UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
20-F




 ̈
            REGISTRATION
      STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
      OF 1934




OR




x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
fiscal year ended December 31, 2009




OR




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




OR




 ̈
            SHELL
      COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934


Date of
event requiring this shell company report______________




For the
transition period from __________ to ___________




Commission
file number 000-51625




CHINA
LINEN TEXTILE INDUSTRY, LTD.


(Exact
name of the Registrant as specified in its charter)




N/A


(Translation
of Registrant’s name into English)




Cayman
Islands


(Jurisdiction
of incorporation or organization)




Chengdong
Street, Lanxi County, Heilongjiang Province


People’s
Republic of China


Tel:
+86-455-563-5885


Fax:
+86-451-8230-9971


(Address
of principal executive offices)




Zhao
Chunfu


Chengdong
Street, Lanxi County, Heilongjiang Province


People’s
Republic of China


Tel:
+86-451-82292393


Fax:
+86-451-8230-9971


(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
            
            Name
      of each exchange on which registeredNone
            
            None




Securities
registered or to be registered pursuant to Section 12(g) of the
Act:




Ordinary
Shares, par value $0.002 per share


(Title of
Class)




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
ordinary shares as of the close of the period covered by the annual report:
20,200,003 ordinary shares, par value $0.002 per share, as of December 31,
2009.




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.     ̈ Yes    x No




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. ̈




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




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer.





 ̈ Large Accelerated
      filer
             ̈ Accelerated
      filer
            x Non-accelerated
      filer




Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:





x US
      GAAP
             ̈ International
      Financial
             ̈
    OtherReporting
      Standards as issued bythe
      International AccountingStandards
      Board




If
“Other” has been checked in response to the previous question, indicate by check
mark which financial statement item the registrant has elected to
follow.




 ̈ Item 17   
                   ̈Item 18




If this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).




 ̈YesxNo








Table of
Contents





PagePART
      I
                    
                    
                    3ITEM
      1.
                    IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
                    
                    3ITEM
      2.
                    OFFER
      STATISTICS AND EXPECTED TIMETABLE
                    
                    3ITEM
      3.
                    KEY
      INFORMATION
                    
                    3ITEM
      4.
                    INFORMATION
      ON OUR COMPANY
                    
                    23ITEM
      4A.
                    UNRESOLVED
      STAFF COMMENTS
                    
                    34ITEM
      5.
                    OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS OVERVIEW
                    
                    34ITEM
      6.
                    DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES
                    
                    40ITEM
      7.
                    MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
                    
                    45ITEM
      8.
                    FINANCIAL
      INFORMATION
                    
                    47ITEM
      9.
                    THE
      OFFER AND LISTING
                    
                    47ITEM
      10.
                    ADDITIONAL
      INFORMATION
                    
                    49ITEM
      11.
                    QUANTITATIVE
      AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
                    
                    62ITEM
      12.
                    DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES
                    
                    62PART
      II
                    
                    
                    63ITEM
      13.
                    DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES
                    
                    63ITEM
      14.
                    MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS
                    
                    63ITEM
      15.
                    CONTROLS
      AND PROCEDURES
                    
                    63ITEM
      16.
                    [RESERVED]
                    
                    64ITEM
      16A.
                    AUDIT
      COMMITTEE FINANCIAL EXPERT
                    
                    64ITEM
      16B.
                    CODE
      OF ETHICS
                    
                    65ITEM
      16C.
                    PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                    
                    65ITEM
      16D.
                    EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
                    
                    65ITEM
      16E.
                    PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
    PURCHASERS
                    
                    65ITEM
      16F.
                    CHANGES
      IN REGISTRANT’S CERTIFYING ACCOUNTANT
                    
                    66ITEM
      16G.
                    CORPORATE
      GOVERNANCE
                    
                    66PART
      III
                    
                    
                    67ITEM
      17.
                    FINANCIAL
      STATEMENTS
                    
                    67ITEM
      18.
                    FINANCIAL
      STATEMENTS
                    
                    67ITEM
      19.
                    EXHIBITS
                    
                    67


i




CERTAIN
INFORMATION




Unless
otherwise indicated and except where the context otherwise requires, in this
annual report on Form 20-F (“Annual Report”) references
to:




·
            “Bright”
      refers to our wholly owned subsidiary Bright International Group Co.,
      Ltd., a Republic of Vanuatu
corporation;




·
            “China
      Linen,” “we,” “us,” “our,” “our company” or -“the company” refer to China
      Linen Textile Industry, Ltd. (together with its subsidiaries, Bright and
      Lanxi Sunrise);




·
            “Creation”
      refers to Creation International Development Investments Limited, an
      exempted company incorporated under the laws of the Cayman Islands that
      holds approximately 40.51% of our ordinary
  shares;




·
            “dollars”
      or “$” refer to the legal currency of the United
  States;




·
            “Lanxi
      Sunrise” or “PRC Subsidiary” refers to Heilongjiang Lanxi Sunrise Linen
      Textile Industry Co., Ltd., a People’s Republic of China corporation of
      which Bright is a 95% holder and Mr. Gao Ren, our Chief Executive Officer
      and chairman, is a 5% holder;




·
            “ordinary
      shares” or “our ordinary shares” refers to the ordinary shares of the
      company, par value $0.002 per
share;




·
            “PRC”
      or “China” refer to the People’s Republic of China;
  and




·
            “RMB”
      refers to Chinese Renminbi.




FORWARD-LOOKING
STATEMENTS




We
believe that some of the information in this Annual Report constitutes
forward-looking statements within the definition of the Private Securities
Litigation Reform Act of 1995. You can identify these statements by
forward-looking words such as “may,” “expect,” “anticipate,” “contemplate,”
“believe,” “estimate,” “intends,” and “continue,” or similar words. You should
read statements that contain these words carefully because they discuss future
expectations, contain projections of future results of operations or financial
condition or state other “forward-looking” information.




We
believe it is important to communicate our expectations to our security holders.
However, there may be events in the future that we are not able to predict
accurately or over which we have no control. The risk factors and cautionary
language included in this Annual Report provide examples of risks, uncertainties
and events that may cause actual results to differ materially from the
expectations described by us in such forward-looking statements, including among
other things:




·
            changing
      principles of generally accepted accounting
  principles;




·
            outcomes
      of government reviews, inquiries, investigations and related
      litigation;




·
            continued
      compliance with government
regulations;




·
            legislation
      or regulatory environments, requirements or changes adversely affecting
      the textile industry in China;




·
            fluctuations
      in customer demand;




·
            management
      of rapid growth;




·
            general
      economic conditions;




·
            changes
      in government policy;




·
            the
      fluctuations in sales of consumer and commercial textiles in
      China;




·
            China’s
      overall economic conditions and local market economic
      conditions;


1




·
            our
      business strategy and plans;




·
            the
      results of future financing efforts;
and




·
            and
      geopolitical events.




You are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this Annual Report.




All
forward-looking statements included herein attributable to us are expressly
qualified in their entirety by the cautionary statements contained or referred
to in this section. Except to the extent required by applicable laws and
regulations, we do not undertake any obligation to update these forward-looking
statements to reflect events or circumstances after the date of this Annual
Report or to reflect the occurrence of unanticipated events.




This
Annual Report should be read in conjunction with our audited financial
statements and the accompanying notes thereto, which are included in Item 18 of
this Annual Report.




2





PART
I




ITEM
      1.
            IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS




Not
required.  See Item 16.F Change in Registrant’s Certifying
Accountant below for information about the recent change in our
auditor.




ITEM
      2.
            OFFER
      STATISTICS AND EXPECTED TIMETABLE




Not
required.




ITEM
      3.
            KEY
      INFORMATION




A.
            Selected
      Financial Data




Selected
financial data for the company for the twelve-month periods ended December 31,
2009, 2008 and 2007 presented below is derived from the audited consolidated
financial statements of the company.  The selected financial data for the
twelve-month periods ended December 31, 2006 and 2005 is derived from the
audited financial statements of Lanxi Sunrise.




All
currency referenced in this report refers to United States dollars unless
otherwise indicated. Our results of operations in any period may not necessarily
be indicative of the results that may be expected for any future period. See
“Risk Factors” included elsewhere in this Annual Report.





Fiscal Year Ended December 31,2009
              
              
              2008(3)
              
              
              2007
              
              
              2006
              
              
              2005Revenues
              
              $
              29,386,131
              
              
              $
              22,945,122
              
              
              $
              20,782,804
              
              
              $
              14,518,393
              
              
              $
              12,863,924Income
      from Operations
              
              
              7,076,487
              
              
              
              3,111,181
              
              
              
              4,455,735
              
              
              
              3,535,282
              
              
              
              1,333,674Net
      Income
              
              
              5,730,519
              
              
              
              2,856,769
              
              
              
              3,473,191
              
              
              
              2,713,090
              
              
              
              199,076Total
      Assets
              
              
              36,130,959
              
              
              
              36,224,260
              
              
              
              31,332,222
              
              
              
              26,389,323
              
              
              
              18,287,159Total
      Current Liabilities
              
              
              12,394,217
              
              
              
              18,168,708
              
              
              
              18,695,620
              
              
              
              18,902,671
              
              
              
              14,187,187Net
      Current Assets
              
              
              12,011,508
              
              
              
              6,192,533
              
              
              
              3,367,908
              
              
              
              612,248
              
              
              
              (222,424
              )Stockholders’
      Equity
              
              
              21,473,612
              
              
              
              15,603,140
              
              
              
              10,993,352
              
              
              
              6,939,639
              
              
              
              4,099,972Weighted
      Average Number of Shares Outstanding
              
              
              20,108,333
              
              
              
              19,511,256
              
              
              
              18,963,005
              
              
              
              N/A
              (1)
              
              
              N/A
              (1)Basic
      and Diluted Earnings Per Share (2)
              
              $
              0.28
              
              
              $
              0.15
              
              
              $
              0.18
              
              
              
              N/A
              (1)
              
              
              N/A
              (1)





(1) The
financial data for 2005 through 2006 was derived from the results of operation
for Lanxi Sunrise, which is a limited liability company. As a result, the
information on net income per share, number of shares outstanding and diluted
net income per share is not applicable.


(2) The
Company did not have any dilutive potential shares or issue any stock
options.  As a result, the diluted earnings for 2007, 2008 and 2009 is the
same as the basic earnings per share.


3


(3) The
Company has restated its consolidated financial statements as of December 31,
2008 and for the year then ended, after having identified a share based
compensation adjustment due to an Advisory Agreement between Lanxi Sunrise and
Mid-Continental Securities Corp., dated March 30, 2007, not accounted for in the
consolidated financial statements. Pursuant to that agreement, Mid-Continental
Securities Corp., or its designees, was entitled to receive a total of 804,000
shares of common stock of the Company as compensation for services after the
reverse merger.  Such shares were transferred to Mid-Continental Securities
Corp. and its designees by certain shareholders of the Company in 2008. In the
restated 2008 Financial Statements, the Company has accounted for this event as
a contribution of capital by its shareholders and recorded a charge to
operations as a general and administrative expense in the amount of
$844,200.  Such shares were valued based on the closing market price of
$1.05 per share on the date of transfer. For the year ended December 31, 2008,
the effect of the restatements was to decrease previously reported net income of
$3,700,969 to $2,856,769.




Exchange
Rate Information




We
conduct our business in China and substantially all of our revenues are
denominated in Renminbi. However, periodic reports made to shareholders will be
expressed in U.S. dollars using the then current exchange rates.  This
annual report contains translations of Renminbi amounts into U.S. dollars at
specified rates solely for the convenience of the reader.  Unless otherwise
noted, all translations from Renminbi to U.S. dollars were made at the noon
buying rate in The City of New York for cable transfers in Renminbi per U.S.
dollar as certified for customs purposes by the Federal Reserve Bank of New
York, as of December 31, 2009, which was RMB6.8259 to US$1.00. No representation
is made that the Renminbi amounts referred to in this prospectus could have been
or could be converted into U.S. dollars at any particular rate or at all. On
August 6, 2010, the noon buying rate was RMB6.7680 to US$1.00.




The
following table sets forth information concerning exchange rates between the
Renminbi and the U.S. dollar for the periods indicated.





Renminbi per U.S. Dollar Noon Buying RateAverage(1)
              
              
              High
              
              
              Low
              
              
              Period-EndYear
      ended December 31, 2005
              
              
              8.1826
              
              
              
              8.2765
              
              
              
              8.0702
              
              
              
              8.0702Year
      ended December 31, 2006
              
              
              7.9579
              
              
              
              8.0702
              
              
              
              7.8041
              
              
              
              7.8041Year
      ended December 31, 2007
              
              
              7.5806
              
              
              
              7.8127
              
              
              
              7.2946
              
              
              
              7.2946Year
      ended December 31, 2008
              
              
              6.9193
              
              
              
              7.2946
              
              
              
              6.7800
              
              
              
              6.8225Year
      ended December 31, 2009
              
              
              6.8295
              
              
              
              6.8470
              
              
              
              6.8244
              
              
              
              6.82592010February
              
              
              6.8285
              
              
              
              6.8330
              
              
              
              6.8258
              
              
              
              6.8258March
              
              
              6.8262
              
              
              
              6.8270
              
              
              
              6.8254
              
              
              
              6.8258April
              
              
              6.8256
              
              
              
              6.8270
              
              
              
              6.8240
              
              
              
              6.8247May
              
              
              6.8275
              
              
              
              6.8310
              
              
              
              6.8245
              
              
              
              6.8305June
              
              
              6.8184
              
              
              
              6.8323
              
              
              
              6.7815
              
              
              
              6.7815July
              
              
              6.7715
              
              
              
              6.7740
              
              
              
              6.7680
              
              
              
              6.7680August
      (through August 6th)
              
              
              6.7762
              
              
              
              6.7807
              
              
              
              6.7709
              
              
              
              6.7735




Source
Federal Reserve Bank of New York




(1)
            Annual
      averages are calculated from month-end rates. Monthly and interim period
      averages are calculated using the average of the daily rates during the
      relevant period.




B.
            Capitalization
      and Indebtedness




Not
required.




C.
            Reasons
      for the Offer and Use of Proceeds




Not
required.


4




D.
              Risk
      Factors




Risks
Relating to Our Business




In
order to produce our products we must be able to purchase sufficient quantities
of flax. If we are unable to purchase sufficient quantities of flax, it will
affect the production capacity of our products, and we may fail to satisfy the
demand of our customers.




We may
become unable to source and purchase sufficient quantities of flax, which
presents a significant risk to our business.  Ordinary quality flax is
widely available, and most of the flax grown in China is ordinary quality
because of dry climate conditions. However, we currently import the flax we
require primarily from France, Belgium and Egypt and rely on our affiliates,
Harbin Zhongyi Sunshine Linen Co., Ltd. and Harbin Sunshine Linen Textile Co.,
Ltd., which are controlled by our Chief Executive Officer and chairman, to
source and import the flax we require annually on our behalf. There is no
assurance that we will be able to continue to rely on contacts and business
relationships established by Harbin Zhongyi Sunshine Linen Co., Ltd. and Harbin
Sunshine Linen Textile Co, Ltd. to source and acquire flax on our behalf, and
there is no assurance that we will continue to be able to source and purchase
sufficient quantities of flax for use in our production process.  In the
event we are unable to acquire sufficient quantities of flax, our production
process will be adversely affected and we may be unable to produce our products.
In such an event, our business could be adversely affected.  The
availability and price of flax are subject to fluctuations due to unpredictable
factors such as weather, plantings, government farm programs and policies, and
market demand. Reduced supply of flax due to weather-related factors or other
reasons could adversely affect our profitability by increasing the cost of raw
materials used in our processing operations. Reduced supplies of flax could also
limit our ability to procure, transport, store, process and merchandise our
products in an efficient manner, which could adversely affect our profitability.
In addition, the availability and price of flax can be affected by other
factors, such as plant disease, which can result in crop failures and reduced
harvests.




Our
operating results will suffer if the price of raw materials increases and we
cannot pass the increased cost through to our customers.




The
primary raw materials included in our products are flax and other supplementary
materials. The prices for these raw materials are subject to market forces
largely beyond our control, including weather, plantings, government farm
programs and policies, and market demand. The prices for these raw materials may
fluctuate significantly based upon changes in these forces. Our operating
results may be harmed if we are unable to pass any raw material price increases
through to our customers. If we are forced to increase prices of our products
due to increases in the prices of raw materials, the demand for our products
could decrease, which could harm our operations and financial
results.




We
are subject to market and channel risks due to our dependence on third-party
distributors.




We sell
our products through distributors.  Because of this, we are dependent to a
large degree upon the success of our European and PRC based distribution
channels as well as the success of specific retailers in the distribution
channel. We rely on these distribution channels to purchase, market, and sell
our products.  Our success is dependent, to a large degree, on the growth
and success of these retailers and distributors, which may be outside our
control.  There can be no assurance that our distribution channels will be
able to grow or prosper as they face price and service pressure from other
channels.  There can be no assurance that retailers in our distribution
channel, in the aggregate, will respond or continue to respond to our marketing
commitment in these channels.




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.


5




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 for horizontal or vertical
mergers or acquisitions.  Our working capital requirements and the cash
flow provided by future operating activities, if any, is expected to 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 shareholders 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, which will increase the number of shares that are eligible for sale.
In addition, a lack of additional financing could force us to substantially slow
down our operations if our cash flows are insufficient at that time to maintain
our operations.





Our
failure to comply with the covenants contained in our bank loans, including as a
result of events beyond our control, could result in an event of default that
could cause repayment of the debt to be accelerated.





As of
December 31, 2007 and during the first quarter of 2008, as a result of a delay
in required payments on certain outstanding bank loans with Agricultural Bank of
China, the bank charged higher interest rates than set forth in the original
loan agreements on an aggregate outstanding loan amount of $5,754,890.  For
the year ended December 31, 2007, interest expense arising from these bank loans
was $817,596, including the additional interest expense of $357,178 incurred
from the higher interest rates.  For the year ended December 31, 2008, we
incurred an additional $102,808 of interest expense due to the event of default
with respect to the bank loans outstanding as of December 31, 2007.  In the
future, if we are not able to comply with the covenants and other requirements
contained in our loan agreements or other debt instruments, another event of
default under the relevant loan agreement could occur. If an event of default
were to occur again, it could trigger additional excess interest payments, a
default under our other debt instruments and we could be prohibited from
accessing additional financing.  In addition, we may not be able to obtain
additional financing to refinance or restructure the payments on the applicable
debt. Even if we were able to secure additional financing, it may not be
available on favorable terms.




Our
future success depends in part on attracting and retaining key senior management
and qualified technical and sales personnel. We also face certain risks with
respect to changes in 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 management team led by our Chief Executive Officer and
chairman. 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 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
acquisition candidates on acceptable terms.  Over time, we may acquire or
make investments in other companies with products 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;




·
            potential
      difficulty in successfully implementing, upgrading and deploying in a
      timely and effective manner new operational information systems and
      upgrades of our internal controls and disclosure procedures and financing,
      accounting and product distribution
systems;




·
            increased
      expenses, including travel, legal, administrative and compensation
      expenses resulting from newly hired
employees;


6




·
            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 shareholders if we issue securities in any
  acquisition.




Moreover,
performance problems with an acquired business’ technology, products or services
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
expect approximately 95% of our sales revenues will be derived from our five
largest customers in 2010 and any reduction in revenues from any of these
customers would reduce our revenues and net income.




In fiscal
year 2008, we derived 95.8% of our revenue from our five largest customers; in
fiscal year 2009, we derived 94.5% of our revenue from our five largest
customers. Harbin Sunshine Linen Textile Co., Ltd. and Harbin Zhongyi Sunshine
Linen Co., Ltd., which are controlled by our  Chief Executive Officer and
Chairman, were among our five biggest customers in each of 2008 and 2009. 
Harbin Zhongyi and Harbin Sunshine are agents of Lanxi Sunrise, through which
our sales to some customers are conducted.  We are working towards
diversifying our customer base to put less reliance on any one customer;
however, the loss of one of our major customers would decrease our revenues and
net income.




We
are subject to credit risk given that we expect approximately 95% of our sales
revenues will be derived from our five largest customers in 2010 and any failure
to collect, or untimely collection of, the trade receivables could affect our
liquidity.




In fiscal
year 2009, we derived 94.5% of our revenue from our five largest
customers.  Although we have insurance to protect us against the
non-payment of amounts due by our customers, our customers generally pay in
installments, with a portion of the payment upfront and a portion of the payment
upon receipt of our products by our customers. We perform ongoing credit
evaluations of our customers’ financial condition and generally have no
difficulties in collecting our payments. 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.




We
may not be able to manage our expected growth and enlarged
business.




Our
growth strategy may not be successful for the following reasons:




·
            Our
      ability to obtain additional capital for growth is subject to a variety of
      uncertainties, including our operating results, our financial condition,
      general market conditions for capital raising activities, and economic
      conditions in China.




·
            Our
      profitability will be adversely affected by the additional costs and
      expenses associated with the operation of new facilities, increased
      marketing and sales support activities, technological improvement
      projects, the recruitment of new employees, the upgrading of our
      management, operational and financial systems, procedures and controls,
      and the training and management of our growing employee
    base.




·
            Failure
      to manage our growth and enlarged business effectively could have a
      material adverse effect on our business, financial condition and results
      of operations.


7




We do not
know whether our revenues will grow at all or grow rapidly enough to absorb the
capital and expenses necessary for our growth. Failure to manage our growth and
enlarged business effectively could have a material adverse effect on our
business, financial condition and results of operations.




Our
limited operating history does not serve as an adequate basis to predict our
future prospects and results of operations.




We have a
limited operating history. From June 2002 until June 2007, Lanxi Sunrise
operated as a state-owned holding company under the Company Law of the
PRC.  In June 2007, Lanxi Sunrise converted from a state-owned holding
company into a privately owned business enterprise. However, we consummated our
reverse acquisition with Bright in which Bright became our wholly owned
subsidiary and Lanxi Sunrise became our 95% owned subsidiary in April 2008. As
such, we have a limited operating history upon which the viability and
sustainability of our business may be evaluated.  See “Operating and
Financial Review and Prospects—Factors Affecting Our Financial Condition and
Results of Operations.” We cannot assure you that we will not incur losses in
the foreseeable future. Our future prospects should be considered in light of
the risks and uncertainties we may face in managing a relatively new business in
China.  Please see “Risk Factors – Risks Relating to Operations in
China.”




If we are
unsuccessful in addressing any of these risks and uncertainties, our business,
financial condition and results of operations would suffer. In particular, as
most of our expenses are fixed in the near future or incurred in advance of
anticipated revenues, we may not be able to modify our business plan in time to
address any shortfall in revenues and profits.




Our
internal controls over financial reporting and our disclosure controls and
procedures have been ineffective, and as a result we may be unable to accurately
report our financial results, report our financial results in a timely manner or
prevent fraud, and investor confidence and the market price of our ordinary
shares may be adversely affected.




Our
reporting obligations as a public company place a significant strain on our
management, operational and financial resources and systems.  Based on the
framework in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission, our management has
concluded that, as of December 31, 2009, we had a material weakness in our
internal controls over financial reporting relating to a failure of certain
departments of the Company to communicate promptly and effectively with our
management. We are a relatively young company with limited accounting personnel
and other resources with which to address our internal controls and procedures.
In addition, we must implement financial and disclosure control procedures and
corporate governance practices that enable us to comply, on a stand alone basis,
with the Sarbanes-Oxley Act of 2002 and related Securities and Exchange
Commission, or the SEC, rules.  For example, we will need to further
develop accounting and financial capabilities, including the establishment of an
internal audit function and development of documentation related to internal
control policies and procedures.  We will need to take action to remediate
the material weaknesses in our internal controls. If we are unable to implement
solutions to remediate the weaknesses in our existing internal controls and
procedures, we may be unable to accurately report our financial results or
prevent fraud and investor confidence and the market price of our ordinary
shares may be adversely impacted.




We are in
the process of instituting changes to our internal controls and management
systems to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of
2002. We will also engage external Sarbanes-Oxley consultants or recruit
experienced professionals to advise us on Sarbanes-Oxley compliance issues.
Section 404 requires us to perform an evaluation of our internal controls over
financial reporting and file annual management assessments of their
effectiveness with the Securities and Exchange Commission. The management
assessment to be filed is required to include a certification of our internal
controls by our chief executive officer and chief financial officer. In addition
to satisfying requirements of Section 404, we may also make improvements to our
management information system to computerize certain manual controls, establish
a comprehensive procedures manual for U.S. GAAP financial reporting, and
increase the headcount in the accounting and internal audit functions with
professional qualifications and experience in accounting, financial reporting
and auditing under U.S. GAAP.


8




In the
future, our auditors will be required to attest to our evaluation of internal
controls over financial reporting. Unless we successfully design and implement
changes to our internal controls and management systems, or if we fail to
maintain the adequacy of these controls as such standards are modified or
amended from time to time, we may not be able to comply with Section 404 of the
Sarbanes-Oxley Act of 2002. As a result, our auditors may be unable to attest to
the effectiveness of our internal controls over financial reporting. This could
subject us to regulatory scrutiny and result in a loss of public confidence in
our management, which could, among other things, adversely affect the price of
our ordinary shares and our ability to raise additional capital.




We
purchase flax approximately twice a year, which may not be possible if we are
unable to accumulate funds or obtain financing to make purchases at that
time.




We import
flax primarily from France, Belgium and Egypt.  Although there is typically
a sufficient supply of raw material, we cannot predict when our operations may
not generate sufficient cash flows to fund our purchasing requirements. In such
case, we will be required to finance our cash needs through public or private
equity offerings, bank loans or other debt financing, or otherwise. There can be
no assurance that international or domestic financing will be available on terms
favorable to us or at all, which could force us to delay, reduce or abandon our
purchases, increase our financing costs, or both.




The
transfer of state-owned equities in China is subject to approval by certain
governmental authorities. Any failure by us to comply with PRC laws and
regulations in respect of the transfer of state-owned equities may result in the
imposition of fines or other penalties.




Lanxi
Sunrise was established as a state-owned holding company in June 2002 and
changed into a privately owned business enterprise in June 2007, when Mr. Gao,
our Chief Executive Officer and chairman, purchased all of the state-owned
equities of Lanxi Sunrise. Under PRC law, the transfer of state-owned equities
is subject to certain procedures and approvals. There was no approval regarding
the transferring of the stated-owned equities; however, the State-Owned Assets
and Administration Commission of Lanxi County subsequently issued a Confirmation
Letter stating that it recognized the transfer of such state-owned assets to Mr.
Gao.  Although this letter was issued, we cannot exclude the possibility
that higher levels of the PRC government may revoke the letter which may result
in the imposition of fines or other penalties.




We
may not possess all of the approvals, permits and licenses required to operate
our business, or we may fail to maintain the approvals, permits and licenses we
currently hold. This could subject us to fines and other penalties, which may
have a material adverse effect on our business, financial condition and results
of operations.




We are
required to hold a variety of approvals, permits and licenses to operate our
business in China. We may not possess all of the approvals, permits and licenses
required for all of our business activities. In addition, there may be
circumstances under which an approval, permit or license granted by a
governmental agency is subject to change without substantial advance notice, and
it is possible that we could fail to obtain an approval, permit or license that
is required to expand our business as we intend. If we fail to obtain or to
maintain such permits or licenses or renewals are granted with onerous
conditions, we could be subject to fines and other penalties and be limited in
the number or the quality of the products that we would be able to offer. As a
result, our business, financial condition and results of operations could be
materially and adversely affected.




Our
Articles of Association include certain provisions that may discourage a change
of control.




Certain
provisions of our memorandum and articles of association may have an
anti-takeover effect and may delay, defer or prevent a tender offer or takeover
attempt that a shareholder might consider to be in its best interests, including
those attempts that might result in a premium over the market price being paid
for the shares held by shareholders.




Certain
of these provisions provide for:




·
            requiring
      a special resolution, namely the affirmative vote of not less than
      sixty-six and two-thirds percent (66 2/3%) of such shareholders as being
      entitled to vote at a general meeting of the company in person or by proxy
      or a written resolution signed by all shareholders entitled to vote,
      generally to remove a director;
and


9




·
            appointing
      additional directors to the board by resolution of the existing directors
      (provided that such additional directors shall not exceed 1/3 in number of
      the directors elected at the last annual general meeting) or by an
      ordinary resolution, namely the affirmative vote of a majority of the
      shareholders entitled to vote at a duly convened meeting in person or by
      proxy.




These
anti-takeover provisions could make it more difficult for a third party to
acquire us, even if the third-party’s offer may be considered beneficial by many
shareholders. As a result, shareholders may be limited in their ability to
obtain a premium for their shares.




The
effects of the global financial crisis are far-reaching and difficult to
predict.




During
the second half of 2008, the international capital markets experienced severe
volatility and exhibited overall significant declines in prices of equity
securities, which events taken in combination with a freezing of international
credit markets and lack of availability of private capital led to a near
shutdown of private flows of capital. In addition, the fraud perpetrated by
Bernard Madoff exacerbated a lack of confidence in global financial institutions
and their oversight.




Government
responses to these events have included partial nationalization of certain
industries and enterprises, “bail-out” packages intended to provide liquidity to
market participants and several high profile acquisitions and bankruptcies.
While global economies have begun to show signs of stabilizing and, in some
instances, the beginnings of recovery, it is difficult to predict the effect
that the global financial crisis may have on our business, our expansion plans
and our ability to raise capital required to implement our expansion
plans.




We
do not presently maintain business disruption insurance. Any disruption in the
operations of our production facility would damage our business and disrupt our
production and have a material adverse effect on our business, financial
position on results of operations.




Our
business could be materially and adversely affected by power shortages, natural
disasters, terrorist attacks or other events in the PRC. For example, in early
2008, parts of the PRC suffered a wave of strong snow storms that severely
impacted public transportation systems and the power supply in those areas. In
May 2008, Sichuan Province in the PRC suffered a strong earthquake measuring
approximately 8.0 on the Richter scale that caused widespread damage and
casualties. The May 2008 Sichuan earthquake may have a material adverse effect
on the general economic conditions in the areas affected by the earthquake. In
July 2008, explosive devices were detonated on several buses in Kunming, Yunnan
Province of the PRC, which resulted in disruptions to public transportation
systems in Kunming and casualties. Any future natural disasters, terrorist
attacks or other events in the PRC could cause a reduction in usage of, or other
severe disruptions to, public transportation systems and could have a material
adverse effect on our business and results of operations.




While we
have property damage insurance and automobile insurance, we do not carry
business disruption insurance, which is not readily available in the PRC. Any
disruption of the operations in our production facility would have a significant
negative impact on our ability to manufacture and deliver products, which would
cause a potential diminution in sales, the cancellation of orders, damage to our
reputation and potential lawsuits.




Risks
Relating to Our Industry




The
linen textile industry is competitive and includes many competitors which are
larger, have more resources and more technological capability than us. 
There is no assurance that we will be able to effectively compete with our
competitors or that we will be able to maintain or increase 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.  We have many
large competitors in China which only make thread and do not also produce
cloth.  We also have 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 we must establish and maintain
connections with buyers in foreign markets.  There is no assurance that we
will be able to continue to compete in this market and to maintain or increase
our market share.


10




Risks
Relating to Operations in China




Changes
in political, economic and legal developments in China may adversely affect our
business.




As we
derive substantially all of our revenues in China and substantially all of our
assets and operations are in China, our continued growth would depend heavily on
China’s general economic condition. The Chinese economy has grown significantly
in recent years, especially after China’s accession to the World Trade
Organization in 2001. We, however, cannot assure you that the Chinese economy
will continue to grow, or that such growth will be steady or in geographic
regions or economic sectors that will benefit us. A downturn in China’s economic
growth or a decline in economic condition may have material adverse effects on
our results of operations.




Further,
we will continue to be affected by the political, social and legal developments
of China. Since the late 1970s, the PRC government has introduced a series of
economic and political reforms, including measures designed to effectuate the
country’s transitioning from a planned economy to a more market-oriented
economy. During such economic and political reforms, a comprehensive system of
laws were promulgated, including many new laws and regulations seeking to
provide general guidance on economic and business practices in China and to
regulate foreign investment. Although the Chinese economy has been transitioning
from a planned economy to a more market-oriented economy, a substantial portion
of the productive assets in China is still owned by the PRC government. The
continued control of these assets and other aspects of the national economy by
the Chinese government could materially and adversely affect our
business.




In the
past twenty years, the growth of the Chinese economy has been uneven across
different geographic regions and different economic sectors. In order to
stabilize national economic growth, the PRC government adopted a series of
macroeconomic policies. These policies include measures that restricted
excessive growth and investment in specific sectors of the economy. More
recently, on the other hand, the PRC government has implemented stimulus
responses to the global financial crisis. We cannot predict the future direction
of economic reforms or the effects that any such measures may have on our
business, financial condition or results of operations.




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 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.




11


Most
of our revenues are denominated in Renminbi, which is not freely convertible for
capital account transactions and may be subject to exchange rate
volatility.




We are
exposed to the risks associated with foreign exchange controls and restrictions
in China, as our revenues are primarily denominated in Renminbi, which is
currently not freely exchangeable. The PRC government imposes control over the
convertibility between Renminbi and foreign currencies. Under the PRC foreign
exchange regulations, payments for “current account” transactions, including
remittance of foreign currencies for payment of dividends, profit distributions,
interest and operation-related expenditures, may be made without prior approval
but are subject to procedural requirements. Strict foreign exchange control
continues to apply to “capital account” transactions, such as direct foreign
investment and foreign currency loans. These capital account transactions must
be approved by or registered with the PRC State Administration of Foreign
Exchange, or “SAFE.” Further, any capital contribution by an offshore
shareholder to its PRC subsidiaries should be approved by the Ministry of
Commerce, “MOFCOM,” in China or its local counterparts. We cannot assure you
that we are able to meet all of our foreign currency obligations to remit
profits out of China or to fund operations in China.




On August
29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues
concerning the Improvement of the Administration of Payment and Settlement of
Foreign Currency Capital of Foreign-invested Enterprises, or “Circular 142”, to
regulate the conversion by foreign invested enterprises, or FIEs, of foreign
currency into Renminbi by restricting how the converted Renminbi may be used.
Circular 142 requires that Renminbi converted from the foreign
currency-dominated capital of a FIE may only be used for purposes within the
business scope approved by the applicable government authority and may not be
used for equity investments within the PRC unless specifically provided for
otherwise. In addition, SAFE strengthened its oversight over the flow and use of
Renminbi funds converted from the foreign currency-dominated capital of a FIE.
The use of such Renminbi may not be changed without approval from SAFE, and may
not be used to repay Renminbi loans if the proceeds of such loans have not yet
been used.




We rely principally on dividends and
other distributions on equity paid by our PRC Subsidiary, and limitations on its
ability to pay dividends to us could have a material adverse effect on our
business and results of operations.




We are a
holding company and we rely principally on dividends and other distributions on
equity paid by our PRC Subsidiary for our cash and financing requirements,
including the funds necessary to pay dividends and other cash distributions to
our shareholders, service any debt we may incur and pay our operating expenses.
If our PRC Subsidiary incurs debt on its own behalf in the future, the
instruments governing the debt may restrict its ability to pay dividends or make
other distributions to us.




As an
entity established in China, our PRC Subsidiary is subject to certain
limitations with respect to dividend payments. PRC regulations currently permit
payment of dividends only out of accumulated profits as determined in accordance
with accounting standards and regulations in China. Our PRC Subsidiary is a
Sino-foreign joint venture enterprise, and may not distribute its after-tax
profits to us if it has not already made contributions to its reserve fund,
enterprise development fund and employee bonus and welfare fund at percentages
that are decided by its board of directors. The total amount of our restricted
net assets was RMB48.3 million ($7.1 million) as of December 31, 2009. In
addition, if our PRC Subsidiary in China incurs further debt on its own behalf
in the future, the instruments governing the debt may restrict its ability to
pay dividends or make other distributions to us. Limitations on the ability of
our PRC Subsidiary to pay dividends to us could adversely limit our ability to
grow, make investments or acquisitions that could be beneficial to our
businesses, pay dividends, or otherwise fund and conduct our business.
Accordingly, if for any of the above or other reasons, we do not receive
dividends from our PRC Subsidiary, our liquidity, financial condition and
ability to make dividend distributions to our shareholders will be materially
and adversely affected.




Fluctuation
in the value of the Renminbi and of the U.S. dollar may have a material adverse
effect on investments in our ordinary shares.




Any
significant revaluation of the Renminbi may have a material adverse effect on
the U.S. dollar equivalent amount of our revenues and financial condition as
well as on the value of, and any dividends payable on, our ordinary shares in
foreign currency terms. For instance, a decrease in the value of Renminbi
against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our
financial results, the value of your investment in our ordinary shares and the
dividends we may pay in the future, if any, all of which may have a material
adverse effect on the prices of our ordinary shares. As of December 31, 2009, we
had cash denominated in U.S. dollars of approximately $6,822. Any further
appreciation of Renminbi against U.S. dollars may result in significant exchange
losses.


12




Prior to
1994, Renminbi experienced a significant net devaluation against most major
currencies, and there was significant volatility in the exchange rate during
certain periods. Upon the execution of the unitary managed floating rate system
in 1994, the Renminbi was devalued by 50% against the U.S. dollar. Since 1994,
the Renminbi to U.S. dollar exchange rate has largely stabilized. On July 21,
2005, the People’s Bank of China announced that the exchange rate of U.S. dollar
to Renminbi would be adjusted from $1 to RMB8.27 to $1 to RMB8.11, and it ceased
to peg the Renminbi to the U.S. dollar. Instead, the Renminbi would be pegged to
a basket of currencies, whose components would be adjusted based on changes in
market supply and demand under a set of systematic principles. On September 23,
2005, the PRC government widened the daily trading band for Renminbi against
non-U.S. dollar currencies from 1.5% to 3.0% to improve the flexibility of the
new foreign exchange system. Since the adoption of these measures, the value of
Renminbi against the U.S. dollar has fluctuated on a daily basis within narrow
ranges, but overall has further strengthened against the U.S. dollar. There
remains significant international pressure on the PRC government to further
liberalize its currency policy, which could result in a further and more
significant appreciation in the value of the Renminbi against the U.S. dollar.
The Renminbi may be revalued further against the U.S. dollar or other
currencies, or may be permitted to enter into a full or limited free float,
which may result in an appreciation or depreciation in the value of the Renminbi
against the U.S. dollar or other currencies.




Adverse
changes in PRC economic and political policies could have a material adverse
effect on the overall economic growth of China and that could increase
inflation, which may reduce the demand for our products and materially and
adversely affect our business.




Our PRC
Subsidiary is based in China. As such, our business, financial condition,
results of operations and prospects are affected significantly by economic,
political and legal developments in China. China’s economy differs from the
economies of most developed countries in many aspects, including:




·
            the
      level of government involvement;




·
            the
      level of development;




·
            the
      growth rate;




·
            the
      level and control of capital investment;
and




·
            the
      control of foreign exchange.




While the
Chinese economy has grown significantly in the past two decades, the growth has
been uneven geographically, among various sectors of the economy and during
different periods. We cannot assure you that the Chinese economy will continue
to grow or to do so at the pace that has prevailed in recent years, or that if
there is growth, such growth will be steady and uniform. In addition, if there
is a slowdown, such slowdown could have a negative effect on our business. For
example, the Chinese economy experienced high inflation in the second half of
2007 and the first half of 2008. China’s consumer price index increased by 7.0%
during the nine months ended September 30, 2008 as compared to the same period
in 2007. To combat inflation and prevent the economy from overheating, the PRC
government adopted a number of tightening macroeconomic measures and monetary
policies. Due in part to the impact of the global crisis in financial services
and credit markets and other factors, the growth rate of China’s gross domestic
product as measured against the same period of the previous year decreased to
7.1% in the first half of 2009, down from 10.4% in the first half of 2008.
Beginning in September 2008, among other measures, the PRC government began to
loosen macroeconomic measures and monetary policies, including reducing interest
rates and decreasing the statutory reserve rates for banks. In addition, in
November 2008 the PRC government announced an economic stimulus package in the
amount of $586 billion. It is uncertain whether the various macroeconomic
measures, monetary policies and economic stimulus packages adopted by the PRC
government will be effective in restoring or sustaining the fast growth rate of
the Chinese economy. In addition, such measures, even if they benefit the
overall Chinese economy in the long term, may have a negative effect on us. For
example, our financial condition and results of operations may be materially and
adversely affected by government control over capital
investments.


13




China’s
legal system is different from those in most other countries.




China is
a civil law jurisdiction. Under the civil law system, prior court decisions may
be cited as persuasive authority but do not have binding precedential effect.
Although progress has been made in the promulgation of laws and regulations
dealing with economic matters, such as corporate organization and governance,
foreign investment, commerce, taxation and trade, China’s legal system remains
less developed than the legal systems in many other countries. Furthermore,
because many laws, regulations and legal requirements have been recently
adopted, their interpretation and enforcement by the courts and administrative
agencies may involve uncertainties. Sometimes, different government departments
may have different interpretations. Licenses and permits issued or granted by
one government authority may be revoked by a higher government authority at a
later time. Government authorities may decline to take action against unlicensed
operators which may work to the disadvantage of licensed operators, including
us. The PRC legal system is based in part on government policies and internal
rules (some of which may not be published on a timely manner or at all) that may
have a retroactive effect. We may even not be aware of our violation of these
policies and rules until some time after the violation. Changes in China’s legal
and regulatory framework, the promulgation of new laws and possible conflicts
between national and provincial regulations could adversely affect our financial
condition and results of operations. In addition, any litigation in China may
result in substantial costs and diversion of resources and management
attention.




Because
our funds are held in banks in the PRC that do not provide insurance, the
failure of any bank in which we deposit our funds could affect our ability to
continue in business.




Banks and
other financial institutions in the PRC do not provide insurance for funds held
on deposit. A significant portion of our assets are in the form of cash
deposited with banks in the PRC, and in the event of a bank failure, we may not
have access to our funds on deposit. Depending upon the amount of money we
maintain in a bank that fails, our inability to have access to our cash could
impair our operations, and, if we are not able to access funds to pay our
suppliers, employees and other creditors, we may be unable to continue in
business.




PRC
regulations relating to the establishment of offshore companies by PRC residents
may subject our PRC resident shareholders to personal liability and limit our
ability to inject capital into the PRC subsidiary, limiting our subsidiary’s
ability to distribute profits to us or otherwise adversely affect
us.




SAFE
issued the Notice on Issues Relating to the Administration of Foreign Exchange
in Fund-raising and Reverse Investment Activities of Domestic Residents
Conducted via Offshore Special Purpose Companies, or “Notice 75,” on October 21,
2005, which became effective as of November 1, 2005 and the operating procedures
in May 2007, collectively the SAFE Rules. According to the SAFE Rules, prior
registration with the local SAFE branch is required for PRC residents to
establish or to control an offshore company for the purposes of financing that
offshore company with assets or equity interests in an onshore enterprise
located in the PRC. An amendment to registration or filing with the local SAFE
branch by such PRC resident is also required for the injection of equity
interests or assets of an onshore enterprise in the offshore company or overseas
funds raised by such offshore company, or any other material change involving a
change in the capital of the offshore company. Moreover, the SAFE Rules have
retroactive effect. As a result, PRC residents who had established or acquired
control of offshore companies that had made onshore investments in the PRC
before promulgation of the SAFE Rules were required to complete the relevant
registration procedures with the local SAFE branch by March 31, 2006. The SAFE
rules define “PRC residents” to include both legal persons and natural persons
who either hold legal PRC identification documents, or who habitually reside in
China due to economic interests or needs. If any PRC resident fails to file its
SAFE registration for an existing offshore enterprise, any dividends remitted by
the onshore enterprise to its overseas parent after October 21, 2005 will be
considered to be an evasion of foreign exchange purchase rules, and the payment
of the dividend will be illegal. As a result, both the onshore enterprise and
its actual controlling persons can be fined. In addition, failure to comply with
the registration procedures may result in restrictions on the relevant onshore
enterprise, including prohibitions on the payment of dividends and other
distributions to its offshore parent or affiliate and capital inflow from the
offshore enterprise. The PRC resident shareholders of the offshore enterprise
may also be subject to penalties under Chinese foreign exchange administration
regulations.


14




To date,
we have not received any communications from, or had contact with, the PRC
government with respect to SAFE Rules. Neither do we have information regarding
whether our shareholders who may be subject to SAFE Rules have made necessary
applications, filings and amendments as required under SAFE Rules. However, we
have requested our shareholders and beneficial owners who may be subject to SAFE
Rules to make the necessary applications, filings and amendments as required
under SAFE Rules. We have advised these shareholders and beneficial owners to
comply with the relevant requirements. However, we cannot provide any assurance
that all of our shareholders and beneficial owners who may be PRC residents will
comply with our request to make or obtain any applicable registrations or comply
with other requirements required by SAFE Rules. The failure or inability of our
PRC resident shareholders or beneficial owners to make any required
registrations or comply with other requirements may subject such shareholders or
beneficial owners to fines and legal sanctions and may also limit our ability to
contribute additional capital into or provide loans to our PRC subsidiaries,
limit the ability of our PRC subsidiaries to pay dividends or otherwise
distribute profits to us, or otherwise adversely affect us.




In
January 2007, SAFE promulgated the Detailed Rules for the Implementation of the
Measures for the Administration of Individual Foreign Exchange, and the
Operating Rules on the Foreign Exchange Administration of the Evolvement of
Domestic Individuals in the Employee Stock Ownership Plans and Share Option
Schemes of Overseas Listed Companies, or “Circular 78.” Under Circular 78, where
PRC domestic individuals are involved in the employee stock ownership plans or
share option schemes of overseas listed companies, such plans or schemes must be
submitted to competent foreign exchange administration authorities for approval,
and the PRC employees shall entrust its agent or the affiliates or branches of
the overseas listed company to apply to competent authorities for purchasing
certain amount of foreign exchange at certain times each year, in order to
purchase the stock or exercise its option right under the employee stock
ownership plans or the share option schemes within the amounts approved by the
authorities. In addition, the PRC employees involved must declare the progress
of such plans or schemes to the administration authorities periodically. All the
proceeds obtained by such employees from the overseas listed company through the
employee stock ownership plans or the share option schemes, or from sale of the
shares of such overseas listed company, after deducting relevant fees and costs
incurred overseas, shall be remitted to the domestic account of the employees in
full amount. As of the date of this Annual Report, no employee share option has
been granted and is outstanding under the current share option scheme. All the
options for the shares of our Company to be granted to and all the stock
ownership plans to be made for our PRC employees in the future, including
exercise of the option rights and performance of such plans, would be subject to
Circular 78 since we become an overseas listed company. If we or our PRC
employees fail to comply with the provisions of Circular 78, we and/or our PRC
employees may be subject to fines and legal sanctions imposed by the SAFE or
other PRC government authorities. If our PRC employees fail to obtain the
approval from or make relevant registrations with SAFE or its local branches, it
will prevent us from conducting the share option schemes or the stock ownership
plans for our PRC employees. In addition, it may impose cost on us for obtaining
the approval from SAFE or its local branches in connection with the foreign
exchange registration.




In
addition, the PRC employees involved in the Incentive Plan must be subject to
approval by the competent foreign exchange administration authorities and make
the registrations as required under Circular 78. We cannot assure you that the
administration authorities would approve the Incentive Plan, or permit such PRC
employees to go through the registration procedures. If this occurs, the
management, operations and financial conditions of the listed company may be
adversely affected.




The
discontinuation of any preferential tax treatment currently available to us and
the increase in the enterprise income tax in the PRC could in each case result
in a decrease in our profits and materially and adversely affect our results of
operations.




According
to Lan Zheng Fa (2006) No. 14 to issued by Lanxi County People’s Government on
August 20, 2006, Lanxi Sunrise is enjoying a loan interest discount of
approximately $12.58 million over a six-year period, and Lanxi Sunrise was
awarded a subsidy equivalent to the income taxes payable by the company to the
PRC State Administration of Taxation and local administration of taxation for
three years. Upon expiration of the three-year period, Lanxi Sunrise will enjoy
a subsidy equivalent to the income taxes payable by the company to the local
administration of taxation for two years. The discontinuation of such
preferential tax treatment currently available to us will result in a decrease
in our profits.


15




Under
the EIT Law, we and/or Bright may be classified as a “resident enterprise” of
the PRC. Such classification could result in PRC tax consequences to us and our
non-PRC shareholders and/or Bright.




Under the
Enterprise Income Tax Law of the PRC (“EIT Law”), which became effective on
January 1, 2008, an enterprise established outside of China with “de facto
management bodies” within China is considered a “resident enterprise,” meaning
that it can be treated in a manner similar to a Chinese enterprise for
enterprise income tax purposes, although the dividends paid to one resident
enterprise from another may qualify as “tax-exempt income.” The implementing
rules of the EIT Law define de facto management as “substantial and overall
management and control over the production and operations, personnel,
accounting, and properties” of the enterprise. The EIT Law and its implementing
rules are relatively new and ambiguous in terms of some definitions,
requirements and detailed procedures, and currently no official interpretation
or application of this new “resident enterprise” classification is available;
therefore, it is unclear how tax authorities will determine tax residency based
on the facts of each case.




If the
PRC tax authorities determine that we and/or Bright is a “resident enterprise”
for PRC enterprise income tax purposes, a number of PRC tax consequences could
follow. First, we and/or Bright may be subject to enterprise income tax at a
rate of 25% on our worldwide taxable income, as well as PRC enterprise income
tax reporting obligations. Second, although under the EIT Law and its
implementing rules, dividends paid to us from our PRC Subsidiary through Bright
(assuming we and Bright are treated as resident enterprises under the EIT Law)
may qualify as “tax-exempt income,” we cannot guarantee that such dividends will
not be subject to PRC withholding tax. Finally, if we are determined to be a
resident enterprise under the EIT Law, it could result in a situation in which a
10% PRC tax is imposed on dividends we pay to our non-PRC shareholders and gains
derived by our non-PRC shareholders from transferring our shares, if such income
is considered PRC-sourced income by the relevant PRC authorities.




If any
such PRC tax applies, a non-PRC shareholder may be entitled to a reduced rate of
PRC tax under an applicable income tax treaty and/or a deduction of such PRC tax
against such shareholder’s domestic taxable income or a foreign tax credit in
respect for such PRC tax against such shareholder’s domestic income tax
liability (subject to applicable conditions and limitations). You should consult
with your own tax advisors regarding the applicability of any such taxes, the
effects of any applicable income tax treaties, and any available deductions or
foreign tax credits.




Changes
in PRC government policy on foreign investment in China may adversely affect our
business and results of operations.




Our PRC
subsidiary is a foreign invested enterprise. As we conduct a significant portion
of our businesses through a foreign investment enterprise in the PRC, we are
subject to restrictions on foreign investment policies imposed by the PRC law
from time to time. Generally, foreign invested enterprises enjoy more favorable
tax treatment in the form of tax incentives and other preferential policies but
are subject to more stringent restrictions in their business operations. If we
cannot obtain approval from relevant approval authorities to engage in
businesses that become restricted or prohibited for foreign investors, we may be
forced to sell or restructure the businesses that have become restricted or
prohibited for foreign investment. If we are forced to adjust our business
portfolio as a result of changes in government policy on foreign investment, our
business, financial condition and results of operations would likely be
materially adversely affected.




Changes
in PRC laws and regulations on labor and employee benefits may adversely affect
our business and results of operations.




As we
conduct a significant portion of our business through our PRC Subsidiary, we are
subject to PRC laws and regulations on labor and employee benefits. In recent
years, the PRC government has implemented policies to strengthen the protection
of employees and obligate employers to provide more benefits to their employees.
In addition, an employment contract law came into effect in China on January 1,
2008. The PRC employment contract law and related legislations require more
benefits to be provided to employees, such as an increase in pay or compensation
for termination of employment contracts. As a result, we expect to incur higher
labor costs, which would have an adverse impact on our business and results of
operations.


16




We
may be unable to complete a business combination transaction efficiently or on
favorable terms due to complicated merger and acquisition regulations that
became effective on September 8, 2006.




On August
8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and
Acquisitions of Domestic Companies by Foreign Investors, which became effective
on September 8, 2006. This new regulation, among other things, governs the
approval process by which a PRC company may participate in an acquisition of
assets or equity interests. Depending on the structure of the transaction, the
new regulation will require the PRC parties to make a series of applications and
supplemental applications to the government agencies. In some instances, the
application process may require the presentation of economic data concerning a
transaction, including appraisals of the target business and evaluations of the
acquirer, which are designed to allow the government to assess the transaction.
Government approvals will have expiration dates by which a transaction must be
completed and reported to the government agencies. Compliance with the new
regulations is likely to be more time consuming and expensive than in the past
and the government can now exert more control over the combination of two
businesses. Accordingly, due to the new regulation, our ability to engage in
business combination transactions has become significantly more complicated,
time consuming and expensive, and we may not be able to negotiate a transaction
that is acceptable to our shareholders or sufficiently protect their interests
in a transaction.




The new
regulation allows PRC government agencies to assess the economic terms of a
business combination transaction. Parties to a business combination transaction
may have to submit to MOFCOM and other relevant government agencies an appraisal
report, an evaluation report and the acquisition agreement, all of which form
part of the application for approval, depending on the structure of the
transaction. The regulations also prohibit a transaction at an acquisition price
obviously lower than the appraised value of the PRC business or assets and in
certain transaction structures, require that consideration must be paid within
defined periods, generally not in excess of a year. The regulation also limits
our ability to negotiate various terms of the acquisition, including aspects of
the initial consideration, contingent consideration, holdback provisions,
indemnification provisions and provisions relating to the assumption and
allocation of assets and liabilities. Transaction structures involving trusts,
nominees and similar entities are prohibited. Therefore, such regulation may
impede our ability to negotiate and complete a business combination transaction
on financial terms that satisfy our investors and protect our shareholders’
economic interests.




The
approval of the China Securities Regulatory Commission may be required in
connection with an offering of our securities under PRC regulations, and, if
required, we cannot currently predict whether we would be able to obtain such
approval.




On August
8, 2006, six PRC regulatory agencies, including the China Securities Regulatory
Commission, or “CSRC,” MOFCOM the State-Owned Assets Supervision and
Administration Commission, or “SASAC”, the State Administration of Taxation, or
“SAT”, the State Administration for Industry and Commerce, or “SAIC” and SAFE
jointly promulgated the Regulation on Mergers and Acquisitions of Domestic
Companies by Foreign Investors, which became effective on September 8, 2006 and
was amended on June 22, 2009 (the “M&A Regulation”). This M&A
Regulation, among other things, has certain provisions that purport to require
offshore special purpose vehicles, or “SPVs”, formed for the purpose of listing
of the equity interests in the PRC Companies on an overseas stock exchange and
directly or indirectly controlled by PRC individuals or companies to obtain
approval from the CSRC prior to listing their securities on an overseas stock
exchange. The application of this M&A Regulation remains unclear with no
consensus currently existing among the leading PRC law firms regarding the scope
and applicability of the CSRC approval requirement. On September 21, 2006, the
CSRC published on its official website a notice specifying the documents and
materials that are required to be submitted for obtaining CSRC approval. As the
application of this M&A rule is currently unclear and since the M&A
Regulation was promulgated, the PRC government has not issued the implementing
rules, and there may be some uncertainties as to how this M&A Regulation
will be interpreted or implemented. If the CSRC or another PRC regulatory agency
subsequently were to determine that the CSRC approval is required for an
offering, we could face sanctions by the CSRC or other PRC regulatory agencies.
If this happens, these regulatory agencies may impose fines and penalties on our
operations in the PRC, limit our operating privileges in the PRC, delay or
restrict the repatriation of the proceeds from this transaction into the PRC,
restrict or prohibit payment or remittance of dividends by its PRC subsidiaries,
or take other actions that could have a material adverse effect on our business,
financial condition, results of operations, reputation and prospects, as well as
the trading price of our ordinary shares. The CSRC or other PRC regulatory
agencies may also take actions requiring or advising us to halt such an
offering.


17




The
approval of MOFCOM may be required in connection with the acquisition of Lanxi
Sunrise by Bright under PRC regulations, and, if required, we cannot currently
predict whether we will be able to obtain such approval.




The
M&A Regulation also established additional procedures and requirements that
could make merger and acquisition activities by foreign investors in China more
time-consuming and complex, including requirements in some instances that the
approval of the MOFCOM or its competent local office shall be required in
advance of any change-of-control transaction in which a foreign investor takes
control of a PRC domestic enterprise. Where a PRC enterprise or individual
intends to acquire a domestic PRC affiliate in the name of a foreign company
which the enterprise or the individual lawfully established or controls, such
transaction shall be treated as a “related acquisition” and subject to the
examination and approval of the MOFCOM. Regarding the transaction between Bright
and Lanxi Sunrise, we cannot guarantee you that relevant PRC government
authorities will not determine that approval of the MOFCOM was required at the
time of the acquisition. If relevant PRC government authorities deem such
transactions to be a related acquisition subject to the M&A Regulation, we
may have violated the M&A Regulation and could be subject to administrative
fines and other penalties from relevant PRC authorities, and we may be required
to obtain approval for such transactions from the MOFCOM and could be required
to divest Lanxi Sunrise, in which case we would lose the benefit of the revenues
from such entity, which is substantial. There are no specific declarations of
fines or penalties for such violations under current PRC laws and regulations
and so the penalties we may suffer are uncertain. In the future, we may grow our
business in part by acquiring additional businesses in China. Compliance with
the requirements of the M&A Regulation to complete such transactions could
be time-consuming, and any required approval processes, including obtaining
approval from the MOFCOM or its competent local office, may delay or inhibit our
ability to complete such transactions, which could affect our ability to expand
business.




If
there are any adverse public health developments in China, our business and
operations may be severely disrupted.




Any
prolonged occurrence of avian flu, severe acute respiratory syndrome, or “SARS,”
swine flu, or other adverse public health developments in China or other regions
where we have an operation or presence may have a material adverse effect on our
business operations. These could include the ability of our personnel to travel
or to promote our services within China or at other regions where we have an
operation or presence, as well as temporary closure of our facilities. In
particular, there have been reports of occurrences of avian flu and swine flu in
various parts of China in recent years, including confirmed human cases. In
response, the PRC government has authorized local governments to impose
quarantine and other restrictions on movements of people and goods in the event
of an epidemic. Any closures or travel or other operational restrictions would
severely disrupt our business operations and adversely affect our results of
operations. We have not adopted any written preventive measures or contingency
plans to combat any future outbreak of avian flu, SARS, swine flu, or any other
epidemic.




You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us, our management or the experts named in this
Annual Report.




We
conduct substantially all of our operations in China and substantially all of
our assets are located in China. In addition, most of our directors and
executive officers reside within China. As a result, it may not be possible to
effect service of process within the United States or elsewhere outside China
upon some of our directors and senior executive officers, including with respect
to matters arising under U.S. federal securities laws or applicable state
securities laws. It would also be difficult for investors to bring an original
lawsuit against us or our directors or executive officers before a Chinese court
based on U.S. federal securities laws or otherwise. Moreover, our PRC legal
counsel has advised us that the PRC does not have treaties with the United
States or many other countries providing for the reciprocal recognition and
enforcement of judgment of courts. As such, recognition and enforcement in China
of judgments against us, our directors, executive officers or the experts named
in this Annual Report obtained from a court in any of those jurisdictions may be
difficult or impossible to enforce.




The
Chinese government could change its policies toward private enterprise or even
nationalize or expropriate private enterprises, which could result in the total
loss of our investment in that country.




Our
business is subject to significant political and economic uncertainties and may
be adversely affected by political, economic and social developments in China.
Over the past several years, the Chinese government has pursued economic reform
policies including the encouragement of private economic activity and greater
economic decentralization. The Chinese government may not continue to pursue
these policies or may significantly alter them to our detriment from time to
time with little, if any, prior notice.


18




Changes
in policies, laws and regulations or in their interpretation or the imposition
of confiscatory taxation, restrictions on currency conversion, restrictions or
prohibitions on dividend payments to shareholders, devaluations of currency or
the nationalization or other expropriation of private enterprises could have a
material adverse effect on our business. Nationalization or expropriation could
even result in the total loss of our investment in China and in the total loss
of your investment in us.




Contract
drafting, interpretation and enforcement in China involves significant
uncertainty, which could leave us vulnerable to legal disputes and challenges
related to our contracts.




We have
entered into numerous contracts governed by PRC law, many of which are material
to our business. As compared with contracts in the United States, contracts
governed by PRC law tend to contain less detail and are not as comprehensive in
defining contracting parties’ rights and obligations. As a result, contracts in
China are more vulnerable to disputes and legal challenges. In addition,
contract interpretation and enforcement in China is not as developed as in the
United States, and the result of any contract dispute is subject to significant
uncertainties. Therefore, we cannot assure you that we will not be subject to
disputes under our material contracts, and if such disputes arise, we cannot
assure you that we will prevail.




If
our land use rights are revoked, we would have no operational
capabilities.




Under
Chinese law land is owned by the state or rural collective economic
organizations. The state issues to the land users the land use right
certificate. Land use rights can be revoked and the land users forced to vacate
at any time when redevelopment of the land is in the public interest. The public
interest rationale is interpreted quite broadly and the process of land
appropriation may be less than transparent. Each of our facilities rely on these
land use rights as the cornerstone of their operations, and the loss of such
rights would have a material adverse effect on our company.




We
could be liable for damages for defects in our products pursuant to the Tort
Liability Law of the PRC.




The Tort
Liability Law of the People’s Republic of China, which was passed during the
12th Session of the Standing Committee of the 11th National People’s Congress on
December 26, 2009, states that manufacturers are liable for damages caused by
defects in their products and sellers are liable for damages attributable to
their fault. If the defects are caused by the fault of third parties such as the
transporter or storekeeper, manufacturers and sellers are entitled to claim for
compensation from these third parties after paying the compensation
amount.




We
are subject to a variety of environmental laws and regulations related to our
manufacturing operations. Our failure to comply with environmental laws and
regulations may have a material adverse effect on our business and results of
operations.




Our
manufacturing process generates noise, waste water, gaseous and other industrial
wastes and we are required to comply with national and local regulations
regarding environmental protection. We may not have all necessary environmental
permits to conduct our business as it is presently conducted or control the use
of, or may not be able to restrict adequately the discharge of hazardous
substance. We are now in the process of applying for the waste disposal
permit.  Our failure to obtain such permit on time may result in fines or
penalties to us and may have an adverse affect on our operations.  If we
fail to comply with any environmental regulations, we may be required to pay
substantial fines, suspend production or cease of operations. Additionally,
these regulations may change in a manner that could have a material adverse
effect on our business, results of operations and financial condition. We have
made and will continue to make capital and other expenditures to comply with
environmental requirements.


19




We
face uncertainty from China’s Circular on Strengthening the Administration of
Enterprise Income Tax on Non-Resident Enterprises’ Share Transfer that was
released in December 2009 with retroactive effect from January 1,
2008.




The
Chinese State Administration of Taxation, or “SAT,” released a circular
(Guoshuihan No. 698, or “Circular 698”) on December 10, 2009 that addresses the
transfer of shares by nonresident companies.  Circular 698, which is
effective retroactively to January 1, 2008, may have a significant impact on
many companies that use offshore holding companies to invest in China. 
Circular 698, which provides parties with a short period of time to comply with
its requirements, indirectly taxes foreign (non-PRC) companies, or foreign
investors, on gains derived from the indirect sale of a Chinese company. 
Where a foreign investor indirectly transfers equity interests in a Chinese
resident enterprise by selling the shares in an offshore holding company, and
the latter is located in a country or jurisdiction where the actual tax burden
is less than 12.5% or where the offshore income of its residents is not taxable,
the foreign investor is required to provide the tax authority in charge of that
Chinese resident enterprise with certain relevant information within 30 days of
the execution of the equity transfer agreement. Moreover, where a foreign
investor indirectly transfers equity interests in a Chinese resident enterprise
through an abuse of form of organization and there are no reasonable commercial
purposes such that the corporate income tax liability is avoided, the PRC tax
authority will have the power to re-assess the nature of the equity transfer in
accordance with PRC’s “substance-over-form” principle and deny the existence of
the offshore holding company that is used for tax planning
purposes.




There is
uncertainty as to the application of Circular 698.  For example, while the
term “indirectly transfer” is not defined, it is understood that the relevant
PRC tax authorities have jurisdiction regarding requests for information over a
wide range of foreign entities having no direct contact with China. Moreover,
the relevant PRC taxing authority has not yet promulgated any formal provisions
or formally declared or stated how to calculate the actual tax burden in the
country or jurisdiction of the offshore holding company and the extent of the
disclosure to the tax authority in charge of the Chinese resident enterprise (or
the process by which such disclosure should be made).  In addition, there
are not any formal declarations with regard to how to decide “abuse of form of
organization” and “reasonable commercial purpose,” which can be utilized by us
to determine if our company complies with Circular 698.  As a result, we
(or a foreign investor in us) may become at risk of being taxed under Circular
698 and we (or such foreign investor) may be required to expend valuable
resources to comply with Circular 698 or to establish that we (or such foreign
investor) should not be taxed under Circular 698, which could have a material
adverse effect on our financial condition and results of operations (or such
foreign investor’s investment in us).




Risks
Relating to Our Ordinary Shares




Our
Company, as a foreign private issuer, has limited reporting requirements under
the Securities Exchange Act of 1934, as amended, which makes it less transparent
than a United States issuer.




We are
exempt from the rules prescribing the furnishing and content of proxy
statements, and our officers, directors and principal shareholders are exempt
from the reporting and short-swing profit recovery provisions. Also, we are not
required to publish financial statements as frequently, as promptly or
containing the same information as United States companies. As a result, we may
be less transparent than a U.S. issuer.




Our
ordinary shares are currently quoted only on the OTC Bulletin Board, which may
have an unfavorable impact on our stock price and liquidity.




Our
ordinary shares are currently 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 shareholders to
trade shares of our ordinary shares, could depress the trading price of our
ordinary shares 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 ordinary shares was $2.00 per share and
our shares are considered to be a “penny stock.”  As a “penny stock,” our
ordinary shares 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.


20




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 ordinary shares will qualify for exemption from the
Penny Stock Rule. In any event, even if our ordinary shares 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 shareholders holds a significant percentage of our outstanding voting
securities.




Mr. Gao,
who is our Chief Executive Officer and chairman, controls approximately 41% of
our outstanding voting securities through a contractual agreement with a 41%
shareholder, which is Creation International Development Investments Limited,
the sole registered shareholder of which is Mr. Gabriele Sanesi. As a result, Mr
Gao possesses significant influence, giving him the ability, among other things,
to 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.




The
market price for our ordinary shares may be volatile.




The
market price for our ordinary shares is likely to be highly volatile and subject
to wide fluctuations in response to factors including the
following:




·
            actual
      or anticipated fluctuations in our quarterly operating results and changes
      or revisions of our expected
results;




·
            changes
      in financial estimates by securities research
  analysts;




·
            announcements
      by us and our affiliates or our competitors of new products, acquisitions,
      strategic relationships, joint ventures or capital
      commitments;




·
            addition
      or departure of our senior management and key research and development
      personnel;




·
            fluctuations
      of exchange rates between the Renminbi and the U.S.
  dollar;




·
            litigation
      related to our intellectual
property;




·
            release
      or expiry of lock-up or other transfer restrictions on our outstanding
      ordinary shares; and




·
            sales
      or perceived potential sales of our ordinary
  shares.




In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also have a material
adverse effect on the market price of our ordinary shares.




There
will be a substantial number of our ordinary shares available for sale in the
future that may adversely affect the market price of our ordinary
shares.


21


We
currently have an authorized share capital of 500,000,000 ordinary voting shares
with a par value of $0.002 per share, of which 20,215,003 are issued and
outstanding. Our outstanding shares are currently eligible for resale under Rule
144. Sales of substantial amounts of ordinary shares, or the perception that
such sales could occur under Rule 144 or otherwise, could reduce the market
price of our ordinary shares and could impair our ability to raise capital
through the sale of our equity securities. The availability of such a
significant number of securities for trading in the public market may have an
adverse effect on the market price of our ordinary shares.




Cayman
Islands law may be less protective of shareholder rights than the laws of the
U.S. or other jurisdictions.




We were
incorporated as an exempted company under the laws of the Cayman Islands. Our
corporate affairs are governed by our memorandum and articles of association,
the Companies Law (2009 Revision) of the Cayman Islands and the common law of
the Cayman Islands. The rights of shareholders to take action against our
directors and us, the rights of minority shareholders to institute actions, and
the fiduciary responsibilities of our directors to us are to a large extent
governed by the common law of the Cayman Islands. The common law of the Cayman
Islands is derived in part from judicial precedent in the Cayman Islands as well
as from English common law, the latter of which has persuasive, but not binding,
authority on a court in the Cayman Islands. Any shareholder of a company may
petition the Court which may make a winding up order if the Court is of the
opinion that it is just and equitable that the company should be wound up or, as
an alternative to a winding up order, (a) an order regulating the conduct of the
company’s affairs in the future, (b) an order requiring the company to refrain
from doing or continuing an act complained of by the shareholder petitioner or
to do an act which the shareholder petitioner has complained it has omitted to
do, (c) an order authorizing civil proceedings to be brought in the name and on
behalf of the company by the shareholder petitioner on such terms as the Court
may direct, or (d) an order providing for the purchase of the shares of any
shareholders of the company by other shareholders or by the company itself and,
in the case of a purchase by the company itself, a reduction of the company’s
capital accordingly. The rights of our shareholders and the fiduciary
responsibilities of our directors under Cayman Islands law may be different to
those provided for under statutes or judicial precedent in some jurisdictions in
the United States. In particular, the Cayman Islands has a less developed body
of securities laws than the United States.




As a
result of all of the above, our shareholders may have more difficulty in
protecting their interests in the face of actions taken by management, our
directors or principal shareholders than they would as a shareholder of a U.S.
company.




Your
ability to bring an action against us or against our directors and executive
officers, or to enforce a judgment against us or them, will be
limited.




We are
not incorporated in the United States. We are a Cayman Islands exempted company,
Bright is a Republic of Vanuatu company and Lanxi Sunrise  is a PRC
company, and all of our officers and directors reside outside the United States.
We conduct our business outside the United States, and substantially all of our
assets are located outside the United States. All of our directors and executive
officers are non-U.S. citizens and reside, and substantially all of the assets
of those persons are located, outside the United States. As a result, it may be
difficult or impossible for you to bring an action against us or against these
individuals in the United States in the event that you believe that your rights
have been infringed under U.S. securities laws or otherwise. Even if you are
successful in bringing an action of this kind, the laws of the Cayman Islands or
the PRC may render you unable to enforce a judgment against our assets or the
assets of our directors and executive officers. In addition, there is
uncertainty as to whether the courts of the Cayman Islands or the PRC would (i)
recognize or enforce judgments of U.S. courts against us or our directors or
officers predicated upon the civil liability provisions of the securities laws
of the United States or any state in the United States; or (ii) entertain
original actions brought in the Cayman Islands or the PRC against us or our
directors or officers predicated upon the securities laws of the United States
or any state in the United States.




22




We
may not be able to pay any dividends on our ordinary shares.




Under
Cayman Islands law, we may only pay dividends out of our profits or our share
premium account subject to our ability to service our debts as they become due
in the ordinary course of business. Our ability to pay dividends will therefore
depend on our ability to generate sufficient profits. We cannot give any
assurance that we will declare dividends of any amounts, at any rate or at all
in the future. We have not paid any dividends in the past. Future dividends, if
any, will be at the discretion of our board of directors and will depend upon
our results of operations, our cash flows, our financial condition, the payment
of our subsidiaries of cash dividends to us, our capital needs, future prospects
and other factors that our directors may deem appropriate. You should refer to
the “Dividend Policy” section in this Annual Report for additional information
regarding our current dividend policy for additional legal restrictions on the
ability of our PRC subsidiaries to pay dividends to us.




In
addition, due to the failure of the Measures to define or interpret the terms
“non-profit,” “for-profit” or “for the purpose of making a profit” as they
relate to our business, we cannot assure you that the PRC government authorities
will not request our subsidiaries to use their after-tax profits for their own
development and restrict our subsidiaries’ ability to distribute their after-tax
profits to us as dividends.




Volatility
in the price of our ordinary shares may result in shareholder litigation that
could in turn result in substantial costs and a diversion of our management’s
attention and resources.




The
financial markets in the Unites States and other countries have experienced
significant price and volume fluctuations, and market prices of textile
companies have been and continue to be extremely volatile. Volatility in the
price of our ordinary shares may be caused by factors outside of our control and
may be unrelated or disproportionate to our results of operations. In the past,
following periods of volatility in the market price of a public company’s
securities, shareholders have frequently instituted securities class action
litigation against that company. Litigation of this kind could result in
substantial costs and a diversion of our management’s attention and
resources.




ITEM
      4.
            INFORMATION
      ON OUR COMPANY




A.
              History
      and Development of the
Company




We are an
exempted company incorporated under the Companies Law (1998 Revision) of the
Cayman Islands on February 3, 2000 as Aquasol Envirotech, Ltd.  On June 9,
2008, we changed our name to China Linen Textile Industry, Ltd.  On July 9,
2008, we acquired all of the shares of capital stock of Bright from its
shareholders in exchange for the issuance of 18,963,005 of our ordinary shares
and Bright became our wholly owned subsidiary.  The company, through
Bright, which is the registered beneficial owner of 95% of Lanxi Sunrise, is
engaged in research, production and sales of linen textile products.  Lanxi
Sunrise and Bright entered into an equity transfer agreement in August 2007,
pursuant to which Bright was to become the 95% holder of Lanxi Sunrise upon
satisfaction of certain conditions set forth in the agreement, which occurred in
April 2008. Mr. Gao, our Chief Executive Officer and chairman, is the owner of
the remaining 5% of Lanxi Sunrise.




Reverse
Acquisition with Bright




Lanxi
Sunrise and Bright entered into an equity transfer agreement in August 2007,
pursuant to which Bright was to become the 95% holder of Lanxi Sunrise upon
satisfaction of certain conditions set forth in the agreement, which occurred in
April 2008. Mr. Gao, our Chief Executive Officer and chairman, remains the owner
of the remaining 5% of Lanxi Sunrise.




Immediately
prior to our reverse acquisition with Bright, on June 9, 2008, Mr. Gao, our
Chief Executive Officer and chairman, along with two employees of Lanxi Sunrise,
purchased a total of 900,000 shares, or approximately 39.58% of our issued and
outstanding ordinary shares, from seven previous shareholders.  The
purchase price was $309,996, or approximately $0.34 per share, and resulted in
the acquisition of 39.58% of our ordinary shares by Mr. Gao and the two
employees of Lanxi Sunrise while we were still a shell company.




Following
this stock purchase transaction by Mr. Gao and the two Lanxi Sunrise employees,
on July 9, 2008, the company acquired 100 shares 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 ordinary shares of the
company. As a result of the transaction, Bright became a wholly owned subsidiary
of the company. Bright is the registered beneficial owner of 95% of Lanxi
Sunrise. For accounting purposes, Bright is regarded as the accounting acquirer,
while the company before the reverse acquisition is deemed to have been acquired
by Bright.  As a result the consolidated financial statements of the
company have been prepared as a continuation of the consolidated financial
statements of Bright.


23




The
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.  On June 9, 2008, in anticipation of
completion of the Reverse Acquisition, we changed our name to China Linen
Textile Industry, Ltd.




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 Mr. Gao
and other former shareholders of Bright.




On June
30, 2008, we completed a 1:2 reverse stock split, thereby reducing our issued
and outstanding shares from 2,273,996 to approximately 1,136,998.




2010
Restructuring




On April
15, 2010, so as to not violate certain applicable PRC regulations, all direct
equity interests in us (approximately 40.51% of our outstanding ordinary shares)
held by or on behalf of Mr. Gao, our Chief Executive Officer and chairman, was
transferred to Creation.  Mr. Gabriele Sanesi, a citizen of Italy, is the
sole shareholder and director of Creation.  Pursuant to an agreement dated
April 15, 2010 among Creation and Messrs. Gao and Sanesi (the “April 2010 Agreement”), Mr.
Sanesi has granted Mr. Gao the irrevocable right to exercise his rights as a
shareholder and director of Creation.  In addition, in accordance with the
April 2010 Agreement, Mr. Sanesi has agreed to transfer 100% of his equity
interests in Creation to Mr. Gao if our net income from January 1, 2010 to June
30, 2010 is no less than US$2.0 million.




See
“Information on our Company—C. Organizational Structure” for a chart depicting
our corporate structure as of the date hereof.




Our
registered office is located at the offices of Appleby Trust (Cayman) Ltd.,
Clifton House, 75 Fort Street, PO Box 1350, George Town, Grand Cayman, KY1-1108,
Cayman Islands. Our principal executive offices are located at Chengdong Street,
Lanxi County, Heilongjiang Province, PRC and the telephone number at this
address is 86-455-5635885. Investor inquiries should be directed to us at our
principal executive offices. Our website is www.china-linen.net. The information
contained on our website does not form part of this prospectus. Our agent for
service of process in the United States is Island Stock Transfer, 100 Second
Avenue South, Suite 705S, St. Petersburg, Florida, 33701. Our public filings can
be accessed at www.sec.gov.




B.
              Business
      Overview




We are
principally engaged in the production and sale of linen yarn and various types
of linen fabric. We are also involved in consultation, research and development
related to linen technology and linen products.




We
conduct all of our business activities through our majority-owned subsidiary,
Lanxi Sunrise, which was incorporated in Lanxi County, Heilongjiang Province,
PRC on June 11, 2002, as a state-owned holding company under the Company Law of
the PRC. Lanxi Sunrise converted from a state-owned holding company into a
privately owned business enterprise in June 2007.  Its manufacturing
facility is located in Lanxi County, Heilongjiang Province in the northeast
section of the PRC near the city of Harbin.




The linen
industry chain involves a 5-step process including (i) fiber production; (ii)
yarn spinning; (iii) fabric weaving; (iv) bleaching; and (v) dyeing and
finishing.  Our current operations are focused on only two of the steps in
this process, yarn spinning and fabric weaving.  In the future, we plan to
expand our operations to other segments of the industry chain including dyeing
and finishing and the production of its own supply of flax.




We import
flax primarily from France, Belgium and Egypt. The raw flax is put through a
5-step process at our manufacturing facility to make yarn. A portion of the yarn
is sold to customers and a portion is used by us to weave various types of linen
cloth. Our primary products include flax yarn, linen fabric, gray linen fabric,
linen/cotton interwoven fabric and linen/rayon interwoven
fabric.


24




Products
and Services




We
operate one yarn-spinning factory and two weaving factories at our facility in
Lanxi County, PRC.  The main products we produce at this facility are flax
yarn and gray linen fabric. We also design and produce other linen fabrics in
various specifications requested by our customers including 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 our
yarn-spinning factory, we processes raw flax into yarn through an automated
multi-step process.  The annual production capacity of our yarn-spinning
factory is approximately 1,600 tons of pure semi-bleached linen yarn and gray
yarn in various specifications.  Our 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 our annual yarn production is used by us for our own
production of linen cloth. The remaining 5% of the yarn produced by us is sold
to other producers of linen cloth in China and elsewhere.




We do not
currently have our own yarn-dying facility.  We subcontracts this portion
of the production process when required by customer specifications.




Our
products are divided into four principal groups:




Linen
Fabric




Our
company can produce over 100 types of linen fabric. We mainly produce linen gray
fabric and semi-bleached fabric. Linen fabric is produced by arranging the flax
yarn both horizontally and vertically on the loom during the production process.
Linen gray fabric is the main raw material for dyeing and finishing plants. We
currently do not have enough production capacity to produce enough linen gray
fabric to meet the sales demand for our dyed and finished products. In the
future, we definitely plan to expand our production of linen fabric in order to
accomplish our development strategy.




Linen
Yarn




Linen
yarn is a thin, long and has tensile strength and flexibility due to being
twisted through several processes. Linen yarn is an unfinished product in linen
textile industry, and is a main raw material for weaving. Linen yarn is supplied
to weaving mills to process into fabric. There are over 50 types of yarn
produced by our company, which are mainly used by us for weaving fabric. We
currently do not have enough production capacity to produce enough linen yarn to
meet the demand for our products. In the future, we definitely plan to increase
our production capacity of linen yarn in order to accomplish our development
strategy.




Linen
Fabric Processing




We have a
subcontracting business that processes linen yarn provided by other factories
into linen fabric by using our weaving machines, for which we charge a
processing fee.  We intend to continue operating this line of business, but
it is not part of our long-term growth strategy.




Linen
Yarn Processing




We have a
subcontracting business that processes flax provided by other factories into
linen yarn by using our weaving machines, for which we charge a processing
fee.  We intend to continue operating this line of business, but it is not
part of our long-term growth strategy.




25


Distribution
and Marketing




Both the
importation of raw materials and the export of finished goods are partially done
through Agency Agreements with  Harbin Zhongyi Sunshine Linen Co., Ltd.
(“Harbin Zhongyi” ) and  Harbin Sunshine Linen Textile Co., Ltd. (“Harbin
Sunshine”), our affiliates, which are controlled by Gao Ren, our Chief Executive
Officer and chairman. Under the terms of the Agency Agreements, Harbin Zhongyi
and Harbin Sunshine purchase and import flax on our behalf and resell it to us
at a price equal to cost plus 6%.  Harbin Zhongyi and Harbin Sunshine also
act as our agents for export of finished goods, but do not charge a fee as part
of the export process. Accordingly, finished goods to be exported are sold to
Harbin Zhongyi and Harbin Sunshine and at a price equal to the price to be paid
by the overseas buyer of the goods.




Harbin
Zhongyi was established in 2006 and Harbin Sunshine was established in 1997,
engaging in the import/export business and having special licenses from the
central government of the PRC which allow them 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 Zhongyi and Harbin Sunshine, we are able to benefit from
the special licenses held by Harbin Zhongyi and Harbin Sunshine.  In the
process of distributing finished goods, we also benefit from our Agency
Agreements with Harbin Zhongyi and Harbin Sunshine by taking advantage of
long-term customer contacts established by Harbin Zhongyi and Harbin
Sunshine.




Seasonality




The
cyclical period of purchasing for raw materials is approximately 6 months, and
flax purchases occur approximately twice each year in order to satisfy
production needs. Sales during each of the four quarters are nearly
equal.




Customers




We have a
diversified customer base.  Our largest customer markets are currently
located in China, Italy, USA, Brazil, Belgium, Spain and Greece. In the domestic
market in China, our 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




We import
flax primarily from France, Belgium and Egypt because there is an insufficient
supply of flax currently grown in China.  The ability to continue to source
flax is a significant risk faced by us.




We
currently import the flax we require primarily from France, Belgium and Egypt
and we currently rely on our affiliates, Harbin Zhongyi Sunshine Linen Co., Ltd.
and Harbin Sunshine Linen Textile Co., Ltd., which are controlled by our Chief
Executive Officer and chairman, to source and import the flax we require
annually on our behalf.  We have Agency Agreements with Harbin Zhongyi and
Harbin Sunshine pursuant to which Harbin Zhongyi and Harbin Sunshine purchase
and import flax on our behalf and resell it to us at a price equal to cost plus
6%.  The price of flax is subject to market forces largely beyond our
control, including weather, plantings, government farm programs and policies,
and market demand.




The areas
of China where flax is typically grown, including areas near our 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 our management believes that, for
various reasons, we are well positioned to maintain a competitive position
within the industry.


26




We have
many competitors, several of which are larger than us.  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. We make and sell thread to other companies,
but we are also one of the largest manufacturers of linen cloth in China. 
In addition, our production facility operates on a continuous 24-hour per day
basis, and 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, we have been able to hire an experienced and capable management
team.  In addition, we have a good supply of labor available at rates of
pay which are lower than those typically paid to workers in southern
China.




We have
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
imports of manufacturing equipment, and a waiver of import tax on raw materials
imported by companies, such as ours, which manufacture goods for
export.




We are
positioned to supply end-users for linen yarn and linen fabric, as linen yarn is
sold to weaving factories and linen fabric is sold to dyeing and finishing
plants. Due to the long industrial chain, the gross profit of linen fabric is
higher than that of linen yarn. We predominantly sell linen fabric, which
accounts for around 90% of our revenue.




Our
subcontracting businesses specialize in processing linen yarn and linen fabric
on behalf of third parties, which are handled by our spinning factory and
weaving factory. Our subcontracting businesses only account for a small
proportion of our production capacity. Our subcontracting business that
specializes in processing linen yarn accounted for 5.23% of our revenue and our
subcontracting business that specializes processing linen fabric accounted for
1.76% of our revenue in 2009.




Intellectual
Property




We have
registered the trademark “Fairy Deer” which we intend to use to seek to
establish a recognizable brand for our products.




We have
established a technological center where we conduct our 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.  We seek to use any technological advances we
make in our own production process but have not sought patent protection for any
such advances.




Legal
Proceedings




From time
to time, we have disputes that arise in the ordinary course of our business.
Currently, there are no material legal proceedings to which we are a party, or
to which any of our property is subject, that will have a material adverse
effect on our financial condition.




C.
              Organizational
      Structure


The chart
below depicts our corporate structure as of the date hereof.  As depicted
below, we own 100% of the capital stock of Bright and have no other
subsidiaries.  Bright owns 95% of the capital stock of Lanxi Sunrise, the
entity through which we conduct all of our business operations.  Mr. Gao,
our Chief Executive Officer and chairman, owns the remaining 5% of Lanxi
Sunrise.


27







D.
            Property,
      Plants and Equipment




We
operate a production facility in Lanxi County, Heilongjiang Province, PRC. 
We have 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 government has granted the company the commercial land use
rights for the property at which our production facility is located for a period
of 50 years.




Our
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.




On July
1, 2010, we, through Lanxi Sunrise, entered into a Fixed Asset Lease Agreement
(the “Lease Agreement”) with Lanxi Tianxianfang Linen Co., Ltd. (the “Lessor”).
Pursuant to the Lease Agreement, Lanxi Sunrise has leased all of the fixed
assets, including real estate, production facilities, and equipment (“Facility”)
owned by the Lessor in the PRC.  Lanxi Sunrise intends to acquire all of
the equity of the Lessor at some future date pursuant to a non-binding Company
Acquisition Intent Agreement entered into between Lanxi Sunrise and the Lessor
on April 26, 2010 (“Intent Agreement”).




The
Facility was leased to expand Lanxi Sunrise’s existing production capacity of
linen yarn. The Facility includes a building with an area of 7,120 square meters
(23,358 square feet), and includes spinning machines, bleaching machines and
other equipment.  The Facility is located at Fourth Neighborhood, Chengdong
Street (East Town Street), Lanxi Town, PRC.  Lanxi Sunrise commenced
operations at the Facility on July 2, 2010.


28




The lease
term is for a period of one year, which commenced on July 1, 2010 and ends on
June 30, 2011 (the “Term”).  The rent for the Term (the “Rent”) is RMB2.49
million (approximately U.S.$367,501), which will be paid in two equal
installments. The first installment of Rent for the initial six-month period of
the Term was made on July 4, 2010, and the second installment of Rent for the
second six-month period of the Term is due between December 21, 2010 and
December 31, 2010. The Rent does not include fees for water, electricity, gas,
communication, equipment, property management expenses, or salaries of employees
who will continue to work at the Facility although such employees will continue
to be employees of the Lessor.  Lanxi Sunrise and the Lessor have agreed
that the Intent Agreement will remain in effect for the Term of the Lease
Agreement, and that in the event the Lessor arranges to transfer or sell the
Facility to a third party during the Term, or within the six-month period
following the Term, Lanxi Sunrise shall have a right of first refusal to enter
into such arrangements to acquire the Facility under the same terms and
conditions as were negotiated by the third party.




In the
event that Lanxi Sunrise and the Lessor enter into a definitive agreement for
the acquisition by Lanxi Sunrise of all of the equity of the Lessor, the Lease
Agreement shall immediately terminate and the Lessor shall reimburse Lanxi
Sunrise for any unused rent that had previously been paid by Lanxi
Sunrise.  At any time during the Term, either party may notify the other in
writing to terminate the Lease Agreement in the event that (i) the Facility at
the inception of the lease had safety defects or hazards that may be potential
fire hazards, (ii) Lanxi Sunrise does not make reasonable use of the Facility or
creates safety hazards, and fails to cease such activity after corrective
measures are demanded in writing by Lessor, (iii) Lanxi Sunrise modifies the
Facility, without consent from the Lessor and/or approval from relevant
authorities, to engage in operation and production activities for products not
specified in the Lease Agreement, or (iv) Lanxi Sunrise adds or modifies any
equipment, or produces, transports, stores and uses hazardous material without
obtaining written consent from Lessor or the approval from operation safety
authorities or fire departments; in the event of termination due to the a breach
of the Lease Agreement as described in (i)-(iv), the party in breach must pay
damages to the other party in an amount equal to 30% of the annual rent, and may
be responsible for additional damages.  The Lessor is not a related party
to the Company or Lanxi Sunrise.




We
currently operate our 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.




E.
              China
      Regulations




This
section sets forth a summary of the most significant China regulations or
requirements that may affect our business activities operated in China or our
shareholders’ right to receive dividends and other distributions of profits from
the PRC Subsidiary.




Foreign
Investment in PRC Operating Companies




The Foreign Investment Industrial
Catalogue jointly issued by the MOFCOM and the National Development and
Reform Commission or the NDRC in 2007 classified various industries/businesses
into three different categories: (i) encouraged for foreign investment; (ii)
restricted to foreign investment; and (iii) prohibited from foreign investment.
For any industry/business not covered by any of these three categories, they
will be deemed industries/businesses permitted to have foreign investment.
Except for those expressly provided restrictions, encouraged and permitted
industries/businesses are usually 100% open to foreign investment and ownership.
With regard to those industries/businesses restricted to or prohibited from
foreign investment, there is always a limitation on foreign investment and
ownership. The PRC Subsidiary’s business does not fall under the industry
categories that are restricted to, or prohibited from foreign investment and is
not subject to limitation on foreign investment and ownership.




29




Regulation
of Foreign Currency Exchange




Foreign
currency exchange in the PRC is governed by a series of regulations, including
the Foreign Currency
Administrative Rules (1996), as amended, and the Administrative Regulations Regarding
Settlement, Sale and Payment of Foreign Exchange (1996), as amended.
Under these regulations, the Renminbi is freely convertible for trade and
service-related foreign exchange transactions, but not for direct investment,
loans or investments in securities outside the PRC without the prior approval of
the SAFE. Pursuant to the Administrative Regulations Regarding
Settlement, Sale and Payment of Foreign Exchange (1996), foreign invested
enterprises (“FIEs”), such as Lanxi Sunrise, may purchase foreign exchange
without the approval of the SAFE for trade and service-related foreign exchange
transactions by providing commercial documents evidencing these transactions.
They may also retain foreign exchange, subject to a cap approved by SAFE, to
satisfy foreign exchange liabilities or to pay dividends. However, the relevant
Chinese government authorities may limit or eliminate the ability of FIEs to
purchase and retain foreign currencies in the future. In addition, foreign
exchange transactions for direct investment, loan and investment in securities
outside the PRC are still subject to limitations and require approvals from the
SAFE.




Regulation
of FIEs’ Dividend Distribution




The
principal laws and regulations in the PRC governing distribution of dividends by
FIEs include:




(i)
            The
      Sino-foreign Equity Joint Venture Law (1979), as amended, and the
      Regulations for the Implementation of the Sino-foreign Equity Joint
      Venture Law (1983), as amended;




(ii)
            The
      Sino-foreign Cooperative Enterprise Law (1988), as amended, and the
      Detailed Rules for the Implementation of the Sino-foreign Cooperative
      Enterprise Law (1995), as amended;




(iii)
            The
      Foreign Investment Enterprise Law (1986), as amended, and the Regulations
      of Implementation of the Foreign Investment Enterprise Law (1990), as
      amended.




Under
these regulations, FIEs in the PRC may pay dividends only out of their
accumulated profits, if any, determined in accordance with Chinese accounting
standards and regulations. In addition, FIEs in the PRC are required to set
aside at least 10% of their respective accumulated profits each year, if any, to
fund certain reserve funds unless such reserve funds have reached 50% of their
respective registered capital. These reserves are not distributable as cash
dividends. The board of directors of an FIE has the discretion to allocate a
portion of its after-tax profits to staff welfare and bonus funds, which may not
be distributed to equity owners except in the event of liquidation.




Regulation
of a Foreign Currency’s Conversion into RMB and Investment by FIEs




On August
29, 2008, the SAFE issued a Notice of the General Affairs Department of the
State Administration of Foreign Exchange on the Relevant Operating Issues
concerning the Improvement of the Administration of Payment and Settlement of
Foreign Currency Capital of Foreign-Invested Enterprises or Notice 142, to
further regulate the foreign exchange of FIEs. According to the Notice 142, FIEs
shall obtain verification report from a local accounting firm before converting
its registered capital of foreign currency into Renminbi, and the converted
Renminbi shall be used for the business within its permitted business scope. The
Notice 142 explicitly prohibits FIEs from using RMB converted from foreign
capital to make equity investments in the PRC, unless the domestic equity
investment is within the approved business scope of the FIE and has been
approved by SAFE in advance.




Regulation
of Foreign Exchange in Certain Onshore and Offshore Transactions




In
October 2005, the SAFE issued the Notice on Issues Relating to the
Administration of Foreign Exchange in Fund-raising and Return Investment
Activities of Domestic Residents Conducted via Offshore Special Purpose
Companies, or SAFE Notice 75, which became effective as of November 1, 2005, and
was further supplemented by two implementation notices issued by the SAFE on
November 24, 2005 and May 29, 2007, respectively. SAFE Notice 75 states that PRC
residents, whether natural or legal persons, must register with the relevant
local SAFE branch prior to establishing or taking control of an offshore entity
established for the purpose of overseas equity financing involving onshore
assets or equity interests held by them. The term “PRC legal person residents”
as used in SAFE Notice 75 refers to those entities with legal person status or
other economic organizations established within the territory of the PRC. The
term “PRC natural person residents” as used in SAFE Notice 75 includes all PRC
citizens and all other natural persons, including foreigners, who habitually
reside in the PRC for economic benefit. The SAFE implementation notice of
November 24, 2005 further clarifies that the term “PRC natural person residents”
as used under SAFE Notice 75 refers to those “PRC natural person residents”
defined under the relevant PRC tax laws and those natural persons who hold any
interests in domestic entities that are classified as “domestic-funding”
interests.


30




PRC
residents are required to complete amended registrations with the local SAFE
branch upon: (i) injection of equity interests or assets of an onshore
enterprise to the offshore entity, or (ii) subsequent overseas equity financing
by such offshore entity. PRC residents are also required to complete amended
registrations or filing with the local SAFE branch within 30 days of any
material change in the shareholding or capital of the offshore entity, such as
changes in share capital, share transfers and long-term equity or debt
investments or, providing security, and these changes do not relate to return
investment activities. PRC residents who have already organized or gained
control of offshore entities that have made onshore investments in the PRC
before SAFE Notice 75 was promulgated must register their shareholdings in the
offshore entities with the local SAFE branch on or before March 31,
2006.




Under
SAFE Notice 75, PRC residents are further required to repatriate into the PRC
all of their dividends, profits or capital gains obtained from their
shareholdings in the offshore entity within 180 days of their receipt of such
dividends, profits or capital gains. The registration and filing procedures
under SAFE Notice 75 are prerequisites for other approval and registration
procedures necessary for capital inflow from the offshore entity, such as
inbound investments or shareholders loans, or capital outflow to the offshore
entity, such as the payment of profits or dividends, liquidating distributions,
equity sale proceeds, or the return of funds upon a capital
reduction.




Government
Regulations Relating to Taxation




On March
16, 2007, the National People’s Congress, approved and promulgated the EIT Law,
which took effect on January 1, 2008. Under the EIT Law, FIEs and domestic
companies are subject to a uniform tax rate of 25%. The EIT Law provides a
five-year transition period starting from its effective date for those
enterprises which were established before the promulgation date of the EIT Law
and which were entitled to a preferential lower tax rate under the
then-effective tax laws or regulations.




On
December 26, 2007, the State Council of the PRC issued Circular 39, providing
that the enterprises that had been approved to enjoy a low tax rate prior to the
promulgation of the EIT Law will be eligible for a five-year transition period
since January 1, 2008, during which time the tax rate will be increased step by
step to the 25% unified tax rate set out in the EIT Law. From January 1, 2008,
for the enterprises whose applicable tax rate was 15% before the promulgation of
the EIT Law, the tax rate will be increased to 18% for year 2008, 20% for year
2009, 22% for year 2010, 24% for year 2011, and 25% for year 2012. For the
enterprises whose applicable tax rate was 24%, the tax rate was changed to 25%
beginning on January 1, 2008.




The EIT
Law provides that an income tax rate of 20% may be applicable to dividends
payable to non-PRC investors that are “non-resident enterprises”. Non-resident
enterprises refer to enterprises which do not have an establishment or place of
business in the PRC, or which have such establishment or place of business in
the PRC but the relevant income is not effectively connected with the
establishment or place of business, to the extent such dividends are derived
from sources within the PRC. The income tax for dividends payable to
non-resident enterprises is subject to withholding at the income source, with
the payor acting as the obligatory withholder under the EIT Law, and therefore
such income taxes generally are called withholding taxes in practice. The State
Council of the PRC has reduced the withholding tax rate from 20% to 10% through
the Implementation Rules of the EIT Law. It is currently unclear in what
circumstances a source will be considered as located within the PRC. We are a
Cayman Islands holding company and substantially all of our income is derived
from dividends we receive from our PRC Subsidiary located in the PRC. Thus, if
we are considered as a “non-resident enterprise” under the EIT Law and the
dividends paid to us by our PRC Subsidiary (through Bright) are considered
income sourced within the PRC, such dividends may be subject to a 10%
withholding tax.




The new
tax law provides only a framework of the enterprise tax provisions, leaving many
details on the definitions of numerous terms as well as the interpretation and
specific applications of various provisions unclear and unspecified. Any
increase in our tax rate in the future could have a material adverse effect on
our financial conditions and results of operations.


31




Regulations
of Overseas Investments and Listings




On August
8, 2006, six PRC regulatory agencies, including the MOFCOM, the CSRC, the SASAC,
the SAT, the SAIC and the SAFE, jointly amended and released the New M&A
Rule, which became effective on September 8, 2006. This regulation, among other
things, includes provisions that purport to require that an offshore SPV formed
for purposes of overseas listing of equity interest in PRC companies and
controlled directly or indirectly by PRC companies or individuals obtain the
approval of the CSRC prior to the listing and trading of such SPV’s securities
on an overseas stock exchange.




On
September 21, 2006, the CSRC published on its official website procedures
regarding its approval of overseas listings by SPVs. The CSRC approval
procedures require the filing of a number of documents with the CSRC and it
would take several months to complete the approval process. The application of
the New M&A Rule with respect to overseas listings of SPVs remains unclear
with no consensus currently existing among the leading PRC law firms regarding
the scope of the applicability of the CSRC approval requirement.




Environmental
Regulations




On
December 26, 1989, the Standing Committee of the National People’s Congress
issued the Environment Protection Law, setting forth the legal framework for
environment protection in China. The Environmental Protection Law requires the
State Administration of Environmental Protection to implement uniform
supervision and administration of environmental protection standards nationwide
and to establish national waste discharge standards. Local environmental
protection bureaus are responsible for environmental protection in their
jurisdictions and may set stricter local standards which are required to be
registered at the State Administration of Environmental Protection. Companies
are required to comply with the stricter of the two standards. Enterprises
producing environmental contamination and other public hazards must incorporate
the relevant environmental protection standards into their planning and
establish environmental protection systems. These companies must also adopt
effective measures to prevent environmental contamination and hazardous
emissions, such as waste gas, waste water, deposits, dusts, pungent gases and
radioactive matters as well as noise, vibration and magnetic radiation.
Companies discharging contaminated wastes in excess of the discharge standards
prescribed by the State Administration of Environmental Protection must pay
non-standard discharge fees in accordance with national regulations and be
responsible for the applicable remediation. Government authorities may impose
different penalties against persons or companies in violation of the
environmental protection laws and regulations depending on individual
circumstances. Such penalties may include warnings, fines, imposition of
deadlines for remediation, orders to cease certain operations, orders to
reinstall contamination prevention and remediation facilities that have been
removed or left unused, imposition of administrative actions against the
responsible persons or orders to close down the company. Where the violation is
deemed serious, responsible persons may be required to pay damages, and may be
subject to criminal liability.




Regulations
Relating to Employee Share Options




Pursuant
to the Implementation Rules of the Administration Measure for Individual Foreign
Exchange, or the Individual Foreign Exchange Rule, and an implementation notice
on the rule, issued in January and March 2007, respectively, by the SAFE, PRC
citizens who are granted share options by an overseas publicly-listed company
are required, through a PRC agent designated by such overseas publicly-listed
company, to register with the SAFE and complete certain other procedures related
to the share options. PRC agents may be the subsidiary of such overseas
publicly-listed company, trade union of any such PRC subsidiary having legal
person status, a trust and investment company or other financial institution
qualified to engage in assets custodian business. Such individuals’ foreign
exchange income received from the sale of shares or dividends distributed by the
overseas publicly-listed company must first be remitted into a collective
foreign exchange account opened and managed by the PRC agent before distribution
to such individuals in a foreign currency or in RMB. We and our PRC citizen
employees who have been granted share options, or PRC optionees, will be subject
to these rules when our company becomes an overseas publicly-listed company. If
we or our PRC optionees fail to comply with these regulations, we or our PRC
optionees may be subject to fines and legal sanctions. However, as these rules
have only been recently promulgated, it is currently unclear as to how these
rules will be interpreted and implemented.


32




Regulations
on Trademarks




Both the
PRC Trademark Law, adopted in 1982 and revised in 1993 and 2001, and the
Implementation Regulation of the PRC Trademark Law adopted by the State Council
in 2002, give protection to the holders of registered trademarks. The Trademark
Office, under the authority of the State Administration for Industry and
Commerce, handles trademark registrations and grants rights for a term of ten
years for registered trademarks, which may be renewed by the Trademark Office.
The PRC Trademark Law has adopted a “first-to-file” principle with respect to
trademark registration. Where a trademark for which a registration has been made
is identical or similar to another trademark which has already been registered
or been subject to a preliminary examination and approval for use on the same
kind of or similar commodities or services, the application for registration of
such trademark may be rejected. Any person applying for the registration of a
trademark may not prejudice the existing right first obtained by others, nor may
any person register in advance a trademark that has already been used by another
party and has already gained a “sufficient degree of reputation” through such
party’s use. Trademark license agreements must be filed with the Trademark
Office or its regional offices.




Regulation
on Employment




On
June 29, 2007, the National People’s Congress promulgated the Labor Contract Law of PRC, or
the Labor Law, which became effective as of January 1, 2008. On
September 18, 2008, the PRC State Council issued the PRC Labor Contract Law
Implementation Rules, which became effective as of the date of issuance.
The Labor Law and its implementation rules are intended to give employees
long-term job security by, among other things, requiring employers to enter into
written contracts with their employees and restricting the use of temporary
workers. The Labor Law and its implementation rules impose greater liabilities
on employers, require certain terminations to be based upon seniority rather
than merit and significantly affect the cost of an employer’s decision to reduce
its workforce. Employment contracts lawfully entered into prior to the
implementation of the Labor Law and continuing after the date of its
implementation remain legally binding and the parties to such contracts are
required to continue to perform their respective obligations thereunder.
However, employment relationships established prior to the implementation of the
Labor Law without a written employment agreement were required to be
memorialized by a written employment agreement that satisfies the requirements
of the Labor Law within one month after it became effective on January 1,
2008.




PRC
Antitrust Law




The PRC
Antitrust Law was promulgated on August 30, 2007 and became effective on August
1, 2008. The government authorities in charge of antitrust matters in China are
the Antitrust Commission and other antitrust authorities under the State
Council. The PRC Antitrust Law regulates (i) monopoly agreements, including
decisions or actions in concert that preclude or impede competition, entered
into by business operators; (ii) abuse of dominant market position by business
operators; and (iii) concentration of business operators that may have the
effect of precluding or impeding competition.




Except
for the exemptions set forth under Article 15 of the PRC Antitrust Law,
competing business operators are prohibited from entering into monopoly
agreements that fix or change commodity prices, restrict the production volume
or sales volume of commodities, divide markets for sales or procurement of raw
materials, restrict procurement of new technologies or new equipment or
development of new technologies or new equipment, result in joint boycott of
transactions or constitute monopoly agreements as determined by the antitrust
authority.




In
addition, business operators with the ability to control the price or quantity
of commodities or other trading conditions or those with the ability to block or
affect other business operators into the relevant markets are prohibited from
engaging in certain business conducts that would result in abuse of their
dominant market position.




Moreover,
concentration of business operators refers to (i) merger with other business
operators; (ii) gaining control over other business operators through
acquisition of equity interest or assets of other business operators; and (iii)
gaining control over other business operators through exerting influence on
other business operators through contracts or other means. In the event of
occurrence of any concentration of business operators and to the extent required
by the Antitrust Law, the relevant business operators must file with the
antitrust authority under the State Council prior to conducting the contemplated
business concentration. If the antitrust authority decides not to further
investigate whether the contemplated business concentration has the effect of
precluding or impeding competition or fails to make a decision within 30 days
from receipt of relevant materials, the relevant business operators may proceed
to consummate the contemplated business concentration.


33




Tort
Liability Law




The Tort
Liability Law of the People’s Republic of China, which was passed during the
12th Session of the Standing Committee of the 11th National People’s Congress on
December 26, 2009, states that manufacturers are liable for damages caused by
defects in their products and sellers are liable for damages attributable to
their fault. If the defects are caused by the fault of third parties such as the
transporter or storekeeper, manufacturers and sellers are entitled to claim for
compensation from these third parties after paying the compensation
amount.




ITEM
      4A.
            UNRESOLVED
      STAFF COMMENTS




In
connection with a review by the staff of the SEC (the “Staff”) of our Annual Report
on Form 20-F for the year ended December 31, 2008, we have received and
responded to comments from the Staff. As of the date of the filing of this
Annual Report, certain of the Staff comments remain unresolved and these pertain
primarily to our method of accounting treatment of the recapitalization pursuant
to the share exchange transaction that we consummated with Bright.  We
believe that our most recent amendment to our Annual Report on Form 20-F for the
fiscal year ended December 31, 2008 contains modifications to our financial
statements that are responsive to the outstanding staff comments.




ITEM
      5.
            OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS





Critical
Accounting Policies




1.
            In
      the application by us of accounting policies, which are described in the
      notes of the audited financial statements, management is required to make
      judgments, estimates and assumptions about the carrying amounts of assets
      and liabilities that are not readily apparent from other sources. 
      The estimates and associated assumptions are based on historical
      experience and other factors that are considered to be relevant. 
      Actual results may differ from these
estimates.





The
estimates and underlying assumptions are reviewed on an ongoing basis. Revisions
to accounting estimates are recognized in the period in which the estimate is
revised if the revision affects only that period or in the period of the
revision and future periods if the revision affects both the current and future
periods.





The
followings are the key assumptions concerning the future, and other key sources
of estimation uncertainty at the balance sheet date, that have a significant
risk of causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year.





(a)
            Impairment
      of property, plant and equipment





Our
property, plant and equipment comprise a significant portion of our total
assets.  Changes in technology or industry conditions may cause the
estimated period of use or the value of these assets to change. Long-lived
assets including property, plant and equipment are reviewed for impairment at
least annually or whenever events or changes in circumstances have indicated
that their carrying amounts may not be recoverable.  If any such indication
exists, the recoverable amount is estimated.  The recoverable amount of an
asset is the greater of its net selling price and value-in-use.  In
assessing value-in-use, the estimated future cash flows are discounted to their
present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset,
which requires significant judgment relating to level of revenue and amount of
operating costs.  We use all readily available information in determining
an amount that is a reasonable approximation of the recoverable amount,
including estimates based on reasonable and supportable assumptions and
projections of revenue and operating costs. Changes in these estimates could
have a significant impact on the carrying value of the assets and could result
in additional impairment charge or reversal of impairment in future
periods.


34




(b)
            Depreciation





Depreciation
is calculated to write off the cost of items of property, plant and equipment,
less their estimated residual value, if any, using the straight-line method over
their estimated useful lives.


We review
the estimated useful lives and residual values of the assets annually in order
to determine the amount of depreciation expense to be recorded during any
reporting period.  The useful lives and residual values are based on our
historical experience with similar assets and taking into account anticipated
technological changes.  The depreciation expense for future periods is
adjusted if there are significant changes from previous estimates.





(c)
            Impairment
      loss for doubtful accounts





We assess
impairment loss for doubtful accounts based upon evaluation of the
recoverability of the accounts receivable and other receivables at each balance
sheet date.  The estimates are based on the ageing of the accounts
receivable and other receivables balances, customer credit-worthiness and the
historical write-off experience, net of recoveries.  If the financial
condition of the customers were to deteriorate, actual write-offs would be
higher than estimated.





(d)
            Allowance
      for inventories





We make
allowances for inventories based on assessment of the net realizable value of
inventories.  These estimates are based on the current market condition and
the historical experience of manufacturing and selling products of similar
nature.  In addition, these estimates could change significantly as a
result of change in customer preference and competitor actions in response to
serve industry cycles. Allowance is applied to inventories where events or
changes in circumstances indicate that the net realizable value is lower than
the cost of inventories.  The identification of obsolete inventories
required the use of judgment and estimates on the conditions and usefulness of
the inventories.





(e)
            Sensitivity
      analysis





The
functional currency of our subsidiary, Lanxi Sunrise, is in PRC currency
“Renminbi,” or “RMB.”





The
following table indicates the approximate change in our net income and retained
profits that would arise if foreign exchange rate of RMB to which we have
significant exposure at the balance sheet date had changed at that date,
assuming all other risk variables remained constant.





2009
                    
                    
                    2008Increase /
                      decrease in
                      foreign
                      exchange rate
                    
                    
                    Effect on net
                      income
                      USD’000
                    
                    
                    Increase /
                      decrease in
                      foreign
                      exchange rate
                    
                    
                    Effect on net
                      income
                      USD’000RMB
                    
                    
                    1
                    %
                    
                    
                    60
                    
                    
                    
                    1
                    %
                    
                    
                    37




If the
aggregate amount of our imports and exports were substantially similar for
future periods, oursensitivity to foreign exchange rate fluctuation resulting
from such activity could be reduced.




A.
              Operating
      Results





Fiscal Years Ended December
31, 2009, 2008 and 2007





The
following table summarizes the results of operations through Lanxi Sunrise
during the fiscal years ended December 31, 2009, 2008 and 2007 and provides
information regarding the dollar and percentage increase or (decrease) from the
2009 to 2008 fiscal period, and from the 2008 to 2007 fiscal
period:


35




Year Ended December 31,
                    
                    
                    2009 v 2008
                    
                    
                    2008 v 2007Item
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    Increase /
                      (Decrease)
                    
                    
                    Increase /
                      (%
                      Decrease)
                    
                    
                    Increase /
                      (Decrease)
                    
                    
                    Increase /
                      (%
                      Decrease)Revenue
                    
                    $
                    29,386,131
                    
                    
                    $
                    22,945,122
                    
                    
                    $
                    20,782,804
                    
                    
                    $
                    6,441,009
                    
                    
                    
                    28.07
                    %
                    
                    
                    2,162,318
                    
                    
                    
                    10.40
                    %Cost
      of Goods Sold
                    
                    
                    20,675,433
                    
                    
                    
                    17,648,852
                    
                    
                    
                    15,075,310
                    
                    
                    
                    3,026,581
                    
                    
                    
                    17.15
                    %
                    
                    
                    2,573,542
                    
                    
                    
                    17.07
                    %Gross
      Profit
                    
                    
                    8,710,688
                    
                    
                    
                    5,296,270
                    
                    
                    
                    5,707,494
                    
                    
                    
                    3,414,418
                    
                    
                    
                    64.47
                    %
                    
                    
                    (411,224
                    )
                    
                    
                    (7.20
                    )%Operating
      Expenses
                    
                    
                    1,634,201
                    
                    
                    
                    2,185,089
                    
                    
                    
                    1,251,759
                    
                    
                    
                    (550,888
                    )
                    
                    
                    (25.21
                    )%
                    
                    
                    933,330
                    
                    
                    
                    74.56
                    %Other
      Income (expense)
                    
                    
                    795,716
                    
                    
                    
                    952,502
                    
                    
                    
                    623,899
                    
                    
                    
                    (156,786
                    )
                    
                    
                    (16.46
                    )%
                    
                    
                    328,603
                    
                    
                    
                    52.67
                    %Provision
      for Taxes
                    
                    
                    2,141,684
                    
                    
                    
                    1,206,914
                    
                    
                    
                    1,606,443
                    
                    
                    
                    934,770
                    
                    
                    
                    77.45
                    %
                    
                    
                    (399,529
                    )
                    
                    
                    (24.87
                    )%Net
      income
                    
                    
                    5,730,519
                    
                    
                    
                    2,856,769
                    
                    
                    
                    3,473,191
                    
                    
                    
                    2,873,750
                    
                    
                    
                    100.59
                    %
                    
                    
                    (616,422
                    )
                    
                    
                    (17.75
                    )%Basic
      and Diluted Earning per Share
                    
                    $
                    0.28
                    
                    
                    $
                    0.15
                    
                    
                    $
                    0.18
                    
                    
                    $
                    0.13
                    
                    
                    
                    86.67
                    %
                    
                    
                    (0.03
                    )
                    
                    
                    (16.67
                    )%Weighted
      Average Shares Outstanding
                    
                    
                    20,108,333
                    
                    
                    
                    19,511,256
                    
                    
                    
                    18,963,005
                    
                    
                    
                    597,077
                    
                    
                    
                    3.06
                    %
                    
                    
                    548,251
                    
                    
                    
                    2.89
                    %




Revenue





Revenue
increased from $22,945,122 for the fiscal year ended December 31, 2008 to
$29,386,131 for the fiscal year ended December 31, 2009, representing an
increase of $6,441,009, or approximately 28.07%. The increase in revenue
was primarily attributable to increased sales volume of linen
fabric.





Revenue
increased from $20,782,804 the fiscal year ended December 31, 2007, to
$22,945,122 for the fiscal year ended December 31, 2008, or approximately
10.40%.  The increase in revenue was primarily attributable to appreciation
of Chinese Renminbi (RMB) against the US dollar which was increased from an
average of 7.5709 RMB: $1 in 2007 to 6.9199 RMB to $1 in 2008.





Cost
of Goods Sold





Cost of
goods sold increased from $17,648,852 for the fiscal year ended 2008 to
$20,675,433 for the fiscal year ended 2009, representing an increase of
$3,026,581, or approximately 17.15%. The increase in cost of goods sold was
primarily attributable to the increase in sales volume.





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 an increase in sales volume and appreciation of RMB
against US dollar during the year.





36




Gross
Profit




Gross
profit increased from $5,296,270 for the fiscal year ended December 31, 2008 to
$8,710,688 for the fiscal year ended December 31, 2009, representing an increase
of $3,414,418, or approximately 64.47%.  The increase in gross profit was
mainly attributable to increases in sales in 2009, and because revenue per unit
increased more than the cost per unit. Gross profit for the fiscal year ended
December 31, 2009 was approximately 29.64% of revenues as compared to gross
profit of approximately 23.10% of revenues for the fiscal year ended December
31, 2008.





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, representing a decrease
of $411,224, or approximately 7.20%, which was mainly attributable to decreases
in the selling prices of linen products due to the financial crisis during the
fiscal year ended December 31, 2008 compared to the fiscal year ended December
31, 2007.





Operating
Expenses





Operating
expenses decreased by $550,888, or approximately 25.21%, in the fiscal year
ended December 31, 2009 as compared to the fiscal year ended December 31, 2008.
 The decrease in operating expenses was mainly attributable to a decrease
of $772,716, or approximately 43.13%, in general and administrative
expenses.  Generally administrative expenses decreased primarily because of
a decrease in stock-based compensation, which accounted for $844,200 of
operating expenses for the fiscal year ended December 31, 2008, compared with
only $8,984 in the fiscal year ended December 31, 2009.





Operating
expenses increased significantly by $933,330, or approximately 74.56%, in the
fiscal year ended December 31, 2008 as compared to the fiscal year ended
December 31, 2007.  The significant increase in operating expenses was
attributable to the share based compensation costs for advisory fees of $844,200
which was from a contribution of 804,000 shares of common stock from
shareholders in 2008. In addition, there was an increase of $87,926, or
approximately 28.78% in selling expenses, which was attributable to an increase
in transportation expenses during the year.  In addition, the counsel
service fees accounted for $ 35,341.21 while there were no such fees in
2007.





Other
Income





Other
income decreased from $952,502 for the fiscal year ended December 31, 2008 to
$795,716 for the fiscal year ended December 31, 2009, representing a decrease of
$156,786, or approximately 16.46%.  This decrease was mainly due to a
decrease in government subsidies received by Lanxi Sunrise.  For each of
the years ended December 31, 2009 and 2010, Lanxi Sunrise was, and will be,
entitled to receive government subsidies on local income taxes paid by it equal
to 40% of its total annual income tax paid for each such year.





Other
income increased significantly from $623,899 for the fiscal year ended December
31, 2007 to $952,502 for the fiscal year ended December 31, 2008, or
approximately 52.67%. Other income consists of subsidy income and net interest
income. The increase in other income from 2007 to 2008 is primarily attributable
to improvements in both interest income and expense.  Interest income
increased from $69,812 in 2007 to $175,299 in 2008, and interest expense
decreased from $817,596 in 2007 to $540,203 in 2008.





Provision
for Taxes





Provision
for taxes increased by $934,770 or 77.5% from $1,206,914 for the fiscal
year ended December 31, 2008 to $2,141,684 for the fiscal year ended December
31, 2009.  Income before tax was $7,872,203 for the fiscal year ended
December 31 2009, and $4,063,683 for the fiscal year ended December 31
2008.  The decrease in operating expenses for the fiscal year ended
December 31, 2009 compared to the fiscal year ended December 31, 2008 was
primarily due to a decrease in stock-based compensation of $835,216, which
resulted in a corresponding decrease in general and administrative expenses.
Gross profit increased by $3,414,418 for the fiscal year ended December 31, 2009
compared to the fiscal year ended December 31, 2008, which was primarily due to
an increase in revenue. As a result, income before tax increased by $3,808,520
for the fiscal year ended December 31, 2009 compared to the fiscal year ended
December 31, 2008, and provision for taxes was accordingly
increased.


37




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, which was primarily
attributable to the fact that for the fiscal year beginning January 1, 2008, the
enterprise income tax rate in the PRC was decreased to 25% from the previous
rate of 33% in 2007.





Net
income (profit after taxes)





Net
income was $5,730,519 for the fiscal year ended December 31, 2009 as compared to
$2,856,769 for the fiscal year ended December 31, 2008, representing an increase
of $2,873,750, or approximately 100.59%.  This increase in net income is
primarily attributable to the below reasons.  Revenue increased $6,441,009
for the fiscal year ended December 31, 2009 compared to the fiscal year ended
December 31, 2008. Gross profit increased by $3,414,418 for the fiscal year
ended December 31, 2009 compared to the fiscal year ended December 31, 2008,
which was primarily due to the increase in revenue.  The decrease in
operating expenses for the fiscal year ended December 31, 2009 compared to the
fiscal year ended December 31, 2008 was primarily due to a decrease in
stock-based compensation of $835,216, which resulted in a $550,888 decrease in
operating expenses for the fiscal year ended December 31, 2009.  Income
before tax was $7,872,203 for the fiscal year ended December 31, 2009 compared
to $4,063,683 for the fiscal year ended December 31, 2008, which accordingly
resulted in an increase in net income.





Net
income was $2,856,769 for the fiscal year ended December 31, 2008 as compared to
$3,473,191 for the fiscal year ended December 31, 2007, representing a decrease
of $616,422, or approximately 17.75%. The significant decrease in net income in
2008 compared to 2007 is primarily attributable to the share based compensation
costs charged to operations in 2008 as a result of the contribution of 804,000
shares of common stock from certain shareholders for advisory services rendered
to the Company, for which there was no such charge in 2007.




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 $32,149 for the year ended
December 31, 2009 as compared with a foreign currency translation gain of
$764,910 for the fiscal year ended December 31, 2008.   We used different
exchange rates in translating Renminbi 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, 2009 and 2008, respectively, and income and
expenses during the year were translated at applicable average monthly end rates
for 2009 and 2008, respectively.





Chinese
Economic, Fiscal, Monetary and other Policy





The
Company’s majority-owned 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 Relating to Doing Business in China” for more details.




38




B.
              Liquidity
      and Capital Resources




As of
December 31, 2009, we had cash and cash equivalents of $2,320,656, and total
current assets of $24,405,725. Management believes we have sufficient cash and
current assets to fund current operations for the next fiscal year. As of
December 31, 2009, we had a working capital surplus of $12,011,508. We
anticipate that the combination of our sales and collection of accounts
receivables, customer deposits and proceeds from bank and shareholder loans will
generate sufficient cash flow to sustain our working capital needs. However we
may require other sources of capital.





We do not
know of any trends, events or uncertainties that are likely to have a material
impact on our short-term or long-term liquidity other than those factors
discussed below.





If
additional capital is needed, we will explore financing options from related
parties, such as Chairman Gao. Loans from related parties maybe granted from
time to time as required to meet current working capital needs. We have no
formal agreement that ensures that we will receive such loans. We may exhaust
this source of funding at any time.





From time
to time, additional subsidies in the form of grants or low or zero interest
loans are available from one or more levels of the PRC government.  These
governmental programs may be launched or ceased at any time. Once launched,
there is no guarantee that they will continue.





As of
December 31, 2009, we had outstanding loans from the Agricultural Bank of China
equal to $4,048,583 with an annual interest rate of 6.903%.   As of
December 31, 2008, we had outstanding loans from the Agricultural Bank of China
equal to $4,041,291 with an annual interest rate of 9.711%.  These bank
loans are collateralized by our buildings and equipment.




Material
commitments for capital expenditures as of December 31, 2009 were $889,000,
which are for the purchase of machinery and equipment that will be used for the
expansion of our current production capacity.




The
following chart illustrates the percentage of accounts receivable attributable
to our three largest customers.







Customer
                  
                  Percentage of Accounts
      ReceivableShaoxing
      Yinxiang Linen and Cotton textile Co. Ltd.
                  
                  
                  51.86
                  %Shaoxing
      Hongda Linen and Cotton textile Co. Ltd.
                  
                  
                  40.12
                  %Zhaozhou
      Tongren Linen Co. Ltd.
                  
                  
                  5.31
                  %




C.
              Research
      and Development




In April
2005, we established a technological center through which we conduct 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.




Our
technological center has established cooperative relationships with Tianjin
Institute of Technology and Donghua University to take advantage of their
research activities and our advanced production equipment to seek to develop new
varieties of linen spinning yarns, woven cloth, yarn-dyed fabrics and other
printed and dyed products.




And at
the end of 2009, the Heilongjiang provincial government has formally approved
Lanxi Sunrise, our majority-owned subsidiary, to build China’s first and only
linen research and development center in China, the “Heilongjiang Provincial
Linen New Products Research and Development Center.” The establishment of the
linen research center in Heilongjiang will further our research and development
capabilities and expedite the introduction of new linen products. The center is
also expected to expand brand awareness of our products, thereby broadening our
market reach.




39




D.
              Trend
      Information




In the
future, there are no events that are reasonable likely to have a material effect
on the company’s continuing operations, capital liquidity, and profitability or
capital resources.




We
anticipate that costs of goods sold will decrease because of lower prices of raw
materials. We will continue to increase sales volume by expanding in domestic
and international markets, and revenues are expected to increase over 30%
compared to those in 2009.




China’s
linen industry traditionally has been fragmented.  Small manufacturers hold
a sizeable portion of the market, even though many of them are inefficient,
outdated and have poor safety records.  We believe that, in our industry,
government policy is encouraging industry consolidation and greater investment
in new technologies to improve production and safety.  Given this
fragmentation and the opportunity to grow, we will actively pursue advantageous
acquisition opportunities to expand or improve the gross and net profit margins
on our core products, or expanding by expanding overall margins by expanding
into new operations, such as bleaching or yard-dyed fabric
manufacturing.




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, 2009:


Contractual Obligations
                  
                  Payments due by periodLess than 1
                    year
                  
                  
                  1-3 years
                  
                  
                  3-5 years
                  
                  
                  More than 5
                    yearsLong-Term
      Debt Obligations
                  
                  $
                  4,048,583
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Capital
      (Finance) Lease Obligations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Operating
      Lease Obligations
                  
                  
                  164,814
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Purchase
      Obligations
                  
                  
                  791,599
                  
                  
                  
                  97,401
                  
                  
                  
                  -
                  
                  
                  
                  -Other
      Long-Term Liabilities Reflected on the Company’s Balance Sheet under the
      GAAP of the primary financial statements
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  $
                  5,004,996
                  
                  
                  $
                  97,401
                  
                  
                  $
                  -
                  
                  
                  
                  -




ITEM
      6.
            DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES




A.
              Directors,
      Senior Management and
Employees




Executive
Officers and Directors




Set forth
below is information regarding our directors and executive officers as of August
17, 2010. All of the directors will serve until the next annual meeting of
shareholders and until their successors are appointed, or until their earlier
death, retirement, resignation or removal. Provided below is a brief description
of our directors’ and executive officers’ business experience during the past
five years and any directorships he/she has held in other companies, if any,
subject to the reporting requirements under the federal securities laws. The
business address of each such person is the address of the company, which is
Chengdong Street, Lanxi County, Heilongjiang Province.


40





NAME
            
            AGE
            
            POSITIONGao
      Ren
            
            47
            
            Chief
      Executive Officer and Chairman of the BoardMa
      Yongfeng
            
            49
            
            Vice
      General ManagerTeng
      Yunhai
            
            49
            
            Vice
      General Manager and Executive DirectorZhao
      Chunfu
            
            47
            
            Vice
      General Manager, Secretary and DirectorLi
      Songyun
            
            39
            
            Chief
      Marketing OfficerQi
      Shaofeng
            
            52
            
            Chief
      Financial Officer




Mr. Gao Ren has been the Chief
Executive Officer and Chairman of our Board of Directors since July 2008. Before
serving as the Chairman of the Board and general manager of our Company from
June 2002 to July 2008, 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 graduated from Heilongjiang Radio and Television
University in July 1984 with a degree in Industrial and Electric Automation. He
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.”




Mr. Ma Yongfeng is a general
accountant and is a Vice General Manager of our Company.  Mr. Yongfeng has
been with the company since 2002. He was previously accountant, vice
section chief, chief accountant, and financial officer of Heilongjiang Lanxi
Linen Textile Industry United General Corporation from 1984 to 2002. He
graduated from Heilongjiang Suihua College with an associate degree in linen
textile in July 1983. He is also a graduate of CEO class of Tsinghua
University.




Mr. Teng Yunhai is a senior
engineer and currently serves as Vice General Manager and Executive Director of
our Company.  Mr. Yunhai has been with the company since June 2005. 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.
from February 2002 to May 2005.  He graduated from Qiqihar Light Industry
Institute in July 1983 with a B.S. in light industry equipment.




Mr. Zhao Chunfuis a senior
engineer and currently serves as the Vice General Manager, Secretary and as a
Director of our Company since December 2007. 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. from February 2002 to November 2007. He graduated from
North-East Heavy Machinery Institute in July 1984 with a B,S. degree in
industrial and electric automation.




Ms. Li Songyun has been our
chief marketing officer since June 2002. Her main responsibility is management
of the sales of linen products. She was previously business manager of Harbin
Import & Export Group Corp. She graduated from Heilongjiang University in
July 1994 with B.A. in English.




Mr. Qi Shaofeng has been our
Chief Financial Officer since January 2010. From 2008 to 2009, he worked as an
independent consultant with several pre-initial public offering companies with a
focus on restructuring and private placement financings.  In 2007, he was
nominated as the chief financial officer of China Sunergy Co., Ltd., a company
that fabricates solar cells and is listed on NASDAQ. From 2005 to 2006, Mr. Qi
worked with Tiens Group Company, a bio-pharmaceutical and health care company,
serving as the global finance director of the global financial center and
executive director of the global restructuring committee, and the financial
director of its subsidiary, Tiens Biotech Group (USA), Inc., a company listed on
NYSE Amex. From 2004 to 2005, Mr. Qi was the chief financial officer, vice
president and board director of ShengXing Group, a conglomerate engaged in the
retail chain store and real estate business. From 1997 to 2003, he served as
chief financial officer and senior financial consultant of the China operations
department of Delta and Pine Land Company, a bio-chemical company listed on the
NYSE. Mr. Qi received his honored doctorate degree from Lincoln University in
2003. Mr. Qi also received his MBA degree from Wayne State University in 1997, a
master’s degree in management science from Marine Maritime Academy in 1994, and
bachelor’s degree in accounting from Shanghai Maritime University in 1984. Mr.
Qi has been a member of the Australian National Institute of Accountants since
2005, a member of U.S. Institute of Management Accountants since 2000, and a
member of the Association of Professional Business Management with the title of
Certified Business Manager since 2001. He received a diploma in accounting and
finance accredited by the Association of Chartered Certified Accountants in
2001.


41




Family
Relationships




There are
no family relationships between any of our directors or executive
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.




Employment
Agreements




We have
entered into employment agreements with each of our employees and
officers.




Teng
Yunhai entered into an employment agreement for a term of five years, beginning
in January 2008 and ending in January 2013, with Lanxi Sunshine for an annual
salary of RMB 25,200 ($3,642), which salary was adjusted by the board of
directors to RMB 36,000 ($5,277) for 2009. Lanxi Sunrise may terminate the
employment of Mr. Teng with thirty days’ advance written notice or by paying Mr.
Teng an additional month of salary if 1) Mr. Teng is not competent to perform
the job under the employment agreement, and remains so after being trained to
take another position; 2) Mr. Teng falls ill or is injured due to work, after a
medical leave is unable to return to his duties, and remains so after receiving
training for his original or modified duties; or 3) the employment agreement
cannot be fulfilled due to material changes of the objective circumstances and
the parties cannot reach an agreement on the modification of the
contract.




Gao Ren
entered into an employment agreement without a fixed term with Lanxi Sunshine
effective in January 2008 for an annual salary of RMB 42,000 ($6,070), which
salary was adjusted by the board of directors to RMB 120,000 ($17,590) for 2009.
Lanxi Sunrise may terminate the employment of Mr. Gao with thirty days’ advance
written notice or by paying Mr. Gao an additional month of salary if 1) Mr. Gao
is not competent to perform the job under the employment agreement, and remains
so after being trained to take another position; 2) Mr. Gao falls ill or is
injured due to work, after a medical leave is unable to return to his duties,
and remains so after receiving training for his original or modified duties; or
3) the employment agreement cannot be fulfilled due to material changes of the
objective circumstances and the parties cannot reach an agreement on the
modification of the contract.




Qi
Shaofeng entered into an employment agreement for a term of three years,
beginning January 31, 2010 and ending on January 31, 2013, with China Linen
Textile Industry, Ltd. for a base annual salary of $105,600, plus any additional
bonus pursuant to any bonus program approved by the board for the benefit of the
senior executives of the company. Lanxi Sunrise may terminate the employment
with Mr. Qi for cause with sixty days’ advance written notice and Mr. Qi shall
be entitled to receive only his base salary and authorized benefits through the
date of termination. Lanxi Sunrise may also terminate the employment with Mr. Qi
without cause following the delivery of a notice of termination to Mr. Qi, or
should Mr. Qi decide to resign from his position for good reason, Mr. Qi shall
receive, within ten days following termination, a lump sum payment of any earned
but unpaid base salary through the date of termination and any unpaid bonus for
any calendar year preceding the year in which the termination occurs. In
addition, should Mr. Qi be terminated without cause by the company or should he
resign for good reason, Mr. Qi shall receive one year base salary as severance
pay.


42




Zhao
Chunfu entered into an employment agreement for the position of Vice General
Manager for a term of five years, beginning in January 2008 and ending in
January 2013, with Heilongjiang Lanxi Sunshine Linen Textile Co., Ltd. for an
annual salary of RMB 27,600 ($3,989), which salary was adjusted by the board of
directors to RMB 36,000 ($5,277) for 2009. Lanxi Sunrise may terminate the
employment of Mr. Zhao with thirty days’ advance written notice or by paying Mr.
Ma an additional month of salary if 1) Mr. Zhao is not competent to perform the
job under the employment agreement, and remains so after being trained to take
another position; 2) Mr. Zhao falls ill or is injured due to work, after a
medical leave is unable to return to his duties, and remains so after receiving
training for his original or modified duties; or 3) the employment agreement
cannot be fulfilled due to material changes of the objective circumstances and
the parties cannot reach an agreement on the modification of the
contract.




Ma
Yongfeng entered into an employment agreement for the position of Vice General
Manager for a term of five years, beginning in January 2008 and ending in
January 2013, with Heilongjiang Lanxi Sunshine Linen Textile Co., Ltd. for an
annual salary of RMB 31,200 ($4,509), which salary was adjusted by the board of
directors to RMB 60,000 ($8,795) for 2009. Lanxi Sunrise may terminate the
employment of Mr. Ma with thirty days’ advance written notice or by paying Mr.
Ma an additional month of salary if 1) Mr. Ma is not competent to perform the
job under the employment agreement, and remains so after being trained to take
another position; 2) Mr. Ma falls ill or is injured due to work, after a medical
leave is unable to return to his duties, and remains so after receiving training
for his original or modified duties; or 3) the employment agreement cannot be
fulfilled due to material changes of the objective circumstances and the parties
cannot reach an agreement on the modification of the contract.




Li
Songyun entered into an employment agreement for a term of five years, beginning
in January 2008 and ending in January 2013, with Lanxi Sunshine for an annual
salary of RMB 25,200 ($3,694). Lanxi Sunrise may terminate the employment of Ms.
Li with thirty days’ advance written notice or by paying Ms. Li an additional
month of salary if 1) Ms. Li is not competent to perform the job under the
employment agreement, and remains so after being trained to take another
position; 2) Ms. Li falls ill or is injured due to work, after a medical leave
is unable to return to her duties, and remains so after receiving training for
her original or modified duties; or 3) the employment agreement cannot be
fulfilled due to material changes of the objective circumstances and the parties
cannot reach an agreement on the modification of the contract.




B.
              Compensation




Board
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, 2009, the amount of compensation paid to each
of our officers and directors was as follows:





NAME
                
                POSITION
                
                SALARYGao
      Ren
                
                Chief
      Executive Officer and Chairman of the Board
                
                $
                17,590Ma
      Yongfeng
                
                Vice
      General Manager
                
                $
                8,795Teng
      Yunhai
                
                Vice
      General Manager and Executive Director
                
                $
                5,277Zhao
      Chunfu
                
                Vice
      General Manager, Secretary and Director
                
                $
                5,277Li
      Songyun
                
                Chief
      Marketing Officer
                
                $
                3,694Huang
      Xiaofang*
                
                Chief
      Financial Officer
                
                $
                3,694




*Mr. Qi
Shaofeng replaced Mr. Huang Xiaofang as our chief financial officer on January
31, 2010.


43




During
the fiscal year ended December 31, 2009, 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. We intend 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. 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.




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.




Board
of Directors




Each of
the directors named above were elected or appointed to serve until the next
annual meeting of the company’s shareholders or until their successors have been
appointed or duly elected and qualified. Thereafter, directors will be elected
for one-year terms at the annual shareholders’ meeting.  Officers are
elected by and serve at the discretion of the Board.




There is
no arrangement or understanding between any of our directors or officers 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 board of directors. 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 our
affairs.




D.
              Employees




As of
December 31, 2009, we had approximately 1,246 full-time employees, of whom 60
are administrative and accounting staff (including 40 who also perform duties as
technological staff), 70 are technological staff, 40 are sales staff, and the
remaining 1,076 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




See Item
7, below.


44




ITEM
      7.
            MAJOR
      SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS




A.
              Major
      Shareholders




The
following table sets forth, as of August 12, 2010, 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 ordinary shares. 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. Beneficial ownership is determined in accordance with SEC rules and
generally includes voting or investment power with respect to securities. All
share ownership figures include ordinary shares issuable upon securities
convertible or exchangeable into ordinary shares within sixty (60)
days.





Name
      and Address
              
              Number
      of Shares
                  Beneficially
      Owned
              
              
              Percent
                  of
      Class (1)Creation
      International Development Investments Limited (4)
              
              
              8,188,889
              
              
              
              40.51
              %Gao
      Ren (4)
              
              
              –
              
              
              
              –Ma
      Yongfeng  (2)(3)
              
              
              –
              
              
              
              –Teng
      Yunhai (2)(3)
              
              
              3,189
              
              
              
              0.02
              %Li
      Songyun (2)(3)
              
              
              143,858
              
              
              
              0.71
              %Zhao
      Chunfu (2)(3)
              
              
              502,500
              
              
              
              2.49
              %Qi
      Shaofeng (2)
              
              
              –
              
              
              
              –All
      directors and officers as a group (6 persons)
              
              
              8,838,436
              
              
              
              43.73
              %





(1)
            Percentage
      of beneficial ownership held by each person is determined by dividing (i)
      the number of ordinary shares beneficially owned by such person as of the
      date of this Annual Report by (ii) 20,215,003 ordinary shares outstanding
      as of the date of this Annual Report, plus, in the case of (ii), the
      number of ordinary shares such person has the right to acquire within 60
      days of the date of this Annual
Report.


(2)
            The
      person is an officer, a director or both.  The business address of
      our directors and officers is Chengdong Street, Lanxi County, Heilongjiang
      Province, PRC.


(3)
            These
      shares were received in connection with our share exchange that we
      consummated with Bright on July 9,
2008.


(4)
            Mr.
      Gao, our Chief Executive Officer and chairman, is party to an agreement,
      dated April 15, 2010, with Creation International Development Investments
      Limited (“Creation”), and its sole
      shareholder, Mr. Gabriele Sanesi, pursuant to which Mr. Gao may acquire
      all of the shares of Creation in accordance with the terms and conditions
      set forth therein.




B.
              Related
      Party Transactions




2010
Restructuring




On April
15, 2010, so as to not violate certain applicable PRC regulations, all direct
equity interests in us (approximately 40.51% of our outstanding ordinary shares)
held on or behalf of Mr. Gao, our Chief Executive Officer and chairman was
transferred to  Creation.  Gabriele Sanesi, a citizen of Italy, is the
sole shareholder and director of Creation.  Pursuant to an agreement dated
April 15, 2010 among Creation and Messrs. Gao and Sanesi, or the “April 2010 Agreement,” Mr.
Sanesi has granted Mr. Gao the irrevocable right to exercise his rights as a
shareholder and director of Creation.  In addition, in accordance with the
April 2010 Agreement, Mr. Sanesi has agreed to transfer 100% of his equity
interests in Creation to Mr. Gao if the net income of the company from January
1, 2010 to June 30, 2010 is no less than US$2.0 million.


45




Related
Party Transactions




Since the
beginning of 2009, we entered into the following transactions with certain
related parties, in addition to the share transactions noted above.




Due to
China’s foreign currency control and export and import license requirements, on
November 7, 2005, the company entered into an Agency Agreement with Harbin
Sunshine Linen Textile Co, Ltd., our affiliate.  Pursuant to the terms of
the Agency Agreement, Harbin Sunshine Linen Textile Co., Ltd., acts as our agent
in importing flax and exporting linen yarn, linen fabric and other products. We
pay Harbin Sunshine Linen Textile Co., Ltd, an import fee equal to the cost of
flax imported on our behalf plus 6%.  We do not pay any fee for exporting
services provided by Harbin Sunshine Linen Textile Co, Ltd.




We
purchase raw materials from, sell finished goods to, and outsource some of our
production to related parties who are under common control.  One such
related party is Harbin Zhongyi Sunshine Linen Co., Ltd, which is controlled by
Mr. Gao, our Chief Executive Officer and principal shareholder.  Pursuant
to these arrangements, we had amounts due from Harbin Zhongyi Sunshine Linen
Co., Ltd., totaling $2,061,100 as of December 31, 2009 and amounts due to Harbin
Zhongyi Sunshine Linen Co., Ltd. of $56,470 as of December 31, 2008.  In
addition, we had amounts due from Harbin Sunshine Linen Textile Co, Ltd.,
totaling $515,479 and $1,185,605, as of December 31, 2009 and 2008.




As of
December 31, 2009, we owed $45,672 to Mr. Gao, our Chief Executive Officer and
principal shareholder.  There was amount of $319,326 due from Mr. Gao as of
December 31, 2008.




The
following table summarizes related party transactions in the fiscal years ending
December 31, 2009, 2008 and 2007 relating to selling finished goods, purchasing
raw materials, processing products and selling linen yarn:




For the Year Ended December
    31,2009
                  
                  
                  2008
                  
                  
                  2007Transactions
                  
                  Amount
                  
                  
                  Percentage of
                    Total Similar
                    Transactions
                  
                  
                  Amount
                  
                  
                  Percentage
                    of
                    Total Similar
                    Transactions
                  
                  
                  Amount
                  
                  
                  Percentage of
                    Total Similar
                    Transactions(a)
      Selling finished goods toHarbin
      Sunshine Linen Textile Co., Ltd.
                  
                  $
                  4,169,833
                  
                  
                  
                  14.6
                  %
                  
                  $
                  4,161,201
                  
                  
                  
                  20.9
                  %
                  
                  $
                  7,126,297
                  
                  
                  
                  34.3
                  %Purchasing
      raw materials fromHarbin
      Sunshine Linen Textile Co., Ltd.
                  
                  $
                  41,337
                  
                  
                  
                  1.05
                  %
                  
                  $
                  1,444,461
                  
                  
                  
                  54.5
                  %
                  
                  $
                  3,892,253
                  
                  
                  
                  61.3
                  %(b)
      Selling finished goods toHarbin
      Zhongyi Sunshine Linen Co., Ltd
                  
                  $
                  7,289,137
                  
                  
                  
                  25.5
                  %
                  
                  $
                  1,554,289
                  
                  
                  
                  7.8
                  %
                  
                  $
                  1,203,176
                  
                  
                  
                  5.8
                  %Purchasing
      raw materials fromHarbin
      Zhongyi Sunshine Linen Co., Ltd
                  
                  $
                  1,382,827
                  
                  
                  
                  35.2
                  %
                  
                  $
                  911,015
                  
                  
                  
                  34.4
                  %
                  
                  $
                  1,522,890
                  
                  
                  
                  24.0
                  %(c)
      Processing products for Songyuan QiananSunshine
      Linen Co., Ltd.
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  96,223
                  
                  
                  
                  0.5
                  %




46




C.
            Interests
      of experts and counsel.




Not
required.




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 Lanxi
Sunrise, 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
Company and its subsidiary, Bright, maintain their 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.  Gains and losses
resulting from foreign currency transactions are included in
operations.




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 other comprehensive income and accumulated other
comprehensive income in the statements of changes in shareholders’
equity.




The
financial statements filed herewith are found in Item 17.




B.
            Significant
      Changes




None.




ITEM
      9.
            THE
      OFFER AND LISTING




A.
            Offer
      and Listing Details




Our
ordinary shares are currently quoted by the Over the Counter Bulletin Board
(“OTC Bulletin Board”)
under the symbol “CTXIE”, which was changed from “CTXIF” by OTC Bulletin Board
on July 22, 2010 since we were unable to timely file our annual report on Form
20-F for the year ended December 31, 2009 with the Securities and Exchange
Commission.  We anticipate that our symbol will be changed back to “CTXIF”
on or about August 20, 2010, after the filing of this annual
report.




The table
below reflects the high and low bid prices for our ordinary shares for the
period from November 1, 2009 through August 12, 2010. Prior to November 1, 2009,
however, there was limited trading of our ordinary shares. The OTC Bulletin
Board quotations reflect inter-dealer prices, are without retail markup,
markdowns or commissions, and may not represent actual
transactions.


47





Ordinary SharesHigh
              
              
              LowAnnual Highs and Lows2009
      (from November 1 through December 31) (1)
              
              $
              1.89
              
              
              $
              0.452010
      (through August 12th)
              
              
              1.90
              
              
              
              0.80Quarterly Highs and Lows2009Fourth
      Quarter
              
              $
              1.89
              
              
              $
              0.452010First
      Quarter
              
              $
              1.90
              
              
              $
              1.32Second
      Quarter
              
              
              1.90
              
              
              
              0.80Third
      Quarter (through August 12th)
              
              
              1.25
              
              
              
              0.81Monthly Highs and LowsFebruary
      2010
              
              
              1.75
              
              
              
              1.19March
      2010
              
              
              1.99
              
              
              
              1.46April
      2010
              
              
              1.89
              
              
              
              1.52May
      2010
              
              
              1.72
              
              
              
              1.01June
      2010
              
              
              1.60
              
              
              
              0.80July
      2010
              
              
              1.20
              
              
              
              0.81




(1)
            There
      were a limited number of trades of our ordinary shares during the period
      prior to November 1, 2009, which are not meaningful to
    report.




Number of Holders.  As
of August 12, 2010, there were 170 holders of record of our outstanding ordinary
shares, though we believe that the number of beneficial holders is significantly
greater.




Dividend Policy.  We
have not paid cash dividends on any of our ordinary shares since formation and
we do not anticipate paying any dividends on our outstanding ordinary shares in
the foreseeable future. We plan to retain any earnings to finance the
development of the business and for general corporate purposes.




B.
            Plan
      of Distribution




Not
required




C.
            Markets




Our
ordinary shares have been quoted on the OTC Bulletin Board since June 3,
2008.




D.
            Selling
      Shareholders




Not
required.


48




E.
            Dilution




Not
required




F.
            Expenses
      of the Issue




Not
required




ITEM
      10.
            ADDITIONAL
      INFORMATION




A.
            Share
      Capital




Not
required.




B.
            Memorandum
      and Articles of Association





Charter





Our
charter documents consist of our memorandum of association and articles of
association.  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 were
incorporated in the Cayman Islands on 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
lawful business activity.





Ordinary 
Shares





All
issued and outstanding ordinary shares are fully paid and non-assessable.
 At any general meeting of the shareholders a resolution put to the vote of
the meeting will be decided on a show of hands and every shareholder present in
person or by proxy and entitled to vote will have one vote.  On a poll
every shareholder present in person or by proxy and entitled to vote will have
one vote for each ordinary share of which he is the holder.   The
holders of ordinary shares will be entitled to dividends on a pro-rata basis, if
declared by the board of directors and subject to the requirements of the
Companies Law.  There are no preferences, conversion rights,
preemptive rights, subscription rights, or restrictions or transfers attached to
the ordinary shares.  In the event of liquidation, dissolution, or winding
up of the company, the holders of ordinary shares are entitled to participate in
the assets of the company available for distribution after satisfaction of the
claims of creditors.





Changes
in Capital





The
company may, by ordinary resolution of the shareholders, amend the memorandum
and articles of association to increase its authorized capital, and increase or
decrease the number of authorized but unissued shares, or the par value of such
shares.





The
company may, by special resolution:


49


(a)
            consolidate
      and divide all or any of its share capital into ordinary shares of a
      larger amount than its existing ordinary
shares;





(b)
            sub-divide
      its existing ordinary shares, or any of them, into ordinary shares of
      smaller amount than is fixed by the Memorandum of Association, subject
      nevertheless to the provisions of section 13 of the Companies Law;
      and





(c)
            cancel
      any ordinary shares which, at the date of the passing of the resolution,
      have not been taken or agreed to be taken by any
  person.





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 once in every
calendar year.  Both Annual and Extraordinary General meetings must provide
at least 21 days notice to shareholders.  A quorum must be present to
conduct business at any Annual or Extraordinary General meeting.




The
directors 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 Companies Law (2009 Revision), or by the memorandum and articles of
association, required to be exercised by the company or consented to by the
shareholders.





Directors
will serve as such until the next annual general 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.





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 resolved by the company in general meeting or, in default, at such
time and place as the directors may determine, or, in default, at such time in
the third month following that in which the anniversary of our continuation
occurs, and at such place as the directors shall determine.  A quorum at an
annual general meeting and extraordinary meeting is two or more shareholders
present in person or by proxy and entitled to vote.




Certain
provisions of our memorandum and articles of association may have an
anti-takeover effect and may delay, defer or prevent a tender offer or takeover
attempt that a shareholder might consider to be in its best interest, including
those attempts that might result in a premium over the market price being paid
for the shares held by shareholders.




Certain
of these provisions provide for:




·
            requiring
      a special resolution, namely the affirmative vote of not less than
      sixty-six and two-thirds percent (66 2/3%) of such shareholders as being
      entitled to vote at a general meeting of the company in person or by proxy
      or a written resolution signed by all shareholders entitled to vote,
      generally to remove a director;
and


50




·
            appointing
      additional directors to the board by resolution of the existing directors
      (provided that such additional directors shall not exceed 1/3 in number of
      the directors elected at the last annual general meeting) or by an
      ordinary resolution, namely the affirmative vote of a majority of the
      shareholders entitled to vote at a duly convened meeting in person or by
      proxy.





These
anti-takeover provisions could make it more difficult for a third party to
acquire us, even if the third-party’s offer may be considered beneficial by many
shareholders.





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




Transfer
Agent and Registrar




The
Transfer Agent and Registrar for our ordinary shares is Island Stock Transfer
100 Second Avenue South, Suite 705S, St. Petersburg, Florida, 33701, (727)
289-0010.




C.
            Material
      Contracts




Immediately
prior to our reverse acquisition with Bright, on June 9, 2008, Mr. Gao, our
Chief Executive Officer and chairman, along with two employees of Lanxi Sunrise,
purchased a total of 900,000 shares, or approximately 39.58% of our issued and
outstanding ordinary shares, from seven previous shareholders.  The
purchase price was $309,996, or approximately $0.34 per share, and resulted in
the acquisition of 39.58% of our ordinary shares by Mr. Gao and the two
employees of Lanxi Sunrise while we were still a shell company.




On June
30, 2008, we completed a 1:2 reverse stock split, thereby reducing its issued
and outstanding shares from 2,273,996 to approximately 1,136,998.




Following
this stock purchase transaction by Mr. Gao and the two Lanxi Sunrise employees,
also on July 9, 2008, we acquired 100 shares 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 of our ordinary shares. As
a result of the transaction, Bright became our wholly owned subsidiary. Bright
is the registered beneficial owner of 95% of Lanxi Sunrise.




On April
15, 2010, so as to not violate certain applicable PRC regulations, all direct
equity interests in our Company (approximately 40.51% of our outstanding
ordinary shares) held by or on behalf of Mr. Gao, our Chief Executive Officer
and chairman, was transferred to Creation.  Mr. Gabriele Sanesi, a citizen
of Italy, is the sole shareholder and director of Creation.  Pursuant to an
agreement dated April 15, 2010 among Creation and Messrs Gao and Sanesi (the
“April 2010 Agreement”),
Mr. Sanesi has granted Mr. Gao the irrevocable right to exercise his rights as a
shareholder and director of Creation.  In addition, in accordance with the
April 2010 Agreement, Mr. Sanesi has agreed to transfer 100% of his equity
interests in Creation to Mr. Gao if the net income of the company from January
1, 2010 to June 30, 2010 is no less than US$2.0 million.




D.
            Exchange
      Controls and Other Limitations Affecting Security
  Holders




Under
Cayman Islands law, there are no exchange control restrictions in the Cayman
Islands.


51




E.
            Taxation




The
following summary of the material Cayman Islands, PRC and U.S. federal income
tax consequences of owning and disposing of our ordinary shares is based upon
laws and relevant interpretations thereof in effect as of the date of this
Annual Report, all of which are subject to change. This summary does not deal
with all possible tax consequences relating to an investment in our ordinary
shares, such as the tax consequences under state, local and other tax laws. As
used in this discussion, references to “we,” “our,” or “us” refer only to China
Linen Textile Industry, Ltd.




Cayman Islands
Taxation




Under
existing legislation in the Cayman Islands, no income, corporate or capital
gains tax, estate duty, inheritance tax, gift tax or withholding tax is imposed
upon us or our shareholders. The Cayman Islands are not party to any double
taxation treaties.




No Cayman
Islands stamp duty will be payable by our shareholders in respect of the issue
or transfer of our ordinary shares. However, an instrument transferring title to
an ordinary share, if brought into or executed in the Cayman Islands, would be
subject to a nominal stamp duty.




PRC
Taxation




The
following is a summary of the material PRC tax consequences relating to the
acquisition, ownership and disposition of our ordinary shares.




You
should consult with your own tax adviser regarding the PRC tax consequences of
the acquisition, ownership and disposition of our ordinary shares in your
particular circumstances.




Resident
Enterprise Treatment




On March
16, 2007, the Fifth Session of the Tenth National People’s Congress passed the
Enterprise Income Tax Law of the PRC (“EIT Law”), which became effective on
January 1, 2008. Under the EIT Law, enterprises are classified as “resident
enterprises” and “non-resident enterprises.” Pursuant to the EIT Law and its
implementing rules, enterprises established outside China whose “de facto
management bodies” are located in China are considered “resident enterprises”
and subject to the uniform 25% enterprise income tax rate on their worldwide
taxable income. According to the implementing rules of the EIT Law, “de facto
management body” refers to a managing body that in practice exercises overall
management control over the production and business, personnel, accounting and
assets of an enterprise.




On April
22, 2009, the State Administration of Taxation (“SAT”) issued the Notice on the
Issues Regarding Recognition of Enterprises that are Domestically Controlled as
PRC Resident Enterprises Based on the De Facto Management Body Criteria, which
was retroactively effective as of January 1, 2008. This notice provides that an
overseas incorporated enterprise that is controlled domestically will be
recognized as a “tax-resident enterprise” if it satisfies all of the following
conditions: (i) the senior management responsible for daily production/business
operations are primarily located in the PRC, and the location(s) where such
senior management execute their responsibilities are primarily in the PRC; (ii)
strategic financial and personnel decisions are made or approved by
organizations or personnel located in the PRC; (iii) major properties,
accounting ledgers, company seals and minutes of board meetings and stockholder
meetings, etc., are maintained in the PRC; and (iv) 50% or more of the board
members with voting rights or senior management habitually reside in the
PRC.




Given the
short history of the EIT Law and lack of applicable legal precedent, it remains
unclear how the PRC tax authorities will determine the resident enterprise
status of a company organized under the laws of a foreign (non-PRC)
jurisdiction, such as us and/or Bright. If the PRC tax authorities determine
that we are and/or Bright is a “resident enterprise” under the EIT Law, a number
of tax consequences could follow. First, we and/or Bright could be subject to
the enterprise income tax at a rate of 25% on our and/or Bright’s worldwide
taxable income, as well as PRC enterprise income tax reporting obligations.
Second, the EIT Law provides that dividend income between “qualified resident
enterprises” is exempt from enterprise income tax. As a result, if we and Bright
are each treated as a “qualified resident enterprise,” all dividends paid from
Lanxi Sunrise to us (through Bright) should be exempt from PRC
tax.


52




As of the
date of this prospectus, there has not been a definitive determination by us,
Bright or the PRC tax authorities as to the “resident enterprise” or
“non-resident enterprise” status of us or Bright. However, since it is not
anticipated that we and/or Bright would receive dividends or generate other
income in the near future, we and Bright are not expected to have any income
that would be subject to the 25% enterprise income tax on worldwide taxable
income in the near future. We and Bright will make any necessary tax payment if
we or Bright (based on future clarifying guidance issued by the PRC), or the PRC
tax authorities, determine that we are or Bright is a resident enterprise under
the EIT Law, and if we or Bright were to have income in the future.




Dividends
From Lanxi Sunrise




If Bright
is not treated as a resident enterprise under the EIT Law, then dividends that
Bright receives from Lanxi Sunrise may be subject to PRC withholding tax. The
EIT Law and the implementing rules of the EIT Law provide that (A) an income tax
rate of 25% will normally be applicable to “non-resident enterprises” which (i)
have an establishment or place of business inside the PRC, and (ii) have income
in connection with their establishment or place of business that is sourced from
the PRC or is earned outside the PRC but has an actual connection with their
establishment or place of business inside the PRC, and (B) a PRC withholding tax
at a rate of 10% will normally be applicable to dividends payable to
non-resident enterprises which (i) do not have an establishment or place of
business in the PRC or (ii) have an establishment or place of business in the
PRC, but the relevant income is not effectively connected with such
establishment or place of business, to the extent such dividends are derived
from sources within the PRC.




As
described above, the PRC tax authorities may determine the resident enterprise
status of entities organized under the laws of foreign jurisdictions on a
case-by-case basis. We and Bright are holding companies and substantially all of
our income and that of Bright may be derived from dividends. Thus, if we and/or
Bright are considered a “non-resident enterprise” under the EIT Law and the
dividends paid to us and/or Bright are considered income sourced within the PRC,
such dividends received may be subject to PRC withholding tax as described in
the foregoing paragraph.




We are a
Cayman Islands holding company which owns a 100% equity interest in a subsidiary
in the Republic of Vanuatu (Bright), which in turns owns a 95% equity interest
in Lanxi Sunrise, a PRC company. As a result, if Bright were treated as a
“non-resident enterprise” under the EIT Law, then dividends that Bright receives
from Lanxi Sunrise  (assuming such dividends were considered sourced within
the PRC) may be subject to a 10% PRC withholding tax.  Similarly, if we
were treated as a “non-resident enterprise” under the EIT Law and Bright were
treated as a “resident enterprise” under the EIT Law, then dividends that we
receive from Bright (assuming such dividends were considered sourced within the
PRC) may be subject to a 10% PRC withholding tax. Any such taxes on dividends
could materially reduce the amount of dividends, if any, we could pay to our
shareholders.




As of the
date of this prospectus, there has not been a definitive determination as to the
“resident enterprise” or “non-resident enterprise” status of us or Bright. As
described above, however, Lanxi Sunrise  is not expected to pay any
dividends in the near future. Lanxi Sunrise and Bright will make any necessary
tax withholding if, in the future, Lanxi Sunrise or Bright were to pay any
dividends and Lanxi Sunrise or Bright (based on future clarifying guidance
issued by the PRC), or the PRC tax authorities, determine that Bright is or we
are a non-resident enterprise under the EIT Law.




Dividends
that Non-PRC Resident Enterprise Investors Receive From Us; Gain on the Sale or
Transfer of Our Ordinary Shares




If we are
determined to be a resident enterprise under the EIT Law and dividends payable
to (or gains realized by) our investors that are not tax residents of the PRC
(“non-resident investors”) are treated as income derived from sources within the
PRC, then the dividends that non-resident investors receive from us and any such
gain derived by such investors on the sale or transfer of our ordinary shares
may be subject to income tax under the PRC tax laws.




Under the
PRC tax laws, PRC withholding tax at the rate of 10% is applicable to dividends
payable to non-resident investors which (i) do not have an establishment or
place of business in the PRC or (ii) have an establishment or place of business
in the PRC but the relevant income is not effectively connected with the
establishment or place of business, to the extent that such dividends are deemed
to be sourced within the PRC. Similarly, any gain realized on the transfer of
our ordinary sharesby such investors is
also subject to 10% PRC income tax if such gain is regarded as income derived
from sources within the PRC.


53




The
dividends paid by us to non-resident investors with respect to our ordinary
shares, or gain non-resident investors may realize from the sale or transfer of
our ordinary shares, may be treated as PRC-sourced income and, as a result, may
be subject to PRC tax at a rate of 10%. In such event, we may be required to
withhold a 10% PRC tax on any dividends paid to non-resident investors. In
addition, non-resident investors in our ordinary shares may be responsible for
paying PRC tax at a rate of 10% on any gain realized from the sale or transfer
of our ordinary shares if such non-resident investors and the gain satisfy the
requirements under the PRC tax laws. However, under the PRC tax laws, we would
not have an obligation to withhold PRC income tax in respect of the gains that
non-resident investors (including U.S. enterprise investors) may realize from
the sale or transfer of our ordinary shares.




If we
were to pay any dividends in the future, and if we (based on future clarifying
guidance issued by the PRC), or the PRC tax authorities, determine that we must
withhold PRC tax on any dividends payable by us under the PRC tax laws, we will
make any necessary tax withholding on dividends payable to our non-resident
investors. If non-resident investors as described under the PRC tax laws
(including U.S. enterprise investors) realize any gain from the sale or transfer
of our ordinary shares and if such gain were considered as PRC-sourced income,
such non-resident investors would be responsible for paying 10% PRC tax on the
gain from the sale or transfer of our ordinary shares. As indicated above, under
the PRC tax laws, we would not have an obligation to withhold PRC income tax in
respect of the gains that non-resident investors (including U.S. enterprise
investors) may realize from the sale or transfer of our ordinary
shares.




On
December 10, 2009, the SAT released Circular Guoshuihan No. 698 (“Circular 698”)
that reinforces the taxation of certain equity transfers by non-resident
investors through overseas holding vehicles. Circular 698 addresses indirect
equity transfers as well as other issues. Circular 698 is retroactively
effective from January 1 2008. According to Circular 698, where a non-resident
investor that indirectly holds an equity interestin a PRC resident
enterprise through a non-PRC offshore holding company indirectly transfers an
equity interest in the PRC resident enterprise by selling an equity interest in
the offshore holding company, and the latter is located in a country or
jurisdiction where the actual tax burden is less than 12.5% or where the
offshore income of its residents is not taxable, the non-resident investor is
required to provide the PRC tax authority in charge of that PRC resident
enterprise with certain relevant information within 30 days of the execution of
the equity transfer agreement. The tax authorities in charge will evaluate the
offshore transaction for tax purposes. In the event that the tax authorities
determine that such transfer is abusing forms of business organization and a
reasonable commercial purpose for the offshore holding company other than the
avoidance of PRC income tax liability is lacking, the PRC tax authorities will
have the power to re-assess the nature of the equity transfer under the doctrine
of substance over form. If the SAT’s challenge of a transfer is successful, it
may deny the existence of the offshore holding company that is used for tax
planning purposes and subject the non-resident investor to PRC tax on the
capital gain from such transfer. Since Circular 698 has a short history, there
is uncertainty as to its application. We (or a non-resident investor) may become
at risk of being taxed under Circular 698 and may be required to expend valuable
resources to comply with Circular 698 or to establish that we (or such
non-resident investor) should not be taxed under Circular 698, which could have
a material adverse effect on our financial condition and results of operations
(or such non-resident investor’s investment in us).




Penalties
for Failure to Pay Applicable PRC Income Tax




A
non-resident investor in us may be responsible for paying PRC tax at a rate of
10% on any gain realized from the sale or transfer of our ordinary sharesif such non-resident
investor and the gain satisfy the requirements under the PRC tax laws, as
described above.


54




According
to the EIT Law and its implementing rules, the PRC Tax Administration Law (the
“Tax Administration Law”) and its implementing rules, the Provisional Measures
for the Administration of Withholding of Enterprise Income Tax for Non-Resident
Enterprises (the “Administration Measures”) and other applicable PRC laws or
regulations (collectively the “Tax Related Laws”), where any gain derived by a
non-resident investor from the sale or transfer of our ordinary sharesis subject to any income
tax in the PRC, and such non-resident investor fails to file any tax return or
pay tax in this regard pursuant to the Tax Related Laws, such investor may be
subject to certain fines, penalties or punishments, including without
limitation: (1) if the non-resident investor fails to file a tax return and
present the relevant information in connection with tax payments, the competent
PRC tax authorities may order it to do so within the prescribed time limit and
may impose a fine up to RMB 2,000, and in egregious cases, may impose a fine
ranging from RMB 2,000 to RMB 10,000; (2) if the non-resident investor fails to
file a tax return or fails to pay all or part of the amount of tax payable, the
non-resident investor may be required to pay the unpaid tax amount payable, a
surcharge on overdue tax payments (the daily surcharge is 0.05% of the overdue
amount, beginning from the day the deferral begins) and a fine ranging from 50%
to 500% of the unpaid amount of the tax payable; (3) if the non-resident
investor fails to file a tax return and to pay the tax within the prescribed
time limit according to the order by the PRC tax authorities, the PRC tax
authorities may collect and check information about the income receivable by the
non-resident investor in the PRC fromother payers (the “Other
Payers”) who will pay amounts to such non-resident investor, and send a “Notice
of Tax Issues” to the Other Payers to collect and recover the tax payable and
overdue fines imposed on such non-resident investor from the amounts otherwise
payable to such non-resident investor by the Other Payers; (4) if the
non-resident investor fails to pay the tax payable within the prescribed time
limit as ordered by the PRC tax authorities, a fine may be imposed on the
non-resident investor ranging from 50% to 500% of the unpaid tax payable, and
the PRC tax authorities may, upon approval by the director of the tax bureau (or
sub-bureau) of, or higher than, the county level, take the following compulsory
measures: (i) notify in writing the non-resident investor’s bank or other
financial institution to withhold from the account thereof for payment of the
amount of tax payable, and (ii) detain, seal off, or sell by auction or on the
market the non-resident investor’s commodities, goods or other property in a
value equivalent to the amount of tax payable; or (5) if the non-resident
investor fails to pay all or part of the amount of tax payable or the surcharge
for the overdue tax payment, and can not provide a guarantee to the PRC tax
authorities, the PRC tax authorities may notify the frontier authorities to
prevent the non-resident investor or its legal representative from leaving the
PRC.




United States Federal Income
Taxation




General




The
following is a summary of the material U.S. federal income tax consequences of
the acquisition, ownership and disposition of our ordinary shares. The
discussion below of the U.S. federal income tax consequences to “U.S. Holders”
will apply to a beneficial owner of our ordinary shares that is for U.S. federal
income tax purposes:




·
            an
      individual citizen or resident of the United
  States;




·
            a
      corporation (or other entity treated as a corporation) that is created or
      organized (or treated as created or organized) in or under the laws of the
      United States, any state thereof or the District of
    Columbia;




·
            an
      estate whose income is includible in gross income for U.S. federal income
      tax purposes regardless of its source;
or




·
            a
      trust if (i) a U.S. court can exercise primary supervision over the
      trust’s administration and one or more U.S. persons are authorized to
      control all substantial decisions of the trust, or (ii) it has a valid
      election in effect under applicable U.S. Treasury regulations to be
      treated as a U.S. person.




If a
beneficial owner of our ordinary shares is not described as a U.S. Holder and is
not an entity treated as a partnership or other pass- through entity for U.S.
federal income tax purposes, such owner will be considered a “Non-U.S. Holder.”
The U.S. federal income tax consequences applicable specifically to Non-U.S.
Holders are described below under the heading “Non-U.S. Holders.”




This
summary is based on the Internal Revenue Code of 1986, as amended (the “Code”),
its legislative history, Treasury regulations promulgated thereunder, published
rulings and court decisions, all as currently in effect. These authorities are
subject to change or differing interpretations, possibly on a retroactive
basis.




This
discussion does not address all aspects of U.S. federal income taxation that may
be relevant to any particular holder based on such holder’s individual
circumstances. In particular, this discussion considers only holders that own
our ordinary shares as capital assets within the meaning of Section 1221 of the
Code, and does not discuss the potential application of the alternative minimum
tax or the U.S. federal income tax consequences to holders that are subject to
special rules, including:


55




·
            financial
      institutions or financial services
entities;




·
            broker-dealers;




·
            taxpayers
      that are subject to the mark-to-market accounting rules under Section 475
      of the Code;




·
            tax-exempt
      entities;




·
            governments
      or agencies or instrumentalities
thereof;




·
            insurance
      companies;




·
            regulated
      investment companies;




·
            real
      estate investment trusts;




·
            certain
      expatriates or former long-term residents of the United
      States;




·
            persons
      that actually or constructively own 5% or more of our voting
      stock;




·
            persons
      that acquired our ordinary shares pursuant to the exercise of employee
      stock options, in connection with employee stock incentive plans or
      otherwise as compensation;




·
            persons
      that hold our ordinary shares as part of a straddle, constructive sale,
      hedging, conversion or other integrated transaction;
  or




·
            persons
      whose functional currency is not the U.S.
  dollar.




This
discussion does not address any aspect of U.S. federal non-income tax laws, such
as gift or estate tax laws, or state, local or non-U.S. tax laws or, except as
discussed herein, any tax reporting obligations of a holder of our ordinary
shares. Additionally, this discussion does not consider the tax treatment of
partnerships or other pass-through entities or persons who hold our ordinary
shares through such entities. If a partnership (or other entity classified as a
partnership for U.S. federal income tax purposes) is the beneficial owner of our
ordinary shares, the U.S. federal income tax treatment of a partner in the
partnership will generally depend on the status of the partner and the
activities of the partnership. This discussion also assumes that any
distribution made (or deemed made) in respect of our ordinary shares and any
consideration received (or deemed received) by a holder in connection with the
sale or other disposition of such ordinary shares will be in U.S.
dollars.




We have
not sought, and will not seek, a ruling from the Internal Revenue Service
(“IRS”) or an opinion of counsel as to any U.S. federal income tax consequence
described herein. The IRS may disagree with the description herein, and its
determination may be upheld by a court. Moreover, there can be no assurance that
future legislation, regulations, administrative rulings or court decisions will
not adversely affect the accuracy of the statements in this
discussion.




THIS
DISCUSSION IS ONLY A SUMMARY OF CERTAIN MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY
SHARES. IT IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR IN OUR ORDINARY SHARES
IS URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX
CONSEQUENCES TO SUCH INVESTOR OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF
OUR ORDINARY SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL,
AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND ANY APPLICABLE TAX
TREATIES.


56




U.S.
Holders




Taxation
of Distributions




Subject
to the passive foreign investment company, or “PFIC,” rules discussed below, a
U.S. Holder generally will be required to include in gross income as ordinary
income the amount of any cash dividend paid on our ordinary shares. A cash
distribution on such ordinary shares generally will be treated as a dividend for
U.S. federal income tax purposes to the extent the distribution is paid out of
our current or accumulated earnings and profits (as determined for U.S. federal
income tax purposes). Such dividend will not be eligible for the
dividends-received deduction generally allowed to domestic corporations in
respect of dividends received from other domestic corporations. The portion of
such cash distribution in excess of such earnings and profits generally will be
applied against and reduce (but not below zero) the U.S. Holder’s adjusted tax
basis in our ordinary shares. Any remaining excess generally will be treated as
gain from the sale or exchange of such ordinary shares.




With
respect to non-corporate U.S. Holders for taxable years beginning before January
1, 2011, dividends may be subject to U.S. federal income tax at the lower
applicable regular long term capital gains tax rate (see “—Taxation on the
Disposition of ordinary shares” below) provided that (1) our ordinary shares are
readily tradable on an established securities market in the United States or, in
the event we are deemed to be a PRC “resident enterprise” under the EIT Law, we
are eligible for the benefits of the Agreement between the Government of the
United States of America and the Government of the People’s Republic of China
for the Avoidance of Double Taxation and the Prevention of Tax Evasion with
Respect to Taxes on Income (the “U.S.-PRC Tax Treaty”), (2) we are not a PFIC,
as discussed below, for either the taxable year in which the dividend was paid
or the preceding taxable year, and (3) certain holding period requirements are
met. Under published IRS authority, shares are considered for purposes of clause
(a) above to be readily tradable on an established securities market in the
United States only if they are listed on certain exchanges, which presently do
not include the OTC Bulletin Board. Because our ordinary shares currently are
quoted only on the OTC Bulletin Board and will not, therefore, be treated as
readily tradable on an established securities market in the United States, any
dividends paid on our ordinary shares currently will not qualify for the lower
rate unless we are deemed to be a PRC “resident enterprise” under EIT Law and
are eligible for the benefits of the U.S.-PRC Treaty. U.S. Holders should
consult their own tax advisors regarding the availability of the lower rate for
any dividends paid with respect to our ordinary shares.




If a PRC
tax applies to any dividends paid to a U.S. Holder on our ordinary shares, such
tax should be treated as a foreign tax eligible for a deduction from such
holder’s U.S. federal taxable income or a foreign tax credit against such
holder’s U.S. federal income tax liability (subject to applicable conditions and
limitations). In addition, such U.S. Holder should be entitled to certain
benefits under the U.S.-PRC Tax Treaty, if such holder is considered a resident
of the United States for purposes of the U.S.-PRC Tax Treaty. U.S. Holders
should consult their own tax advisors regarding the deduction or credit for any
such PRC tax and their eligibility for the benefits of the U.S.-PRC Tax
Treaty.




Taxation
on the Disposition of Ordinary Shares




Upon a
sale or other taxable disposition of our ordinary shares, and subject to the
PFIC rules discussed below, a U.S. Holder generally will recognize capital gain
or loss in an amount equal to the difference between the amount realized and the
U.S. Holder’s adjusted tax basis in the ordinary shares.




The
regular U.S. federal income tax rate on capital gains recognized by U.S. Holders
generally is the same as the regular U.S. federal income tax rate on ordinary
income, except that long-term capital gains recognized by non-corporate U.S.
Holders are generally subject to U.S. federal income tax at a maximum regular
rate of 15% for taxable years beginning before January 1, 2011 (and 20%
thereafter). Capital gain or loss will constitute long-term capital gain or loss
if the U.S. Holder’s holding period for the ordinary shares exceeds one year.
The deductibility of capital losses is subject to various
limitations.


57




If a PRC
tax applies to any gain from the disposition of our ordinary shares by a U.S.
Holder, such tax should be treated as a foreign tax eligible for a deduction
from such holder’s U.S. federal taxable income or a foreign tax credit against
such holder’s U.S. federal income tax liability (subject to applicable
conditions and limitations). In addition, such U.S. Holder should be entitled to
certain benefits under the U.S.-PRC Tax Treaty, if such holder is considered a
resident of the United States for purposes of the U.S.-PRC Tax Treaty. U.S.
Holders should consult their own tax advisors regarding the deduction or credit
for any such PRC tax and their eligibility for the benefits of the U.S.-PRC Tax
Treaty.




Passive
Foreign Investment Company Rules




A foreign
(i.e., non-U.S.) corporation will be a passive foreign investment company
(“PFIC”), if at least 75% of its gross income in a taxable year of the foreign
corporation, including its pro rata share of the gross income of any corporation
in which it is considered to own at least 25% of the shares by value, is passive
income. Alternatively, a foreign corporation will be a PFIC if at least 50% of
its assets in a taxable year of the foreign corporation, ordinarily determined
based on fair market value and averaged quarterly over the year, including its
pro rata share of the assets of any corporation in which it is considered to own
at least 25% of the shares by value, are held for the production of, or produce,
passive income. Passive income generally includes dividends, interest, rents and
royalties (other than certain rents or royalties derived from the active conduct
of a trade or business), and gains from the disposition of passive
assets.




Based on
the expected composition of the assets and income of us and our subsidiaries for
our 2010 taxable year, it is not anticipated that we will be treated as a PFIC
for our 2010 taxable year.However, our actual PFIC
status for our 2010 taxable year or any subsequent taxable year will not be
determinable until after the end of such taxable year. Accordingly, there can be
no assurance with respect to our status as a PFIC for our 2010 taxable year or
any future taxable year.




If we are
determined to be a PFIC for any taxable year (or portion thereof) that is
included in the holding period of a U.S. Holder, and such U.S. Holder did not
make either a timely qualified electing fund (“QEF”) election for our first
taxable year as a PFIC in which the U.S. Holder held (or was deemed to hold) our
ordinary shares, or a mark-to-market election, as described below, such holder
generally will be subject to special rules with respect to:




·
            any
      gain recognized by the U.S. Holder on the sale or other disposition of its
      ordinary shares; and




·
            any
      “excess distribution” made to the U.S. Holder (generally, any
      distributions to such U.S. Holder during a taxable year of the U.S. Holder
      that are greater than 125% of the average annual distributions received by
      such U.S. Holder in respect of the ordinary shares during the three
      preceding taxable years of such U.S. Holder or, if shorter, such U.S.
      Holder’s holding period for the ordinary
  shares).




Under
these rules,




·
            the
      U.S. Holder’s gain or excess distribution will be allocated ratably over
      the U.S. Holder’s holding period for the ordinary
  shares;




·
            the
      amount allocated to the U.S. Holder’s taxable year in which the U.S.
      Holder recognized the gain or received the excess distribution, or to the
      period in the U.S. Holder’s holding period before the first day of our
      first taxable year in which we qualified as a PFIC, will be taxed as
      ordinary income;




·
            the
      amount allocated to other taxable years (or portions thereof) of the U.S.
      Holder and included in its holding period will be taxed at the highest tax
      rate in effect for that year and applicable to the U.S. Holder;
      and




·
            the
      interest charge generally applicable to underpayments of tax will be
      imposed in respect of the tax attributable to each such other taxable year
      of the U.S. Holder.


58




In
general, a U.S. Holder may avoid the PFIC tax consequences described above in
respect to our ordinary shares by making a timely QEF election to include in
income its pro rata share of our net capital gains (as long-term capital gain)
and other earnings and profits (as ordinary income), on a current basis, in each
case whether or not distributed, in the taxable year of the U.S. Holder in which
or with which our taxable year ends. A U.S. Holder may make a separate election
to defer the payment of taxes on undistributed income inclusions under the QEF
rules, but if deferred, any such taxes will be subject to an interest
charge.




The QEF
election is made on a shareholder-by-shareholder basis and, once made, can be
revoked only with the consent of the IRS. A U.S. Holder generally makes a QEF
election by attaching a completed IRS Form 8621 (Return by a Shareholder of a
Passive Foreign Investment Company or Qualified Electing Fund), including the
information provided in a PFIC annual information statement, to a timely filed
U.S. federal income tax return for the tax year to which the election relates.
Retroactive QEF elections generally may be made only by filing a protective
statement with such return and if certain other conditions are met or with the
consent of the IRS.




In order
to comply with the requirements of a QEF election, a U.S. Holder must receive
certain information from us. Upon request from a U.S. Holder, we will endeavor
to provide to the U.S. Holder no later than 90 days after the request such
information as the IRS may require, including a PFIC annual information
statement, in order to enable the U.S. Holder to make and maintain a QEF
election. However, there is no assurance that we will have timely knowledge of
our status as a PFIC in the future or of the required information to be
provided.




If a U.S.
Holder made a QEF election with respect to our ordinary shares, and the special
tax and interest charge rules do not apply to such shares (because of a timely
QEF election for our first taxable year as a PFIC in which the U.S. Holder holds
(or is deemed to hold) such shares or a purge of the PFIC taint pursuant to a
purging election, as described below), any gain recognized on the sale of our
ordinary shares generally will be taxable as capital gain and no interest charge
will be imposed. As discussed above, U.S. Holders of a QEF are currently taxed
on their pro rata shares of its earnings and profits, whether or not
distributed. In such case, a subsequent distribution of such earnings and
profits that were previously included in income generally should not be taxable
as a dividend to such U.S. Holders. The tax basis of a U.S. Holder’s shares in a
QEF will be increased by amounts that are included in income, and decreased by
amounts distributed but not taxed as dividends, under the above rules. Similar
basis adjustments apply to property if by reason of holding such property the
U.S. Holder is treated under the applicable attribution rules as owning shares
in a QEF.




Although
a determination as to our PFIC status will be made annually, an initial
determination that we are a PFIC will generally apply for subsequent years to a
U.S. Holder who held ordinary shares while we were a PFIC, whether or not we
meet the test for PFIC status in those subsequent years. A U.S. Holder who makes
the QEF election discussed above for our first taxable year as a PFIC in which
the U.S. Holder holds (or is deemed to hold) our ordinary shares, however, will
not be subject to the PFIC tax and interest charge rules discussed above in
respect to such shares. In addition, such U.S. Holder will not be subject to the
QEF inclusion regime with respect to such shares for any of our taxable years
that ends within or with a taxable year of the U.S. holder and in which we are
not a PFIC. On the other hand, if the QEF election is not effective for each of
our taxable years in which we are a PFIC and during which the U.S. Holder holds
(or is deemed to hold) our ordinary shares, the PFIC rules discussed above will
continue to apply to such shares unless the holder makes a “purging election.” A
purging election generally creates a deemed sale of such shares at their fair
market value. The gain recognized by the purging election generally will be
subject to the special tax and interest charge rules treating the gain as an
excess distribution, as described above. As a result of the purging election,
the U.S. Holder generally will have a new basis and holding period in its
ordinary shares.




Alternatively,
if a U.S. Holder, at the close of its taxable year, owns ordinary shares in a
PFIC that is treated as marketable stock, the U.S. Holder may make a
mark-to-market election with respect to such shares for such taxable year. If
the U.S. Holder makes a valid mark-to-market election for the first tax year in
which the U.S. Holder holds (or is deemed to hold) our ordinary shares and for
which we are determined to be a PFIC, such holder generally will not be subject
to the PFIC rules described above in respect to its ordinary shares. Instead, in
general, the U.S. Holder will include as ordinary income each year the excess,
if any, of the fair market value of its ordinary shares at the end of its
taxable year over the adjusted basis in its ordinary shares. The U.S. Holder
also will be allowed to take an ordinary loss in respect of the excess, if any,
of the adjusted basis of its ordinary shares over the fair market value of its
ordinary shares at the end of its taxable year (but only to the extent of the
net amount of previously included income as a result of the mark-to-market
election). The U.S. Holder’s basis in its ordinary shares will be adjusted to
reflect any such income or loss amounts, and any further gain recognized on a
sale or other taxable disposition of the ordinary shares will be treated as
ordinary income.


59




The
mark-to-market election is available only for stock that is regularly traded on
a national securities exchange that is registered with the Securities and
Exchange Commission or on a foreign exchange or market that the IRS determines
has rules sufficient to ensure that the market price represents a legitimate and
sound fair market value. The OTC Bulletin Board is not considered to be a
national securities exchange that would allow a U.S. Holder to make a
mark-to-market election. Because our ordinary shares are currently quoted only
on the OTC Bulletin Board, such shares currently may not qualify as marketable
stock for purposes of the election. U.S. Holders should consult their own tax
advisors regarding the availability and tax consequences of a mark-to-market
election in respect to our ordinary shares.




If we are
a PFIC and, at any time, have a foreign subsidiary that is classified as a PFIC,
U.S. Holders generally would be deemed to own a portion of the shares of such
lower-tier PFIC, and generally could incur liability for the deferred tax and
interest charge described above if we receive a distribution from, or dispose of
all or part of our interest in, the lower-tier PFIC. Upon request, we will
endeavor to cause any lower-tier PFIC to provide to a U.S. Holder no later than
90 days after the request the information that may be required to make or
maintain a QEF election with respect to the lower- tier PFIC. However, there is
no assurance that we will have timely knowledge of the status of any such
lower-tier PFIC or will be able to cause the lower-tier PFIC to provide the
required information. U.S. Holders are urged to consult their own tax advisors
regarding the tax issues raised by lower-tier PFICs.




If a U.S.
Holder owns (or is deemed to own) shares in a PFIC during any taxable year of
the U.S. Holder, such holder may have to file an IRS Form 8621 (whether or not a
QEF election or mark-to-market election is made).




The rules
dealing with PFICs and with the QEF and mark-to-market elections are very
complex and are affected by various factors in addition to those described
above. Accordingly, U.S. Holders of our ordinary shares should consult their own
tax advisors concerning the application of the PFIC rules to our ordinary shares
under their particular circumstances.




Additional
Taxes After 2012




For
taxable years beginning after December 31, 2012, U.S. Holders that are
individuals, estates or trusts and whose income exceeds certain thresholds
generally will be subject to a 3.8% Medicare contribution tax on unearned
income, including, among other things, dividends on, and capital gains from the
sale or other taxable disposition of, our ordinary shares, subject to certain
limitations and exceptions.  U.S. Holders should consult their own tax
advisors regarding the effect, if any, of such tax on their ownership and
disposition of our ordinary shares.




Non-U.S.
Holders




Cash
dividends paid to a Non-U.S. Holder in respect to its ordinary shares generally
will not be subject to U.S. federal income tax, unless the dividends are
effectively connected with the Non-U.S. Holder’s conduct of a trade or business
within the United States (and, if required by an applicable income tax treaty,
are attributable to a permanent establishment or fixed base that such holder
maintains in the United States).




In
addition, a Non-U.S. Holder generally will not be subject to U.S. federal income
tax on any gain attributable to a sale or other disposition of our ordinary
shares unless such gain is effectively connected with its conduct of a trade or
business in the United States (and, if required by an applicable income tax
treaty, is attributable to a permanent establishment or fixed base that such
holder maintains in the United States) or the Non-U.S. Holder is an individual
who is present in the United States for 183 days or more in the taxable year of
sale or other disposition and certain other conditions are met (in which case,
such gain from United States sources generally is subject to tax at a 30% rate
or a lower applicable tax treaty rate).


60




Dividends
and gains that are effectively connected with the Non-U.S. Holder’s conduct of a
trade or business in the United States (and, if required by an applicable income
tax treaty, are attributable to a permanent establishment or fixed base in the
United States) generally will be subject to U.S. federal income tax (but not the
Medicare contribution tax) in the same manner as for a U.S. Holder and, in the
case of a Non-U.S. Holder that is a corporation for U.S. federal income tax
purposes, may also be subject to an additional branch profits tax at a 30% rate
or a lower applicable tax treaty rate.




Backup
Withholding and Information Reporting




In
general, information reporting for U.S. federal income tax purposes will apply
to distributions made on our ordinary shares within the United States to a
non-corporate U.S. Holder and to the proceeds from sales and other dispositions
of our ordinary shares by a non-corporate U.S. Holder to or through a U.S.
office of a broker. Payments made (and sales and other dispositions effected at
an office) outside the United States will be subject to information reporting in
limited circumstances.  In addition, backup withholding of U.S. federal
income tax, currently at a rate of 28%, generally will apply to dividends paid
on our ordinary shares to a non-corporate U.S. Holder and the proceeds from
sales and other dispositions of our ordinary shares by a non-corporate U.S.
Holder, in each case who:




·
            fails
      to provide an accurate taxpayer identification
  number;




·
            is
      notified by the IRS that backup withholding is required;
  or




·
            in
      certain circumstances, fails to comply with applicable certification
      requirements.




A
Non-U.S. Holder generally may eliminate the requirement for information
reporting and backup withholding by providing certification of its foreign
status, under penalties of perjury, on a duly executed applicable IRS Form W-8
or by otherwise establishing an exemption.




Backup
withholding is not an additional tax. Rather, the amount of any backup
withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S.
Holder’s U.S. federal income tax liability and may entitle such holder to a
refund, provided that certain required information is timely furnished to the
IRS. Holders are urged to consult their own tax advisors regarding the
application of backup withholding and the availability of and procedures for
obtaining an exemption from backup withholding in their particular
circumstances.




F.
            Dividends
      and paying agents




Not
required.




G.
            Statement
      by experts




Not
required.




H.
            Documents
      on display




Documents
concerning us that are referred to in this document may be inspected at our
principal executive offices at Chengdong Street, Lanxi County, Heilongjiang
Province, PRC and the telephone number at this address is
86-455-5635885.




In
addition, we will file annual reports and other information with the Securities
and Exchange Commission. We will file annual reports on Form 20-F and submit
other information under cover of Form 6-K. As a foreign private issuer, we are
exempt from the proxy requirements of Section 14 of the Exchange Act and our
officers, directors and principal shareholders will be exempt from the insider
short-swing disclosure and profit recovery rules of Section 16 of the Exchange
Act. Annual reports and other information we file with the Commission may be
inspected at the public reference facilities maintained by the Commission at
Room 100 F. Street, N.E., Washington, D.C. 20549, and copies of all or any part
thereof may be obtained from such offices upon payment of the prescribed fees.
You may call the Commission at 1-800-SEC-0330 for further information on the
operation of the public reference rooms and you can request copies of the
documents upon payment of a duplicating fee, by writing to the Commission. In
addition, the Commission maintains a web site that contains reports and other
information regarding registrants (including us) that file electronically with
the Commission which can be assessed at http://www.sec.gov.


61




I.
            Subsidiary
      Information




Not
required.




ITEM
      11.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK




Not
required.




ITEM
      12.
            DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY
SECURITIES




Not
required.


62


PART
II




ITEM
      13.
            DEFAULTS,
      DIVIDEND ARREARAGES AND
DELINQUENCIES




There has
been no default of any indebtedness nor is there any arrearage in the payment of
dividends.




ITEM
      14.
            MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS




Not
required.




ITEM
      15.
            CONTROLS
      AND PROCEDURES




A.
            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. However, our chief executive officer and chief financial
officer also concluded that our disclosure controls and procedures were not
effective as of the end of the period covered by this report to provide
reasonable assurance of the achievement of these objectives solely because of
the material weakness in internal control over financial reporting set forth
below.




B.
            Management’s
      Annual Report on Internal Control over Financial
  Reporting




Our
management 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. Our management
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 our assets;
(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 our assets that
could have a material effect on the financial statements.


63


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.  We had a material weakness in our
internal controls over financial reporting relating to a failure of certain
departments of the Company to communicate promptly and effectively with our
management.




Report on Internal Control
Over Financial Reporting




With the
participation of the Chief Executive Officer and Chief Financial Officer, our
management evaluated the effectiveness of our internal control over financial
reporting as of December 31, 2009 based upon the 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, 2009, we had a material weakness in our
internal controls over financial reporting. We had a material weakness in our
internal controls over financial reporting relating to a failure of certain
departments of the Company to communicate promptly and effectively with our
management, which reduces the efficiency of our internal controls over financial
reporting.We do
not have an audit committee and rely solely upon our internal auditor to conduct
internal control supervision, which creates a weakness in the sufficiency of
our internal controls design and regular review.  Further, our
internal controls system needs to be improved and updated. To remediate the
weakness, our management, under the direction of the Chief Executive Officer and
Chief Financial Officer, intends to continue to review and make changes to the
overall design of our internal control environment, as well as policies and
procedures to improve the overall effectiveness of internal controls over
financial reporting and our disclosure controls and procedures.  Our Chief
Executive Officer and Chief Financial Officer intend to improve the
communication between our departments and management, to perfect and update the
internal controls system, to improve supervision over financial reporting by
management, and to regularly conduct self-assessments of the effectiveness of
our internal controls system.  We plan to establish an audit committee in
order to improve and reinforce internal audit functions, ensure the availability
of an independent assessment of our internal audit, and integrate this
assessment into the internal controls of the company. We plan to appoint all
independent directors, including the chairperson, to our audit committee. The
chairperson will supervise the formulation of systems and resources to assist
the audit committee in its functions.




C.
            Attestation
      report of the registered public accounting
firm




This
Annual Report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our 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.




D.
            Changes
      in Internal Controls over Financial
Reporting




There was
no change in our internal control over financial reporting during the period
covered by this Annual Report, that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.




ITEM
      16.
            [RESERVED]




ITEM
      16A.
            AUDIT
      COMMITTEE FINANCIAL EXPERT.




We do not
currently have an audit committee, and our Board of Directors has not determined
that one of its members is an audit committee financial expert.


64




ITEM
      16B.
            CODE
      OF ETHICS.




We have
adopted a Code of Ethics that applies to our Board of Directors, chief executive
officer, chief financial officer, and other senior financial
officers.




ITEM
      16C.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES.




Audit
Fees




UHY HK
was the company’s principal accountant for the fiscal year ended December 31,
2008.  UHY HK also provided audit services to us in connection with the
fiscal year ended December 31, 2009, prior to the time of its resignation, as
discussed below. The aggregate fees billed by UHY for audit of the company's
annual financial statements were $62,000 for the fiscal year ended December 31,
2009 and $61,000 for the fiscal year ended December 31, 2008.




Audit-Related
Fees




UHY HK
billed the company $3,000 for assurance-related services that were related to
its audit of the company's financial statements during the fiscal year ended
2009.




Tax
Fees




UHY HK
did not bill the company any amounts for tax compliance, advice and planning for
the fiscal years ended December 31, 2009 and 2008.




All
Other Fees




UHY HK
did not bill the company any amounts for other products and services during the
fiscal years ended December 31, 2009 and 2008.




Pre-Approval
of Services




We do not
have an audit committee. As a result, our board of directors performs the duties
of an audit committee. Our board of directors evaluates and approves in advance
the scope and cost of the engagement of an auditor before the auditor renders
its audit and non-audit services. We do not rely on pre-approval policies and
procedures.




ITEM
      16D.
            EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES.




None.




ITEM
      16E.
            PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
    PURCHASERS.




2010
Restructuring




On April
15, 2010, so as to not violate certain applicable PRC regulations, all direct
equity interests in our Company (approximately 40.51% of our outstanding
ordinary shares) held by or on behalf of Mr. Gao, our Chief Executive Officer
and chairman, was transferred to Creation International Development Investments
Limited, an exempted company incorporated under the laws of the Cayman Islands
(“Creation”).  Mr.
Gabriele Sanesi, a citizen of Italy, is the sole shareholder and director of
Creation.  Pursuant to an agreement dated April 15, 2010 among Creation and
Messrs Gao and Sanesi (the “April 2010 Agreement”), Mr.
Sanesi has granted Mr. Gao the irrevocable right to exercise his rights as a
shareholder and director of Creation.  In addition, in accordance with the
April 2010 Agreement, Mr. Sanesi has agreed to transfer 100% of his equity
interests in Creation to Mr. Gao if the net income of the company from January
1, 2010 to June 30, 2010 is no less than US$2.0 million.


65




ITEM
      16F.
            CHANGES
      IN REGISTRANT’S CERTIFYING
ACCOUNTANT.




On June
24, 2010, we received a letter of resignation from UHY Vocation HK CPA Limited
(“UHY HK”), our
independent registered public accounting firm, which letter stated that the
resignation would be effective immediately. UHY HK was engaged by us on April 9,
2009, until its resignation on June 24, 2010 (the “Engagement
Period”).




Prior to
June 24, 2010, UHY HK had not previously advised our management or our board of
directors of its intention to resign its engagement as our independent
registered public accounting firm. The resignation was not sought or recommended
by our board of directors.




The
report of UHY HK for the financial statements for the fiscal year ended December
31, 2008 does not contain an adverse opinion or a disclaimer of opinion, and was
not qualified or modified as to uncertainty, audit scope, or accounting
principles.




During
the Engagement Period, there were no disagreements within the meaning of Item
304(a)(1)(iv) of Regulation S-K between UHY HK and us on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to UHY HK’s
satisfaction, would have caused UHY HK to make reference to the subject matter
of the disagreement in connection with its reports. During the Engagement
Period, except as described below in this Form 20-F, there were no reportable
events within the meaning of Item 304(a)(1)(v) of Regulation S-K for the fiscal
years ended December 31, 2008 and 2009 and through the date of this
report.  However, in connection with the 2009 audit of the Company’s
financial statements, it was discovered that the Company had recorded sales
transactions with related parties which did not appear to be in accordance with
Generally Accepted Accounting Principles.  Although the Company ultimately
agreed to reverse the occurred transactions, UHY HK decided not to continue to
be associated with the Company because of certain material weaknesses in the
Company's internal controls.  This constituted a “reportable event" as
described in Item 304(a)(1)(v) of Regulation S-K.




We
provided UHY HK with the disclosure in this annual report on Form 20-F.  We
requested that UHY HK furnish us with a letter addressed to the Securities and
Exchange Commission stating whether UHY HK agreed with the above statements
related to UHY HK.  A copy of UHY HK’s letter, dated August 17, 2010, is
attached as exhibit 15.1 to this annual report on Form 20-F.




On July
5, 2010, we engaged Parker Randall CF (H.K.) (“Parker Randall”) as our new
auditor as approved by our Board of Directors on July 3, 2010.




In the
years ended December 31, 2007 and 2008 and the subsequent interim period prior
to engaging Parker Randall, neither we nor anyone on our behalf consulted with
Parker Randall with respect to either (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our consolidated financial
statements, and no written report or oral advice was provided by Parker Randall
to us that Parker Randall concluded was an important factor considered by us in
reaching a decision as to the accounting, auditing or financial reporting issue,
or (ii) any matter that was either the subject of a disagreement (as defined in
Item 16F(a)(1)(iv) of Form 20-F and the related instructions to that Item) or a
"reportable event" (as defined in Item 16F(a)(1)(v) of Form 20-F).




ITEM
      16G.
            CORPORATE
      GOVERNANCE.




Not
required.


66


PART
III




ITEM
      17.
            FINANCIAL
      STATEMENTS




We have
elected to provide financial statements pursuant to Item 17.




ITEM
      18.
            FINANCIAL
      STATEMENTS




Audited
consolidated financial statements of China Linen Textile Industry, Ltd. for the
fiscal years ended December 31, 2009 and 2008 are filed as part of this Annual
Report beginning on page F-1. Audited consolidated financial statements of China
Linen Textile Industry, Ltd. for the fiscal years ended December 31, 2008 and
2007 are filed as part of this Annual Report beginning on Page
F-40.




ITEM
      19.
            EXHIBITS




INDEX
TO EXHIBITS





ExhibitNumber1.1
                
                Certificates
      of Incorporation of Aquasol EnviroTech Ltd., a Cayman Island company dated
      October 1, 2002
                
                (1)1.1.1
                
                Certificate
      of Incorporation of China Linen Textile Industry, Ltd., dated May 26,
      2008.
                
                (2)1.2
                
                Memorandum
      of Association of Aquasol Envirotech Ltd.
                
                (1)1.2.1
                
                Articles
      of Association of China Linen Textile Industry, Ltd., dated May 26,
      2008.
                
                (2)1.3
                
                Certificate
      of Extraprovincial Registration in the Province of British Columbia,
      Canada dated October 11, 2002.
                
                (1)1.4
                
                Certificate
      of Incorporation of Aquasol EnvironTech Inc., a British Columbia company,
      dated November 25, 1998.
                
                (1)1.5
                
                Certificate
      of Name Change of Aquasol EnvironTech Inc. to Aquasol EnviroTech (Canada)
      Inc., a British Columbia company, dated December 11, 2000.
                
                (1)1.6
                
                Articles
      and Memorandum of Aquasol EnviroTech (Canada) Inc.
                
                (1)1.7
                
                Certificate
      of Incorporation dated June 19, 1997 of Noralta Technologies Corporation
      (an Alberta, Canada Corporation)
                
                (1)1.8
                
                Certificates
      of Name Change dated February 23, 1998 from Noralta Technologies
      Corporation to Aquasol Technologies Inc. (Alberta)
                
                (1)1.9
                
                Certificate
      of Dissolution of Aquasol Technologies Inc. (Alberta) dated May 20,
      2005
                
                (1)4.1
                
                Agency
      Agreement between Heilongjiang Lanxi Sunrise Linen Textile Industry Co.,
      Ltd., and Harbin Sunshine Linen Textile Co., Ltd., dated November 7,
      2005.
                
                (1)


67




ExhibitNumber4.2
                  
                  Agreement
      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.
                  
                  (2)4.3
                  
                  Fixed
      Asset Lease Agreement between Heilongjiang Lanxi Sunrise Linen Textile
      Industry Co., Ltd. and Lanxi Tianxianfang Linen Co., Ltd., dated July 1,
      2010
                  
                  (3)4.4
                  
                  Loan
      Agreement between Heilongjiang Lanxi Sunrise Linen Textile Industry Co.,
      Ltd. and Lanxi Branch, Agricultural Bank of China, dated March 18,
      2009
                  
                  *4.5
                  
                  Loan
      Agreement between Heilongjiang Lanxi Sunrise Linen Textile Industry Co.,
      Ltd. and Lanxi Branch, Agricultural Bank of China, dated March 18,
      2009.
                  
                  *4.6
                  
                  Loan
      Agreement between Heilongjiang Lanxi Sunrise Linen Textile Industry Co.,
      Ltd. and Lanxi Branch, Agricultural Bank of China, dated March 20,
      2009
                  
                  *4.7
                  
                  Loan
      Agreement between Heilongjiang Lanxi Sunrise Linen Textile Industry Co.,
      Ltd. and Lanxi Branch, Agricultural Bank of China, dated March 23,
      2009.
                  
                  *4.8
                  
                  Loan
      Agreement between Heilongjiang Lanxi Sunrise Linen Textile Industry Co.,
      Ltd. and Lanxi Branch, Agricultural Bank of China, dated March 25,
      2009
                  
                  *4.9
                  
                  Loan
      Agreement between Heilongjiang Lanxi Sunrise Linen Textile Industry Co.,
      Ltd. and Lanxi Branch, Agricultural Bank of China, dated March 22,
      2010
                  
                  *4.10
                  
                  Loan
      Agreement between Heilongjiang Lanxi Sunrise Linen Textile Industry Co.,
      Ltd. and Lanxi Branch, Agricultural Bank of China, dated March 24,
      2010
                  
                  *4.11
                  
                  Loan
      Agreement between Heilongjiang Lanxi Sunrise Linen Textile Industry Co.,
      Ltd. and Lanxi Branch, Agricultural Bank of China, dated March 30,
      2010
                  
                  *4.12
                  
                  Maximum
      Pledge Agreement between Agricultural Bank of China and Heilongjiang Lanxi
      Sunrise Linen Textile Industry Co., Ltd., dated March 21,
    2008
                  
                  *4.13
                  
                  Land
      Use Right Certificate, dated April 24, 2009
                  
                  *4.14
                  
                  Land
      Use Right Certificate, dated April 24, 2009
                  
                  *4.15
                  
                  Land
      Use Right Certificate, dated September 5, 2006
                  
                  *4.16
                  
                  Labor
      Contract with Gao Ren, dated January 7, 2008
                  
                  *4.17
                  
                  Labor
      Contract with Teng Yunhai, dated January 7, 2008
                  
                  *4.18
                  
                  Labor
      Contract with Ma Yongfeng, dated January 7, 2008
                  
                  *


68





ExhibitNumber4.19
                  
                  Labor
      Contract with Li Songyun, dated January 7, 2008
                  
                  *4.20
                  
                  Labor
      Contract with Zhao Chunfu, dated January 7, 2008
                  
                  *4.21
                  
                  Off-Shore
      Employment Agreement with Shaofeng Qi, dated January 31,
    2010
                  
                  *4.22
                  
                  Agency
      Agreement between Heilongiang Lanxi Sunrise Linen Textile Industry Co.,
      Ltd. and Harbin Zhongyi Sunrise Linen Co., Ltd., dated January 4,
      2008
                  
                  *5.1
                  
                  2005
      Stock Option Plan
                  
                  (1)8.1
                  
                  List
      of Subsidiaries of the Company
                  
                  *11.1
                  
                  Code
      of Ethics – Chief Executive Officer
                  
                  (1)11.2
                  
                  Code
      of Ethics – Chief Financial Officer
                  
                  (1)11.3
                  
                  Code
      of Ethics – Directors and Officers
                  
                  (1)12.1
                  
                  Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
                  
                  *12.2
                  
                  Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
                  
                  *13.1
                  
                  Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002
                  
                  *15.1
                  
                  Letter,
      dated August 17, 2010, from UHY HK to the Securities and Exchange
      Commission
                  
                  *





*
            Filed
      herewith.


(1)
              Previously
      filed with the Registration Statement on Form 20FR12G filed with the SEC
      on November 16, 2005.


(2)
            Previously
      filed with the Annual Report on Form 20F filed with the SEC on July 10,
      2008 for the period ended December 31,
2008.


(3)
            Previously
      filed with the Current Report on Form 6-K filed with the SEC on July 16,
      2010.


69




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 annual report on its behalf.





CHINA
      LINEN TEXTIL INDUSTRY, LTD.By:
              /s/
      Gao
      RenGao
      RenChief
      Executive Officer and ChairmanAugust
      18, 2010


70


CHINA
LINEN TEXTILE INDUSTRY, LTD.
  AUDITED
CONSOLIDATED FINANCIAL STATEMENTS
  Years
ended December 31, 2009 and 2008
  
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 TABLE
OF CONTENTS
 
 PageReport
      of Independent Registered Public Accounting Firm
                  
                  F-1Financial
      StatementsConsolidated
      Balance Sheets
                  
                  F-2Consolidated
      Statements of Operations and Other Comprehensive Income
                  
                  F-3Consolidated
      Statements of Changes in Shareholders’ Equity
                  
                  F-4Consolidated
      Statements of Cash Flows
                  
                  F5
      - F6Notes
      to Consolidated Financial Statements
                  
                  F7
      - F39
  
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Shareholders and Board of Directors of
 China
Linen Textile Industry, Ltd.
 
 We have
audited the accompanying consolidated balance sheets of China Linen Textile
Industry, Ltd. and its subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of operations and other comprehensive income,
changes in shareholders’ equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (PCAOB) of United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits include consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company, Ltd. and its
subsidiaries as of December 31, 2009 and 2008, and the results of its operations
and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
  
 Parker
Randall CF (H.K.) CPA Limited
 Hong
Kong
 August
12, 2010
  F-1
 CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 CONSOLIDATED
BALANCE SHEETS
 December
31, 2009 and 2008
 (Stated
in US Dollars)
  RestatedNotes
                          
                          
                          2009
                          
                          
                          2008$
                          
                          
                          $ASSETSCurrent
      assetsCash
                          
                          
                          
                          
                          
                          2,320,656
                          
                          
                          
                          10,674Bank
      checks and commercial paper
                          
                          
                          
                          
                          
                          1,921,610
                          
                          
                          
                          1,566,733Accounts
      receivable, net
                          
                          
                          3
                          
                          
                          
                          8,762,516
                          
                          
                          
                          9,374,255Inventory
                          
                          
                          4
                          
                          
                          
                          4,862,855
                          
                          
                          
                          8,335,042Prepaid
      expenses
                          
                          
                          5
                          
                          
                          
                          2,183,219
                          
                          
                          
                          1,666,980Other
      receivables
                          
                          
                          
                          
                          
                          
                          100,165
                          
                          
                          
                          275,888Due
      from related parties
                          
                          
                          6
                          
                          
                          
                          2,576,579
                          
                          
                          
                          1,535,954Governmental
      subsidy receivable
                          
                          
                          7
                          
                          
                          
                          1,449,331
                          
                          
                          
                          1,296,522Deferred
      tax assets
                          
                          
                          19
                          
                          
                          
                          228,794
                          
                          
                          
                          299,193Total
      current assets
                          
                          
                          
                          
                          
                          
                          24,405,725
                          
                          
                          
                          24,361,241Non-current
      assetsProperty,
      plant and equipment, net
                          
                          
                          8
                          
                          
                          
                          9,195,907
                          
                          
                          
                          8,817,291Land
      use right, net
                          
                          
                          9
                          
                          
                          
                          408,134
                          
                          
                          
                          416,185Governmental
      subsidy receivable, non-current
                          
                          
                          7
                          
                          
                          
                          1,882,593
                          
                          
                          
                          2,387,837Deferred
      tax assets, non-current
                          
                          
                          19
                          
                          
                          
                          238,600
                          
                          
                          
                          241,706TOTAL
      ASSETS
                          
                          
                          
                          
                          
                          
                          36,130,959
                          
                          
                          
                          36,224,260LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesBank
      loans
                          
                          
                          10
                          
                          
                          
                          4,048,583
                          
                          
                          
                          4,041,291Accounts
      payable
                          
                          
                          
                          
                          
                          
                          2,565,188
                          
                          
                          
                          2,709,566Accrued
      expenses and other payables
                          
                          
                          11
                          
                          
                          
                          1,101,571
                          
                          
                          
                          1,559,459Taxes
      payable
                          
                          
                          12
                          
                          
                          
                          3,729,506
                          
                          
                          
                          8,804,430Deferred
      revenue
                          
                          
                          
                          
                          
                          
                          423,153
                          
                          
                          
                          289,527Deferred
      governmental subsidy
                          
                          
                          13
                          
                          
                          
                          88,995
                          
                          
                          
                          88,834Loans
      from local government
                          
                          
                          
                          
                          
                          
                          -
                          
                          
                          
                          295,001Due
      to related parties
                          
                          
                          14
                          
                          
                          
                          74,888
                          
                          
                          
                          56,470Deferred
      tax liabilities
                          
                          
                          19
                          
                          
                          
                          362,333
                          
                          
                          
                          324,130Total
      current liabilities
                          
                          
                          
                          
                          
                          
                          12,394,217
                          
                          
                          
                          18,168,708Non-current
      liabilitiesDeferred
      governmental subsidy, non-current
                          
                          
                          13
                          
                          
                          
                          1,792,482
                          
                          
                          
                          1,855,453Deferred
      tax liabilities, non-current
                          
                          
                          19
                          
                          
                          
                          470,648
                          
                          
                          
                          596,959TOTAL
      LIABILITIES
                          
                          
                          
                          
                          
                          
                          14,657,347
                          
                          
                          
                          20,621,120STOCKHOLDER’S
      EQUITYCommon
      stock$0.002
      par value, 500,000,000 shares authorized;20,200,003
      shares and 20,100,003 sharesissued
      and outstanding as of December 31, 2009 and 2008
                          
                          
                          
                          
                          
                          
                          42,274
                          
                          
                          
                          42,074Additional
      paid-in capital
                          
                          
                          
                          
                          
                          
                          3,093,816
                          
                          
                          
                          2,986,212Statutory
      reserves
                          
                          
                          
                          
                          
                          
                          1,593,559
                          
                          
                          
                          1,019,595Retained
      earnings
                          
                          
                          
                          
                          
                          
                          15,060,004
                          
                          
                          
                          9,903,449Accumulated
      other comprehensive income
                          
                          
                          
                          
                          
                          
                          1,683,959
                          
                          
                          
                          1,651,810TOTAL
      STOCKHOLDER’S EQUITY
                          
                          
                          
                          
                          
                          
                          21,473,612
                          
                          
                          
                          15,603,140TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                          
                          
                          
                          
                          
                          
                          36,130,959
                          
                          
                          
                          36,224,260
 See
notes to consolidated financial statements.
  F-2
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
 For
the Years Ended December 31, 2009 and 2008
 (Stated
in US Dollars)
 
 RestatedNotes
                                                                                    
                                                                                    
                                                                                    2009
                                                                                    
                                                                                    
                                                                                    2008$
                                                                                    
                                                                                    
                                                                                    $RevenuesNet
      sales
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    29,386,131
                                                                                    
                                                                                    
                                                                                    
                                                                                    22,945,122Costs
      of goods sold
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    20,675,443
                                                                                    
                                                                                    
                                                                                    
                                                                                    17,648,852Gross
      profit
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    8,710,688
                                                                                    
                                                                                    
                                                                                    
                                                                                    5,296,270Operating
      expensesSelling
      expenses
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    615,176
                                                                                    
                                                                                    
                                                                                    
                                                                                    393,348General
      and administrative expenses
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,019,025
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,791,741Total
      operating expenses
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,634,201
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,185,089Operating
      income
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    7,076,487
                                                                                    
                                                                                    
                                                                                    
                                                                                    3,111,181Other
      income (expense)Interest
      income
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    252,355
                                                                                    
                                                                                    
                                                                                    
                                                                                    175,299Interest
      expense
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    (314,898
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (540,203
                                                                                    )Government
      subsidies
                                                                                    
                                                                                    
                                                                                    15
                                                                                    
                                                                                    
                                                                                    
                                                                                    863,436
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,324,225Other
      expense
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    (5,177
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (6,819
                                                                                    )Total
      other income
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    795,716
                                                                                    
                                                                                    
                                                                                    
                                                                                    952,502Income
      before tax
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    7,872,203
                                                                                    
                                                                                    
                                                                                    
                                                                                    4,063,683Income
      tax
                                                                                    
                                                                                    
                                                                                    19
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,141,684
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,206,914Net
      income
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    5,730,519
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,856,769Other
      comprehensive incomeEffects
      of foreign currency conversion
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    32,149
                                                                                    
                                                                                    
                                                                                    
                                                                                    764,910Comprehensive
      income
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    5,762,668
                                                                                    
                                                                                    
                                                                                    
                                                                                    3,621,679Basic
      and diluted earnings per share
                                                                                    
                                                                                    
                                                                                    18
                                                                                    
                                                                                    
                                                                                    
                                                                                    0.28
                                                                                    
                                                                                    
                                                                                    
                                                                                    0.15
 
 See notes to consolidated financial
statements
  F-3
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
 For
the Years Ended December 31, 2009 and 2008
 (Stated
in US Dollars)
 
 Common
      Stock
                      
                      
                      Additional
                      
                      
                      
                      
                      
                      
                      
                      
                      Accumulated
                        OtherNumber of
                        shares
                      
                      
                      Amount
                      
                      
                      Paid-in
                        Capital
                      
                      
                      Statutory
                        Reserve
                      
                      
                      Retained
                        Earnings
                      
                      
                      Comprehensive
                        Income
                      
                      
                      Total$
                      
                      
                      $
                      
                      
                      $
                      
                      
                      $
                      
                      
                      $
                      
                      
                      $Balances
      at January 1, 2008
                      
                      
                      18,963,005
                      
                      
                      
                      37,926
                      
                      
                      $
                      2,002,251
                      
                      
                      
                      630,573
                      
                      
                      $
                      7,435,702
                      
                      
                      $
                      886,900
                      
                      
                      $
                      10,993,352Shares
      effectively issued to former shareholders as part of the
      recapitalization
                      
                      
                      1,136,998
                      
                      
                      
                      4,148
                      
                      
                      
                      139,761
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      143,909Shares
      contributed by shareholders as consideration for advisory
      services
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      844,200
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      844,200Net
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,856,769
                      
                      
                      
                      -
                      
                      
                      
                      2,856,769Appropriation
      to statutory reserves
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      389,022
                      
                      
                      
                      (389,022
                      )
                      
                      
                      -
                      
                      
                      
                      -Other
      comprehensive income effects of foreign currency
Conversion
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      764,910
                      
                      
                      
                      764,910Balances
      at December 31, 2008 (Restated)
                      
                      
                      20,100,003
                      
                      
                      
                      42,074
                      
                      
                      
                      2,986,212
                      
                      
                      
                      1,019,595
                      
                      
                      
                      9,903,449
                      
                      
                      
                      1,651,810
                      
                      
                      
                      15,603,140Shares
      contributed by shareholders as consideration for consulting
      services
                      
                      
                      100,000
                      
                      
                      
                      200
                      
                      
                      
                      107,604
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      107,804Net
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,730,519
                      
                      
                      
                      -
                      
                      
                      
                      5,730,519Appropriation
      to statutory reserves
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      573,964
                      
                      
                      
                      (573,964
                      )
                      
                      
                      -
                      
                      
                      
                      -Other
      comprehensive income effects of foreign currency
conversion
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      32,149
                      
                      
                      
                      32,149Balances
      at December 31, 2009
                      
                      
                      20,200,003
                      
                      
                      
                      42,274
                      
                      
                      
                      3,093,816
                      
                      
                      
                      1,593,559
                      
                      
                      
                      15,060,004
                      
                      
                      
                      1,683,959
                      
                      
                      
                      21,473,612
  F-4
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 For
the Years Ended December 31, 2009 and 2008
 (Stated
in US Dollars)
  Restated2009
                    
                    
                    2008$
                    
                    
                    $Cash
      Flows from Operating ActivitiesNet
      income
                    
                    
                    5,730,519
                    
                    
                    
                    2,856,769Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Fair
      value of contributed common stock for advisory services
                    
                    
                    8,984
                    
                    
                    
                    844,200Bad
      debt (recoveries)/expenses
                    
                    
                    (31,313
                    )
                    
                    
                    31,310Impairment
      loss on property, plant and equipment
                    
                    
                    4,081
                    
                    
                    
                    -Depreciation
                    
                    
                    506,434
                    
                    
                    
                    442,381Amortization
                    
                    
                    8,795
                    
                    
                    
                    8,671Deferred
      income taxes
                    
                    
                    (15,290
                    )
                    
                    
                    22,742Changes
      in assets and liabilities:Increase
      in bank checks and commercial paper
                    
                    
                    (351,798
                    )
                    
                    
                    (1,155,604
                    )Decrease
      in accounts receivable
                    
                    
                    884,956
                    
                    
                    
                    2,271,622Decrease
      in inventory
                    
                    
                    3,484,721
                    
                    
                    
                    1,606,161Increase
      inprepaid
      expenses
                    
                    
                    (620,250
                    )
                    
                    
                    (553,109
                    )Decrease/(increase)
      in other receivables
                    
                    
                    244,367
                    
                    
                    
                    (235,926
                    )(Increase)/decrease
      ingovernmental
      subsidy, net
                    
                    
                    (484,093
                    )
                    
                    
                    650,299Decrease
      in accounts payable
                    
                    
                    (149,159
                    )
                    
                    
                    (197,951
                    )Decrease
      in accrued expenses and other payables
                    
                    
                    (548,092
                    )
                    
                    
                    (208,028
                    )(Decrease)/increase
      in taxes payable
                    
                    
                    (4,310,506
                    )
                    
                    
                    974,980Increase
      in deferred revenue
                    
                    
                    162,204
                    
                    
                    
                    16,394Increase
      in due from/to related parties
                    
                    
                    (1,048,002
                    )
                    
                    
                    (3,105,746
                    )Net
      cash provided by operating activities
                    
                    
                    3,476,558
                    
                    
                    
                    4,269,165Cash
      Flows from Investing ActivitiesPurchase
      of property, plant and equipment
                    
                    
                    (872,962
                    )
                    
                    
                    (2,159,769
                    )Net
      cash used in investing activities
                    
                    
                    (872,962
                    )
                    
                    
                    (2,159,769
                    )
 
 See
notes to consolidated financial statements.
  F-5
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 For
the Years Ended December 31, 2009 and 2008
 (Stated
in US Dollars)
 
 Restated2009
                      
                      
                      2008$
                      
                      
                      $Cash
      Flows from Financing ActivitiesProceeds
      from bank loans
                      
                      
                      4,043,601
                      
                      
                      
                      3,936,110Payments
      on bank loans
                      
                      
                      (4,043,601
                      )
                      
                      
                      (5,986,251
                      )Payments
      on loans from local government
                      
                      
                      (295,321
                      )
                      
                      
                      (43,353
                      )Payments
      on loans from related parties
                      
                      
                      -
                      
                      
                      
                      (124,804
                      )Proceeds
      from reverse merger
                      
                      
                      -
                      
                      
                      
                      141,526Net
      cash used in financing activities
                      
                      
                      (295,321
                      )
                      
                      
                      (2,076,772
                      )Net
      increase in cash and cash equivalents
                      
                      
                      2,308,275
                      
                      
                      
                      32,624Effects
      of foreign currency conversion on cash
                      
                      
                      1,707
                      
                      
                      
                      (25,409
                      )Cash
      and cash equivalents – beginning of year/period
                      
                      
                      10,674
                      
                      
                      
                      3,459Cash
      and cash equivalents – end of year/period
                      
                      
                      2,320,656
                      
                      
                      
                      10,674Supplemental
      Disclosures of Cash Flow InformationCash
      paid during the year for:Interest
                      
                      
                      310,895
                      
                      
                      
                      1,553,494Income
      taxes
                      
                      
                      1,526,428
                      
                      
                      
                      857,118
 
 See
notes to consolidated financial statements.
  F-6
 
 CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 (Stated
in US Dollars)
 
 1. 
      ORGANIZATION AND PRINCIPAL ACTIVITIES
 
 The
company is currently principally engaged in the business of production and
distribution of various types of linen products, such as linen clothing, linen
yarn, linen, and blending linen, etc.  The Company is also involved in
consultation and research and development related to of linen technology and
linen products.
 
 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, the Company ceased operations and
became a shell company.
 
 The
Company entered into a share exchange transaction on July 9, 2008 as detailed
below which resulted in a change of control of the Company.  This
transaction was accounted for as a reverse merger whereby the historical
financial statements and operations of the accounting acquirer are included in
the financial statements of the Company.
 
 Business
Acquisition
 On August
5, 2007, the owners of Heilongjiang Lanxi Sunrise Linen Textile Industry Co.,
Ltd. (“Lanxi Sunrise”) entered into a Share Purchase Agreement (the “Agreement”)
with Bright International Group Co., Ltd. (“Bright”).  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 was
treated as reorganization in which Bright is a continuing entity of Lanxi
Sunrise.
  F-7
 
 CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 (Stated
in US Dollars)
 
 NOTE
1 — ORGANIZATION AND PRINCIPAL ACTIVITIES (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 reverse merger, the Company effectively issued
1,136,998 shares (post split) of common stock on July 9, 2008.  As a result
of the transaction, Bright became a wholly owned subsidiary of the
Company.  The transaction was 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 accounting 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.
 
 The
Company conducts all of its business activities through its wholly owned
subsidiary, Lanxi Sunrise, which was incorporated in Lanxi County, Heilongjiang
Province, the People's Republic of China (the "PRC") on June 11, 2002, as a
state-owned holding company under the Company Law of PRC and changed into a
privately owned business enterprise in June 2007. Lanxi Sunrise manufacturing
facility is located in Lanxi County, Heilongjiang Province in the northeast
section of the PRC near the city of Harbin.
 
 Bright,
incorporated in the Republic of Vanuatu on July 4, 2007, is an investment
holding company with 95% equity ownership interest in Lanxi
Sunrise.
  F-8
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 (Stated
in US Dollars)
 
 2. 
      SIGNIFICANT ACCOUNTING POLICIES
 
 Basis
of Presentation
 The
financial statements are prepared in accordance with accounting principles
generally accepted 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.
 
 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 sheets.
 
 Economic
and Political Risks
 The
Group’s operations are conducted solely in the PRC.  There are significant
risks associated with doing business in the PRC, among others, political,
economic, legal and foreign currency exchange risks.  The Group’s results
may be adversely affected by changes in the political and social conditions in
the PRC, and by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion, remittances
abroad, and rates and methods of taxation, among other things.
 
 Use
of Estimates
 In
preparing the consolidated financial statements in conformity with US GAAP,
management makes estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the dates of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting periods.  These accounts and
estimates include, but are not limited to, the valuation of accounts receivable,
inventories, deferred income taxes and the estimation on useful lives of plant
and machinery.  Actual results could differ from those
estimates.
  F-9
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 (Stated
in US Dollars)
 
 2.       
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.  As of December 31, 2009 and 2008, there were
cash and cash equivalents of $2,320,656 and $10,674 respectively.
 
 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 consists of amounts due from customers. The Group extends unsecured
credit to its customers in the ordinary course of business but 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 management’s assessment of known requirements, aging of receivables,
payment history, the customer’s current credit worthiness and the economic
environment.
 
 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 both December 31,
2009 and 2008, two customers accounted for approximately 92% of its accounts
receivable balances. 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.
  F-10
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 (Stated
in US Dollars)
 
 2.       
SIGNIFICANT ACCOUNTING POLICIES(Continued)
 
 Inventories
 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. In assessing the ultimate realization of inventories, the management
makes judgments as to future demand requirements compared to current or
committed inventory levels.  The Group’s reserve requirements generally
increase/decrease due to management projected demand requirements, market
conditions and product life cycle changes.  As of December 31, 2009 and
2008, the Group did not make any allowance for slow-moving or defective
inventories.
 
 Fair
value of Financial Instruments
 The
carrying values of the Group’s financial instruments, including cash and cash
equivalents, accounts receivables, other receivables and prepayments, short-term
borrowings, accounts payables, derivative instruments, and other accrued
liabilities are at their fair values due to the maturity of such
instruments.
 
 Other
Receivables
 Other
receivables principally include 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.
 
 Property,
plant and equipment
 Property,
plant and equipment, other than construction in progress, are stated at cost
less depreciation and amortization and accumulated impairment loss.  Cost
represents the purchase price of the asset and other costs incurred to bring the
asset into its existing use.  Maintenance, repairs and betterments,
including replacement of minor items, are charged to expense; major additions to
physical properties 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.
  F-11
 
 CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 (Stated
in US Dollars)
 
 2.       
SIGNIFICANT ACCOUNTING POLICIES(Continued)
 
 Property,
plant and equipment (Continued)
 Depreciation
of property, plant and equipment is calculated to written off the cost, less
their estimated residual value, if any, using the straight-line method over
their estimated useful lives.  The principal annual rates are as
follows:
 
 Leasehold
      land and buildings
                20
      yearsPlant
      and machinery
                14
      yearsMotor
      vehicles
                5
      yearsOffice
      equipment
                3
      years
 
 Upon sale
or disposition, the applicable amounts of asset cost and accumulated
depreciation are removed from the accounts and the net amount less proceeds from
disposal is charged or credited to income.
 
 Construction
in progress mainly represents expenditures in respect of the Group’s corporate
campus and machinery under construction, which the campus was completed and at
which production began in 2009.  Assets under construction are not
depreciated until the construction is completed and the assets are ready for
their intended use.
 
 Accounting
for the Impairment of Long-Lived Assets
 The Group
adopted Statement of Financial Accounting Standards No. 144, “Accounting for the
Impairment or Disposal of Long-Live Assets” (“SFAS 144”), which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets.  The Group periodically evaluates the carrying value of long-lived
assets to be held and used in accordance with SFAS 144. SFAS 144 requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets’ carrying amounts. In
that event, a loss is recognized based on the amount by which the carrying
amount exceeds the fair market value of the long-lived assets. Loss on
long-lived assets to be disposed of is determined in a similar manner, except
that fair market values are reduced for the cost of disposal. Based on its
review, the Group believes that, as of December 31, 2009 and 2008, there were no
significant impairments of its long-lived assets.
  F-12
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 (Stated
in US Dollars)
 
 2.       
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 or residential purposes
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 purposes for
a 50-year period ended August 15, 2056. The cost of this land use right is
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.
 
 (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
purposes for a 50-year period ended December 29, 2054. The cost of this land use
right is amortized over its prospective beneficial period, using the
straight-line method. A 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 a 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 a guarantee for a related party through April 10, 2008 to
receive an import letter of credit, as more fully disclosed in the "Related
Party Transaction" of this note.
  F-13
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 (Stated
in US Dollars)
 
 2.       
SIGNIFICANT ACCOUNTING POLICIES(Continued)
 
 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 has granted various subsidies to Lanxi Sunrise as
follows:
 
 (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. For the year ended December 31, 2009, Lanxi
Sunrise has received the refund of income tax payment from the local government
for the year of 2006 amounted to $1,320,000 (RMB 8,991,000).
 
 (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.
  F-14
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 (Stated
in US Dollars)
 
 2.       
SIGNIFICANT ACCOUNTING POLICIES(Continued)
 
 Governmental
Subsidies (Continued)
 (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. Management
estimated 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' estimated useful life of 20 years.
 
 (4)
              Sewage
      Facilities Improvement Subsidy
 In
December 2008, the local government granted $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 by 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. Subsidy income of $16,185 was recognized for the year
ended December 31, 2009. As the sewage facilities and equipment were under
construction and installation in the year of 2008, no subsidy income was thus
recognized.
 
 (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. 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. Due to the short-term nature of these
loans, no subsidy income has been recorded with respect to these
loans.
  F-15
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 (Stated
in US Dollars)
 
 2.       
SIGNIFICANT ACCOUNTING POLICIES(Continued)
 
 Foreign
Currency Translation
 The
Company and Bright maintain its books and accounting records in the United
States Dollar ("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.
 
 For
financial reporting purposes, the financial statements of the Group which are
prepared using the functional currency have been translated into United States
dollars. Assets and liabilities are translated at the exchange rates at the
balance sheet dates and revenue and expenses are translated at the average
exchange rates and stockholders’ equity is translated at historical
exchange rates. Any translation adjustments resulting are not included in
determining net income but are included in foreign exchange adjustment to other
comprehensive income, a component of stockholders’ equity.
 
 2009
                    
                    
                    2008Year
      end US$: RMB exchange rate
                    
                    
                    6.8172
                    
                    
                    
                    6.8295Average
      periodic US$: RMB exchange rate
                    
                    
                    6.8221
                    
                    
                    
                    6.9199
 
 RMB is
not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions.  No
representation is made that the RMB amounts could have been, or could be,
converted into US$ at the rates used in translation.
 
 Revenue
Recognition
 Revenue
represents the invoiced value of goods sold recognized upon the delivery of
goods to customers. Revenue is recognized when all of the following criteria are
met:
 l
              Persuasive
      evidence of an arrangement exists;
 l
              Delivery
      has occurred or services have been
rendered;
 l
              The
      seller’s price to the buyer is fixed or determinable;
  and
 l
              Collectability
      is reasonably assured.  Payments have been
    established.
  F-16
 
 CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 (Stated
in US Dollars)
 
 2.       
SIGNIFICANT ACCOUNTING POLICIES(Continued)
 
 Revenue
Recognition (Continued)
 The
return policy of goods is recognized in actual basis when the goods sold were
being returned by customer then the closing balance of the period/year is
actually deducted by the increment of relevant cost of sales.  As the sales
return rate is low and immaterial, no such provision is required to be
made.
 
 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.
 
 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. Research and development
costs were immaterial for the Group in the years ended December 31, 2009 and
2008, respectively, and are included in general and administration
expenses.
 
 Comprehensive
Income
 The Group
has adopted ASC 220 “Comprehensive Income” which establishes the rules for the
reporting of comprehensive income and its components. Comprehensive income is
defined to include all changes in equity except those resulting from investments
by owners and distributions to owners.  Among other disclosures, all items
that are required to be recognized under current accounting standards as
components of comprehensive income are required to be reported in a consolidated
financial statement that is presented with the same prominence as other
financial statements. The Group’s current components of other comprehensive
income are the foreign currency translation adjustment.
 
 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 purchases
of raw materials included in the cost of producing the finished
goods.
  F-17
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 (Stated
in US Dollars)
 
 2.       
SIGNIFICANT ACCOUNTING POLICIES(Continued)
 
 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, 2009 and 2008, respectively.
 
 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. Management believes full time employees who have passed
the probation period are entitled to such benefits. The total provisions for
employee pension were $46,366 and $55,751 for the years ended December 31,
2009 and 2008, respectively.
 
 Share-based
compensation
 The
issuance of the Company’s common stock for non-cash consideration have been
assigned a per share amount equaling the fair value. The fair value is
determined by the management by reference to the market price of the
Company’s shares on the measurement date. The non-cash consideration received
pertains to services rendered by the consultant.
 
 The
Company accounts for equity instruments issued to the consultant in exchange for
services in accordance with the provisions of EITF Issue No. 96-18,
Accounting for Equity Instruments that are Issued to Other than Employees for
Acquiring, or in Conjunction with Selling Goods or Services, and EITF Issue
No. 00-18, Accounting Recognition for Certain Transactions Involving Equity
Instruments Granted to Other than Employees. The measurement date for the fair
value of the equity instruments issued is determined at the earlier of
(i) the date at which a commitment for performance by the consultant is
reached or (ii) the date at which the consultant’s performance is complete.
In the case of equity instruments issued to consultants, the fair value of the
equity instrument is recognized over the term of the consulting
agreement.
 
 The
Company records the fair value of the fully vested, non-forfeitable common
stock issued for future consulting services as prepaid consulting in its
consolidated balance sheet.
  F-18
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 (Stated
in US Dollars)
 
 2.       
SIGNIFICANT ACCOUNTING POLICIES(Continued)
 
 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.
 
 The Group
has passed a resolution in January 2010 whereby Lanxi Sunrise will continue to
allocate 10% of the after-tax net earnings to statutory surplus reserve despite
the reserve having reached 50% of Lanxi Sunrise’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 January 1, 2006, the
Group has no further requirements to make appropriations to the statutory public
welfare fund. The Group does not make appropriations to the discretionary
surplus reserve fund.
 
 The Group
contributed $573,966 and $389,022 to the statutory surplus reserve fund in 2009
and 2008 respectively. Statutory reserves consist of the
followings:
 
 Statutory
                          
                          
                          Statutory
                          
                          
                          TotalSurplus
                          
                          
                          Welfare
                          
                          
                          StatutoryReserve
                          
                          
                          Reserve
                          
                          
                          ReservesBalance
      on January 1, 2008
                          
                          $
                          488,238
                          
                          
                          $
                          142,335
                          
                          
                          $
                          630,573Contribution
      in 2008
                          
                          
                          389,022
                          
                          
                          
                          -
                          
                          
                          
                          389,022Balance
      on December 31, 2008
                          
                          $
                          877,260
                          
                          
                          $
                          142,335
                          
                          
                          $
                          1,019,595Contribution
      in 2009
                          
                          
                          573,964
                          
                          
                          
                          -
                          
                          
                          
                          573,964Balance
      on December 31, 2009
                          
                          $
                          1,451,224
                          
                          
                          $
                          142,335
                          
                          
                          $
                          1,593,559
  F-19




CHINA
LINEN TEXTILE INDUSTRY, LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009 and 2008


(Stated
in US Dollars)





2.     SIGNIFICANT ACCOUNTING POLICIES(Continued)





Related
Party Transactions


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:





Name
              
              RelationshipRen
      Gao
              
              Majority
      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
      Qianan 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
      the control by Jun Gao*





* Jun
Gao, the elder brother of Ren Gao, is considered as a related party of the
Group.





(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 requirements, the Group engages related
parties, Harbin Zhongyi Sunshine Linen Co., Ltd and Harbin Sunshine Linen
Textile Co., Ltd., to act as the Group’s agents in importing raw materials and
exporting products on similar terms with unrelated parties. Due from/to related
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.


F-20


CHINA
LINEN TEXTILE INDUSTRY, LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009 and 2008


(Stated
in US Dollars)





2.     SIGNIFICANT ACCOUNTING POLICIES(Continued)





Related
Party Transactions (Continued)


(2) Loans
from Related Parties





Loans
from related parties are interest-free short-term loans from Mr. Ren Gao, the
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. As at December 31,
2009, the Group did not pledge any of its assets or provide any guarantees to
related parties.





Income
Taxes


The Group
accounts for income taxes under ASC 740 “Income Taxes”, which method are called
the asset and liability method.  Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carry-forwards.  Deferred tax assets are reduced by a valuation allowance
to the extent management concludes it is more likely than not that the assets
will not be realized.  Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. 
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the statements of income and comprehensive income in the periods
that includes the enactment date.


F-21


CHINA
LINEN TEXTILE INDUSTRY, LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009 and 2008


(Stated
in US Dollars)





2.     SIGNIFICANT ACCOUNTING POLICIES(Continued)





Commitments
and Contingencies


Liabilities
for loss contingencies arising from claims, assessments, litigation, fines and
penalties and other sources are recorded when it is probable that a liability
has been incurred and the amount of the assessment can be reasonably
estimated.





Fair
Value Measurements


In August
2009, the FASB issued Accounting Standards Update “ASU” 2009-5 “Measuring
Liabilities at Fair Value”. This ASU provides amendments to ASC 820-10 “Fair
Value Measurements and Disclosures” to address concerns regarding the
determination of the fair value of liabilities. Because liabilities are often
not “traded”, due to restrictions placed on their transferability, there is
typically a very limited amount of trades (if any) from which to draw market
participant data. As such, many entities have had to determine the fair value of
a liability through the use of a hypothetical transaction. This ASU clarifies
the valuation techniques that must be used when the liability subject to the
fair value determination is not traded as an asset in an active
market.





In April
2009, the FASB issued ASC 820-10-65-4 (formerly FSP No. 157-4, “Determining Fair
Value When the Volume and Level of Activity for the Asset and Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly”).
This standard emphasizes that even if there has been a significant decrease in
the volume and level of activity, the objective of a fair value measurement
remains the same. Fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction (that is, not a
forced liquidation or distressed sale) between market participants. This
standard provides a number of factors to consider when evaluating whether there
has been a significant decrease in the volume and level of activity for an asset
or liability in relation to normal market activity.





In
addition, when transactions or quoted prices are not considered orderly,
adjustments to those prices based on the weight of available information may be
needed to determine the appropriate fair value. This standard is effective for
interim and annual reporting periods ending after June 15, 2009, and shall be
applied prospectively. Early adoption is permitted for periods ending after
March 15, 2009. The adoption of this standard did not have a material effect on
our consolidated financial statements.


F-22


CHINA
LINEN TEXTILE INDUSTRY, LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009 and 2008


(Stated
in US Dollars)





2.     SIGNIFICANT ACCOUNTING POLICIES(Continued)





Recent
Accounting Pronouncements


In June
2009, the FASB established the FASB Accounting Standards Codification (ASC) as
the single source of authoritative U.S generally accepted accounting principles
(GAAP) recognized by the FASB to be applied to nongovernmental entities. Rules
and interpretive releases of the Securities and Exchange Commission (“SEC”)
under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. The ASC superseded all previously existing non-SEC
accounting and reporting standards, and any prior sources of U.S. GAAP not
included in the ASC or grandfathered are not authoritative. New accounting
standards issued subsequent to June 30, 2009 are communicated by the FASB
through Accounting Standards Updates (ASUs). The ASC did not change current U.S.
GAAP but changes the approach by referencing authoritative literature by topic
(each a “Topic”) rather than by type of standard.





Adoption
of the ASC did not have a material impact on the Company’s consolidated
financial statements, but references in the Company’s notes to consolidated
financial statements to former FASB positions, statements, interpretations,
opinions, bulletins or other pronouncements are now presented as references to
the corresponding Topic in the ASC.





Effective
January 1, 2009, FASB issued FASB ASC 350-30 and ASC 275-10-50 (formerly FSP FAS
142-3, “Determination of the Useful Life of Intangible Assets”), which amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142 ("SFAS 142"), “Goodwill and Other Intangible Assets.” The
adoption of these revised provisions did not have a material impact on the
Company’s Consolidated Financial Statements.





Effective
January 1, 2009, the Company adopted FASB ASC 805-10, (formerly SFAS 141R,
"Business Combinations"), which establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any non-controlling interest in an
acquiree and the goodwill acquired.  In addition, the provisions in this
ASC require that any additional reversal of deferred tax asset valuation
allowance established in connection with fresh start reporting on January
7, 1998 be recorded as a component of income tax expense rather than as a
reduction to the goodwill established in connection with the fresh start
reporting. The Company will apply ASC 805-10 to any business combinations
subsequent to adoption.


F-23


CHINA
LINEN TEXTILE INDUSTRY, LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009 and 2008


(Stated
in US Dollars)





2.     SIGNIFICANT ACCOUNTING POLICIES(Continued)





Recent
Accounting Pronouncements (Continued)


Effective
July 1, 2009, the Company adopted FASB ASC 825-10-65 (formerly FASB Staff
Position (“FSP”) No. FAS 107-1 and Accounting Principles Board 28-1, "Interim
Disclosures about Fair Value of Financial Instruments"), which amends previous
guidance to require disclosures about fair value of financial instruments for
interim reporting periods of publicly traded companies as well as in annual
financial statements. The adoption of FASB ASC 825-10-65 did not have a material
impact on the Company’s consolidated financial statements.





Effective
July 1, 2009, the Company adopted FASB ASC 820-10-65 (formerly FSP FAS 157-4,
"Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly"), which provides guidance on how to determine the fair value of assets
and liabilities when the volume and level of activity for the asset or liability
has significantly decreased when compared with normal market activity for the
asset or liability as well as guidance on identifying circumstances that
indicate a transaction is not orderly. The adoption of ASC 820-10-65 did not
have a material impact on the Company’s consolidated financial
statements.





Effective
July 1, 2009, the Company adopted FASB ASC 855-10 (formerly SFAS 165,
“Subsequent Events”), which establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date, but before
financial statements are issued or are available to be issued. Adoption of ASC
855-10 did not have a material impact on the Company’s consolidated financial
statements.


F-24


CHINA
LINEN TEXTILE INDUSTRY, LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009 and 2008


(Stated
in US Dollars)





3. 
   ACCOUNTS RECEIVABLE


Accounts
receivable consist of the following:





December 31,
                
                
                December 31,2009
                
                
                2008Accounts
      receivable
                
                $
                9,238,460
                
                
                $
                10,105,819Less:
      Allowance for doubtful accounts
                
                
                (475,944
                )
                
                
                (731,564
                )Accounts
      receivable, net
                
                $
                8,762,516
                
                
                $
                9,374,255





There was
reversal of bad debt expense of $245,755 credited to operations for the years
ended December 31, 2009. Bad debt expense of $31,310 was charged to operations
for the year ended December 31, 2008.





4. 
   INVENTORY


Inventory
consists of the followings:





December 31,
                
                
                December 31,2009
                
                
                2008Finished
      goods
                
                $
                2,443,517
                
                
                $
                6,175,230Work-in-progress
                
                
                406,297
                
                
                
                697,378Raw
      materials
                
                
                1,994,074
                
                
                
                1,443,502Supplies
      and low-value materials
                
                
                18,967
                
                
                
                18,932$
                4,862,855
                
                
                $
                8,335,042





No
allowance for inventories was provided at December 31, 2009 and
2008.


F-25





CHINA
LINEN TEXTILE INDUSTRY, LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009 and 2008


(Stated
in US Dollars)





5. 
   PREPAID EXPENSES


Prepaid
expenses consist of the followings:





December 31,
                
                
                December 31,2009
                
                
                2008Raw
      materials and supplies
                
                $
                1,756,565
                
                
                $
                1,323,979Advance
      to contractors
                
                
                315,137
                
                
                
                329,423Others
                
                
                111,517
                
                
                
                13,578$
                2,183,219
                
                
                $
                1,666,980





There was
bad debt expense of $206,136 charged to operations for the year ended December
31, 2009.  No allowance for bad debt was provided for the year ended
December 31, 2008.





6. 
   DUE FROM RELATED PARTIES


Due from
related parties consist of the followings:





Name of Related Parties
                
                December 31,
                
                
                December 31,2009
                
                
                2008Ren
      Gao
                
                $
                -
                
                
                $
                319,326Harbin
      Sunshine Linen Textile Co., Ltd.
                
                
                515,479
                
                
                
                1,185,605Harbin
      Zhongyi Sunshine Linen Co., Ltd.
                
                
                2,061,100
                
                
                
                -Songyuan
      Qianan Sunshine Linen Co., Ltd.
                
                
                -
                
                
                
                31,023$
                2,576,579
                
                
                $
                1,535,954


F-26


CHINA
LINEN TEXTILE INDUSTRY, LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009 and 2008


(Stated
in US Dollars)





7. 
   GOVERNMENTAL SUBSIDY RECEIVABLE


Governmental
subsidy receivable consists of the following:





(1)
            Current
      Portion





Name of Governmental Subsidy
                  
                  December 31,
                  
                  
                  December 31,2009
                  
                  
                  2008Income
      Tax Subsidy-2006
                  
                  $
                  -
                  
                  
                  $
                  1,019,420Income
      Tax Subsidy-2006 for interest imputed
                  
                  
                  -
                  
                  
                  
                  159,963Income
      Tax Subsidy-2007
                  
                  
                  1,252,755
                  
                  
                  
                  -Income
      Tax Subsidy-2007 for interest imputed
                  
                  
                  196,576
                  
                  
                  
                  -Sewage
      Facilities Improvement Subsidy
                  
                  
                  -
                  
                  
                  
                  73,212Monetary
      grant
                  
                  
                  -
                  
                  
                  
                  43,927$
                  1,449,331
                  
                  
                  $
                  1,296,522





(2)
            Non-current
      Portion





Name of Governmental Subsidy
                  
                  December 31,
                  
                  
                  December 31,2009
                  
                  
                  2008Income
      Tax Subsidy-2007
                  
                  $
                  -
                  
                  
                  $
                  1,250,498Income
      Tax Subsidy-2007 for interest imputed
                  
                  
                  -
                  
                  
                  
                  94,538Income
      Tax Subsidy-2008
                  
                  
                  1,044,683
                  
                  
                  
                  1,042,801Income
      Tax Subsidy-2008 for interest imputed
                  
                  
                  60,704
                  
                  
                  
                  -Income
      Tax Subsidy-2009
                  
                  
                  777,206
                  
                  
                  
                  -$
                  1,882,593
                  
                  
                  $
                  2,387,837


F-27


CHINA
LINEN TEXTILE INDUSTRY, LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009 and 2008


(Stated
in US Dollars)





8. 
   PROPERTY, PLANT AND EQUIPMENT


The
following is a summary of property, plant and equipment:





December 31,
                
                
                December 31,2009
                
                
                2008CostBuilding
      and warehouses
                
                $
                4,161,061
                
                
                $
                4,153,567Machinery
      and equipment
                
                
                7,651,155
                
                
                
                4,616,477Office
      equipment and furniture
                
                
                141,953
                
                
                
                121,708Motor
      vehicles
                
                
                8,831
                
                
                
                8,815Total
                
                $
                11,963,000
                
                
                $
                8,900,567Accumulated
      depreciation
                
                
                (2,841,436
                )
                
                
                (2,330,433
                )Construction
      in progress
                
                
                -
                
                
                
                2,168,870Idle
      fixed assets
                
                
                66,964
                
                
                
                70,921Fixed
      assets to be disposed
                
                
                7,379
                
                
                
                7,366Property,
      plant and equipment, net
                
                $
                9,195,907
                
                
                $
                8,817,291





Depreciation
expense charged to operations was $506,434 and $442,381 for the years ended
December 31, 2009 and 2008, respectively.





9. 
   LAND USE RIGHT


The
following is a summary of land use right, less amortization:





December 31,
                
                
                December 31,2009
                
                
                2008Land
      use right
                
                $
                440,063
                
                
                $
                439,271Less:
      Amortization
                
                
                (31,929
                )
                
                
                (23,086
                )Land
      use right, net
                
                $
                408,134
                
                
                $
                416,185





Amortization
expense charged to operations was $8,795 and $8,671 for the years ended
December 31, 2009 and 2008, respectively.


F-28





CHINA
LINEN TEXTILE INDUSTRY, LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009 and 2008


(Stated
in US Dollars)





10. 
 BANK LOANS


Bank
loans consist of the following as of December 31, 2009:




Loan from Financial Institutions
                              
                              Annual
                                Interest
                                Rate
                              
                              Loan period
                              
                              Loan
                                Amount
                              
                              CollateralLanxi
      Branch of Agriculture Bank of China
                              
                              
                              6.903
                              %
                              3/18/2009
      – 3/17/2010
                              
                              $
                              968,139
                              
                              The
      Group's
                                equipment
      and
                                buildingsLanxi
      Branch of Agriculture Bank of China
                              
                              
                              6.903
                              %
                              3/18/2009
      – 3/17/2010
                              
                              
                              440,063Lanxi
      Branch of Agriculture Bank of China
                              
                              
                              6.903
                              %
                              3/20/2009
      – 3/19/2010
                              
                              
                              440,063Lanxi
      Branch of Agriculture Bank of China
                              
                              
                              6.903
                              %
                              3/23/2009
      – 3/22/2010
                              
                              
                              1,320,190Lanxi
      Branch of Agriculture Bank of China
                              
                              
                              6.903
                              %
                              3/25/2009
      – 3/24/2010
                              
                              
                              880,128Total
                              
                              
                              
                              
                              
                              
                              $
                              4,048,583





Interest
expense charged to operations for these bank loans was $310,895 for the year
ended December 31, 2009.  Management anticipates that the bank loans will
be renewed after the due date for another year.  There was no default of
bank loan or interest payments during the year.





Bank
loans consist of the following as of December 31, 2008:




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





Interest
expense charged to operations for these bank loans was $373,650 for the year
ended December 31, 2009.  The above bank loans were all renewed during 2009
with expected maturity dates of March 2010.


F-29


CHINA
LINEN TEXTILE INDUSTRY, LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009 and 2008


(Stated
in US Dollars)





11. 
 ACCRUED EXPENSES AND OTHER PAYABLES


Accrued
expenses and other payables consist of the followings:





December 31,
                
                
                December 31,2009
                
                
                2008Accrued
      payroll
                
                $
                262,153
                
                
                $
                364,855Accrued
      employee benefits
                
                
                265,886
                
                
                
                284,250Accrued
      pension expenses
                
                
                102,957
                
                
                
                153,291Accrued
      sales commission
                
                
                -
                
                
                
                77,376Other
      accrued expenses
                
                
                246,473
                
                
                
                401,202Other
      payables
                
                
                224,102
                
                
                
                278,485$
                1,101,571
                
                
                $
                1,559,459





12. 
 TAXES PAYABLE


Taxes
payable consist of the followings:





December 31,
                
                
                December 31,2009
                
                
                2008Income
      taxes payable
                
                $
                3,414,122
                
                
                $
                4,046,654Sales-related
      taxes payable
                
                
                23,080
                
                
                
                351,460VAT
      payable
                
                
                288,496
                
                
                
                4,292,961Property
      taxes payable
                
                
                3,808
                
                
                
                113,355$
                3,729,506
                
                
                $
                8,804,430





The VAT
payable brought forward from the year of 2006, 2007 and 2008 which was granted
by the Government to be repaid from 2009 onwards was repaid during
2009.


F-30


CHINA
LINEN TEXTILE INDUSTRY, LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009 and 2008


(Stated
in US Dollars)





13. 
 DEFERRED GOVERNMENTAL SUBSIDIES


Deferred
governmental subsidies consist of the following:


(1)
            Current
      Portion


December 31,
                    
                    
                    December 31,Name of Governmental Subsidy
                    
                    2009
                    
                    
                    2008Land
      subsidy
                    
                    $
                    7,628
                    
                    
                    $
                    7,614Building
      subsidy
                    
                    
                    42,495
                    
                    
                    
                    42,418Sewage
      facilities improvement subsidy
                    
                    
                    38,872
                    
                    
                    
                    38,802$
                    88,995
                    
                    
                    $
                    88,834





(2)
            Non-current
      Portion


December 31,
                    
                    
                    December 31,Name of Governmental Subsidy
                    
                    2009
                    
                    
                    2008Land
      subsidy
                    
                    $
                    362,954
                    
                    
                    $
                    354,687Building
      subsidy
                    
                    
                    764,901
                    
                    
                    
                    763,523Sewage
      facilities improvement subsidy
                    
                    
                    664,627
                    
                    
                    
                    737,243$
                    1,792,482
                    
                    
                    $
                    1,855,453





14. 
 DUE TO RELATED PARTIES


Due to
related parties consist of the followings:


December 31,
                      
                      
                      December 31,Name of Related Parties
                      
                      2009
                      
                      
                      2008Ren
      Gao
                      
                      $
                      45,672
                      
                      
                      $
                      -Harbin
      Zhongyi Sunshine Linen Co., Ltd.
                      
                      
                      -
                      
                      
                      
                      56,470Songyuan
      Qianan Sunshine Linen Co., Ltd.
                      
                      
                      29,216
                      
                      
                      
                      -$
                      74,888
                      
                      
                      $
                      56,470


F-31


CHINA
LINEN TEXTILE INDUSTRY, LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009 and 2008


(Stated
in US Dollars)





15. 
 GOVERNMENTAL SUBSIDY INCOME


Governmental
subsidy income consists of the followings:





December 31,
                
                
                December 31,Name of Governmental Subsidy
                
                2009
                
                
                2008Income
      tax refund subsidy
                
                $
                776,643
                
                
                $
                1,029,178Land
      use right subsidy
                
                
                7,622
                
                
                
                7,514Building
      subsidy
                
                
                42,464
                
                
                
                41,864Sewage
      subsidy
                
                
                16,185
                
                
                
                -Financial
      support grants
                
                
                20,522
                
                
                
                245,669$
                863,436
                
                
                $
                1,324,225





16. 
 RELATED PARTY TRANSACTIONS





December 31,
                      2009
                    
                    
                    December 31,
                      2008Transactions
                    
                    Amount
                    
                    
                    Percentage of
                      Total Similar
                      Transactions
                    
                    
                    Amount
                    
                    
                    Percentage of
                      Total Similar
                      Transactions(a)
      Selling finished goods to
                      Harbin Sunshine Linen Textile Co., Ltd.
                    
                    $
                    4,169,833
                    
                    
                    
                    14.6
                    %
                    
                    $
                    4,161,201
                    
                    
                    
                    20.9
                    %Purchasing raw materials from
                      Harbin Sunshine Linen Textile Co., Ltd.
                    
                    $
                    41,337
                    
                    
                    
                    1.05
                    %
                    
                    $
                    1,444,461
                    
                    
                    
                    54.5
                    %(b)
      Selling finished goods to
                      Harbin Zhongyi Sunshine Linen Co., Ltd
                    
                    $
                    7,289,137
                    
                    
                    
                    25.5
                    %
                    
                    $
                    1,554,289
                    
                    
                    
                    7.8
                    %Purchasing raw materials from
                      Harbin Zhongyi Sunshine Linen Co., Ltd
                    
                    $
                    1,382,827
                    
                    
                    
                    35.2
                    %
                    
                    $
                    911,015
                    
                    
                    
                    34.4
                    %





F-32


CHINA
LINEN TEXTILE INDUSTRY, LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009 and 2008


(Stated
in US Dollars)





17. 
 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 2009 as summarized in the following:




December 31,
                    
                    
                    December 31,2009
                    
                    
                    2008Major Customers
                    
                    Revenue
                    
                    
                    Percentage of
                      Total Revenue
                    
                    
                    Revenue
                    
                    
                    Percentage of
                      Total RevenueHarbin
      Sunshine Linen Textile Co., Ltd.
                    
                    $
                    4,169,833
                    
                    
                    
                    14.2
                    %
                    
                    $
                    4,161,201
                    
                    
                    
                    18.1
                    %Harbin
      Zhongyi Sunshine Linen Co., Ltd.
                    
                    
                    7,289,137
                    
                    
                    
                    24.8
                    %
                    
                    
                    1,554,289
                    
                    
                    
                    6.8
                    %Three
      unrelated customers
                    
                    
                    16,299,625
                    
                    
                    
                    55.5
                    %
                    
                    
                    16,274,719
                    
                    
                    
                    70.9
                    %Total
                    
                    $
                    27,758,595
                    
                    
                    
                    94.5
                    %
                    
                    $
                    21,990,209
                    
                    
                    
                    95.8
                    %





Major
Suppliers


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




December 31,
                
                
                December 31,2009
                
                
                2008Major Suppliers
                
                Purchase
                
                
                Percentage of
                  Total Purchase
                
                
                Purchase
                
                
                Percentage of
                  Total Purchase-Harbin
      Sunshine Linen Textile Co., Ltd.
                
                $
                41,337
                
                
                
                0.4
                %
                
                $
                1,444,461
                
                
                
                54.5
                %Harbin
      Zhongyi Sunshine Linen Co., Ltd.
                
                
                1,382,827
                
                
                
                11.7
                %
                
                
                911,015
                
                
                
                34.4
                %Two
      unrelated customers
                
                
                5,236,901
                
                
                
                44.4
                %
                
                
                -
                
                
                
                -
                %Total
                
                $
                6,661,065
                
                
                
                56.5
                %
                
                $
                2,355,476
                
                
                
                88.9
                %


F-33


CHINA
LINEN TEXTILE INDUSTRY, LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009 and 2008


(Stated
in US Dollars)





18. 
 EARNINGS PER SHARE




December 31,
                
                
                December 31,2009
                
                
                2008Net
      income for basic and diluted earnings per share
                
                $
                5,730,519
                
                
                $
                2,856,769Weighted
      average number of shares
                
                
                20,108,333
                
                
                
                19,511,256Basic
      and diluted earnings per share
                
                $
                0.28
                
                
                $
                0.15





19. 
 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
income tax on consolidated statements of operation and other comprehensive
income represented the provision of income taxes for the operating subsidiary,
Lanxi Sunrise only.  No provision for the Company and Bright has been made
as both companies have no operation nor assessable profits for the year ended
December 31, 2009.





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 25% on income as reported in its statutory financial
statements after appropriate tax adjustments.


F-34


CHINA
LINEN TEXTILE INDUSTRY, LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009 and 2008


(Stated
in US Dollars)





19.   INCOME TAX(Continued)


The
provision for income taxes consists of the followings:




December 31,
                
                
                December 31,2009
                
                
                2008Current
      Income Tax
                
                $
                2,156,974
                
                
                $
                1,184,172Deferred
      Income Tax
                
                
                (15,290
                )
                
                
                22,742Income
      Tax
                
                $
                2,141,684
                
                
                $
                1,206,914





The
components of net deferred tax liabilities are as follows:





December 31,
                
                
                December 31,2009
                
                
                2008Deferred
      tax assets:Accrued
      Pension
                
                $
                25,739
                
                
                $
                38,326Accrued
      Expenses
                
                
                17,950
                
                
                
                68,276Bad
      Debt Allowance
                
                
                175,387
                
                
                
                182,891Fixed
      assets provision
                
                
                34,090
                
                
                
                33,009Deferred
      Subsidy Income
                
                
                214,228
                
                
                
                218,397Total
      deferred tax assets
                
                $
                467,394
                
                
                $
                540,899Deferred
      tax liabilities:Subsidy
      Receivable
                
                $
                (832,981
                )
                
                $
                (921,089
                )Net
      deferred tax liabilities
                
                $
                (365,587
                )
                
                $
                (380,190
                )Reported
      as:Current
      deferred tax assets
                
                $
                228,794
                
                
                $
                299,193Current
      deferred tax liabilities
                
                
                (362,333
                )
                
                
                (324,130
                )Non-current
      deferred tax assets
                
                
                238,600
                
                
                
                241,706Non-current
      deferred tax liabilities
                
                
                (470,648
                )
                
                
                (596,959
                )Net
      deferred taxes
                
                $
                (365,587
                )
                
                $
                (380,190
                )


F-35


CHINA
LINEN TEXTILE INDUSTRY, LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009 and 2008


(Stated
in US Dollars)





19.   INCOME TAX(Continued)


The
effective tax rate differed from the statutory income tax rate is as
follows:





December 31,
                
                
                December 31,2009
                
                
                2008China
      statutory income tax rate
                
                
                25
                %
                
                
                25
                %Effect
      of:Non-deductible
      expenses
                
                
                1.23
                %
                
                
                5.19
                %Change
      in income tax rate and others
                
                
                -
                
                
                
                (0.49
                )%Effective
      Tax Rate
                
                
                26.23
                %
                
                
                29.70
                %





20. 
 COMMON STOCK CONTRIBUTED BY SHAREHOLDERS FOR SERVICES





Lanxi
Sunrise 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 of
the Company as compensation for services after the reverse merger.  Such
shares were transferred to Mid-Continental Securities Corp. by some shareholders
of the Company in 2008. The Company has accounted for this as a
contribution of capital by its shareholders and recorded a charge to operations
as general and administrative expense in the amount of $844,200 for the year
ended December 31, 2008. Such shares were valued based on the closing market
price of $1.05 per share at the date of transfer.





On
November 16, 2009, the Board of Directors authorized the issuance of 100,000
shares of common stock to an independent party pursuant to a consultancy
agreement dated on the same date for financial advisory services to be provided
to the Company from November 16, 2009 through November 15, 2010. The shares were
valued at $107,804 and during the year ended December 31, 2009, the Company
recorded general and administrative expense of approximately $9,000 related to
the agreement.


F-36


CHINA
LINEN TEXTILE INDUSTRY, LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009 and 2008


(Stated
in US Dollars)





21. 
 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.





22. 
 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.


F-37


CHINA
LINEN TEXTILE INDUSTRY, LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009 and 2008


(Stated
in US Dollars)





22.   COMMITMENTS AND CONTINGENCIES
(Continued)





Environmental
(Continued)


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
leases certain production equipment from an unrelated third party for its
production line of yarn forming. The fair value of this 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 renewed on an annual base. The leased equipment is essential to
production and the ability to renew the lease will significantly affect the
Group's performance.


F-38


CHINA
LINEN TEXTILE INDUSTRY, LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009 and 2008


(Stated
in US Dollars)





22.   COMMITMENTS AND CONTINGENCIES(Continued)





Capital
Commitment


Contractual
commitments for capital expenditure approximated $889,000 (RMB 6,060,000)
relating to the construction of sewage facilities and acquisition of equipment
as of December 31, 2009.





23.   SUBSEQUENT
EVENTS





An
evaluation of subsequent events was performed through August 12, 2010, which is
the date the financial statements were issued.





24.   RESTATEMENT
OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS





The
Company has restated its consolidated financial statements as of December 31,
2008 and for the year then ended, after having identified a share based
compensation adjustment due to an Advisory Agreement between Lanxi Sunrise and
Mid-Continental Securities Corp. dated March 30, 2007 not accounted for in the
consolidated financial statements.





Pursuant
to that agreement, Mid-Continental Securities Corp., or its designees, were
entitled to receive a total of 804,000 shares of common stock of the Company as
compensation for services after the reverse merger.  Such shares were
transferred to Mid-Continental Securities Corp. and its designees by certain
shareholders of the Company in 2008. In the restated 2008 Financial Statements,
the Company has accounted for this event as a contribution of capital by its
shareholders and recorded a charge to operations as a general and administrative
expense in the amount of $844,200.  Such shares were valued based on
the closing market price of $1.05 per share on the date of
transfer.





For the
year ended December 31, 2008, the effect of the restatements was to decrease
previously reported net income of $3,700,969 to $2,856,769.




F-39


CHINA
LINEN TEXTILE INDUSTRY, LTD.
 AUDITED
CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008 and 2007
  F-40
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 TABLE
OF CONTENTS
 
 PageReport
      of Independent Registered Public Accounting Firm
                    F-42Financial
      StatementsConsolidated
      Balance Sheets
                    F-43Consolidated
      Statements of Operations and Other Comprehensive Income
                    F-44Consolidated
      Statements of Changes in Shareholders’ Equity
                    F-45Consolidated
      Statements of Cash Flows
                    F-46
      - F-47Notes
      to Consolidated Financial Statements
                    F-48
      - F- 80
  F-41
 
 F-42
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 CONSOLIDATED
BALANCE SHEETS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
  2008
                      
                      
                      
                      2007
      (A)ASSETSCurrent
      AssetsCash
                      
                      $
                      10,674
                      
                      
                      $
                      3,459Bank
      checks and commercial paper
                      
                      
                      1,566,733
                      
                      
                      
                      370,172Accounts
      receivable, net
                      
                      
                      9,374,255
                      
                      
                      
                      10,962,247Inventory
                      
                      
                      8,335,042
                      
                      
                      
                      9,328,163Prepaid
      expenses
                      
                      
                      1,666,980
                      
                      
                      
                      1,036,098Other
      receivables
                      
                      
                      275,888
                      
                      
                      
                      117,648Due
      from related parties
                      
                      
                      1,535,954
                      
                      
                      
                      22,967Governmental
      subsidy receivable
                      
                      
                      1,296,522
                      
                      
                      
                      -Deferred
      tax assets
                      
                      
                      299,193
                      
                      
                      
                      222,774Total
      current assets
                      
                      $
                      24,361,241
                      
                      
                      $
                      22,063,528Property,
      Plant and Equipment, net
                      
                      
                      8,817,291
                      
                      
                      
                      6,619,007Land
      Use Right, net
                      
                      
                      416,185
                      
                      
                      
                      397,912Governmental
      Subsidy Receivable, non-current
                      
                      
                      2,387,837
                      
                      
                      
                      2,197,554Deferred
      Tax Assets, non-current
                      
                      
                      241,706
                      
                      
                      
                      54,221Total
      assets
                      
                      $
                      36,224,260
                      
                      
                      $
                      31,332,222LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesBank
      loans
                      
                      $
                      4,041,291
                      
                      
                      $
                      5,754,890Accounts
      payable
                      
                      
                      2,709,566
                      
                      
                      
                      2,724,846Accrued
      expenses and other payables
                      
                      
                      1,559,459
                      
                      
                      
                      1,703,620Taxes
      payable
                      
                      
                      8,804,430
                      
                      
                      
                      6,129,478Deferred
      revenue
                      
                      
                      289,527
                      
                      
                      
                      255,539Deferred
      governmental subsidy
                      
                      
                      88,834
                      
                      
                      
                      46,846Loans
      from local government
                      
                      
                      295,001
                      
                      
                      
                      317,349Due
      to related parties
                      
                      
                      56,470
                      
                      
                      
                      1,584,179Loans
      from related parties
                      
                      
                      -
                      
                      
                      
                      116,858Deferred
      tax liabilities
                      
                      
                      324,130
                      
                      
                      
                      62,015Total
      current liabilities
                      
                      $
                      18,168,708
                      
                      
                      $
                      18,695,620Deferred
      Governmental Subsidy, non-current
                      
                      
                      1,855,453
                      
                      
                      
                      1,093,861Deferred
      Tax Liabilities, non-current
                      
                      
                      596,959
                      
                      
                      
                      549,389Total
      liabilities
                      
                      $
                      20,621,120
                      
                      
                      $
                      20,338,870COMMITMENTS
      AND CONTINGENCIESShareholders'
      EquityCommon
      stock$0.002
      par value, 500,000,000 shares authorized; 20,100,003 shares and 18,963,005
      shares issued and outstanding as of December 31, 2008 and 2007
      respectively
                      
                      $
                      42,074
                      
                      
                      $
                      37,926Additional
      paid-in capital
                      
                      
                      2,986,212
                      
                      
                      
                      2,002,251Statutory
      Reserves
                      
                      
                      1,019,595
                      
                      
                      
                      630,573Retained
      earnings
                      
                      
                      9,903,449
                      
                      
                      
                      7,435,702Accumulated
      other comprehensive income
                      
                      
                      1,651,810
                      
                      
                      
                      886,900Total
      stockholders' equity
                      
                      $
                      15,603,140
                      
                      
                      $
                      10,993,352Total
      liabilities and stockholders' equity
                      
                      $
                      36,224,260
                      
                      
                      $
                      31,332,222
 
 See
notes to consolidated financial statements.
 
 (A)
Represents the consolidated financial statements of Bright International Group
Co. Ltd.
  F-43
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 AND
OTHER COMPREHENSIVE INCOME
 For
the Years Ended December 31, 2008 and 2007
 (Stated
in US Dollars)
 
 2008
                            
                            
                            
                            2007
      (A)RevenuesNet
      sales
                            
                            $
                            22,945,122
                            
                            
                            $
                            20,782,804Costs
      of goods sold
                            
                            
                            17,648,852
                            
                            
                            
                            15,075,310Gross
      profit
                            
                            $
                            5,296,270
                            
                            
                            $
                            5,707,494Operating
      expensesSelling
      expenses
                            
                            
                            393,348
                            
                            
                            
                            305,422General
      and administrative expenses
                            
                            
                            1,791,741
                            
                            
                            
                            946,337Total
      operating expenses
                            
                            $
                            2,185,089
                            
                            
                            $
                            1,251,759Operating
      income
                            
                            $
                            3,111,181
                            
                            
                            $
                            4,455,735Other
      income (expense)Interest
      income
                            
                            $
                            175,299
                            
                            
                            $
                            69,812Interest
      expense
                            
                            
                            (540,203
                            )
                            
                            
                            (817,596
                            )Government
      subsidies
                            
                            
                            1,324,225
                            
                            
                            
                            1,407,967Other
      expense
                            
                            
                            (6,819
                            )
                            
                            
                            (36,284
                            )Total
      other income
                            
                            $
                            952,502
                            
                            
                            $
                            623,899Income
      before tax
                            
                            $
                            4,063,683
                            
                            
                            $
                            5,079,634Income
      tax
                            
                            
                            1,206,914
                            
                            
                            
                            1,606,443Net
      income
                            
                            $
                            2,856,769
                            
                            
                            $
                            3,473,191Other
      comprehensive incomeEffects
      of foreign currency conversion
                            
                            
                            764,910
                            
                            
                            
                            612,543Comprehensive
      income
                            
                            $
                            3,621,679
                            
                            
                            $
                            4,085,734Basic
      and diluted earnings per share
                            
                            $
                            0.15
                            
                            
                            $
                            0.18
 
 See
notes to consolidated financial statements.
 
 (A)
Represents the consolidated financial statements of Bright International Group
Co. Ltd.
  F-44
  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
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                Accumulated
                                                  Other</
      fon t>Number
      of
                                                  shares
                                                
                                                
                                                Amount
                                                
                                                
                                                Paid-in&
      lt; /font>Capital
                                                
                                                
                                                Statutory&
      lt; /font>
                                                  Reserve<
      ;/f ont>
                                                
                                                
                                                Retained
                                                  Earnings
                                                
                                                
                                                Comprehensive<
      /fo nt>
                                                  Income<
      /fo nt>
                                                
                                                
                                                Total</
      fon t>Balances
      at January 1, 2007
                                                
                                                
                                                18,963,005
                                                
                                                
                                                $
                                                37,926
                                                
                                                
                                                $
                                                2,002,251
                                                
                                                
                                                $
                                                427,005
                                                
                                                
                                                $
                                                4,199,100
                                                
                                                
                                                $
                                                274,357
                                                
                                                
                                                $
                                                6,940,639Net
      income
                                                
                                                
                                                
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                3,473,191
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                3,473,191Appropriation
      to statutory reserves
                                                
                                                
                                                
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                203,568
                                                
                                                
                                                
                                                (203,568
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Dividend
      distribution
                                                
                                                
                                                
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (33,021
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (33,021
                                                )Other
      comprehensive income effects of foreign currencyConversion
                                                
                                                
                                                
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                612,543
                                                
                                                
                                                
                                                612,543Balances
      at December 31, 2007
                                                
                                                
                                                18,963,005
                                                
                                                
                                                $
                                                37,926
                                                
                                                
                                                $
                                                2,002,251
                                                
                                                
                                                $
                                                630,573
                                                
                                                
                                                $
                                                7,435,702
                                                
                                                
                                                $
                                                886,900
                                                
                                                
                                                $
                                                10,993,352Shares
      effectively issued to former shareholders as part of the
      recapitalization
                                                
                                                
                                                1,136,998
                                                
                                                
                                                
                                                4,148
                                                
                                                
                                                
                                                139,761
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                143,909Shares
      contributed by shareholders as consideration for advisory
      services
                                                
                                                
                                                
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                844,200
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                844,200Net
      income
                                                
                                                
                                                
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                2,856,769
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                2,856,769Appropriation
      to statutory reserves
                                                
                                                
                                                
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                389,022
                                                
                                                
                                                
                                                (389,022
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Other
      comprehensive income effects of foreign currencyConversion
                                                
                                                
                                                
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                764,910
                                                
                                                
                                                
                                                764,910Balances
      at December 31, 2008
                                                
                                                
                                                20,100,003
                                                
                                                
                                                $
                                                42,074
                                                
                                                
                                                $
                                                2,986,212
                                                
                                                
                                                $
                                                1,019,595
                                                
                                                
                                                $
                                                9,903,449
                                                
                                                
                                                $
                                                1,651,810
                                                
                                                
                                                $
                                                15,603,140
  See
notes to consolidated financial statements.
  F-45
  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
      (A)Cash
      Flows from Operating ActivitiesNet
      income
                    
                    $
                    2,856,769
                    
                    
                    $
                    3,473,191Adjustments
      to reconcile net income to net cash provided by operating
      activities:Fair
      value of contributed common stock for advisory services
                    
                    
                    844,200
                    
                    
                    
                    -Bad
      debt expenses
                    
                    
                    31,310
                    
                    
                    
                    426,369Depreciation
                    
                    
                    442,381
                    
                    
                    
                    346,918Amortization
                    
                    
                    8,671
                    
                    
                    
                    7,925Deferred
      income taxes
                    
                    
                    22,742
                    
                    
                    
                    182,735Deferred
      governmental subsidy
                    
                    
                    650,299
                    
                    
                    
                    -Changes
      in:Bank
      checks and commercial paper
                    
                    
                    (1,155,604
                    )
                    
                    
                    (13,209
                    )Accounts
      receivable
                    
                    
                    2,271,622
                    
                    
                    
                    (5,776,736
                    )Inventory
                    
                    
                    1,606,161
                    
                    
                    
                    2,065,370Prepaid
      expenses
                    
                    
                    (553,109
                    )
                    
                    
                    1,935,417Other
      receivables
                    
                    
                    (235,926
                    )
                    
                    
                    308,299Accounts
      payable
                    
                    
                    (197,951
                    )
                    
                    
                    (124,142
                    )Accrued
      expenses and other payables
                    
                    
                    (208,028
                    )
                    
                    
                    572,114Taxes
      payable
                    
                    
                    974,980
                    
                    
                    
                    2,176,022Deferred
      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
                    
                    
                    $
                    754,978Cash
      Flows from Investing ActivitiesPurchase
      of property, plant and equipment
                    
                    $
                    (2,159,769
                    )
                    
                    $
                    (284,120
                    )Net
      cash used in investing activities
                    
                    $
                    (2,159,769
                    )
                    
                    $
                    (284,120
                    )
  F-46
  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
      (A)Cash
      Flows from Financing ActivitiesProceeds
      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
                    )Proceeds
      from reverse merger
                    
                    
                    141,526
                    
                    
                    
                    -Net
      cash used in financing activities
                    
                    $
                    (2,076,772
                    )
                    
                    $
                    (495,101
                    )Increase
      (Decrease) in cash
                    
                    
                    32,624
                    
                    
                    
                    (24,243
                    )Effects
      of foreign currency conversion on cash
                    
                    
                    (25,409
                    )
                    
                    
                    (13,201
                    )Cash
      at beginning of year
                    
                    
                    3,459
                    
                    
                    
                    40,903Cash
      at end of year
                    
                    $
                    10,674
                    
                    
                    $
                    3,459Supplemental
      Disclosures of Cash Flow InformationCash
      paid during the year for:Interest
                    
                    $
                    1,553,494
                    
                    
                    $
                    4,108Income
      taxes
                    
                    $
                    857,118
                    
                    
                    $
                    54,438
 
 See
notes to consolidated financial statements.
 
 (A)
Represents the consolidated financial statements of Bright International Group
Co. Ltd.
  F-47
  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 currently 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 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.  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.
  F-48
  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(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 reverse merger, the Company effectively
issued 1,136,998 shares (post split) of common stock on July 9,
2008.  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
accounting 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.
 
 The
Company conducts 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 state-owned
holding company under the Company Law of PRC and changed into a privately owned
business enterprise in June 2007. Lanxi Sunrise manufacturing facility is
located in Lanxi County, Heilongjiang Province in the northeast section of the
PRC near the city of Harbin.
 
 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.  The remaining 5% is owned by the
president of the Company, Mr. Ren Gao.
  F-49
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE
2 — SIGNIFICANT ACCOUNTING POLICIES
 
 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.  For financial reporting purposes, the reverse merger has been
accounted for as a recapitalization of the Company whereby the historical
financial statements and operations of Bright become the historical financial
statements of the Company, with no adjustment to the carrying value of assets
and liabilities.  The financial statements have been prepared as if
the reverse merger transaction had occurred retroactively at the beginning of
the periods presented.  Share and per share amounts reflect the
effects of the recapitalization and reverse stock split for all periods
presented.  In addition, the presentation for all periods includes
equity transactions of Bright as adjusted for the effects of the
recapitalization and reverse stock split.
 
 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.
  F-50
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE 2 — 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 $1,651,810 and $886,900 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
$1.00 USD 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.
  F-51
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE 2 — SIGNIFICANT ACCOUNTING
POLICIES(Continued)
 
 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.
 
 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.
  F-52
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE 2 — SIGNIFICANT ACCOUNTING
POLICIES(Continued)
 
 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.
 
 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.
  F-53
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE 2 — SIGNIFICANT ACCOUNTING
POLICIES(Continued)
 
 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.
  F-54
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE 2 — SIGNIFICANT ACCOUNTING
POLICIES(Continued)
 
 Governmental Subsidies(Continued)
 
 (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.
 
 (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.
  F-55
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE 2 — SIGNIFICANT ACCOUNTING
POLICIES(Continued)
 
 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
      yearsMachinery
      and equipment
                14
      yearsOffice
      equipment and furniture
                3
      yearsMotor
      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.
 F-56
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE 2 — 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.
  F-57
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE 2 — SIGNIFICANT ACCOUNTING
POLICIES(Continued)
 
 Land Use Right(Continued)
 
 (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.
 F-58
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE 2 — 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.
 
 Other
Comprehensive Income
 Statement
of Financial Accounting Standards (SFAS) No. 130, “Reporting Comprehensive
Income,” establishes standards for reporting and display of other comprehensive
income, its components and accumulated balances. Other comprehensive income as
defined includes all changes in equity during a period from non-owner sources.
Accumulated other 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 other 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.
  F-59
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE 2 — SIGNIFICANT ACCOUNTING
POLICIES(Continued)
 
 Stock-Based
Compensation
 The
Company adopted SFAS No. 123R, “Share-Based Payments.”  This
Statement requires a public entity to measure the cost of services received in
exchange for an award of equity instruments based on the grant or issue fair
value of the award.  That cost will be recognized over the period
during which services are received.  Stock compensation for stock
granted to non-employees has been determined in accordance with SFAS 123R and
the Emerging Issues Task Force consensus Issue No. 96-18, "Accounting for Equity
Instruments that are issued to Other than Employees for Acquiring, or in
Conjunction with Selling Goods or Services" ("EITF 96-18"), as the fair value of
the consideration received or the fair value of equity instruments issued,
whichever is more reliably measured.  The Company recognized $844,200
of expense in connection with a shareholder contributing 804,000 shares to a
service provider for advisory service.
 
 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:
  Statutory
                  
                  
                  Statutory
                  
                  
                  TotalSurplus
                  
                  
                  Welfare
                  
                  
                  StatutoryReserve
                  
                  
                  Reserve
                  
                  
                  ReservesBalance
      on January 1, 2007
                  
                  $
                  284,670
                  
                  
                  $
                  142,335
                  
                  
                  $
                  427,005Contribution
      in 2007
                  
                  
                  203,568
                  
                  
                  
                  -
                  
                  
                  
                  203,568Balance
      on December 31, 2007
                  
                  $
                  488,238
                  
                  
                  $
                  142,335
                  
                  
                  $
                  630,573Contribution
      in 2008
                  
                  
                  389,022
                  
                  
                  
                  -
                  
                  
                  
                  389,022Balance
      on December 31, 2008
                  
                  $
                  877,260
                  
                  
                  $
                  142,335
                  
                  
                  $
                  1,019,595
  F-60
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE 2 — SIGNIFICANT ACCOUNTING
POLICIES(Continued)
 
 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:
 
 Name
                
                RelationshipRen
      Gao
                
                Majority
      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 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.
 F-61
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE 2 — SIGNIFICANT ACCOUNTING
POLICIES(Continued)
 
 Related Party Transaction(Continued)
 (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.
  F-62
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE 2 — SIGNIFICANT ACCOUNTING
POLICIES(Continued)
 
 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.
 
 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.
 F-63
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE
3 — ACCOUNTS RECEIVABLE
  Accounts
receivable consist of the following:
 
 December 31,
                  
                  
                  December 31,2008
                  
                  
                  2007Accounts
      receivable
                  
                  $
                  10,105,819
                  
                  
                  $
                  11,617,527Less:
      Allowance for doubtful accounts
                  
                  
                  (731,564
                  )
                  
                  
                  (655,280
                  )Accounts
      receivable, net
                  
                  $
                  9,374,255
                  
                  
                  $
                  10,962,247
 
 Bad debt
expense charged to operations was $31,310 and $426,369 for the years ended
December 31, 2008 and 2007, respectively.
 
 NOTE
4 — INVENTORY
  Inventory
consists of the followings:
 
 December 31,
                  
                  
                  December 31,2008
                  
                  
                  2007Finished
      goods
                  
                  $
                  6,175,230
                  
                  
                  $
                  5,480,818Work-in-progress
                  
                  
                  697,378
                  
                  
                  
                  1,900,506Raw
      materials
                  
                  
                  1,443,502
                  
                  
                  
                  1,929,110Supplies
      and low-value materials
                  
                  
                  18,932
                  
                  
                  
                  17,729$
                  8,335,042
                  
                  
                  $
                  9,328,163
  F-64
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE
5 — PREPAID EXPENSES
  Prepaid
expenses consist of the followings:
 
 December 31,
                  
                  
                  December 31,2008
                  
                  
                  2007Raw
      materials and supplies
                  
                  $
                  1,323,979
                  
                  
                  $
                  990,979Advance
      to contractors
                  
                  
                  329,423
                  
                  
                  
                  27,083Others
                  
                  
                  13,578
                  
                  
                  
                  18,036$
                  1,666,980
                  
                  
                  $
                  1,036,098
  NOTE
6 — DUE FROM RELATED PARTIES
  Due from
related parties consist of the followings:
 
 Name of Related Parties
                  
                  December 31,
                  
                  
                  December 31,2008
                  
                  
                  2007Ren
      Gao
                  
                  $
                  319,326
                  
                  
                  $
                  -Harbin
      Sunshine Linen Textile Co., Ltd.
                  
                  
                  1,185,605
                  
                  
                  
                  -Heilongjiang
      Lanxi Linen Textile Co., Ltd.
                  
                  
                  -
                  
                  
                  
                  22,967Songyuan
      Qianan Sunshine Linen Co., Ltd.
                  
                  
                  31,023
                  
                  
                  
                  -$
                  1,535,954
                  
                  
                  $
                  22,967
  F-65
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE
7 — GOVERNMENTAL SUBSIDY RECEIVABLE
  Governmental
subsidy receivable consists of the following:
 
 (1)
              Current
      Portion
 
 Name of Governmental Subsidy
                    
                    December 31,
                    
                    
                    December 31,2008
                    
                    
                    2007Income
      Tax Subsidy-2006
                    
                    $
                    1,019,420
                    
                    
                    $
                    -Income
      Tax Subsidy-2006 for interest imputed
                    
                    
                    159,963
                    
                    
                    
                    -Sewage
      Facilities Improvement Subsidy
                    
                    
                    73,212
                    
                    
                    
                    -Monetary
      grant
                    
                    
                    43,927
                    
                    
                    
                    -$
                    1,296,522
                    
                    
                    $
                    -
 
 (2)
              Non-current
      Portion
 
 Name of Governmental Subsidy
                    
                    December 31,
                    
                    
                    December 31,2008
                    
                    
                    2007Income
      Tax Subsidy-2006
                    
                    $
                    -
                    
                    
                    $
                    954,514Income
      Tax Subsidy-2006 for interest imputed
                    
                    
                    -
                    
                    
                    
                    72,161Income
      Tax Subsidy-2007
                    
                    
                    1,250,498
                    
                    
                    
                    1,170,879Income
      Tax Subsidy-2007 for interest imputed
                    
                    
                    94,538
                    
                    
                    
                    -Income
      Tax Subsidy-2008
                    
                    
                    1,042,801
                    
                    
                    
                    -$
                    2,387,837
                    
                    
                    $
                    2,197,554
  F-66
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE
8 — PROPERTY, PLANT AND EQUIPMENT
  The
following is a summary of property, plant and equipment:
 
 December 31,
                  
                  
                  December 31,2008
                  
                  
                  2007Building
      and warehouses
                  
                  $
                  4,153,567
                  
                  
                  $
                  3,889,110Machinery
      and equipment
                  
                  
                  4,616,477
                  
                  
                  
                  4,293,405Office
      equipment and furniture
                  
                  
                  121,708
                  
                  
                  
                  116,541Motor
      vehicles
                  
                  
                  8,815
                  
                  
                  
                  8,817$
                  8,900,567
                  
                  
                  $
                  8,307,873Less:
      Accumulated depreciation
                  
                  
                  (2,330,433
                  )
                  
                  
                  (1,768,450
                  )Subtotal
                  
                  $
                  6,570,134
                  
                  
                  $
                  6,539,423Add:
      Construction in progress
                  
                  
                  2,168,870
                  
                  
                  
                  -Idle fixed assets
                  
                  
                  70,921
                  
                  
                  
                  72,687Fixed assets to be disposed
                  
                  
                  7,366
                  
                  
                  
                  6,897Total
                  
                  $
                  8,817,291
                  
                  
                  $
                  6,619,007
 
 Depreciation
expense charged to operations was $442,381 and $346,918 for the years ended
December 31, 2008 and 2007, respectively.
 
 NOTE
9 — LAND USE RIGHT
  The
following is a summary of land use right, less amortization:
 
 December 31,
                  
                  
                  December 31,2008
                  
                  
                  2007Land
      use right
                  
                  $
                  439,271
                  
                  
                  $
                  411,302Less:
      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.
  F-67
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE
10 — BANK LOANS
  Bank
loans consist of the followings as of December 31, 2008:
  Financial Institutions
                  
                  Loan
                    Amount
                  
                  Duration
                  
                  Annual
                    Interest
                    Rate
                  
                  CollateralLanxi
      Branch of Agriculture Bank of China
                  
                  $
                  439,271
                  
                  3/21/2008
      – 3/20/2009
                  
                  
                  9.711
                  %Lanxi
      Branch of Agriculture Bank of China
                  
                  
                  439,271
                  
                  3/21/2008
      – 3/20/2009
                  
                  
                  9.711
                  %
                  The
      Group'sLanxi
      Branch of Agriculture Bank of China
                  
                  
                  878,542
                  
                  3/25/2008
      – 3/24/2009
                  
                  
                  9.711
                  %
                  equipment
      andLanxi
      Branch of Agriculture Bank of China
                  
                  
                  966,396
                  
                  3/28/2008
      – 3/27/2009
                  
                  
                  9.711
                  %
                  buildingsLanxi
      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%.
 F-68
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE 10 — BANK LOANS(Continued)
  Bank
loans consist of the followings as of December 31, 2007:
 
 Financial
      Institutions
                      
                      Loan
                        Amount
                      
                      Duration
                      
                      Annual
                        Interest
                        Rate
                      
                      
                      Overdue
                        Interest
                        Rate
                      
                      CollateralLanxi
      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
                      %
                      The
      Group'sLanxi
      Branch of Agriculture Bank of China
                      
                      
                      904,866
                      
                      09/30/2005-09/29/2006
                      
                      
                      7.488
                      %
      *
                      
                      
                      14.688
                      %
                      equipment
      andLanxi
      Branch of Agriculture Bank of China
                      
                      
                      889,126
                      
                      12/2/2005-12/1/2006
                      
                      
                      7.488
                      %
      *
                      
                      
                      14.688
                      %
                      buildingsLanxi
      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
 
 *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.
  F-69
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE
11 — ACCRUED EXPENSES AND OTHER PAYABLES
  Accrued
expenses and other payables consist of the followings:
 
 December 31,
                  
                  
                  December 31,2008
                  
                  
                  2007Accrued
      payroll
                  
                  $
                  364,855
                  
                  
                  $
                  129,146Accrued
      employee benefits
                  
                  
                  284,250
                  
                  
                  
                  361,691Accrued
      pension expenses
                  
                  
                  153,291
                  
                  
                  
                  90,637Accrued
      interest expenses
                  
                  
                  -
                  
                  
                  
                  1,021,811Accrued
      sales commission
                  
                  
                  77,376
                  
                  
                  
                  72,450Other
      accrued expenses
                  
                  
                  401,202
                  
                  
                  
                  10,658Other
      payables
                  
                  
                  278,485
                  
                  
                  
                  17,227$
                  1,559,459
                  
                  
                  $
                  1,703,620
 
 NOTE
12 — TAXES PAYABLE
  Taxes
payable consist of the followings:
 
 December 31,
                  
                  
                  December 31,2008
                  
                  
                  2007Income
      taxes payable
                  
                  $
                  4,046,654
                  
                  
                  $
                  3,478,721Sales-related
      taxes payable
                  
                  
                  351,460
                  
                  
                  
                  275,768VAT
      payable
                  
                  
                  4,292,961
                  
                  
                  
                  2,298,825Property
      taxes payable
                  
                  
                  113,355
                  
                  
                  
                  76,164$
                  8,804,430
                  
                  
                  $
                  6,129,478
  F-70
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE
13 — DEFERRED GOVERNMENTAL SUBSIDIES
  Deferred
governmental subsidies consist of the following:
  (1)
              Current
      Portion
  December 31,
                    
                    
                    December 31,Name of Governmental Subsidy
                    
                    2008
                    
                    
                    2007Land
      subsidy
                    
                    $
                    7,614
                    
                    
                    $
                    7,129Building
      subsidy
                    
                    
                    42,418
                    
                    
                    
                    39,717Sewage
      facilities improvement subsidy
                    
                    
                    38,802
                    
                    
                    
                    -$
                    88,834
                    
                    
                    $
                    46,846
 (2)
              Non-current
      Portion
  December 31,
                    
                    
                    December 31,Name
      of Governmental Subsidy
                    
                    2008
                    
                    
                    2007Land
      subsidy
                    
                    $
                    354,687
                    
                    
                    $
                    339,233Building
      subsidy
                    
                    
                    763,523
                    
                    
                    
                    754,628Sewage
      facilities improvement subsidy
                    
                    
                    737,243
                    
                    
                    
                    -$
                    1,855,453
                    
                    
                    $
                    1,093,861
  NOTE
14 — DUE TO RELATED PARTIES
  Due to
related parties consist of the followings:
  December 31,
                  
                  
                  December 31,Name
      of Related Parties
                  
                  2008
                  
                  
                  2007Harbin
      Sunshine Linen Textile Co., Ltd.
                  
                  $
                  -
                  
                  
                  $
                  1,130,912Harbin
      Zhongyi Sunshine Linen Co., Ltd.
                  
                  
                  56,470
                  
                  
                  
                  453,267$
                  56,470
                  
                  
                  $
                  1,584,179
  F-71
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE
15 — LOANS FROM RELATED PARTIES
  Loans
from related parties consist of the following:
 
 December 31,
                      
                      
                      December 31,Name
      of Related Parties
                      
                      2008
                      
                      
                      2007Mr.
      Ren Gao, Majority Owner of the Group
                      
                      $
                      -
                      
                      
                      $
                      116,858
   NOTE
16 — GOVERNMENTAL SUBSIDY INCOME
  Governmental
subsidy income consists of the followings:
 
 For the Year Ended
                    December 31,Name
      of Governmental Subsidy
                  
                  2008
                  
                  
                  2007Income
      tax refund subsidy
                  
                  $
                  1,029,178
                  
                  
                  $
                  1,128,040Land
      use right subsidy
                  
                  
                  7,514
                  
                  
                  
                  6,868Building
      subsidy
                  
                  
                  41,864
                  
                  
                  
                  -Leading
      enterprise grant
                  
                  
                  -
                  
                  
                  
                  132,085Financial
      supporting grants
                  
                  
                  245,669
                  
                  
                  
                  140,974$
                  1,324,225
                  
                  
                  $
                  1,407,967
  F-72
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE
17 — RELATED PARTY TRANSACTIONS
 
 For the Year Ended December 31,2008
                    
                    
                    2007Transactions
                    
                    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
                    %
  F-73
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE
18 — 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
                    
                    
                    2007Major Customers
                    
                    Revenue
                    
                    
                    Percentage of
                      Total Revenue
                    
                    
                    Revenue
                    
                    
                    Percentage of
                      Total RevenueHarbin
      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
                          
                          
                          2007Major Suppliers
                          
                          Purchase
                          
                          
                          Percentage of
                            Total Revenue
                          
                          
                          Purchase
                          
                          
                          Percentage of
                            Total RevenueHarbin
      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
                          %
  F-74
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE
19 — EARNINGS PER SHARE
  For the Year Ended
                    December 31,2008
                  
                  
                  2007Net
      income for basic and diluted earnings per share
                  
                  $
                  2,856,769
                  
                  
                  $
                  3,473,191Weighted
      average number of shares
                  
                  
                  19,511,256
                  
                  
                  
                  18,963,005Basic
      and diluted earnings per share
                  
                  $
                  0.15
                  
                  
                  $
                  0.18
 
 The
weighted average number of shares and earnings per share for 2007 have been
restated for the impact of share exchange as a result of the Reverse
Acquisition.
 
 NOTE
20 — 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.
  F-75
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE
21 — COMMON STOCK CONTRIBUTED BY SHAREHOLDER FOR SERVICES
 
 Lanxi
Sunrise 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 of
the Company as compensation for services after the reverse merger.  Such
shares were transferred to Mid-Continental Securities Corp. and certain of its
designees by some shareholders of the Company in 2008. The Company has accounted
for this as a contribution of capital by its shareholders and recorded a charge
to operations as general and administrative expense in the amount of $844,200
for the year ended December 31, 2008.  Such shares were valued based
on the closing market price of $1.05 per share at the date
of transfer.
 
 NOTE
22 — 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
income tax on consolidated statements of operation represented the provision of
income taxes for the operating subsidiary, Lanxi Sunrise only.  No
provision for the Company and Bright has been made as both companies have no
operation nor assessable profits for the year ended December 31,
2008.
 
 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%.
 
 The
provision for income taxes consists of the followings:
 
 For the Year Ended
                    December 31,2008
                  
                  
                  2007Current
      Income Tax
                  
                  $
                  1,184,172
                  
                  
                  $
                  1,423,708Deferred
      Income Tax
                  
                  
                  22,742
                  
                  
                  
                  182,735Income
      Tax
                  
                  $
                  1,206,914
                  
                  
                  $
                  1,606,443
  F-76
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE 22 — INCOME TAX
(Continued)
 
 The
components of net deferred tax assets are as follows:
 
 For the Year Ended
                    December 31,2008
                  
                  
                  2007Deferred
      tax assets:Accrued
      Pension
                  
                  $
                  38,326
                  
                  
                  $
                  22,659Accrued
      Expenses
                  
                  
                  68,276
                  
                  
                  
                  -Bad
      Debt Allowance
                  
                  
                  182,891
                  
                  
                  
                  163,820Fixed
      assets provision
                  
                  
                  33,009
                  
                  
                  
                  30,908Deferred
      Subsidy Income
                  
                  
                  218,397
                  
                  
                  
                  23,313Other
                  
                  
                  -
                  
                  
                  
                  36,295Gross
      deferred tax assets
                  
                  $
                  540,899
                  
                  
                  $
                  276,995Valuation
      allowance
                  
                  
                  -
                  
                  
                  
                  -Total
      deferred tax assets
                  
                  $
                  540,899
                  
                  
                  $
                  276,995Deferred
      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
                  
                  
                  $
                  222,774Current
      deferred tax liabilities
                  
                  
                  (324,130
                  )
                  
                  
                  (62,015
                  )Non-current
      deferred tax assets
                  
                  
                  241,706
                  
                  
                  
                  54,221Non-current
      deferred tax liabilities
                  
                  
                  (596,959
                  )
                  
                  
                  (549,389
                  )Net
      deferred taxes
                  
                  $
                  (380,190
                  )
                  
                  $
                  (334,409
                  )
  F-77
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE 22 — INCOME TAX(Continued)
  The
effective tax rate differed from the statutory income tax rate is as
follows:
 
 For the Year Ended
                    December 31,2008
                  
                  
                  2007China
      statutory income tax rate
                  
                  
                  25
                  %
                  
                  
                  33
                  %Effect
      of:Non-deductible
      expenses
                  
                  
                  5.19
                  %
                  
                  
                  0.20
                  %Change
      in income tax rate and others
                  
                  
                  (0.49
                  )%
                  
                  
                  (1.57
                  )%Effective
      Tax Rate
                  
                  
                  29.70
                  %
                  
                  
                  31.63
                  %
 
 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
23 — 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”).
  F-78
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE 23— ASSET RETIREMENT OBLIGATIONS(Continued)
 
 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”).
 
 NOTE
24— 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.
  F-79
  CHINA
LINEN TEXTILE INDUSTRY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008 and 2007
 (Stated
in US Dollars)
 
 NOTE 24 — COMMITMENTS AND
CONTINGENCIES(Continued)
 
 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.
 
 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.
  F-80