**Exhibit 99.1**

** **

Tothe Stockholders and Board of Directors

XilingolTongli Germanium Co., Ltd.

 

Wehave audited the accompanying balance sheets of Xilingol Tongli Germanium Co.,Ltd (the “Company”) as of December 31, 2008 and the related statements ofincome, stockholders’ equity and cash flows for the year ended December 31,2008. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audit.

 

Weconducted our audit of these statements in accordance with the generallyaccepted accounting principles (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudit provide a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of the Company as of December 31,2008 and the results of its operations and its cash flows for the year ended December 31,2008, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

/s/Beijing Topson Co., Ltd.

 

BEIJINGTOPSON CO., LTD.

CERTIFIEDPUBLIC ACCOUNTANTS

 

 

Beijing, PRC, 100081

April 5, 2009

 

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XILINGOL TONGLI GERMANIUM CO., LTD.

BALANCE SHEETS

AS OF DECEMBER 31, 2008

 
| ** **                                                                                                | ** ** | **2008**   | ** ** | **2007**  | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------|------------|
| ASSETS                                                                                                    |       |       |       |      |       |
| CURRENT ASSETS:                                                                                           |       |       |       |      |       |
| Cash                                                                                                      |       | $          | 301,704    |      | $          | 822,129 |   |
| Accounts receivable, trade, net of allowance of  bad debt $0 and $0 as of December 31, 2008 and 2007 |       | 23,886     |       | 62,225    |       |
| Inventories                                                                                               |       | 2,574,700  |       | 680,080   |       |
| Other receivables                                                                                         |       | 8,666      |       | 4,639     |       |
| Other receivables from related parties                                                                    |       | 707,775    |       | 670,694   |       |
| Advances to suppliers                                                                                     |       | 84,648     |       | 968,898   |       |
|                                                                                                      |       |       |       |      |       |
| Total current assets                                                                                      |       | 3,701,377  |       | 3,208,666 |       |
|                                                                                                      |       |       |       |      |       |
| PLANT AND EQUIPMENT, net                                                                                  |       | 12,172,427 |       | 7,296,942 |       |
|                                                                                                      |       |       |       |      |       |
| OTHER ASSETS:                                                                                             |       |       |       |      |       |
| Prepaid Expense,                                                                                          |       | 94,306     |       | 106,240   |       |
| Intangible asset, net of accumulated amortization                                                         |       | 4,863      |       | 11,393    |       |
| Total other assets                                                                                        |       | 99,170     |       | 117,634   |       |
|                                                                                                      |       |       |       |      |       |
| Total assets                                                                                              |       | $          | 15,972,974 |      | $          | 10,623,241 |   |
|                                                                                                      |       |       |       |      |       |
| LIABILITIES AND SHAREHOLDERS’  EQUITY                                                                |       |       |       |      |       |
|                                                                                                      |       |       |       |      |       |
| CURRENT LIABILITIES:                                                                                      |       |       |       |      |       |
| Accounts payable, trade                                                                                   |       | $          | 977,146    |      | $          | — |   |
| Advance from Customer                                                                                     |       | 262,631    |       | 1,138     |       |
| Short term bank loans                                                                                     |       | 729,480    |       | 683,611   |       |
| Other payables                                                                                            |       | 812,193    |       | 138,234   |       |
| Dividend payable                                                                                          |       | 2,370,927  |       | 3,048,496 |       |
| Accrued liabilities(Salary & Welfare)                                                            |       | 316,124    |       | 352,954   |       |
| Taxes payable                                                                                             |       | (65,766    | )          | 23,266    |       |
| Total current liabilities                                                                                 |       | 5,402,733  |       | 4,247,699 |       |
|                                                                                                      |       |       |       |      |       |
| LONG TERM LIABILITIES                                                                                     |       |       |       |      |       |
| Construction payable                                                                                      |       | 269,476    |       | 192,880   |       |
|                                                                                                      |       |       |       |      |       |
| SHAREHOLDERS’ EQUITY:                                                                                |       |       |       |      |       |
| Paid in & additional capital                                                                     |       | 7,582,569  |       | 4,884,631 |       |
| Statutory reserves                                                                                        |       | 980,333    |       | 587,063   |       |
| Retained earnings                                                                                         |       | (23,594    | )          | —    |       |
| Accumulated other comprehensive income                                                                    |       | 1,761,457  |       | 710,968   |       |
| Total shareholders’ equity                                                                           |       | 10,300,765 |       | 6,182,662 |       |
|                                                                                                      |       |       |       |      |       |
| Total liabilities and shareholders’ equity                                                           |       | $          | 15,972,974 |      | $          | 10,623,241 |   |

 

2

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XILINGOL TONGLI GERMANIUM CO., LTD.

STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME

FOR YEARS ENDED DECEMBER 31, 2008

 
| ** **                               | ** ** | **2008**        | ** ** | **2007**  | ** ** |
|------------------------------------------|------------|-----------------|------------|-----------|------------|
|                                     |       |            |       |      |       |
| REVENUES                                 |       | $               | 9,408,093  |      | $          | 7,343,908 |   |
| TOTAL REVENUES                           |       | 9,408,093       |       | 7,343,908 |       |
|                                     |       |            |       |      |       |
| COST OF GOODS SOLD                       |       | 4,310,669       |       | 2,865,569 |       |
| Selling Tax                              |       | 63,464          |       | 76,317    |       |
| COST OF GOODS SOLD - RELATED PARTY       |       |            |       |      |       |
| TOTAL COST OF GOODS SOLD                 |       | 4,374,133       |       | 2,941,886 |       |
|                                     |       |            |       |      |       |
| GROSS PROFIT                             |       | 5,033,959       |       | 4,402,022 |       |
|                                     |       |            |       |      |       |
| OPERATING EXPENSE                        |       |            |       |      |       |
| Selling expenses                         |       | 5,581           |       | 11,300    |       |
| General and administrative expenses      |       | 1,470,662       |       | 899,435   |       |
| Total operating expense                  |       | 1,476,243       |       | 910,735   |       |
|                                     |       |            |       |      |       |
| INCOME FROM OPERATIONS                   |       | 3,557,717       |       | 3,491,287 |       |
|                                     |       |            |       |      |       |
| OTHER (INCOME) EXPENSE                   |       |            |       |      |       |
| Interest income                          |       | –23,048.95 |       | (4,925    | )          |
| Interest expense                         |       | 442,865.45      |       | 41,383    |       |
| Other income                             |       | (226,921        | )          | (1,610    | )          |
| Other expense                            |       | 26,295          |       | 23,243    |       |
| Total other expense, net                 |       | 219,191         |       | 58,091    |       |
|                                     |       |            |       |      |       |
| INCOME BEFORE INCOME TAXES               |       | 3,338,525       |       | 3,433,196 |       |
|                                     |       |            |       |      |       |
| PROVISION FOR INCOME TAXES               |       | 609,708         |       | 56,938    |       |
|                                     |       |            |       |      |       |
| NET INCOME BEFORE MINORITY INTEREST      |       | 2,728,818       |       | 3,376,258 |       |
|                                     |       |            |       |      |       |
| LESS MINORITY INTEREST                   |       |            |       |      |       |
|                                     |       |            |       |      |       |
| NET INCOME                               |       | 2,728,818       |       | 3,376,258 |       |
|                                     |       |            |       |      |       |
| OTHER COMPREHENSIVE INCOME               |       |            |       |      |       |
| Foreign currency translation adjustments |       | 48,928          |       | 140,334   |       |
|                                     |       |            |       |      |       |
| COMPREHENSIVE INCOME                     |       | $               | 2,777,746  |      | $          | 3,516,592 |   |

 

3

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XILINGOL TONGLI GERMANIUM CO., LTD.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2008

 
| ** **                                                                     | ** ** | **2008**   | ** ** |
|--------------------------------------------------------------------------------|------------|------------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                          |       |       |       |
| Net income                                                                     |       | $          | 2,777,746  |   |
| Adjustments to  reconcile net income to cash provided by operating activities: |       |       |       |
| Minority  Interest                                                             |       |       |       |
| Depreciation                                                                   |       | 157,976    |       |
| Amortization                                                                   |       | 6,563      |       |
| Change in  operating assets and liabilities:                                   |       | —     |       |
| Accounts  receivable                                                           |       | 38,252     |       |
| Inventories                                                                    |       | -1,663,579 |       |
| Other  receivables                                                             |       | -3,343     |       |
| Other  receivables from related parties                                        |       | 7,127      |       |
| Advance to  suppliers                                                          |       | 854,073    |       |
| Prepaid expenses  and deferred assets                                          |       | 17,151     |       |
| Deposits                                                                       |       | —     |       |
| Accounts payable                                                               |       | 879,162    |       |
| Advance from  Customer                                                         |       | 235,203    |       |
| Other payables                                                                 |       | 598,032    |       |
| Accrued  liabilities                                                           |       | -338,869   |       |
| Taxes payable                                                                  |       | -81,509    |       |
| Net cash  provided by operating activities                                     |       | 3,483,985  |       |
|                                                                           |       |       |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                          |       |       |       |
| Purchase of  property and equipment                                            |       | -4,104,058 |       |
| Construction  payable                                                          |       | 57,271     |       |
| Net cash used in  investing activities                                         |       | (4,046,787 | )          |
|                                                                           |       |       |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                          |       |       |       |
| Payment of  dividend                                                           |       | -2,926,842 |       |
| Proceeds from  capital contribution                                            |       | 2,926,842  |       |
| Net cash  provided by financing activities                                     |       | —     |       |
|                                                                           |       |       |       |
| EFFECT OF EXCHANGE RATE ON CASH                                                |       | 42,377     |       |
|                                                                           |       |       |       |
| INCREASE (DECREASE) IN CASH                                                    |       | (471,497   | )          |
|                                                                           |       |       |       |
| CASH, beginning of year                                                        |       | 822,129    |       |
|                                                                           |       |       |       |
| CASH, end of year                                                              |       | $          | 301,704    |   |

 

4

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XILINGOL TONGLI GERMANIUM CO., LTD.

STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 2008

 
| ** **                             | ** ** | ** **             | ** ** | ** **            | ** ** | ** **       | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------------------|------------|-----------------------|------------|------------------|------------|-------------------|------------|------------|------------|
| ** **                             | ** ** | **Capital**            | ** ** | **Retained earnings** | ** ** | **other**        | ** ** | ** **        | ** ** |
| ** **                             | ** ** | **Paid-in &** | ** ** | **Statutory**         | ** ** | ** **       | ** ** | **comprehensive** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Additional capital** | ** ** | **reserves**          | ** ** | **Unrestricted** | ** ** | **income**        | ** ** | **Totals** | ** ** |
| BALANCE, December 31, 2007        |       | 4,884,631              |       | 587,063               |       | —           |       | 710,968           |       | 6,182,662  |       |
|                                   |       |                   |       |                  |       |             |       |              |       |       |       |
| Paid in capital                        |       | 2,697,938              |       |                  |       |             |       |              |       | 2,697,938  |       |
| Net income                             |       |                   |       |                  |       | 2,777,746        |       |              |       | 2,777,746  |       |
| Distrbuted to statutory reserve        |       |                   |       | 393,270               |       | (393,270         | )          |              |       | —     |       |
| Distrbuted to dividend                 |       |                   |       |                  |       | (2,370,926       | )          |              |       | (2,370,926 | )          |
| Distrbuted to Welfare                  |       |                   |       |                  |       | (37,144          | )          |              |       | (37,144    | )          |
| Accumulated other comprehensive income |       |                   |       |                  |       |             |       | 1,050,489         |       | 1,050,489  |       |
| BALANCE, December 31, 2008        |       | $                      | 7,582,569  |                  | $          | 980,333          |       | $                 | (23,594    | )          | $          | 1,761,457 |   | $ | 10,300,765 |   |
|                                        |            |                        |            |                       |            |                  |            |                   |            |            |            |  |  |  |  |  |

 

5

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XILINGOL TONGLI GERMANIUM CO., LTD.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31 2008

 

**Note 1 - Organization**

 

Xilingol Tongli Germanium Co., Ltd. (“XTG”, “theCompany”, “we” or “us”) is a joint venture company, and incorporated in August 4,1999, located in the city of Xilingol, Inner Mongolia. Approved by SichuanForeign Trade Committee and issued approved documents [1999] 036#. The Companyproduces high pure arsenic and other high purematerials & electric goods used for semiconductor.

 

The company has a registered capital RMB$7,000,000 (approximately USD$830,000). At April 10, 2001, American Xtal Technology, Inc.(AXT) paid capital RMB$1,750,000 (transferred FROM us Dollar); Nanjing GermaniumProduction Co., Ltd. (NGP) paid capital RMB$1,330,000, and Xilingol WlantugaCoal Co., Ltd. (XWC) paid capital RMB$3,920,000. The capital was verified byYongxin CPA firm.

 

At July 28, 2006, the company increasedregistered capital by dividend to RMB$39,468,852. After changed, the capital inthe company, AXT was RMB$9,866,329, NGP was RMB$7,498,407, and XWC was22,104,116. The capital has been verified by Yongxin CPA firm.

 

At March 14, 2008, the company increasedregistered capital by dividend to RMB$ 61,769,859. After changed, theregistered capital and rate was: AXT RMB$15,440,581 and 25%; NGPRMB$11,734,839, and 19%; and XWC RMB$34,590,440, and 56%. The capital has been verified by XilingolYongxin CPA firm.

 

**Note 2 - Summary of Significant Accounting Policies**

 

Useof estimates

 

Thepreparation of the financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Revenue recognition

 

The Company’s revenue recognition policies are incompliance with Staff Accounting Bulletin (“SAB”) 104. Products sales revenue isrecognized at the date of shipment to customers when a formal arrangementexists, the price is fixed or determinable, the delivery is completed, no othersignificant obligations of the Company exist and collectability is reasonablyassured.  Payments received before all ofthe relevant criteria for revenue recognition are recorded as customerdeposits.

 

Foreign currency translation and othercomprehensive income

 

Thereporting currency of the Company is the US dollar. The functional currency ofthe Company is the Chinese Renminbi (RMB).

 

6

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XILINGOL TONGLI GERMANIUM CO., LTD.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31 2008

 

Forthe company all assets and liabilitiesaccounts were translated at the exchange rate on the balance sheet date;stockholder’s equity is translated at the historical rates and items in thestatement of operations items and cash flow statements are translated at theaverage rate for the year. Translation adjustments resulting from this processare included in accumulated other comprehensive income in the statement ofshareholders’ equity.  The resultingtranslation gains and losses that arise from exchange rate fluctuations ontransactions denominated in a currency other than the functional currency areincluded in the results of operations as incurred.

 

Accumulatedother comprehensive income (loss) in the statement of shareholders’ equityamounted to $1,761,457 and $710,968 as of December 31, 2008 and 2007, respectively. The balance sheet amounts with the exception of equity at December 31, 2008 and 2007were translated at RMB6.8542 to $1 and at RMB7.3141 to $1, respectively.  The averagetranslation rates applied to income and cash flow statement amounts for theyears ended December 31, 2008 and 2007 were at RMB6.96279 to $1 and at RMB7.61811 to $1, respectively.

 

Fairvalue of financial instruments

 

Thecarrying amounts of the Company’s financial instruments (including accountsreceivable and payable, payables to related parties and bank loan) approximatefair value due to the relatively short period to maturity of these instruments.

 

Cashand concentration of risk

 

TheCompany considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cashequivalents for cash flow statement purposes. Cash includes cash on hand anddemand deposits in accounts maintained with state owned banks within the PRC.

 

Certainfinancial instruments, which subject the Company to concentration of creditrisk, consist of cash.  Balances atfinancial institutions or state owned banks within the PRC are not covered byinsurance.  As of December 31, 2008, theCompany had deposits totaling $301,704that are not covered by insurance. The Company has notexperienced any losses in such accounts and believes it is not exposed to anysignificant risks on its cash in bank accounts.

 

TheCompany’s operations are carried out in the PRC. Accordingly, the Company’sbusiness, financial condition and results of operations may be influenced bythe political, economic and legal environments in the US and China, and by thegeneral state of China’s economy. The Company’s operations in China are subjectto specific considerations and significant risks typically associated withcompanies in the North America. These include risks associated with, amongothers, the political, economic,financial and legal environments and foreign currency exchange.  The Company’s results may be adverselyaffected by changes in governmental policies with respect to laws andregulations, anti-inflationary measures andChinese industry policy.

 

7

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XILINGOL TONGLI GERMANIUM CO., LTD.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31 2008

 

Forthe year ended December 31, 2008, one supplier accounted for approximately 68% of the Company’s totalpurchases. As of December 31, 2008, one accountspayable was due to these suppliers.

 

Forthe year ended December 31,2008, three customers accounted for approximately 80.75%, of theCompany’s total sales.  As of December 31, 2008, one customer’s accountreceivable balance amounted to $707,775, representing 96.7% of the total accounts receivable of the Company.

 

Accountsreceivables and allowance for doubtful accounts

 

Managementregularly reviews aging of the receivables and changes in payment trends by itscustomers, and records a reserve when they believe collection of amounts dueare at risk. Accounts considered uncollectible are written off. At December 31, 2008,management concluded that its allowance for doubtful accounts was zero. The Company had trade accounts receivable of $23,886 as of December 31, 2008, and $707,775 was the accounts receivable of related parties NGP.

 

Inventories

 

Inventoriesare stated at the lower of cost or market using weighted average method.Inventories consist of raw materials and supplies, work in process, andfinished goods.  Raw materials mainlyconsist of germanium coal, hydrochloricacid and additives used in processing.  The cost of finished goodsincluded (1) direct costs of raw materials, (2) overhead, such as labor,depreciation and repairing expense.

 

The Company reviews its inventory regularlyfor possible obsolescence.  As of December 31, 2008, the Companyrecorded no reserves for inventory obsolescence.

 

Plantand equipment, net

 

Plantand equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings asincurred; while additions, renewals and betterments are capitalized.  When the property and equipment is retired orotherwise disposed of, the related cost and accumulated depreciation areremoved from the respective accounts, and any gain or loss is included inoperations.  Depreciation of property andequipment is provided using the straight-line method for substantially allassets with estimated lives as follows:

 
| ** **                | ** ** | **Estimated Useful Life** |
|---------------------------|------------|---------------------------|
| Building                  |       | 15-20 years               |
| Machinery and equipment   |       | 10 years                  |
| Other equipment           |       | 5 years                   |
| Transportation  equipment |       | 5 years                   |

 

Intangibles

 

Underthe Statement of Financial Accounting Standards (“SFAS”) No. 142, “*Goodwill and Other Intangible Assets*,” all goodwill andcertain intangible assets determined to have

 

8

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XILINGOL TONGLI GERMANIUM CO., LTD.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31 2008

 

indefinitelives will not be amortized but will be tested for impairment at leastannually. Intangible assets other than goodwill will be amortized over theiruseful lives and reviewed for impairment in accordance with SFAS No. 144, “*Accounting for Impairment or Disposal of Long-Lived Assets*.”

 

The Company’s intangibleassets is unpatent technology purchased from NGP at1999, which the Company amortizes over 10 years.

 

Incometaxes

 

TheCompany records and reports income taxes pursuant to Statement of FinancialAccounting Standards No. 109, “*Accounting for IncomeTaxes*” (“SFAS 109”).  SFAS 109requires the recognition of deferred income tax liabilities and assets for theexpected future tax consequences of temporary differences between income taxbasis and financial reporting basis of assets and liabilities. Provision forincome taxes consists of taxes currently due plus deferred taxes.

 

TheCompany adopted FASB Interpretation 48, “*Accounting for Uncertaintyin Income Taxes*” (“FIN 48”), on January 1, 2007.  A tax position is recognizedas a benefit only if it is “more likely than not” that the tax position wouldbe sustained in a tax examination, with a tax examination being presumed tooccur.  The amount recognized is thelargest amount of tax benefit that is greater than 50% likely of being realizedon examination.  For tax positions notmeeting the “more likely than not” test, no tax benefit is recorded.  The Company believes that the adoption of FIN48 had no effect on its financial statements as of and for the years ended December 31, 2008.

 

Deferredtax is accounted for using the balance sheet liability method in respect oftemporary differences arising from differences between the carrying amount ofassets and liabilities in the financial statements and the corresponding taxbasis used in the computation of assessable tax profit.  In principle, deferred tax liabilities arerecognized for all taxable temporary differences, and deferred tax assets are recognizedto the extent that it is probably that taxable profit will be available againstwhich deductible temporary differences can be utilized.  Deferred tax is calculated at the tax ratesthat are expected to apply to the period when the asset is realized or theliability is settled.  Deferred tax ischarged or credited in the income statement, except when it related to itemscredited or charged directly to equity, in which case the deferred tax is alsodealt with in equity.

 

The company located on the West of China, andenjoyed the favorable rate of income tax 15%.

 

ValueAdded Tax (VAT)

 

Salesrevenue represents the invoiced value of goods, net of a value-added tax(VAT).  All of the Company’s goods that are sold in the PRC are subject to a Chinesevalue-added tax at a rate of 13% or 17% of thegross sales price, respectively(the VAT rate in the company is 17%).  This VAT may be offset by VAT paid by theCompany on raw materials and other materials included in the cost of producingtheir finished products. The Company recorded VAT payable and VAT receivablenet of payments in the financial statements. The VAT tax return is filed to offset the payables against thereceivables.

 

9

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XILINGOL TONGLI GERMANIUM CO., LTD.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31 2008

 

Recentlyissued accounting pronouncements

 

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement ofFinancial Accounting Standards (SFAS) No. 157, “*Fair Value Measurements*”**(“SFAS 157”).SFAS 157 defines fair value, establishes a framework for measuring fair valueunder accounting principles generally accepted in the United States (GAAP) andexpands disclosures about fair value measurements. Fair value is defined under SFAS157 as the exchange price that would be received for an asset or paid totransfer a liability (an exit price) in the principal or most advantageousmarket for the asset or liability in an orderly transaction between marketparticipants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires theCompany to maximize the use of observable inputs and minimize the use ofunobservable inputs when measuring fair value. SFAS No. 157 will be effective for fair value measurementsbeginning in the first quarter of fiscal 2008. The Company does not believe that the adoption of SFAS 157 has anymaterial impact on the Company’s financial position or results of operations.

 

InFebruary 2007, the FASBissued SFAS No. 159, “*The Fair Value Option forFinancial Assets and Financial Liabilities—including an amendment of FASBStatement No. 115*” (“FAS 159”). FAS 159 permits companies tochoose to measure many financial instruments and certain other items at fairvalue that are not currently required to be measured at fair value.  The objective of FAS 159 is to provideopportunities to mitigate volatility in reported earnings caused by measuringrelated assets and liabilities differently without having to apply hedgeaccounting provisions.  FAS 159 alsoestablishes presentation and disclosure requirements designed to facilitatecomparisons between companies that choose different measurement attributes forsimilar types of assets and liabilities. SFAS 159 applies to the Company’s first fiscal year beginning after November 15,2007. The Company is evaluating the impact of this statement on its financialstatements.

 

InJune 2007, the FASB issued FASB Staff Position No. EITF 07-3, “*Accounting for Nonrefundable Advance Payments for Goods or ServicesReceived for use in Future Research and Development Activities*” (“FSPEITF 07-3”), which addresses whether nonrefundable advance payments for goodsor services that used or rendered for research and development activitiesshould be expensed when the advance payment is made or when the research anddevelopment activity has been performed. FSP EITF 07-3 will be effective for an entity’s financial statementsissued for fiscal years beginning after December 15, 2007.  The Company does not expect the adoption ofFSP EITF 07-3 to have a material impact on the Company’s financial position orresults of operations.

 

In December 2007, the FASB issued SFAS No. 160,“*Noncontrolling Interests in Consolidated FinancialStatements - an amendment of Accounting Research Bulletin No. 51*”(“SFAS 160”), which establishes accounting and reporting standards forownership interests in subsidiaries held by parties other than the parent, theamount of consolidated net income attributable to the parent and to thenoncontrolling interest, changes in a parent’s ownership interest and thevaluation of retained non-controlling equity investments when a subsidiary isdeconsolidated.  The statement alsoestablishes reporting requirements that provide sufficient disclosures thatclearly identify and distinguish between the interests of the parent and theinterests of the non-controlling

 

10

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XILINGOL TONGLI GERMANIUM CO., LTD.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31 2008

 

owners.  SFAS 160 is effective for fiscal yearsbeginning after December 15, 2008. The Company has not determined theeffect the application of SFAS 160 will have on its financial statements.

 

In December 2007, SFAS No. 141(R), “*Business Combinations*”,was issued.  SFAS No. 141R replacesSFAS No. 141, “*Business Combinations*”*.*SFAS 141R retains the fundamentalrequirements in SFAS 141 that the acquisition method of accounting (which SFAS141 called the *purchase method*)be used for all business combinations and for an acquirer to be identified foreach business combination.  SFAS 141Rrequires an acquirer to recognize the assets acquired, the liabilities assumed,and any noncontrolling interest in the acquiree at the acquisition date, measuredat their fair values as of that date, with limited exceptions.  This replaces SFAS 141’s cost-allocationprocess, which required the cost of an acquisition to be allocated to theindividual assets acquired and liabilities assumed based on their estimatedfair values.  SFAS 141R also requires theacquirer in a business combination achieved in stages (sometimes referred to asa step acquisition) to recognize the identifiable assets and liabilities, aswell as the noncontrolling interest in the acquiree, at the full amounts oftheir fair values (or other amounts determined in accordance with SFAS141R).  SFAS 141R applies prospectivelyto business combinations for which the acquisition date is on or after thebeginning of the first annual reporting period beginning on or after December 15,2008.  An entity may not apply it beforethat date.  The Company is currentlyevaluating the impact that adopting SFAS No. 141R will have on itsfinancial statements.

 

**Note****3****- Inventories**

 

Inventoriesat December 31, 2008 and 2007consisted of the following:

 
| ** **      | ** ** | **2008**  | ** ** | **2007** | ** ** |
|-----------------|------------|-----------|------------|----------|------------|
| Raw materials   |       | $         | 1,182,569  |     | $          | 431,586 |   |
| Work in process |       | 176,896   |       | 130,862  |       |
| Finished goods  |       | 1,215,235 |       | 117,632  |       |
| Totals          |       | $         | 2,574,700  |     | $          | 680,080 |   |

 

**Note****4****- Plant and equipment**

 

Plantand equipment at December 31, 2008 and 2007 consisted ofthe following:

 
| ** **                    | ** ** | **2008**  | ** ** | **2007**  | ** ** |
|-------------------------------|------------|-----------|------------|-----------|------------|
| Buildings and improvements    |       | $         | 3,791,845  |      | $          | 3,263,866 |   |
| Transportation equipment      |       | 150,948   |       | 141,457   |       |
| Machinery and equipment       |       | 5,403,645 |       | 4,320,223 |       |
| Other Equipment               |       | 28,360    |       | 24,513    |       |
| Totals                        |       | 9,374,798 |       | 7,750,061 |       |
| Less accumulated depreciation |       | 1,568,538 |       | 929,919   |       |
| Construction in Process       |       | 4,366,167 |       | 476,800   |       |
| Totals                        |       | $         | 12,172,427 |      | $          | 7,296,942 |   |

 

Depreciationexpense for the years ended December 31, 2008 amounted to $576,223.

 

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XILINGOL TONGLI GERMANIUM CO., LTD.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31 2008

 

**Note****5****— Intangibles**

 

The intangible assets is unpatent technology boughtat 1999 original cost is RMB$500,000, amortization period is 10 year-long. Thebalance at the year end December 31, 2008 amounted to RMB$33,333.96.

 

**Note****6****—****Related Party Transactions**

 

Nanjing Germanium Production Co., Ltd. (NGP) is oneshareholder of the company. The company sold goods to NGP US$5,098,408, and is54% of total sales. The balance of account receivable for BTT is US$696,737 for the year end December 31, 2008.

 

**Note****7****—****Dividend Payable**

 

Thedividend distributed to shareholders in 2008and 2007 wasUS$2,370,927 andUS$3,048,496, respectively.

 

**Note****8****- Income taxes**

 

Underthe existing Income Tax Laws of the PRC,the Company is generally subject to an income tax at an effective rate of 25% on taxable income, which is based on the net income, reported in the statutory financial statements afterappropriate tax adjustments.

 
| ** **                | ** ** | **2008** | ** ** |
|---------------------------|------------|----------|------------|
| Taxable income            |       | $        | 4,064,718  |   |
| Rate of income tax        |       | 15       | %          |
|                      |       |     |       |
| Total provision for taxes |       | $        | 609,708    |   |

 

ValueAdded Tax

 

VATon sales and VAT on purchases in China amounted to US$1,574,526 and US$739,479 for the year ended December 31, 2008.

 

Salesand purchases are recorded net of VAT collected and paid as the Company acts asan agent for the government. VAT taxes are not impacted by the income taxholiday.

 

Taxespayable at December 31, 2008consisted of the following:

 
| ** **          | ** ** | **2008** | ** ** |
|---------------------|------------|----------|------------|
| VAT                 |       | $        | -119,662   |   |
| Income tax          |       | 51,911   |       |
| Others              |       | 1,985    |       |
| Total taxes payable |       | $        | -65,766    |   |

 

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XILINGOL TONGLI GERMANIUM CO., LTD.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31 2008

 

**Note****9****- Statutory reserves**

 

TheCompany is required to transfer 15% of its netincome (10% as reserved fund and 5% as developingfund), as determined in accordance with the PRC relatives rules andregulations, to a statutory surplus reserve fund until such reserve balancereaches 50% of the Company’s registered capital.

 

Thetransfer to this reserve must be made before distribution of any dividend toshareholders. For the year ended December 31, 2008, the Company transferred $393,270, representing 15% of the year’s net income determined in accordance with PRC accountingrules and regulations, to this reserve.

 

**Note 1****0****— Employee****benefit**

 

TheCompany is required to transfer 10% of its netincome as employee welfare & bonus fund. For the year ended December 31, 2008, theCompany transferred RMB$37,144, representing 10% of the year’s net income determined in accordance with PRC accountingrules and regulations, to this fund.

 

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