are fully paid and non-assessable.  Each holder of record of common shares is entitled to one vote for each common share so held on all matters requiring a vote of shareholders, including the election of directors.  The holders of common shares will be entitled to dividends on a pro-rata basis, if declared by the board of directors.  There are no preferences, conversion rights, preemptive rights, subscription rights, or restrictions or transfers attached to the common shares.  In the event of liquidation, dissolution, or winding up of the Company, the holders of common shares are entitled to participate in the assets of the Company available for distribution after satisfaction of the claims of creditors.  Changes in Capital   25   The Company may, by a resolution of directors, amend the Memorandum and Articles of Association to increase or decrease its authorized capital, the number of authorized but unissued shares, or the par value of such shares.  However, no reduction of capital may occur if it reduces the capital of the Company to an amount that is less than the aggregate par value of all outstanding shares and all shares with par value held by the Company.  Further, the Company must be able to satisfy its liabilities in the ordinary course of business after the reduction in capital.  Powers and Duties of Directors Under the provisions of the Articles, Directors meetings must be held in the Cayman Islands every year.  Annual General Meetings must be held every 12 months.  Both Annual and Extraordinary General meetings must provide 21 days notice to shareholders.  A quorum must be present to conduct business at any Annual or Extraordinary General meeting.  The directors are to manage or supervise the management of the affairs and business of the Company and have authority to exercise all such powers of the Company as are not, by the Business Corporations Act, or by the memorandum or the articles of incorporation, required to be exercised by the Company in a general meeting.  Directors will serve as such until the next annual meeting.  In general, a director who is, in any way, directly or indirectly interested in an existing or proposed contract or transaction with the Company whereby a duty or interest might be created to conflict with his duty or interest as a director, is to declare the nature and extent of his interest in such contract or transaction or the conflict or potential conflict with his duty and interest as a director.  Such director may not vote in respect of any such contract or transaction with the Company in which he is interested and if he does so, his vote will note be counted, but he will be counted in the quorum present at the meeting at which such vote is taken.  However, notwithstanding the foregoing, directors have the right to vote on determining the remuneration of the directors.  The directors may from time to time on behalf of the Company: (a) borrow money in such manner and amount from such sources and upon such terms and conditions as they think fit; (b) issue bonds, debentures and other debt obligations; or (c) mortgage, charge or give other security on the whole or any part of the property and assets of the Company.  There is no minimum share ownership requirement for the Company's directors.  Shareholders  An annual general meeting is to be held once in every calendar year at such time and place as may be determined by the directors.  A quorum at an annual general meeting and special meeting is two or more shareholders or one or more proxy holder representing two shareholders, or one shareholder and a proxy holder representing another shareholder.  There are no limitations of rights to own securities including non-resident or foreign shareholders rights to own and vote their shareholdings.  There are currently no anti-takeover, poison pill or shareholder rights protections in the event of a takeover bid in place.  Ownership Threshold  There is no threshold at which an individual must declare shareholdings.  SEC disclosure regulations require that holders of 5% or more of the issued securities must disclose such holdings  Material Contracts  On June 9, 2008, pursuant to the terms of Share Transfer Agreements dated June 9, 2008,  3 persons designated by Lanxi Sunrise purchased 900,000 shares, or approximately 39.58%, of the Companys issued and outstanding common stock from 7 shareholders of the Company for a total purchase price of $310,000, or approximately $0.344 per share.  On June 30, 2008, following closing under the Share Transfer Agreements, the Company completed a 1:2 reverse stock split, thereby reducing its issued and outstanding shares from 2,273,996 to approximately 1,136,998.  On July 9, 2008, the Company acquired 100 shares of the issued and outstanding capital stock of Bright, constituting all of the issued and outstanding capital stock of Bright. The 100 shares of Bright were acquired from the individual shareholders of Bright in a share exchange transaction in return for the issuance of 18,963,005 shares of common stock of the Company.  26   As a result of this transaction, Bright became a wholly-owned subsidiary of the Company, and Lanxi Sunrise became an indirect 95% owned subsidiary of the Company. Completion of the transaction resulted in a change in control of the Company.   After the transaction, the Company was no longer a shell company.  Exchange Controls  Cayman Islands  There are no material Cayman Islands laws which impose any material exchange controls on the Company or that affect the payment of dividends, interest or other payments to nonresident holders of its common stock. Cayman Islands law and the Companys Memorandum and Articles of Association impose no material limitations on the right of non-residents or foreign owners to hold or vote the Companys common stock.  China  China imposes control over the convertibility of Renminbi into foreign currencies. Under the current unified floating exchange rate system, the People's Bank of China (PBOC) publishes a daily exchange rate for Renminbi (the PBOC Exchange Rate) based on the previous day's dealings in the inter-bank foreign exchange market. Financial institutions authorized to deal in foreign currency may enter into foreign exchange transactions at exchange rates within an authorized range above or below the PBOC Exchange Rate according to market conditions.  Pursuant to the Foreign Exchange Control Regulations issued by the State Council on April 1, 1996 and the Administration of Settlement, Sale and Payment of Foreign Exchange Regulations which came into effect on July 1, 1996 regarding foreign exchange control (the Regulations) conversion of Renminbi into foreign exchange by foreign investment enterprises for current account items, including the distribution of dividends and profits to foreign investors of joint ventures, is permissible. Foreign investment enterprises are permitted to remit foreign exchange from their foreign exchange bank account in China on the basis of, inter alia, the terms of the relevant joint venture contracts and the board resolutions declaring the distribution of the dividend and payment of profits. Conversion of Renminbi into foreign currencies and remittance of foreign currencies for capital account items, including direct investment, loans, security investment, is still subject to the approval of the State Administration of Foreign Exchange, or SAFE, in each such transaction. On January 14, 1997, the State Council amended the Foreign Exchange Control Regulations and added, among other things, Article 5, which provides that the Chinese Government shall not impose restrictions on recurring international payments and transfers.  Under the Regulations, foreign investment enterprises are required to open and maintain separate foreign exchange accounts for different types of foreign exchange transactions, and the permitted scope of receipts and expenditures for such accounts is limited to the type of foreign exchange transactions designated for such accounts. In addition, foreign investment enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business upon the production of valid commercial documents and, in the case of capital account item transactions, document approval from the SAFE.  Currently, foreign investment enterprises ("FIEs") are required to apply to the SAFE for foreign exchange registration certificates. These certificates are subject to review and renewal by the SAFE on an annual basis, Once an FIE obtains this certificate or a foreign exchange sales notice from the SAFE (which is obtained on a transaction-by-transaction basis), upon fulfilling certain other conditions, the FIE may enter into foreign exchange transactions at banks authorized to conduct foreign exchange business to obtain foreign exchange for their needs. The above requirements will not limit our ability to declare dividends in the future, if ever declared.  Dividends and Paying Agents  We have not paid any dividends on our Common Stock since our inception and do not intend to pay any cash dividends to our stockholders in the foreseeable future. Accordingly, we have not made arrangements for the payment of dividends to nonresident holders of shares of Common Stock.  Statement by Experts  Not applicable.  27    Taxation  The following is not intended to be, nor should it be considered to be, legal or income tax advice to any particular Company shareholder or relied upon for tax planning purposes. Accordingly each shareholder should consult their own independent tax advisors for advice with respect to the income tax consequences to them having regard to their own particular circumstances.  U.S. Federal Income Tax Consequences  The following is a summary of the anticipated material U.S. federal income tax consequences to a U.S. Holder (as defined below) arising from and relating to the acquisition, ownership, and disposition of common shares of the Company (Common Shares).  This summary is for general information purposes only and does not purport to be a complete analysis or listing of all potential U.S. federal income tax consequences that may apply to a U.S. Holder as a result of the acquisition, ownership, and disposition of Common Shares. In addition, this summary does not take into account the individual facts and circumstances of any particular U.S. Holder that may affect the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares. Accordingly, this summary is not intended to be, and should not be construed as, legal or U.S. federal income tax advice with respect to any U.S. Holder. Each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the U.S. federal income, U.S. state and local, and foreign tax consequences of the acquisition, ownership, and disposition of Common Shares.  Scope of Discussion  Authority  This summary is based on the Internal Revenue Code of 1986, as amended (the Code), Treasury Regulations (whether final, temporary, or proposed), published rulings of the Internal Revenue Service (the IRS), published administrative positions of the IRS, and U.S. court decisions that are applicable and, in each case, as in effect and available, as of the date of this report. Any of the authorities on which this summary is based could be changed in a material and adverse manner at any time, and any such change could be applied on a retroactive basis. This summary does not discuss the potential effects, whether adverse or beneficial, of any proposed legislation that, if enacted, could be applied on a retroactive basis.  U.S. Holder  For purposes of this summary, a U.S. Holder is a beneficial owner of Common Shares that, for U.S. federal income tax purposes, is (a) an individual who is a citizen or resident of the U.S., (b) a corporation, or any other entity classified as a corporation for U.S. federal income tax purposes, that is created or organized in or under the laws of the U.S. or any state in the U.S., including the District of Columbia, (c) an estate if the income of such estate is subject to U.S. federal income tax regardless of the source of such income, or (d) a trust if (i) such trust has validly elected to be treated as a U.S. person for U.S. federal income tax purposes or (ii) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of such trust.  Non-U.S. Holder  For purposes of this summary, a non-U.S. Holder is a beneficial owner of Common Shares other than a U.S. Holder. This summary does not address the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares to non-U.S. Holders. Accordingly, a non-U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the U.S. federal income, U.S. state and local, and foreign tax consequences (including the potential application of and operation of any tax treaties) of the acquisition, ownership, and disposition of Common Shares.  U.S. Holders Subject to Special U.S. Federal Income Tax Rules Not Addressed  This summary does not address the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares to U.S. Holders that are subject to special provisions under the Code, including the following U.S. Holders: (a) U.S. Holders that are tax-exempt organizations, qualified retirement plans, individual retirement accounts, or  28   other tax-deferred accounts; (b) U.S. Holders that are financial institutions, insurance companies, real estate investment trusts, or regulated investment companies; (c) U.S. Holders that are dealers in securities or currencies or U.S. Holders that are traders in securities that elect to apply a mark-to-market accounting method; (d) U.S. Holders that have a functional currency other than the U.S. dollar; (e) U.S. Holders that are liable for the alternative minimum tax under the Code; (f) U.S. Holders that own Common Shares as part of a straddle, hedging transaction, conversion transaction, constructive sale, or other arrangement involving more than one position; (g) U.S. Holders that acquired Common Shares in connection with the exercise of employee stock options or otherwise as compensation for services; (h) U.S. Holders that hold Common Shares other than as a capital asset within the meaning of Section 1221 of the Code; or (i) U.S. Holders that own (directly, indirectly, or constructively) 10% or more of the total combined voting power of the outstanding shares of the Company. U.S. Holders that are subject to special provisions under the Code, including U.S. Holders described immediately above, should consult their own financial advisor, legal counsel or accountant regarding the U.S. federal income, U.S. state and local, and foreign tax consequences of the acquisition, ownership, and disposition of Common Shares.  If an entity that is classified as a partnership (or pass-through entity) for U.S. federal income tax purposes holds Common Shares, the U.S. federal income tax consequences to such partnership (or pass-through entity) and the partners of such partnership (or owners of such pass-through entity) generally will depend on the activities of the partnership (or pass-through entity) and the status of such partners (or owners). Partners of entities that are classified as partnerships (or owners of pass-through entities) for U.S. federal income tax purposes should consult their own financial advisor, legal counsel or accountant regarding the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares.  Tax Consequences Other than U.S. Federal Income Tax Consequences Not Addressed  This summary does not address the U.S. state and local, U.S. federal estate and gift, or foreign tax consequences to U.S. Holders of the acquisition, ownership, and disposition of Common Shares. Each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the U.S. state and local, U.S. federal estate and gift, and foreign tax consequences of the acquisition, ownership, and disposition of Common Shares.  U.S. Federal Income Tax Consequences of the Acquisition, Ownership, and Disposition of Common Shares  Distributions on Common Shares  General Taxation of Distributions  A U.S. Holder that receives a distribution, including a constructive distribution, with respect to the Common Shares will be required to include the amount of such distribution in gross income as a dividend to the extent of the current or accumulated earnings and profits of the Company. To the extent that a distribution exceeds the current and accumulated earnings and profits of the Company, such distribution will be treated (a) first, as a tax-free return of capital to the extent of a U.S. Holders tax basis in the Common Shares and, (b) thereafter, as gain from the sale or exchange of such Common Shares. (See more detailed discussion at Disposition of Common Shares below).  Distributions Paid in Foreign Currency  The amount of a distribution paid to a U.S. Holder in foreign currency generally will be equal to the U.S. dollar value of such distribution based on the exchange rate applicable on the date of receipt. A U.S. Holder that does not convert foreign currency received as a distribution into U.S. dollars on the date of receipt generally will have a tax basis in such foreign currency equal to the U.S. dollar value of such foreign currency on the date of receipt. Such a U.S. Holder generally will recognize ordinary income or loss on the subsequent sale or other taxable disposition of such foreign currency (including an exchange for U.S. dollars).  Dividends Received Deduction  Dividends paid on the Common Shares generally will not be eligible for the dividends received deduction. The availability of the dividends received deduction is subject to complex limitations that are beyond the scope of this discussion, and a U.S. Holder that is a corporation should consult its own financial advisor, legal counsel, or accountant regarding the dividends received deduction.   29   Disposition of Common Shares  A U.S. Holder will recognize gain or loss on the sale or other taxable disposition of Common Shares in an amount equal to the difference, if any, between (a) the amount of cash plus the fair market value of any property received and (b) such U.S. Holders tax basis in the Common Shares sold or otherwise disposed of. Any such gain or loss generally will be capital gain or loss, which will be long-term capital gain or loss if the Common Shares are held for more than one year. Gain or loss recognized by a U.S. Holder on the sale or other taxable disposition of Common Shares generally will be treated as U.S. source for purposes of applying the U.S. foreign tax credit rules. (See more detailed discussion at Foreign Tax Credit below).  Preferential tax rates apply to long-term capital gains of a U.S. Holder that is an individual, estate, or trust. There are currently no preferential tax rates for long-term capital gains of a U.S. Holder that is a corporation. Deductions for capital losses are subject to significant limitations under the Code.  Foreign Tax Credit  The Company does not anticipate that a U.S. Holder will incur foreign income tax on dividends paid on the Common Shares. Notwithstanding, a U.S. Holder that pays (whether directly or through withholding) foreign income tax with respect to dividends paid on the Common Shares generally will be entitled, at the election of such U.S. Holder, to receive either a deduction or a credit for such foreign income tax paid. Generally, a credit will reduce a U.S. Holders U.S. federal income tax liability on a dollar-for-dollar basis, whereas a deduction will reduce a U.S. Holders income subject to U.S. federal income tax. This election is made on a year-by-year basis and applies to all foreign taxes paid (whether directly or through withholding) by a U.S. Holder during a year.  Complex limitations apply to the foreign tax credit, including the general limitation that the credit cannot exceed the proportionate share of a U.S. Holders U.S. federal income tax liability that such U.S. Holders foreign source taxable income bears to such U.S. Holders worldwide taxable income. In applying this limitation, a U.S. Holders various items of income and deduction must be classified, under complex rules, as either foreign source or U.S. source. In addition, this limitation is calculated separately with respect to specific categories of income (including passive income, high withholding tax interest, financial services income, general income, and certain other categories of income). Dividends paid by the Company generally will constitute foreign source income and generally will be categorized as passive income or, in the case of certain U.S. Holders, financial services income. However, for taxable years beginning after December 31, 2006, the foreign tax credit limitation categories are reduced to passive category income and general category income (and the other categories of income, including financial services income, are eliminated). The foreign tax credit rules are complex, and each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the foreign tax credit rules.  Information Reporting; Backup Withholding Tax  Payments made within the U.S., or by a U.S. payor or U.S. middleman, of dividends on, or proceeds arising from the sale or other taxable disposition of, Common Shares generally will be subject to information reporting and backup withholding tax, at the rate of 28%, if a U.S. Holder (a) fails to furnish such U.S. Holders correct U.S. taxpayer identification number (generally on Form W-9), (b) furnishes an incorrect U.S. taxpayer identification number, (c) is notified by the IRS that such U.S. Holder has previously failed to properly report items subject to backup withholding tax, or (d) fails to certify, under penalty of perjury, that such U.S. Holder has furnished its correct U.S. taxpayer identification number and that the IRS has not notified such U.S. Holder that it is subject to backup withholding tax. However, U.S. Holders that are corporations generally are excluded from these information reporting and backup withholding tax rules. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a credit against a U.S. Holders U.S. federal income tax liability, if any, or will be refunded, if such U.S. Holder furnishes required information to the IRS. Each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the information reporting and backup withholding tax rules.  Additional Rules that May Apply to U.S. Holders  If the Company is a controlled foreign corporation or a passive foreign investment company (each as defined below), the preceding sections of this summary may not describe the U.S. federal income tax consequences to U.S. Holders of the acquisition, ownership, and disposition of Common Shares. Controlled Foreign Corporation  30    The Company generally will be a controlled foreign corporation under Section 957 of the Code (a CFC) if more than 50% of the total voting power or the total value of the outstanding shares of the Company is owned, directly or indirectly, by citizens or residents of the U.S., domestic partnerships, domestic corporations, domestic estates, or domestic trusts (each as defined in Section 7701(a)(30) of the Code), each of which own, directly or indirectly, 10% or more of the total voting power of the outstanding shares of the Company (a 10% Shareholder).  If the Company is a CFC, a 10% Shareholder generally will be subject to current U.S. federal income tax with respect to (a) such 10% Shareholders pro rata share of the subpart F income (as defined in Section 952 of the Code) of the Company and (b) such 10% Shareholders pro rata share of the earnings of the Company invested in United States property (as defined in Section 956 of the Code). In addition, under Section 1248 of the Code, any gain recognized on the sale or other taxable disposition of Common Shares by a U.S. Holder that was a 10% Shareholder at any time during the five-year period ending with such sale or other taxable disposition generally will be treated as a dividend to the extent of the earnings and profits of the Company that are attributable to such Common Shares. If the Company is both a CFC and a passive foreign investment company (as defined below), the Company generally will be treated as a CFC (and not as a passive foreign investment company) with respect to any 10% Shareholder.  The Company does not believe that it has previously been, or currently is, a CFC. However, there can be no assurance that the Company will not be a CFC for the current or any subsequent taxable year.  Passive Foreign Investment Company  The Company generally will be a passive foreign investment company under Section 1297 of the Code (a  PFIC) if, for a taxable year, (a) 75% or more of the gross income of the Company for such taxable year is passive income or (b) 50% or more of the assets held by the Company either produce passive income or are held for the production of passive income, based on the fair market value of such assets (or on the adjusted tax basis of such assets, if the Company is not publicly traded and either is a controlled foreign corporation or makes an election). Passive income includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions.  For purposes of the PFIC income test and asset test described above, if the Company owns, directly or indirectly, 25% or more of the total value of the outstanding shares of another foreign corporation, the Company will be treated as if it (a) held a proportionate share of the assets of such other foreign corporation and (b) received directly a proportionate share of the income of such other foreign corporation. In addition, for purposes of the PFIC income test and asset test described above, passive income does not include any interest, dividends, rents, or royalties that are received or accrued by the Company from a related person (as defined in Section 954(d)(3) of the Code), to the extent such items are properly allocable to the income of such related person that is not passive income.  If the Company is a PFIC, the U.S. federal income tax consequences to a U.S. Holder of the acquisition, ownership, and disposition of Common Shares will depend on whether such U.S. Holder makes an election to treat the Company as a qualified electing fund or QEF under Section 1295 of the Code (a QEF Election) or a mark-to-market election under Section 1296 of the Code (a Mark-to-Market Election). A U.S. Holder that does not make either a QEF Election or a Mark-to-Market Election will be referred to in this summary as a Non-Electing U.S. Holder.  Under Section 1291 of the Code, any gain recognized on the sale or other taxable disposition of Common Shares, and any excess distribution (as defined in Section 1291(b) of the Code) paid on the Common Shares, must be ratably allocated to each day in a Non-Electing U.S. Holders holding period for the Common Shares. The amount of any such gain or excess distribution allocated to prior years of such Non-Electing U.S. Holders holding period for the Common Shares generally will be subject to U.S. federal income tax at the highest tax applicable to ordinary income in each such prior year. A Non-Electing U.S. Holder will be required to pay interest on the resulting tax liability for each such prior year, calculated as if such tax liability had been due in each such prior year.  A U.S. Holder that makes a QEF Election generally will not be subject to the rules of Section 1291 of the Code discussed above. However, a U.S. Holder that makes a QEF Election generally will be subject to U.S. federal income tax on such U.S. Holders pro rata share of (a) the net capital gain of the Company, which will be taxed as long-term capital gain to such U.S. Holder, and (b) and the ordinary earnings of the Company, which will be taxed as ordinary income to such U.S. Holder. A U.S. Holder that makes a QEF Election will be subject to U.S. federal income tax on such amounts for each  31   taxable year in which the Company is a PFIC, regardless of whether such amounts are actually distributed to such U.S. Holder by the Company.  A U.S. Holder that makes a Mark-to-Market Election generally will not be subject to the rules of Section 1291 of the Code discussed above. A U.S. Holder may make a Mark-to-Market Election only if the Common Shares are marketable stock (as defined in Section 1296(e) of the Code). A U.S. Holder that makes a Mark-to-Market Election will include in gross income, for each taxable year in which the Company is a PFIC, an amount equal to the excess, if any, of (a) the fair market value of the Common Shares as of the close of such taxable year over (b) such U.S. Holders tax basis in such Common Shares. A U.S. Holder that makes a Mark-to-Market Election will, subject to certain limitations, be allowed a deduction in an amount equal to the excess, if any, of (a) such U.S. Holders adjusted tax basis in the Common Shares over (b) the fair market value of such Common Shares as of the close of such taxable year.  The Company does not believe that it was a PFIC for the taxable year ended December 31, 2005, and does not expect that it will be a PFIC for the taxable year ending December 31, 2006. The determination of whether the Company was, or will be, a PFIC for a taxable year depends, in part, on the application of complex U.S. federal income tax rules, which are subject to differing interpretations. In addition, whether the Company will be a PFIC for the taxable year ending December 31, 2006 and each subsequent taxable year depends on the assets and income of the Company over the course of each such taxable year and, as a result, cannot be predicted with certainty as of the date of this report. Accordingly, there can be no assurance that the IRS will not challenge the determination made by the Company concerning its PFIC status or that the Company was not, or will not be, a PFIC for any taxable year.  The PFIC rules are complex, and each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the PFIC rules and how the PFIC rules may affect the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares.  ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.  The Company deposits surplus funds with Chinese banks earning daily interest. The Company does not invest in any instruments for trading purposes. The Companys operations is not sensitive to fluctuations in exchange rates and does not have any long-term debt instruments. The trade accounts due and trade accounts payable for the Company approximate fair value.  For financial reporting purposes, Renminbi (RMB) has been translated into United States dollars as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at period end. Income statement accounts are translated at the average rate of exchange prevailing during the period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders equity as Accumulated other comprehensive income - foreign currency translation adjustments. Gains and losses resulting from foreign currency transactions are included in other comprehensive income (expenses) with a foreign currency translation gain amounted to $612,543 for the fiscal year ended December 31, 2007.   ITEM 12.   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.  Not applicable   ITEM 13.   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.  Not applicable.   ITEM 14.   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.  Not applicable.    32   ITEM 15.  CONTROLS AND PROCEDURES.  Disclosure Controls and Procedures  The Securities and Exchange Commission defines the term disclosure controls and procedures to mean the company's controls and other procedures of an issuer that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the issuers management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  The Company maintains such a system of controls and procedures in an effort to ensure that all information which it is required to disclose in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified under the SEC's rules and forms and that information required to be disclosed is accumulated and communicated to principal executive and principal financial officers to allow timely decisions regarding disclosure.  As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are designed to provide reasonable assurance of achieving the objectives of timely alerting them to material information required to be included in our periodic SEC reports and of ensuring that such information is recorded, processed, summarized and reported with the time periods specified.  Our chief executive officer and chief financial officer also concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance of the achievement of these objectives.  Internal Control Over Financial Reporting  The management of the Company is responsible for the preparation of the financial statements and related financial information appearing in this Annual Report on Form 20-F. The financial statements and notes have been prepared in conformity with accounting principles generally accepted in the United States of America. The management of the Company also is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. A company's internal control over financial reporting is defined as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.  Management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company's disclosure controls and internal controls will prevent all error and all fraud. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable, not absolute, assurance that the objectives of the control system are met and may not prevent or detect misstatements. Further, over time control may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate.  With the participation of the Chief Executive Officer and Chief Financial Officer, our management evaluated the effectiveness of the Company's internal control over financial reporting as of December 31, 2008 based upon the  33   framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management has concluded that, as of December 31, 2008, the Company's internal control over financial reporting was effective.  This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this Annual Report on Form 20-F.  There was no change in the Company's internal control over financial reporting during the period covered by this annual report, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.  ITEM 16A.  AUDIT COMMITTEE FINANCIAL EXPERT.  Not applicable.   ITEM 16B.   CODE OF ETHICS.  Not applicable.   ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES.  Not applicable.   ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.  Not applicable.   ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.  Not applicable.   ITEM 17.  FINANCIAL STATEMENTS  The following financial statements are filed with this report on Form 20-F:  a. Audited Consolidated financial statements of China Linen Textile Industry, Ltd., for the fiscal years ended December 31, 2008 and 2007.        34       35             CHINA LINEN TEXTILE INDUSTRY, LTD. AUDITED CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2008 and 2007  36


CHINA LINEN TEXTILE INDUSTRY, LTD.    TABLE OF CONTENTS    PageReport of Independent Registered Public Accounting Firm40Financial StatementsConsolidated Balance Sheets41-42Consolidated Statements of Operations43Consolidated Statements of Changes in Shareholders Equity44Consolidated Statements of Cash Flows45Notes to Consolidated Financial Statements46-68   1        [f200820fa_final002.jpg]  40        CHINA LINEN TEXTILE INDUSTRY, LTD.  CONSOLIDATED BALANCE SHEETS December 31, 2008 and 2007 (Stated in US Dollars)


|                                                          |   |            |  |   |           
|--------------------------------------------------------- | - | ---------- |  | - | ----------
|                                                          |   | 2008       |  |   | 2007      
|ASSETS                                                    |   |            |  |   |           
|Current Assets                                            |   |            |  |   |           
|Cash                                                      | $ | 10,674     |  | $ | 144,985   
|Bank checks and commercial paper                          |   | 1,566,733  |  |   | 370,654   
|Accounts receivable, net                                  |   | 9,374,255  |  |   | 10,962,247
|Inventory                                                 |   | 8,335,042  |  |   | 9,328,163 
|Prepaid expenses                                          |   | 1,666,980  |  |   | 1,036,098 
|Other receivables                                         |   | 275,888    |  |   | 117,648   
|Due from related parties                                  |   | 1,535,954  |  |   | 22,967    
|Governmental subsidy receivable                           |   | 1,296,522  |  |   | -         
|Deferred tax assets                                       |   | 299,193    |  |   | 222,774   
|Total current assets                                      | $ | 24,361,241 |  | $ | 22,205,536
|Property, Plant and Equipment, net                        |   | 8,817,291  |  |   | 6,626,980 
|Land Use Right, net                                       |   | 416,185    |  |   | 397,912   
|Governmental Subsidy Receivable, non-current              |   | 2,387,837  |  |   | 2,197,554 
|Deferred Tax Assets, non-current                          |   | 241,706    |  |   | 54,221    
|Total assets                                              | $ | 36,224,260 |  | $ | 31,482,203
|LIABILITIES AND STOCKHOLDERS' EQUITY                      |   |            |  |   |           
|Current Liabilities                                       |   |            |  |   |           
|Bank loans                                                | $ | 4,041,291  |  | $ | 5,754,890 
|Accounts payable                                          |   | 2,709,566  |  |   | 2,724,846 
|Accrued expenses and other payables                       |   | 1,559,459  |  |   | 1,709,692 
|Taxes payable                                             |   | 8,804,430  |  |   | 6,129,478 
|Deferred revenue                                          |   | 289,527    |  |   | 255,539   
|Deferred governmental subsidy                             |   | 88,834     |  |   | 46,846    
|Loans from local government                               |   | 295,001    |  |   | 317,349   
|Due to related parties                                    |   | 56,470     |  |   | 1,584,179 
|Loans from related parties                                |   | -          |  |   | 116,858   
|Deferred tax liabilities                                  |   | 324,130    |  |   | 62,015    
|Total current liabilities                                 | $ | 18,168,708 |  | $ | 18,701,692
|Deferred Governmental Subsidy, non-current                |   | 1,855,453  |  |   | 1,093,861 
|Deferred Tax Liabilities, non-current                     |   | 596,959    |  |   | 549,389   
|Total liabilities                                         | $ | 20,621,120 |  | $ | 20,344,942
|COMMITMENTS AND CONTINGENCIES                             |   |            |  |   |           
|Shareholders' Equity                                      |   |            |  |   |           
|Common stock                                              |   |            |  |   |           
|Authorized: 500,000,000 ordinary voting shares with       |   |            |  |   |           
|par value of $0.002 each                                  |   |            |  |   |           
|Issued and outstanding: 20,100,003 ordinary voting shares | $ | 40,200     |  | $ | 40,200    
|Additional paid-in capital                                |   | 2,204,186  |  |   | 2,204,186 

41


|                                           |   |            |  |   |           
|------------------------------------------ | - | ---------- |  | - | ----------
|Statutory Reserves                         |   | 1,019,595  |  |   | 630,573   
|Retained earnings                          |   | 10,747,649 |  |   | 7,435,702 
|Accumulated other comprehensive income     |   | 1,591,510  |  |   | 826,600   
|Total stockholders' equity                 | $ | 15,603,140 |  | $ | 11,137,261
|Total liabilities and stockholders' equity | $ | 36,224,260 |  | $ | 31,482,203

See notes to consolidated financial statements.  42        CHINA LINEN TEXTILE INDUSTRY, LTD.  CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 2008 and 2007 (Stated in US Dollars)


|                                       |   |            |  |   |            
|-------------------------------------- | - | ---------- |  | - | -----------
|                                       |   | 2008       |  |   | 2007       
|Revenues                               |   |            |  |   |            
|Net sales                              | $ | 22,945,122 |  | $ | $20,782,804
|Costs of goods sold                    |   | 17,648,852 |  |   | 15,075,310 
|Gross profit                           | $ | 5,296,270  |  | $ | 5,707,494  
|Operating expenses                     |   |            |  |   |            
|Selling expenses                       |   | 393,348    |  |   | 305,422    
|General and administrative expenses    |   | 947,541    |  |   | 1,047,292  
|Total operating expenses               | $ | 1,340,889  |  | $ | 1,352,714  
|Operating income                       | $ | 3,955,381  |  | $ | 4,354,780  
|Other income (expense)                 |   |            |  |   |            
|Interest income                        | $ | 175,299    |  | $ | 74,447     
|Interest expense                       |   | (540,203)  |  |   | (817,596)  
|Government subsidies                   |   | 1,324,225  |  |   | 1,407,967  
|Other expense                          |   | (6,819)    |  |   | (36,284)   
|Total other income                     | $ | 952,502    |  | $ | 628,534    
|Income before tax                      | $ | 4,907,883  |  | $ | 4,983,314  
|Income tax                             |   | 1,206,914  |  |   | 1,606,443  
|Net income                             | $ | 3,700,969  |  | $ | 3,376,871  
|Other comprehensive income             |   |            |  |   |            
|Effects of foreign currency conversion |   | 764,910    |  |   | 643,077    
|Comprehensive income                   | $ | 4,465,879  |  | $ | 4,019,948  




|                                     |   |        |  |   |       
|------------------------------------ | - | ------ |  | - | ------
|Basic and diluted earnings per share | $ | 0.1841 |  | $ | 0.1680

See notes to consolidated financial statements.  43        CHINA LINEN TEXTILE INDUSTRY, LTD.  CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY For the Years Ended December 31, 2008 and 2007 (Stated in US Dollars)


|                                    |  |              |  |                            |  |                   |  |                   |  |                                        |  |            
|----------------------------------- |  | ------------ |  | -------------------------- |  | ----------------- |  | ----------------- |  | -------------------------------------- |  | -----------
|                                    |  | Common
Stock |  | Additional
Paid-in
Capital |  | Statutory
Reserve |  | Retained
Earnings |  | Accumulated
Other
Comprehensive
Income |  | Total      
|                                    |  |              |  |                            |  |                  
|                                    |  |              |  |                            |  |                  
|                                    |  |              |  |                            |  |                   |  |                   |  |                                        |  |            
|Balances at December 31, 2006       |  | $ 40,200     |  | $2,204,186                 |  | $  427,005        |  | $4,295,420        |  | $   183,523                            |  | $7,150,334 
|Net income                          |  | -            |  | -                          |  | -                 |  | 3,376,871         |  | -                                      |  | 3,376,871  
|Appropriation to statutory reserves |  | -            |  | -                          |  | 203,568           |  | (203,568)         |  | -                                      |  | -          
|Dividend distribution               |  | -            |  | -                          |  | -                 |  | (33,021)          |  | -                                      |  | (33,021)   
|Other comprehensive income          |  |              |  |                            |  |                   |  |                   |  |                                        |  |            
|effects of foreign currency         |  |              |  |                            |  |                   |  |                   |  |                                        |  |            
|conversion                          |  | -            |  | -                          |  | -                 |  | -                 |  | 643,077                                |  | 643,077    
|                                    |  |              |  |                            |  |                   |  |                   |  |                                        |  |            
|Balances at December 31, 2007       |  | $ 40,200     |  | $2,204,186                 |  | $  630,573        |  | $7,435,702        |  | $   826,600                            |  | $11,137,261
|Net income                          |  | -            |  | -                          |  | -                 |  | 3,700,969         |  | -                                      |  | 3,700,969  
|Appropriation to statutory reserves |  | -            |  | -                          |  | 389,022           |  | (389,022)         |  | -                                      |  | -          
|Other comprehensive income          |  |              |  |                            |  |                   |  |                   |  |                                        |  |            
|effects of foreign currency         |  |              |  |                            |  |                   |  |                   |  |                                        |  |            
|conversion                          |  | -            |  | -                          |  | -                 |  | -                 |  | 764,910                                |  | 764,910    
|Balances at December 31, 2008       |  | $ 40,200     |  | $2,204,186                 |  | $1,019,595        |  | $10,747,649       |  | $  1,591,510                           |  | $15,603,140
|                                    |  |              |  |                            |  |                   |  |                   |  |                                        |  |            

See notes to consolidated financial statements.  44        CHINA LINEN TEXTILE INDUSTRY, LTD.  CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2008 and 2007 (Stated in US Dollars)


|                                                  |               |  |              |  |  | 
|------------------------------------------------- | ------------- |  | ------------ |  |  | 
|                                                  | 2008          |  | 2007        
|Cash Flows from Operating Activities              |               |  |             
|Net income                                        | $  3,700,969  |  | $  3,376,871
|Adjustments to reconcile net income to net cash   |               |  |             
|provided by operating activities:                 |               |  |             
|Bad debt expenses                                 | 31,310        |  | 426,369     
|Depreciation                                      | 442,381       |  | 346,918     
|Amortization                                      | 8,671         |  | 7,925       
|Deferred income taxes                             | 22,742        |  | 182,735     
|Deferred governmental subsidy                     | 650,299       |  | -           
|Changes in:                                       |               |  |             
|Bank checks and commercial paper                  | (1,155,604)   |  | (13,515)    
|Accounts receivable                               | 2,271,622     |  | (5,776,736) 
|Inventory                                         | 1,606,161     |  | 2,065,370   
|Prepaid expenses                                  | (553,109)     |  | 1,935,417   
|Other receivables                                 | (235,926)     |  | 309,880     
|Accounts payable                                  | (197,951)     |  | (124,142)   
|Accrued expenses and other payables               | (208,028)     |  | 632,075     
|Taxes payable                                     | 974,980       |  | 2,176,022   
|Deferred revenue                                  | 16,394        |  | (37,120)    
|Due to/from related parties                       | (3,105,746)   |  | (4,788,175) 
|Net cash provided by operating activities         | $  4,269,165  |  | $   719,894 
|                                                  |               |  |             
|Cash Flows from Investing Activities              |               |  |             
|Purchase of property, plant and equipment         | $ (2,159,769) |  | $  (289,171)
|Net cash used in investing activities             | $ (2,159,769) |  | $  (289,171)
|Cash Flows from Financing Activities              |               |  |             
|Proceeds from bank loans                          | $  3,936,110  |  | $         - 
|Payments on bank loans                            | (5,986,251)   |  | (67,998)    
|Payments on loans from local government           | (43,353)      |  | -           
|Payments on loans from related parties            | (124,804)     |  | (394,082)   
|Dividend payment                                  | -             |  | (33,021)    
|Net cash used in financing activities             | $ (2,218,298) |  | $  (495,101)
|Decrease in cash                                  | (108,902)     |  | (64,378)    
|Effects of foreign currency conversion on cash    | (25,409)      |  | (13,201)    
|Cash at beginning of year                         | 144,985       |  | 222,564     
|Cash at end of year                               | $    10,674   |  | $   144,985 
|                                                  |               |  |             
|Supplemental Disclosures of Cash Flow Information |               |  |             
|Cash paid during the year for:                    |               |  |             
|Interest                                          | $ 1,553,494   |  | $     4,108 
|Income taxes                                      | $   857,118   |  | $    54,438 

See notes to consolidated financial statements.  45


CHINA LINEN TEXTILE INDUSTRY, LTD.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)  NOTE 1  ORGANIZATION AND PRINCIPAL ACTIVITIES  China Linen Textile Industry, Ltd. (the Company) is principally engaged in the business of production and distribution of various types of Linen products, such as linen clothing, linen yarn, linen hemp, and blending linen, etc.  It is also involved in consultation, research and development related to of linen technology and linen products.  The Company carries on all of its business activities through its wholly owned subsidiary, Heilongjiang Lanxi Sunrise Linen Textile Industry Co., Ltd. (Lanxi Sunrise) which was incorporated in Lanxi County, Heilongjiang Province, the People's Republic of China (the "PRC") on June 11, 2002, as a limited liability company under the Company Law of PRC.  Lanxi Sunrises manufacturing facility is located in Lanxi County, Heilongjiang Province in the northeast section of the PRC near the city of Harbin.   Prior to the establishment of Lanxi Sunrise at this location as a privately owned business in June, 2002, the manufacturing facility was operated as a government-owned business.  Bright International Group Co., Ltd. (Bright), incorporated in the Republic of Vanuatu on July 4, 2007, is an investment holding company with 95% equity ownership interest in Lanxi Sunrise.  NOTE 2  INFORMATION OF THE COMPANY  The Company was incorporated under the laws of the Cayman Islands B.W.I. on February 3, 2000 as Aquasol Envirotech, Ltd.  The Company was formed to engage in the business of developing, acquiring and marketing water and waste water technology solutions.  The Company built a pilot facility in Squamish, British Columbia, Canada in 2001 and conducted limited operations to test its Bio Trap system for wastewater treatment and reuse.  The pilot facility was closed in 2001 after completion of the test, and since that time, the Company has had no operations and became a shell company.  The Company entered into a share exchange transaction on July 9, 2008 as detailed in below paragraphs resulted in a change of control of the Company.  This transaction has been accounted for as a reverse acquisition in which the financial statements will be prepared under merger method whereby the historical financial statements and operations of the acquirer are included in the financial statements of the Company for the years ended December 31, 2008 and 2007, with no adjustment to the carrying value of assets and liabilities.  Business Acquisition  On August 5, 2007, the owners of Lanxi Sunrise entered into a Share Purchase Agreement (the Agreement) with Bright on July 4, 2007.  Pursuant to the Agreement, the owners of Lanxi Sunrise agreed to transfer their 95% equity ownership interest to Bright for a cash consideration of $750,000 (RMB 5,700,000).  The remaining 5% equity ownership interest was kept by Mr. Ren Gao, majority owner and CEO of Lanxi Sunrise.  On April 8, 2008, the local government approved the transaction as indicated on the Lanxi Sunrise's new business license. Upon completion of the acquisition, Lanxi Sunrise became an enterprise with foreign investment in PRC and a 95%-owned subsidiary of Bright.  As Mr. Ren Gao is the beneficial owner of Bright and remained the sole owner of Lanxi Sunrise after the share purchase, this transaction is treated as reorganization in which Bright is a continuing entity of Lanxi Sunrise.  46      CHINA LINEN TEXTILE INDUSTRY, LTD.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)  NOTE 2  INFORMATION OF THE COMPANY(Continued)   Reverse Acquisition On July 9, 2008, the Company entered into a share exchange transaction with Bright in which the Company acquired all the issued and outstanding capital stock of Bright in return for the issuance of 18,963,005 shares of the Companys common stock.  As a result of the transaction, Bright became a wholly owned subsidiary of the Company.  The transaction is accounted for as a reverse acquisition from accounting perspective since Bright has become the controlling shareholder of the Company after the share exchange transaction.  For accounting purpose, Bright is regarded as the acquirer while the Company before the reverse acquisition is deemed to have been acquired by Bright.  As a result, these consolidated financial statements have been prepared as a continuation of the consolidated financial statements of Bright.  In anticipation of completion of the Reverse Acquisition, the Company changed its name to China Linen Textile Industry, Ltd.  Share Split On June 30, 2008, prior to completion of the Share Exchange transaction, the Company completed a 1:2 reverse split of its issued and outstanding common stock, thereby reducing the number of issued and outstanding shares from 2,273,995 to approximately 1,136,998.  Basis of Presentation The financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP").  Basis of Consolidation The accompanying consolidated financial statements include the accounts of the Company, Bright and Lanxi Sunrise, (hereafter, collectively referred to as the Group).  All significant intercompany accounts and transactions have been eliminated in consolidation.  The Company owned the two subsidiaries since its reverse acquisition on July 9, 2008.  Retrospective adjustments of the comparative figures have been made as if the share exchange transaction between the Company and Bright occurred as of January 1, 2007.  Reclassification Certain reclassifications have been made to the consolidated financial statements for the year ended December 31, 2007 to conform to the presentation for the year ended December 31, 2008.  Foreign Currencies Transactions The Company and Bright maintain its books and accounting records in USD, which is determined as the functional currency.  However, the functional currency of the Companys subsidiary, Lanxi Sunrise, is in PRC currency Renminbi (RMB).  Transactions denominated in currencies other than RMB are translated into RMB at the exchange rates quoted by the Peoples Bank of China (PBOC) prevailing at the date of the transactions. Monetary assets and liabilities denominated in currencies other than RMB are translated into RMB using the applicable exchange rates quoted by the PBOC at the balance sheet dates. Gain and losses resulting from foreign currency transactions are included in operations.    47      CHINA LINEN TEXTILE INDUSTRY, LTD.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)  NOTE 3  SIGNIFICANT ACCOUNTING POLICIES(Continued)  Foreign Currencies Translation The financial statements of Lanxi Sunrise, are translated into the reporting currency, the United States Dollar (USD). Assets and liabilities of Lanxi Sunrise are translated at the prevailing exchange rate at each reporting period end. Contributed capital accounts are translated using the historical rate of exchange when capital is injected. Income and expense accounts are translated at the average rate of exchange during the reporting period. Translation adjustments resulting from translation of these financial statements are reflected as other comprehensive income in the statements of operations and accumulated other comprehensive income in the statements of changes in shareholders' equity.  Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of changes in shareholders equity and amounted to $1,591,510 and $826,600 as of December 31, 2008 and 2007, respectively. The balance sheet amounts with the exception of equity at December 31, 2008 were translated at 6.8295 RMB to $1.00 USD as compared to 7.2939 RMB to $1.00 USD at December 31, 2007. The equity accounts were stated at their historical rate. The average translation rates applied to income statement accounts for the years ended December 31, 2008 and 2007 were 6.9199 RMB to $1.00USD and 7.5709 RMB to $1.00, respectively.  Statement of Cash Flows In accordance with SFAS No. 95, Statement of Cash Flows, cash flows from the Groups operations is calculated based upon the functional currency. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.  Revenue Recognition The Group recognizes revenue when the earnings process is complete. This generally occurs when products are shipped to unaffiliated customer, title and risk of loss have been transferred, collectability is reasonably assured and pricing is fixed or determinable. The corresponding freightout and handling costs are included in the selling expenses. The Group does not provide an unconditional right of return, price protection or any other concessions to its customers. There were no material sales returns and other allowances for the years ended December 31, 2008 and 2007.  Deferred Revenue Deferred revenue consists of prepayments to the Group for products that have not yet been delivered to the customers. Payments received prior to satisfying the Groups revenue recognition criteria are recorded as deferred revenue.  Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results when ultimately realized could differ from those estimates.     48      CHINA LINEN TEXTILE INDUSTRY, LTD.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)  NOTE 3  SIGNIFICANT ACCOUNTING POLICIES(Continued)  Cash and Cash Equivalents Cash and cash equivalents include cash on hand, deposits in banks with maturities of three months or less, and all highly liquid investments which are unrestricted as to withdrawal or use, and which have original maturities of three months or less at the time of purchase.  Bank Checks and Commercial Paper Bank checks and commercial paper include bank checks and commercial paper with original maturities of approximately 180 days or less at the time of issuance. Book value approximates fair value because of the short maturity of those instruments. The Group receives these financial instruments as payments from its customers in the ordinary course of business.  Accounts Receivable Accounts receivable are recorded at the invoiced amount and do not bear interest. The Group generally extends unsecured credit from three to six months to its customers in the ordinary course of business. The Group mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on managements' assessment of known requirements, aging of receivables, payment history, the customer's current credit worthiness, and the economic environment. When a specific accounts receivable balance is deemed uncollectible, a charge is taken to this reserve. Recoveries of balances previously written off are also reflected in this reserve.  Concentrations of Credit Risk The Group sells its products primarily to PRC domestic customers. Credit is extended based on an evaluation of the customer's financial condition. At December 31, 2008 and 2007, two customers accounted for 92% and 90% of its accounts receivable-net, respectively. Due to the longstanding nature of its relationships with these customers and contractual obligations, the Group is confident that it will recover these amounts. The Group establishes an allowance for doubtful accounts based on factors surrounding the credit risk of specific customers and other information.  The Group maintains its cash and cash equivalents with high-quality institutions. Deposits held with banks in PRC may not be insured or exceed the amount of insurance provided on such deposits.  Fair Value of Financial Instruments The carrying value of financial instruments including cash and cash equivalents, bank checks and commercial paper, receivables, payables and accrued expenses, approximates their fair value due to the relatively short-term nature of these instruments.  Inventory Inventories are stated at the lower of cost or market value. Actual cost is used to value raw materials and supplies. Finished goods and work-in-progress are valued on the weighted-average cost method. Elements of costs in finished goods and work-in-progress include raw materials, direct labor, and manufacturing overhead.   49      CHINA LINEN TEXTILE INDUSTRY, LTD.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)  NOTE 3  SIGNIFICANT ACCOUNTING POLICIES(Continued)  Others Receivable Others receivable principally includes advances to employees who are working on projects on behalf of the Group. After the work is finished, they will submit expense reports with supporting documents to the accounting department. Upon being properly approved, the expenses are debited into the relevant accounts and the advances are credited out. Cash flows from these activities are classified as cash flows from operating activities.  Governmental Subsidies The Companys subsidiary, Lanxi Sunrise, is considered to be a leading manufacture enterprise by the local government, Lanxi Government ("Lanxi Government"), which has a long-term desire to encourage Lanxi Sunrise to expand its production capacity and to create more job opportunities for local residents. For that purpose, the local government granted various subsidies to Lanxi Sunrise.  (1) Income Tax Refund Grant On May 19, 2006, the local government ran an incentive program exclusively for Lanxi Sunrise. Among other things, the program provided Lanxi Sunrise to receive government grants equal to Lanxi Sunrise's income taxes for the years 2006, 2007, and 2008, and the local income taxes for the years 2009 and 2010. To be eligible for the grants, Lanxi Sunrise needs to pay income taxes to the tax authority as required by tax laws and regulation, and then submits the proof of payment to Lanxi Government, which will deposit the grants to Lanxi Sunrise's bank account. The Lanxi Government further granted Lanxi Sunrise the deferral of income tax payments for 2006, 2007 and 2008 until 2009, 2010 and 2011, respectively. Lanxi Sunrise records the present value of income tax refund grant as governmental subsidies receivable and governmental subsidy revenue at the same time when the income taxes payable are recorded.  (2) Land Subsidy Included in the incentive program described in the preceding paragraph, the local government provided $333,321 (RMB 2,600,000) subsidy for Lanxi Sunrise to purchase a land use right.  Lanxi Sunrise purchased the land use right in August 2006 for $333,321 (RMB 2,600,000), as more fully disclosed in the "Land Use Right" section of this note. The local government refunded the full amount of the purchase price to Lanxi Sunrise, which recorded the amount as deferred governmental subsidy to be recognized over the land use right's amortization period.   (3) Building Subsidy In January 2005, the local government granted the buildings attached to two adjacent pieces of land to Lanxi Sunrise as government subsidy, as more fully disclosed in the "Land Use Right" section of this note.  Lanxi Sunrise obtained the title documents of these buildings on February 2, 2006. The Management valued the fair value of these buildings at $794,345 (RMB 5,793,572.), based on an appraisal report issued by an independent appraiser certified by the local government. Lanxi Sunrise treated the full amount as deferred governmental subsidy, and began to recognize governmental subsidy revenue when Lanxi Sunrise complied with all conditions attached to the grant in December 2007, over these buildings' depreciation period of 20 years.   50      CHINA LINEN TEXTILE INDUSTRY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)  NOTE 3  SIGNIFICANT ACCOUNTING POLICIES(Continued)  Governmental Subsidies(Continued)  (4) Sewage Facilities Improvement Subsidy In December 2008, the local government granted USD 776,045 (RMB 5,300,000) to Lanxi Sunrise for sewage facilities improvement.  This subsidy is regarded as deferred government subsidy whose primary condition for qualification is to improve the sewage facilities of the production plant from acquiring certain long-term assets.  The government grant is recognised as income over the periods necessary to match them with the related costs of the assets purchased which they are intended to compensate over the periods and in the proportions in which depreciation on those assets is charged.  No subsidy income is recognized in the year of 2008 as the sewage facilities and equipment are currently under construction and installation.  (5) Monetary Grant The local government granted various funds to Lanxi Sunrise, such as leading enterprise fund and financial supporting fund. Lanxi Sunrise recorded these funds as liabilities upon receipt. A government subsidy revenue is recognized only when there is reasonable assurance that Lanxi Sunrise has complied with all conditions attached to the grant.  (6) Interest-free Loans The local government provided certain interest-free loans to Lanxi Sunrise. These loans are unsecured, have no fixed terms of repayment and therefore deemed payable on demand. Receipts from and payments on loans from local government are classified as cash flows from financing activities.  Property, Plant and Equipment Property, plant and equipment are carried at cost. Maintenance, repairs and minor renewals are expensed as incurred; major renewals and improvements that extend the lives or increase the capacity of plant assets are capitalized.  When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the reporting period of disposition.  Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. The estimated useful life of the assets is as follows:


| |                                |         
| | ------------------------------ | --------
| | Building and warehouses        | 20 years
| | Machinery and equipment        | 14 years
| | Office equipment and furniture | 3 years 
| | Motor vehicles                 | 5 years 

Impairment of Long-life Assets Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.  51      CHINA LINEN TEXTILE INDUSTRY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)  NOTE 3  SIGNIFICANT ACCOUNTING POLICIES(Continued)  Land Use Right All land is owned by the Government in the PRC. Enterprises and individuals can pay the State a fee to obtain a right to use land for commercial purpose or residential purpose for an initial period of 50 or 70 years, respectively. The land use right can be sold, purchased, and exchanged in the market. The successor owner of the land use right will reduce the amount of time which has been consumed by the predecessor owner.  (1) Land Use Right  Town East Street  In August 2006, Lanxi Sunrise obtained the land use right of a piece of land, approximately 11 acres, located in the Lanxi County, Heilongjiang Province for $333,321 (RMB 2,600,000). The land use right is for commercial use purpose for a 50-year period ended August 15, 2056. The cost of this land use right will be amortized over its prospective beneficial period, using the straight-line method. Most of Lanxi Sunrises production facilities and headquarters are located on this land. The local government refunded the full amount of the purchase price of $333,321 (RMB 2,600,000) to Lanxi Sunrise, which recorded the amount as deferred governmental subsidy to be recognized over the land use right's amortization period.  Prior to obtaining this land use right, Lanxi Sunrise leased this land from a previous owner which is a state-owned enterprise for free, from June 11, 2002 (inception) through July 2006. Lanxi Sunrise recorded neither rental expenses nor governmental subsidy income for such free rent.  (2) Land Use Right  Lixin Street  In January 2005, Lanxi Sunrise obtained the land use right of two adjacent pieces of land, approximately 2 acres, also located in Lanxi County, Heilongjiang Province for $49,600 (RMB 400,000). The land use right is for commercial use purpose for a 50-year period ended December 29, 2054. The costs of this land use right is amortized over its prospective beneficial period, using the straight-line method. Portion of Lanxi Sunrises production facilities are located in these two pieces of land.  In January 2005, the local government also granted the buildings attached to these two pieces of land to Lanxi Sunrise as governmental subsidy, as more fully disclosed in the "Governmental Subsidies" section of this note. Lanxi Sunrise pledged the use rights of the two pieces of land and the buildings attached, as collateral to provide guarantee for a related party up to April 10, 2008 to receive an import letter of credit, as more fully disclosed in the "Related Party Transaction" of this note.  Research and Development Costs Research and development costs relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed when incurred. The major components of these research and development costs include experimental materials and labor costs. The Research and development cost was immaterial for the Group in the years ended December 31, 2008 and 2007, respectively, and was included in general and administration expenses.  Advertising Costs Advertising costs are expensed as incurred and included as part of selling and marketing expenses. Advertising costs were immaterial for the Group in the years ended December 31, 2008 and 2007, respectively, and was included in selling expenses.   52      CHINA LINEN TEXTILE INDUSTRY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)  NOTE 3  SIGNIFICANT ACCOUNTING POLICIES(Continued)  Value-added Tax (VAT) Sales revenue represents the invoiced value of goods, net of value-added tax (VAT). All of the Groups products that are sold in PRC are subject to 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 may be offset by VAT paid on purchase of raw materials included in the cost of producing the finished goods.  Comprehensive Income Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during a period from non-owner sources. Accumulated comprehensive income, as presented in the accompanying statements of changes in owners' equity consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.  Pension and Employee Benefits Full time employees of the PRC entities participate in a government mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require the PRC entities to accrue for these benefits based on certain percentages of the employees' salaries. The Management believes full time employees who have passed the probation period are entitled to such benefits. The total provisions for employee pension was$55,751, and $87,321 for the years ended December 31, 2008 and 2007, respectively.  Statutory Reserves Pursuant to the applicable laws in PRC, PRC entities are required to make appropriations to three non-distributable reserve funds, the statutory surplus reserve, statutory public welfare fund, and discretionary surplus reserve, based on after-tax net earnings as determined in accordance with the PRC GAAP, after offsetting any prior years losses. Appropriation to the statutory surplus reserve should be at least 10% of the after-tax net earnings until the reserve is equal to 50% of the entity's registered capital. Appropriation to the statutory public welfare fund is 5% to 10% of the after-tax net earnings. The statutory public welfare fund is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation. Beginning from January 1, 2006, enterprise has no further requirements to make the appropriation to the statutory public welfare fund. The Group does not make appropriations to the discretionary surplus reserve fund.  The Group contributed $389,022 and $203,568 to the statutory surplus reserve fund in 2008 and 2007 respectively. Statutory reserves consist of the followings:  53      CHINA LINEN TEXTILE INDUSTRY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)  NOTE 3  SIGNIFICANT ACCOUNTING POLICIES(Continued)  Statutory Reserves (Continued)


|                             |  |              |  |              |  |             
|---------------------------- |  | ------------ |  | ------------ |  | ------------
|                             |  | Statutory    |  | Statutory    |  | Total       
|                             |  | Surplus      |  | Welfare      |  | Statutory   
|                             |  | Reserve      |  | Reserve      |  | Reserves    
|Balance on January 1, 2007   |  | $    284,670 |  | $    142,335 |  | $    427,005
|Contribution in 2007         |  | 203,568      |  | -            |  | 203,568     
|Balance on December 31, 2007 |  | $    488,238 |  | $    142,335 |  | $    630,573
|Contribution in 2008         |  | 389,022      |  | -            |  | 389,022     
|Balance on December 31, 2008 |  | $    877,260 |  | $    142,335 |  | $  1,019,595

Related Party Transaction For the purposes of these financial statements, parties are considered to be related if one 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 vice versa, or where the Group and the party are subject to common control or common significant influence. Related parties may be individuals or other entities. The Groups relationships with related parties are described as follows:  NameRelationshipRen GaoMajority owner of the GroupHeilongjiang Lanxi Linen Textile Co., Ltd.One of the founders of Lanxi Sunrise until Mr. Ren Gao bought out its equity interest in Lanxi Sunrise on June 11, 2007.Songyuan Qiannan Sunshine Linen Co., Ltd.Under common control by Ren GaoHarbin Zhongyi Sunshine Linen Co., Ltd.Under common control by Ren GaoHarbin Sunshine Linen Textile Co., Ltd.Under common control by Ren Gao  (1) Due from/to Related Parties  The Group purchases raw materials from, sells finished goods to, and outsources some of its production to related parties. In addition, due to China foreign currency control and export and import license requirement, the Group engages a related party, Harbin Sunshine Linen Textile Co., Ltd., to act as the Groups agent in importing raw materials and exporting products on similar terms with unrelated parties. Due from/to related  54      CHINA LINEN TEXTILE INDUSTRY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)  NOTE 3  SIGNIFICANT ACCOUNTING POLICIES(Continued)  Related Party Transaction (Continued)  parties derived from such transactions are disclosed separately from arm's length trading accounts receivable and payable. Cash flows from these activities are classified as cash flows from operating activities.  (2) Loans from Related Parties  Loans from related parties are interest-free short-term loans from Mr. Ren Gao, majority owner of the Group to finance the Groups operation. Cash flows from these activities are classified as cash flows from financing activities.  (3) Guarantee to a Related Party  The Companys subsidiary, Lanxi Sunrise, has pledged the land use right of two pieces of land and the buildings attached, as collateral to provide guarantee for Harbin Sunshine Linen Textile Co., Ltd., which was a previous owner of Lanxi Sunrise and is majority owned and controlled by Mr. Ren Gao, the majority owner of the Group, to receive an import letter of credit with the maximum value is $959,700 (RMB 7,600,000) from the Harbin Zhaolin Branch of Bank of China. The period guaranteed is from April 11, 2006 to April 10, 2008. The Group incurred neither liability nor expense related to this guarantee.  Income Taxes The Group accounts for income tax using SFAS No. 109 Accounting for Income Taxes, which requires the asset and liability approach for financial accounting and reporting for income taxes. Under this approach, deferred income taxes are provided for the estimated future tax effects attributable to temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases, and for the expected future tax benefits from loss carryforwards and provisions, if any. Deferred tax assets and liabilities are measured using the enacted tax rates expected in the years of recovery or reversal and the effect from a change in tax rates is recognized in the statement of operations in the period of enactment. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.  Recent Accounting Pronouncements In December 2007, the FASB issued Statements of Financial Accounting Standards No. 141 (revised 2007), Business Combinations (SFAS 141R) and No. 160, Noncontrolling Interests in Consolidated Financial Statements  an amendment to ARB No. 51 (SFAS 160). Both SFAS 141R and SFAS 160 are to be adopted effective January 1, 2009. SFAS 141R requires the application of several new or modified accounting concepts that, due to their complexity, could introduce a degree of volatility in periods subsequent to a material business combination. SFAS 141R requires that all business combinations result in assets and liabilities acquired being recorded at their fair value, with limited exceptions. Other areas related to business combinations that will require changes from current GAAP include: contingent consideration, acquisition costs, contingencies, restructuring costs, in process research and development and income taxes, among others. SFAS 160 will primarily impact the presentation of minority or noncontrolling interests within the Balance Sheet and Statement of Operations as well as the accounting for transactions with noncontrolling interest holders. Management does not expect that the adoption of SFAS No. 141 (revised 2007) and SFAS No. 160 would have a material effect on the Groups financial position and results of operations.  55       CHINA LINEN TEXTILE INDUSTRY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)  NOTE 3  SIGNIFICANT ACCOUNTING POLICIES(Continued)  In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Hedging Instruments and Hedging Activities  an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161, which is effective January 1, 2009, requires enhanced qualitative and quantitative disclosures with respect to derivatives and hedging activities. The Management does not expect that the adoption of SFAS No. 161 would have a material effect on the Groups financial position and results of operations.  In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles.  SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP.  SFAS 162 directs the GAAP hierarchy to the entity, not the independent auditors, as the entity is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP.  SFAS 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to remove the GAAP hierarchy from the auditing standards.  SFAS 162 is not expected to have a material impact on the Groups financial statements.  NOTE 4  ACCOUNTS RECEIVABLE Accounts receivable consist of the following:


|                                      |                |  |               
|------------------------------------- | -------------- |  | --------------
|                                      | December 31,   |  | December 31,  
|                                      | 2008           |  | 2007          
|Accounts receivable                   | $   10,105,819 |  | $   11,617,527
|Less: Allowance for doubtful accounts | (731,564)      |  | (655,280)     
|Accounts receivable, net              | $    9,374,255 |  | $   10,962,247

Bad debt expense charged to operations was $31,310and $426,369 for the years ended December 31, 2008 and 2007, respectively.  NOTE 5  INVENTORY Inventory consists of the followings:


|                                 |                 |  |              
|-------------------------------- | --------------- |  | -------------
|                                 | December 31,    |  | December 31, 
|                                 | 2008            |  | 2007         
|Finished goods                   | $     6,175,230 |  | $   5,480,818
|Work-in-progress                 | 697,378         |  | 1,900,506    
|Raw materials                    | 1,443,502       |  | 1,929,110    
|Supplies and low-value materials | 18,932          |  | 17,729       
|                                 | $     8,335,042 |  | $   9,328,163

56      CHINA LINEN TEXTILE INDUSTRY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)  NOTE 6  PREPAID EXPENSES Prepaid expenses consist of the followings:


|                           |                    |  |                   
|-------------------------- | ------------------ |  | ------------------
|                           | December 31,       |  | December 31,      
|                           | 2008               |  | 2007              
|Raw materials and supplies | $        1,323,979 |  | $          990,979
|Advance to contractors     | 329,423            |  | 27,083            
|Others                     | 13,578             |  | 18,036            
|                           | $        1,666,980 |  | $        1,036,098

NOTE 7  DUE FROM RELATED PARTIES Due from related parties consist of the followings:


|                                           |                   |  |                  
|------------------------------------------ | ----------------- |  | -----------------
|Name of Related Parties                    | December 31,      |  | December 31,     
|                                           | 2008              |  | 2007             
|Ren Gao                                    | $         319,326 |  | $               -
|Harbin Sunshine Linen Textile Co., Ltd.    | 1,185,605         |  | -                
|Heilongjiang Lanxi Linen Textile Co., Ltd. | -                 |  | 22,967           
|Songyuan Qianan Sunshine Linen Co., Ltd.   | 31,023            |  | -                
|                                           | $       1,535,954 |  | $          22,967

NOTE 8  GOVERNMENTAL SUBSIDY RECEIVABLE Governmental subsidy receivable consists of the following:  (1) Current Portion  Name of Governmental SubsidyDecember 31,December 31,20082007Income Tax Subsidy-2006
Income Tax Subsidy-2006 for interest imputed
Sewage Facilities Improvement Subsidy
Monetary grant$          1,019,420
159,963
73,212
43,927$              -
-
-
-$          1,296,522$               -  (2) Non-current Portion  Name of Governmental SubsidyDecember 31,December 31,20082007Income Tax Subsidy-2006$                  -$            954,514Income Tax Subsidy-2006 for interest imputed-72,161Income Tax Subsidy-2007
Income Tax Subsidy-2007 for interest imputed
Income Tax Subsidy-20081,250,498
94,538
1,042,8011,170,879
-
-$          2,387,837$          2,197,554   57      CHINA LINEN TEXTILE INDUSTRY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)  NOTE 8  GOVERNMENTAL SUBSIDY RECEIVABLE Governmental subsidy receivable consists of the following:  (3) Current Portion  Name of Governmental SubsidyDecember 31,December 31,20082007Income Tax Subsidy-2006
Income Tax Subsidy-2006 for interest imputed
Sewage Facilities Improvement Subsidy
Monetary grant$          1,019,420
159,963
73,212
43,927$               -
-
-
-$          1,296,522$               -  (4) Non-current Portion  Name of Governmental SubsidyDecember 31,December 31,20082007Income Tax Subsidy-2006$                  -$            954,514Income Tax Subsidy-2006 for interest imputed-72,161Income Tax Subsidy-2007
Income Tax Subsidy-2007 for interest imputed
Income Tax Subsidy-20081,250,498
94,538
1,042,8011,170,879
-
-$          2,387,837$          2,197,554  NOTE 9  PROPERTY, PLANT AND EQUIPMENT The following is a summary of property, plant and equipment:


|                               |                    |  |                   
|------------------------------ | ------------------ |  | ------------------
|                               | December 31,       |  | December 31,      
|                               | 2008               |  | 2007              
|Building and warehouses        | $        4,153,567 |  | $        3,889,110
|Machinery and equipment        | 4,616,477          |  | 4,293,405         
|Office equipment and furniture | 121,708            |  | 124,514           
|Motor vehicles                 | 8,815              |  | 8,817             
|                               | $        8,900,567 |  | $        8,315,846
|Less: Accumulated depreciation | (2,330,433)        |  | (1,768,450)       
|Subtotal                       | $        6,570,134 |  | $        6,547,396
|Add: Construction in progress  | 2,168,870          |  | -                 
|Idle fixed assets              | 70,921             |  | 72,687            
|Fixed assets to be disposed    | 7,366              |  | 6,897             
|Total                          | $        8,817,291 |  | $        6,626,980

Depreciation expense charged to operations was $442,381 and $346,918 for the years ended December 31, 2008 and 2007, respectively.   58      CHINA LINEN TEXTILE INDUSTRY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)  NOTE 10  LAND USE RIGHT The following is a summary of land use right, less amortization:


|                    |                   |  |                  
|------------------- | ----------------- |  | -----------------
|                    | December 31,      |  | December 31,     
|                    | 2008              |  | 2007             
|Land use right      | $         439,271 |  | $         411,302
|Less: Amortization  | (23,086)          |  | (13,390)         
|Land use right, net | $         416,185 |  | $         397,912

Amortization expense charged to operations was$8,671 and $7,925 for the years ended December 31, 2008 and 2007, respectively.  NOTE 11  BANK LOANS Bank loans consist of the followings as of December 31, 2008:


|                                          |   |             |  |                       |  |                      |  |                                    
|----------------------------------------- | - | ----------- |  | --------------------- |  | -------------------- |  | -----------------------------------
|                                          |   | Loan
Amount |  | Duration              |  | Annual
Interest
Rate |  | Collateral                         
|Financial Institutions                    |   |             |  |                      
|Lanxi Branch of Agriculture Bank of China | $ | 439,271     |  | 3/21/2008  3/20/2009 |  | 9.711%               |  | The Group's
equipment and
buildings
|Lanxi Branch of Agriculture Bank of China |   | 439,271     |  | 3/21/2008  3/20/2009 |  | 9.711%               | 
|Lanxi Branch of Agriculture Bank of China |   | 878,542     |  | 3/25/2008  3/24/2009 |  | 9.711%               | 
|Lanxi Branch of Agriculture Bank of China |   | 966,396     |  | 3/28/2008  3/27/2009 |  | 9.711%               | 
|Lanxi Branch of Agriculture Bank of China |   | 1,317,811   |  | 3/28/2008  3/27/2009 |  | 9.711%               | 
|Total                                     | $ | 4,041,291   |  |                       |  |                      | 

Interest expense charged to operations for these bank loans was $373,650 for the year ended December 31, 2008.  The above bank loans were subsequently renewed and will be due in March 2010.  The annual interest rate of the renewed bank loans is 6.903%.  Bank loans consist of the followings as of December 31, 2007:


|                                          |   |             |  |                       |  |                      |   |                       |  |                                    
|----------------------------------------- | - | ----------- |  | --------------------- |  | -------------------- | - | --------------------- |  | -----------------------------------
|                                          |   | Loan
Amount |  | Duration              |  | Annual
Interest
Rate |   | Overdue
Interest
Rate |  | Collateral                         
|Financial Institutions                    |   |             |  |                       | 
|                                          |   |             |  |                       |  |                      |   |                       |  | The Group's
equipment and
buildings
|Lanxi Branch of Agriculture Bank of China |   | $1,342,272  |  | 09/28/2005-09/27/2006 |  | 7.488%               | * | 14.688%               | 
|Lanxi Branch of Agriculture Bank of China |   | 1,316,168   |  | 09/29/2005-09/28/2006 |  | 7.488%               | * | 14.688%               | 
|Lanxi Branch of Agriculture Bank of China |   | 274,202     |  | 10/22/2005-10/21/2006 |  | 9.792%               | * | 14.688%               | 
|Lanxi Branch of Agriculture Bank of China |   | 411,303     |  | 09/30/2005-09/29/2006 |  | 9.792%               | * | 14.688%               | 
|Lanxi Branch of Agriculture Bank of China |   | 904,866     |  | 09/30/2005-09/29/2006 |  | 7.488%               | * | 14.688%               | 
|Lanxi Branch of Agriculture Bank of China |   | 889,126     |  | 12/2/2005-12/1/2006   |  | 7.488%               | * | 14.688%               | 
|Lanxi Branch of Agriculture Bank of China |   | 411,303     |  | 12/27/2005-12/26/2006 |  | 7.488%               | * | 14.688%               | 
|Lanxi Branch of Agriculture Bank of China |   | 205,650     |  | 11/26/2005-11/25/2006 |  | 9.792%               | * | 14.688%               | 
|Total                                     | $ | 5,754,890   |  |                       |  |                      |   |                       | 

59


| |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  | 

CHINA LINEN TEXTILE INDUSTRY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)  NOTE 11  BANK LOANS(Continued) *The Group was in default on all these bank loans as of December 31, 2007. The Group was also in default on interest payments of $1,021,811 as of December 31, 2007. Because the Group was in default on these loans, the bank charged higher interest rates than the interest rates described in the original loan agreements. The additional interest expenses for the year ended December 31, 2007 was $357,178.  $1,970,906 of the bank loans and all the accrued interest expenses were subsequently paid off in March 2008.  The weighted average interest rate is 14.69% after the loans were overdue. Interest expense charged to operations for these bank loans was $817,596 for the year ended December 31, 2007.  NOTE 12  ACCRUED EXPENSES AND OTHER PAYABLES Accrued expenses and other payables consist of the followings:


|                          |                      |  |                     
|------------------------- | -------------------- |  | --------------------
|                          | December 31,         |  | December 31,        
|                          | 2008                 |  | 2007                
|Accrued payroll           | $            364,855 |  | $            129,146
|Accrued employee benefits | 284,250              |  | 361,691             
|Accrued pension expenses  | 153,291              |  | 90,637              
|Accrued interest expenses | -                    |  | 1,021,811           
|Accrued sales commission  | 77,376               |  | 72,450              
|Other accrued expenses    | 401,202              |  | 10,658              
|Other payables            | 278,485              |  | 23,299              
|                          | $          1,559,459 |  | $          1,709,692

NOTE 13  TAXES PAYABLE Taxes payable consist of the followings:


|                            |                     |  |                    
|--------------------------- | ------------------- |  | -------------------
|                            | December 31,        |  | December 31,       
|                            | 2008                |  | 2007               
|                            |                     |  |                    
|Income taxes payable        | $         4,046,654 |  | $         3,478,721
|Sales-related taxes payable | 351,460             |  | 275,768            
|VAT payable                 | 4,292,961           |  | 2,298,825          
|Property taxes payable      | 113,355             |  | 76,164             
|                            | $         8,804,430 |  | $         6,129,478

60      CHINA LINEN TEXTILE INDUSTRY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)  NOTE 14  DEFERRED GOVERNMENTAL SUBSIDIES Deferred governmental subsidies consist of the following: (1) Current Portion


|                                      |                      |  |                     
|------------------------------------- | -------------------- |  | --------------------
|                                      | December 31,         |  | December 31,        
|Name of Governmental Subsidy          | 2008                 |  | 2007                
|                                      |                      |  |                     
|Land subsidy                          | $              7,614 |  | $              7,129
|Building subsidy                      | 42,418               |  | 39,717              
|Sewage facilities improvement subsidy | 38,802               |  | -                   
|                                      | $             88,834 |  | $             46,846

(2) Non-current Portion


|                                      |                     |  |                     
|------------------------------------- | ------------------- |  | --------------------
|                                      | December 31,        |  | December 31,        
|Name of Governmental Subsidy          | 2008                |  | 2007                
|                                      |                     |  |                     
|Land subsidy                          | $           354,687 |  | $            339,233
|Building subsidy                      | 763,523             |  | 754,628             
|Sewage facilities improvement subsidy | 737,243             |  | -                   
|                                      | $         1,855,453 |  | $          1,093,861

NOTE 15  DUE TO RELATED PARTIES Due to related parties consist of the followings:


|                                        |                    |  |                     
|--------------------------------------- | ------------------ |  | --------------------
|                                        | December 31,       |  | December 31,        
|Name of Related Parties                 | 2008               |  | 2007                
|                                        |                    |  |                     
|Harbin Sunshine Linen Textile Co., Ltd. | $                - |  | $          1,130,912
|Harbin Zhongyi Sunshine Linen Co., Ltd. | 56,470             |  | 453,267             
|                                        | $           56,470 |  | $          1,584,179

NOTE 16  LOANS FROM RELATED PARTIES Loans from related parties consist of the following:


|                                         |                     |  |                     
|---------------------------------------- | ------------------- |  | --------------------
|                                         | December 31,        |  | December 31,        
|Name of Related Parties                  | 2008                |  | 2007                
|Mr. Ren Gao, Majority Owner of the Group | $                 - |  | $            116,858

61      CHINA LINEN TEXTILE INDUSTRY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)   NOTE 17  GOVERNMENTAL SUBSIDY INCOME Governmental subsidy income consists of the followings:


|                             |                                 |  |                     
|---------------------------- | ------------------------------- |  | --------------------
|                             | For the Year Ended
December 31,
|                            
|Name of Governmental Subsidy | 2008                            |  | 2007                
|Income tax refund subsidy    | $          1,029,178            |  | $          1,128,040
|Land use right subsidy       | 7,514                           |  | 6,868               
|Building subsidy             | 41,864                          |  | -                   
|Leading enterprise grant     | -                               |  | 132,085             
|Financial supporting grants  | 245,669                         |  | 140,974             
|                             | $          1,324,225            |  | $          1,407,967

NOTE 18  RELATED PARTY TRANSACTIONS


|                                                                          |   |                                 |  |                                         |   |            |  |                                         | 
|------------------------------------------------------------------------- | - | ------------------------------- |  | --------------------------------------- | - | ---------- |  | --------------------------------------- | 
|                                                                          |   | For the Year Ended December 31,
|                                                                          |   | 2008                            |  | 2007                                   
|Transactions                                                              |   | Amount                          |  | Percentage of
Total Similar
Transaction |   | Amount     |  | Percentage of
Total Similar
Transaction
|                                                                          |   |                                 |  |                                         |   |            |  |                                        
|(a) Selling finished goods to
    Harbin Sunshine Linen Textile Co., Ltd. | $ | 4,161,201                       |  | 18.9%                                   | $ | 7 ,126,297 |  | 34.3%                                  
|                                                                          |   |                                 |  |                                         |   |            |  |                                        
|Purchasing raw materials from
    Harbin Sunshine Linen Textile Co., Ltd. | $ | 1,444,461                       |  | 54.5%                                   | $ | 3,892,253  |  | 61.3%                                  
|                                                                          |   |                                 |  |                                         |   |            |  |                                        
|(b) Selling finished goods to
     Harbin Zhongyi Sunshine Linen Co., Ltd | $ | 1,554,289                       |  | 7.1%                                    | $ | 1,203,176  |  | 5.8%                                   
|                                                                          |   |                                 |  |                                         |   |            |  |                                        
|Purchasing raw materials from
     Harbin Zhongyi Sunshine Linen Co., Ltd | $ | 911,015                         |  | 34.4%                                   | $ | 1,522,890  |  | 24.0%                                  
|                                                                          |   |                                 |  |                                         |   |            |  |                                        
|(c) Processing products for
     Songyuan Qianan Sunshine Linen Co., Ltd. | $ | -                               |  | -                                       | $ | 96,223     |  | 0.5%                                   
|                                                                          |   |                                 |  |                                         |   |            |  |                                        
|                                                                          |   |                                 |  |                                         |   |            |  |                                        

62      CHINA LINEN TEXTILE INDUSTRY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)  NOTE 19  CONCENTRATION  Geographic Areas Information All of the Group's assets exist mainly in the PRC, and its revenues are substantially derived from its operations therein.  Major Customers There were five major customers each of which made sales over 5% of the Groups total sales in 2008 as summarized in the following:


|                                        |  |                                 |  |                             |  |             |  |                             |  |  | 
|--------------------------------------- |  | ------------------------------- |  | --------------------------- |  | ----------- |  | --------------------------- |  |  | 
|                                        |  | For the Year Ended December 31,
|                                        |  | 2008                            |  | 2007                       
|Major Customers                         |  | Revenue                         |  | Percentage of Total Revenue |  | Revenue     |  | Percentage of Total Revenue
|                                        |  |                                 |  |                             |  |             |  |                            
|Harbin Sunshine Linen Textile Co., Ltd. |  | $ 4,161,201                     |  | 18.1%                       |  | $ 7,126,297 |  | 34.3%                      
|Harbin Zhongyi Sunshine Linen Co., Ltd. |  | 1,554,289                       |  | 6.8%                        |  | 1,203,176   |  | 5.8%                       
|Three / four unrelated customers        |  | 16,274,719                      |  | 70.9%                       |  | 10,001,926  |  | 48.1%                      
|                                        |  |                                 |  |                             |  |             |  |                            
|Total                                   |  | $21,990,209                     |  | 95.8%                       |  | $18,331,399 |  | 88.2%                      

Major Suppliers The Group has a diversified supplier line. There were two major suppliers from each of which the Group purchased over 5% of the Groups total purchase, as summarized in the following:


|                                        |  |                                 |  |                             |  |            |  |                             |  | 
|--------------------------------------- |  | ------------------------------- |  | --------------------------- |  | ---------- |  | --------------------------- |  | 
|                                        |  | For the Year Ended December 31,
|                                        |  | 2008                            |  | 2007                       
|Major Suppliers                         |  | Purchase                        |  | Percentage of Total Revenue |  | Purchase   |  | Percentage of Total Revenue
|                                        |  |                                 |  |                             |  |            |  |                            
|Harbin Sunshine Linen Textile Co., Ltd. |  | $1,444,461                      |  | 54.5%                       |  | $3,892,253 |  | 61.3%                      
|Harbin Zhongyi Sunshine Linen Co., Ltd. |  | 911,015                         |  | 34.4%                       |  | 1,522,890  |  | 24.0%                      
|                                        |  |                                 |  |                             |  |            |  |                            
|Total                                   |  | $2,355,476                      |  | 88.9%                       |  | $5,415,143 |  | 85.3%                      

63      CHINA LINEN TEXTILE INDUSTRY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)  NOTE 20  EARNINGS PER SHARE


|                                                    |                                 |  |                   
|--------------------------------------------------- | ------------------------------- |  | ------------------
|                                                    | For the Year Ended
December 31,
|                                                   
|                                                    | 2008                            |  | 2007              
|Net income for basic and diluted earnings per share | $        3,700,969              |  | $        3,376,871
|Weighted average number of shares                   | 20,100,003                      |  | 20,100,003        
|Basic and diluted earnings per share                | $          0.1841               |  | $          0.1680 

The weighted average number of shares and earnings per share for 2007 have been restated for the impact of stock split and share exchange as a result of the Reverse Acquisition.  NOTE 21  SHAREHOLDERS EQUITY  As a result of the Groups reverse acquisition on July 9, 2008, the Groups capital structure has been changed.  The number of common stock was 20,100,003 as of December 31, 2008.  The common stock is $40,200 with paid-in capital $2,204,186.  The new capital structure is retrospectively restated in the consolidated balance sheet as of December 31, 2007.  The additional paid-in capital represents the proceeds from issue of shares over par value in the Company and the additional capital contribution from the shareholders of Lanxi Sunrise.  The accumulated losses of the Company before the reverse acquisition transaction were set off against the additional paid-in capital.  NOTE 22  DIVIDEND DISTRIBUTION  The four founders of Lanxi Sunrise executed a dividend agreement on May 25, 2002, pursuant to which Lanxi Sunrise will distribute dividend to one of the founders, Heilongjiang Lanxi Linen Textile Co., Ltd. ("Heilongjiang Linen") not less than $64,100 (RMB 500,000) annually, payable semiannually in January and June of every year. In 2006, Lanxi Sunrise declared dividend of $64,100 (RMB 500,000), and distributed dividend of $125,800 (RMB 1,000,000). On June 11, 2007, Mr. Ren Gao, majority owner of the Group, purchased Heilongjiang Linen's share of equity interest in Lanxi Sunrise and the original dividend agreement was terminated. Accordingly, Lanxi Sunrise only declared and distributed $33,021 (RMB 250,000) to Heilongjiang Linen.  NOTE 23  INCOME TAX The Group is subject to income taxes on an entity basis, that is, on income arising in or derived from the tax jurisdiction in which the entity is domiciled.  The Company has incurred operating losses since inception and no provision for income taxes is required.  All Chinese enterprises are governed by the PRC Income Tax Law and various local income tax laws, pursuant to which a company generally is subject to an income tax at an effective rate of 33% (30% national income tax and 3% local income tax) on income as reported in its statutory financial statements after appropriate tax adjustments. Beginning from January 1, 2008, the effective national income tax rate reduces to 25%.   64      CHINA LINEN TEXTILE INDUSTRY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)  NOTE 23  INCOME TAX(Continued) The provision for income taxes consists of the followings:


|                    |                                 |  |                     
|------------------- | ------------------------------- |  | --------------------
|                    | For the Year Ended
December 31,
|                   
|                    | 2008                            |  | 2007                
|Current Income Tax  | $          1,184,172            |  | $          1,423,708
|Deferred Income Tax | 22,742                          |  | 182,735             
|Income Tax          | $          1,206,914            |  | $          1,606,443

The components of net deferred tax assets are as follows:


|                                     |                                 |  |                      
|------------------------------------ | ------------------------------- |  | ---------------------
|                                     | For the Year Ended
December 31,
|                                    
|                                     | 2008                            |  | 2007                 
|Deferred tax assets:                 |                                 |  |                      
|Accrued Pension                      | $           38,326              |  | $            22,659  
|Accrued Expenses                     | 68,276                          |  | -                    
|Bad Debt Allowance                   | 182,891                         |  | 163,820              
|Fixed assets provision               | 33,009                          |  | 30,908               
|Deferred Subsidy Income              | 218,397                         |  | 23,313               
|Other                                | -                               |  | 36,295               
|Gross deferred tax assets            | $          540,899              |  | $            276,995 
|Valuation allowance                  | -                               |  | -                    
|Total deferred tax assets            | $          540,899              |  | $            276,995 
|Deferred tax liabilities:            |                                 |  |                      
|Subsidy Receivable                   | $         (921,089)             |  | $           (549,389)
|Other                                | -                               |  | (62,015)             
|Total deferred tax liabilities       | $         (921,089)             |  | $           (611,404)
|Net deferred tax liabilities         | $         (380,190)             |  | $           (334,409)
|                                     |                                 |  |                      
|Reported as:                         |                                 |  |                      
|Current deferred tax assets          | $          299,193              |  | $            222,774 
|Current deferred tax liabilities     | (324,130)                       |  | (62,015)             
|Non-current deferred tax assets      | 241,706                         |  | 54,221               
|Non-current deferred tax liabilities | (596,959)                       |  | (549,389)            
|Net deferred taxes                   | $        (380,190)              |  | $           (334,409)

65      CHINA LINEN TEXTILE INDUSTRY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)  NOTE 23  INCOME TAX (Continued) The effective tax rate differed from the statutory income tax rate is as follows:


|                                     |                                 |  |        
|------------------------------------ | ------------------------------- |  | -------
|                                     | For the Year Ended
December 31,
|                                    
|                                     | 2008                            |  | 2007   
|China statutory income tax rate      | 25%                             |  | 33%    
|Effect of:                           |                                 |  |        
|Non-deductible fine and penalties    | 0.08%                           |  | 0.20%  
|Change in income tax rate and others | (0.49%)                         |  | (0.96%)
|Effective Tax Rate                   | 24.59%                          |  | 32.24% 

Effective at the beginning of the year 2007, the Group adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109. FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including 50% likely of being realized upon ultimate settlement. Management does not anticipate any potential future adjustments would result in a material change to its financial tax position. As a result, there is no unrecognized tax benefit.  NOTE 24  ASSET RETIREMENT OBLIGATIONS  The Group operates within the requirements of numerous regulations at the local, province, and national levels regarding issues such as the handling and disposal of hazardous chemicals, wastewater treatment and effluent and emissions limitations among others. From a practical standpoint, certain environmental contamination cannot be reasonably determined until a facility or asset is retired or an event occurs that otherwise requires the facility to be tested and monitored. In the absence of such requirements to test for environmental contamination prior to an asset or facility retirement, the Group has concluded that it cannot reasonably estimate the cost associated with such environmental-related asset retirement obligations (ARO).  In addition, the Group anticipates operating its manufacturing facilities indefinitely into the future thereby rendering the potential range of settlement dates as indeterminate. Therefore, the Group has not recorded any AROs to recognize legal obligations associated with the retirement of tangible long-lived assets, as contemplated by the Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (SFAS 143) and FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations - an interpretation of FASB Statement No.143 (FIN 47).   66      CHINA LINEN TEXTILE INDUSTRY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)  NOTE 25  COMMITMENTS AND CONTINGENCIES  PRCs Political and Economic System The Group faces a number of risks and challenges not typically associated with companies in North America and Western Europe, since its assets exist mainly in the PRC, and its revenues are derived from its operations therein. The PRC is a developing country with an early stage market economic system, overshadowed by the state. Its political and economic systems are very different from the more developed countries and are in a state of change. The PRC also faces many social, economic and political challenges that may produce major shocks and instabilities and even crises, in both its domestic arena and in its relationships with other countries, including the United States. Such shocks, instabilities and crises may in turn significantly and negatively affect the Groups performance.  Environmental In the ordinary course of its business, the Group is subject to numerous environmental laws and regulations covering compliance matters or imposing liability for the costs of, and damages resulting from, cleaning up sites, past spills, disposals and other releases of hazardous substances. Currently, the Group's environmental compliance costs principally include the routine inspection fees paid to the local environmental department. These amounts are immaterial to the Group's operating costs. However, future extension of its production line or changes in the environmental laws and regulations may significantly increase its environmental compliance costs and therefore have a material adverse effect on the Groups financial position and results of operations. Also, any failure by the Group to adequately comply with such laws and regulations could subject the Group to significant future liabilities.  Governmental Control of Currency Conversion The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC. The Group receives most of its revenues in Renminbi, which is currently not a freely convertible currency. Shortages in the availability of foreign currency may restrict the Groups ability to remit sufficient foreign currency to satisfy foreign currency dominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies.  The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents the Group from obtaining sufficient foreign currency to satisfy its currency demands, the Group may not be able to pay certain of its expenses as they come due.  Operating Lease The Group leased certain production equipment from an unrelated third party for its production line of yarn forming. The fair value of these equipment is approximately $1,631,000 (RMB 11,140,000). The annual rent is $164,814 (RMB 1,125,600), payable quarterly, and is included in costs of goods sold. The lease agreement is renewal on an annual base. The leased equipments are essential to production. The ability to renew the lease will significantly affect the Group's performance.   67      CHINA LINEN TEXTILE INDUSTRY, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (Stated in US Dollars)  NOTE 25  COMMITMENTS AND CONTINGENCIES(Continued)  Capital Commitment Contractual commitments for capital expenditure were $1,386,000 (RMB 9,465,000) relating to the construction of sewage facilities and acquisition of equipment.   68      ITEM 18.  FINANCIAL STATEMENTS  See Item 17    ITEM 19.  EXHIBITS   Exhibit
Number1.1Certificates of Incorporation of Aquasol EnviroTech Ltd., a Cayman Island company dated October 1, 2002.(*)1.1.1Certificate of Incorporation of China Linen Textile Industry, Ltd., dated May 26, 2008.1.2Memorandum of Association of Aquasol Envirotech Ltd.(*)1.2.1Articles of Association of China Linen Textile Industry, Ltd., dated May 26, 2008.1.3Certificate of Extraprovincial Registration in the Province of British Columbia, Canada dated October 11, 2002.(*)1.4Certificate of Incorporation of Aquasol EnvironTech Inc., a British Columbia company, dated November 25, 1998.(*)1.5Certificate of Name Change of Aquasol EnvironTech Inc. to Aquasol EnviroTech (Canada) Inc., a British Columbia company, dated December 11, 2000.(*)1.6Articles and Memorandum of Aquasol EnviroTech (Canada) Inc.(*)1.7Certificate of Incorporation dated June 19, 1997 of Noralta Technologies Corporation (an Alberta, Canada Corporation)(*)1.8Certificates of Name Change dated February 23, 1998 from Noralta Technologies Corporation to Aquasol Technologies Inc. (Alberta)(*)1.9Certificate of Dissolution of Aquasol Technologies Inc. (Alberta) dated May 20, 2005(*)2.1Option Agreements between the Company and Management, Directors, Officers and Employees of Aquasol Envirotech Ltd.(*)2.2Loan Agreement between the Company and Aquasol EnviroTech (Canada) Ltd. dated April 1, 2000(*)4.1Share Exchange agreement between Aquasol EnviroTech Ltd. and Aquasol EnviroTech Ltd. (an Alberta Corporation) dated March 10, 2000(*)4.2Consulting Agreement dated October 1, 2004 and Yenyou (Jeff) Zheng.(*)4.3Cost Sharing Agreement dated October 1, 2004(*)4.4Assignment of Invention(*)4.5Patent Number US #6,582,596 B2, granted June 24, 2003 in the United States(*)4.6Patent Number #138316, granted July 1, 2001 in Taiwan(*)4.7Patent Pending:  Application #2,292,244, Application Date: December 14, 1999 in Canada(*)4.8Pending Patent:  Application #001030779, Application Date: February 28, 2000 in The Peoples Republic of China.(*)4.9Report by NovaTec Consultants Inc. dated September 2001.(*)4.10Cost Sharing Agreement dated July 1, 2006(*)  69       4.11Agreement for Share Exchange between Aquasol Envirotech, Ltd., Bright International Group. Co., Ltd. and the shareholders of Bright International Group Co., Ltd., dated April 11, 2008.(*)4.12Agency Agreement between Heilongjiang Lanxi Sunrise Linen Textile Industry Co., Ltd., and Harbin Sunshine Linen Textile Co., Ltd., dated November 7, 2005.(*)5.1Stock Option Plan dated(*)11.1Code of Ethics  Chief Executive Officer(*)11.2Code of Ethics  Chief Financial Officer(*)11.3Code of Ethics  Directors and Officers(*)12.1Certification of the President Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 200212.2Certification of the Chief Financial Officer Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 200213.1Certification of the President Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2Certification of the Chief Financial Officer Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (*) = previously filed     SIGNATURES  The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this shell company report on its behalf.   CHINA LINEN TEXTILE INDUSTRY, LTD.   BY:  _/s/ Gao Ren______________________ GAO REN, PRESIDENT  DATE: July 28, 2009   70