UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  _____________________________________
 Form
10-K/A
 Amendment
No. 1
 __________________________________________
  (mark
one)
 x
                ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For the fiscal year
ended June 30,
2008
  OR
   ̈
                TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For the transition period from _____ to
_________
  Commission
file number: 000-27129
  _____________________________________
 
 ASIAN
FINANCIAL, INC.
 (Exact name of registrant as specified
in its charter)
 _____________________________________
  Wyoming
                91-1922225(State
      or other jurisdiction of
                  incorporation
      or organization)
                (I.R.S.
      Employer
                  Identification
      No.)
 
 No.
3 Jinyuan Road
 Daxing
Industrial Development Zone
 Beijing,
People’s Republic of China
 102600
 (Address
of principal executive offices)
 +86
10 6021 2222
 (Registrant’s
telephone number, including area code)
  Securities
registered pursuant to Section 12(b) of the Act:  None.
  None
                  (Title
      of class)
                None
                  (Name
      of each exchange on which
registered)
 
 
  Securities registered pursuant to
Section 12(g) of the Act: None.
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
 Yes  ̈   No
x
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
 Yes  ̈   No
x
  Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  o
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
accelerated filer  ̈      
Accelerated filer   ̈      
Non-accelerated filer  x      
Smaller reporting company  ̈
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes  ̈No x
  State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the common equity was sold, or the average
bid and asked prices of such common equity, as of the last business day of the
registrant’s most recently completed second fiscal quarter.
 
 As of
December 31, 2007, which was the last business day of the registrant’s most
recently completed second fiscal quarter, the aggregate market value of the
Company’s common stock, par value $0.001 per share, held by non-affiliates was
approximately $96.0 million, based upon the price of $3.84 per share, as
determined by the purchase price paid by certain of our shareholders for the
Company’s common stock on November 2, 2006 in a private equity purchase
transaction.
 
 There
were 25,000,050 shares of the registrant’s common stock issued and outstanding
as of September 22, 2008.
  
  ASIAN FINANCIAL,
INC.
  FORM
10-K/A
  FOR
THE YEAR ENDED JUNE 30, 2008
 
 INDEX
  PagePART I
                          
                          1Item
      1.
                          Business
                          2Item
      1A.
                          Risk Factors
                          21Item
      2.
                          Properties
                          38Item
      3.
                          Legal Proceedings
                          39Item
      4.
                          Submission of Matters to a Vote
      of Security Holders
                          39PART II
                          
                          40Item
      5.
                          Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                          40Item
      6.
                          Selected Financial Data
                          40Item
      7.
                          Management’s Discussion and
      Analysis of Financial Condition and Results of Operations
                          42Item
      7A.
                          Quantitative and Qualitative
      Disclosures About Market Risk
                          66Item
      8.
                          Financial Statements and
      Supplementary Data
                          68Item
      9.
                          Changes in and Disagreements with
      Accountants on Accounting and Financial Disclosure
                          68Item
      9A.
                          Controls and Procedures
                          68Item
      9B.
                          Other Information
                          70PART III
                          
                          71Item
      10.
                          Directors, Executive Officers and
      Corporate Governance
                          71Item
      11.
                          Executive Compensation
                          74Item
      12.
                          Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                          81Item
      13.
                          Certain
      Relationships and Related Transactions, and Director
      Independence
                          83Item
      14.
                          Principal
      Accounting Fees and Services
                          85PART IV
                          
                          87Item
      15.
                          Exhibits,
      Financial Statement Schedules
                          87Signatures
                          
                          88Report of Independent Registered
      Public Accounting Firm
                          F-1Consolidated Financial Statements
                          F-2
  
  EXPLANATORY NOTE
  This
Amendment No. 1 on Form 10-K/A, or this Annual Report, amends and restates
in its entirety Asian Financial, Inc.’s Annual Report on Form 10-K, for the year
ended June 30, 2008, which was initially filed with the Securities and Exchange
Commission on September 26, 2008, or the Original Filing. This Annual Report
enhances and supplements the disclosure provided in the Original Filing for
Items 1, 1A, 2, 3, 4, 5, and 6 under Part I, Items 7, 7A and 9A under Part II,
Items 10, 11, 12, 13 and 14 under Part III and Item 15 under Part
IV.
  This
Annual Report includes the audited consolidated financial statements and related
notes, neither of which has changed from the information and disclosure reported
in the Original Filing.
  Pursuant
to the rules of the Securities and Exchange Commission, Item 15 of Part IV
of the Original Filing has been amended to contain certifications as of the
current date from our chief executive officer and chief financial officer. The
certifications of our chief executive officer and chief financial officer are
attached to this Annual Report as Exhibits 31.1, 31.2, 32.1 and 32.2,
respectively.
  Except as
otherwise noted, this Annual Report does not include disclosure or information
reflecting any event that occurred subsequent to September 26, 2008, the filing
date of the Original Filing.  Such events include, among others, the
events described in Asian Financial Inc.’s current reports on Form 8-K and
quarterly reports on Form 10-Q that were filed after the date of the Original
Filing.
  
  PART
I
  Special
Note Regarding Forward-Looking Statements
  Except
for historical information, the statements contained in this Annual Report for
the year ended June 30, 2008, including “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” are “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as
amended, or the Securities Act, and Section 21E of the Securities Exchange Act
of 1934, as amended, or the Exchange Act. Generally the words “believe,”
“anticipate,” “may,” “will,” “should,” “expect,” “intend,” “estimate,”
“predict,” “continue,” and similar expressions or the negative thereof or
comparable terminology are intended to identify forward-looking statements which
include, but are not limited to, statements concerning expectations of Asian
Financial, Inc. and its directors and officers regarding its working capital
requirements, financing requirements, business prospects, and other statements
of expectations, beliefs, future plans and strategies, anticipated events or
trends, and similar expressions concerning matters that are not historical
facts. Such statements are not guarantees of future performance and subject to
certain risks and uncertainties, including the matters set forth in this Annual
Report or in other reports or documents Asian Financial, Inc. files with the
Securities and Exchange Commission, from time to time, which could cause actual
results or outcomes to differ materially from those projected. Undue reliance
should not be placed on these forward-looking statements which speak only as of
the date hereof. Asian Financial, Inc. does not ordinarily make projections of
its future operating results and undertakes no obligation (and expressly
disclaims any obligation) to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise,
except as required by law. Readers should carefully review this Annual Report
and other documents filed by Asian Financial, Inc. with the Securities and
Exchange Commission. The forward-looking statements in this Annual Report for
the year ended June 30, 2008 involve known and unknown risks, uncertainties and
other factors that could cause the actual results, performance or achievements
of Asian Financial, Inc. to differ materially from those expressed in or implied
by the forward-looking statements contained herein. Please see the discussion in
“Item 1A. Risk Factors.” This section should be read together with the audited
consolidated financial statements of Asian Financial, Inc. and related notes set
forth elsewhere in this Annual Report.
 
 Introduction
 
 Unless
otherwise indicated and except where the context otherwise requires, references
in this Annual Report to:
 
 ·
              “China”
      and “PRC” are to the People’s Republic of China, excluding Taiwan, Hong
      Kong and Macau;
 
 ·
              “shares”
      and “common shares” are to shares of our common stock after our reverse
      stock split, effective as of July 17,
2007;
 
 ·
              “RMB”
      and “Renminbi” are to the legal currency of
  China;
 
 ·
              “fiscal
      2006,” “fiscal 2007” and “fiscal 2008” are to our fiscal years ended June
      30, 2006, 2007 and 2008,
respectively;
 
 ·
              “$,”
      “dollars,” “US$” and “U.S. dollars” are to the legal currency of the
      United States of America;
 
 ·
              “U.S.
      GAAP” is to the generally accepted accounting principles of the United
      States of America; and
 
 ·
              “U.S.”
      and “United States” are to the United States of
  America.
 
 Unless
otherwise indicated and except where the context otherwise requires, “we,” “us,”
“our company,” “the company” and “our” refer to Asian Financial, Inc., a Wyoming
corporation, its predecessor entities and subsidiaries.
  1
  Unless
otherwise indicated and except where the context otherwise suggests, our
financial information presented in this Annual Report, including the audited
consolidated financial statements and related notes, has been prepared in
accordance with U.S. GAAP.
 
 For the
years ended June 30, 2006, 2007 and 2008, our income statements were translated
at the average rates of RMB8.06 to $1.00, RMB7.81 to $1.00 and RMB7.26 to $1.00,
respectively.
 
 Solely
for your convenience, the foreign currency figures from the Printing and
Printing Equipment Industries Association of China, or PEIAC, have been
translated into U.S. dollars at the rate of RMB7.00 to
$1.00.
 Item
      1.
                Business.
 Overview
 
 We are a
Wyoming corporation and a leading offset printing equipment supplier in China,
headquartered in Beijing. Through our principal operating subsidiary, Duoyuan
Digital Press Technology Industries (China) Co., Ltd., or Duoyuan China, and
Duoyuan China’s manufacturing subsidiaries, namely Langfang Duoyuan Digital
Technology Co., Ltd., or Langfang Duoyuan, and Hunan Duoyuan Printing Machinery
Co., Ltd., or Hunan Duoyuan, we design, manufacture and sell offset printing
equipment used in the offset printing process. The offset printing process
includes the following three stages: (1) “pre-press,” which is the transfer of
images to printing plates; (2) “press,” which is the transfer of images from
printing plates to another media, such as paper; and (3) “post-press,” which is
the last step of the offset printing process that includes cutting, folding,
binding and collating printed materials. We currently commercially produce and
sell one product under our pre-press product category (our computer-to-plate, or
CTP, system) and four types of products under our press product category (our
single color small format presses, single color large format presses, multicolor
small format presses and multicolor large format presses). We do not
commercially produce and sell any post-press products. However, we plan to begin
commercial production and sale of certain post-press products, including a
cold-set corrugated printing press, a machine used to assemble corrugated
cardboard boxes, by the end of 2010. In addition, we plan to begin commercial
production and sale of two other post-press products, namely an automatic
booklet maker and an automatic paper cutter, for which we have developed
prototypes, in 2011.
 
 Our
principal executive offices are located at No. 3 Jinyuan Road, Daxing Industrial
Development Zone, Beijing, People’s Republic of China. Our website address is
www.duoyuan.com. Our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act are available, free of charge, on the
Securities and Exchange Commission website at www.sec.gov.
 
 Corporate
History
 
 We were organized under the laws of the
State of Nevada on August 10, 1998. On July 27, 2005, we merged with Asian
Financial, Inc., a Wyoming corporation, for the purpose of changing our domicile
from Nevada to Wyoming.From our inception until the Equity
Transfer (as defined below), we were a shell company without operations, revenue
or employees, other than officers and directors.
 
 On
October 6, 2006, we closed an equity transfer agreement, or the Equity Transfer
Agreement, with Duoyuan Investments Limited, or Duoyuan Investments, a British
Virgin Islands company with operating subsidiaries in China. Pursuant to the
Equity Transfer Agreement, we issued 47,100,462 common shares to Duoyuan
Investments in exchange for all of Duoyuan Investments’ equity interest in
Duoyuan China, its wholly owned subsidiary. Duoyuan China manufactured single
color offset printing presses, among other products. As a result of this equity
transfer, or the Equity Transfer, Duoyuan China became our wholly owned
subsidiary, and Duoyuan Investments, a company wholly owned by Wenhua Guo, the
chairman of our board of directors and chief executive officer, became our
controlling shareholder. Upon the closing of the Equity Transfer, we commenced
our offset printing equipment business.
  2
  On
November 2, 2006, we closed the transactions contemplated by a securities
purchase agreement, or the Securities Purchase Agreement, by and between us and
certain investors, or the Private Placement Investors. Pursuant to the
Securities Purchase Agreement, we issued an aggregate of 6,132,601 common shares
to the Private Placement Investors for an aggregate purchase price of $23.5
million. This private placement, or Private Placement, was made pursuant to the
exemption from the registration provisions of the Securities Act provided by
Section 4(2) of the Securities Act, and Rule 506 of Regulation D promulgated
thereunder, for issuances not involving a public offering. See “Item 13. Certain
Relationships and Related Transactions, and Directors Independence—Liquidated
Damages Related to Private Placement.”
 
 Our
Subsidiaries
 
 Our
Principal Operating Subsidiary
 
 Duoyuan
China, our principal operating subsidiary, was incorporated onJune
21, 2001 under the laws of the PRC by Duoyuan Industries (Holding), Inc., or
Duoyuan Industries, a British Virgin Islands company, wholly owned by Wenhua
Guo. In 2001, Duoyuan China purchased certain offset printing equipment
manufacturing related assets from Beijing Duoyuan Electric Co. Ltd., or Duoyuan
Electric, a PRC company, which since 1994 was in the business of manufacturing
single color small format presses, among other products. Duoyuan Electric sold
certain raw materials and semi-finished products to Duoyuan China. Duoyuan
Electric also transferred a trademark to Duoyuan China without charge. On
October 29, 2002, Duoyuan Investments purchased all of Duoyuan Industries’
interests in Duoyuan China. Upon the closing of the Equity Transfer with Duoyuan
Investments on October 6, 2006, Duoyuan China became our wholly owned subsidiary
and we commenced our offset printing equipment business.
 
 Duoyuan
China’s principal business activities include marketing and sale of our offset
printing equipment, technical support to our distributors and overall strategic
planning and management of our business.
 
 Our
Manufacturing Subsidiaries
 
 Langfang
Duoyuan was incorporated on October 27, 2000 under the laws of the PRC by
Beijing Yinhang Yinlu Advertisement Co. Ltd., or Beijing Advertisement, and
Beijing Huiyuan Duoyuan Digital Printing Technology Research Institute, or
Huiyuan Institute, each an entity controlled by Wenhua Guo. At the time of
Langfang Duoyuan’s incorporation, Beijing Advertisement and Huiyuan Institute
held an equity interest in Langfang Duoyuan of 5% and 95%, respectively.
Pursuant to an equity transfer agreement dated as of March 25, 2002, Duoyuan
China acquired all of Beijing Advertisement’s 5% interest in Langfang Duoyuan.
Pursuant to an equity transfer agreement dated as of October 16, 2005, Duoyuan
China acquired an additional 90% equity interest in Langfang Duoyuan from
Huiyuan Institute. Huiyuan Institute remains the holder of a 5% equity interest
in Langfang Duoyuan.
 
 Langfang
Duoyuan’s principal business activities include manufacturing our CTP system and
two of our press products, namely our single color small format presses and
multicolor small format presses.
 
 Hunan
Duoyuan was incorporated on March 10, 2004. In December 2003, Duoyuan China
participated in a public auction and entered into an agreement, as further
supplemented in May 2004, to purchase certain assets (including real property,
manufacturing facilities, and intellectual property) from Hunan Printing
Machinery Co., Ltd., which was a bankrupt state owned PRC enterprise. Hunan
Printing Machinery Co., Ltd. was then one of the major large format press
manufacturers in China approved by the Chinese government to produce multicolor
printing equipment. Duoyuan China acquired certain assets from Hunan Printing
Machinery Co., Ltd. for its multicolor printing equipment and large format
printing equipment production capacity. After the acquisition of the assets of
Hunan Printing Machinery  Co., Ltd. in December 2003, Duoyuan China
and Langfang Duoyuan incorporated Hunan Duoyuan on March 10, 2004, with each
holding an 88% and 12% equity interest in Hunan Duoyuan,
respectively.
 
 Hunan Duoyuan’s principal business
activities include manufacturing two of our press products, namely our single
color large format presses and multicolor large format
presses.
  3
  The
entities formed or controlled by Wenhua Guo that were involved in the foregoing
transactions do not operate in the same industry as Duoyuan China. These
entities do not compete with Duoyuan China.
 
 The
following chart summarizes our corporate structure, including our
subsidiaries:
  
 ________________
 *  Represents
our minority shareholders, including the Private Placement
Investors.
 
 Our
Business
  We are a leading offset printing
equipment supplier in China, headquartered in Beijing. Through our principal
operating subsidiary, Duoyuan China, and its manufacturing subsidiaries,
Langfang Duoyuan and Hunan Duoyuan, we design, manufacture and sell offset
printing equipment used in the offset printing process. We currently
commercially produce and sell one product under our pre-press product category
(our CTP system) and four types of products under our press product category
(our single color small format presses, single color large format presses,
multicolor small format presses and multicolor large format presses). We plan to
begin commercial production and sale of certain post-press products, including
our cold-set corrugated printing press, a machine used to assemble corrugated
cardboard boxes, by the end of 2010. In addition, we plan to begin commercial
production and sale of two other post-press products, namely an automatic
booklet maker and an automatic paper cutter, for which we have developed
prototypes, in 2011. We combine technical innovation and precision engineering
to offer a broad range of quality and durable offset printing equipment at
competitive prices.
 
 We
believe our research and development efforts distinguish us from our major
Chinese competitors. Our Langfang Duoyuan research and development and technical
support center and our Hunan Duoyuan technical support center have advanced
design test tools, which we believe enable us to develop new and enhanced
products with improved functionality. As of June 30, 2008, our research and
development team was staffed with 193 experienced researchers, engineers and
technicians focused on developing new and enhanced products. As of June 30,
2008, we hadfour
patents registered in China and fouradditional patents
pending registration. In addition, we have received over 20 technology awards,
recognitions of achievement or endorsements recognizing our innovation, product
development and quality control. In the year ended June 30, 2008, we introduced
a new multicolor large format press, model DY4104, to the market and we designed
four new or enhanced press products, scheduled to launch in the year ended June
30, 2009.
  4
  As of
June 30, 2008, we had an integrated marketing, sales and service team of over
200 professionals covering seven regional markets in China. We sell our products
to more than 80 distributors who are located in over 60 cities and 28 provinces
in China. Our nationwide distribution network, which we believe to be one of the
largest among Chinese offset printing equipment suppliers, enable us to be more
responsive to local market demands than many of our competitors. We regularly
attend industry trade shows and exhibitions to showcase our products, as well as
present seminars and training programs to our distributors to highlight the
functions and capacities of our products. To maintain good relationships with
our end-user customers, we provide certain services during the one-year warranty
period associated with our products. During the warranty period, we provide
training, technical support, warranty and repair services for complex technical
issues to our distributors who work with our end-user customers.
 
 We
believe our pricing is competitive with Chinese and international offset
printing equipment producers. We believe the relatively low operation, labor and
raw material costs in China, our ability to produce a substantial majority of
our key components in-house, our efficient production processes and our
effective inventory management gives us a cost competitive advantage. Our cost
advantage allows us to offer quality products at lower prices, thus making our
products attractive in China and certain international markets.
 
 The
Industry in Which We Operate
 
 China’s Printing
Industry
 
 China’s
printing industry has benefited from China’s rapid economic growth. This growth
has increased publication printing needs, such as newspapers, magazines and
books, and commercial printing needs, such as packages, corporate brochures,
product catalogues and conference materials.
 
 From 2002
to 2007, the total annual output of China’s printing industry grew from
approximately $29 billion to approximately $63 billion, according to PEIAC,
representing a compound annual growth rate, or CAGR, of 17% per annum. In line
with global trends, package printing represents the largest segment in the
Chinese printing industry. According to PEIAC, China produced $20 billion of
package printing in 2007, accounting for 32% of the total output of China’s
printing industry that year.
 
 In 2007,
PIRA International, or PIRA, reported that China was the third largest printing
market in the world behind the United States and Japan. Because of China’s
projected economic growth, China’s printing industry is expected to remain as
one of the fastest growing in the world.
 
 The
printing industry in China is currently undergoing a transition from single
color printing to multicolor printing. A few years ago, most high quality
multicolor printing was handled by large and sophisticated printing companies
located in the coastal areas, especially in the Pearl River delta region.
Presently, almost every major city in China has a suburban area with printing
companies that can meet a wide spectrum of printing demands, from simple single
color printing to fairly high quality multicolor printing. Multicolor printing
is becoming a mainstream capability that almost every Chinese printing company
must have to sustain its competitiveness in the marketplace.
  China’s
Printing Equipment Industry
 
 We
operate in China’s printing equipment industry, which we believe is highly
correlated with China’s overall printing industry. Because we believe these
industries are highly correlated, China’s printing industry may serve as a guide
to China’s overall printing equipment industry dynamics and total expenditures
on printing equipment.
  5
  Over the
past several years, China’s printing equipment industry grew at a faster rate
than its overall printing industry. As noted above, the total annual output of
China’s printing industry grew from approximately $29 billion in 2002 to
approximately $63 billion in 2007, representing a CAGR of 17% per annum. The
total annual output of China’s printing equipment industry, however, grew from
approximately $890 million to approximately $2.5 billion according to
PEIAC, representing a CAGR of 23% per annum for the same periods. PIRA projects
that the market for printing equipment in China will grow at a CAGR of 7.1% per
annum between 2007 and 2012.
 
 We
believe that demand for Chinese made offset printing equipment is strong and
that the market share of domestically made offset printing equipment has been
increasing in recent years. For example, according to PEIAC, although the amount
of imported printing equipment increased annually from $1.3 billion in 2002 to
$1.7 billion in 2004, the total amount of imported printing equipment has
since declined each year to reach $1.6 billion in 2007. We believe this
decline in imported printing equipment is a result of leading Chinese printing
equipment manufacturers’ increased investments in research and development and
improved engineering standards, both of which improve Chinese printing equipment
manufacturers’ ability to compete against international competitors for market
share in China.
 
 We
believe two major entry barriers limit the potential competition we face from
Chinese offset printing equipment producers. First, the offset printing
equipment industry in China is particularly capital intensive due to high
production costs, and second, we believe few manufacturers have the technical
knowledge required to compete in our industry.We believe our position
as an existing and leading offset printing equipment supplier in China gives us
market advantages over potential competitors seeking to enter this
market.
 
 We derive
all of our revenue from sales to our distributors in China. In 2007, according
to PEIAC, there were an
estimated 90,000 licensed printing companies in the Chinese printing equipment
market. This estimate did not include the possibly significant number of
printing companies that operate in China without licenses. Printing companies in
China purchase pre-press, press and post-press printing equipment from foreign
and Chinese equipment providers, including companies like us through our
distributors.
  6
  Our
Products
 
 We
categorize our products according to the three stages of the offset printing
process: pre-press, press and post-press. The following table shows an overview
of the types of products we offer, or plan to offer, within these three
stages:
  
 Pre-Press
                                        
                                        Press(2)
                                        
                                        Post-Press(3)Products
      Offered
                                        
                                        Ÿ  CTP
      system(1)
                                        
                                        ŸSingle Color Small Format Press
                                          ŸSingle Color Large Format Press
                                          ŸMulticolor Small Format Press
                                          ŸMulticolor Large Format Press
                                        
                                        ŸCold-set Corrugated Printing Press(4)
                                          ŸAutomatic Booklet Maker(5)
                                          ŸAutomatic Paper Cutter(5)Functionality
                                        
                                        Digital
      formatting and processing to transfer images onto printing
      plates
                                        
                                        Transfer
      of images from  printing plates to another media, such as
      paper
                                        
                                        Cutting,
      folding, binding and collating printed materialsFiscal
      2008 Revenue(6)
                                          (in
      thousands)
                                        
                                        $3,184
                                        
                                        $87,991
                                        
                                        __
 
 ______________________________
  (1)
                We
      also offer a complimentary plate developer upon request to those end-user
      customers who purchase our CTP system. Our plate developer is an optional
      complementary product to our CTP
system.
 (2)
                We
      also offer a complimentary automatic plate puncher upon request to those
      end-user customers who purchase our press products. Our automatic plate
      puncher is an optional complementary product to our press
      products.
 
 (3)
                    As
      of June 30, 2008, we do not manufacture or sell any post-press
      products.
 (4)
                We
      plan to manufacture and sell this post-press product by the end of
      2010.
 (5)
                We
      plan to manufacture and sell this post-press product in
    2011.
 (6)
                Revenue
      figures before adjustments.
 
 Pre-press
Printing Equipment
 
 Traditionally,
in the pre-press stage of the offset printing process, a plate developer or
other light-sensitive emulsion is used in combination with photomechanical
exposure and various processing procedures to transfer images onto printing
plates, which are then mounted onto an offset press. This method is being
replaced by more technologically advanced methods, including CTP technology,
which use digital formatting and processing to transfer images onto printing
plates.
 
 The
following describes our pre-pressproduct, namely our CTP
system, and its key features and competitive advantages:
 
 ·
              CTP System. CTP
      technology improves the quality of the printing plates and the efficiency
      of the offset printing process by eliminating the labor and chemical
      intensive multiple step processes associated with the traditional
      pre-press processing method. Fully automated CTP technology reduces the
      risk of human error and offers improved consistency and higher quality
      compared to the traditional pre-press method. Although CTP technology has
      been adopted by printing companies in Europe and the United States, most
      of our end-user customers in China did not begin using CTP technology
      until 2002. This is largely because CTP technology related products are
      significantly more costly than existing pre-press printing equipment.
      Although a majority of CTP technology related products in China are
      imported from overseas manufacturers, such as Japan and the United States,
      we also offer our own CTP technology related product, namely our CTP
      system. We believe our CTP system offers similar functionality, quality
      and efficiencies when compared to those manufactured by international
      producers, but at a more competitive price. For the technological features
      of our CTP system, see “—Technology—CTP Technology” below.
 
 7
  Press
Printing Equipment
 
 In the
press stage of the offset printing process, images on printing plates are
transferred onto another printing medium, such as paper. In this stage of the
offset printing process, sheets of paper or other printing media are fed into
the press. Offset lithographic process, based on the principle that oil and
water repel each other, is used for the image transfer.
 
 On the
press, printing plates are dampened first by water rollers and then by ink
rollers. The ink rollers distribute the ink onto the specific image areas on the
printing plates. Water distributed by the water rollers keeps the ink off the
non-image areas of the printing plate. Each printing plate then transfers its
image onto a rubber blanket, which in turn transfers the image onto the printing
media. The printing plate itself does not touch the printing media, hence the
term offset printing. Our press products are sheet-fed, which means individual
sheets of paper or paperboard are fed into the presses. The graphic below
illustrates the basic press process:
 
 
 
 The
following describes our primary press products and their key features and
competitive advantages:
 
 ·
              Single Color Small Format
      Press.  Single color small format presses have one set of
      press rollers dedicated to a single color. Generally, printing on a single
      color press requires that a sheet of paper be processed four times,
      requiring precise adjustments for overprint. Typically, small format
      presses have a maximum sheet in-take width of 520 mm (about 20.5 inches).
      Our single color small format presses have a maximum sheet width of up to
      560 mm (about 22.0 inches), and incorporate our advanced technologies,
      making them efficient and requiring minimal operating
      skills.  Our single color small format presses require low
      initial investment and are typically suitable for end-user customers who
      are transitioning into offset printing from type-set printing or have
      single color printing needs, such as book
  printing.
  8
  ·
              Single Color
      Large Format Press.  Like single color
      small format presses, single color large format presses also have one set
      of press rollers dedicated to a single color. Single color large format
      presses generally have maximum sheet in-take width larger than 520 mm
      (about 20.5 inches) and are able to handle thick and ultra-thick sheets of
      paper. Our single color large format presses have a maximum sheet width of
      740 mm (about 29.1 inches) and incorporate our advanced technologies,
      making them efficient and requiring minimal operating skills. Our single
      color large format presses require relatively low initial investment
      compared to our multicolor (small and large format) presses and are
      typically suitable for end-user customers with basic single color printing
      needs, such as pamphlets.
 
 ·
              Multicolor
      Small Format Press.  Multicolor small
      format presses generally have four sets of rollers dedicated to different
      colors – typically, black, magenta, cyan, and yellow – to generate all
      other colors. Multicolor printing equipment generally require more
      operational skills compared to single color printing equipment. Our
      multicolor small format presses incorporate our
      advanced  technologies, making them highly automated and
      efficient, and help reduce potential human errors. Our multicolor small
      format presses offer a relatively low-cost solution for end-user customers
      with high quality multicolor printing needs, such as corporate brochures,
      product catalogues, labels and small
  packages.
 
 ·
              Multicolor
      Large Format Press.Like multicolor small format
      presses, multicolor large format presses also have four sets of rollers
      dedicated to different colors – typically, black, magenta, cyan, and
      yellow – to generate all other colors. Multicolor large format presses,
      combining multicolor capability with the ability to handle thick and
      ultra-thick sheets of paper, are the most robust type of products among
      our press products. Our multicolor large format presses incorporate our
      advanced technologies, making them highly automated and efficient, and
      help reduce potential human errors. Our multicolor large format presses
      require relatively large investments compared to our other press products,
      and are suitable for end-user customers with high-quality multicolor
      printing needs, such as posters, large packages, and
      banners.  Our multicolor large format presses are also able to
      print at faster speeds compared to our other press products, making them
      ideal for time sensitive printing
needs.
 
 Post-press Printing
Equipment
 
 In the
post-press stage of the offset printing process, printed materials undergo
various processes, including cutting, folding, binding and collating to produce
the final printed product. We currently do not commercially manufacture or sell
any post-press printing equipment. However, we plan to commercially manufacture
and sell the following products under this product category:
 
 ·
              Cold-set Corrugated Printing
      Press. Corrugated printing presses make corrugated cardboard boxes.
      They combine the functions of printing, corrugating, folding and shaping
      cardboard boxes into one machine.Currently,
      manycorrugated
      printing presses use hot-set glue technology, which we believe can result
      in lower quality and/or damaged products, and also generally requires
      higher equipment and operating costs. We plan to introduce a cold-set
      corrugated printing press that utilizes cold-set gluing technology, which
      we believe can generate better quality products, is
      more  efficient and provide greater energy savings. We intend to
      build a cold-set corrugated printing press factory at Langfang Duoyuan,
      and have conducted related land clearing and site preparation services. We
      are also designing workshops and production lines and
      procuring equipment for this cold-set corrugated printing press
      factory. We plan to commercially manufacture and sell cold-set corrugated
      printing presses by the end of 2010.
 
 ·
              Automatic Booklet
      Maker. Automatic booklet makers assemble individual sheets of paper
      into booklets. Stacks of paper are either manually fed or automatically
      transported via collators into the automatic booklet makers, where they
      are then jogged, stapled, and/or folded into separate document sets.
      Trimmers cut away any undesired margins for a clean and crisp
      presentation. We have produced prototypes of our automatic booklet makers,
      which we believe are more efficient compared to similar products currently
      in the market. We plan to begin commercial production and sale of this
      product in 2011.
  9
  ·
              Automatic Paper Cutter.
      Automatic paper cutters are generally designed for high volume industrial
      use as they cut hundreds of sheets of paper at a time on a continuous
      basis. We have produced prototypes of our automatic paper cutters, which
      we believe are more efficient and precise compared to similar products
      currently in the market. We plan to begin commercial production and sale
      of this product in 2011.
 
 Financial
Information About Products & Geographic Areas
 
 The
following table summarizes the percentage of revenue generated by each of our
product category:
  Year ended June 30,2006
                              
                              2007
                              
                              2008Pre-PressCTP
      system
                              
                              
                              5.3
                              %
                              
                              
                              5.6
                              %
                              
                              
                              3.6
                              %PressSingle
      color small format
                              
                              
                              18.1
                              %
                              
                              
                              8.9
                              %
                              
                              
                              4.8
                              %Single
      color large format
                              
                              
                              17.9
                              %
                              
                              
                              14.3
                              %
                              
                              
                              11.9
                              %Multicolor
      small format
                              
                              
                              19.5
                              %
                              
                              
                              25.6
                              %
                              
                              
                              29.4
                              %Multicolor
      large format
                              
                              
                              39.4
                              %
                              
                              
                              46.7
                              %
                              
                              
                              52.0
                              %Adjustments
                              
                              
                              (0.2
                              %)
                              
                              
                              (1.1
                              %)
                              
                              
                              (1.7
                              %)Total
                              
                              
                              100.0
                              %
                              
                              
                              100.0
                              %
                              
                              
                              100.0
                              %
  Revenue
from our single color (small and large format) presses have been consistently
declining as a percentage of our revenue while revenue from our multicolor
(small and large format) presses, in particular our multicolor large format
presses, have been increasing as a percentage of our revenue. This is due to the
growing market demand for multicolor (small and large format) presses. End-user
customers in China are increasingly demanding sophisticated offset printing
equipment, such as our multicolor (small and large format) presses, to produce
high quality printing materials more efficiently. However, single color (small
and large format) presses are still in demand for those end-user customers who
are price sensitive, new to the printing business, or looking to replace or
upgrade their existing single color printing equipment.
 
 We
generate all of our revenue from sales to distributors in China, with South
China being the single largest market, representing 26.9% of our revenue for the
year ended June 30, 2008.
 
 10
  The
following table summarizes the percentage of revenue generated in our key
regional markets in China:
 
 Year ended June 30,Regional
      Markets(1)
                      
                      2006
                      
                      2007
                      
                      2008North China
                      
                      
                      12.4
                      %
                      
                      
                      13.0
                      %
                      
                      
                      8.1
                      %South China
                      
                      
                      20.7
                      %
                      
                      
                      18.6
                      %
                      
                      
                      26.9
                      %Middle China
                      
                      
                      20.0
                      %
                      
                      
                      22.0
                      %
                      
                      
                      19.2
                      %East China
                      
                      
                      11.2
                      %
                      
                      
                      14.2
                      %
                      
                      
                      15.0
                      %Northeast China
                      
                      
                      6.4
                      %
                      
                      
                      7.4
                      %
                      
                      
                      8.0
                      %Northwest China
                      
                      
                      13.8
                      %
                      
                      
                      14.2
                      %
                      
                      
                      8.6
                      %Southwest China
                      
                      
                      15.5
                      %
                      
                      
                      10.6
                      %
                      
                      
                      14.2
                      %Total(2)
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %
 _______________
 (1)
                For
      a map of the regional markets where our distributors are located, see
      “—Distribution and
Marketing—Distribution.”
 (2)
                Our
      products are sold to distributors in China. According to our distributors,
      they have sold our products to certain end-user customers inSaudi
      Arabia, Ghana, Tunisia, South Africa, India, Pakistan, Vietnam, and Brazil
      in the years ended June 30, 2006, 2007 and 2008.  Ourdistributors
      reported that the percentage of revenue generated by sales to end-user
      customers outside of China was less than 2% for theseperiods.
 
 Manufacturing
 
 Our
manufacturing and assembly operations involve the (1) coordination of raw
materials and components procured from third party Chinese suppliers, (2)
internal production processes and (3) external distribution processes. We
manufacture, assemble and test our products at our two manufacturing facilities
located at Langfang and Hunan, China. Our Langfang Duoyuan facility is
located at the Langfang Economic-Technological Development Zone, Langfang, Hebei
Province, China. Our Hunan Duoyuan facility is located at No. 362 Baoqing Xi
Road, Shaoyang, Hunan Province, China. Langfang Duoyuan primarily manufactures
our CTP system, single color small format presses and multicolor small format
presses. Hunan Duoyuan primarily manufactures our single color large format
presses and multicolor large format presses. Both of our facilities at Langfang
Duoyuan and Hunan Duoyuan have advanced and high-precision processing machines,
tools and measuring devices.
 
 We
produce both standardized and customized products, emphasizing precision and
quality in our production and assembly. Single color small format presses and
multicolor small format presses are relatively standard in design, so we hold an
optimum inventory of these presses. We also maintain a small inventory of large
format presses to better meet the needs of our distributors and end-user
customers. Most of our single color large format presses and multicolor large
format presses, however, are built upon order, with subsystems or features that
can be added later if desired. Our flexible production methods, which utilize
standard models and product designs, enable us to meet changing market demands
while controlling production costs. We have implemented a rigid quality control
system for our products, and have complied with the ISO 9001 Quality Assurance
System Standards since September 1996, and with the ISO 14001 Environmental
Management System Standards since March 1999.
 
 We
produce a substantial majority of our key components in-house at Hunan Duoyuan.
In-house production of our key components better ensures the quality of our
products, protects our intellectual property rights, reduces production costs
and limits our exposure to supplier-related risks. Because we produce a
substantial majority of our key components in-house, we believe we currently
have a relatively low cost base compared to other printing equipment
manufacturers, especially when compared to international printing equipment
manufacturers. We purchaseall other raw materials
and components from Chinese suppliers, some of whom produce particular
components based on our specific demands and designs.
 
 Our
Langfang Duoyuan facility has workshops covering several production processes,
including raw material inspection, mechanical processing of components, and
assembly of components into finished products. As of June 30, 2008, our Langfang
Duoyuan facility was ISO 9001 and ISO 14001certified.
  11
  Our Hunan
Duoyuan facility has been producing offset printing equipment since 1969. The
facility has an integrated manufacturing process featuring 13 workshops covering
several production processes, including model casting, heat treatment, raw
finishing, refined finishing and mechanical processing of components and
assembly of components into finished products. Since steel is one of our key raw
materials, our Hunan Duoyuan facility has its own foundry plant on site to
process the steel and certain components necessary to produce our press
products. As of June 30, 2008, our Hunan Duoyuan facility was ISO 9001
certified.
 
 We intend
to build a cold-set corrugated printing press factory at Langfang Duoyuan and
have conducted related land clearing and site preparation services. We are also
designing workshops and production lines and procuring equipment for this
cold-set corrugated printing press factory. We plan to commercially manufacture
and sell cold-set corrugated printing presses by the end of 2010.
 
 Distribution
and Marketing
 
 Distribution
 
 We sell
our products through distributors. Our nationwide distribution network in China
consisted of over 80 distributors located in over 60 cities and 28 provinces in
China as of June 30, 2008. Our nationwide distribution network, which we believe
to be one of the largest among Chinese offset printing equipment suppliers,
enable us to be more responsive to local market demands than many of our
competitors. We also had 18 local representative offices in 18 Chinese provinces
as of June 30, 2008. Our local representatives at these offices contact
potential key local end-user customers and then refer them to our distributors
when the end-user customers are ready to purchase our products.
 
 A
distributor may distribute various models of our products within one or both of
our product categories. Distributors of our single color (small and large
format) presses, typically sell exclusively for us. Some distributors of our
multicolor (small and large format) presses also sell similar products made by
other manufacturers.
 
 We
generally have a diverse group of end-user customers throughout China for each
of our current pre-press and press products, and our sales are not concentrated
to or depended on one or a few major distributors. We have made a conscious
effort to prevent a single distributor from covering too large a distribution
territory to ensure that no particular distributor monopolizes the sales of our
products in any one region. We believe our end-user customer and distributor
diversity reduces our exposure to potential market risks. For the year ended
June 30, 2008, no single distributor accounted for more than 5% of our sales
revenue, and our top five distributors accounted for approximately 18% of our
revenue for the same period. Our distributors have informed us that there are no
significant changes in the composition of our end-user customer base from year
to year.
 
 We select
distributors based on their prior sales performance. We also make selections
based on factors such as sales experience, knowledge of offset printing
equipment, contacts in the offset printing equipment industry, reputation and
market coverage. We regularly evaluate the performance of our distributors and
terminate distributors who fail to meet their sales targets at the end of their
agreement term. We believe this helps us maximize our penetration of target
markets and our sales opportunities.Members of our service
staff call our distributors frequently and members of our senior management
visit our distributors every other month to assist with business strategies and
strengthen our relationship with our distributors.
 
 We
believe we have a relatively established and stable distribution network.
Approximately 89% of our distributors have been working with us for over two
years, and approximately 75% of them have been working with us for over five
years. Our distribution network provides us with established access to end-user
customers throughout China, enables us to be responsive to local market demand,
allows us to effectively diversify our end-user customer base and facilitates
our efforts to improve our market penetration.
 
 12
  
  As
indicated in the map above, our distributors are widely dispersed throughout
each major region of China. As of June 30, 2008, we had 12 distributors in North
China, 16 distributors in South China, 16 distributors in Middle China, 12
distributors in East China, five distributors in Northeast China, 12
distributors in Northwest China and 11distributors in Southwest China. We
currently do not have distributors outside of China, but we plan to establish an
international distribution network in parts of Africa, the Middle East and Asia.
According to our distributors, sales to end-user customers outside of China
accounted for less than 2% of our revenue for the years ended June 30, 2006,
2007 and 2008. These sales were accomplished through our Chinese distributors,
with the support of our sales and marketing team.
 
 Our
distributors are engaged and compensated on a competitive basis based on their
sales performance. We enter into annual distribution agreements with
distributors specifying the terms of sales targets for any given year. For
distributorswho
meet or exceed their sales targets, we provide incentives in the form of sales
rebates.  For distributors who distribute our multicolor (small and
large format) presses, we also extend preferred credit terms. Based on a
distributor’s performance, we may extend credit of up to three times the monthly
average sales we realized from that distributor during the previous
year. We do not extend credit to distributors that have distributed our
products for less than six months. Although distributors may have a variety of
payment arrangements with the end-user customers, we do not factor these
arrangements into our consideration when deciding their preferred credit terms
or installment payment schedules. We assess distributors’ credit worthiness on
an individual basis depending on (1) their sales performances, (2) their payment
and credit histories, (3) the duration and extent of their dealings with us, (4)
their market position and reputation in the offset printing equipment sector and
(5) their sales and marketing abilities. We also lend products to
high-performing distributors for display and demonstration purposes, for up to
three months.
  13
  Marketing
 
 We
support our distributors’ sales efforts through coordinated marketing efforts.
We advertise our products in industry trade journals and magazines. We provide
several types of product brochures and materials to our distributors as well as
potential and existing end-user customers in an effort to familiarize them with
our products’ features and capabilities. In addition, we attend and
participate in industry trade shows and exhibitions, which we believe is the
most important venue to promote our products and corporate image and to showcase
our new product offerings. We also regularly host seminars and training programs
on the latest developments in offset printing equipment technologies for
potential and existing distributors, as well as potential and existing end-user
customers. During these seminars and training programs, we demonstrate our
latest products to the attendees to promote purchases from them.
 
 Suppliers
and Raw Materials
 
 The key
raw materials and components used to manufacture our products are steel, iron
and electronic components. We
produce a substantial majority of our key components in-house at our Hunan
Duoyuan facility. We purchase all other raw materials and components from
Chinese suppliers through non-exclusive purchase orders and supply contracts.
The purchase order or supply contract specifies the price for the raw material
or component and design-related specifications, if any. Although we allow for
adjustments in the price for certain raw materials such as steel and iron under
extraordinary circumstances, the prices for our raw materials are generally
fixed for the effective term of the supply contracts. Our supply contracts are
generally renewable on an annual basis. We maintain multiple supply sources for
each of our key raw materials and other standard off-the shelf parts so as to
minimize any potential disruption of our operations and maintain supply
stability. We purchase certain specialized components, such as springs, from a
single supplier. Some of our suppliers produce components for us based on our
specified designs, and we do not believe we would have difficulty replacing
these suppliers should any of them become unavailable.
 
 For the
years ended June 30, 2006, 2007 and 2008, purchases from our largest supplier
accounted for 13.3%, 9.5% and 8.8%, respectively, of our total purchases of raw
materials and components. For the same periods, our ten largest suppliers
combined accounted for 59.0%, 54.6% and 55.7%, respectively, of our total
purchases of raw materials and components. See “Item 1A. Risk Factors—Risks
Related to Our Business—If we cannot obtain sufficient raw materials and
components that meet our production demand and standards at a reasonable cost,
or at all, our business may be materially and adversely affected.”
 
 Technology
  We
believe our technical innovation and precision engineering enable us to offer a
broad range of high-quality and durable offset printing equipment. We
utilize and incorporate advancedtechnologies to our
products, which enhance automation for processes such as sheet-feeding, image
transfer, ink dispensing and overall centralized control. These technological
advancements increase print quality, reduce operator workload and make our
products more competitive. The following chart briefly describes the
principal technologies we use and their functionalities:
  14
  Technology
              
              FunctionalitySheet-feeding
      system
              
              Automatically
      measures and adjusts sheet placement and feedingSheet-guiding
      technology
              
              Reduces
      paper jams and ensures sheet transferCentralized
      monitoring and automatic regulation
              
              Automatically
      monitors and regulates timing of sheet feedingCentralized
      subsystems
              
              Regulate
      and control sub-systems, such as sheet-feeding, front and side layout, and
      reduces preparation timeCam-controlled
      hem front design
              
              Increases
      printing speed and improves accuracy of sheet transferMultiple
      front lay guides
              
              Increase
      printing efficiencyFront
      lay and transfer gripping sheet controlwith
      localization technology
              
              Improves
      operating stability and print speedPhotoelectric
      detecting and auto lock-up
              
              Automatically
      detect printing errorsDouble-diameter
      impression cylinders
              
              Produce
      higher quality print work while handling thicker sheetsAnti-triangle
      7 o’clock cylinder alignment
              
              Assures
      consistent ink application and prevents dot deformationData
      memory
              
              Stores
      data on memory chip for repetitive print jobsSemiautomatic
      plate-changing
              
              Reduces
      preparation time and increases efficiency during manual transfer of
      printing platesPneumatic
      engagement and disengagement unit
              
              Improves
      print adjustment accuracyContinuous
      alcohol
              
              Improves
      color application quality and automatically adjusts press
      speedCPC
      technology
              
              Controls
      ink dispensation quantity and color hue
  adjustment
   CTP
System
 
 We have
also developed advanced technologies for our CTP system, which allow our
end-user customers to efficiently customize printing plates according to their
needs. These technologies include (1) open data interface technology allowing
for customized workflow control systems, (2) multiple printing plate
compatibility technology and (3) data storage technology. The following
table provides a brief description of these technologies and their functionality
in our CTP system:
  15
  CTP Technology
              
              FunctionalityVariable
      laser modulation
              
              Increases
      printing plate transfer speed and efficiencyIntelligent
      data center
              
              Enables
      files transfer to CTP system through a networkOpen
      data interface
              
              Customizes
      workflow control and monitoringUser-friendly
      interface
              
              Ensures
      simple and safe operationPlate
      compatibility
              
              Enables
      use of different types of printing
plates
   Recognition
for our Products
 
 We have
received over 20 technology awards, recognitions of achievement or endorsements
from the Chinese government, various industry associations and consumer interest
associations for our technological achievement as well as quality and
reliability of our products. In addition, our offset printing equipment has been
endorsed by the China Consumer Protection Fund as reliable products. We did not
and do not have any affiliation with these associations.  These
associations did not receive any compensation from us for these awards,
recognitions of achievement or endorsements.
 
 Intellectual
Property
 
 Our
copyrights, trademarks, trade secrets and other intellectual property rights are
critical to our business. We rely on trademark and copyright laws, trade secret
protection, non-competition and confidentiality and/or licensing agreements with
our executive officers, distributors, research and development personnel and
others to protect our intellectual property rights. Other than as described
herein, we do not possess any licenses to use third party’s intellectual
property rights nor do we license to third parties any intellectual property
rights we own.
 
 As of
June 30, 2008, we had four patents registered with the China Patent Bureau (1) a
vacuum chamber paper sheet lifting and advancing device, expiring on May 22,
2013, (2) a single-fiber field pattern used in multicolor press imaging systems,
expiring on May 22, 2013, (3) a print appearance design, expiring on January 31,
2015 and (4) an automatic printing oil cleaning device for presses, expiring on
September 25, 2010. We also had four additional patents pending registration
with the China Patent Bureau, as of June 30, 2008.
 
 The
protection afforded to our intellectual property rights may be inadequate. It
may be possible for third parties to obtain and use, without our consent,
intellectual property that we own or are licensed to use. Unauthorized use of
our intellectual property by third parties, and the expenses incurred in
protecting our intellectual property rights, may adversely affect our business.
See “Item 1A. Risk Factors—Risks Related to Our Business—Failure to protect our
proprietary technologies or maintain the right to certain technologies may
materially and adversely affect our ability to compete.”
 
 We may
also be subject to litigation involving claims of patent infringement or
violation of other intellectual property rights of third parties. In 1999, we
implemented and continue to follow a procedure under which our product
development teams are required to conduct a patent search of Chinese patents at
the beginning of the product development process for each product. Typically,
our research and development team conducts this search with guidance and
oversight from our in-house patent team. A product development project is
approved only if the result of the patent search indicates that development of
the proposed product will not infringe on any third party intellectual property
rights. We believe that our risk of infringing third party intellectual property
rights can be effectively reduced by our adherence to these procedures. To date,
we have neither been sued on the basis of alleged infringement of third party
intellectual property rights nor have we received any notification from third
parties alleging infringement of their intellectual property rights. However,
due to the complex nature of offset printing technology patents and the
uncertainty of construing the scope of these patents, as well as the limitations
inherent in our patent searches, the risk of infringing on third party
intellectual property rights cannot be fully eliminated. See “Item 1A. Risk
Factors—Risks Related to Doing Business in China—We may be exposed to
infringement or misappropriation claims by third parties, which, if determined
adversely against us, could disrupt our business and subject us to significant
liability to third parties.”
  16
  Research
and Development
 
 Research
and Development Team
 
 We
believe quality product design is an important factor in maintaining our
competitiveness in the offset printing equipment market. As of June 30, 2008,
our research and development team included 124 researchers, engineers and
technicians working at our research and development and technical support center
at Langfang Duoyuan and 69 technicians working at our Hunan Duoyuan technical
support center. The research and development team at Langfang Duoyuan focuses on
designing and building prototypes for new products, as well as improving the
functionality of existing products, with particular focus on our pre-press and
small format press products. The technical support team at Hunan Duoyuan focuses
on testing prototypes and improving production efficiency, with particular focus
on our large format press products. Since Hunan Duoyuan is also our in-house
production base for certain key components used in our products, the technicians
at Hunan Duoyuan also engage in development and improvement of steel foundry
casting techniques and mechanical processing techniques. Our research and
development efforts have led to fourpatents in China, as of
June 30, 2008, covering a wide range of offset printing equipment.
 
 The
quality of our product design is based on a strong research and development team
staffed with experienced researchers, engineers and technicians. The expertise
of our research and development team covers a broad range of disciplines,
including printing, image processing, mechanical engineering, automation and
computer sciences. We believe we have a strong and balanced research and
development team and are not dependent on a small number of key researchers.
Almost all of the members of our research and development team have obtained at
least a bachelor’s degree and the majority of the members of our research and
development team have been with us for over five years.
 
 In
addition to improving our existing product offerings, our research and
development efforts also focus on the development of new products, as well as
the development of new production methodologies to improve our manufacturing
processes. We follow advanced project selection procedures prior to the
development of new products, including the use of detailed market and
technological analyses.
 
 Our
research and development team utilizes advanced design and test tools such as
three-dimensional design software and digital simulation platforms, to test our
product designs. We can design specific offset printing equipment
components using three dimensional design software and export the designs
directly onto the simulation platform before testing them in real world
settings. All new products are subject to rigorous testing prior to commencement
of commercial production, and prototypes are often delivered to end-user
customers for their trial use. We begin manufacturing new products only after
the prototypes from trial production pass our internal quality inspection and
achieve favorable end-user customer satisfaction. This integrated approach
allows us to identify potential difficulties in commercializing a product, and
make appropriate adjustments to develop cost efficient manufacturing processes
prior to mass production.
 
 We
recognize the importance of customer satisfaction with our newly developed
products and continue to seek feedback from our end-user customers even after
the formal launch of a product. Feedback from our major end-user customers,
collected by our sales and service professionals, are categorized and
prioritized, then forwarded to our research and development team to evaluate for
research potential. We believe this process keeps us in touch with our
end-user customers’ needs and improves our design efficiency, consistency and
accuracy.
 
 End-User
Customers
 
 Our
end-user customers are diverse, operating in different industries, including
publishing, commercial printing and packaging. Sales to end-user customers
in China accounted for more than 98% of our revenue for the years ended June 30,
2006, 2007 and 2008. According to our distributors, sales to end-user customers
outside of China accounted for less than 2% of our revenue for the same periods.
These sales were accomplished through our Chinese distributors, with the support
of our sales and marketing team. Our distributors have informed us that we have
not had a significant change in the composition of our end-user customer base
from year to year.
  17
  We offer
a range of products to our end-user customers, who have varying printing needs
and purchasing budgets. Our ability to offer a wide range of solutions, in
terms of pricing and technological sophistication, is one of our competitive
advantages. The following table describes our solution package
offerings:
 
 Solutions
                    
                    End-User
      Customer Printing Needs
                    
                    Featured
      ProductsEconomy(1)
                    
                    Transitional
      printing needs to upgrade to offset printing from type-set
      printing
                    
                    Plate
      developer and single color small format pressesStandard(2)
                    
                    General
      commercial printing needs
                    
                    CTP
      system and single color small format pressesPremium(2)
                    
                    High-quality
      printing needs involving thick paper
                    
                    CTP
      system, single color small format presses and multicolor small format
      pressesNote
      Printing(3)
                    
                    Commercial
      note printing needs involving extra-thin paper
                    
                    CTP
      system and single color small format pressesMulticolor(2)
                    
                    High-quality
      multicolor printing needs
                    
                    CTP
      system and multicolor (small and large format) pressesAdvanced(2)
                    
                    High
      quality and time-sensitive multicolor printing needs
                    
                    CTP
      system and multicolor (small and large format) pressesPackaging(1)
                    
                    Package
      printing needs
                    
                    Single
      color (small and large format) presses and multicolor (small and large
      format) presses
 ______________________________
 (1)
                We
      plan to include our automatic paper cutter in this solution package when
      we introduce this product into the market in
  2011.
 (2)
                We
      also offer a complimentary plate developer to our CTP system in this
      solution package. We plan to include our automatic bookletmaker and automatic paper cutter in this solution package when we
      introduce these two products into the market in
  2011.
 (3)
                We
      also offer a complimentary plate developer to our CTP system in this
      solution package. We plan to include our automatic papercutter in this solution package when we introduce this product into the
      market in 2011.
 
 End-User
Customer Service and Support
 
 Together
with our distributors, we offer sales and post-sales services to our end-user
customers. Our distributors handle common post-sales issues for our end-user
customers, and we assist our end-user customers with more sophisticated and
complex issues. Our service team includes personnel from our sales, service and
research and development departments to ensure timely installation and operation
of our products at the end-user customers’ sites.
 
 Our local
representatives consult with our end-user customers and distributors to
customize a best-fit printing solution based on the end-user customers’
individual printing needs, as well as such end-user customers’ budget
considerations. After product delivery, our distributors are responsible
for installation and configuration. After our products are installed and
operating at the end-user customer’s site, our service team provides training
and technical support to our distributors to ensure satisfactory test runs of
our products. For those who purchase our single color large format presses and
multicolor large format presses, we may keep service staff at our distributor
sites for up to two weeks to assist with meeting end-user customers’ needs and
to provide in-depth training to our distributors. We provide this service team
staffing upon distributor’s request.
 
 To
generate good relationships with our end-user customers, we provide certain
services to them during the one year warranty period. During the warranty
period, we provide training, technical support, warranty andrepair services for
complex technical issues. Our local representative offices make good efforts to
distribute replacement components to distributors and/or end-user customers
within 24 hours of such request. We also provide regular overhaul and upgrade
services during the warranty period. Our service team also solicits end-user
customer feedback and forwards the feedback to our research and development team
to evaluate for product research potential. We believe this integral part of our
post-sales service helps us determine market needs and changing end-user
customer demands.
  18
  As of
June 30, 2008, we had more than 200 marketing, sales and service professionals
providing customer service and support in over 60 cities and 28 provinces in
China. Of these employees, 24 were maintenance technicians.
 
 Competition
 
 We
operate in a competitive industry characterized by demanding technological
requirements and evolving industry standards. We compete primarily on the basis
of our brand recognition and industry reputation, comprehensive product
offerings, quality and performance of our products, established distribution
network, research and development capacities and competitive cost advantage. As
a result of generally lower operating, labor and raw material costs in China, we
are able to charge lower prices compared to our international competitors while
maintaining comparable product quality. Our efforts to produce a substantial
majority of our key components in-house allow us to lower our raw materials and
component costs, reduce our dependency on key suppliers and improve our workflow
and quality control.
 
 Small
Format Press Producers
 
 We
believe there are three tiers of products in China’s single color small format
and multicolor small format press sector, namely top tier, middle tier and
bottom tier. Top tier products generally feature (1) advanced structural or
mechanical designs, (2) advanced automation, (3) higher efficiency and (4) high
print quality. We believe top tier small format press manufacturers focus on
developing strong internal research and development capacities. We believe that
as the market demand for advanced offset printing equipment increases, the
market share occupied by top tier Chinese manufacturers will also increase. In
addition to us, other top tier Chinese manufacturers in the small format press
sector include Yingkou Gronhi Offset Printing Machinery Co., Ltd., Yingkou Saxin
Printing Machine Co., Ltd, Liaoning Dazu Guanhua Printing Equipment Co. Ltd.,
Weifang Huaguang Precision Printing Machinery Co., Ltd., Shandong Weihai Hamada
(JV) Printing Machinery Co., Ltd. and Shandong Weihai Printing Machinery Co.,
Ltd.
 
 Among our
international competitors in the small format press sector, we believe
Heidelberger Druckmaschinen AG is one of the few German producers,
with Japanese producers supplying most of the single color small format
presses and multicolor small format presses in the international
market. The major Japanese small format press producers include Hamada
Printing Press Co., Ltd. and Ryobi, Ltd.
 
 Large
Format Press Producers
 
 There are
a few Chinese companies producing single color large format presses and many of
these companies are not capable of producing multicolor large format presses.
Major Chinese producers in the large format press sector include Beiren Printing
Machinery Holdings Limited, Shanghai Electric Group Printing & Packaging
Machinery Co., Ltd. and Jiangxi Zhongjing Group Co., Ltd.
 
 Our
competitors in the large format press sector are mainly international companies
that include German and Japanese producers. The major international producers
include Heidelberger Druckmaschinen AG, Man Roland Druckmaschinen AG, Koenig
& Bauer Group (KBA), Mitsubishi Heavy Industries, Ltd. and Komori
Corporation. Other important international manufacturers include Shinohara
Machinery Co. Ltd., Sakurai Graphic Systems Corp and Ryobi Ltd., as well as
Adast a.s., the largest Eastern European manufacturer.
 
 These
international producers possess stronger research and development capabilities
and enjoy established recognition in the global market. Their products are more
user friendly to serve the sophisticated needs of high-end customers. We
believe, however, that their products are typically priced higher than our
products.
  19
  Environmental
Regulations
  Our
manufacturing processes may generate noise and other industrial waste. We are
subject to a variety of Chinese national and local environmental laws and
regulations related to our operations, including regulations governing the
storage, discharge and disposal of hazardous substances in the ordinary course
of our manufacturing processes. The major environmental regulations applicable
to us include the Environmental Protection Law, the Prevention and Control of
Air Pollution Law and related Implementation Rules, the Prevention and Control
of Solid Waste Pollution Law and the Prevention and Control of Noise Pollution
Law.
 
 As of
June 30, 2008, we were not a party to any legal proceedings involving PRC
environmental laws and regulations.
 
 Employees
 
 As of
June 30, 2008, we had 1,325 employees, with 271 employees at Duoyuan China, 357
employees at Langfang Duoyuan and 697 employees at Hunan Duoyuan.The table below sets
forth the aggregate number of employees in our three Chinese subsidiaries
categorized by function and the percentage of each category of our total
employees as of June 30, 2008:
 
 Functions
                    
                    Employees
                    
                    PercentageManagement
                    
                    
                    171
                    
                    
                    
                    12.9
                    %Sales
      and Marketing
                    
                    
                    213
                    
                    
                    
                    16.2
                    %Production
                    
                    
                    748
                    
                    
                    
                    56.4
                    %Research
      and Development
                    
                    
                    193
                    
                    
                    
                    14.5
                    %Total
      number of employees
                    
                    
                    1,325
                    
                    
                    
                    100.0
                    %
 
 We
believe we have good relationships with our employees, and we have not
experienced any significant labor disputes. The labor union of Duoyuan China
maintains a cooperative relationship with us.  We are not a party to
any collective bargaining agreement and our employees are not represented by any
collective bargaining agreement. All our employees are based in China and are
full-time. Most of our employees have executed employment agreements governed by
PRC law. These employment agreements are for one year terms and may be renewed
upon notice from the employee and with our consent. We adopted a new form of
employment contract pursuant to the PRC Labor Contract Law, which became
effective on January 1, 2008, after the current employment contracts expired.
After ten years of employment, an employee may enter into an employment
agreement with us for an indefinite period of time. We may terminate employees
for cause, without notice or severance. If we terminate employment due to
economic downturn or performance related reasons, we are obligated to give 30
days advance notice or pay one month’s salary as severance in lieu of notice. In
addition, we may pay additional severance in the amount of one month’s salary
for each year that an employee has served with us, capped at a maximum of 12
months’ salary as severance. An employee may resign without good reason
upon one month’s notice, or resign for good reason without notice.
 
 As
required by PRC regulations, we participate in various employee benefit plans
implemented by municipal and provincial governments, including pension,
work-related injury insurance, medical insurance, unemployment insurance and
housing funds. We make contribution to these employee benefit plans at specified
percentages of the salaries, bonuses, and certain allowances we pay to our
employees, capped at maximum amounts determined by the local government from
time to time.
 
 We may
incur additional labor costs due to the implementation of the PRC Labor Contract
Law that became effective on January 1, 2008. For details, see “Item 1A. Risk
Factors—Risks Related to Doing Business in China—The new provisions of the PRC
Employment Contract Law may substantially increase our labor-related costs in
the future.”
  20
  Item 1A.
                Risk
    Factors.
 
 An investment in our shares involves
a high degree of risk. You should carefully consider the risks and uncertainties
described below together with the other information included in this Annual
Report, including the matters discussed under “PART 1—Special Note Regarding
Forward-Looking Statements,” our consolidated financial statements and the
accompanying notes, before you decide to invest in our shares. The market price
of our shares could decline due to any of these risks, in which case you could
lose all or part of your investment. You should pay particular attention to the
fact that we are a holding company with substantial operations in China and are
subject to legal and regulatory environments that in many respects differ from
those of the United States. Our business, financial condition or results of
operations could be materially and adversely affected by any of the risks
discussed below and any others that are not presently foreseeable to us. This
discussion contains forward-looking statements.
 
 Risks
Related to Our Business
 
 We
conduct all of our operations through our Chinese subsidiaries, and our
performance will depend upon the performance of our subsidiaries.
 
 We have
no operations independent of those of our Chinese subsidiaries, namely Duoyuan
China, Langfang Duoyuan and Hunan Duoyuan. As a result, we are dependent upon
the performance of our subsidiaries and will be subject to the financial,
business and other factors affecting our subsidiaries as well as general
economic and financial conditions. As all of our operations are conducted
through our subsidiaries, we are dependent on their cash flows to meet our
obligations and our performance depends on their performance.
  Claims
by our shareholders are subordinate to existing and future liabilities and
obligations of our Chinese subsidiaries.
 
 Because
all of our assets are held by our Chinese subsidiaries, the claims of our
shareholders will be structurally subordinate to all existing and future
liabilities and obligations and trade payables of our Chinese subsidiaries. In
the event of our bankruptcy, liquidation or reorganization, our assets and those
of our Chinese subsidiaries’ will be available to satisfy the claims of our
shareholders only after all of our subsidiaries’ liabilities and obligations
have been paid in full.
 
 The
market for offset printing equipment is very competitive, and if we are unable
to compete successfully, our business may be materially and adversely
affected.
 
 The
offset printing equipment industry is extremely competitive and is characterized
by rapid technological changes. Our products compete against those offered by
several top-tier Chinese and international companies, particularly German and
Japanese companies.
 
 ·
              Small Format Press
      Producers. Our competitors in the small format press market
      in China include Chinese companies such as Yingkou Gronhi Offset Printing
      Machinery Co., Ltd., Yingkou Saxin Printing Machine Co., Ltd, Liaoning
      Dazu Guanhua Printing Equipment Co. Ltd., Weifang Huaguang Precision
      Printing Machinery Co., Ltd., Shandong Weihai Hamada (JV) Printing
      Machinery Co., Ltd. and Shandong Weihai Printing Machinery Co., Ltd. Our
      international competitors include Heidelberger Druckmaschinen AG, a German
      company, and Hamada Printing Press Co., Ltd. and Ryobi, Ltd., two major
      Japanese small format press
manufacturers.
  ·
              Large Format Press
      Producers.Our
      competitors in the large format press market in China include Chinese
      companies such as Beiren Printing Machinery Holdings Limited, Shanghai
      Electric Group Printing & Packaging Machinery Co., Ltd. and Jiangxi
      Zhongjing Group Co., Ltd. Our international competitors include German
      manufacturers such as Heidelberger Druckmaschinen AG, Man Roland
      Druckmaschinen AG, and Koenig & Bauer Group (KBA) and Japanese
      manufacturers such as Mitsubishi Heavy Industries, Ltd., Komori
      Corporation, Shinohara Machinery Co. Ltd., Sakurai Graphic Systems Corp.
      and Ryobi Ltd.  Adast a.s., one of the largest Eastern European
      manufacturer, is another international
  competitor.
 
 Some of
our competitors, particularly our international competitors, have significantly
greater financial, technical, manufacturing, sales, marketing and other
resources than we do and have achieved greater name recognition for their
products and technologies than we have. Because of this, we may not be able to
successfully increase our market penetration or our overall share of the
printing equipment market in China or internationally. In addition, companies
not currently in direct competition with us may introduce competing products in
the future. Although we attempt to develop and introduce innovative products to
meet customers demand, products or technologies developed by other offset
printing equipment suppliers could render our products or technologies obsolete
or noncompetitive. Customers may defer or change their purchasing decisions in
anticipation of the introduction of new products or the actual introduction of
new products by us or our competitors.
  21
  Increased
competition may result in price reductions, increased sales incentive offers,
lower gross margins and loss of market share, which could require us to increase
investments in research and development, sales and marketing efforts, and other
means of market expansion. Our competitors’ products may be more competitive in
terms of market acceptance, price, quality and performance. We may be adversely
affected if we are unable to maintain current product cost reductions or achieve
future product cost reductions, including warranty costs.
 
 If we
fail to address any of these competitive challenges and we are unable to compete
successfully, there could be a material adverse effect on our business,
financial condition and operating results.
 
 We
face risks and difficulties due to our recent growth.
  We will
continue to encounter risks and difficulties in connection with our significant
growth, including our potential failure to:
  ·
              implement,
      adapt or modify our business model and
strategy;
  ·
              manage
      our investments in new businesses and facility expansion or construction,
      including the cold-set corrugated printing press factory at Langfang
      Duoyuan that we intend to build;
  ·
              maintain
      our current and develop new relationships with
    distributors;
  ·
              manage
      our expanding operations and product
offerings;
  ·
              maintain
      adequate control of expenses, inventory and
  receivables;
  ·
              attract,
      retain and motivate qualified
personnel;
  ·
              protect
      our reputation and enhance customer
loyalty;
  ·
              implement
      additional and improve existing administrative, financial and operations
      systems, procedures and controls;
and
  ·
              anticipate
      and adapt to changes in the offset printing industry, government
      regulations, technology and other competitive and market
      dynamics.
  If we
fail to successfully deal with these risks and difficulties due to our recent
growth, we could fail to achieve our revenue targets and could experience
disruptions in our business, any of which could materially affect our business,
financial condition and results of operation.
  We
may be unsuccessful in developing and selling new products or in penetrating new
markets for which we have limited experience, including the post-press
market.
 
 Our
revenue growth has been primarily from sales of our press products. Our future
success depends, in part, on our ability to develop and sell new press products,
as well as new pre-press and post-press products in a cost-effective and timely
manner. We continually evaluate expenditures for planned product developments
and choose among alternatives based upon our expectations of future market
trends.
 
 We may
expand into business areas for which we do not have significant experience. One
area of planned expansion is the cold-set corrugated printing press product
line, which we expect to begin commercial production and sale by the end of
2010. Many factors, some of which are beyond our control, could materially and
adversely affect our ability to turn this and other products into profitable
businesses, including:
 
 ·
              our
      limited experience in these new
businesses;
  ·
              the
      existence of larger more established
  competitors;
  ·
              our
      potential inability to sell new products to existing end-user customers or
      to locate new end-user customers;
  ·
              the
      timing and completion of our introduction of new
  designs;
  ·
              the
      quality, price and performance of our products and those of our
      competitors;
  ·
              our
      customer service capabilities and responsiveness;
  and
  22
  ·
              any
      unexpected expenses and costs related to the
  expansion.
  Failure
to effectively manage these factors may result in our inability to successfully
develop new products and expand into new markets, including the post-press
market, which could materially and adversely affect our financial condition and
results of operations and result in a loss of business
opportunities.
 
 We
depend on distributors for all of our revenue and will rely on adding
distributors for most of our revenue growth. Failure to maintain relationships
with our distributors or to otherwise expand our distribution network could
negatively affect our ability to effectively sell our products.
 
 We depend
on distributors for all of our revenue. We do not have long-term distribution
agreements, and most distribution agreements have one-year terms. As our
existing distribution agreements expire, we may be unable to renew with our
desired distributors on favorable terms or at all. We compete for quality
distributors with both our international and Chinese competitors. In addition,
we rotate our sales and marketing personnel among the seven regional markets
periodically to reduce our reliance on any single employee’s relationship with
distributors in any market. This practice may make us less attractive to some
distributors. Any disruption of our distribution network, including our failure
to renew our existing distribution agreements with our desired distributors,
could negatively affect our ability to effectively sell our products.
 
 Our
distributors have reduced or terminated their purchases in the past, and could
reduce or terminate their purchases in the future, which could materially and
adversely affect our business.
 
 We do not
have long term distribution agreements with our distributors, who could reduce
their purchases or cease purchasing our products altogether. If major
distributors elect to purchase products from another manufacturer, our operating
results could be harmed through, among other things, decreased sales volumes and
write-offs of accounts receivables and inventory related to products we have
manufactured for these distributors. In addition, any decline in demand for our
products, including any negative development affecting our major distributors or
the printing industry in general, would likely harm our sales and operating
results.
 
 A
substantial portion of our backlog is scheduled for delivery within 90 days or
less, and our distributors may cancel or change their purchase orders or
delivery times for products they have ordered from us without penalty. In
addition, a significant portion of our operating expenses are fixed in advance
based on projected sales. Accordingly, if sales are below expectations in any
given quarter, the resulting impact on our business, financial conditions and
operating results will be more significant given our inability to adjust
spending in the short term to compensate for this shortfall.
 
 If
the market for printing equipment does not grow at the rate we expect or at all,
including due to a decrease in the demand for commercial printing services, our
revenue and profitability may be materially and adversely affected.
 
 We derive
all of our revenue from sales of our products to distributors in China. The
development of our business depends, in large part, on continued growth in the
demand for quality printing equipment in China, including demand driven by
providers of commercial printing services in China and on the maintenance or
growth of the general selling prices of pre-press, press and post-press products
in the market. Although the Chinese printing equipment market has grown rapidly,
the growth may not continue at the same rate or at all.
 
 A variety
of factors, including economic, regulatory, political and social instability,
could contribute to a decrease in the demand for quality offset printing
equipment or commercial printing services. In addition, we believe the average
price charged for regular and low-end commercial printing services has been
decreasing. We also believe that the average selling price of press products,
particularly the less sophisticated single color printing equipment, has been
decreasing. If there is a decrease in the demand for or the price of offset
printing equipment, including as a result of decreased demand for commercial
printing services, our revenue and profitability may be materially and adversely
affected.
  23
  If
we fail to accurately project demand for our products, we may encounter problems
of inadequate supply or oversupply, which may materially and adversely affect
our business, financial condition and operating results.
  Our
distribution agreements contain annual sales targets for each distributor, and
we take such targets into account when we formulate our overall operation plans.
We forecast demand
for our products based on rolling projections from our distributors. The varying
sales and purchasing cycles of our distributors, however, make it difficult for
us to forecast future demand accurately.
  If we
overestimate demand, we may purchase more raw materials or components than
required. If we underestimate demand, our third party suppliers may have
inadequate raw material or product component inventories, which could interrupt
our manufacturing, delay shipments and result in lost sales. In particular, we
are seeking to reduce our procurement and inventory costs by matching our
inventories closely with our projected manufacturing needs and by deferring our
purchase of raw materials and components, from time to time, in anticipation of
supplier price reductions. If we have excess products, we may need to lower
prices to stimulate demand. We also risk new material inventory obsolescence if
we do not sell components before the end of their shelf life. As we seek to
balance inventory cost savings and production flexibility, we may fail to
accurately forecast or meet demand. Our inability to accurately predict and
timely meet our demand could materially and adversely affect our business,
financial condition and operating results.
 
 If
we cannot obtain sufficient raw materials and components that meet our
production demand and standards at a reasonable cost, or at all, our business
may be materially and adversely affected.
 
 The key
raw materials and components used in the manufacturing of our products are
steel, iron and electronic components. We produce a substantial majority of our
key components in-house at our Hunan Duoyuan facility. We purchase all other raw
materials and components from Chinese suppliers.
 
 For the
years ended June 30, 2006, 2007 and 2008, purchases from our largest supplier
accounted for 13.3%, 9.5% and 8.8% of our total raw materials and component
purchases, respectively. For the same periods, our ten largest suppliers
combined accounted for 59.0%, 54.6% and 55.7% of our total raw materials and
component purchases, respectively. If any supplier is unwilling or unable to
provide us with  raw materials and components in the required
quantities and at acceptable costs and quality, we may not be able to find
alternative sources on satisfactory terms in a timely manner, or at all. In
addition, some of our suppliers may fail to meet qualifications and standards
required by our end-user customers, which could impact our ability to purchase
raw materials and components.
 
 Our
inability to find or develop alternative supply sources for raw materials or
components that meet our production demand and standards could result in
production delays or reductions as well as shipment delays. The prices of our
raw materials and components could also increase, and we may not be able to pass
these price increases on to our end-user consumers. For example, steel prices in
China decreased during the year ended June 30, 2006 but increased significantly
during the years ended June 30, 2007 and 2008. Should any of these events occur,
our business may be materially and adversely affected.
 
 We
may be unable to effectively manage our distribution network, and our business,
prospects and brand may be materially and adversely affected by our
distributors’ actions.
 
 Our
ability to manage the activities of our independent distributors is limited. Our
distributors could take one or more of the following actions, any of which may
have a material adverse effect on our business, prospects and
brand:
  ·
              sell
      products that compete with our products, possibly including counterfeit
      products with the “Duoyuan” name;
  ·
              sell
      our products outside their designated territory, possibly in violation of
      the distribution rights of other
distributors;
  ·
              fail
      to adequately promote our products;
  ·
              fail
      to provide proper training and service to our end-user customers;
      or
  ·
              violate
      the anti-corruption laws of China, the United States or other
      countries.
  24
  Failure
to adequately manage our distribution network or non-compliance by distributors
with our distribution agreements could harm our corporate image among our
end-user customers and disrupt our sales, which could result in a failure to
meet our sales goals. Furthermore, we could be liable for actions taken by our
distributors, including violations of applicable law in connection with the
marketing or sales of our products, such as the PRC anti-corruption laws and the
United States Foreign Corrupt Practices Act, or the FCPA. In particular, we may
be held liable under U.S. law for actions taken by our distributors even though
all of our distributors are non-U.S. companies that are not subject to the FCPA.
Our distributors may violate these laws or otherwise engage in illegal practices
with respect to their sales or marketing of our products. If our distributors
violate these laws, we could be required to pay damages or fines, which may
materially and adversely affect our business, financial condition and results of
operations. In addition, our brand, reputation, sales or the price of our shares
could be adversely affected if we become the target of any negative publicity as
a result of actions taken by our distributors.
 
 We
may be unable to successfully expand our manufacturing capacity, which could
result in material delays, quality issues, increased costs and loss of business
opportunities, and, if we fail to accurately gauge demand for our products or
our product and customer initiatives fail, we may have overcapacity, which may
materially and adversely affect our business.
 
 We intend
to upgrade our existing in-house production facilities for our key components
and build a new factory at Langfang Duoyuan to manufacture cold-set corrugated
printing presses, a post-press product. These projects may not be constructed on
time or within budget. We may also experience quality control issues as we
implement these manufacturing upgrades and ramp up production. Any material
delay in completing these projects, or any substantial increase in costs or
quality issues in connection with these projects, could materially and adversely
affect our business, financial condition, results of operations and business
opportunities.
 
 Our
decision to upgrade our existing production facilities and build the new
cold-set corrugated printing press factory at Langfang Duoyuan is based on the
sales of our current products and market trends. However, market demand could
shift and result in lower than anticipated demand for and sales of our existing
or future products, such as our cold-set corrugated printing presses. Our
marketing initiatives to promote our existing and new products may not result in
the anticipated level of customer demand, resulting in production overcapacity
or excess inventory for us, which may have a material adverse effect on our
profitability.
 
 We
are exposed to potential product liability claims that may be costlyto
defend against, and, if successful, may materially and adversely affect our
business.
 
 As a
manufacturer of offset printing equipment, our business exposes us to product
liability risks. Claims against us may also result from actions taken by our
distributors over whom we exercise little to no control. The malfunctioning of
our products could potentially cause financial loss, property damage or personal
injuries. If our products are not properly designed or manufactured or if they
do not perform adequately, we could be subject to claims for damages based on
legal theories, including product liability. Product liability claims may be
expensive to defend and may potentially result in large financial judgments
being made against us, which could adversely affect our financial performance.
We do not maintain liability insurance, so we are responsible for any expenses
we might incur in connection with such claims. Even if a product liability or
other claim is not successful, the adverse publicity, time and expense of
defending such a claim may interfere with or negatively impact our business and
materially and adversely impact our results of operations and
reputation.
 
 If
we fail to meet evolving end-user customer demand and requirements for off-set
printing equipment, including through product enhancements or new product
introductions, or if our products do not compete effectively, our financial
conditions and operating results may be negatively and adversely
affected.
 
 The
offset printing equipment industry is characterized by evolving technological
change, frequent new product developments, periodic product obsolescence, high
industry standards, changing information technologies and evolving distribution
channels. We must adapt quickly to changing technological, application and
solutions needs and the introduction of new technologies and products offering
improved features and functionality. We could incur substantial costs to keep
pace with the technological changes and may fail to adapt to these
changes.
  25
  Our
future success largely depends on our ability to continuously develop new
products with the quality levels our customers demand and new services to
support them. Despite our investments in research and development, we may fail
to develop new products. Our new products may not achieve market acceptance or
be manufactured at competitive costs or in sufficient volume. Our failure to
enhance our existing products and services or to develop and introduce new
products and services that meet changing end-user customer requirements and
evolving technological standards would adversely impact our ability to sell our
products and our financial condition and operating results may be negatively and
adversely affected.
 
 Third
party use of the “Duoyuan” trademark name may dilute their value and
materially and adversely affect our reputation, goodwill and brand.
  We have a
license from Duoyuan Investments, our majority shareholder, wholly owned by
Wenhua Guo, the chairman of our board of directors and chief executive officer,
to use the “Duoyuan” trademark name. Duoyuan Investments, however, may license
the “Duoyuan” trademark name to others for products unrelated to printing, which
may create confusion regarding our brand. In addition, some of our distributors
use the Chinese characters of our name, “Duoyuan,” in their company name, and we
may be unable to prevent such use. The use of “Duoyuan” in the legal names of
these distributors may confuse our end-user customers who may associate our name
with the distributor and incorrectly believe our distributors are our
affiliates. Due to ambiguities in Chinese intellectual property law, the cost of
enforcement and our prior lack of enforcement, we may be unable to prevent third
parties from using the “Duoyuan” trademark name.
 
 We
may undertake acquisitions which may have a material adverse effect on our
ability to manage our business and may be unsuccessful.
 
 Our
growth strategy may involve the acquisition of new technologies, businesses,
products or services or the creation of strategic alliances in areas in which we
do not currently operate. These acquisitions could require that our management
develop expertise in new areas, manage new business relationships and attract
new types of customers. Furthermore, acquisitions may require significant
attention from our management, and the diversion of our management’s attention
and resources could have a material adverse effect on our ability to manage our
business. We may also experience difficulties integrating acquisitions into our
existing business and operations. Future acquisitions may also expose us to
potential risks, including risks associated with:
  ·
              integration
      of new operations, services and
personnel;
  ·
              unforeseen
      or hidden liabilities;
  ·
              diversion
      of resources from our existing businesses and
  technologies;
  ·
              inability
      to generate sufficient revenue to offset the costs of acquisitions;
      and
  ·
              potential
      loss of, or harm to, relationships with employees or
      customers.
  Any of
these risks may have a material adverse effect on our ability to manage our
business and the acquisitions may be unsuccessful.
 
 If
our efforts to expand into international markets are unsuccessful, our business
and financial conditions could be materially and adversely
affected.
 
 Our
long-term business strategy relies in part on establishing an international
distribution network in parts of Africa, the Middle East and Asia. Risks
affecting our international expansion include challenges caused by geographic
distance, language, cultural differences and the burdens of complying with a
wide variety of laws and regulations which differ from those to which we are
accustomed, including:
 
 ·
              international import and export
      legislation;
 ·
              financial condition, expertise
      and performance of potential international
      distributors;
 ·
              foreign tax
      consequences;
 
 
 
  26
  ·
                trade and tariff
      restrictions;
 ·
                quotas;
  and
 ·
                inability to effectively enforce
      contractual or other legal
rights.
 These
risks could result in increased and unbudgeted costs associated with servicing
international markets, which could in turn materially and adversely affect our
business and financial condition.
 
 Our
business is capital intensive and our growth strategy may require additional
capital which may not be available on favorable terms or at all.
  We
believe that our current cash and cash flows from operations will be sufficient
to meet our present and reasonably anticipated cash needs to maintain current
operations. We may, however, require additional cash resources due to changed
business conditions, planned expansion of our manufacturing capacity and product
offerings (for example, our plans to expand our existing property to build a
cold-set corrugated printing press factory at Langfang Duoyuan) or other
investments or acquisitions we may decide to pursue. If our own financial
resources are insufficient to satisfy our capital requirements, we may seek to
sell additional equity or debt securities or obtain additional credit
facilities. The sale of additional equity securities could result in dilution of
shareholders’ holdings. The incurrence of indebtedness would result in increased
debt service obligations and could require us to agree to operating and
financial covenants that would restrict our operations. Financing may not be
available in amounts or on terms acceptable to us, if at all. Any failure by us
to raise additional funds on terms favorable to us, or at all, could limit our
ability to expand our business operations and could harm our overall business
prospects.
 
 Any
interruption in our production process could materially impair our financial
performance and adversely affect our relationships with our
distributors.
  Our
manufacturing operations are complicated and integrated, involving the
coordination of raw materials and components (some purchased from third
parties), internal production processes and external distribution processes.
While these operations are modified on a regular basis in an effort to improve
manufacturing and distribution efficiency and flexibility, we may experience
difficulties in coordinating the various aspects of our manufacturing processes,
thereby causing downtime and delay. For example, due to increased demand for our
multicolor (small and large format) presses, we transferred some of our
employees from the single color press production line to the multicolor press
production line. Production of multicolor (small and large format) presses
involves a more complicated manufacturing process that required additional
training for these transferred employees and ultimately resulted in some
production delays. We manufacture, assemble and store almost all of our
products, as well as conduct most of our research and development activities, at
our manufacturing facilities. We do not maintain back-up facilities, so we
depend on our manufacturing facilities for the continued operation of our
business. A natural disaster or other unanticipated catastrophic event,
including power interruption, water shortage, storm, fire, earthquake, terrorist
attack or war, could significantly impair our ability to manufacture our
products and operate our business and delay our research and development
activities. Our facilities and certain manufacturing equipment would be
difficult to replace and could require substantial replacement time.
Catastrophic events may also destroy our inventory. The occurrence of such an
event could materially and adversely affect our business and operations. In
addition, any interruption in our production, even if temporary, could delay our
delivery to our distributors, who deliver to end-user customers. Any production
interruption and/or delivery delays could negatively affect our business and
potentially our reputation. Any interruption of our business operations could
have a material adverse effect on our business, financial condition and
operating results and may negatively affect our relationships with our
distributors.
 
 We
may be unable to sustain our recent profitability and growth rates.
 
 Prior to
fiscal 2005, we were not profitable. Our revenue grew from $26.5 million in
fiscal 2005 to $43.7 million in fiscal 2006 to $67.8 million in fiscal 2007 to
$89.6 million in fiscal 2008. Although our sales have increased rapidly in
recent years, we expect that our operating expenses will increase as we expand,
and we may not maintain or increase our profitability. Some of the factors which
may contribute to our inability to sustain our recent profitability and growth
include:
  27


·
              competitors
      offering comparable products at lower
prices;
  ·
              decreases
      in the average selling prices of our products, particularly our single
      color presses;
  ·
              superior
      product innovations by competitors;
  ·
              rising
      raw materials and manufacturing
costs;
  ·
              changes
      in our management and key personnel;
and
  ·
              increased
      operating expenses relating to research and development, sales and
      marketing efforts and general and administrative expenses as we seek to
      grow our business.




As a
result of these and additional factors, we may experience lower revenue and
higher expenses and we may therefore fail to maintain our recent profitability
and growth rates, achieve our revenue targets, limit our operating expenses
and/or remain profitable in the future.





We
do not have insurance coverage to protect us against losses.




We do not
maintain insurance coverage for our equipment or manufacturing facilities, and
we do not have any business liability, loss of data or business interruption
insurance coverage for our operations in China. If any claims for injury are
brought against us, or if we experience any business disruption, litigation or
natural disaster, we might incur substantial costs and diversion of resources,
which would materially and adversely affect our business, financial condition
and operating results.





Environmental
claims or failure to comply with any present or future environmental regulations
may require us to spend additional funds and may materially and adversely affect
our business.





We are
subject to environmental laws and regulations that affect our operations,
facilities and products in China. Any failure to comply with any present or
future environmental laws and regulations could result in the assessment of
damages or imposition of fines against us, suspension of production, cessation
of our operations or even criminal sanctions. New laws and regulations could
also require us to acquire costly equipment or to incur other significant
expenses. Our failure to control the use of, or adequately restrict the
discharge of, hazardous substances could subject us to potentially significant
monetary damages and fines or suspension of our business operations, which may
harm our results of operations.





In
connection with the construction of our Langfang Duoyuan facility, which became
operational in October 2000, we obtained the required environmental protection
assessment. We were also required to obtain a pollutant discharging permit from
the governmental authorities in connection with the discharge of certain
pollutants prior to commencing operations. We have not received this permit yet.
Pursuant to the Regulations of Hebei Province on the Administration and
Supervision of Environmental Pollution Prevention, effective March 1, 2008, our
failure to timely obtain this permit may result in us being reprimanded by the
relevant governmental authorities, which may result in a monetary fine in an
amount equal to three times any illegal gains, or RMB5,000 to RMB10,000, if we
have no illegal gains, subject to the discretion of the governmental
authorities. If we are deemed to have materially violated the regulation
regarding the discharge of pollutants, the governmental authorities may order us
to comply with the regulation within a time limit. If more stringent regulations
are adopted in the future, the related compliance costs could be substantial.
Any failure by us to control the use or adequately restrict the discharge of
hazardous substances could subject us to potentially significant monetary
damages and fines or suspensions in our business operations.





The
loss of key personnel, failure to attract or retain specialized technical and
management personnel and recent replacements of our chief financial officer
could materially and adversely affect our business.





We rely
heavily on the services of our key personnel, including Wenhua Guo, the chairman
of our board of directors and chief executive officer, Xiqing Diao, our chief
operating officer, and Yubao Wei, our chief technology officer, each of whom are
a significant asset to us. Our future success will depend on our ability to
retain these key personnel and attract and retain other skilled managerial,
engineering, technical and sales and marketing personnel. Competition for such
key personnel, particularly technical personnel, is intense in the offset
printing equipment industry, and we may fail to attract and retain a sufficient
number of technical personnel to support our anticipated growth. Despite the
incentives we provide, our current employees may not continue to work for
us.  If additional personnel are required for our operations in the
future, we may not be able to obtain the services of additional personnel
necessary for our growth.


28





Turnover
in our senior management could significantly deplete institutional knowledge
held by our existing senior management team and impair our operations, which
could harm our business. During the year ended June 30, 2008, we lost the
services of Gene Michael Bennett and William Milewski, who served as our chief
financial officers from July 19, 2007 to December 20, 2007 and from March 1,
2008 to May 21, 2008, respectively. From December 20, 2007 to March 1, 2008,
Baiyun Sun served as our interim chief financial officer, and she has been
serving as our interim chief financial officer and controller since May 21,
2008. We are actively seeking to hire a permanent chief financial officer, and
we will make the required announcement when the process is completed. From
December 2007 through March 2008 and from May 2008 through the present, we did
not and presently do not have a permanent chief financial officer. During these
transition periods, certain of our projects were subject to delay or put on hold
which may have a material adverse effect on our financial condition and
operating results.





In
addition, if any of our key personnel joins a competitor or forms a competing
company, we may not be able to replace them easily and we may lose customers,
business partners, key professionals and staff members as a result. All of our
key personnel have entered into employment agreements with us, which include
confidentiality and non-disclosure provisions. However, if any disputes arise
between these key personnel and us, it is not clear, in light of uncertainties
associated with the Chinese legal system, what the court decisions will be and
the extent to which these court decisions could be enforced in China, where all
of these key personnel reside and hold some of their assets. See “—Risks Related
to Doing Business in China—Uncertainties with respect to the Chinese legal
system could limit the legal protections available to our shareholders and
us.”





Failure
to protect our proprietary technologies or maintain the right to certain
technologies may materially and adversely affect our ability to
compete.





We
believe that the protection of our intellectual property rights will continue to
be important to the success of our business. We rely on a combination of patent,
copyright, trademark and trade secret laws and restrictions on disclosure to
protect our intellectual property rights. We have also entered into
confidentiality or license agreements with our employees, business partners and
other third parties. We have implemented procedures to control access to and
distribution of documents and other proprietary information. These efforts may
fail to adequately protect our intellectual property rights. Further, these
agreements do not prevent others from independently developing technologies that
are equivalent or superior to our technology. In addition, unauthorized parties
may attempt to copy or otherwise obtain and use our proprietary technology.
Monitoring unauthorized use of technology is difficult, particularly in China,
where the laws may not protect our proprietary rights as fully as do the laws of
the United States.





As of
June 30, 2008, we had four patents registered andfour patent application
pending registration in China. Patents might not be issued for our pending
applications, and any issued patents may not protect or benefit us or otherwise
give us adequate protection from competing products. For example, issued patents
may be circumvented or challenged and declared invalid or unenforceable or
provide only limited protection for our technologies. We also cannot be certain
that others will not design around our patented technology, independently
develop our unpatented proprietary technology or develop effective competing
technologies on their own.





We
may be exposed to infringement or misappropriation claims by third parties,
which, if determined adversely against us, could disrupt our business and
subject us to significant liability to third parties.




We rely
upon certain proprietary confidential information, trademarks, unpatented
know-how, unpatented trade secrets and improvements and continuing technological
innovation to develop and maintain our competitive position. In addition, as of
June 30, 2008, we hadfourpatents that we use in
our business andfour patent application
pending registration. Competitors may claim that one or more of  our
products or our various processes infringe upon their patents or other
intellectual property. A successful claim of patent or other intellectual
property infringement could subject us to significant damages or an injunction
preventing the manufacture, sale or use of our affected products or otherwise
limit our freedom to operate. The legal protection of intellectual property in
China is significantly more limited than in the United States and many other
countries and may afford us little or no effective protection.


29





Technologies
licensed to and relied on by us may be subject to infringement or corresponding
claims by others which could damage our ability to rely on such technologies. In
addition, although we endeavor to ensure that companies that work with us
possess appropriate intellectual property rights or licenses, we cannot fully
avoid the risks of intellectual property rights infringement created by
suppliers of components used in our products or companies with which we
collaborate on research and development activities. Our current or potential
competitors, many of which have substantial resources and have made substantial
investments in competing technologies, may have obtained or may obtain patents
that will prevent, limit or interfere with our ability to make, use or sell our
products in China or other countries. The defense of intellectual property
claims, including patent infringement suits, and related legal and
administrative proceedings can be both costly and time-consuming and may
significantly divert the efforts and resources of our technical and management
personnel. Furthermore, an adverse determination in any such litigation or
proceeding to which we may become a party could cause us to:





·
              pay
      damage awards;
  ·
              seek
      licenses from third parties;
  ·
              pay
      additional ongoing royalties, which could decrease our profit
      margins;
  ·
              redesign
      our products; or
  ·
              be
      restricted by injunctions.




These
factors could effectively prevent us from pursuing some or all of our business
and result in our customers or potential customers deferring, canceling or
limiting their purchase or use of our products, which could have a material
adverse effect on our financial condition and results of
operations.





We
have not held any annual shareholder meetings since we acquired Duoyuan China in
2006, and as a result, our shareholders have limited ability to exercise their
voting rights.





We have
not held an annual meeting of shareholders since we acquired Duoyuan China in
2006. Under Wyoming law, the district court of the county in which a
corporation’s principal office is located may summarily order a meeting be held
upon application of any member or other person entitled to participate in an
annual or regular meeting, if an annual meeting was not held within fifteen
months after the corporation’s last annual meeting. Because we have not held
regular shareholders’ meetings, our shareholders’ ability to exercise their
voting rights may be limited.





Wenhua
Guo, the chairman of our board of directors and chief executive officer and
beneficial owner of 70.25% of our common shares, has substantial influence over
us, and his interests may not be aligned with the interests of our other
shareholders.





Wenhua
Guo, the chairman of our board of directors and chief executive officer,
beneficially owns 70.25% of our outstanding common shares. As a result, he
has significant influence over our business, including decisions regarding
mergers, consolidations, the sale of all or substantially all of our assets,
election of directors, and other significant corporate actions, which may at
times conflict with the interests of our other shareholders. This concentration
of ownership may also have the effect of discouraging, delaying or preventing a
future change of control, which in turn could prevent our shareholders from
recognizing a gain in the event that a favorable offer is extended.





We
may be exposed to potential risks relating to our internal control over
financial reporting and our ability to have those controls attested to by our
independent auditors.





We are
required by the Securities and Exchange Commission to include a report of
management on our internal control over financial reporting in our annual
reports. In addition, the independent registered public accounting firm auditing
a company’s financial statements must attest to and report on management’s
assessment of the effectiveness of our internal control over financial reporting
and the operating effectiveness of our internal controls. Our management has
concluded that our internal control over our financial reporting is not
effective and has material weaknesses. Our independent registered public
accounting firm is not yet required to attest to our management’s assessment,
but once it is required to do so it may issue a report that is qualified if it
is not satisfied with our controls at that time or the level at which our
controls are documented, designed, operated or reviewed. We have identified
significant deficiencies or material weaknesses in our internal controls that we
may not be able to remediate in a timely manner, and investors and others may
lose confidence in the reliability of our financial statements. We can provide
no assurance that we will be in compliance with Section 404 of the
Sarbanes-Oxley Act of 2002, be able to rectify the material weaknesses we have
identified or will receive a positive attestation from our independent auditors
in the future. Any of these possible outcomes could result in loss of investor
confidence in the reliability of our reporting processes, which could adversely
affect the price of our shares.


30





The
termination and expiration or unavailability of preferential tax treatments once
available to us may materially and adversely affect our business.





Prior to
January 1, 2008, enterprises established in China were generally subject to 30%
state and 3% local enterprise income tax rate. However, enterprises that
satisfied certain conditions enjoyed preferential tax treatments. For example,
in accordance with the Foreign Invested Enterprise Income Tax Law, or FIE Income
Tax Law, which was effective until December 31, 2007, a foreign-invested
manufacturing enterprise scheduled to operate for a period not less than ten
years would be exempted from paying income tax in its first and second years of
generating profit, followed by a 50% reduction in its tax rate in the third,
fourth and fifth years subject to the approval of relevant tax authorities.
Duoyuan China, which we believe qualifies as a manufacturing enterprise
scheduled to operate more than ten years, enjoyed an income tax exemption for
its first two profitable years (2004 and 2005) and a 50% income tax reduction
for the next three years (2006 through 2008). Since the definition of
manufacturing enterprise is unclear and subject to discretionary interpretation
and enforcement by the PRC authorities, if Duoyuan China is deemed not qualified
for such preferential tax treatment in the prior periods by relevant tax
authorities, it may be required to refund prior tax benefits
received.





Effective
January 1, 2008, the PRC National People’s Congress enacted the PRC Enterprise
Income Tax Law, or New EIT Law. The New EIT Law generally imposes a single
uniform income tax rate of 25% on all Chinese enterprises, including
foreign-invested enterprises, and eliminates or modifies most of the tax
exemptions, reductions and preferential treatments available under the previous
tax laws and regulations, subject to the State Council’s further regulation.
According to the New EIT Law and relevant implementation rules, the specific
foreign invested enterprises which used to enjoy a tax holiday in accordance
with the state laws, regulations or the relevant rules will continue to enjoy it
under the new tax law until the expiration of such tax holiday. As a result, on
the condition that Duoyuan China is deemed to be qualified for the preferential
tax treatments discussed above by the relevant tax authority, Duoyuan China will
continue to enjoy the 50% tax reduction for the calendar year 2008 with an
applicable income tax rate of 12.5%. Beginning on January 1, 2009, Duoyuan China
will be subject to the 25% income tax rate. Our other two subsidiaries, Langfang
Duoyuan and Hunan Duoyuan, were both granted five-year income tax eliminations
beginning with their first profitable year, by the relevant local governments.
However, these tax preferential treatments granted by the local governments were
not supported by relevant state laws and regulations, thus Langfang Duoyuan and
Hunan Duoyuan may be ordered by relevant authorities to refund these tax
benefits. Langfang Duoyuan became subject to the 25% income tax rate beginning
on January 1, 2008. Pursuant to the tax preferential treatments granted by the
local government, Hunan Duoyuan will become subject to the 25% income tax rate
beginning on January 1, 2010. See “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations—Critical Accounting
Policies—Taxes and Incentives.”





The
newly enacted PRC tax law affects tax exemptions on dividends received by us and
increases the enterprise income tax rate applicable to us.





We are a
company incorporated in the State of Wyoming, United States. We conduct all of
our business through our Chinese subsidiaries and we derive all of our income
from these subsidiaries. According to the PRC enterprise income tax law
applicable prior to January 1, 2008, dividends derived by foreign legal persons
from business operations in China were exempted from the Chinese enterprise
income tax. However, such tax exemption may cease after January 1, 2008, when
the new PRC Enterprise Income Tax Law and its implementation rules became
effective. Under the New EIT Law, if we are not deemed to be a resident
enterprise for Chinese tax purposes, a 10% withholding tax rate would be
applicable to any dividends paid by our Chinese subsidiaries to us. However, if
we are deemed to have a “de facto management organization” in China, we would be
categorized as a resident enterprise for Chinese tax purposes and thus would be
subject to an 25% enterprise income tax rate on all of our income. According to
the Implementing Rules of PRC Enterprise Income Tax Law, “de facto management
organization” means organizations implementing substantive and comprehensive
management and control over the production and business operations, staff,
accounts and property of an enterprise. As substantially all members of our
management are located in China, we may be considered a Chinese tax resident
enterprise and therefore subject to an enterprise income tax rate of 25% on our
worldwide income, excluding dividends received directly from another Chinese tax
resident. As a result of such changes, our historical tax rates will not be
indicative of our tax rates for future periods and the value of our common
shares may be adversely affected.


31





We
may be unable to ensure compliance with U.S. economic sanctions laws, especially
when we sell our products to distributors over which we have limited
control.





The
United States Department of the Treasury’s Office of Foreign Assets Control, or
OFAC, administers certain laws and regulations that impose penalties on U.S.
persons and, in some instances, foreign entities owned or controlled by U.S.
persons, for conducting activities or transacting business with certain
countries, governments, entities or individuals subject to U.S. economic
sanctions, or U.S. Economic Sanctions Laws. We will not engage in or fund,
directly or indirectly, any activity or business with any country, government,
entity or individual that U.S.
Economic Sanctions Laws prohibit U.S. persons, or foreign entities owned or
controlled by U.S. persons, from engaging in or funding. However, we sell our
products through independent non-U.S. distributors which are responsible for
interacting with the end-user customers of our products. Although none of these
independent non-U.S. distributors are located in or conduct business with
countries subject to U.S. economic sanctions such as Cuba, Sudan, Iran, Syria
and Myanmar, we may not be able to ensure that such non-U.S. distributors comply
with any applicable U.S. Economic Sanctions Laws. As a result of the foregoing,
actions could be taken against us that could materially and adversely affect our
reputation and have a material and adverse effect on our business, financial
condition, results of operations and prospects.





Risks
Related to Doing Business in China





Because
our operations are all located outside of the United States and are subject to
Chinese laws, any change in
Chinese laws may materially and adversely affect our business.





All of
our operations are outside of the United States and in China, which exposes us
to risks, such as exchange controls and currency restrictions, currency
fluctuations and devaluations, changes in local economic conditions, changes in
Chinese laws and regulations and exposure to possible expropriation or other
Chinese government actions. These factors may have a material adverse effect on
our operations, results of operations and financial condition.





Recent
Chinese regulations relating to the establishment of offshore special purpose
companies by Chinese residents may subject our Chinese resident shareholders to
personal liability and limit our ability to acquire Chinese companies or inject
capital into our Chinese subsidiaries, limit our Chinese subsidiaries’ ability
to distribute profits to us, or otherwise materially and adversely affect our
business.





The State
Administration of Foreign Exchange, or 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 in October 2005, which became effective in November 2005, and
an implementing rule in May 2007, collectively the SAFE Rules. According to the
SAFE Rules, Chinese residents, including both legal persons and natural persons
and Chinese citizens and foreign citizens who reside in China, are required to
register with the SAFE or its local branch before establishing or controlling
any company outside China, referred to in the SAFE rules as an “offshore special
purpose company,” for the purpose of financing that offshore company with their
ownership interests in the assets of or their interests in any Chinese
enterprise. In addition, a Chinese resident that is a shareholder of an offshore
special purpose company is required to amend its SAFE registration with the
local SAFE branch with respect to that offshore special purpose company in
connection with the injection of equity interests or assets of a Chinese
enterprise in the offshore company or overseas fund raising by the offshore
company, or any other material change in the capital of the offshore company,
including any increase or decrease of capital, transfer or swap of share,
merger, division, long-term equity or debt investment or creation of any
security interest. The SAFE Rules apply retroactively. As a result, Chinese
residents who have established or acquired control of offshore companies that
have made onshore investments in China in the past were required to complete the
relevant registration procedures with the competent local SAFE branch. If any
resident of China failed to file its SAFE registration for an existing offshore
entity, any dividends remitted by the onshore entity to its overseas parent
since April 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 of any illegal action of this type, both the onshore entity and its
actual controlling person(s) can be fined. In addition, failure to comply with
the registration procedures may result in restrictions on the relevant onshore
entity, including prohibitions on the payment of dividends and other
distributions to its offshore parent or affiliate and capital inflow from the
offshore entity. Chinese resident shareholders of the offshore entity may also
be subject to penalties under Chinese foreign exchange administration
regulations.


32





Our
majority shareholder, Duoyuan Investments, is wholly owned by Wenhua Guo, who is
the chairman of our board of directors and chief executive officer and a Chinese
citizen as defined in the SAFE Rules. We have asked Mr. Guo, and will ask our
future shareholders and beneficial owners who are Chinese residents, to make the
necessary applications and filings as required under Notice 75 and other related
rules. Mr. Guo has submitted the application and the review process is underway
but not yet complete as he has not yet received his registration certificate, so
we cannot provide any assurances that  he can obtain such SAFE
registration. Moreover, due to uncertainty concerning the reconciliation of
Notice 75 with other approval or registration requirements, it remains unclear
how Notice 75, and any future legislation concerning offshore or cross-border
transactions, will be interpreted, amended and implemented by the relevant
government authorities. We will attempt to comply, and attempt to ensure that
Mr. Guo and our future shareholders and beneficial owners who are subject to
these rules comply, with the relevant requirements. However, we cannot provide
any assurances that all of our shareholders and beneficial owners who are
Chinese residents will comply with our request to make or obtain any applicable
registrations or comply with other requirements required by Notice 75 or other
related rules. The failure or inability of our Chinese resident shareholders or
beneficial owners to register with the SAFE in a timely manner pursuant to the
SAFE Rules, or the failure or inability of any future Chinese resident
shareholders or beneficial owners to make any required SAFE registration or
comply with other requirements under the SAFE Rules, may subject these
shareholders or beneficial owners to fines or other sanctions and may also limit
our ability to contribute additional capital into or provide loans to our
Chinese subsidiaries, limit our Chinese subsidiaries’ ability to pay dividends
to us, repay shareholder loans or otherwise distribute profits or proceeds from
any reduction in capital, share transfer or liquidation to us, or otherwise
adversely affect us.




We
may not be able to enforce our legal rights in China or elsewhere, and it may be
difficult to serve us with legal process or enforce judgments against us or our
management, which could materially and adversely affect our
business.





Although
we are incorporated in the State of Wyoming, United States, all of our
operations are in China. Our operating subsidiaries are formed under Chinese
law, and all of our assets are located in China. As a result, most of our
material agreements are governed by Chinese law. Since all of our revenue is
derived from our operations in China, our business, financial condition and
results of operations are subject to legal developments in China. There is no
assurance that we will be able to enforce any of our material agreements or that
remedies will be available outside of China with respect to our material
agreements. The legal system and enforcement of laws in China may not be as
transparent as those in the United States. The Chinese judiciary is relatively
inexperienced in enforcing corporate and commercial law, leading to a high
degree of uncertainty regarding the outcome of any litigation. The inability to
enforce or obtain a remedy under any of our future agreements could result in a
significant loss of business, business opportunities or capital.





Additionally,
all of our officersand our directors
reside outside of the United States. Because our operations, assets and officers
and directors are located outside of the United States, it may not be possible
for U.S. investors to enforce their legal rights, effect service of process upon
our directors or officers or enforce civil or criminal judgments of U.S. courts
against us or our directors and officers under U.S. federal securities laws.
Moreover, we have been advised that China’s treaties do not provide for
reciprocal recognition and enforcement of judgments by U.S. courts. Further, it
is unclear if extradition treaties now in effect between the United States and
China would permit effective enforcement of criminal penalties of the federal
securities laws of the United States.


33


We
may have difficulty establishing adequate management, legal and financial
controls in China, which could impair our planning processes and make it
difficult to provide accurate reports of our operating results.





China has
historically not followed Western-style management and financial reporting
concepts and practices, and its access to modern banking, computer and other
control systems has been limited. We may have difficulty hiring and retaining a
sufficient number of qualified employees to work in China with skills in these
areas. As a result, we may experience difficulty establishing management, legal
and financial controls, collecting financial data, preparing financial
statements, books of account and corporate records and instituting business
practices that meet U.S. standards. Consequently, it may be difficult for our
management to forecast our needs and present accurate operating
results.





The
Chinese government could change its policies toward private enterprises, which
could materially and adversely affect our business.





Our
business is subject to political and economic uncertainties in China and may be
adversely affected by its political, economic and social developments. 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 alter them to our detriment from time to time. Changes in
policies, laws and regulations, including 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 result in the total loss of our investment in
China.




Economic,
political and social conditions in China could materially and adversely affect
our business.





All of
our business, assets and operations are located in China. The economy of China
differs from the economies of most developed countries in many respects,
including government involvement, level of development, growth rate, control of
foreign exchange and allocation of resources. The economy of China has been
transitioning from a planned economy to a more market-oriented economy. Although
the Chinese government has recently implemented measures emphasizing the
utilization of market forces for economic reform, reduction of state ownership
of productive assets and establishment of sound corporate governance in business
enterprises, a substantial portion of productive assets in China is still owned
by the Chinese government. In addition, the Chinese government continues to play
a significant role in regulating industry by imposing industrial policies. It
also exercises significant control over China’s economic growth through the
allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential treatment to
particular industries or companies. Therefore, the Chinese government’s
involvement in the economy could adversely affect our business, financial
condition or operating results. The Chinese government has implemented various
measures from time to time to control the rate of economic growth. Some of these
measures benefit the overall economy of China, but may have a negative effect on
our business, financial condition and operating results.





A
slowdown in the Chinese economy may negatively affect our growth and
profitability.





The
Chinese economy on average grew approximately 9% per year for more than 25
years. Due to several factors, including those affecting the global economy as a
whole, China’s economic growth may be less compared to its historical growth,
which may have a negative effect on our business. The recent global economic
recession, which began in early 2008 has caused the global financial markets to
undergo pervasive and fundamental disruption and loss, has affected the Chinese
economy. This global economic recession has led to an increased level of
commercial and consumer delinquencies, decline in consumer confidence, increased
market volatility and widespread reduction of business activity generally.
Current global economic pressures may further negatively impact China’s economy.
A worsening of  global economic conditions and/or reduced business
activity would likely negatively affect the Chinese economy which may slow our
growth and reduce or eliminate our profitability.


34





Government
control of currency conversion and exchange rate fluctuations may materially and
adversely affect our business.





All of
our revenue and expenses are denominated in Renminbi, the currency of China. A
portion of such revenue may be converted into other currencies to meet our
foreign currency obligations. In addition, we incur approximately 1% of our
expenses in foreign currencies, mostly for professional services such as
auditors, attorneys and other intermediaries. Foreign exchange transactions
under our capital account, including principal payments with respect to foreign
currency-denominated obligations, continue to be subject to significant foreign
exchange controls and require the approval of the SAFE in China. These
limitations could affect our ability to obtain foreign exchange through debt or
equity financing or to obtain foreign exchange for capital
expenditures.





The
Renminbi is reported to be measured against a basket of currencies determined by
the People’s Bank of China. The Renminbi may appreciate or depreciate
significantly in value against the U.S. dollar in the long term, depending on
the fluctuation of the basket of currencies against which it is currently
valued, or it may be permitted to enter into a full float, which may also result
in a significant appreciation or depreciation of the Renminbi against the U.S.
dollar. Because all of our earnings and cash assets are denominated in Renminbi
and our financial reporting is denominated in U.S. dollars, fluctuations in the
exchange rates between the U.S. dollar and the Renminbi will affect our
financial results reported in U.S. dollars terms without giving effect to any
underlying change in our business, financial condition or results of operations.
Fluctuations in the exchange rate will also affect the relative value of any
dividend we issue that will be exchanged into U.S. dollars and earnings from,
and the value of, any U.S. dollar denominated investments we make in the
future.





Historically,
we have not engaged in exchange rate hedging activities. Although we may
implement hedging strategies to mitigate exchange rate risk, these strategies
may not eliminate our exposure to foreign exchange rate fluctuations and may
involve costs and risks of their own, such as ongoing management time and
expertise, external costs to implement the strategy and potential accounting
implications.





Uncertainties
with respect to the Chinese legal system could limit the protections available
to our  shareholders and us.





The
Chinese legal system is based on written statutes and their interpretation by
the Supreme People’s Court. Although the Chinese government has introduced new
laws and regulations to modernize its business, securities and tax systems,
China does not yet possess a comprehensive body of business law. Because Chinese
laws and regulations are relatively new, interpretation, implementation and
enforcement of these laws and regulations involve uncertainties and
inconsistencies. Therefore, it may be difficult to enforce contracts under
Chinese law. These uncertainties could materially and adversely affect our
business, financial condition and operating results. In addition, as the Chinese
legal system develops, changes in these laws and regulations, their
interpretation or their enforcement may have a material adverse effect on our
business operations. Moreover, interpretative case law does not have the same
precedential value in China as in the United States, so legal compliance in
China may be more difficult or expensive. These uncertainties could limit the
legal protections available to us and other foreign investors, including our
shareholders.




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





The new
Regulation on Mergers and Acquisitions of Domestic Companies by Foreign
Investors, or the New Merger Regulation, governs the approval process by which a
Chinese company may participate in an acquisition of assets or equity interests.
Depending on the structure of the transaction, the New Merger Regulation will
require the Chinese parties to make a series of applications to certain
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 Merger Regulation 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 Merger 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 Merger Regulation allows Chinese government agencies to assess the
economic terms of a business combination transaction. Parties to a business
combination transaction may have to submit to the Ministry of Commerce 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 New Merger Regulation also
prohibits a transaction at an acquisition price obviously lower than the
appraised value of the Chinese business or assets and, in certain transaction
structures, requires that consideration must be paid within defined periods,
generally not in excess of a year. The New Merger 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, the New Merger
Regulation may impede our ability to negotiate and complete a business
combination transaction on financial terms that satisfy our investors and
protect our investors’ economic interests.


35





The
new provisions of the PRC Employment Contract Law may substantially increase our
labor-related costs in the future.





The PRC
Employment Contract Law, which became effective as of January 1, 2008, contains
many more provisions favorable to employees than existing labor regulations in
effect in China. This may substantially increase our labor-related costs in our
future operations. According to the new law, an employee is entitled to
terminate his or her employment relationship with his or her employer for
certain causes, such as delay in payment of wages or social insurance
contribution or dissatisfactory labor protection, and under such circumstances
the employer is liable to pay compensation to the employee. The amount of such
compensation payment shall be one month's salary for each year that the employee
has served the employer, subject to a cap of twelve months' salary. An employer
shall also be liable to compensate an employee when the employer decides not to
renew an existing employment contract that is about to expire, unless the
employee refuses to renew the employment contract even though the employer
offers equal or more favorable terms than those in the existing employment
contract. In addition, an employer is obligated to conclude an open-ended
employment contract with an employee after two consecutive terms of fixed-term
employment, which means the employer will be liable to pay damages to an
employee if it terminates this employee without cause, until the employee
reaches an age at which he or she is eligible for pension. We may have greater
difficulty terminating underperforming employees and may incur higher level of
labor costs in order to comply with the provisions of the new law, which may
have a material adverse effect on our business, financial condition and
operating results.





The
contractual arrangements entered into between our Chinese subsidiaries may be
subject to audit or challenge by the Chinese tax authorities. Any finding that
our Chinese subsidiaries owe additional taxes could substantially reduce our net
earnings and the value of our shareholders’ investments.





Under
Chinese laws and regulations, arrangements and transactions among affiliated
parties may be subject to audit or challenge by the Chinese tax authorities. We
could face material and adverse tax consequences if the Chinese tax authorities
determine that the contractual arrangements between our Chinese subsidiaries do
not represent arm’s-length prices and, as a result, apply a transfer pricing
adjustment to any of our income. A transfer pricing adjustment could, among
other things, result in a reduction of the expense deductions recorded by our
Chinese subsidiaries for PRC tax purposes or an increase in taxable income, any
of which could increase our tax liabilities. In addition, the Chinese tax
authorities may impose late payment fees and other penalties on our Chinese
subsidiaries for under-paid taxes.





Claims
by our shareholders are subordinate to existing and future liabilities and
obligations of our Chinese subsidiaries.





Because
virtually all of our assets are held by our Chinese subsidiaries, the claims of
our shareholders will be structurally subordinate to all existing and future
liabilities and obligations and trade payables of our Chinese subsidiaries. In
the event of our bankruptcy, liquidation or reorganization, our assets and those
of our Chinese subsidiaries’ will be available to satisfy the claims of our
shareholders only after all of our subsidiaries’ liabilities and obligations
have been paid in full.


36





We
rely principally on dividends and other distributions paid by our Chinese
subsidiaries. Limitations on the ability of our Chinese subsidiaries to pay
dividends to us could have a material adverse effect on our
business.




We are a
holding company and we rely principally on dividends and other distributions
paid by our Chinese subsidiaries 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 Chinese subsidiaries incur debt on its own behalf, the instruments
governing the debt may restrict its ability to pay dividends or make other
distributions to us. Furthermore, relevant Chinese laws and regulations permit
payments of dividends by our Chinese subsidiaries only out of their respective
retained earnings after tax, if any, determined in accordance with Chinese
accounting standards and regulations.




Under
Chinese laws and regulations, each of our operating subsidiaries is required to
set aside a portion of its net income each year to fund certain statutory
reserves. These reserves, together with the registered equity, are not
distributable as cash dividends. As of June 30, 2008, we had statutory reserves
of $6.0 million and total shareholder equity of $93.8 million. As a result of
these Chinese laws and regulations, each of our Chinese subsidiaries is
restricted in its ability to transfer a portion of its net assets to us,
including in the form of dividends, loans or advances. Limitations on the
ability of our Chinese subsidiaries 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.





Risks
Associated with Our Common Shares




Our
shares are not traded and shareholders may not be able to liquidate their
investment at all, or may only be able to liquidate the investment at a price
less than our value.




Our
shares are not currently traded on any securities market or over-the-counter
quotation system. The price of our shares, if traded in the future or
transferred in privately negotiated transactions, may not reflect the value of
our company. Consequently, investors may not be able to liquidate their
investment at all or, if they are able to liquidate it, may only be able to do
so at a price that does not reflect the value of the business. Because the price
for our shares, if traded, may be low, many brokerage firms may not be willing
to effect transactions in the securities. Even if an investor finds a broker
willing to effect a transaction in our shares, the combination of brokerage
commissions, transfer fees, taxes, if any, and any other selling costs may
exceed the selling price. Further, many lending institutions will not permit the
use of common shares like ours as collateral for any loans.





Our
share prices could decrease if a substantial number of shares are sold under
Rule 144.




A
substantial majority of our outstanding shares are “restricted securities”
within the meaning of Securities Act Rule 144, or Rule 144. As restricted
shares, these shares may be resold only pursuant to an effective registration
statement or under the requirements of Rule 144 or other applicable exemptions
from registration under the Securities Act and as required under applicable
state securities laws. Rule 144 provides in essence that an affiliate who has
held restricted securities for a period of at least six months may, under
certain conditions, sell every three months, in brokerage transactions, a number
of shares that does not exceed the greater of 1.0% of our outstanding common
shares. There is no limit on the amount of restricted securities that may be
sold by a non-affiliate after the restricted securities have been held by the
non-affiliate for at least six months, provided current public information about
us is available, and after one year, the non-affiliate is entitled to sell an
unlimited number of the shares without restriction. If a substantial number of
shares of our shares are sold under Rule 144 or other exemption, it could cause
the price of our shares to go down.


37


The
conversion of outstanding derivative securities could cause our shareholders’
ownership to be diluted and may decrease the value of our shareholders’
investments.





Outstanding
derivative securities and current and future obligations to issue our securities
to various parties may dilute the value of our shareholders’ investments. On
October 9, 2006, we issued to CCG Investor Relations Partners, LLC, or CCG,
warrants to acquire 37,288 shares at a strike price of $4.61 per share. On
November 2, 2006, we issued warrants to Roth Capital Partners, LLC, or Roth
Capital, to purchase 613,260 shares at a strike price of $4.21 per share for a
term of five years. These warrants are exercisable at any time after June 30,
2008 on a cashless or net exercise basis. In addition, in December 2007 we
issued to 25 of our Private Placement Investors warrants to purchase 576,425
shares at a strike price of $5.76 per share for a term of five years starting on
June 30, 2008, which are exercisable at any time after June 30, 2008 on a
cashless basis. For as long as these warrants are outstanding and exercisable,
the warrant holder will have an opportunity to profit from a rise in the market
price of our common shares without assuming the risks of ownership. The
outstanding warrants may have an adverse effect on the terms upon which we can
obtain additional capital. We expect that the warrant holders will exercise the
warrants at a time when we are able to obtain equity capital on terms more
favorable than the exercise prices provided by the warrants. Holders of our
common shares do not have pre-emptive rights.





We
do not intend to pay dividends in the foreseeable future.




To date,
we have paid no dividends. Our board of directors does not intend to pay any
dividends in the foreseeable future. The holders of our common shares are
entitled to receive dividends when, as and if declared by our board of directors
out of legally available funds.  As a result, a return on an
investment in our common shares may be realized only through a sale of such
shares, if at all.





We
have the right to issue additional common shares and preferred shares without
the consent of our shareholders. This would have the effect of diluting our
shareholders’ ownership in us and could decrease the value of our
shares.




As of
June 30, 2008, we had 100,000,000 common shares authorized for issuance, of
which only 25,000,050 shares of common shares were issued and outstanding.
Approximately 74,999,950 authorized common shares are available for issuance for
any purpose without shareholder approval. The issuance of these available shares
would dilute shareholders’ percentage ownership of us. We have outstanding
warrants to acquire 1,226,972 common shares.




In
addition, our articles of incorporation authorize the issuance of preferred
shares, the rights, preferences, designations and limitations of which may be
set by our board of directors. While no preferred shares are currently
outstanding, our articles of incorporation authorize the issuance of up to
1,000,000 preferred shares at the discretion of our board of directors.
Preferred shares may be issued upon filing of amended articles of incorporation
and the payment of required fees, requiring no further shareholder action. If
issued, the rights, preferences, designations and limitations of the preferred
shares would be set by our board of directors and could operate to the
disadvantage of our outstanding common shares. These terms could include, among
others, preferences as to dividends and distributions on
liquidation.





Item 2.
            Properties.





Duoyuan
China leases 3,080 square meters of space, located at No. 3 Jinyuan Road, Daxing
Industrial Development Zone, Beijing, China, or No. 3 Jinyuan, from Duoyuan
Information Terminal Manufacture (Langfang) Co., Ltd., or Duoyuan Information, a
company owned by Wenhua Guo, the chairman of our board of directors and chief
executive officer. The property is used as an office building. Duoyuan China
originally leased the property at No.3 Jinyuan from Duoyuan Clean Water
Technology Industries (China) Co., Ltd., or Duoyuan Water, a company owned by
Mr. Guo. The initial lease had a five-year term from January 1, 2003 to December
31, 2007 and was extended for one year. As a result of the property transfer
between Duoyuan Water and Duoyuan Information, in which Duoyuan Information
became the new owner of No. 3 Jinyuan, the initial lease with Duoyuan Water was
terminated and we entered into a new lease with Duoyuan Information. Duoyuan
China’s new lease for No. 3 Jinyuan is for a period from July 1, 2008 to
December 31, 2009.





Langfang
Duoyuan was granted land use rights from the Chinese government for 133,333
square meters of land located to the east of Jinzhiguang Electronic Company,
Langfang Economic-Technological Development Area, Langfang, Hebei Province,
China. The land use rights have a 50-year term and will expire on September 29,
2052. In addition to the land use rights, Langfang Duoyuan also has ownership of
9,333 square meters of office building and 21,593 square meters of production
facilities located at this site. Langfang Duoyuan currently does not have an
outstanding mortgage or pledge on the properties located at this
site.


38





Hunan
Duoyuan was granted land use rights from the Chinese government for 229,281
square meters of land for industrial use located at No. 362 Baoqing Xi Road
Shaoyang, Hunan Province, China. The land use rights have a 50-year term and
will expire on May 19, 2054. In addition to the land use rights, Hunan Duoyuan
also has ownership of 68,068 square meters of office building and production
facilities located at this site. All of Hunan Duoyuan’s land and buildings have
been mortgaged under a Maximum Amount Mortgage Contract (which will expire in
July 2010) to China Agricultural Bank as security interests of Duoyuan China’s
debt obligations.




We
believe our properties and facilities have been adequately maintained, are
generally in good condition and are suitable and adequate for our
business.





We intend
to build a cold-set corrugated printing press factory at Langfang Duoyuan, and
have conducted related land clearing and site preparation services. We are also
designing workshops and production lines and procuring equipment for this
cold-set corrugated printing press factory at Langfang Duoyuan. We plan to
commercially manufacture and sell cold-set corrugated printing presses by the
end of 2010.





Item 3.
            Legal
      Proceedings.





Neither
we nor any of our direct or indirect subsidiaries is a party to, nor is any of
our property the subject of, any legal proceedings other than ordinary routine
litigation incidental to our respective businesses. There are no proceedings
pending in which any of our officers, directors, promoters or control persons is
adverse to us or any of our subsidiaries or in which any of these persons is
taking a position or has a material interest that is adverse to us. There are no
proceedings pending in which any of our officers, directors, promoters or
control persons is adverse to us.





We are
not a party to any administrative or judicial proceeding arising under U.S.
federal, state or local environmental laws or their Chinese
counterparts.





Item 4.
            Submission of Matters to a Vote
      of Security Holders.





None.


39





PART
II




Item 5.
            Market for Registrant’s Common
      Equity, Related Stockholder Matters and Issuer Purchases of Equity
      Securities.





Currently
there is no public trading market for our common shares. No dividends have been
declared or paid on our common shares. As of September 22, 2008, we had 89
holders of our common shares of record.





Item 6.
            Selected Financial
      Data.





The
following summary of consolidated financial data should be read in conjunction
with “Item 7—Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and our consolidated financial statements and the notes
thereto that are included elsewhere in this Annual Report. Historical results
are not necessarily indicative of the results that may be expected for any
future period. Certain factors that affect the comparability of the information
set forth in the following table are described in the notes to those financial
statements. This historical selected financial data should be read along with
the historical financial statements and related notes and “Item 7—Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included elsewhere in this Annual Report.




Year Ended June, 302004
                
                
                2005
                
                
                2006
                
                
                2007
                
                
                2008(in thousands, except for share numbers)Statement
      of operations data:Revenue
                
                $
                12,891
                
                
                $
                26,469
                
                
                $
                43,747
                
                
                $
                67,812
                
                
                $
                89,628Cost
      of revenue
                
                
                8,924
                
                
                
                16,887
                
                
                
                22,478
                
                
                
                37,694
                
                
                
                44,462Gross
      profit
                
                
                3,967
                
                
                
                9,582
                
                
                
                21,269
                
                
                
                30,118
                
                
                
                45,166Research
      and development expenses
                
                
                0
                
                
                
                680
                
                
                
                1,037
                
                
                
                1,046
                
                
                
                1,683Selling,
      general and administrative expenses
                
                
                4,364
                
                
                
                5,431
                
                
                
                6,649
                
                
                
                10,905
                
                
                
                13,177Income
      (Loss) from operations
                
                
                (397
                )
                
                
                3,471
                
                
                
                13,583
                
                
                
                18,167
                
                
                
                30,306Liquidated
      damage income (expenses), net of settlement
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                (2,119
                )
                
                
                235Change
      in fair value of derivative instruments
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                73Other
      income (expense), net
                
                
                36
                
                
                
                492
                
                
                
                (239
                )
                
                
                (21
                )
                
                
                (535
                )Income
      before minority interests and provision for income taxes
                
                
                (361
                )
                
                
                3,963
                
                
                
                13,344
                
                
                
                16,027
                
                
                
                30,079Minority
      interest
                
                
                4
                
                
                
                86
                
                
                
                187
                
                
                
                241
                
                
                
                382Provision
      for income taxes
                
                
                0
                
                
                
                0
                
                
                
                261
                
                
                
                1,807
                
                
                
                3,238Net
      income (loss)
                
                
                (365
                )
                
                
                3,877
                
                
                
                12,896
                
                
                
                13,979
                
                
                
                26,459Foreign
      currency translation adjustment
                
                
                0
                
                
                
                0
                
                
                
                426
                
                
                
                1,834
                
                
                
                8,200Comprehensive
      income (loss)
                
                $
                (365
                )
                
                $
                3,877
                
                
                $
                13,322
                
                
                $
                15,813
                
                
                $
                34,659EPS
      - basic and diluted
                
                $
                (0.02
                )
                
                $
                0.21
                
                
                $
                0.68
                
                
                $
                0.61
                
                
                $
                1.06Weighted
      average number of shares outstanding - basic and diluted
                
                
                17,562,353
                
                
                
                18,867,436
                
                
                
                18,867,436
                
                
                
                23,041,021
                
                
                
                25,000,050


40





Year Ended June 30,Consolidated Balance Sheets
                        
                        2004
                        
                        
                        2005
                        
                        
                        2006
                        
                        
                        2007
                        
                        
                        2008Total
      Current Assets
                        
                        $
                        16,706,040
                        
                        
                        $
                        22,001,699
                        
                        
                        $
                        34,906,390
                        
                        
                        $
                        51,267,370
                        
                        
                        $
                        72,017,168Total
      Assets
                        
                        $
                        30,144,508
                        
                        
                        $
                        37,467,181
                        
                        
                        $
                        50,544,359
                        
                        
                        $
                        80,279,865
                        
                        
                        $
                        112,904,557Total
      Current Liabilities
                        
                        $
                        25,046,847
                        
                        
                        $
                        28,406,269
                        
                        
                        $
                        27,961,760
                        
                        
                        $
                        20,332,147
                        
                        
                        $
                        16,430,553Total
      Liabilities
                        
                        $
                        25,288,189
                        
                        
                        $
                        28,733,264
                        
                        
                        $
                        28,489,006
                        
                        
                        $
                        21,132,913
                        
                        
                        $
                        19,098,220Total
      Stockholder’s equity
                        
                        $
                        4,856,319
                        
                        
                        $
                        8,733,917
                        
                        
                        $
                        22,055,353
                        
                        
                        $
                        59,146,952
                        
                        
                        $
                        93,806,337




Exchange
Rate Information





The
following table sets forth the noon buying rates for U.S. dollars in effect in
New York City for cable transfers of Renminbi as certified for customs purposes
by the Federal Reserve Bank of New York, for the periods indicated:





Period
                  
                  Period End
                  
                  Average
                  
                  High
                  
                  Low2003
                  
                  
                  8.2767
                  
                  8.2772
                  
                  
                  8.2800
                  
                  8.27652004
                  
                  
                  8.2765
                  
                  8.2768
                  
                  
                  8.2774
                  
                  8.27642005
                  
                  
                  8.0702
                  
                  8.1940
                  
                  
                  8.2765
                  
                  8.07022006
                  
                  
                  7.8041
                  
                  7.9723
                  
                  
                  8.0702
                  
                  7.80412007
                  
                  
                  7.2946
                  
                  7.6072
                  
                  
                  7.8127
                  
                  7.29462008
      (as of June 30, 2008)
                  
                  
                  6.8540
                  
                  7.2627
                  
                  
                  7.6278
                  
                  6.8540





As of
September 22, 2008, the exchange rate between Renminbi and U.S. dollars is
6.8306.


41





Item 7.
            Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations.





Overview





We are a
leading offset printing equipment supplier in China, headquartered in Beijing.
We design, manufacture and sell equipment used in two of the three stages of the
offset printing process, “pre-press” and “press”. As of June 30, 2008, we
commercially produce and sell one product under the pre-press product category
(our CTP system) and four types of products under the press product category
(our single color small format presses, single color large format presses,
multicolor small format presses and multicolor large format presses). We plan to
begin commercial production and sale of certain products used in “post-press,”
or the third stage of the offset printing process, including our cold-set
corrugated printing press, by the end of 2010. Through our technical innovation
and precision engineering, we offer a broad range of quality and durable offset
printing equipment at competitive prices. We sell our products to more than 80
distributors who are located in over 60 cities and 28 provinces in China. Our
nationwide distribution network, which we believe to be one of the largest among
Chinese offset printing equipment suppliers, enables us to be more responsive to
local market demands than many of our competitors.





We are
organized under the laws of the State of Wyoming. On October 6, 2006, we closed
the Equity Transfer with Duoyuan Investments pursuant to which we acquired
Duoyuan China and commenced our present line of offset printing equipment
business. We conduct all of our business through our principal operating
subsidiary, Duoyuan China, and its two manufacturing subsidiaries, Langfang
Duoyuan and Hunan Duoyuan. Duoyuan China’s principal business activities include
marketing and sale of our offset printing equipment, technical support to our
distributors and overall strategic planning and management of our business.
Langfang Duoyuan’s principal business activities include manufacturing our CTP
system and two of our press products, namely our single color small format
presses and multicolor small format presses. Hunan Duoyuan’s principal business
activities include manufacturing two of our press products, namely our single
color large format presses and multicolor large format presses. Our majority
shareholder is Duoyuan Investments, a British Virgin Islands company wholly
owned by Wenhua Guo, the chairman of our board of directors and chief executive
officer.





On
November 2, 2006, we closed the Private Placement and issued an aggregate of
6,132,601 common shares to the Private Placement Investors for an aggregate
purchase price of $23.5 million. This Private Placement was made pursuant to the
exemption from the registration provisions of the Securities Act provided by
Section 4(2) of the Securities Act, and Rule 506 of Regulation D promulgated
thereunder, for issuances not involving a public offering.





Outlook





We derive
all of our revenue from sales to our distributors in China. The total annual
output of China’s printing equipment industry grew from approximately
$890 million in 2002 to approximately $2.5 billion in 2007, according to
PEIAC, representing a CAGR of 23% per annum. PIRA projects that the market for
printing equipment in China will grow at a CAGR of 7.1% per annum between 2007
and 2012, making it the third largest printing equipment market in the world.





Our
revenue increased from $43.7 million in fiscal 2006 to $67.8 million in fiscal
2007 to $89.6 million in fiscal 2008. For fiscal 2006, 2007 and 2008, our income
from operations was $13.6 million, $18.2 million and $30.3 million,
respectively. Our operating results reflect significant growth in sales of our
multicolor large format presses following our acquisition of certain assets from
Hunan Printing Machinery Co., Ltd., then a bankrupt state-owned PRC enterprise
that manufactured multicolor printing equipment and large format printing
equipment. In connection with the acquisition, we established Hunan
Duoyuan.





Our
business expansion plans are focused on the development and manufacturing of
press and post-press products. We dedicate a large portion of our research and
development expenses to creating and improving our press products, particularly
our multicolor (small and large format) presses. In addition, we plan to begin
commercial production and sale of certain post-press products, including a
cold-set corrugated printing press, a machine used to assemble corrugated
cardboard boxes, by the end of 2010. We estimate that approximately $25.0
million of additional capital expenditure is needed to launch our cold-set
corrugated printing press business.We also plan to begin
commercial production and sale of two other post-press products, namely an
automatic booklet maker and an automatic paper cutter, for which we have
developed prototypes, in 2011.


42





Principal
Factors Affecting Our Results of Operations





The
following factors have had, and we expect that they will continue to have, a
significant effect on the development of our business, financial condition and
results of operations:





Growth
of the Printing Equipment Market in China





We
believe the growing market for printing equipment in China has affected and will
continue to affect our financial condition favorably by increasing market demand
for our products. The total annual output of China’s printing equipment industry
grew from approximately $890 million in 2002 to approximately $2.5 billion
in 2007, according to PEIAC, representing a CAGR of 23% per annum. PIRA projects
that the market for printing equipment in China will grow at a CAGR of 7.1% per
annum between 2007 and 2012. However, any adverse changes in China’s economic
conditions may adversely affect demand for our products. See “Item 1A. Risk
Factors—Risks Related to Our Business—If the market for printing equipment does
not grow at the rate we expect or at all, including due to a decrease in the
demand for commercial printing services, our business may be materially and
adversely affected.”





Acquisitions
and Expansion of Our Production Capacity





To meet
the potential increase in demand for our products and to improve our overall
product quality and manufacturing efficiency, we intend to expand our production
capacity at our existing manufacturing facilities in Langfang Duoyuan and Hunan
Duoyuan. More specifically, we plan to upgrade our in-house production
facilities for our key components at Hunan Duoyuan and build a new factory at
Langfang Duoyuan to manufacture cold-set corrugated printing presses, a
post-press product. We intend to invest approximately $5.0 million and $25.0
million, respectively, for these projects and we expect these projects will be
completed by the end of 2010. We will also consider strategic acquisitions to
increase our production capacity and obtain new technology for additional
products. As our production capacity increases, we also plan to expand our
distribution network and end-user customer base.





Fluctuations
in Raw Material Costs





Price
fluctuations in raw materials and components impact our gross profits and
results of operations. Our operations require substantial quantities of various
raw materials, particularly steel and iron, and electronic components. These
materials and components have been and continue to be susceptible to significant
price fluctuations. For example, steel prices in China decreased during the year
ended June 30, 2006, but increased significantly during the years ended June 30,
2007 and 2008, increasing our raw material costs as a percentage of revenue. For
fiscal 2008, raw material costs accounted for approximately 90% of our
production costs. We attempt to minimize the effect of price fluctuations in raw
materials and components by:





·
            producing
      a substantial majority of our key components in-house, as measured by the
      cost of revenue, and purchasing other off-the-shelf components from third
      party suppliers;





·
            buying
      in large quantities to increase our purchasing leverage;
    and





·
            reducing
      raw material and component consumption through research and development
      and increased automation of our manufacturing
  process.





Ultimately,
we may need to raise our product prices sufficiently in order to recover higher
raw material and component costs and maintain our profit margin.





Product
Mix





Our
revenue and, as described in greater detail below, gross margins in any given
period will be directly impacted by our product mix. Due to the technological
complexity and high capital requirements of multicolor (small and large format)
presses, the number of companies selling multicolor (small and large format)
presses in China is significantly smaller than those selling single color (small
and large format) presses. As a result, our multicolor (small and large format)
presses have a higher average unit sales price, which can be substantially
greater than that of single color (small and large format) presses, and generate
better gross profits. Also, sales prices and margins for our single color (small
and large format) presses have faced consistent downward pressure because of
increased competition.


43





Changes
in PRC Tax Regulations





Our
Chinese subsidiaries have enjoyed significant tax preferential treatments. These
preferential tax treatments were applicable to foreign-invested manufacturing
enterprises scheduled to operate for a period of not less than ten years in
accordance with the FIE Income Tax Law, which was effective until December 31,
2007. The additional tax that would otherwise be payable without such
preferential tax treatments totaled $4.5 million for the year ended June 30,
2007 and $7.9 million for the year ended June 30, 2008. See “Item 1A. Risk
Factors—Risks Related to Our Business—The termination and expiration or
unavailability of preferential tax treatments once available to us may
materially and adversely affect our business.”





As a
result of recent changes in the FIE Income Tax Law, we expect that our tax
expenses in the future will be significantly higher. In addition, as explained
below, some of the tax preferences we previously received were granted by local
governments and not supported by relevant state laws and regulations. As a
result, our Chinese subsidiaries may be ordered by relevant authorities to
refund these tax benefits. In addition, as a result of the changes in Chinese
tax laws, our historical operating results will not be indicative of our
operating results for future periods. See “—Critical Accounting Policies—Taxes
and Incentives” below.





Impact
of Recent Currency Exchange Rate Increase





We use
the U.S. dollar as the reporting currency for our financial statements. Our
operations are conducted through our Chinese subsidiaries. On July 21, 2005, the
Chinese government changed its policy of benchmarking the value of the Renminbi
to the U.S. dollar and, as a result, the Renminbi has appreciated by
approximately 17.3% from RMB8.28 to $1.00 on July 21, 2005 to RMB6.85 to $1.00
on June 30, 2008. In converting our Renminbi income statement amount into U.S.
dollars, the average translation rates used for the years ended in June 30,
2006, 2007, and 2008 were RMB8.06 to $1.00, RMB7.81 to $1.00 and RMB7.26 to
$1.00, respectively. Our U.S. dollar denominated operating results for these
periods have benefited as a result of the appreciation of the Renminbi against
the U.S. dollar.





Components
of Revenue and Expenses





Revenue





Our
revenue is reported net of value-added taxes, or VAT, that are levied on our
products. As of June 30, 2008, all of our products were subject to VAT at a rate
of 17% of the gross sales price. We also offer sales rebates as an incentive for
large purchase orders. These sales rebates are recorded as a reduction of our
revenue.





We derive
all of our revenue from the sale of our offset printing equipment to
distributors in China. We sell products in the pre-press and press product
categories of printing equipment with substantially all our revenue being
derived from the sale of our press printing equipment. Pre-press printing
equipment comprised approximately 3.6% of our revenue and press printing
equipment comprised approximately 96.4% of our revenue for fiscal 2008, as
adjusted for sales rebates. For fiscal 2006, 2007 and 2008, within the press
category of our printing equipment, we derived 58.9%, 72.3% and 81.4% of our
revenue from the sale of our multicolor (small and large format) presses,
respectively, before adjustment for sales rebates. For fiscal 2006, 2007 and
2008, we derived 36.0%, 23.2% and 16.7% of our revenue from the sale of our
single color (small and large format) presses, before adjustment for sales
rebates.





For
fiscal 2006, 2007 and 2008, our multicolor large format presses and our
multicolor small format presses were our best selling products. For fiscal 2006,
2007 and 2008, our multicolor large format presses accounted for approximately
39.4%, 46.7% and 52.0% of our revenue, respectively, and our multicolor small
format presses accounted for approximately 19.5%, 25.6% and 29.4% of our
revenue, respectively.


44





Because
of the increasing market demand for multicolor (small and large format) presses
in China, which typically have higher profit margins than single color (small
and large format) presses, we plan to continue to expand our multicolor (small
and large format) press production capacities, product offerings and sales
network. Our multicolor (small and large format) presses incorporate our
advanced technologies, making them highly automated and efficient, and help
reduce potential human errors. Our multicolor small format presses offer a
relatively low-cost solution for end-user customers with high quality multicolor
printing needs, such as corporate brochures, product catalogues, labels and
small packages. Our multicolor large format presses, which require relatively
large investments compared to our other press products, are suitable for
end-user customers with high-quality multicolor printing needs, such as posters,
large packages, and banners. Our multicolor large format presses are also
capable of printing at faster speed than our other press products, making them
ideal for time sensitive printing needs.





Although
we expect that our multicolor (small and large format) presses will continue to
be our best selling products, we expect that sales of our pre-press product and
single color (small and large format) presses will continue to grow as the
printing industry in China continues to expand. Our pre-press product, or CTP
system, is a more technologically advanced product than products that use the
traditional pre-press processing method. Our CTP system improves the quality of
the printing plates and eliminates the labor and chemical intensive multiple
step processes associated with traditional pre-press processing methods.
Although computer-to-plate technology is relatively new in China, we believe
there is revenue growth potential for our CTP system with increased market
acceptance. We also expect to see revenue growth with our single color (small
and large format) presses, which are typically suited for end-use customers who
are entering offset printing from type-set printing or need to print works that
are mostly single colored, such as books. Our single color (small and large
format) presses require low initial investments and minimal operating skills
compared to our multicolor (small and large format) presses.





The
following table provides a breakdown of our revenue, by product category, for
the periods indicated:





Year Ended June 30,2006
                                                            
                                                            
                                                            2007
                                                            
                                                            
                                                            2008(in thousands, except percentages)Pre-pressCTP
      system
                                                            
                                                            $
                                                            2,326
                                                            
                                                            
                                                            
                                                            5.3
                                                            %
                                                            
                                                            
                                                            $
                                                            3,769
                                                            
                                                            
                                                            
                                                            5.6
                                                            %
                                                            
                                                            
                                                            $
                                                            3,184
                                                            
                                                            
                                                            
                                                            3.6
                                                            %PressSingle
      color small format presses
                                                            
                                                            
                                                            7,918
                                                            
                                                            
                                                            
                                                            18.1
                                                            %
                                                            
                                                            
                                                            
                                                            6,021
                                                            
                                                            
                                                            
                                                            8.9
                                                            %
                                                            
                                                            
                                                            
                                                            4,328
                                                            
                                                            
                                                            
                                                            4.8
                                                            %Single
      color large format presses
                                                            
                                                            
                                                            7,817
                                                            
                                                            
                                                            
                                                            17.9
                                                            %
                                                            
                                                            
                                                            
                                                            9,730
                                                            
                                                            
                                                            
                                                            14.3
                                                            %
                                                            
                                                            
                                                            
                                                            10,700
                                                            
                                                            
                                                            
                                                            11.9
                                                            %Multicolor
      small format presses
                                                            
                                                            
                                                            8,527
                                                            
                                                            
                                                            
                                                            19.5
                                                            %
                                                            
                                                            
                                                            
                                                            17,350
                                                            
                                                            
                                                            
                                                            25.6
                                                            %
                                                            
                                                            
                                                            
                                                            26,366
                                                            
                                                            
                                                            
                                                            29.4
                                                            %Multicolor
      large format presses
                                                            
                                                            
                                                            17,229
                                                            
                                                            
                                                            
                                                            39.4
                                                            %
                                                            
                                                            
                                                            
                                                            31,671
                                                            
                                                            
                                                            
                                                            46.7
                                                            %
                                                            
                                                            
                                                            
                                                            46,597
                                                            
                                                            
                                                            
                                                            52.0
                                                            %Adjustments
                                                            
                                                            
                                                            (70
                                                            )
                                                            
                                                            
                                                            (0.2
                                                            )%
                                                            
                                                            
                                                            
                                                            (729
                                                            )
                                                            
                                                            
                                                            (1.1
                                                            )%
                                                            
                                                            
                                                            
                                                            (1,547
                                                            )
                                                            
                                                            
                                                            (1.7
                                                            )%Net revenue
                                                            
                                                            $
                                                            43,747
                                                            
                                                            
                                                            
                                                            100.0
                                                            %
                                                            
                                                            
                                                            $
                                                            67,812
                                                            
                                                            
                                                            
                                                            100.0
                                                            
                                                            
                                                            
                                                            $
                                                            89,628
                                                            
                                                            
                                                            
                                                            100.0
                                                            %





In fiscal
2006, 2007 and 2008, sales to distributors in China accounted for all of our
revenue. We use an extensive distribution network to reach a broad end-user
customer base. We generally make sales on a purchase order and short-term
agreement basis. We do not have long-term purchase orders with any of our
distributors. No single distributor accounted for more than 6.0% of our revenue
for fiscal 2006, 2007 and 2008.





Adjustments
to revenue accounted for 0.2%, 1.1% and 1.7% for fiscal 2006, 2007 and 2008,
respectively, for sales rebates paid to distributors as part of our incentive
program that rewards those distributors who meet or exceed their sales targets
in the prior year. We provide sales rebates, or discounts of 2% to 5%, to
distributors who place large purchase orders with us. The greater the dollar
amount of the purchase order, the higher the percentage rebate we offer to our
distributors. These sales rebates are paid at the end of each calendar year. We
intend to continue this incentive program.


45





Cost
of Revenue





Our cost
of revenue consists primarily of direct costs to manufacture our products,
including component and raw material costs, salaries and related manufacturing
personnel expenses, production plant and equipment depreciation and repair and
maintenance costs.  Our costs of revenue were $22.5 million, $37.7
million and $44.5 million for the years ended June 30, 2006, 2007 and 2008,
respectively.





The
direct costs of manufacturing a new product are generally highest when a new
product is first introduced due to (1) start-up costs associated with
manufacturing a new product and (2) generally higher raw material and component
costs due to lower initial production volumes. As production volumes increase,
we typically improve our manufacturing efficiencies and are able to strengthen
our purchasing power by buying raw materials and components in greater
quantities, which decreases raw material and component costs. In addition, we
are able to lower or help offset rising raw material and component costs by
identifying lower-cost raw materials and components. Also, when production
volumes become sufficiently large, we often gain further cost efficiencies by
producing our key components in-house. For this reason, Hunan Duoyuan began
manufacturing our key components in-house starting in fiscal 2007. We currently
manufacture a substantial majority of our key components in-house at our Hunan
Duoyuan facility. In-house manufacturing reduces the per unit cost of our
products.





Our
principal raw materials are steel, iron and electronic components. We
produce a substantial majority of our key components in-house at our Hunan
Duoyuan facility. We purchase all other raw materials and components
from Chinese suppliers. Because we produce a substantial majority of our key
components in-house, we believe we currently have a relatively low cost base
compared to other printing equipment manufacturers, especially when compared to
international printing equipment manufacturers. Also, the relatively low
operation, labor and raw material costs in China have historically allowed us to
decrease our cost of revenue as we increase purchase volumes and make
improvements in manufacturing processes. However, we believe that these
reductions will be increasingly offset by the rising costs of raw materials,
components and wages in China as a result of China’s further economic
development. In particular, we expect that the costs of raw materials will
increase in the near term. For fiscal 2008, the price of steel and iron each
increased by 28.0% and 16.0%, respectively, when compared to fiscal
2007.





As we
focus on manufacturing more advanced products and new product lines, we may find
it necessary to use more expensive raw materials and components. We plan to
mitigate future increases in raw material and component costs by using more
common resources across our product lines, increasing in-house manufacturing of
our key components and adopting more uniform manufacturing and assembly
practices. In addition, to minimize and control raw material waste and increase
production efficiency, we continue to make investments to improve and further
automate our manufacturing process.





Gross
Margins





Our gross
profit margins for the years ended June 30, 2006, 2007 and 2008 were 48.6%,
44.4% and 50.4%, respectively. Our gross profit margins are impacted by changes
in the average selling prices of our products, product sales mix and cost of
revenue. The average selling prices for our products may decline if competitors
lower their prices and we respond by reducing prices for some of our products to
compete more effectively or if we choose to lower our prices to gain market
share. For example, in fiscal 2008 we lowered the price of one of our single
color small format presses, model DY52T, to gain market share. Alternatively, we
are able to increase our average selling prices in certain circumstances, such
as when we introduce new or enhanced products into the market. For example, in
fiscal 2008 we introduced a new model of our multicolor large format presses,
model DY4104, which has all of the existing features of our other multicolor
large format presses, but is also capable of printing on packaging materials
directly. As of June 30, 2008, this new model is the most expensive product we
sell.


46


Since the
average selling prices and gross profit margins of our products vary by product
line, changes in our product sales mix will also impact our overall gross profit
margins. Our more sophisticated and technologically advanced products, such as
our CTP system and multicolor (small and large format) presses, generally have
higher gross profit margins than our less sophisticated and low technology
products, such as our single color (small and large format) presses. Therefore,
product mix impacts our overall gross profit margins.  For fiscal
2006, 2007 and 2008, the overall gross profit margins for our CTP system were
50.6%, 42.6% and 47.1%, respectively, and the overall gross profit margins for
our multicolor (small and large format) presses were 56.0%, 49.7% and 51.2% for
the same periods. For fiscal 2006, 2007 and 2008, the overall gross profit
margins for our single color (small and large format) presses were 36.2%, 28.5%
and 46.5%, respectively.





Given
recent market trends and to better offset raw material costs and maintain our
gross profit, we have been adjusting our product mix by increasing our
production and sale of multicolor (small and large format) presses while
decreasing our production and sale of single color (small and large format)
presses. As a result, our gross profit margins increased by 6.0% from 44.4% in
fiscal 2007 to 50.4% in fiscal 2008, primarily due to the increase in the
proportion of revenue from sales of our multicolor (small and large format)
presses.





Lastly,
our gross profit margins are also affected by changes in our cost of revenue and
our ability to manage such cost as described in further detail “—Cost of
Revenue” above. For example, our gross profit margin decreased by 4.2% from
48.6% for fiscal 2006 to 44.4% for fiscal 2007, primarily as a result of the
increase in our raw material costs, particularly steel and iron.





Research
and Development Expenses





Our
research and development expenses consist primarily of costs associated with
designing, developing and testing our products. Among other things, these costs
include employee compensation and benefits for our research and development
team, expenditures on purchases of supplies and raw materials, depreciation
expenses related to equipment used for research and development and other
related costs. Our research and development team focuses its efforts on
upgrading and enhancing our existing products and designing new products,
discovering new ways to improve our press printing equipment, particularly our
multicolor (small and large format) presses, and developing new post-press
printing equipment. Our research and development expenses as a percentage of
revenue were 2.4%, 1.5% and 1.9% for the years ended June 30, 2006, 2007 and
2008, respectively. Although research and development expenses decreased as a
percentage of revenue between fiscal 2006 and fiscal 2007, this decrease was
mainly a function of our revenue increasing faster than our research and
development expenses. From fiscal 2006 to fiscal 2008, our research and
development expenses increased by $0.7 million, or 62.4%, from $1.0 million in
fiscal 2006 to $1.7 million in fiscal 2008.





We plan
to upgrade our existing products and design new products, particularly
multicolor (small and large format) presses as well as certain post-press
equipment like our cold-set corrugated printing press. We plan to continue to
investing in research and development to maintain and enhance our market
competitiveness.





Selling
Expenses





Our
selling expenses consist primarily of employee subsidies and benefits for our
sales and marketing staff, transportation costs and marketing, sales,
advertising, travel and entertainment activities expenses.  Our
selling expenses were $3.8 million, $7.8 million and $8.7 million for the years
ended June 30, 2006, 2007 and 2008, respectively.





From
fiscal 2006 to fiscal 2008, our selling expenses increased primarily as a result
of increased sales and marketing
activities, the hiring of additional sales representatives and increased
transportation costs. Our selling expenses as a percentage of revenue increased
by 2.9% from 8.6% in fiscal 2006 to 11.5% in fiscal 2007, because of increased
transportation costs. Specifically, shipping and handling costs of our products
increased by $0.5 million, or 83.6%, from $0.6 million in fiscal 2006 to $1.1
million in fiscal 2007. In fiscal 2008, however, our selling expenses as a
percentage of revenue deceased by 1.8% from 11.5% in fiscal 2007 to 9.7% in
fiscal 2008, as our transportation costs remained steady and we improved our
selling and marketing efficiencies. In the near term, we expect that certain
components of our selling expenses will increase as we increase our market
penetration in China. Specifically, we expect that advertising expenses will
increase as we increase our advertising in magazines and trade journals and
expand into new forms of media, including online advertising and television. In
addition, we anticipate that exhibition expenses will increase as we plan to
participate in more trade shows and exhibitions all across China to develop and
enhance our reputation in the printing and packaging industries. We also expect
salary expenses to increase as we continue to hire additional sales
representatives to help broaden our end-user customer base. This anticipated
increase in selling expenses will be a direct result of our plan to grow,
strengthen and support our nationwide distribution network.


47





Because
we sell all of our products to distributors, our selling expenses as a
percentage of revenue are significantly lower than manufacturers that primarily
sell directly to end-user customers. While we intend to continue to sell our
products exclusively to distributors, we plan to build our brand recognition
through increased marketing activities both inside and outside of China, which
may increase our sales and marketing expenses on an actual basis, as well as a
percentage of revenue.





General
and Administrative Expenses





Our
general and administrative expenses consist primarily of employee compensation
and benefits for our general management, finance and administrative staff,
depreciation and amortization with respect to equipment used for general
corporate purposes, consultant fees and other expenses incurred for general
corporate purposes. Our general and administrative expenses were $2.9 million,
$3.1 million and $4.5 million for the years ended June 30, 2006, 2007 and
2008, respectively.





We expect
our general and administrative expenses to increase as we add management staff
and other professionals such as attorneys and consultants as our business
expands. Additionally, as a public company, we anticipate we will incur more
expenses as we seek more guidance and services from attorneys, investors
relationship consultants and auditors. Our general and administrative expenses
as a percentage of revenue were 6.6%, 4.5% and 5.0% for fiscal 2006, 2007 and
2008, respectively. In general, as a percentage of revenue, we expect that
general and administrative expenses will decrease in the future as we increase
our staffing level at a slower rate than we increase our revenue.





Liquidated
Damages Expense





In
November 2006, we raised approximately $23.5 million by issuing shares to the
Private Placement Investors under the Private Placement. We were obligated to
(1) register the resale of these shares with the Securities and Exchange
Commission within 90 days of the closing of the Private Placement, pursuant to a
registration rights agreement dated October 24, 2006, or the Registration Rights
Agreement, and (2) terminate certain related party transactions. We failed to
timely register for resale the private placement shares and terminate the
related party transactions, resulting in liquidated damages. We recorded
liquidated damages and expenses of $2.1 million for the year ended June 30,
2007. In November 2007, we reached a settlement with the Private Placement
Investors who agreed to waive all penalties due in exchange for warrants or cash
payments. We settled the claims for liquidated damages in the third quarter of
fiscal 2008, and we reversed the accrual and recognized a net liquidated damages
gain of $0.2 million for fiscal 2008. See “—Critical Accounting
Policies—Liquidated Damages Expense.”





Other
Income (Expense)





Other
expense is comprised primarily of interest expense from four loans we have with
the Bank of Agriculture, Chongwen branch in the aggregate amount of $11.4
million as of June 30, 2008. Other expense is net of interest income from our
interest bearing checking accounts.





Minority
Interests





Minority
interests refer to the 5% equity interest in Langfang Duoyuan and 0.6% equity
interest in Hunan Duoyuan held by Huiyuan Institute.  For a summary of
Huiyuan Institute’s equity ownership, see “Item 1. Business—Our Subsidiaries—Our
Manufacturing Subsidiaries.” Income allocated to the minority interests was $0.2
million, $0.2 million and $0.4 million for the years ended June 30, 2006, 2007
and 2008, respectively.





Provision
for Income Taxes





Our
provision for income taxes was $0.3 million, $1.8 million and $3.2 million for
the years ended June 30, 2006, 2007 and 2008, respectively. Our effective tax
rate was 0.0%, 16.5%, and 10.9%, for the same periods.


48





Foreign
Currency Translation Adjustments





Although
all of our revenue and expenses are denominated in Renminbi, we use U.S. dollars
in our financial reporting. Our results of operations and cash flows are
calculated based on the average exchange rate during the relevant periods. Our
assets and liabilities are calculated based on the uniform exchange rate
announced by the People’s Bank of China at the end of the relevant periods. Our
share capital is calculated based on historical exchange rates. This practice is
in compliance with U.S. GAAP.





Critical
Accounting Policies





We
prepare our financial statements in accordance with U.S. GAAP, which requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses and related disclosure of contingent assets
and liabilities. We evaluate our estimates and judgments, including those
related to sales, returns, pricing concessions, bad debts, inventories,
investments, fixed assets, intangible assets, income taxes and other
contingencies, based on our historical experience and various other assumptions
that we believe are reasonable under the circumstances. Actual results may
differ from these estimates under different assumptions or
circumstances.





We
believe the following accounting policies are critical to the portrayal of our
financial condition and results of operations and require difficult, subjective
or complex management judgments, often as a result of the need to estimate the
effects of matters that are inherently uncertain.





Revenue
Recognition




We
recognize revenue in accordance with Staff Accounting Bulletin No. 104,
Revenue Recognition, which specifies that revenue is realized or realizable and
earned when four criteria are met:




·
              persuasive
      evidence of an arrangement exists, such as sales
  contracts;
  ·
              product
      is shipped or services have been
rendered;
  ·
              the
      price to the buyer is fixed or determinable;
and
  ·
              collectability
      of payment is reasonably
assured.





In
accordance with Statement of Financial Accounting Standards, or SFAS, No. 48,
“Revenue Recognition when Right Exists,” revenue is recorded net of an estimate
of markdowns, price concessions and warranty costs. Such reserve is based on
management’s evaluation of historical experience, current industry trends and
estimated costs.





We sell
our products solely to our distributors under master distribution agreements.
The agreements list the material terms and conditions with the exception of
delivery, price and quantity terms, which are stipulated separately in purchase
orders. We do not sell to distributors on consignment. Subject to preferred
credit terms discussed below, payment is due before shipment. Title transfers
when our products are shipped. Our distributors have a right to return products
within one month after we have shipped the products, but only if our products
have manufacturing defects that cannot be repaired. We have not had returns
during the years ended June 30, 2006, 2007 and 2008, and thus made no allowance
for returned products.





We
typically recognize revenue when goods are shipped and title to the goods has
passed. Sales revenue represents the invoiced value of goods, net of VAT. The
products we sell in China are subject to a 17% VAT based on the products’ gross
sales price. This VAT may be offset by the VAT paid by us on raw materials and
other materials included in our production costs.





Purchase
prices are set in the purchase orders and may not be renegotiated after purchase
orders are signed. Our master distribution agreements, which typically have a
one year term with annual renewal, do not include purchase order cancellation or
termination clauses. Our distributors are equipped to install our products. We
are not contractually obligated to perform any installation services. As a
result, our revenue is not impacted.


49





We
granted sales rebates to distributors based on the percentage of annual cash
receipt. We account for the sales rebate in accordance with Emerging Issues Task
Force, or EITF, Issue 01-09, “Accounting for Consideration Given by a Vendor to
a Customer (Including a Reseller of the Vendor's Products).”  The
sales rebate is included as a reduction of sales and accounts receivable to be
received by us.





Accounts
Receivable, Trade and Allowance for Doubtful Accounts





During
the normal course of business, we extend unsecured preferred credit terms to
some of our distributors, specifically those distributing our multicolor (small
and large format) presses. We assign credit limits to each distributor. As a
distributor builds a sales history with us, we may adjust the credit limits. Our
management reviews these credit limits from time to time and makes adjustments
as it deems advisable.





For
single color (small and large format) presses, distributors must pay the entire
purchase price before shipment. For multicolor (small and large format) presses,
distributors are required to pay between 50% and 70% of the purchase price
before shipment. Our sales representatives evaluate the creditworthiness of
these distributors in order to determine their installment payment schedules for
the remaining 30% to 50% of the multicolor (small and large format) press
purchase prices. These installment payment schedules, entered into at the time a
distributor signs a purchase order, generally last for six to nine
months.





We review
accounts receivable on a quarterly basis to determine if the allowance for
doubtful accounts is adequate. We record a reserve for doubtful accounts when
collection of the full amount is no longer probable. Our reserves of $0.5
million and $1.2 million as of June 30, 2007 and 2008, respectively, were
consistent with our historical experience and we consider them
adequate.





Inventories





We record
inventories at the lower of cost or market, using the weighted-average method.
We review our inventory on a regular basis for possible obsolete goods by
examining our products’ shelf life and distributor demand to determine if any
reserve is necessary for potential obsolescence. However, most of our
products are manufactured on a purchase order basis. We determined that no
reserves were necessary for the years ended June 30, 2006, 2007 and
2008.





Liquidated
Damages Expense





In
November 2006, we raised approximately $23.5 million by issuing shares to the
Private Placement Investors under the Private Placement. We were obligated to
(1) register the resale of these shares with theSecurities
and Exchange Commission within 90 days of the closing of the Private Placement,
pursuant to the Registration Rights Agreement and (2) terminate certain related
party transactions. We failed to timely register for resale the private
placement shares and terminate the related party transactions, resulting in
liquidated damages. We recorded liquidated damages and expenses of $2.1 million
for the year ended June 30, 2007. In November 2007, we reached a settlement with
the Private Placement Investors who agreed to waive all penalties due in
exchange for warrants or cash payments. We settled the claims for liquidated
damages in the third quarter of fiscal 2008, and we reversed the accrual and
recognized a net liquidated damages gain of $0.2 million for fiscal 2008. These
liquidated damages and their settlement are treated in accordance with Statement
of Financial Accounting Standards No. 5, Accounting for
Contingencies.





The
registration liquidated damages meet the definition of a registration payment
arrangement as defined in Financial Accounting Standards Board’s, or FASB, Staff
Position No. EITF 00-19-2, “Accounting for Registration Payment Arrangements,”
or EITF 00-19-2. In accordance with EITF 00-19-2, paragraph 7, the contingent
obligation to make future payments or otherwise transfer consideration under a
registration payment and related party arrangement is recognized and measured
separately. In accordance with FASB Interpretation No. 14, “Reasonable
Estimation of the Amount of Loss,” we have recorded an expense and a liability
equal to the minimum estimated loss. In November 2007, we reached a settlement
with our Private Placement Investors, who agreed to waive the liquidated damages
due in exchange for warrants or cash payments. Therefore, we reversed the
accrual and recognized a gain, which is included in liquidated damages as a
credit balance in our financial statements.


50





Impairment
of Long-Lived Assets, Including Intangible Assets and Fixed Assets





We review
our long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may no longer be
recoverable.





When
these events occur, we measure impairment by comparing the carrying value of the
long-lived assets to the estimated undiscounted future cash flows expected to
result from the use of the assets and their eventual disposition. If the sum of
the expected undiscounted cash flows is less than the carrying amount of the
assets, we recognize an impairment loss based on the fair value of the assets.
We have not suffered any impairment of long-lived assets.





As of
June 30, 2008, we expect the long-lived intangible assets on our balance sheet,
primarily related to the land use rights for Langfang Duoyuan and Hunan Duoyuan,
to be fully recoverable.





Income
Taxes





We
recognize deferred income taxes for temporary differences between the tax basis
of assets and liabilities and their reported amounts in the financial
statements, net operating loss carry-forwards and credits by applying enacted
statutory tax rates applicable to future years.





We reduce
deferred tax assets by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. We provide for current income taxes in accordance with the
laws of the relevant tax authorities.





Taxes and
Incentives





Prior to
January 1, 2008, our subsidiaries were governed by theFIE Income Tax Law and
various local income tax laws, or collectively the Old Income Tax
Laws.




Beginning
on January 1, 2008, the New EIT Law replaced the Old Income Tax Laws for
domestic Chinese enterprises and foreign invested enterprises. Generally, the
income tax rate of 25% in accordance with the New EIT Law replaced the 33% rate
applicable to domestic Chinese enterprises and foreign invested enterprises, or
FIEs.





According
to the Old Income Tax Laws, upon approval by the PRC tax authorities, FIEs
scheduled to operate for ten years or more and engaged in manufacturing and
production may be exempt from income taxes for two years, commencing with their
first profitable year of operations, after taking into account any losses
brought forward from prior years, and thereafter with a 50% reduction for the
next three years. For tax filing purposes in China, all yearly periods refer to
calendar years.





As a
foreign-invested manufacturing enterprises scheduled to operate for a period of
not less than ten years in accordance with the FIE Income Tax Law, Duoyuan China
enjoyed a two-year tax exemption followed by a three-year 50% tax reduction.
Duoyuan China began to generate net profit in the calendar year ended December
31, 2004. Therefore, Duoyuan China had an income tax exemption for the calendar
years ended December 31, 2004 and 2005, and enjoys a 50% tax reduction for the
calendar years ended December 31, 2006, 2007 and 2008. We believe Duoyuan China
will be subject to a 12.5% tax rate for the calendar year ended December 31,
2008. Beginning on January 1, 2009, Duoyuan China will be subject to the 25%
income tax rate under the New EIT Law. See “Item 1A.  Risk
Factors—Risks Related to Our Business—The termination and expiration or
unavailability of preferential tax treatments once available to us may
materially and adversely affect on our business.”


51


Our
Langfang Duoyuan facility is located in a Special Economic and High Technology
Zone, and the Administration Committee of such zone has granted Langfang Duoyuan
a special income tax rate for doing business in the special zone. With this
approval from the local government, Langfang Duoyuan is exempted from income
taxes for five years, commencing with its first year of profitable operations.
Langfang Duoyuan began to generate net profit in the calendar year ended
December 31, 2003. Therefore, Langfang Duoyuan enjoyed an income tax exemption
for the calendar years 2003 through 2007. Langfang Duoyuan became subject to the
25% income tax rate starting January 1, 2008, under the New EIT Law. Because
this tax preferential treatment was granted by the local government and was not
supported by the state laws and regulations, we face a risk of being ordered to
refund these prior tax benefits. See “Item 1A. Risk Factors—Risks Related to Our
Business— The termination and expiration or unavailability of preferential tax
treatments once available to us may materially and adversely affect our
business.”





Prior to
the incorporation of Hunan Duoyuan, we negotiated with the Hunan Shaoyang
Treasury Department for an income tax exemption. The Hunan Shaoyang Treasury
Department granted Hunan Duoyuan a five year income tax exemption commencing
with its first year of profitable operations. Hunan Duoyuan began to generate
net profit in the calendar year ended December 31, 2005. Therefore, Hunan
Duoyuan enjoys an income tax exemption for the calendar years 2005 through 2009.
Pursuant to the tax preferential treatment granted by the local government,
Hunan Duoyuan will become subject to the 25% income tax rate starting January 1,
2010, under the New EIT Law. Because this tax preferential treatment was granted
by the local government and was not supported by the state laws and regulations,
we face a risk of being ordered to refund these prior tax benefits. See “Item
1A. Risk Factors—Risks Related to Our Business—The termination and expiration or
unavailability of preferential tax treatments once available to us may
materially and adversely affect on our business.”





The
following table reconciles the U.S. statutory rates to our effective tax rates
for the years ended June 30, 2007 and 2008:




Year Ended June 30,2007
                                            
                                            
                                            2008U.S.
      statutory rates
                                            
                                            
                                            34.0
                                            %
                                            
                                            
                                            
                                            34.0
                                            %Foreign
      income not recognized in U.S.
                                            
                                            
                                            (34.0
                                            )
                                            
                                            
                                            
                                            (34.0
                                            )China
      income taxes
                                            
                                            
                                            33.0
                                            
                                            
                                            
                                            
                                            29.0China
      income tax exemption
                                            
                                            
                                            (16.5
                                            )
                                            
                                            
                                            
                                            (18.1
                                            )Effective
      income tax rates
                                            
                                            
                                            16.5
                                            %
                                            
                                            
                                            
                                            10.9
                                            %




VAT





Enterprises
or individuals who sell commodities, engage in repair and maintenance, or import
and export goods in China are subject to a VAT in accordance with Chinese laws.
The VAT standard rate is 17% of the gross sales price. A credit is available
whereby VAT paid on the purchases of semi-finished products or raw materials
used in finished products can be used to offset the VAT due on sales of the
finished products.





VAT on
sales amounted to $12.9 million for the year ended June 30, 2006, $19.8 million
for the year ended June 30, 2007, and $28.9 million for the year ended June 30,
2008, respectively.  VAT on purchases amounted to $9.3 million for the
year ended June 30, 2006, $7.3 million for the year ended June 30, 2007, and
$20.1 million for the year ended June 30, 2008, respectively. Our sales and
purchases are recorded net of VAT, which is not impacted by the tax preferential
treatments we enjoy.


52


Results
of Operations





The
following table sets forth selected data from our consolidated statements of
income for the periods indicated as a percentage of revenue:




Year Ended June 30,2006
                                
                                
                                2007
                                
                                
                                2008$
                                
                                
                                % of Revenue
                                
                                
                                $
                                
                                
                                % of Revenue
                                
                                
                                $
                                
                                
                                % of Revenue(in thousands, except percentages)Revenue
                                
                                
                                43,747
                                
                                
                                
                                100.00
                                
                                
                                
                                67,812
                                
                                
                                
                                100.00
                                
                                
                                
                                89,628
                                
                                
                                
                                100.00Cost
      of revenue
                                
                                
                                22,478
                                
                                
                                
                                51.4
                                
                                
                                
                                37,694
                                
                                
                                
                                55.6
                                
                                
                                
                                44,462
                                
                                
                                
                                49.6Gross
      profit
                                
                                
                                21,269
                                
                                
                                
                                48.6
                                
                                
                                
                                30,118
                                
                                
                                
                                44.4
                                
                                
                                
                                45,166
                                
                                
                                
                                50.4Selling,
      general and administrative expenses
                                
                                
                                6,649
                                
                                
                                
                                15.2
                                
                                
                                
                                10,905
                                
                                
                                
                                16.1
                                
                                
                                
                                13,177
                                
                                
                                
                                14.7Research
      and development
                                
                                
                                1,037
                                
                                
                                
                                2.4
                                
                                
                                
                                1,046
                                
                                
                                
                                1.5
                                
                                
                                
                                1,683
                                
                                
                                
                                1.9Income
      from operations
                                
                                
                                13,583
                                
                                
                                
                                31.0
                                
                                
                                
                                18,167
                                
                                
                                
                                26.8
                                
                                
                                
                                30,306
                                
                                
                                
                                33.8Liquidated
      damage, net of settlement
                                
                                
                                –
                                
                                
                                
                                –
                                
                                
                                
                                (2,119
                                )
                                
                                
                                (3.1
                                )
                                
                                
                                235
                                
                                
                                
                                0.3Change
      of the fair value of derivative instruments
                                
                                
                                –
                                
                                
                                
                                –
                                
                                
                                
                                –
                                
                                
                                
                                –
                                
                                
                                
                                73
                                
                                
                                
                                0.1Other
      income (expense), net
                                
                                
                                (239
                                )
                                
                                
                                (0.5
                                )
                                
                                
                                (21
                                )
                                
                                
                                (0.3
                                )
                                
                                
                                (535
                                )
                                
                                
                                (0.6
                                )Income
      before minority interests and provision for income taxes
                                
                                
                                13,344
                                
                                
                                
                                30.5
                                
                                
                                
                                16,027
                                
                                
                                
                                23.6
                                
                                
                                
                                30,079
                                
                                
                                
                                33.6Minority
      interests
                                
                                
                                187
                                
                                
                                
                                0.4
                                
                                
                                
                                241
                                
                                
                                
                                0.4
                                
                                
                                
                                382
                                
                                
                                
                                0.4Provision
      for income taxes
                                
                                
                                261
                                
                                
                                
                                0.6
                                
                                
                                
                                1,807
                                
                                
                                
                                2.7
                                
                                
                                
                                3,238
                                
                                
                                
                                3.6Net
      income
                                
                                
                                12,896
                                
                                
                                
                                29.5
                                
                                
                                
                                13,979
                                
                                
                                
                                20.6
                                
                                
                                
                                26,459
                                
                                
                                
                                29.5Foreign
      currency translation adjustment
                                
                                
                                426
                                
                                
                                
                                1.0
                                
                                
                                
                                1,834
                                
                                
                                
                                2.7
                                
                                
                                
                                8,200
                                
                                
                                
                                9.1Comprehensive
      income
                                
                                
                                13,321
                                
                                
                                
                                30.5
                                
                                
                                
                                15,813
                                
                                
                                
                                23.3
                                
                                
                                
                                34,659
                                
                                
                                
                                38.7





Comparison
of Year Ended June 30, 2007 and Year Ended June 30, 2008





Revenue





Our
revenue increased $21.8 million, or 32.2%, from $67.8 million for the year
ended June 30, 2007 to $89.6 million for the year ended June 30, 2008. This
increase was primarily due to increased demand for our multicolor (small and
large format) presses. Our top five selling models, which represented more than
75% of our total revenue in fiscal 2008, were all multicolor (small and large
format) presses. This increase in revenue from our multicolor (small and large
format) presses was offset by a decrease in revenue from our CTP system and
single color small format presses.


53





Pre-press
Printing Equipment





CTP system.Revenue for our CTP system decreased by $0.6 million, or 15.5%, from $3.8
million for the year ended June 30, 2007 to $3.2 million for the year ended June
30, 2008. This decrease was primarily due to increased competition from Chinese
competitors. For most of fiscal 2007, we believe we were the dominant
manufacturer of computer-to-plate pre-press products in China. By the end of the
third quarter of fiscal 2007, we became aware of a number of Chinese competitors
that entered the computer-to-plate pre-press market, decreasing our market share
and demand for our CTP system.





Press Printing
Equipment





Revenue
for our press printing equipment increased by $23.2 million, or 35.8%, from
$64.8 million for the year ended June 30, 2007 to $88.0 million for the year
ended June 30, 2008. This increase was primarily due to an increase in demand
for our multicolor (small and large format) presses.





Single color
small format press.Revenue for our single color small format presses
decreased by $1.7 million, or 28.1%, from $6.0 million for the year ended June
30, 2007 to $4.3 million for the year ended June 30, 2008. This decrease was
primarily due to increased competition from Chinese competitors, decrease in our
single color small format product offerings and decreased marketing efforts.
Demand for our single color small format presses, a less sophisticated and low
technology product, decreased as more Chinese manufacturers entered the single
color small format press business, increasing competition. The low barrier to
entry allows manufacturers to enter this market with relative low
cost.  As part of our plan to focus on selling more technologically
advanced products like our multicolor (small and large format) presses, we
discontinued the manufacture of five different models of our single color small
format presses in fiscal 2008.  For these same reasons, we also
decreased marketing efforts for our single color small format presses, instead
increasing our marketing efforts for our multicolor (small and large format)
presses.





Single color
large format press.Revenue for our single color large format presses
increased by $1.0 million, or 10.0%, from $9.7 million for the year ended June
30, 2007 to $10.7 million for the year ended June 30, 2008. This increase was
primarily due to the increased demand for a new single color large format press,
model J4109, which we introduced in fiscal 2007.  Model J4109, which
is an enhanced version of models DY166 and J4105, gained market acceptance
during fiscal 2008 and we recognized revenue of $4.9 million from the sale of
this product.  This increase in revenue for model J4109 was offset by
a decrease in revenue for models DY166 and J4105 of $4.3 million for fiscal 2008
when compared to fiscal 2007.





Multicolor small
format press.Revenue for our multicolor small format presses increased
by $9.0 million, or 52.0%, from $17.4 million for the year ended June 30, 2007
to $26.4 million for the year ended June 30, 2008. This increase was primarily
due to increased demand.  We believe the increase in demand for our
multicolor small format presses was partially a result of increased marketing
activities. During fiscal 2008, we increased our marketing efforts by
advertising our products in a greater number of magazines and trade journals
more frequently than in fiscal 2007. In addition, we performed more
demonstrations of our multicolor small format presses to our end-user customers
to showcase the quality of the printed materials as well as the speed and ease
of use in fiscal 2008 when compared to fiscal 2007.





Multicolor large
format press.Revenue for our multicolor large format presses increased
by $14.9 million, or 47.1%, from $31.7 million for the year ended June 30, 2007
to $46.6 million for the year ended June 30, 2008. This increase was primarily
due to increased demand.  We believe the increase in demand for our
multicolor large format presses was partially a result of increased marketing
activities. During fiscal 2008, we increased our marketing efforts by
advertising our products in a greater number of magazines and trade journals
more frequently than in fiscal 2007. In addition, we performed more
demonstrations of our multicolor large format presses to our end-user customers
to showcase the quality of the printed materials as well as the speed and ease
of use in fiscal 2008 when compared to fiscal 2007. The increase in revenue is
also a result of the revenue recognized from the sale of model DY4104, a new
multicolor large format press that we introduced to the market in fiscal
2008.  Model DY4104, a highly automated and energy efficient machine,
has been well received since its introduction to the market.  It is
capable of printing on larger sheets of paper than our existing multicolor large
format press models and it is capable of printing on packaging materials
directly.  We recognized revenue from the sale of this new product in
the amount of $8.1million during fiscal 2008.


54





Cost
of Revenue





Our cost
of revenue increased by $6.8 million, or 18.0%, from $37.7 million for the year
ended June 30, 2007 to $44.5 million for the year ended June 30, 2008. This
increase was primarily due to an increase in the volume of our products sold
during this period, particularly the sale of our multicolor (small and
large format) presses. Most of our increases were from the purchase of
additional raw materials, such as steel and iron, as more materials were needed
to manufacture our multicolor (small and large format) presses. Our raw material
costs increased by $5.7 million, or 16.7%, from $34.2 million in fiscal 2007 to
$39.9 million in fiscal 2008. Also, our labor costs increased by $0.4 million,
or 16.7%, from $2.3 million in fiscal 2007 to $2.7 million in fiscal 2008
primarily due to employees working additional hours to produce a greater volume
of products. Lastly, our depreciation expense had increased by $0.9 million, or
164.6%, from $0.6 million in fiscal 2007 to $1.5 million in fiscal 2008 mainly
due to the purchase of new manufacturing equipment to be used at Hunan Duoyuan.
This increase in cost of revenue was partially offset by a reduction of $0.2
million in our parts costs for repairs of our manufacturing
equipment.





As a
percentage of revenue, the cost of revenue decreased by 6.0% from 55.6% for
fiscal 2007 to 49.6% for fiscal 2008. This decrease was mainly due to the
increase in sales of our multicolor (small and large format) presses,
which overall have lower costs and higher gross profit margins
than our single color (small and large format) presses. In addition, we
began manufacturing our key components in-house in fiscal 2007 at Hunan Duoyuan,
reducing the per unit cost of our products.





Gross
Profit




As a
result of the factors above, our gross profit increased by $15.1 million, or
50.0%, from $30.1 million for the year ended June 30, 2007 to $45.2
million for the year ended June 30, 2008.




Our gross
profit margin increased from 44.4% in fiscal 2007 to 50.4% for fiscal 2008. The
increase in gross profit and gross profit margin during this period was due to
the increased production and sale of our multicolor (small and large format)
presses, which have higher gross profits and gross profit margins than our
single color (small and large format) presses.





Selling
Expenses





Selling
expenses increased by $0.9 million, or 11.2%, from $7.8 million for the year
ended June 30, 2007 to $8.7 million for the year ended June 30, 2008.
This increase was primarily due to an increase in the salaries and commissions
of our sales staff, our advertising expenses and participation in industry trade
conferences.





The
salaries and commissions paid to our sales staff increased by $1.3 million, or
49.3%, from $2.6 million in fiscal 2007 to $3.9 million in fiscal 2008. The
increase in salaries and commissions was primarily due to the hiring of 14 new
sales employees during the year and bonuses awarded to our sales personnel for
meeting or exceeding their sales and performance targets.





Our
advertising expenses increased by $0.3 million, or 21.4%, from $1.1 million in
fiscal 2007 to $1.4 million in fiscal 2008. This increase was primarily due
to an increase in print advertising for our products in magazine and trade
journals, and the costs of preparing exhibition and promotional
materials.





As a
percentage of revenue, selling expenses decreased by 1.8% from 11.5% in fiscal
2007 to 9.7% in fiscal 2008.  This decrease was mainly due to our
increased sales volume, which created economies of scale, reducing our per unit
selling expenses.


55


General
and Administrative Expenses





General
and administrative expenses increased by $1.4 million, or 45.3%, from $3.1
million for the year ended June 30, 2007 to $4.5 million for the year ended
June 30, 2008. This increase was primarily due to an increase in
professional fees paid to our auditors and attorneys and an increase in reserve
for doubtful accounts.





Our
professional fees increased by $0.4 million from $3,903 in fiscal 2007 to $0.4
million in fiscal 2008 as we paid the outstanding balance due to our auditors
and attorneys. In addition, we increased our reserve for doubtful accounts by
$0.7 million, or 136.3%, from $0.5 million in fiscal 2007 to $1.2 million in
fiscal 2008. We increased our reserve for doubtful accounts as we increased
sales of our multicolor (small and large format) presses. For multicolor (small
and large format) presses, distributors are not required to pay for the entire
purchase price before shipment unlike for our single color (small and large
format) presses. Instead distributors for our multicolor (small and large
format) presses are required to pay 50% to 70% of the purchase price before
shipment, based on their preferred credit terms. Because of the increase in
sales of multicolor (small and large format) presses and the greater risk of
non-paymentand
incomplete or partial payment from our distributors, we increased our reserve
for doubtful accounts.





As a
percentage of revenue, general and administrative expenses increased from 4.5%
in fiscal 2007 to 5.0% in fiscal 2008.  This increase was mainly
because of the reasons described above.





Research
and Development Expenses





Research
and development expenses increased by $0.7 million, or 61.0%, from $1.0
million for the year ended June 30, 2007 to $1.7 million for the year ended June
30, 2008.  This increase was primarily due to an increase in
salary expenses of our research and development team and increased costs from
the purchase of raw materials in connection with our sample product development.
Specifically, we hired an additional six engineers in fiscal 2008, increasing
our research and development team to 193 employees and salary expenses increased
by $0.2 million, or 21.7%, from $1.0 million in fiscal 2007 to $1.2 million in
fiscal 2008.





As a
percentage of revenue, research and development expenses increased from 1.5% in
fiscal 2007 to 1.9% in fiscal 2008.  This increase was mainly because
of increase in salary expenses as a result of thesix new engineers we
hired and the increased costs from the purchase of raw materials in connection
with our sample product development, as described above.





Income
from Operations





Income
from operations increased by $12.1 million, or 66.8%, from $18.2 million for the
year ended June 30, 2007 to $30.3 million for the year ended June 30,
2008.





The
increase was due to the increased sale of our multicolor (small and large
format) presses, which generated higher revenue for us.





Liquidated
Damages Expense





In
November 2006, we raised approximately $23.5 million by issuing shares to the
Private Placement Investors under the Private Placement.  We were
obligated to (1) register the resale of these shares with theSecurities
and Exchange Commission within 90 days of the closing of the Private Placement,
pursuant to the Registration Rights Agreement and (2) terminate certain related
party transactions. We failed to timely register for resale the private
placement shares and terminate the related party transactions, resulting in
liquidated damages. We recorded $2.1 million in liquidated damages and expenses
for the year ended June 30, 2007. In November 2007, we reached a settlement with
the Private Placement Investors who agreed to waive all penalties due in
exchange for warrants or cash payments. We settled the claims for liquidated
damages in the third quarter of fiscal 2008, and we reversed the accrual and
recognized a net liquidated damages gain of $0.2 million for fiscal
2008.  This amount has been included in liquidated damages expenses on
our financial statements in according with EITF 00-19-2.  See
“—Components of Revenue and Expenses—Liquidated Damages
Expense.”


56


Other
Income (Expenses)





Other
expenses increased by $0.5 million from $20,734 for the year ended June 30, 2007
to $0.5 million for the year ended June 30, 2008.





We had
interest expense of $0.7 million from our short-term borrowing in each of fiscal
2007 and fiscal 2008. In fiscal 2007, our interest expense was offset by
non-operating rental income of $0.4 million. In fiscal 2008, we did not
recognize any rental income.





Minority
Interests





Minority
interests increased by $0.2 million, or 58.6%, from $0.2 million for the year
ended June 30, 2007 to $0.4 million for the year ended June 20, 2008. The
increase in minority interest is mainly due to the increase of net income in
Langfang Duoyuan and Hunan Duoyuan.





Provision
for Income Taxes





Provision
for income taxes increased $1.4 million, or 79.2%, from $1.8 million for the
year ended June 30, 2007 to $3.2 million for the year ended June 30, 2008. This
increase in the provision for income taxes was primarily attributable to the
increase in our revenue by 32.2% over the same period. Our effective tax rates
for fiscal 2007 and fiscal 2008 were 16.5% and 10.9%, respectively.





Duoyuan
China began paying income tax on January 1, 2006. The income tax rate for
Duoyuan China in the first half of fiscal 2008 was 16.5%, and the income tax
rate for Duoyuan China in the second half of fiscal 2008 was 12.5%. Beginning on
January 1, 2009, the income tax rate for Duoyuan China will increase to 25%.
Pursuant to the tax preferential treatment granted by the local government,
Langfang Duoyuan was exempt from paying taxes prior to calendar year 2008.
Langfang Duoyuan began paying income tax on January 1, 2008. The income tax rate
for Langfang Duoyuan was 0% in the first half of fiscal 2008 and 25% in the
second half of fiscal 2008. Pursuant to the tax preferential treatment granted
by the local government, Hunan Duoyuan is tax exempted through calendar year
2009.





Due to
various special tax rates, preferential tax treatments and incentives that have
been granted to us in China, our taxes in recent years have been relatively low.
The additional amounts of tax that we would have otherwise been required to pay
had we not enjoyed the various preferential tax treatments would have been $4.5
million in fiscal 2007 and $7.9 million in fiscal 2008.





Net
Income





As a
result of the foregoing, netincome increased by
$12.5 million, or 89.3%, from $14.0 million for year ended June 30, 2007 to
$26.5 million for the year ended June 30, 2008.





As a
percentage of revenue, net income increased 8.9% from 20.6% for fiscal 2007 to
29.5% for fiscal 2008.





Foreign
Currency Translation Adjustment





The
foreign currency translation adjustment increased by $6.4 million, or 347.0%,
from $1.8 million for the year ended June 30, 2007 to $8.2 million for the year
ended June 30, 2008. The increase in the foreign currency translation adjustment
is due to the appreciation of the Renminbi against the U.S. dollar. Our assets
and liabilities are translated at a rate of RMB7.60 to $1.00 at June 30, 2007
and RMB6.85 to $1.00 at June 30, 2008. Our results of operations are translated
at a rate of RMB7.81 for the year ended June 30, 2007 and RMB7.26 to $1.00 for
the year ended June 30, 2008. Our equity accounts are translated at historical
rates.


57


Comparison
of Year Ended June 30, 2006 and Year Ended June 30, 2007





Revenue





Our
revenue increased by $24.1 million, or 55.0%, from $43.7 million for the
year ended June 30, 2006 to $67.8 million for the year ended June 30, 2007. This
increase was mainly attributable to an increase in the number of units sold,
particularly our multicolor (small and large format) presses. Revenue increased
in fiscal 2007 for each of our products, except for our single color small
format presses, which decreased by $1.9 million, or 24.0%, from $7.9 million in
fiscal 2006 to $6.0 million in fiscal 2007. The decrease in revenue for our
single color small format presses was primarily due to decreased demand for our
single color small format presses as a result of increased competition from
Chinese competitors.





Pre-press
Printing Equipment





CTP system.Revenue for our CTP system increased by $1.5 million, or 62.3%, from $2.3
million for the year ended June 30, 2006 to $3.8 million for the year ended June
30, 2007.  This increase is primarily because we believe we were the
dominant manufacturer of computer-to-plate pre-press products in China. During
fiscal 2006, we believe we were one of a few Chinese offset printing equipment
manufacturers that produced and sold computer-to-plate pre-press products in
China. Although we believe that at least three other Chinese competitors entered
the computer-to-plate pre-press market during fiscal 2007, we believe were one
of the first suppliers of computer-to-plate pre-press products and we believe we
dominated this business segment during fiscal 2007. During fiscal 2007, we
marketed our CTP system along the coastal areas and other economically-developed
regions of China and the demand for our CTP system increased. Consequently,
sales of our CTP system increased in fiscal 2007.





Press Printing
Equipment





Revenue
for our press printing equipment increased by $23.3 million, or 56.1%, from
$41.5 million for the year ended June 30, 2006 to $64.8 million for the year
ended June 30, 2007. This increase was primarily due to an increase in demand
for our multicolor (small and large format) presses.





Single color
small format press.Revenue for our single
color small format presses decreased by $1.9 million, or 24.0%, from $7.9
million for the year ended June 30, 2006 to $6.0 million for the year ended June
30, 2007. This decrease was primarily due to increased competition from Chinese
competitors and decreased marketing efforts. Demand for our single color small
format presses, a less sophisticated and low technology product, decreased as
more Chinese manufacturers entered the single color small format press business,
increasing competition. The low barrier to entry allows manufacturers to enter
this market with relative low cost. In addition, as part of our plan to focus on
selling more technologically advanced products, we also decreased marketing
efforts for our single color small format presses, instead increasing our
marketing efforts for our multicolor (small and large format)
presses.





Single color
large format press.Revenue for our single color large format presses
increased by $1.9 million, or 24.5%, from $7.8 million for the year ended June
30, 2006 to $9.7 million for the year ended June 30, 2007. This increase was
primarily due to increased demand for model DY174, a newer model of our single
color large format press. We believe the increase in demand for our single color
large format presses, particularly model DY174, was partially a result of
increased marketing activities.  We promoted model DY174 as a
complementary product to our multicolor (small and large format) presses at
exhibitions and trade shows we participated in fiscal 2007.





Multicolor small
format press.Revenue for our multicolor small format presses increased
by $8.9 million, or 103.5%, from $8.5 million for the year ended June 30, 2006
to $17.4 million for the year ended June 30, 2007. This increase was primarily
due to increased demand.  We believe the increase in demand for our
multicolor small format presses was partially a result of increased marketing
activities.  During fiscal 2007, we participated in 101 exhibitions
and trade shows, an increase of 52 exhibitions and trade shows when compared to
fiscal 2006. In addition, we performed more demonstrations of our multicolor
small format presses to our end-user customers, to showcase the quality of the
printed materials as well as the speed and ease of use, in fiscal 2007 when
compared to fiscal 2006.





Multicolor large
format press.Revenue for our
multicolor large format presses increased by $14.5 million, or 83.8%, from $17.2
million for the year ended June 30, 2006 to $31.7 million for the year ended
June 30, 2007. This increase was primarily due to increased
demand.  We believe the increase in demand for our multicolor large
format presses was partially a result of increased marketing
activities.  During fiscal 2007, we participated in 101 exhibitions
and trade shows, an increase of 52 exhibitions and trade shows when compared to
fiscal 2006. In addition, we performed more demonstrations of our multicolor
large format presses to our end-user customers, to showcase the quality of the
printed materials as well as the speed and ease of use, in fiscal 2007 when
compared to fiscal 2006.


58





Cost
of Revenue





Our cost
of revenue increased by $15.2 million, or 67.6%, from $22.5 million for the year
ended June 30, 2006 to $37.7 million for the year ended June 30, 2007. This
increase in our cost of revenue was primarily due to the increase in volume of
our products sold during this period, particularly the sale of our multicolor
(small and large format) presses. Most of our increases were from the purchase
of additional raw materials, such as steel and iron, as more materials were
needed to manufacture our multicolor (small and large format) presses. Our raw
material costs increased by $14.5 million, or 73.7%, from $19.7 million in
fiscal 2006 to $34.2 million in fiscal 2007. Also, our labor costs increased by
$0.5 million, or 25.3%, from $1.8 million in fiscal 2006 to $2.3 million in
fiscal 2007 primarily due to employees working additional hours to produce a
greater volume of products. Lastly, our depreciation expense had increased by
$0.2 million, or 51.2%, from $0.4 million in fiscal 2006 to $0.6 million in
fiscal 2007 mainly due to the purchase of new manufacturing equipment to be used
at Hunan Duoyuan.





As a
percentage of revenue, our cost of revenue increased from 51.4% in fiscal 2006
to 55.6% for fiscal 2007. The increase was mainly due to the reasons described
above.





Gross
Profit





As a
result of the factors above, our gross profit increased by $8.8 million, or
41.6%, from $21.3 million for the year ended June 30, 2006 to $30.1 million for
the year ended June 30, 2007. The increase in gross profit during this period
was due to the increased production and sale of our multicolor (small and large
format) presses, which have higher gross profits and profit marginsthan our single color
(small and large format) presses.





Gross
profit margin decreased by 4.2% from 48.6% in fiscal 2006 to 44.4% in fiscal
2007. This decrease in gross profit margin percentage was due to the overall
price increases of our raw materials, particularly steel and iron. Specifically,
the price of steel and iron each increased by 49.1% and 45.5% in fiscal 2007,
respectively, when compared to fiscal 2006.





Selling
Expenses





Selling
expenses increased by $4.0 million, or 108.6%, from $3.8 million for the year
ended June 30, 2006 to $7.8 million for the year ended June 30, 2007. This
increase was primarily due to an increase in the salaries and commissions of our
sales staff, our advertising expenses and participation in industry trade
conferences.





The
salaries and commissions paid to our sales staff increased by $1.1 million, or
78.9%, from $1.5 million in fiscal 2006 to $2.6 million in fiscal 2007. The
increase in salaries and commissions was primarily due to the hiring of 13 new
sales representatives during the year and bonuses awarded to our sales personnel
for meeting or exceeding their sales and performance targets.





Our
advertising expenses increased by $0.5 million, or 87.2%, from $0.6 million in
fiscal 2006 to $1.1 million in fiscal 2007. This increase was primarily due
to an increase in print advertising for our products in magazine and trade
journals, our increased participation in industry trade conferences and the
related costs of preparing exhibition and promotional materials.





As a
percentage of revenue, selling expenses increased by 2.9% from 8.6% for fiscal
2006 to 11.5% for fiscal 2007.  This increase was mainly due to the
reasons described above.





General
and Administrative Expenses





General
and administrative expenses increased by $0.2 million, or 6.3%, from $2.9
million for the year ended June 30, 2006 to $3.1 million for the year ended June
30, 2007.  This increase was primarily due to an increase in traveling
costs of our executive management, office supplies and reserve for doubtful
accounts.


59





Traveling
costs increased by $0.1 million from $0.1 million in fiscal 2006 to $0.2 million
in fiscal 2007. This increase was primarily due to increased traveling costs
incurred by members of our executive management team as they met with potential
investors in connection with the Private Placement.





General
office supplies increased by $0.1 million from $0.2 million in fiscal 2006 to
$0.3 million in fiscal 2007. This increase was primarily due to increased
purchases of ink cartridges for printers and copiers and other office
supplies.





The
reserve for doubtful accounts increased by $0.5 million from $0 in fiscal 2006
to $0.5 million in fiscal 2007. We increased our reserve for doubtful accounts
as we increased sales of our multicolor (small and large format) presses. For
multicolor (small and large format) presses, distributors are not required to
pay for the entire purchase price before shipment unlike for our single color
(small and large format) presses. Instead distributors for our multicolor (small
and large format) presses are required to pay 50% to 70% of the purchase price
before shipment, based on their preferred credit terms. Because of the increase
in sales of multicolor (small and large format) presses and the greater risk of
non-paymentand
incomplete or partial payment from our distributors, we increased our reserve
for doubtful accounts.





As a
percentage of revenue, general and administrative expenses decreased from 6.6%
to 4.5% for fiscal 2006 and fiscal 2007, respectively. This decrease was
primarily a result ofour revenue increasing
faster than our administrative expenses.





Research
and Development Expenses





Research
and development expenses remained constant at $1.0 million for the years ended
June 30, 2006 and 2007. Research
and development expenses in fiscal 2007 included the purchase of raw materials
in connection with our sample development and the research expenses related to
the design of a new single color small format press and a multicolor large
format press.





As a
percentage of revenue, research and development expenses decreased from 2.4% to
1.5% in fiscal 2006 and fiscal 2007, respectively. This decrease was mainly a
function of our revenue increasing faster than our research and development
expenses.





Income
from Operations





Income
from operations increased by $4.6 million, or 33.7%, from $13.6 million for the
year ended June 30, 2006 to $18.2 million for the year ended June 30,
2007.





The
increase was due to the increased sale of our multicolor (small and large
format) presses, which generate higher revenue than single color (small and
large format) presses.





Liquidated
Damages Expense





In
November 2006, we raised approximately $23.5 million by issuing shares to the
Private Placement Investors under the Private Placement.  We were
obligated to (1) register the resale of these shares with theSecurities
and Exchange Commission within 90 days of the closing of the Private Placement,
pursuant to the Registration Rights Agreement and (2) terminate certain related
party transactions. We failed to timely register for resale the private
placement shares and terminate the related party transactions, resulting in
liquidated damages. We recorded $2.1 million in liquidated damages and expenses
for the year ended June 30, 2007. We did not have any liquidated damages
expenses in the year ended June 30, 2006.





Other
Income (Expenses)





Other
expenses decreased by $218,240, or 91.3%, from $238,974 for the year ended June
30, 2006 to $20,734 for the year ended June 30, 2007.




60


We had
interest expense of $0.7 million from short-term borrowing in each of fiscal
2006 and fiscal 2007. In each of fiscal 2006 and fiscal 2007, interest expenses
were offset by non-operating rental income of $0.5 million. In addition, in
fiscal 2007, our interest expense was offset by $0.2 million of interest
income.





Minority
Interests





Minority
interests increased by $53,464, or 28.6%, from $187,120 for the year ended June
30, 2006 to $240,584 for the year ended June 30, 2007. This increase was
primarily due to the increase of net income of Langfang Duoyuan and Hunan
Duoyuan.





Provision
for Income Taxes





Provision
for income taxes increased by $1.5 million, or 592.0%, from $0.3 million for the
year ended June 30, 2006 to $1.8 million for the year ended June 30, 2007. This
increase in the provision for income taxes was primarily attributable to the
increase in our revenue by 55.0% over the same period. Our effective tax rates
for fiscal 2006 and fiscal 2007 were 0.0% and 16.5%, respectively.





Duoyuan
China was tax exempt prior to January 1, 2006. Duoyuan China’s income tax rate
from January 1, 2006 to June 30, 2007 was 16.5%.  Langfang Duoyuan was
tax exempt prior to January 1, 2008. Pursuant to the preferential tax treatment
granted by the local government, Hunan Duoyuan is tax exempted through calendar
year 2009.





Net
Income





As a
result of the foregoing, net income increased by $1.1 million, or 8.4%, from
$12.9 million for the year ended June 30, 2006 to $14.0 million for the year
ended June 30, 2007. Net income margin decreased to 20.6% for fiscal 2007 from
29.6% for fiscal 2006. This decrease was mainly attributed to the accrual of
liquidated damages and the related party transaction penalty, which together
were equivalent to over 3% of our revenue for fiscal 2007.





As a
percentage of revenue, net income decreased 8.9% from 29.5% for the year ended
June 30, 2006 to 20.6% for the year ended June 30, 2007.





Foreign
Currency Translation Adjustment





Foreign
currency exchange adjustment increased by $1.4 million, or 330.7%, from $0.4
million for the year ended June 30, 2006 to $1.8 million for the year ended June
30, 2007. The primary reason for the increase in the foreign currency exchange
adjustment was the Renminbi appreciation against the U.S. dollar. For fiscal
2007, our assets and liabilities are translated at a rate of RMB7.60 to $1.00,
and our operating results are translated at RMB7.81 to $1.00. For fiscal 2006,
our assets and liabilities were translated at a rate of RMB8.01 to $1.00, and
our operating results are translated at RMB8.06 to $1.00. Our equity accounts
are calculated on basis of historical exchange rates.





Liquidity
and Capital Resources





We relied
primarily on cash flows from operating activities and our bank loans for our
capital requirements for the years ended June 30, 2006, 2007 and 2008. Since we
have not encountered any difficulties in meeting our cash obligations to date,
we believe that cash flows from operating activities and our bank loans will be
sufficient to meet our presently anticipated cash needs for at least the next 12
months.





Our
long-term liquidity needs will relate primarily to working capital to pay our
suppliers, as well as any increases in manufacturing capacity or acquisitions of
third party businesses or licenses that we may seek in the future. We expect to
meet these requirements primarily throughrevolving short-term
bank borrowings, as well as our cash flows from operations, which we expect will
increase with the planned increase in our manufacturing capacity. We believe our
working capital is sufficient for these current requirements, though we may
require additional cash due to changing business conditions or other future
developments, including any investments or acquisitions we may decide to pursue.
If our existing cash is insufficient to meet our requirements, we may seek to
sell additional equity securities or increase our borrowing level. The actual
amount and timing of our future capital requirements may differ materially from
our estimate depending on our actual results of operations.




61




The
actual amount and timing of our future capital requirements may differ
materially from our estimate depending on our actual results of operations. As
of June 30, 2006, 2007 and 2008, we had cash of $3.7 million, $7.8 million and
$14.2 million, respectively. For a discussion of our current level of borrowing,
see “—Sources and Uses of Cash” below. There is no seasonal fluctuation to our
borrowing requirements.





Sources
and Uses of Cash





The
following table sets forth a summary of our cash flows for the periods
indicated:




Year ended June 30,2006
                                                            
                                                            2007
                                                            
                                                            2008Cash
      flows data:
                                                            
                                                            (in
      thousands)Cash
      flows provided by (used in) operating activities
                                                            
                                                            $
                                                            4,933
                                                            
                                                            
                                                            $
                                                            (4,200
                                                            )
                                                            
                                                            $
                                                            16,801Cash
      flows used in investing activities
                                                            
                                                            
                                                            (1,563
                                                            )
                                                            
                                                            
                                                            (11,081
                                                            )
                                                            
                                                            
                                                            (10,524
                                                            )Cash
      flows provided by (used in) financing activities
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            19,171
                                                            
                                                            
                                                            
                                                            (1,092
                                                            )





As of
June 30, 2008, we had four short term loans outstanding, in the aggregate amount
of $11.4 million with Bank of Agriculture, Chongwen branch, in China. Each loan
has an expiration date of no longer than one year. One loan in the amount of
$2.9 million has an interest rate of 6.732%. Two loans, in the aggregate amount
of $7.0 million, have an interest rate of 7.227%. The last loan, in the amount
of $1.5 million, has an interest rate of 8.57%. Interest on our loans is accrued
quarterly. We had a total of $12.3 million, $12.9 million and $11.4 million
outstanding on these loans as of June 30, 2006, 2007 and 2008, respectively. The
loans outstanding as of June 30, 2008 are secured by our plant and land use
rights for our Hunan Duoyuan facility. We plan to either repay the debt as it
matures or refinance the debt.  These loans were made under our
RMB100.0 million ($14.3 million) revolving credit line. We are allowed to
refinance these loans by entering into new short-term loan
agreements.





Banks in
China are subject to national banking regulations and may withdraw our credit
line if regulations change. If the Bank of Agriculturewere to withdraw our
credit line, we would use cash on hand or external financing to repay amounts
outstanding. We provide our financial information as well as other documentation
required by the Bank of Agriculture on a quarterly basis. We have not had any
indication from the Bank of Agriculture that it intends to not renew the
short-term loan agreements.





Operating
Activities





Net cash
provided by operating activities for the years ended June 30, 2006, 2007 and
2008 was generated from our net income of $12.9 million, $14.0 million and $26.5
million, respectively, as adjusted in each year for non-cash items such as
depreciation and amortization, and for changes in various assets and liabilities
such as accounts receivable, accounts payable and inventories.





Net cash
provided by operating activities increased from net operating cash used of $4.2
million in fiscal 2007 to net operating cash provided of $16.8 million in fiscal
2008. This increase was primarily due to an increase in net income from $14.0
million to $26.5 million over the same period. This increase in operating cash
flows was offset by (1) an increase in accounts receivable of $9.7 million, (2)
an increase in inventory of $1.6 million and (3) a decrease in accounts payable
of $1.3 million. The increase in accounts receivable was primarily due to a
marked increase in sales of our multicolor (small and large format) presses. In
addition, we selectively granted preferred credit terms to distributors who
distribute our multicolor (small and large format) presses, reducing the amount
of advanced payments due to us as a reward for meeting or exceeding their sales
targets in the prior year.  The increase in inventory was primarily
due to increase in production of multicolor (small and large format)
presses.  More raw materials are needed to produce multicolor (small
and large format) presses than single color (small and large format)
presses.  Accounts payable decreased because we shortened the payment
periods for several key suppliers.  We agreed to a shorter payment
schedule with these suppliers in order to obtain favorable pricing on raw
materials.




62




Net cash
provided by operating activities decreased from net operating cash provided of
$4.9 million in fiscal 2006 to net operating cash used of $4.2 million in fiscal
2007. This decrease was primarily due to (1) an increase in accounts receivable
of $9.5 million, (2) an increase in inventory of $2.4 million and (3) a decrease
in accounts payable of $10.9 million. The decrease in our operating cash flows
was partially offset by an increase in net income from $12.9 million to $14.0
million over the same period. The increase in accounts receivable was primarily
due to an increase in sales of our multicolor (small and large format) presses.
In addition, we selectively granted preferred credit terms to our distributors
who distribute our multicolor (small and large format) presses, reducing the
amount of advanced payments due to us as a reward for meeting or exceeding their
sales targets in the prior year.  The increase in inventory was
primarily due to increase in production of multicolor (small and large format)
presses and single color large format presses. Accounts payable decreased
because we shortened the payment periods for several key
suppliers.  We agreed to a shorter payment schedule with these
suppliers in order to obtain favorable pricing on raw materials.





Investing
Activities





Net cash
used in investing activities for the years ended June 30, 2006, 2007 and 2008
was $1.6 million, $11.1 million and $10.5 million, respectively.





Net cash
used in investing activities decreased $0.6 million, or 5.0%, from $11.1 million
in fiscal 2007 to $10.5 million in fiscal 2008. For fiscal 2008, our investing
activities includedimproving and upgrading
our production lines and manufacturing facilities at Langfang Duoyuan and/or
Hunan Duoyuan, and purchasing machinery and equipment to use at these
facilities.  Net cash used in investing activities also included
expenses related to the launching of a new post-press product, namely our
cold-set corrugated printing press.  Specifically, we expended (1)
$2.1 million to improveand upgrade our
production lines and manufacturing facilities at Langfang Duoyuan and Hunan
Duoyuan, (2) $1.5 million to purchase machinery and equipment, including a JY
sand mixer, which is used for heating and shaping parts for our press products,
and a double-post low temperature wax injector to improve the casting
manufacturing of our press parts, (3) $4.3 million for land clearing and site
preparation services for building our cold-set corrugated printing press factory
at Langfang Duoyuan and (4) $2.6 million as prepayment for new manufacturing
equipment to produce our cold-set corrugated printing presses.





Net cash
used in investing activities increased $9.5 million, or 609.0%, from $1.6
million in fiscal 2006 to $11.1 million in fiscal 2007. During fiscal 2007, we
used $0.3 million to make general building improvements at Langfang Duoyuan. In
addition, we used $10.8 million to purchase machinery and equipment, including a
grinding machine, gear grinding machine, universal gear measuring machine,
lathe, milling and drilling machine for use at Hunan Duoyuan.  We
purchased this equipment to manufacture our single color large format and
multicolor large format presses more efficiently.





During
fiscal 2006, we used $0.2 million to purchase an external cylindrical grinding
machine and internal grinder machine to replace the existing equipment at Hunan
Duoyuan. In addition, we used $0.1 million to upgrade our computer network at
Hunan Duoyuan. We also made a prepayment of $1.3 million to purchase a gear
grinding machine, milling machine, universal gear measuring machine and other
manufacturing equipment to use at Hunan Duoyuan. This equipment purchase was
completed during fiscal 2007.





Financing
Activities





Cash
provided by and used in our financing activities consists of borrowings from and
repayments to our short-term loans. Net cash used in financing activities was
$1.1 million for the year ended June 30, 2008, which was the result of our
payment for lines of credit exceeding proceeds by approximately $2.75 million
offsetting with a decrease in restricted cash of $2.1 million, compared to net
cash provided by financing activities of $19.2 million for the year ended June
30, 2007, which was the result of the Private Placement we completed in November
2006. We did not engage in any private placement fundraising activities in
fiscal 2008.




63




Net cash
provided by financing activities was $19.2 million in fiscal 2007, which was the
result of the Private Placement we completed in November 2006. Of this $19.2
million, we used $9.2 million for equipment purchase, $3.5 million for
technology renovation and $6.5 million for infrastructure renovation of our
manufacturing facilities at Langfang Duoyuan and Hunan Duoyuan. No other
financing was needed in fiscal 2006.





Contractual
Obligations





The
following table sets forth our contractual obligations as of June 30,
2008:




Obligations
                
                Total
                
                
                Less than 1
                    Year
                
                
                1-3 Years
                
                
                3-5
                    Years
                
                
                More than
                    5 Years(in
      thousands)Long
      Term Debt Obligations
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Capital
      Lease Obligations
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Operating
      Lease Obligations
                
                $
                82
                
                
                $
                82
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Purchase
      Obligations
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Repayment
      Obligations under Line of Credit
                
                $
                11,380
                
                
                $
                11,380
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Total
                
                $
                11,462
                
                
                $
                11,462
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -





Other
than the contractual obligations set forth above, we do not have any operating
lease obligations or repayment obligations under lines of credit.





Capital
Expenditures





Our
capital expenditures for the years ended June 30, 2006, 2007 and 2008 were $1.6
million, $11.1 million and $10.5 million, respectively. Our capital expenditures
for the years ended June 30, 2006 and 2007 were primarily for improving and
upgrading our production lines and manufacturing facilities at Langfang Duoyuan
and/or Hunan Duoyuan, and purchasing machinery and equipment to use at these
facilities.





For
fiscal 2008, our capital expenditures were primarily for improving and upgrading
our production lines and manufacturing facilities at Langfang Duoyuan and/or
Hunan Duoyuan, and purchase machinery and equipment to use at these facilities.
Our capital expenditures in fiscal 2008 also included expenses related to the
launching of a new post-press product, namely our cold-set corrugated printing
press.  Specifically, we expended (1) $2.1 million to improveand upgrade our
production lines and manufacturing facilities at Langfang Duoyuan and Hunan
Duoyuan, (2) $1.5 million to purchase machinery and equipment, including a JY
sand mixer, which is used for heating and shaping parts for our press products,
and a double-post low temperature wax injector to improve the casting
manufacturing of our press parts, (3) $4.3 million for land clearing and site
preparation services for building our cold-set corrugated printing press factory
at Langfang Duoyuan and (4) $2.6 million as prepayment for new manufacturing
equipment to produce our cold-set corrugated printing presses.





In fiscal
2009 and fiscal 2010, we intend to make additional capital expenditures of
approximately $25.0 million, in the aggregate, in connection with launching our
cold-set corrugated printing press business, which will include the purchase of
the necessary technology to produce our cold-set corrugated printing
presses.  In addition, during these periods, we also plan to make
capital expenditures of approximately $5.0 million, in the aggregate, to upgrade
our in-house production facilities for our key components at Hunan
Duoyuan.





Our
future capital requirements will depend on many factors including our rate of
revenue growth, the timing and extent of spending to support research and
development efforts, the expansion of manufacturing and sales activities and the
introduction of new products. In connection with the anticipated launch of our
cold-set corrugated printing press product line, we may enter into agreements or
letters of intent with respect to potential investments in, or acquisitions of,
complementary businesses, products or technologies, which may require us to seek
additional equity or debt financing. The sale of additional equity securities or
convertible debt securities would result in additional dilution to our
shareholders. Additional debt would result in increased interest expense and
could result in covenants that would restrict our operations. We have not made
arrangements to obtain additional financing and additional financing, if
required, may be unavailable in amounts or on terms acceptable to us, if at
all.




64


Off-Balance
Sheet Arrangements





We have
not entered into any off-balance sheet arrangements.





Recently
Issued Accounting Pronouncements





In
February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement No.
115,” or SFAS 159. SFAS 159 permits companies to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. The objective of SFAS 159 is to
provide opportunities to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
hedge accounting provisions. SFAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. SFAS 159 is effective as of the beginning of the fiscal year that
begins after November 15, 2007. We adopted SFAS No. 159 on January 1, 2008. We
chose not to elect the option to measure the fair value of eligible financial
assets and liabilities.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51,” or SFAS 160, which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated. SFAS 160 also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
160 is effective for fiscal years beginning after December 15, 2008. We have not
determined the effect that the application of SFAS 160 will have on our
consolidated financial statements.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities—An Amendment of SFAS No. 133,” or SFAS 161. SFAS 161
seeks to improve financial reporting for derivative instruments and hedging
activities by requiring enhanced disclosures regarding the impact on financial
position, financial performance and cash flows. To achieve this increased
transparency, SFAS 161 requires (1) the disclosure of the fair value of
derivative instruments and gains and losses in a tabular format, (2) the
disclosure of derivative features that are credit risk-related and (3)
cross-referencing within the footnotes. SFAS 161 is effective on January 1,
2009. We are in the process of evaluating the new disclosure requirements under
SFAS 161.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles,” or SFAS 162. SFAS 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with GAAP for nongovernmental entities. SFAS 162 is
effective 60 days following the Securities and Exchange Commission’s approval of
the Public Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles.” We do not expect the adoption of this statement to have a material
impact on our results of operations, financial position or cash
flows.





In June
2008, the FASB issued EITF 07-5 “Determining whether an Instrument (or Embedded
Feature) is indexed to an Entity’s Own Stock,” or EITF No. 07-5. This Issue is
effective for financial statements issued for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years. Early
application is not permitted. Paragraph 11(a) of SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” or SFAS 133, specifies that a
contract that would otherwise meet the definition of a derivative but is both
(a) indexed to our own stock and (b) classified as stockholders’ equity in
the statement of financial position would not be considered a derivative
financial instrument. EITF No.07-5 provides a new two-step model to be applied
in determining whether a financial instrument or an embedded feature is indexed
to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph
11(a) scope exception. This standard triggers liability accounting on all
options and warrants exercisable at strike prices denominated in any currency
other than the functional currency in China (Renminbi). We are currently
evaluating the impact of adoption of EITF No. 07-5 on our consolidated financial
statements.




65




Seasonality





Typically,
we recognize lower revenue during our third fiscal quarter from January to March
each year due to the Chinese Lunar New Year holiday, when our factories close
for one week. Our distributors, who are all in China, are also on holiday during
this time of the year. Typically, our second fiscal quarter, from October to
December each year, is our strongest quarter because most Chinese businesses
complete planned purchases of capital goods during this period.





Inflation




Inflationary
factors, such as increases in the cost of our products and overhead costs, could
impair our operating results. Although we do not believe that inflation has had
a material impact on our financial position or results of operations to date, a
high rate of inflation in the future may have an adverse effect on our ability
to maintain current levels of gross profit and selling, general and
administrative expenses as a percentage of revenue if the selling prices of our
products do not increase with these increased costs.





Other
Events





Reverse
Stock Split





Effective
as of July 17, 2007, our Board of Directors approved and we effected a 1 for
2.68189924 reverse split of our then issued and outstanding shares. All share
and per share prices used in our financial statements and notes thereto have
been retroactively restated to reflect this reverse stock split.





We had
67,047,481 pre-split shares issued and outstanding prior to the reverse stock
split and 25,000,050 shares issued and outstanding after the reverse stock
split.





Item 7A.
              Quantitative and Qualitative
      Disclosures About Market
Risk.





Exchange
Rate Sensitivity





Although
we maintain our books and records in Renminbi, the functional currency of China,
we use the U.S. dollar as the reporting currency of our financial statements.
The exchange rate between the U.S. dollar and the Renminbi is subject to the
foreign exchange quotation publicized by the People’s Bank of China daily.
Results of operations and cash flows are translated at average exchange rates
during the period, assets and liabilities are translated at the unified exchange
rate as quoted by the People’s Bank of China at the end of the period and equity
is translated at historical exchange rates.





Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than Renminbi are included in the results of
operations as incurred. Gains and losses from foreign currency transactions are
included in the results of operations. There were no material transaction gains
or losses for the year ended June 30, 2008.





Although
the conversion of the Renminbi is highly regulated in China, the value of the
Renminbi against the value of the U.S. dollar (or any other currency) may
fluctuate and be affected by, among other things, changes in China’s political
and economic conditions. Under the currency policy in effect in China today, the
Renminbi is permitted to fluctuate in value within a narrow band against a
basket of certain foreign currencies. China is currently under significant
international pressures to liberalize this currency policy, and if such
liberalization occur, the value of the Renminbi could appreciate or depreciate
against the U.S. dollar. The exchange rate of the Renminbi as of June 30, 2008
was RMB6.854 to $1.00. This floating exchange rate, and any appreciation of the
Renminbi that may result from such rate, could have various adverse effects on
our business, as described in “Item 1A. Risk Factors—Risks Related to Doing
Business in China—Government control of currency conversion and exchange rate
fluctuations may materially and adversely affect our business.”




66


Our
exposure to foreign exchange risk primarily relates to cash and cash equivalents
denominated in U.S. dollars as a result of our past issuance of common shares
through private placements. For example, to the extent that we need to convert
U.S. dollars received in the private placements into Renminbi for our
operations, appreciation of the Renminbi against the U.S. dollar would have an
adverse effect on the Renminbi amount that we receive from the conversion.
Conversely, if we decide to convert our Renminbi into U.S. dollars for the
purpose of making dividend payments on our common shares or for other business
purposes, appreciation of the U.S. dollar against the Renminbi would have a
negative effect on the U.S. dollar amount available to us. In addition,
fluctuations in the exchange rate would affect our financial results reported in
U.S. dollar terms without giving effect to any underlying change in our business
or results of operations.





At June
30, 2008, our outstanding financial instruments with foreign currency exchange
rate risk exposure had an aggregate fair value of approximately $23.5 million
(including our non-U.S. dollar-denominated fixed rate debt). The potential
increase in the fair values of these instruments resulting from a 10% adverse
change in quoted foreign currency exchange rates would be approximately $2.4
million at June 30, 2008. We have not entered into any foreign currency
instruments for trading purposes at June 30, 2008.





We
currently do not hedge our exposure to fluctuations in the Renminbi to U.S.
dollar exchange rate. In the future, we may choose to reduce our exposures
through financial instruments (hedges) that provide offsets or limits to
our exposures when considered appropriate.





Exchange
Controls





Chinese
law allows enterprises owned by foreign investors to remit their profits,
dividends and bonuses earned in China to other countries, and the remittance
does not require prior approval by the SAFE regulations formerly required
extensive documentation and reporting, some of which was burdensome and delayed
payments. If there is a return to payment restrictions and reporting, the
ability of a Chinese company to attract investors will be reduced. Also, current
investors may not be able to obtain the profits of the business which they own
as a result of other restrictions that the Chinese government may impose.
Relevant Chinese law and regulation permit payment of dividends only from
retained earnings, if any, determined in accordance with Chinese accounting
standards and regulations. It is possible that the Chinese tax authorities may
require changes in our reported income that would limit our ability to pay
dividends and other distributions. Chinese law requires companies to set aside a
portion of net income to fund certain reserves which amounts are to
distributable as dividends. These rules and possible changes could restrict a
company in China from repatriating funds to us and our shareholders as
dividends.




Interest
Rate Risk




We are
exposed to interest rate risk due primarily to our short-term loans. As of June
30, 2008, we had RMB78.0 million ($11.4 million) outstanding on our bank lines
of credit which are subject to interest rate change risk. Although the interest
rates on our short-term loansare fixed during their
respective terms, the terms are typically 12 months
or less and interest rates are subject to change upon renewal. The interest
rates on our short-term loansare determined by
reference to the benchmark interest rates set by the People’s Bank of China, or
the PBOC. Since May 28, 2006, the PBOC has increased the benchmark interest rate
of Renminbi bank loans with a term of 6 to 12 months three times and on each
occasion by approximately 0.27%. As a result, from 2006 to 2007, the benchmark
interest rate for these Renminbi bank loansincreased from 5.85% to
7.29% and the interest rate applicable to us increased from 6.14% to 7.23% over
the same period. Any future increase in the PBOC’s benchmark interest rate will
result in an increase in our interest expenses.





As of
June 30, 2008, our short term loans with exposure to interest rate risk had an
aggregate fair value of approximately $11.4 million. The potential change in
fair market value for these short term loans from an adverse 10% change in
quoted interest rates across all maturities, often referred to as a parallel
shift in the yield curve, would be approximately $1.1million at June 30,
2008. We have not hedged our exposure to interest rate risk and have not entered
into any interest rate sensitive instruments for trading purposes at June 30,
2008. We monitor interest rates in conjunction with our cash requirements to
determine the appropriate level of debt balances relative to other sources of
funds.




67




Item 8.
              Financial Statements and
      Supplementary Data.





The
information required by this item is contained in the consolidated financial
statements listed in Item 15(a) (1) under the caption “Consolidated Financial
Statements.”





Item 9.
              Changes in and Disagreements with
      Accountants on Accounting and Financial
  Disclosure.





None.


Item 9A.
              Controls and
      Procedures.




Evaluation
of Disclosure Controls and Procedures





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our periodic reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms and that such information
is accumulated and communicated to our management, including our chief executive
officer and interim chief financial officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, our management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and our
management necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.





As of
June 30, 2008, the end of the fiscal year covered by this Annual Report, we
carried out an evaluation, under the supervision and with the participation of
our management, including our chief executive officer and our interim chief
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on the foregoing, our chief executive
officer and interim chief financial officer concluded that because of the
material weakness in internal control over financial reporting described below,
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) were not effective as of June 30,
2008.





Management’s
Annual Report on Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, which is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with U.S. GAAP. 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 U.S. GAAP and that
our receipts and expenditures are being made only in accordance with
authorizations of our management and directors 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.





Any
system of internal control, no matter how well designed, has inherent
limitations, including the possibility that a control can be circumvented or
overridden and misstatements due to error or fraud may occur and not be detected
in a timely manner. Also, because of changes in conditions, internal control
effectiveness may vary over time. Accordingly, even an effective system of
internal control will provide only reasonable assurance with respect to
financial statement preparation.





68




A
material weakness (within the meaning of Public Company Accounting Oversight
Board Auditing Standard No. 5) is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of our annual or interim
financial statements will not be prevented or detected on a timely basis. A
significant deficiency is a deficiency, or a combination of deficiencies, in
internal control over financial reporting that is less severe than a material
weakness, yet important enough to merit attention by those responsible for
oversight of our financial reporting.





Our
management assessed the effectiveness of our internal control over financial
reporting as of June 30, 2008. In making this assessment, our management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in "Internal Control-Integrated Framework." During its
assessment of the effectiveness of internal control over financial reporting as
of June 30, 2008, our management identified material weaknesses related to the
following:





1.
            Accounting
      and Finance Personnel Weaknesses - We lack accounting and finance
      personnel with adequate knowledge, skills and training with respect to
      financial reporting and preparation of financial statements under U.S.
      GAAP. Our accounting department needs to improve its knowledge of U.S.
      GAAP by increasing training and supervision of its current staff and/or
      hiring knowledgeable accounting personnel. A failure to implement this
      change may have a material impact on the application of U.S. GAAP to our
      overall financial reporting and accounting, including sales (including
      rebates), cost of revenue, accounts receivable, payables and expenses,
      inventory and other material
accounts.





2.
            Lack of
      Internal Audit Function - We lack sufficient personnel to perform
      our internal audit functions effectively. In addition, the scope and
      effectiveness goal of internal audit function have not been identified.
      Due to this weakness, we may be ineffective in timely prevention or
      detection of errors in the recording of accounting transactions, which may
      have a material impact on our financial
  statements.





In light
of the foregoing material weaknesses, our management has concluded that our
internal control over financial reporting was not effective as of June 30, 2008.
Our ineffective internal control over financial reporting could result in
material misstatements in our annual or interim financial statements that would
not be prevented or detected. However, nothing has come to the attention of
management that causes them to believe that any material inaccuracies or errors
exist in our financial statements as of June 30, 2008. The reportable conditions
and other areas of our internal control over financial reporting identified by
us as needing improvement have not resulted in a material restatement of our
financial statements. We are not aware of any instance where such reportable
conditions or other identified areas of weakness have resulted in a material
misstatement or omission in any report we have filed with or submitted to the
Securities and Exchange Commission.





Remediation
of Material Weaknesses in Internal Control over Financial Reporting





Our
management has identified the steps necessary to address the material weaknesses
described above, as follows:





1.
            We
      are in the process of hiring a permanent Chief Financial Officer with
      knowledge of and experience with U.S. GAAP. In addition, we intend to
      expand training and supervision of our accounting staff to ensure timely
      and accurate recording of financial transactions, reconciliation of
      certain material accounts and preparation of financial statements in
      accordance with U.S. GAAP. Furthermore, we are working to establish
      policies and procedures regarding timing and method of seeking outside
      counsel with relevant expertise to advise on transactions with complex and
      non-routine accounting and legal
issues.





2.
            We
      are evaluating whether we have sufficient resources and qualified
      personnel to develop an effective internal audit function. Our management
      is also examining the scope and timing of its work. Specifically, internal
      audit functions will be instituted in key financial areas as well as key
      non-financial areas which can have a material impact on our financial
      statements.





We
believe that the foregoing steps will remediate the material weaknesses
identified above, and we will continue to monitor the effectiveness of these
steps and make any changes that our management deems appropriate.




69




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of compliance with the
policies and procedures may deteriorate.





Auditor
Attestation





This
Annual Report does not include an attestation of our registered public
accounting firm regarding internal control over financial reporting. Our
management’s report on internal control 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 our management’s report
in this Annual Report.





Changes
In Internal Control Over Financial Reporting





There
were no changes in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended
June 30, 2008 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.





Item 9B.
              Other
      Information.





None.


70


PART
III




Item 10.
              Directors, Executive Officers and
      Corporate Governance.





The
following table sets forth information regarding the members of our board of
directors and executive officers and other significant employees as of June 30,
2008. In connection with the closing of the Equity Transfer, our executive
officers and directors at that time resigned and were completely replaced with
the executive officers and directors of
Duoyuan China. There are no family relationships between and among the
directors and executive officers.





Also
provided herein are brief descriptions of the business experience of each
director and executive officer during the past five years and an indication of
directorships held by each director in other companies subject to the reporting
requirements under the Federal securities laws. The business address of each of
our directors and executive officers is No. 3 Jinyuan Road, Daxing Industrial
Development Zone, Beijing, People’s Republic of China 102600.





Name
                
                Age
                
                PositionDirectorsWenhua
      Guo
                
                46
                
                Chairman
      of Board of Directors, Chief Executive OfficerXiqing
      Diao
                
                38
                
                Director,
      Chief Operating OfficerLianjun
      Cai
                
                58
                
                DirectorChristopher
      Patrick Holbert
                
                37
                
                DirectorPunan
      Xie
                
                72
                
                DirectorOfficersGene
      Michael Bennett
                
                60
                
                Former
      Chief Financial OfficerWenzhong
      Liu
                
                40
                
                Vice
      President of Sales and MarketingWilliam
      Milewski
                
                45
                
                Former
      Chief Financial OfficerBaiyun
      Sun
                
                53
                
                Interim
      Chief Financial Officer and ControllerYubao
      Wei
                
                41
                
                Chief
      Technology Officer




Our
Directors





Wenhua Guo,
Chairman of the Board of Directors and Chief Executive Officer. Mr. Guo
is the founder of Duoyuan China and has served as the chairman of our board of
directors and chief executive officer since the closing of the Equity Transfer
on October 6, 2006. Before Mr. Guo founded Duoyuan China, he was a physics
teacher at Beijing Chemical Institute from 1983 to 1989. Mr. Guo is also
chairman of Duoyuan Electric Group and the founder, chairman and chief executive
officer of Duoyuan Global Water Inc. Mr. Guo received a bachelor’s degree in
physics from Beijing Normal University, China.




Lianjun Cai,
Director.Mr. Cai has served as
our director and chairman of our compensation committee of the board of
directors since April 2007. Mr. Cai served as director of Industrial Committee
of Daxing Industrial Development Zone in Beijing from 2001 to 2004. From 1992 to
2001, he served as general manager of the Management Committee of Daxing
Industrial Development Zone. Mr. Cai received a bachelor’s degree in economy
management from Beijing Communist Party Committee School, China.





Xiqing Diao,
Director and Chief Operating Officer.  Mr. Diao has served as our
director and chief operating officer since November 2005. He served as vice
general manager of Duoyuan Water from August to November 2005, assistant general
manager of Duoyuan Electric (Tianjin) Auto Water Pump Co., Ltd. from January to
July 2005, and general manager of Operations of Duoyuan Electric Group from
January 2003 to December 2004. From May 2001 to December 2002, Mr. Diao served
as general manager of No. 1 Division of Duoyuan Water.He was also an
ISO9001:2000 Internal Auditor, ISO 14000 Internal Auditor and ISO14000 Internal
Auditor in 2004. Mr. Diao received a bachelor’s degree in mechanics from Tianjin
Textile Technology Institute, China.




71


Christopher
Patrick Holbert, Director.  Mr. Holbert has
served as our director since July 2007. Since July 2007, he has served as the
chairman of our audit committee and a member of our compensation and nominating
committees. Since September 2008, he has served as a member of the board of
directors of Duoyuan Global Water Inc. Since August 2008, Mr. Holbert has served
as vice president of Vision China Media Inc. From July 2006 to October 2008, he
served as the chief financial officer of Techfaith Wireless Technology Limited.
From 2005 to 2006, he served as the director of finance for CDC Corporation.
From 2004 to 2005, he served as director of Sarbanes-Oxley Act of 2002
compliance at Chinadotcom Corporation, the predecessor of CDC Corporation. From
2003 to 2004, he served as vice president of finance of Newpalm China, a
subsidiary of Chinadotcom Corporation. From 2001 to 2003, he was the founding
partner of Expat-CFO Services Limited, a Shanghai-based financial consultancy
providing advice on doing business in China. Mr. Holbert has also served as an
auditor and consultant with Deloitte Touche Tohmatsu. He is a certified public
accountant and has 12 years of experience in the field of accounting and
financial management. Mr. Holbert received a bachelor’s degree in science
with a concentration in accounting from Bowie State University, United
States.





Punan Xie,
Director.
Mr. Xie has served as our director and chairman of our nominatingcommittee since April
2007. Mr. Xie taught at Beijing Institute of Printing from 1978 to 2001 and was
the section chief of the Research Department, director of faculty of the
Printing Faculty and assistant tothe president of the
Beijing Institute of Printing from 1985 to 1987. Mr. Xie served as vice
principal of Beijing Institute of Printing from 1987 to 2001. He served as
director of the Program of Print Engineering of the National Higher Education
Committee, vice director of the National Standard Committee of Printing
Equipment, and vice director of Educational Committee of China Printing
Technical Association. Mr. Xie was a technical committee member of China
Printing Equipment and Appliance Association, counselor of the expert
consultative committee of the Beijing government, valuator for the National
Science and Technology Achievement Award and national expert of evaluation of
light-industry products and printing equipment import. Mr. Xie received a
bachelor of science degree in printing mechanism from the Moscow Institute of
Printing, Russia.





Our
Executive Officers





Gene Michael
Bennett, Former Chief Financial Officer.  Mr. Bennett served as
our chief financial officer from July 18, 2007 to December 20, 2007. Mr. Bennett
had served as our director and our audit committee chairman between April 2007
and July 2007. He resigned from our board of directors on July 18, 2007. Mr.
Bennett was a partner at Nexis Investment Consulting Corporation (Beijing)
between 2004 and 2007, where he assisted Chinese companies to raise funding and
assisted U.S. companies to find appropriate mergers and acquisitions candidates
and investment opportunities. He was a partner at ProCFO from 2000 to 2004,
where he provided temporary chief financial officer services to companies with
such needs. Mr. Bennett received a bachelor’s degree in finance and accounting
and a master of business administration degree from Michigan State University,
United States.





Wenzhong Liu,
Vice President of Sales and Marketing.Mr. Liu has served as
our vice president of salesand marketing since
November 2005. He served as assistant general manager of sales at Duoyuan
China from July to October 2005, interim general manager of sales at Duoyuan
China from November 2004 to June 2005, and sales representative at Duoyuan China
from January 2001 to October 2004. Mr. Liu received a bachelor’s degree in
science from Luoyang Engineering Institute, China.





William Milewski,
Former Chief Financial Officer.Mr. Milewski served as
our chief financial officer from


March 1,
2008 to May 21, 2008. Prior to joining us, he served as chief financial officer
of Foster Partners Asia between 2006 and 2008. Prior to serving at Foster
Partners Asia, he served as co-founder and chief financial officer of Bbmao.com
Co. Ltd., China’s first metasearch engine provider. From 2003 to 2005, Mr.
Milewski served as chief financial officer of POINTek, Inc., an optical
components manufacturer.  Mr. Milewski received a bachelor’s degree in
economics and French from George Washington University, United States, and a
master of business administration degree from the University of Hartford, United
States.





Baiyun Sun,
Interim Chief Financial Officer and Controller. Ms. Sun has served as
our interim chief financial officer since May 21, 2008. As of June 30, 2008, she
is also our controller. Previously, she served as our interim chief financial
officer from December 20, 2007 to March 1, 2008. Prior to that, she was our
chief financial officer from October 6, 2006 to July 18, 2007, our director and
vice president between June 2001 and April 2007 and chief accountant of Duoyuan
Electric Group from January 1994 to May 2001. Ms. Sun received a bachelor’s
degree in accounting from Beijing Finance and Commerce Institute,
China.




72




Yubao Wei, Chief
Technology Officer.Mr. Wei has served as
our chief technology officer since December 2007. He served as the general
manager of production of Duoyuan China from July 2004 to December 2007 and as
general manager of technology of Duoyuan China from July 2003 to June 2004. Mr.
Wei received a master’s degree in engineering from Tsinghua University,
China.




Board
of Directors and Committees




Board
of Directors




Our board
of directors consists of five directors, namely (1) Wenhua Guo, (2) Xiqing Diao,
(3) Lianjun Cai, (4) Christopher Patrick Holbert and (5) Punan Xie. Our
directors hold office until our annual meeting of shareholders, where their
successor will be duly elected and qualified, or until the directors’ death,
resignation or removal, whichever is earlier. We have not held an annual meeting
of shareholders since we acquired Duoyuan China in 2006. See “Item 1A. Risk
Factors—Risks Related to Our Business—We have not held any annual shareholder
meetings since we acquired Duoyuan China in 2006, and as a result, our
shareholders have limited ability to exercise their voting rights.”




Our board
of directors is comprised of a majority of “independent” directors, as such term
is defined in the NASDAQ rules and Rule 10A-3 of the Exchange Act. Our three
independent directors are Messrs. Cai, Holbert and  Xie. The remaining
two directors, Messrs. Guo and Diao also serve as our executive officers and do
not qualify as independent directors.




Our board
of directors has three committees, namely our (1) audit committee, (2)
compensation committee and (3) nominating committee. All of our committees are
comprised of independent directors.




Compensation
Committee




Our
compensation committee is comprised of Lianjun Cai, Punan Xie and Christopher
Patrick Holbert. Mr. Cai serves as the chairman of our compensation committee.
Our compensation committee operates under a charter adopted by our board of
directors. The purpose of our compensation committee is to determine
compensation of our executive officers and directors and oversee our
compensation policies. The primary responsibilities of our compensation
committee include (1) determining the amount and form of executive compensation,
(2) administering our equity-based compensation plans, if one is adopted, (3)
reviewing and evaluating executive performances and (4) establishing and
reviewing our general compensation policies.





Nominating
Committee





Our
nominating committee is comprised of Punan Xie, Lianjun Cai and Christopher
Patrick Holbert. Mr. Xie serves as the chairman of our nominating committee. Our
nominating committee operates under a charter adopted by our board of directors.
The purpose of our nominating committee is to identify director candidates,
recommend director nominees, and oversee our corporate governance. The primary
responsibilities of our nominating committee include (1) identifying and
evaluating director candidates, (2) recommending committee members and (3)
conducting annual performance evaluation of our board of directors.




Audit
Committee




Our audit
committee, established in accordance with Section 3(a)(58)(A) of the
Exchange Act, is comprised of Christopher Patrick Holbert, Lianjun Cai and Punan
Xie. Mr. Holbert serves as the chairman of our audit committee. The charter of
our audit committee provides that its members must meet the independence
requirements under the NASDAQ rules and as well as those imposed by Rule 10A-3
of the Exchange Act. Our board of directors determined that each member of our
audit committee meets the foregoing independence requirements. Our board of
directors has determined that Mr. Holbert is an “audit committee financial
expert,” as such term is defined by the Securities and Exchange
Commission.




73




Our audit
committee operates under a charter adopted by our board of directors. The
purpose of our audit committee is to oversee our accounting and financial
reporting processes and audits of our financial statements. The primary
responsibilities of our audit committee include (1) appointing and providing for
the compensation of the independent auditor, (2) overseeing and evaluating the
independent auditor’s work, (3) overseeing our internal control procedures over
financial reporting and (4) approving all professional services to be provided
to us by our independent auditor.




Code
of Ethics




We have
not adopted a code of ethics applicable to our chief executive officer, chief
financial officer, controller or persons performing similar functions. We are in
the process of designing a code of ethics and will provide the required
disclosure once it is completed.




Involvement
in Certain Legal Proceedings





To the
best of our knowledge, during the past five years, none of our directors or
executive officers has been involved with any of the following events (1) any
bankruptcy petition filed by or against any business of which such person was a
general partner or executive officer either at the time of the bankruptcy or
within two years prior to that time, (2) any conviction in a criminal proceeding
or being subject to a pending criminal proceeding (excluding traffic violations
and other minor offenses), (3) any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his/her involvement in any type of business, securities or banking activities,
or (4) any determination by a court of competent jurisdiction (in a civil
action), the Securities and Exchange Commission or the Commodities Futures
Trading Commission that has not been reversed, suspended or vacated,
regarding violation of a federal or state securities or commodities
law.




Item 11.
              Executive
      Compensation.





Compensation
Discussion and Analysis





During
the year ended June 30, 2008, our compensation committee was responsible for
setting our compensation policies, approving the amount and form of executive
compensation and administering our benefit plans. The primary objectives of our
compensation committee with respect to our executive compensation program were
to attract and retain highly talented and dedicated executives and to align
executives’ incentives with the creation of shareholder value. As of June 30,
2008, our compensation committee consisted of Lianjun Cai, Christopher Patrick
Holbert and Punan Xie. Mr. Cai served as the chairman of our compensation
committee.





During
fiscal 2008, our named executive officers consisted of Wenhua Guo, our chief
executive officer, Baiyun Sun, our interim chief financial officer and
controller, Gene Michael Bennett, former chief financial officer, and William
Milewski, former chief financial officer.





In determining the amounts of
compensation paid to our named executive officers during fiscal 2008, our
compensation committee generally reviewed and considered the level of
compensation paid to comparable executives at two publicly listed companies in
China: Beiren Printing Machinery Holdings Limited, or Beiren, and Shanghai
Electric Printing & Package Machinery Co., Ltd., or Shanghai Electric. Our
compensation committee chose these companies because they are Chinese companies,
operating in the offset printing industry that are of similar size and in a
similar stage of development as us. Our compensation committee did not
“benchmark” or specifically target base salary or annual discretionary incentive
compensation based on this data. Instead, our compensation committee reviewed
the publicly-available compensation information paid by these companies to their
named executive officers in order to obtain a general understanding of Beiren
and Shanghai Electric’s current compensation practices and
levels.




74




Our
compensation committee subjectively considered each officer’s general
performance for the year, our overall performance as compared to Beiren and
Shanghai Electric and our performance as compared to our internal strategic
business goals for the year. Our compensation committee considers the local
compensation practices of China.For
fiscal 2008, our compensation committee did not, and has not historically,
retained a compensation consultant to review our executive compensation
program.





Elements
of Compensation





During the year ended June 30, 2008,
our executive compensation consisted of an annual base salary and an annual
discretionary cash bonus program. We did not grant, and have not historically
granted, any stock, stock option or other types of equity compensation. We may
implement a long-term equity incentive plan in the future. However, due to the
adverse impact of Chinese tax laws, we currently do not consider these types of
awards desirable.





Base
Salary





Each of
our named executive officers’ base salary is supplemented by a position subsidy
and a household subsidy, which together represent a “living allowance.” Although
these subsidies are not required under Chinese law, they are common practice for
Chinese companies when compensating their executives, and our compensation
committee noted that both Beiren and Shanghai Electric paid these subsidies.
Consistent with our historic practice, our compensation committee utilized a
75%, 15% and 10% ratio for base salary, position subsidy and household subsidy,
respectively, during the year ended June 30, 2008. Based on its review of the
comparative data, our compensation committee believed that this ratio to be
consistent with the ratios used by other Chinese companies, including Beiren and
Shanghai Electric.





The table
below sets forth the base salary, position subsidy and household subsidy paid to
our named executive officers for the year ended June 30, 2008:





Name
      and Position
                    
                    Base Salary
                    
                    
                    Position Subsidy
                    
                    
                    Household Subsidy
                    
                    
                    TotalWenhua
      Guo
                      Chairman
      and ChiefExecutive
      Officer
                    
                    $
                    24,000
                    
                    
                    $
                    5,620
                    
                    
                    $
                    2,400
                    
                    
                    $
                    32,020Baiyun
      Sun(1)
                      Interim
      ChiefFinancial
      Officer and Controller
                    
                    $
                    24,000
                    
                    
                    $
                    5,620
                    
                    
                    $
                    2,400
                    
                    
                    $
                    32,020Gene
      Michael Bennett(2)
                      Former
      ChiefFinancial
      Officer
                    
                    $
                    111,100
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    111,100William
      Milewski(3)
                      Former
      ChiefFinancial
      Officer
                    
                    $
                    50,667
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    50,667







(1)
                  Ms.
      Sun served as our interim chief financial officer upon the resignation of
      Mr. Bennett on December 20, 2007 until we appointed Mr. Milewski as our
      chief financial officer on March 1, 2008. She has been serving as our
      interim chief financial officer and controller since Mr. Milewski resigned
      on May 21, 2008.


(2)
                  Mr.
      Bennett served as our chief financial officer between July 18, 2007 and
      December 20, 2007. The total salary paid to Mr. Bennett during fiscal 2008
      was $81,100. After Mr. Bennett resigned as our chief financial officer on
      December 20, 2007, he continued to serve us as an independent outside
      consultant for six months for which we paid him $5,000 per month for a
      total of $30,000.


(3)
                  Mr.
      Milewski served as our chief financial officer between March 1, 2008 and
      May 21, 2008 and held no other position with us during fiscal
      2008.





Wenhua
Guo and Baiyun Sun





The base
salaries of Wenhua Guo and Baiyun Sun for the year ended June 30, 2008 were
primarily determined by our compensation committee’s review of (1) the base
salaries paid by Beiren and Shanghai Electric and (2) our internal annual base
salary level for each category of executive officers, supplemented by the
position subsidy and the household subsidy.




75




Because
Mr. Guo served as both the chairman of our board and chief executive officer,
our compensation committee reviewed the compensation paid by each of Beiren and
Shanghai Electric to their chairman and/or general managers during fiscal 2007.
In its review, our compensation committee noted that Beiren’s chairman was paid
approximately $94,000 in annual compensation and their general manager was paid
approximately $69,100 in annual compensation. Our compensation committee also
noted that Shanghai Electric reported paying its executive general manager
approximately $86,300 in annual compensation for fiscal 2007. Upon review of
this information, our compensation committee increased Mr. Guo’s base salary
from $25,615 in fiscal 2007to $32,020 in fiscal
2008, a 25% increase.





Similarly,
our compensation committee noted that the reported fiscal 2007 annual
compensation for Beiren’s financial manager was approximately $51,000 and it was
$72,000 for the financial manager of Shanghai Electric. Upon review of this
information, our compensation committee increased Ms. Sun’s base salary from
$25,615 in fiscal 2007 to $32,020 in fiscal 2008, a 25% increase. During fiscal
2008, Ms. Sun served as interim chief financial officer from July 1, 2007 until
July 17, 2007, December 20, 2007 to February 28, 2008, and May 21, 2008 through
the end of fiscal 2008.





Former
Chief Financial Officers





Gene
Michael Bennett served as our chief financial officer between July 18, 2007 and
December 20, 2007. William Milewski served as our chief financial officer
between March 1, 2008 and May 21, 2008. When determining the base salaries for
each of these two individuals, our compensation committee adopted a different
methodology than the one used for our other executives because these two
individuals had prior work experience outside China and were familiar with U.S.
GAAP, a key consideration in their hire. For each officer, our compensation
committee reviewed and considered publicly-available salary information for
chief financial officers of several Chinese companies listed on a U.S. stock
exchange, including the following:





eLong,
      Inc.
                  Fuwei
      Films (Holdings) Co., Ltd.Sohu.com
      Inc.
                  Trina
      Solar Ltd.Sina.com,
      Inc.
                  Canadian
      Solar Inc.AsiaInfo
      Holdings, Inc.
                  Home
      Inns & Hotels Management Inc.WuXi
      PharmaTech (Cayman) Inc.
                  Mindray
      Medical International Ltd.E-House
      (China) Holdings Ltd.
                  New
      Oriental Education & Technology Group, Inc.Perfect
      World Co., Ltd.
                  Verigy
      Ltd.Spreadtrum
      Communications, Inc.
                  Himax
      Technologies, Inc.Yingli
      Green Energy Holding Co. Ltd.
                  China
      GrenTech Corp. Ltd.LDK
      Solar Hi-tech Co., Ltd.
                  Suntech
      Power Holdings Co. Ltd.China
      Sunergy Co., Ltd.
                  Actions
      Semiconductor Co., Ltd.Acorn
      International, Inc.
                  Vimicro
      International Corp.Qiao
      Xing Mobile Communication Co., Ltd.
                  China
      Medical Technologies Inc.Simcere
      Pharmaceutical Group
                  Baidu.com,
      Inc.Tongjitang
      Chinese Medicines Company
                  Focus
      Media Holding Ltd.Xinhua
      Finance Media Ltd.
                  China
      Techfaith Wireless Communication Technology Ltd.JA
      Solar Holdings Co. Ltd.
                  Hurray!
      Holding Co., Ltd.Solarfun
      Power Holdings Co., Ltd.
                  Comtech
      Group, Inc.





While
these companies span a wide range of industries and are not restricted to the
offset printing equipment industry, our compensation committee selected them for
review to better understand the compensation practices and ranges for chief
financial officers of companies operating in China that were also listed on a
U.S. stock exchange. These companies are also comparable to us in terms of size
and capitalization.




76




Based on
its review of the compensation paid by these companies to their chief financial
officers, our compensation committee determined that the annual base salary for
our chief financial officer should range from $120,000 to $200,000.Our compensation
committee generally believed that a chief financial officer who is familiar with
U.S. GAAP, familiar with U.S public company reporting requirements and/or fluent
in both English and Chinese should command a substantially higher salary than
Chinese candidates who speak and write only Chinese and are familiar only with
Chinese accounting principles.





Our
compensation committee also considered other subjective factors to determine the
precise compensation amount for each individual officer, including the officers’
past work experience and the level of responsibility required of our chief
financial officer. The actual base salary amounts for each executive were
negotiated with each officer at the time of his hire. Based on this information,
our compensation committee approved an annual base salary of $132,000 for Mr.
Bennett and $168,000 for Mr. Milewski. The difference in compensation levels
between Mr. Bennett and Mr. Milewski was primarily because that Mr. Milewski had
more extensive experience working with U.S. companies.





Discretionary
Annual Bonus





Consistent
with our historical practice, for the year ended June 30, 2008, our compensation
committee had the authority to award discretionary annual cash bonuses to our
executive officers, including each of the named executive officers. The annual
discretionary bonuses are intended to compensate and reward the executives for
their individual contributions, as reviewed and determined by our compensation
committee on a subjective basis, to our revenue increase and business operations
in any given year. Our compensation committee’s decision to award discretionary
annual bonuses, if any, and the amount of such bonuses to individual executives
are generally determined separate and apart from its consideration of base
salary increases due to our compensation committee’s belief that each form of
compensation is designed for a different purpose. Eight of our executive
officers were eligible to receive annual discretionary bonuses during fiscal
2008. Gene Michael Bennett and William Milewski did not receive bonuses during
fiscal 2008 due to their respective short tenures with us.





For each
fiscal year where our revenue increased, including for fiscal 2008, our
compensation committee sets aside a portion of our revenue growth (e.g., the
growth in revenue during the most recently completed fiscal year as compared to
the prior fiscal year) as a discretionary bonus pool for our eligible executive
officers. Our compensation committee considers several factors when determining
the bonus pool size for any given fiscal year, including general industry and
market conditions, our sales and profit growth, our gross and net profit margins
and how actual growth rates and margins compared to our internal target growth
rates and margins established at the beginning of the fiscal year.





Additionally,
our compensation committee conducts performance reviews of our executive
officers who are eligible for discretionary bonuses. During the performance
review, our compensation committee assigns each executive officer a score based
on his or her performance. Our compensation committee then determines the
average score of all the executive officers reviewed and applies a
pre-established formula to yield an annual bonus pool the size of 0.5% to 1% of
our revenue growth. If the average performance score is low, the bonus pool will
be closer to the lower end of the range. A high average performance score will
lead to a bonus pool rate to be closer the high end of the range.





For the
year ended June 30, 2008, our bonus pool was 0.85% of our revenue growth. In
establishing the pool, our compensation committee considered our 32.2% increase
in revenue from fiscal 2007 to fiscal 2008 and our 89.3% increase in net income
during the same period.





In
determining each named executive officer’s individual discretionary bonus for
fiscal 2008, our compensation committee established an internal bonus structure,
as described below, based on individual qualitative performance
benchmarks.





Wenhua Guo’s fiscal 2008 discretionary
bonus performance benchmarks included (1) increase overall sales and profit
growth and (2) accomplish strategic activities such as secure major financing,
complete corporate acquisitions and/or form strategic corporate alliances. Based
on his significant contributions to the growth of our revenue and profit in
fiscal 2008 (as described above), Mr. Guo was awarded a discretionary bonus of
$35,200 for fiscal 2008.




77


Baiyun
Sun’s performance benchmarks included (1) timely and accurate preparation of our
financial data and (2) assisting Mr. Guo in devising and carrying out
financial strategies. Our compensation committee determined that Ms. Sun met
these performance benchmarks and awarded her a discretionary bonus of $27,800
for fiscal 2008.





The
following table shows the bonus pool scores and discretionary bonus amounts for
our executive officers, including our named executive officers, for the year
ended June 30, 2008:





Name and Position
                                        
                                        Bonus Pool Score
                                        
                                        
                                        Amount of BonusWenhua
      Guo
                                          Chairman
      and Chief Executive Officer
                                        
                                        
                                        19%
                                        
                                        
                                        $
                                        35,200Baiyun
      Sun
                                          Interim
      Chief Financial Officer and Controller
                                        
                                        
                                        15%
                                        
                                        
                                        $
                                        27,800Gene
      Michael Bennett
                                          Former
      Chief Financial Officer
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –William
      Milewski
                                          Former
      Chief Financial Officer
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –Xiqing
      Diao
                                          Chief
      Operating Officer
                                        
                                        
                                        15%
                                        
                                        
                                        $
                                        27,800





Retirement
Benefits





Our
Chinese employees, including each of our named executive officers (excluding
Gene Michael Bennett and William Milewski), participate in pension programs
implemented by Chinese municipal and provincial governments. Our Chinese
employees are required to contribute 8% of his or her monthly base salary to
these pension programs. Therefore, we withhold and pay such amounts on behalf of
these employees. The amount in the “Salary” column of the Summary compensation
Table below includes each applicable employee’s 8% pension contribution.
Municipal statistics bureaus calculate the average monthly salary for employees
in a city and establish a pension contribution range. If an employee’s actual
monthly salary falls within the prescribed range, his or her actual monthly
salary will be used to calculate his or her pension contribution amount. If an
employee’s actual monthly salary is outside the range, the average monthly
salary calculated by the municipal statistics bureaus will be used to calculate
his or her pension contribution amount.





In
addition, we are required to contribute 20% of the employees’ monthly salary
before tax to the pension programs described above. Our 20% contribution to the
pension program is reflected in the “All Other Compensation” column of the
Summary Compensation table below.





No
retirement or pension benefits are determined by an employee’s compensation
level or years of service.





Other
Compensation





Other
than the annual salary for our executive officers, the bonus that may be awarded
to executive officers at the discretion of our compensation committee and
arrangements with executive officers for the use of a company car, we do not
provide any other benefits and perquisites for our executive officers. However,
our compensation committee may, in its discretion, provide benefits and
perquisites to executive officers if it deems such provisions
advisable.





Security
Ownership Guidelines





Due to
adverse Chinese tax consequences associated with employee equity incentive
plans, we do not have a stock granting policy or any stock ownership
guidelines.




78




Summary
Compensation Table





The
following table sets forth information regarding compensation received by our
named executive officers, for the year ended June 30, 2008. The compensation of
our other executive officers (including Yubao Wei, our chief technology officer,
and Xiqing Diao, our chief operating officer) did not exceed $100,000 per
year.




Name and Principal
                                        Position
                                      
                                      Fiscal
                                        Year
                                      
                                      Salary (1)(2)
                                      
                                      
                                      Bonus (1)(3)
                                      
                                      
                                      Stock
                                        Awards
                                      
                                      
                                      Option
                                        Awards
                                      
                                      
                                      Nonequity
                                        Incentive Plan
                                        Compensation
                                      
                                      
                                      All Other
                                        Compensation(1) (4)
                                      
                                      
                                      Total (1)Wenhua
      Guo
                                        Chairman
      and
                                      
                                      2008
                                      
                                      $
                                      32,020
                                      
                                      
                                      $
                                      35,200
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      1,294
                                      
                                      
                                      $
                                      68,514Chief
      ExecutiveOfficer
                                      
                                      2007
                                      
                                      $
                                      25,615
                                      
                                      
                                      $
                                      21,500
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      2,587
                                      
                                      
                                      $
                                      47,115Baiyun
      Sun
                                        Interim
      Chief Financial
      Officer and
                                      
                                      2008
                                      
                                      $
                                      32,020
                                      
                                      
                                      $
                                      27,800
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      1,294
                                      
                                      
                                      $
                                      61,114Controller
                                      
                                      2007
                                      
                                      $
                                      25,615
                                      
                                      
                                      $
                                      19,200
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      2,587
                                      
                                      
                                      $
                                      44,815Gene Michael
      Bennett(5)Former
      ChiefFinancial
      Officer
                                      
                                      2008
                                      
                                      $
                                      111,100
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      111,100William Milewski
      (6)
                                        Former
      ChiefFinancial
      Officer
                                      
                                      2008
                                      
                                      $
                                      50,667
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      50,667





(1)
                Amounts
      sent forth in these columns were paid to or received by the executive in
      Renminbi and were converted into U.S. dollars based on the conversion rate
      in effect on June 30,
2008.


(2)
                The
      amount in the “Salary” column includes each executive’s 8% contribution to
      the pension program. We withhold and pay such percentage on behalf of the
      employee. For Mr. Guo and Ms. Sun, their contribution was approximately
      $1,294 and $1,294 in fiscal 2008,
respectively.


(3)
                Amounts
      represent the annual discretionary bonus paid to each applicable executive
      during the respective fiscal year. For more information on the annual
      discretionary bonuses paid in fiscal 2008, see the “Compensation
      Discussion and Analysis”
above.


(4)
                Amounts
      represent our required contribution, equal to 20% of the employees’
      monthly base salary before tax, to the employee contribution pension
      program.


(5)
                Mr.
      Bennett resigned on December 20, 2007. No additional amount is due to
      him.


(6)
                Mr.
      Milewski resigned on May 21, 2008.  No additional amount is due
      to him.





Employment
Contracts





All of
our executive officers, including Wenhua Guo and Baiyun Sun (excluding Gene
Michael Bennett and William Milewski) have executed standard employment
agreements with us, which are governed by Chinese law. Our standard employment
agreements are for a fixed period of one year and may be renewed upon both
parties’ consents. After ten years of employment, an employee may enter into an
employment agreement with us for an indefinite period of time. We did not enter
into any new employment agreement with Ms. Sun for her temporary interim chief
financial officer positions. Ms. Sun remained bound by her existing employment
agreement during such time and currently.





Other
than the amount of compensation, the terms and conditions of the employment
agreements for our executive officers are substantially the same as those of our
standard employment agreements for non-executive employees. Pursuant to our
standard employment agreements, we may terminate employees for cause, without
notice or severance. If we terminate employment due to economic downturn or
performance related reasons, we are obligated to give 30 days advance notice or
pay one-month’s salary as severance in lieu of notice. In addition, we may pay
additional severance in the amount of one-month’s salary for each year that an
employee has served with us, capped at a maximum of 12 months’ salary as
severance. An employee may resign without good reason upon one month’s notice,
or resign for good reason without notice.




79


In the
event Mr. Guo or Ms. Sun were to be terminated by us due to economic
considerations or unsuitability for their respective positions, we would be
obligated to pay each of them up to 12 months of their respective salaries (as
of June 30, 2008).





Termination
of Employment and Change-in-Control Arrangements





Gene
Michael Bennett





Gene
Michael Bennett served as our chief financial officer from July 18, 2007 to
December 20, 2007. Upon his resignation, Mr. Bennett executed a letter of
resignation and separation agreement, effective December 20, 2007. Pursuant to
his agreement, Mr. Bennett continued to serve as an independent outside
consultant for a six-month period until June 20, 2008, during which time we paid
him $5,000 per month. Mr. Bennett was entitled to no additional compensation
from us upon his resignation.





William
Milewski





William
Milewski served as our chief financial officer from March 1, 2008 to May 21,
2008. Upon his resignation, Mr. Milewski executed a letter of resignation and
separation agreement, effective May 31, 2008. Pursuant to his agreement, Mr.
Milewski received a bonus equal to one month base salary, or $14,000, in
recognition of the contributions he made during his employment with us. He also
continues to serve as an independent outside consultant for an eight-month
period until January 21, 2009, during which time we will pay him $3,500 per
month. Mr. Milewski is entitled to no additional compensation from us due to his
resignation.





Grants
of Plan-Based Awards





During
the year ended June 30, 2008, neither we nor our subsidiaries granted any stock,
stock option or other types of equity compensation, or any non-equity incentive
plan compensation awards, to any executive officers.





Outstanding
Equity Awards at Fiscal Year-End





We did
not have any outstanding equity awards as of June 30, 2008.





Option
Exercises and Stock Vested





Because
we have not previously granted any equity compensation to the named executive
officers, there were no stock option exercises or vesting of stock during the
year ended June 30, 2008.





Long-Term
Incentive Plan Awards





We
currently do not have a stock option plan, stock appreciation rights plan or
other long-term incentive plans. We may implement a long-term incentive plan in
the future. However, because of Chinese tax laws, we currently do not consider
these types of awards desirable.





Director
Compensation





Only our
non-employee directors are compensated for serving on our board of directors,
and the payments vary depending on the non-employee directors’ experiences and
expertise. Additionally, our non-employee directors receive $1,000 for attending
each meeting of our board of directors at which there is a quorum, whether in
person or by telephone, up to a maximum of $5,000 per fiscal year. There are no
other fees or reimbursements paid to our non-employee directors.




80


The
following table sets forth the compensation paid during the year ended June 30,
2008 to our directors:


Name of Director
                                              
                                              Fees
                                                Earned or
                                                Paid in
                                                Cash (4)
                                              
                                              
                                              Stock
                                                Awards
                                              
                                              
                                              Options
                                                Awards
                                              
                                              
                                              Non-Equity
                                                Incentive Plan
                                                Compensation
                                              
                                              
                                              Change in Pension
                                                Value and
                                                Nonqualified
                                                Deferred
                                                Compensation
                                                Earnings
                                              
                                              
                                              All Other
                                                Compensation
                                              
                                              
                                              Total(2)Wenhua
      Guo(1)
                                                Chairman
      and Chief ExecutiveOfficer
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Xiqing
      Diao(2)
                                                Chief
      OperatingOfficer
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Lianjun
      Cai
                                              
                                              $
                                              8,734
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              $
                                              8,734Christopher
      Patrick Holbert
                                              
                                              $
                                              26,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              $
                                              26,000Punan
      Xie
                                              
                                              $
                                              13,974
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              $
                                              13,974Gene
      Michael Bennett(3)
                                                Former
      ChiefFinancial
      Officer
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -





(1)
              Mr.
      Guo served as director during fiscal 2008. He did not receive any
      compensation for his service as
director.


(2)
              Mr.
      Diao served as director during fiscal 2008. He did not receive any
      compensation for his service as
director.


(3)
                Mr.
      Bennett served as director between July 1, 2007 and July 18, 2007. He did
      not receive any compensation for his service as
  director.


(4)
                Amounts
      set forth in these columns were paid to or received by the director in
      Renminbi and were converted into U.S. dollars based on the conversion rate
      in effect on June 30,
2008.





Compensation
Committee Interlocks and Insider Participation





None of
our executive officers or the executive officers of Duoyuan China served as a
member of our compensation committee or the equivalent of another entity during
the years ended June 30, 2006, 2007 or 2008. None of our executive officers or
the executive officers of Duoyuan China served as a director of another entity,
other than affiliates of Duoyuan China, during fiscal 2006, 2007 and
2008.





Compensation
Committee Report




Our compensation committee has reviewed
and discussed the Compensation Discussion and Analysis contained in this Annual
Report with management. Based on our compensation committee’s review of and the
discussions with management with respect to the Compensation Discussion and
Analysis, our compensation committee recommended to the board of directors that
the Compensation Discussion and Analysis be included in this Annual Report for
filing with theSecurities and Exchange
Commission.




The
foregoing report is provided by the following directors, who constitute our
compensation committee: Lianjun Cai, Christopher Patrick Holbert and Punan
Xie.




Item 12.
              Security Ownership of Certain
      Beneficial Owners and Management and Related Stockholder
      Matters.





As used
in this section, the term beneficial ownership with respect to a security is
defined by Rule 13d-3 under the Exchange Act, as consisting of sole or shared
voting power (including the power to vote or direct the vote) and/or sole or
shared investment power (including the power to dispose of or direct the
disposition of) with respect to the security through any contract, arrangement,
understanding, relationship or otherwise, subject to community property laws
where applicable.




81


As of
September 22, 2008, we had a total of 25,000,050 common shares outstanding,
which are our only issued and outstanding voting equity securities.





The
following table sets forth, as of September 22, 2008: (1) the names and
addresses of each beneficial owner of more than five percent (5%) of our common
shares known to us, the number of common shares beneficially owned by each such
person and the percent of our common shares so owned and (2) the names and
addresses of each director and executive officer, the number of common shares
beneficially owned and the percentage of our common shares so owned by each such
person and by all of our directors and executive officers as a group. Each
person has sole voting and investment power with respect to our common shares,
except as otherwise indicated. Beneficial ownership consists of a direct
interest in common shares, except as otherwise indicated.




Name and Address of Beneficial Owner
                                  
                                  Amount of
                                    Beneficial
                                    Ownership (1)
                                  
                                  Percentage
                                    Ownership (1)Directors
      and Executive OfficersWenhua
      Guo
                                    Chairman
      and Chief Executive Officer
                                  
                                  
                                  17,562,355
                                  (2)(3)
                                  
                                  70.25%Lianjun
      Cai
                                    Director
                                  
                                  
                                  0
                                  
                                  
                                  0%Punan
      Xie
                                    Director
                                  
                                  
                                  0
                                  
                                  
                                  0%Christopher
      Patrick Holbert
                                    Director
                                  
                                  
                                  0
                                  
                                  
                                  0%Xiqing
      Diao
                                    Director,
      Chief Operating Officer
                                  
                                  
                                  0
                                  
                                  
                                  0%Baiyun
      Sun
                                    Interim
      Chief Financial Officer and Controller
                                  
                                  
                                  0
                                  
                                  
                                  0%Gene
      Michael Bennett
                                    Former
      Chief Financial Officer
                                  
                                  
                                  0
                                  
                                  
                                  0%William
      Milewski
                                    Former
      Chief Financial Officer
                                  
                                  
                                  0
                                  
                                  
                                  0%Principal
      ShareholdersDuoyuan
      Investments Limited
                                    No.
      3 Jinyuan Road
                                    Daxing
      Industrial Development Zone
                                    Beijing,
      People’s Republic of China, 102600
                                  
                                  
                                  17,562,355
                                  (2)
                                  
                                  70.25%Barry
      M. Kitt
                                    4965
      Preston Park Blvd., Ste 240
                                    Plano,
      TX 75093
                                  
                                  
                                  1,542,295
                                  (4)
                                  
                                  6.17%Pinnacle
      China Fund, L.P.
                                    4965
      Preston Park Blvd., Ste 240
                                    Plano,
      TX 75093
                                  
                                  
                                  1,300,002
                                  (4)
                                  
                                  5.20%All
      Directors and Executive Officers as a Group (8 members)
                                  
                                  
                                  17,562,355
                                  
                                  
                                  70.25%







(1)
            The
      percentage of beneficial ownership is based on 25,000,050 common shares
      outstanding as of September 22, 2008. Beneficial ownership is determined
      in accordance with the rules of the Securities and Exchange Commission.
      Unless otherwise indicated, each of the shareholders named in this table
      has sole voting and dispositive power with respect to the common shares
      shown as beneficially owned by such shareholder. The address for all of
      our directors and executive officers is c/o Asian Financial, Inc., No. 3
      Jinyuan Road, Daxing Industrial Development Zone, Beijing, People’s
      Republic of China, 102600.





(2)
            Duoyuan
      Investments Limited, a British Virgin Islands company, is the direct
      holder of 17,562,355 common shares.  All of the equity interests
      of Duoyuan Investments Limited is held by Wenhua Guo, the
      chairman of our board of directors and chief executive officer, who as
      such may be deemed the beneficial owner of the 17,562,355 common shares
      owned by Duoyuan Investments
Limited.





(3)
            As
      an inducement to participate in the Private Placement and as set forth in
      the Securities Purchase Agreement, Wenhua Guo had agreed to cause Duoyuan
      Investments Limited to deposit 6,899,177 common shares in escrow to be
      released to Duoyuan Investments Limited or the Private Placement Investors
      pursuant to the terms set forth in the make good escrow agreement dated
      October 24, 2006, or the Make Good Escrow Agreement. Duoyuan
      Investments Limited retained the voting power and dividend rights of these
      escrow shares until any release of the shares to the Private Placement
      Investors. The Make Good Escrow Agreement set forth annual performance and
      financial benchmarks for us to meet for each year ended June 30, 2006,
      2007 and 2008. A third of the escrow shares would be released promptly to
      the Private Placement Investors after each annual notification to the
      escrow agent of our failure to meet the performance and financial
      benchmarks for any applicable year. A third of the escrow shares would be
      released promptly to Duoyuan Investments Limited after each annual
      notification of our success in meeting the performance and financial
      benchmarks for any applicable year. We met all annual performance and
      financial benchmarks for the years ended June 30, 2006, 2007 and 2008. All
      escrow shares have been or will be released to Duoyuan Investments
      Limited.




82




(4)
            Pinnacle
      China Fund, L.P. is the direct holder of 1,300,002 common shares. Pinnacle
      China Fund, L.P.’s general partner is Pinnacle China Advisors, L.P.
      Pinnacle China Advisors, L.P.’s general partner is Pinnacle China
      Management, L.L.C. Pinnacle China Management, L.L.C. is managed by Kitt
      China Management, L.L.C., managed solely by Barry M. Kitt. As a
      result of Mr. Kitt's control over these entities, Mr. Kitt may be deemed
      the beneficial owner of the 1,300,002 common shares owned by Pinnacle
      China Fund, L.P.





Pinnacle
      Fund, L.P. is the direct holder of 242,293 common shares. Pinnacle
      Fund, L.P.’s general partner is Pinnacle Advisors,
      L.P.  Pinnacle Advisors, L.P.’s general partner is Pinnacle Fund
      Management, LLC. The sole member of Pinnacle Fund Management,
      LLC is Mr. Kitt. As a result of Mr. Kitt's control over these
      entities,
      Mr. Kitt may be deemed the beneficial owner of the 242,293 common shares
      owned by Pinnacle Fund, L.P.





Mr.
      Kitt expressly disclaims beneficial ownership of the 1,542,295 common
      shares owned by Pinnacle China Fund, L.P. and Pinnacle Fund,
      L.P.




Securities
Authorized for Issuance Under Equity Compensation Plans




None.




Item 13.
              Certain Relationships and Related
      Transactions, and Director
Independence.




Liquidated
Damages Related to Private Placement





In November 2006, we raised
approximately $23.5 million by issuing shares to the Private Placement Investors
in the Private Placement. We were obligated to (1) register the resale of these
shares with theSecurities and Exchange Commission
within 90 days of the closing of the Private Placement, pursuant to the
Registration Rights Agreement, and (2) terminate certain related party
transactions. We failed to timely register for resale the private placement
shares and terminate the related party transactions, resulting in liquidated
damages. We recorded liquidated damages and expenses of $2.1million for the year
ended June 30, 2007. There was no interest charge for late
payment.





In
November 2007, we reached a settlement with the Private Placement Investors to
waive the respective liquidated damages owed to them in exchange for either cash
or warrants for common shares. Each Private Placement Investor made its own
election and, accordingly, we issued to 25 of these Private Placement Investors
warrants to purchase 576,425 common shares, and we paid a total of $0.4 million
in cash to 10 of these Private Placement Investors. The Private Placement
Investors agreed that the our issuance of these warrants and our payments of
cash constituted full satisfaction of our obligations to pay them liquidated
damages with respect to the penalties under the Securities Purchase Agreement
and the Registration Rights Agreement. We settled the claims for liquidated
damages in the third quarter of fiscal 2008.





Make
Good Escrow Arrangement


As an
inducement to participate in the Private Placement and as set forth in the
Securities Purchase Agreement, Wenhua Guo had agreed to cause Duoyuan
Investments to deposit 6,899,177 common shares in escrow to be released to
Duoyuan Investments or the Private Placement Investors pursuant to the terms set
forth in the Make Good Escrow Agreement. Duoyuan Investments retained the voting
power and dividend rights of these escrow shares until any release of the shares
to the Private Placement Investors. The Make Good Escrow Agreement set forth
annual performance and financial benchmarks for us to meet for each year ended
June 30, 2006, 2007 and 2008. A third of the escrow shares would be released
promptly to the Private Placement Investors after each annual notification to
the escrow agent of our failure to meet the performance and financial benchmarks
for any applicable year. A third of the escrow shares would be released promptly
to Duoyuan Investments after each annual notification of our success in meeting
the performance and financial benchmarks for any applicable year. We
met all annual performance and financial benchmarks for the years ended June 30,
2006, 2007 and 2008. All escrow shares have been or will be released to Duoyuan
Investments.


83




Real
Property Related Transactions





Duoyuan
China leases No. 3 Jinyuan, which consists of 3,080 square meters of space, from
Duoyuan Information, a company owned by Wenhua Guo, the chairman of our board of
directors and chief executive officer. The property is used as an office
building. Duoyuan China originally leased the property at No. 3 Jinyuan from
Duoyuan Water, a company owned by Mr. Guo. The initial lease had a five-year
term from January 1, 2003 to December 31, 2007 and was extended for one year. As
a result of the property transfer between Duoyuan Water and Duoyuan Information,
in which Duoyuan Information became the new owner of No. 3 Jinyuan, the initial
lease with Duoyuan Water was terminated and we entered into a new lease with
Duoyuan Information. Duoyuan China’s new lease for No. 3 Jinyuan is for a period
from July 1, 2008 to December 31, 2009.





Pursuant
to the terms of the lease with Duoyuan Water, Duoyuan China’s rental payments
included electricity and water utility costs. During the term of the lease,
Duoyuan Water paid Duoyuan China’s portion of the electricity and water bill. As
a result, such utility costs became Duoyuan China’s payable to Duoyuan Water. In
addition, Duoyuan China transferred some of its employees to Duoyuan Water. The
social welfare tax associated with these employees accrued before the transfer,
thus that amount became Duoyuan China’s payable to Duoyuan Water. Between July
2007 and December 2007, Duoyuan China paid RMB3.4 million ($0.5 million) to
Duoyuan Water for these accrued payable payments accumulated during calendar
years 2005 to 2007. By December 31, 2007, all accrued payables Duoyuan China
owed to Duoyuan Water under the terminated lease had been settled.





Langfang
Duoyuan leased part of its manufacturing plant to Duoyuan Water Treatment
Equipment Manufacturing (Langfang) Co., Ltd, a company 80% owned by Mr. Guo. The
lease is valid from October 1, 2004 to September 30, 2009. On May 25, 2007,
pursuant to a termination agreement, Langfang Duoyuan and Duoyuan Water
Treatment Equipment Manufacturing (Langfang) Co., Ltd terminated the lease.
Total rental income for the years ended June 30, 2006, 2007 and 2008 amounted to
$0.4 million, $0.4 million and $0, respectively.





Intellectual
Property Transfer





Duoyuan
China uses the trademark name “Duoyuan” under a license agreement with Duoyuan
Water, of which Wenhua Guo, the chairman of our board of directors and chief
executive officer, is controlling shareholder. The trademark license does not
have a term. As the cost of obtaining the trademark is immaterial, the license
is provided to Duoyuan China at no charge.





By
assignment agreement dated December 26, 2002 with Huiyuan Institute, Duoyuan
China obtained ownership of a patent it used previously pursuant to a license.
Prior to the execution of a Termination of the Letter of Patent Use
Authorization dated March 11, 2008, Duoyuan China made use of a patent for “an
automatic offset press printing oil supply quick clearing device” under a
license agreement with Huiyuan Institute, of which Mr. Guo is the controlling
shareholder. The patent license did not have a term and was provided to Duoyuan
China at no charge.




Sales
and Purchase Transactions with Related Parties





After the
completion of our Langfang Duoyuan facility, there were approximately $0.4
million in surplus construction materials, which Langfang Duoyuan sold to
Duoyuan China at cost. As of December 31, 2006, Duoyuan China had failed to
settle this account and violated the related party transaction covenants under
the Securities Purchase Agreement. As of June 30, 2007, this receivable account
had been fully settled.





Loans
to Related Parties





During
the construction of our Langfang Duoyuan plant, Duoyuan China Information
Technology Industry Co., Ltd., of which Wenhua Guo is the controlling
shareholder, paid the municipal infrastructure allocation fee, utilities and
other expenses for Langfang Duoyuan. During fiscal 2005, Duoyuan China paid back
this debt, which amounted to $1.1 million.





As of
June 30, 2005, Duoyuan China owed $4.6 million to Huiyuan Institute for Duoyuan
China’s purchase of Huiyuan Institute’s 90% equity interest in Langfang Duoyuan.
This outstanding amount was fully paid on May 16, 2006.




84




During
2006, Duoyuan China received various short-term loans from Duoyuan Water. These
loans were non-interest bearing and due on demand. These short-term loans became
related party payables to Duoyuan Water. As of December 31, 2006, Duoyuan China
had failed to settle these short-term loans, which amounted to $290,308, and
violated the related party transaction covenants under the Securities Purchase
Agreement. As of June 30, 2007, the payable account related to this transaction
had been fully settled.





Also
during 2006, Duoyuan China made several short-term loans to Duoyuan Water. The
loans were non-interest bearing and due on demand. These short-term loans became
related party receivables to Duoyuan China. As of December 31, 2006, Duoyuan
China had failed to settle this receivable account, which amounted to $3.4
million, and violated the related party transaction covenants under the
Securities Purchase Agreement. As of June 30, 2007, the receivable account
related to this transaction had been fully settled.





Indebtedness
of Management




None.





Review,
Approval or Ratification of Transactions with Related Persons





As
provided in our audit committee charter, all related party transactions must be
reviewed and approved by our audit committee. As such, we will conduct a review
of all related party transactions for potential conflicts of interest on an
ongoing basis. All such transactions relating to executive officers and
directors must be approved by our audit committee.





Director
Independence





Our board
of directors reviewed our directors’ responses to a questionnaire inquiring
about their transactions, relationships and arrangements with us, as well as
those of their immediate family members. The questionnaire also inquired as to
other potential conflicts of interest. After reviewing this information, our
board of directors determined that it is comprised of a majority of “independent
directors,” as such term is defined in the NASDAQ rules and Rule 10A-3 of the
Exchange Act. Among our five directors, Lianjun Cai, Christopher Patrick Holbert
and Punan Xie meet the NASDAQ and the Exchange Act standards for independent
directors. The remaining two directors, Wenhua Guo and Xiqing Diao, also
serve as our executive officers and do not qualify as independent
directors. Our independent directors did not engaged in any transaction, or
otherwise have relationship or arrangement with us that would compromise their
independency as defined by the NASDAQ rules or Rule 10A-3 of the Exchange Act.
Our audit committee is currently comprised of three independent directors,
Messrs. Holbert, Cai and Xie. Mr. Holbert serves as the chairman of our audit
committee. Our compensation committee is comprised of three independent
directors, Messrs. Cai, Holbert and Xie. Mr. Cai serves as the chairman of our
compensation committee. Our
nominating committee is comprised of three independent directors, Messrs. Xie,
Cai and Holbert. Mr. Xie serves as the chairman of our nominating
committee.





Item 14.
              Principal Accounting Fees and
      Services.





In
connection with the audit during the year ended June 30, 2008, for the audits of
our annual financial statements and review of our quarterly financial
statements, we entered into an engagement agreement with for professional
services rendered by our principal accountant, Moore Stephens Wurth Frazer and
Torbet, LLP, or Moore Stephens. This agreement is subject to alternative dispute
resolution procedures and an exclusion of punitive damages. The description of
the fees billed to us by Moore Stephens for the years ended June 30, 2008
and 2007 is set forth below:




85




Year ended
      June 30,2007
                                  
                                  
                                  2008Audit
      Fees(1)
                                  
                                  $
                                  220,000
                                  
                                  
                                  $
                                  220,000Audit
      Related Fees
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Tax
      Fees(2)
                                  
                                  $
                                  6,000
                                  
                                  
                                  $
                                  5,000All
      Other Fees
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Total
      Fees
                                  
                                  $
                                  226,000
                                  
                                  
                                  $
                                  225,000





(1)
            Audit
      fees were for the audits of our annual financial statements and review of
      our quarterly financial statements.





(2)
            Tax fees were for professional
      services rendered for tax compliance, tax advice, and tax planning for the
      year ended June 30, 2008. Our audit committee has a policy for the
      pre-approval of all audit and non-audit services provided by
      our  independent registered public accounting firm. Each year,
      our audit committee approves the proposed services, including the type and
      nature of such services. Our audit committee pre-approval is also required
      for engagements that may arise during the course of the year that are
      outside the scope of the initial services and fees pre-approved by our
      audit committee.





All audit
and related services are approved by our audit committee prior to the rendering
of services.


86





PART
IV




Item 15.
              Exhibits, Financial Statement
      Schedules.








(a)
            The
      following documents are filed as part of this
  report:




(1)
            Consolidated Financial
      Statements. The consolidated financial statements required to be
      filed as part of this Annual Report and the Report of Independent
      Registered Public Accounting Firm are included beginning on page
      F-1.





(2)
            Financial Statement
      Schedules. All Schedules are either included in the Notes to
      Consolidated Financial Statements or are omitted because they are not
      applicable.





(3)
            Exhibits (numbered in
      accordance with Item 601 of Regulation S-K). The exhibits listed on
      the accompanying Exhibit Index filed or incorporated by references as part
      of this Annual Report and such Exhibit Index is incorporated herein by
      reference. On the Exhibit Index, a “±” identifies each management contract
      or compensatory plan or arrangement required to be filed as an exhibit to
      this Annual Report, and such listing is incorporated herein by
      reference.


87





SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.




Asian
      Financial, Inc.
              (Registrant)Date:
      March 10, 2009
            
            By:
            /s/
      Wenhua GuoWenhua
      Guo
              Chairman
      of the Board of Directors and Chief Executive OfficerDate:
      March 10, 2009
            
            By:
            /s/ William D. SuhWilliam
      D. Suh
              Chief
      Financial Officer


88





EXHIBIT
      INDEX





Number
                    
                    Description2.1
                    
                    Equity
      Transfer Agreement dated August 31, 2006 (Incorporated by reference to
      Exhibit 2.1 to Current Report on Form 8-K (File No.000-27129) filed with
      the Securities and Exchange Commission on September 6,
    2006).3.1
                    
                    Articles
      of Incorporation, as amended of Asian Financial, Inc. (Incorporated by
      reference to Exhibit 3.1 to Amendment No. 1 to Registration Statement on
      Form S-1 (File No. 333-141507) filed with the Securities and Exchange
      Commission on July 5, 2007).3.2
                    
                    Amended
      and Restated Bylaws of Asian Financial, Inc. (Incorporated by reference to
      Exhibit 3.2 to Amendment No. 4 to Registration Statement on Form S-1 (File
      No. 333-141507) filed with the Securities and Exchange Commission on
      February 11, 2008).3.3
                    
                    Audit
      Committee Charter of Asian Financial, Inc. (Incorporated by reference to
      Exhibit 3.3 to Amendment No. 1 to Registration Statement on Form S-1 (File
      No. 333-141507) filed with the Securities and Exchange Commission on July
      5, 2007).3.4
                    
                    Compensation
      Committee Charter of Asian Financial, Inc. (Incorporated by reference to
      Exhibit 3.4 to Amendment No. 1 to Registration Statement on Form S-1 (File
      No. 333-141507) filed with the Securities and Exchange Commission on July
      5, 2007).3.5
                    
                    Nominating
      Committee Charter of Asian Financial, Inc. (Incorporated by reference to
      Exhibit 3.5 to Amendment No. 1 to Registration Statement on Form S-1 (File
      No. 333-141507) filed with the Securities and Exchange Commission on July
      5, 2007).4.1
                    
                    Securities
      Purchase Agreement dated October 24, 2006 (Incorporated by reference to
      Exhibit 4.1 to Amendment No. 1 to Registration Statement on Form S-1 (File
      No. 333-141507) filed with the Securities and Exchange Commission on July
      5, 2007).4.2
                    
                    Warrant
      issued to Roth Capital Partners, LLC dated November 2, 2006 (Incorporated
      by reference to Exhibit 4.2 to Amendment No. 4 to Registration Statement
      on Form S-1 (File No. 333-141507) filed with the Securities and Exchange
      Commission on February 11, 2008).4.3
                    
                    Form
      of Warrant dated December 31, 2007 issued to certain investors party to
      the Securities Purchase Agreement dated October 24, 2006 (filed as exhibit
      4.1 hereto) in satisfaction of related party penalties in relation thereto
      (Incorporated by reference to Exhibit 4.3 to Amendment No. 4 to
      Registration Statement on Form S-1 (File No. 333-141507) filed with the
      Securities and Exchange Commission on February 11,
  2008).4.4
                    
                    Amendment
      to Securities Purchase Agreement dated November 28, 2007 (Incorporated by
      reference to Exhibit 4.4 to Amendment No. 4 to Registration Statement on
      Form S-1 (File No. 333-141507) filed with the Securities and Exchange
      Commission on February 11, 2008).4.5
                    
                    Form
      of Certificate representing the common stock, par value $0.001, of Asian
      Financial, Inc. (Incorporated by reference to Exhibit 4.5 to Annual Report
      on Form 10-K (File No. 000-27129) filed with the Securities and Exchange
      Commission on September 26, 2008).10.1
                    
                    Lease
      Agreement between Duoyuan Clean Water Technology Industries (China) Co.,
      Ltd. and Duoyuan Digital Printing Technology Industry (China) Co. Ltd.
      (Incorporated by reference to Exhibit 10.7 to Amendment No. 5 to
      Registration Statement on Form S-1 (File No. 333-141507) filed with the
      Securities and Exchange Commission on March 14, 2008).10.2
                    
                    Share
      Transfer Agreement, dated October 16, 2005, between Beijing Huiyuan
      Duoyuan Digital Printing Technology Research Institute and Duoyuan Digital
      Printing Technology Industry (China) Co., Ltd. (Incorporated by reference
      to Exhibit 10.9 to Amendment No. 4 to Registration Statement on Form S-1
      (File No. 333-141507) filed with the Securities and Exchange Commission on
      February 11, 2008).10.3
                    
                    Property
      Lease Agreement, dated December 25, 2002 between Duoyuan Water
      Environmental Protection Technology Industry (China) Co. Ltd. And Duoyuan
      Digital Printing Technology Industry (China) Co. Ltd. (Incorporated by
      reference to Exhibit 10.12 to Amendment No. 1 to Registration Statement on
      Form S-1 (File No. 333-141507) filed with the Securities and Exchange
      Commission on July 5,
2007).




89




10.4
                  
                  Letter
      of Trademark Use Authorization dated June 30, 2001, from Duoyuan Water
      Environmental Protection Technology Industry (China) Co., Ltd. to Duoyuan
      Technology Industry (China) Co., Ltd. (Incorporated by reference to
      Exhibit 10.13 to Amendment No. 1 to Registration Statement on Form S-1
      (File No. 333-141507) filed with the Securities and Exchange Commission on
      July 5, 2007).10.5
                  
                  Termination
      of Letter of Patent Use Authorization, from Beijing Huiyuan Duoyuan
      Digital Printing Technology Research Institute to Duoyuan Digital
      Technology Industry (China) Co. Ltd. (see Exhibit 10.11) (Incorporated by
      reference to Exhibit 10.24 to Amendment No. 5 to Registration Statement on
      Form S-1 (File No. 333-141507) filed with the Securities and Exchange
      Commission on March 14, 2008).10.6
                  
                  Letter
      of Patent Use Authorization, dated June 30, 2001, from Beijing Huiyuan
      Duoyuan Digital Printing Technology Research Institute to Duoyuan Digital
      Technology Industry (China) Co. Ltd. (Incorporated by reference to Exhibit
      10.14 to Amendment No. 1 to Registration Statement on Form S-1 (File No.
      333-141507) filed with the Securities and Exchange Commission on July 5,
      2007).10.7
                  
                  Assignment
      of Patent Agreement dated December 26, 2002. (Incorporated by reference to
      Exhibit 10.25 to Amendment No. 5 to Registration Statement on Form S-1
      (File No. 333-141507) filed with the Securities and Exchange Commission on
      March 14, 2008).10.8
                  
                  Registration
      Rights Agreement dated October 24, 2006 (Incorporated by reference to
      Exhibit 4.1Current Report on Form 8-K (File No. 000-27129) filed with the
      Securities and Exchange Commission on October 25,
2006).10.9
                  
                  Convertible
      Promissory Note covering the fiscal years ended December 31, 1995 through
      1999 (Incorporated by reference to Exhibit 10.18 to Amendment No. 4 to
      Registration Statement on Form S-1 (File No. 333-141507) filed with the
      Securities and Exchange Commission on February 11,
  2008).10.10
                  
                  Convertible
      Promissory Note covering the fiscal years ended December 31, 2003 through
      2004 (Incorporated by reference to Exhibit 10.19 to Amendment No. 4 to
      Registration Statement on Form S-1 (File No. 333-141507) filed with the
      Securities and Exchange Commission on February 11,
  2008).10.11
                  
                  Maximum
      Amount Mortgage Contract dated July 28, 2007 (Incorporated by reference to
      Exhibit 10.21 to Amendment No. 4 to Registration Statement on Form S-1
      (File No. 333-141507) filed with the Securities and Exchange Commission on
      February 11, 2008).10.12
      ±
                  
                  English
      Summary of Form of Employment Agreement (Incorporated by reference to
      Exhibit 10.8 to Amendment No. 4 to Registration Statement on Form S-1
      (File No. 333-141507) filed with the Securities and Exchange Commission on
      February 11, 2008).10.13
      ±
                  
                  Employment
      Agreement between Asian Financial, Inc. and Gene Michael Bennett dated as
      of July 18, 2007 (Incorporated by reference to Exhibit 10.22 to Amendment
      No. 5 to Registration Statement on Form S-1 (File No. 333-141507) filed
      with the Securities and Exchange Commission on March 14,
      2008).10.14
      ±
                  
                  Separation
      Agreement and Release of All Claims effective December 20, 2007 between
      Asian Financial, Inc. and Gene Michael Bennett (Incorporated by reference
      to Exhibit 99.1 to Current Report on Form 8-K (File No. 000-27129) filed
      with the Securities and Exchange Commission on December 27,
      2007).10.15
      ±
                  
                  Employment
      Agreement with William Milewski dated as of March 1, 2008 (Incorporated by
      reference to Exhibit 10.23 to Amendment No. 5 to Registration Statement on
      Form S-1 (File No. 333-141507) filed with the Securities and Exchange
      Commission on March 14, 2008).10.16
      ±
                  
                  Separation
      Agreement and Release of All Claims effective May 21, 2008 between Asian
      Financial, Inc. and William Edward Milewski (Incorporated by reference
      Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-27129) filed
      with the Securities and Exchange Commission on May 27,
    2008).21.1
                  
                  List
      of Subsidiaries (Incorporated by reference to Exhibit 21.1 to Annual
      Report on Form 10-K (File No. 000-27129) filed with the Securities and
      Exchange Commission on September 26, 2008).23.1*
                  
                  Consent
      of Moore Stephens Wurth Frazer and Torbet, LLP.31.1*
                  
                  Chairman
      of the Board and Chief Executive Officer Certification required by Rules
      13a-14 and 15d-14 under the Securities Exchange Act of 1934, as
      amended.31.2*
                  
                  Chief
      Financial Officer Certification required by Rules 13a-14 and 15d-14 under
      the Securities Exchange Act of 1934, as amended.32.1*
                  
                  Certification
      of Chairman of the Board and Chief Executive Officer pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of
      2002.32.2*
                  
                  Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of Sarbanes-Oxley Act of
  2002.




*  Filed
herewith.
 ±  Management
contract or compensatory plan or arrangement.


90




REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM




To the
Board of Director and Stockholders of


Asian
Financial Inc. and Subsidiaries





We have
audited the accompanying consolidated balance sheets of Asian Financial Inc. and
subsidiaries as of June 30, 2008 and 2007, and the related consolidated
statements of income and other comprehensive income, stockholders’ equity, and
cash flows for each of the years in the three-year period ended June 30, 2008.
Asian Financial Inc.’s management is responsible for these financial statements.
Our responsibility is to express an opinion on these financial statements based
on our audits.





We
conducted our audits on accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the 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 audit included 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, to a test basis, evidence supporting the amounts and disclosures in
the financial statement, 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 financial statements referred to above present fairly, in all
material respects, the financial position of Asian Financial Inc. and
subsidiaries as of June 30, 2008 and 2007, and the results of its operations as
its cash flows for each of the years in the three-year period ended June 30,
2008 in conformity with accounting principles generally accepted in the United
States of America.





/s/ Moore
Stephens Wurth Frazer and Torbet, LLP





Walnut,
California





September
5, 2008


F-1


ASIAN
FINANCIAL INC. AND SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS


AS OF
JUNE 30, 2008 AND 2007





2008
            
            2007ASSETSCURRENT
      ASSETS:Cash
            
            $
            14,199,700
            
            $
            7,816,361Restricted
      cash
            
            
            -
            
            
            2,097,490Accounts
      receivable, net of allowance for doubtful accounts of $1,178,328and
      $498,648 as of June 30, 2008 and 2007, respectively
            
            
            33,184,833
            
            
            21,170,423Inventories
            
            
            23,950,551
            
            
            20,074,605Other
      receivables
            
            
            20,834
            
            
            68,160Deferred
      expense
            
            
            661,250
            
            
            -Other
      assets
            
            
            
            
            
            40,331Total
      current assets
            
            
            72,017,168
            
            
            51,267,370PLANT
      AND EQUIPMENT, net
            
            
            34,130,651
            
            
            25,332,554OTHER
      ASSETS:Intangible
      assets, net
            
            
            4,003,128
            
            
            3,679,941Advances
      on equipment purchases
            
            
            2,753,610
            
            
            -Total
      other assets
            
            
            6,756,738
            
            
            3,679,941Total
      assets
            
            $
            112,904,557
            
            $
            80,279,865




LIABILITIES AND
      SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Lines
      of credit
            
            $
            11,380,200
            
            $
            12,887,000Accounts
      payable
            
            
            1,489,255
            
            
            2,572,061Accrued
      liabilities
            
            
            1,749,129
            
            
            1,107,591Other
      payables
            
            
            108,983
            
            
            198,000Other
      payables - related parties
            
            
            -
            
            
            369,564Taxes
      payable
            
            
            1,702,986
            
            
            1,078,503Liquidated
      damages payable
            
            
            -
            
            
            2,119,428Total
      current liabilities
            
            
            16,430,553
            
            
            20,332,147DERIVATIVE
      INSTRUMENT LIABILITIES
            
            
            1,374,824
            
            
            -MINORITY
      INTEREST
            
            
            1,292,843
            
            
            800,766COMMITMENTS
      AND CONTINGENT LIABILITIES
            
            
            -
            
            
            -SHAREHOLDERS'
      EQUITY:Preferred
      stock; $0.001 par value; 1,000,000 shares authorized; no shares issued and
      outstanding
            
            
            -
            
            
            -Common
      stock; $0.001 par value; 100,000,000 shares authorized;25,000,050
      shares issued and outstanding
            
            
            25,000
            
            
            25,000Additional
      paid-in capital
            
            
            27,263,040
            
            
            27,263,040Statutory
      reserves
            
            
            6,000,090
            
            
            3,282,601Retained
      earnings
            
            
            50,058,176
            
            
            26,316,141Accumulated
      other comprehensive income
            
            
            10,460,031
            
            
            2,260,170Total
      shareholders' equity
            
            
            93,806,337
            
            
            59,146,952Total
      liabilities and shareholders' equity
            
            $
            112,904,557
            
            $
            80,279,865




The
accompanying notes are integral part of the these consolidated
statements.
 See
report of independent registered public accounting
firm.


F-2


ASIAN
FINANCIAL INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME


FOR THE
YEARS ENDED JUNE 30, 2008, 2007 AND 2006





2008
            
            2007
            
            2006REVENUES
            
            $
            89,627,677
            
            $
            67,811,867
            
            $
            43,746,561COST
      OF SALES
            
            
            44,461,903
            
            
            37,693,679
            
            
            22,477,905GROSS
      PROFIT
            
            
            45,165,774
            
            
            30,118,188
            
            
            21,268,656RESEARCH
      AND DEVELOPMENT EXPENSES
            
            
            1,683,304
            
            
            1,045,543
            
            
            1,036,570SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
            
            
            13,177,154
            
            
            10,905,809
            
            
            6,649,280INCOME
      FROM OPERATIONS
            
            
            30,305,316
            
            
            18,166,836
            
            
            13,582,806LIQUIDATED
      DAMAGES, net of settlement
            
            
            235,492
            
            
            (2,119,428
            )
            
            -CHANGE
      IN FAIR VALUE OF DERIVATIVE INSTRUMENTS
            
            
            73,112
            
            
            -
            
            
            -OTHER
      INCOME (EXPENSE), net
            
            
            (535,056
            )
            
            (20,734
            )
            
            (238,974
            )INCOME
      BEFORE MINORITY INTEREST AND PROVISION FOR INCOME TAXES
            
            
            30,078,864
            
            
            16,026,674
            
            
            13,343,832MINORITY
      INTEREST
            
            
            381,633
            
            
            240,584
            
            
            187,120INCOME
      BEFORE PROVISION FOR INCOME TAXES
            
            
            29,697,231
            
            
            15,786,090
            
            
            13,156,712PROVISION
      FOR INCOME TAXES
            
            
            3,237,707
            
            
            1,806,943
            
            
            261,133NET
      INCOME
            
            
            26,459,524
            
            
            13,979,147
            
            
            12,895,579OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation gain
            
            
            8,199,861
            
            
            1,834,313
            
            
            425,857COMPREHENSIVE
      INCOME
            
            $
            34,659,385
            
            $
            15,813,460
            
            $
            13,321,436BASIC
      AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
            
            
            25,000,050
            
            
            23,041,021
            
            
            18,867,436BASIC
      AND DILUTED EARNING PER SHARE
            
            $
            1.06
            
            $
            0.61
            
            $
            0.68


The
accompanying notes are integral part of the these consolidated
statements.
 See
report of independent registered public accounting
firm.
 F-3


ASIAN
FINANCIAL INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY


FOR THE
YEARS ENDED JUNE 30, 2008, 2007 AND 2006





Common Stock
            
            
            
            Retained earnings
            
            AccumulatedNumber of
              shares
            
            Amount
            
            Additionalpaid-incapital
            
            Statutory
              reserves
            
            Unrestricted
            
            othercomprehensiveincome
            
            TotalBALANCE, July
      1, 2005
            
            
            17,562,388
            
            $
            17,562
            
            $
            5,992,339
            
            $
            581,640
            
            $
            2,142,376
            
            $
            -
            
            $
            8,733,917Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            12,895,579
            
            
            
            
            
            12,895,579Adjustment
      to statutory reserves
            
            
            
            
            
            
            
            
            
            
            
            1,289,558
            
            
            (1,289,558
            )
            
            
            
            
            -Foreign
      currency translation adjustments
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            425,857
            
            
            425,857BALANCE,
      June 30, 2006
            
            
            17,562,388
            
            $
            17,562
            
            $
            5,992,339
            
            $
            1,871,198
            
            $
            13,748,397
            
            $
            425,857
            
            $
            22,055,353Shares
      due to reorganization on August 31, 2006
            
            
            1,305,048
            
            
            1,305
            
            
            (1,305
            )
            
            
            
            
            13,979,147
            
            
            
            
            
            13,979,147Net
      income
            
            
            
            
            
            
            
            
            
            
            
            1,411,403
            
            
            (1,411,403
            )
            
            
            
            
            -Shares
      issued for cash, $1.43 per share
            
            
            6,132,614
            
            
            6,133
            
            
            21,272,006
            
            
            
            
            
            
            
            
            
            
            
            21,278,139Foreign
      currency translation adjustments
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,834,313
            
            
            1,834,313BALANCE,
      June 30, 2007
            
            
            25,000,050
            
            $
            25,000
            
            $
            27,263,040
            
            $
            3,282,601
            
            $
            26,316,141
            
            $
            2,260,170
            
            $
            59,146,952Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            26,459,524
            
            
            
            
            
            26,459,524Adjustment
      to statutory reserves
            
            
            
            
            
            
            
            
            
            
            
            2,717,489
            
            
            (2,717,489
            )
            
            
            
            
            -Foreign
      currency translation adjustments
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            8,199,861
            
            
            8,199,861BALANCE,
      June 30, 2008
            
            
            25,000,050
            
            $
            25,000
            
            $
            27,263,040
            
            $
            6,000,090
            
            $
            50,058,176
            
            $
            10,460,031
            
            $
            93,806,337


The
accompanying notes are integral part of the these consolidated
statements.
 See
report of independent registered public accounting firm.
 F-4


ASIAN
FINANCIAL INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
YEARS ENDED JUNE 30, 2008, 2007 AND 2006





2008
            
            2007
            
            2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
            
            $
            26,459,524
            
            $
            13,979,147
            
            $
            12,895,579Adjustments
      to reconcile net income to cashprovided
      by (used in) operating activities:Minority
      interest
            
            
            381,633
            
            
            240,584
            
            
            187,120Depreciation
            
            
            2,239,063
            
            
            882,842
            
            
            590,635Amortization
            
            
            75,297
            
            
            70,047
            
            
            67,821Loss
      on fixed assets disposal
            
            
            1,458
            
            
            -
            
            
            -Bad
      debt expense
            
            
            589,901
            
            
            322,305
            
            
            -Change
      in fair value of derivative instruments
            
            
            (73,112
            )
            
            -
            
            
            -Liquidated
      damages penalty
            
            
            706,476
            
            
            2,119,428
            
            
            -Gain
      from settlement of liquidated damages
            
            
            (941,968
            )
            
            -
            
            
            -Change
      in operating assets and liabilitiesAccounts
      receivable
            
            
            (9,740,414
            )
            
            (9,452,582
            )
            
            (6,010,258
            )Inventories
            
            
            (1,566,856
            )
            
            (2,440,076
            )
            
            (1,390,188
            )Other
      receivables
            
            
            51,706
            
            
            71,457
            
            
            -Other
      receivables - related parties
            
            
            -
            
            
            913,154
            
            
            5,289Deferred
      expense
            
            
            (661,250
            )
            
            -
            
            
            -Other
      assets
            
            
            42,230
            
            
            (43,198
            )
            
            36,625Accounts
      payable
            
            
            (1,287,681
            )
            
            (10,935,839
            )
            
            4,361,870Customer
      deposits
            
            
            -
            
            
            (19,265
            )
            
            18,653Other
      payables
            
            
            (104,471
            )
            
            (341,354
            )
            
            286,617Other
      payables - related parties
            
            
            (386,960
            )
            
            (455,164
            )
            
            (6,518,709
            )Accrued
      liabilities
            
            
            538,634
            
            
            312,551
            
            
            69,749Taxes
      payable
            
            
            477,886
            
            
            576,025
            
            
            332,069Net
      cash provided by (used in) operating activities
            
            
            16,801,096
            
            
            (4,199,938
            )
            
            4,932,872CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of equipment
            
            
            (7,925,596
            )
            
            (13,314,596
            )
            
            (297,559
            )Advances
      on equipment purchases
            
            
            (2,598,661
            )
            
            2,233,885
            
            
            (1,265,352
            )Net
      cash used in investing activities
            
            
            (10,524,257
            )
            
            (11,080,711
            )
            
            (1,562,911
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from private placement
            
            
            -
            
            
            21,278,139
            
            
            -Proceeds
      from lines of credit
            
            
            10,739,820
            
            
            15,050,400
            
            
            -Payments
      for lines of credit
            
            
            (13,493,620
            )
            
            (15,060,400
            )
            
            -Payments
      for liquidated damages payable
            
            
            (436,000
            )
            
            -
            
            
            -Restricted
      cash
            
            
            2,097,490
            
            
            (2,097,490
            )
            
            -Net
      cash (used in) provided by financing activities
            
            
            (1,092,310
            )
            
            19,170,649
            
            
            -EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
            
            
            1,198,810
            
            
            186,650
            
            
            75,316INCREASE
      IN CASH
            
            
            6,383,339
            
            
            4,076,650
            
            
            3,445,277CASH,
      beginning of year
            
            
            7,816,361
            
            
            3,739,711
            
            
            294,434CASH,
      end of year
            
            $
            14,199,700
            
            $
            7,816,361
            
            $
            3,739,711





The
accompanying notes are integral part of the these consolidated
statements.


See
report of independent registered public accounting firm.


F-5





ASIAN
FINANCIAL INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2008





Note 1 – Organization background
and principal activities





Asian Financial, Inc.
(“AFI”) was
organized under the laws of the State of Nevada on August 10, 1998. On July 27,
2005, AFI merged with Asian Financial, Inc. (a Wyoming entity) for the purpose
of changing its domicile from Nevada to Wyoming. AFI has no operations and
generated no revenues since inception.





Duoyuan
Investments Limited (“Duoyuan BVI”) is a British Virgin Islands company that
owns 100% of the equity interest of Duoyuan Digital Printing Technology Industry
(China) Co., Ltd. (“Duoyuan China”). Duoyuan China has two subsidiaries, a 99.4%
ownership in Hunan Duoyuan Printing Machinery Co., Ltd. and 95% ownership in
Langfang Duoyuan Digital Technology Co., Ltd (collectively referred to as the
Duoyuan Interest).





On August
31, 2006, Asian Financial, Inc. entered into a definitive Equity Transfer
Agreement with Duoyuan BVI to acquire the “Duoyuan Interest” in exchange for
47,100,462 new (pre-split) shares of common stock in Asian Financial. Prior to
the acquisition, Asian Financial, Inc. had 3,500,000 (pre-split) shares of
outstanding common stock. Accordingly, at the closing, there were 50,600,462
(pre-split) shares outstanding. The Equity Transfer Agreement became effective
October 6, 2006. The stock exchange transaction has been accounted as a reverse
acquisition and recapitalization of the Company whereby Duoyuan BVI is deemed to
be the accounting acquirer (legal acquiree) and the Company to be the accounting
acquiree (legal acquirer). The historical financial statements for periods prior
to October 6, 2006 are those of Duoyuan BVI, except that the equity section and
earnings per share have been retroactively restated to reflect the reverse
acquisition. As a
result of the equity transfer, Duoyuan China became Asian Financial, Inc’s
wholly-owned subsidiary, and Mr. Wenhua Guo, the sole shareholder of Duoyuan
BVI, became our controlling shareholder.





Duoyuan Digital Printing Technology
Industry (China) Co., Ltd. (“Duoyuan China”) was
originally established and wholly owned by Duoyuan Industries (Holding) Inc.
(“Duoyuan Industries”), a British Virgin Islands company. In September 2002,
Duoyuan Industries entered into an Equity Transfer Agreement with Duoyuan BVI,
whereby Duoyuan BVI acquired 100% of the equity in Duoyuan China from Duoyuan
Industries. Mr. Wenhua Guo is the sole shareholder of both Duoyuan Industries
and Duoyuan BVI. Duoyuan China was incorporated in the People’s Republic of
China (“PRC”) in 2001 with the registered capital $6,000,000. Duoyuan China has
increased its registered capital to $19,000,000. As of June 30, 2007,
$18,000,000 was contributed to Duoyuan China from the Company, and the remaining
$1,000,000 was received in July and August 2007. The capital was raised through
a private placement to accredited investors, see Note 11. On August 21, 2007,
Duoyuan China received its business license requiring $25,000,000 registered
capital. As of June 30, 2008, Duoyuan China owns 95.0% of Langfang Duoyuan
Digital Technology Co., Ltd. and 88.0% of Hunan Duoyuan Printing Machinery Co.,
Ltd.





Langfang Duoyuan Digital Technology
Co., Ltd. (“Langfang
Duoyuan”) is
located in the city of Langfang, China and manufactures digital printing
products. Langfang Duoyuan was originally called Langfang Duoyuan Digital
Printing Technology Co., Ltd. when Beijing Huiyuan Duoyuan Research Institute
Co., Ltd. (“Huiyuan Institute”) owned 95% and Beijing Yinlu Advertising Co.,
Ltd. (Yinlu) owned 5%. On March 21, 2002, Yinlu transferred its 5% ownership to
Duoyuan China. On October 16, 2005, Huiyuan Institute transferred 90% of the
equity of Langfang Duoyuan to Duoyuan China whereby Duoyuan China holds 95% of
the equity of Langfang Duoyuan while Huiyuan Institute remains the holder of 5%
of the Langfang Duoyuan equity. As of June 30, 2008 Langfang Duoyuan owns 12.0%
of Hunan Duoyuan Printing Machinery Co., Ltd.





Hunan Duoyuan Printing Machinery Co.,
Ltd. (“Hunan Duoyuan”) is
located in Hunan, China and manufactures printing equipment. Hunan Duoyuan was
established on March 10, 2006, is 88% owned by Duoyuan China and 12% by Langfang
Duoyuan. The business license expires March 2034.




See
report of independent registered public accounting firm.




F-6


ASIAN
FINANCIAL INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2008





Note 2 – Summary of significant
accounting policies





The reporting
entity





The
consolidated financial statements of Asian Financial Inc. and subsidiaries (“the
Company”) reflect activities of Asian Financial Inc., Duoyuan BVI - 100%,
Duoyuan China - 100%, Langfang Duoyuan - 95.0%, and Hunan Duoyuan - 99.4%.





Basis of
presentation





The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
All material inter-company transactions and balances have been eliminated in the
consolidation.





Use of
estimates





The
preparation of financial statements in conformity with generally accepted
accounting principles of the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. For example, the
Company estimates the allowance for doubtful accounts as well as the fair value
of its warrants, carried as derivative instruments, marked to market each
reporting period. Management believes that the estimates used in preparing its
financial statements are reasonable and prudent. Actual results could differ
from these estimates.





Foreign currency
translation




The
reporting currency of the Company is the US dollar. The Company uses their local
currency RMB, as their functional currency. Results of operations and cash flows
are translated at average exchange rates during the period, assets and
liabilities are translated at the unified exchange rate as quoted by the
People’s Bank of China at the end of the period, and equity is translated at
historical exchange rates.





Translation
adjustments amounted to $10,460,031 and $2,260,170 as of June 30, 2008 and 2007,
respectively. Asset and liability accounts at June 30, 2008, were translated at
6.85 RMB to $1.00 USD as compared to 7.60 RMB at June 30, 2007. Equity accounts
were stated at their historical rate. The average translation rates applied to
income statements for the years ended June 30, 2008, 2007 and 2006 were 7.26
RMB, 7.81 RMB and 8.06RMB, respectively.





Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred. Gains and losses from foreign currency
transactions are included in the results of operation. There were no material
transaction gains or losses for the years ended June 30, 2008, 2007 and 2006,
respectively.





Revenue
recognition





The
Company recognizes revenue in accordance with SAB 104, which specifies that
revenue is realized or realizable and earned when four criteria are met:





·
            Persuasive
      evidence of an arrangement exists. (The Company considers its sales
      contracts to be persuasive evidence of an
  arrangement.)


·
            Delivery
      has occurred or services have been rendered.


·
            The
      seller’s price to the buyer is fixed or determinable.


·
            Collectability
      of payment is reasonably assured.




See report of independent registered public
accounting firm.




F-7


ASIAN
FINANCIAL INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2008




In
accordance with SFAS 48, “Revenue Recognition when Right of Return Exists,”
revenue is recorded net of an estimate of markdowns, price concessions and
warranty costs. Such reserve is based on management’s evaluation of historical
experience, current industry trends and estimated costs.




The
Company sells its products solely to its distributors. Master distribution
agreements are signed with each distributor. The agreements list all terms and
conditions with the exception of delivery, price and quantity terms, which are
evidenced separately in purchase orders. There are no instances where
receivables from distributor are not due and payable until goods purchased from
the Company are sold by the distributor. The Company does not sell products to
distributors on a consignment basis. Title transfers when products are shipped.
Its distributors have a right to return within one month after the Company
shipped the products, only if the Company’s products have manufacturing defects
that cannot be repaired. The Company has never experienced any returns and
therefore made no allowance for sales returns.





The
Company recognizes revenue when the goods are delivered and title has passed.
Sales revenue represents the invoiced value of goods, net of a value-added tax
(VAT). All of the Company’s products that are sold in the PRC are subject to a
Chinese value-added tax at a rate of 17% of the gross sales price or at a rate
approved by the Chinese local government. This VAT may be offset by the VAT paid
by the Company on raw materials and other materials included in the cost of
producing their finished product. The Company’s distributors are able to install
our products without our assistance. As a result, there is no substantial
performance required on the Company’s part.





Purchase
prices of our products are fixed and customers are not allowed to renegotiate
pricing after the contracts are signed. The Company’s agreements with its
distributors do not include cancellation or termination clauses.





Credit
limits are assigned to each distributor. As a distributor builds a sales history
with the Company, the credit limit can be increased. Credit limits are reviewed
by management and reductions are made if deemed necessary.





Our
distributors are all equipped to install our products. We are not contractually
obligated to perform any installation services. As a result, our revenue
recognition is not impacted. The Company granted sales rebate to distributors
based on the percentage of annual cash receipt. The Company accounts for the
sales rebate in accordance with Emerging Issues Task Force (“EITF”) Issue 01-09,
“Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)”. The sales rebate is included as a reduction
of sales and accounts receivable to be received by the Company.





Shipping and
handling





Shipping
and handling costs related to costs of goods sold are included in selling,
general and administrative costs. Shipping and handling costs amounted to
$960,147, $1,127,745 and $623,323, respectively, for the years ended June 30,
2008, 2007 and 2006.





Intangible
assets





All land
in the People’s Republic of China is owned by the government. However, the
government grants rights to use the land. Land use rights are valid for a
limited period of time, depending on their use. Based upon PRC regulations, land
use rights last for 50 years for industrial property. The Company has the right
to use the land for 50 years and has elected to amortize the cost of rights over
50 years using the straight-line method.





Intangible
assets consisted of the following:





June 30, 2008
            
            June 30, 2007Intangible -
      land use right
            
            $
            4,439,619
            
            $
            4,001,439Less
      accumulated amortization
            
            
            (436,491
            )
            
            (321,498
            )Total
            
            $
            4,003,128
            
            $
            3,679,941






See report of independent registered public accounting
firm.


F-8


ASIAN
FINANCIAL INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2008





Total
amortization expense for the years ended June 30,
2008, 2007 and 2006 amounted to $75,297, $70,047 and $67,821, respectively.





Intangible
assets of the Company are reviewed each reporting period to determine whether
their carrying value has become impaired. The Company considers assets to be
impaired if the carrying value exceeds the future projected cash flows from
related operations. The Company also re-evaluates the periods of amortization to
determine whether subsequent events and circumstances warrant revised estimates
of useful lives. As of June 30, 2008, the Company expects these assets to be
fully recoverable.





Plant and equipment





Plant and
equipment are stated at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets with 5% residual value. Estimated useful lives of the assets are as
follows:





Estimated
      Useful LifeBuildings
            
            
            30
            
            
            YearsOffice
      equipment
            
            
            3-10
            
            
            YearsMotor
      vehicles
            
            
            4-10
            
            
            YearsMachinery
      and equipment
            
            
            5-10
            
            
            Years





Construction
in progress represents the costs incurred in connection with the construction of
buildings or new additions to the Company’s plant facilities. No depreciation is
provided for construction in progress until such time as the assets are
completed and are placed into service. Maintenance, repairs and minor renewals
are charged directly to expenses as incurred. Major additions and betterments to
property and equipment are capitalized.





The cost
and related accumulated depreciation and amortization of assets sold or
otherwise retired are eliminated from the accounts and any gain or loss is
included in earnings.





Plant and
equipment consist of the following:





June 30, 2008
            
            June 30, 2007Buildings
            
            $
            13,643,084
            
            $
            8,201,747Office
      equipment
            
            
            924,251
            
            
            797,941Motor
      vehicles
            
            
            322,447
            
            
            292,989Plant
      and machinery
            
            
            20,305,152
            
            
            18,709,322Construction
      in progress
            
            
            4,268,971
            
            
            -Total
            
            
            39,463,905
            
            
            28,001,999Less:
      accumulated depreciation
            
            
            (5,333,254
            )
            
            (2,669,445
            )Plant
      and equipment, net
            
            $
            34,130,651
            
            $
            25,332,554





The
depreciation expense for the years ended June 30,
2008, 2007 and 2006 amounted to $2,239,063, $882,842 and $590,635, respectively.





Interest
costs totaling $140,949 was capitalized into construction in progress for the
year ended June 30, 2008; no interest was capitalized in 2007 or
2006.






See report of independent registered public accounting
firm.





F-9


ASIAN
FINANCIAL INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2008





Long-lived
assets of the Company are reviewed each reporting period to determine whether
their carrying value has become impaired. The Company considers assets to be
impaired if the carrying value exceeds the future projected cash flows from
related operations. The Company also re-evaluates the periods of amortization to
determine whether subsequent events and circumstances warrant revised estimates
of useful lives. As of June 30, 2008, the Company expects these assets to be
fully recoverable.





Concentration of
risk





Cash
includes cash on hand and demand deposits in accounts maintained with
state-owned banks within the People’s Republic of China and offshore banking
account with DBS bank. Total cash in state-owned banks and DBS bank at June 30,
2008 and June 30, 2007 amounted to $14,192,775 and $7,764,148, respectively,
none of which are covered by insurance. The Company has not experienced any
losses in such accounts and believes it is not exposed to any risks on its cash
in bank accounts.





For the
year ended June 30, 2008, one supplier accounted for approximately 12% of the
Company’s purchases; for the year ended June 30, 2007 four suppliers accounted
for approximately 59% of the company’s purchases; for the year ended June 30,
2006, five suppliers accounted for approximately 69% of the Company's purchases.
These suppliers represent 14% and 40% of the Company's total accounts payable as
of June 30, 2008 and 2007.





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





Restricted
cash





Restricted
cash represents cash held in escrow in connection with the November 2006 private
placement. As of June 30, 2008 and 2007, a total of $0 and $2,097,490,
respectively, was held in escrow.





Inventories





Inventories
are stated at the lower of cost (weighted average method) or market, and consist
of the following:





June 30, 2008
            
            June 30, 2007Raw
      materials
            
            $
            7,282,772
            
            $
            5,118,566Work
      in process
            
            
            10,984,027
            
            
            9,265,459Finished
      goods
            
            
            5,683,752
            
            
            5,690,580Totals
            
            $
            23,950,551
            
            $
            20,074,605





The
Company reviews its inventory on a regular basis for possible obsolete goods to
determine if any reserves are necessary. As of June 30, 2008 and 2007, the
Company determined that no reserves were necessary.





Liquidated
damages





The
liquidated damages associated with the registration of the shares and the
settlement of all outstanding related party balances are treated in accordance
with FSP EITF 00-19-2, which requires the Company to recognize an expense and a
liability equal to minimum estimated losses.






See report of independent registered public accounting
firm.




F-10


ASIAN
FINANCIAL INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2008





Financial
instruments





Statement
of Financial Accounting Standards No. 107 (SFAS 107), “Disclosures about Fair
Value of Financial Instruments” requires disclosure of the fair value of
financial instruments held by the Company. SFAS 107 defines the fair value of
financial instruments as the amount at which the instrument could be exchanged
in a current transaction between willing parties. The Company considers the
carrying amount of cash, accounts receivable, other receivables, accounts
payable, accrued liabilities, other payables and line of credit to approximate
their fair values because of the short period of time between the origination of
such instruments and their expected realization and their current market rate of
interest.





Accounts receivable, and
allowance for doubtful accounts





The
Company’s business operations are conducted in the People’s Republic of China.
During the normal course of business, the Company extends unsecured credit to
its customers by selling on various credit terms from three to nine months.
Management reviews its accounts receivable on a quarterly basis to determine if
the allowance for doubtful accounts is adequate. An estimate for doubtful
accounts is recorded in the period of the related sales. The Company’s existing
reserve is consistent with its historical experience and considered adequate by
management.





Accounts
receivable, net of allowance for doubtful accounts outstanding at June 30, 2008
and 2007 amounted to $33,184,833 and $21,170,423, respectively. Management
monitors accounts receivable aging and customer operating to determine if the
allowance for doubtful accounts is adequate. The Company has recorded an
allowance for doubtful accounts for trade accounts receivables aged between nine
months and one year at 15% and currently the Company does not have any
outstanding balance aged over year. As of June 30, 2008 and 2007, allowances for
doubtful accounts were $1,178,328 and $498,648, respectively.





The
following represents the changes of allowance for doubtful
accounts:





June 30, 2008
            
            June 30, 2007Balance,
      beginning of period
            
            $
            498,648
            
            $
            159,725Additional
      reserves
            
            
            589,901
            
            
            322,305Foreign
      currency translation adjustments
            
            
            89,779
            
            
            16,618Balance,
      end of period
            
            $
            1,178,328
            
            $
            498,648





Income
taxes





The
Company records income taxes pursuant to SFAS 109, which requires recognition of
deferred income tax liabilities and assets for the expected future tax
consequences of temporary differences between income tax basis and financial
reporting basis of assets and liabilities. Provision for income taxes consist of
taxes currently payable plus deferred taxes. Since the Company had no operations
within the United States, there is no provision for US income taxes and there
are no deferred tax amounts as of June 30,
2008 and 2007.





The
Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
“more likely than not” test, no tax benefit is recorded. The adoption had no
affect on the Company’s financial statements.





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






See report of independent registered public accounting
firm.




F-11


ASIAN
FINANCIAL INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2008





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





China income
tax





The
Company’s subsidiaries are governed by the Income Tax Law of the People’s
Republic of China (PRC) concerning Foreign Investment Enterprises and Foreign
Enterprises and various local income tax laws (the Income Tax Laws).





Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
(“FIEs”).


The key
changes are:





a.
            The
      new standard EIT rate of 25% will replace the 33% rate currently
      applicable to both DES and FIEs, except for High Tech companies who pay a
      reduced rate of 15%;





b.
            Companies
      established before March 16, 2007 will continue to enjoy tax holiday
      treatment approved by local government for a grace period of either for
      the next 5 years or until the tax holiday term is completed, whichever is
      sooner. These companies will pay the standard tax rate as defined in point
      “a” above when the grace period expires.





The
Company and its subsidiaries were established before March 16, 2007 and
therefore are qualified to continue enjoying the reduced tax rate as described
below.





Prior to
March 16, 2007, upon approval by the PRC tax authorities, FIE's scheduled to
operate for a period of 10 years or more and engaged in manufacturing and
production may be exempt from income taxes for two years, commencing with their
first profitable year of operations, after taking into account any losses
brought forward from prior years, and thereafter with a 50% reduction for the
subsequent three years.





Duoyuan
China has become a wholly foreign-owned enterprise since its inception. This
entity status allows Duoyuan China a two-year income tax exemption and a 50%
income tax reduction for the following three years. Duoyuan China also had
operating losses prior to the calendar year ended December 31, 2003 and started
to generate a net profit for the calendar year ended December 31, 2004.
Therefore Duoyuan China has an income tax exemption for the calendar years ended
December 31, 2004 and 2005 and 50% income tax reduction for the calendar years
ended December 31, 2006, 2007 and 2008. The income tax rate for Duoyuan China in
calendar years ended December 31, 2006 and 2007 was 16.5% and in the calendar
year ended 2008 were 12.5%. Beginning January 1, 2009, the income tax rate for
Duoyuan China will increase to 25%.





Langfang
Duoyuan is located in a Special Economic and High Technology Zone and the PRC
tax authority has offered a special income tax rate to Langfang Duoyuan for
doing business in the special zone. With the approval of the local government,
Langfang Duoyuan is exempt from income taxes for five years, commencing with
their first profitable year of operations. Langfang Duoyuan has operating losses
prior to the calendar year ended December 31, 2002 and started to generate a net
profit for the calendar year ended December 31, 2003. Therefore Langfang Duoyuan
has an income tax exemption for the years ended December 31, 2003, through
December 31, 2007. Langfang Duoyuan is subject to an income tax rate of 25%
starting January 1, 2008, under the newly unified corporate income tax
rate.






See report of independent registered public accounting
firm.





F-12


ASIAN
FINANCIAL INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2008





Prior to
acquiring Hunan Duoyuan, the shareholders negotiated with Hunan Shaoyang
Treasure Department to obtain an income tax exemption benefit. The Treasure
Department granted the company a five-year income tax exemption commencing with
the first profitable year of operations. In addition, the Treasure Department
granted a 50% refund of income taxes based upon the amount of income taxes paid
by Hunan Duoyuan. Hunan Duoyuan suffered an operating loss in the first year of
operations ended December 31, 2004 and started to generate a net profit for the
calendar year ended December 31, 2005. Therefore Hunan Duoyuan has an income tax
exemption for the years ended December 31, 2005, through December 31, 2009. We
believe Hunan Duoyuan will become subject to income tax at a rate of 25%
starting January 1, 2010, under the newly unified corporate income tax rate.





PRC law
requires that before a foreign invested enterprise can legally distribute
profits to its partners, it must satisfy all tax liabilities, provide for losses
in previous years, and make allocations, in proportions made at the discretion
of the board of directors, after the statutory reserve. The statutory reserves
include the surplus reserve fund and the common welfare fund and represent
restricted retained earnings.





During
the years ended June 30, 2008, 2007 and 2006 the provision for income taxes
amounted to $3,237,707, $1,806,943 and $261,133, respectively. The estimated tax
savings due to this tax exemption for the years ended June 30, 2008, 2007 and
2006 amounted to $7,864,995, $4,509,810 and $4,154,255, respectively. The net
effect on earnings per share had the income tax been applied would decrease
basic and diluted earnings per share from $1.06 to $0.74, $0.61 to $0.49 and
$0.68 to $0.46 for the years ended June 30, 2008, 2007 and 2006,
respectively.





The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended June 30, 2008 and 2007:





2008
            
            2007U.S.
      Statutory rates
            
            
            34.0
            %
            
            34.0
            %Foreign
      income not recognized in USA
            
            
            (34.0
            )
            
            (34.0
            )China
      income taxes
            
            
            29.0
            
            
            33.0China
      income tax exemption
            
            
            (18.1
            )
            
            (16.5
            )Effective
      income tax rates
            
            
            10.9
            %
            
            16.5
            %





Value added
tax





Enterprises
or individuals who sell commodities, engage in repair and maintenance or import
and export goods in the PRC are subject to a value added tax, VAT, in accordance
with Chinese laws. The VAT standard rate is 17% of the gross sales price. A
credit is available whereby VAT paid on the purchases of semi-finished products
or raw materials used in the production of the Company’s finished products can
be used to offset the VAT due on sales of the finished product.





VAT on
sales and VAT on purchases amounted to $28,937,411 and $20,121,852 for the year
ended June 30, 2008, $19,791,244 and $7,258,360 for the year ended June 30,
2007, and $12,931,347 and $9,326,775 for the year ended June 30, 2006,
respectively. Sales and
purchases are recorded net of VAT collected and paid as the Company acts as an
agent because the VAT taxes are not impacted by the income tax
holiday.





Advertising
costs





The
Company expenses the cost of advertising as incurred in selling, general and
administrative costs. Advertising costs were $1,357,362, $1,118,480 and $597,611
for the years ended June 30, 2008, 2007 and 2006, respectively.






See report of independent registered public accounting
firm.




F-13


ASIAN
FINANCIAL INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2008





Research and development
costs





Research
and development costs are expensed as incurred. The costs of material and
equipment acquired or constructed for research and development activities, and
have alternative future uses, either in research and development, marketing, or
sales, are capitalized as property and equipment and depreciated over their
estimated useful lives.





Recently issued accounting
pronouncements





In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which
addresses the measurement of fair value by companies when they are required to
use a fair value measure for recognition or disclosure purposes under GAAP. SFAS
No. 157 provides a common definition of fair value to be used throughout GAAP
which is intended to make the measurement of fair value more consistent and
comparable and improve disclosures about those measures. SFAS No. 157 will be
effective for an entity's financial statements issued for fiscal years beginning
after November 15, 2007. The Company is currently evaluating the effect SFAS No.
157 will have on its consolidated financial position, liquidity, or results of
operations.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement No.
115 (“SFAS 159”). SFAS 159 permits companies to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. The objective of SFAS 159 is to provide
opportunities to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply hedge
accounting provisions. SFAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and liabilities.
SFAS 159 is effective as of the beginning of the fiscal year that begins after
November 15, 2007. The Company is evaluating the impact that this
statement will have on its consolidated financial statements.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51” (“SFAS
160”), which establishes accounting and reporting standards for ownership
interests  in
subsidiaries held by parties other than the parent, the amount of consolidated
net income attributable to the parent and to the  noncontrolling
interest, changes in a parent’s ownership interest and the valuation of retained
non-controlling equity investments when  a
subsidiary is deconsolidated. The Statement also establishes reporting
requirements that provide sufficient disclosures that clearly  identify
and distinguish between the interests of the parent and the interests of the
non-controlling owners. SFAS 160 is effective for  fiscal
years beginning after December 15, 2008. The Company has not determined the
effect that the application of SFAS 160 will  have on
its consolidated financial statements.





In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about
Derivative Instruments and Hedging Activities - An Amendment of SFAS
No. 133” (“SFAS 161”). SFAS 161 seeks to improve financial reporting for
derivative instruments and hedging activities by requiring enhanced disclosures
regarding the impact on financial position, financial performance, and cash
flows. To achieve this increased transparency, SFAS 161 requires (1) the
disclosure of the fair value of derivative instruments and gains and losses in a
tabular format; (2) the disclosure of derivative features that are credit
risk-related; and (3) cross-referencing within the footnotes. SFAS 161 is
effective on January 1, 2009. The Company is in the process of evaluating
the new disclosure requirements under SFAS 161.





In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). SFAS 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with GAAP for nongovernmental entities. SFAS 162 is
effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles." The Company does not
expect the adoption of this statement to have a material impact on our results
of operations, financial position or cash flows.






See report of independent registered public accounting
firm.




F-14


ASIAN
FINANCIAL INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2008





In June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
No. 07-5”). This Issue is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years. Early application is not permitted. Paragraph 11(a) of Statement of
Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the
definition of a derivative but is both (a) indexed to the Company’s own
stock and (b) classified in stockholders’ equity in the statement of
financial position would not be considered a derivative financial instrument.
EITF No.07-5 provides a new two-step model to be applied in determining whether
a financial instrument or an embedded feature is indexed to an issuer’s own
stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception.
This standard triggers liability accounting on all options and warrants
exercisable at strike prices denominated in any currency other than the
functional currency in China (Renminbi). The Company is currently evaluating the
impact of adoption of EITF No. 07-5 on the Company’s consolidated financial
statements.





Reclassifications





Certain
prior period amounts have been reclassified to conform to current period
presentation. These reclassifications have no effect on net income or cash
flows.





Note 3 – Earnings per
share





The
Company reports earnings per share in accordance with the provisions of SFAS No.
128, “Earnings Per Share.” SFAS 128 requires presentation of basic and diluted
earnings per share in conjunction with the disclosure of the methodology used in
computing such earnings per share. Basic earnings per share excludes dilution
and is computed by dividing income available to common stockholders by the
weighted average common shares outstanding during the period. Diluted earnings
per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock.





All share
and per share amounts used in the Company's financial statements and notes
thereto have been retroactively restated to reflect the 1-for-2.68189924 reverse
stock split, which occurred on July 17, 2007.





The
following is a reconciliation of the basic and diluted earnings per share
computation for the years ended June 30, 2008, 2007 and 2006:





2008
            
            2007
            
            2006For
      the years ended June 30, 2008, 2007 and 2006Net
      income for earnings per share
            
            $
            26,459,524
            
            $
            13,979,147
            
            $
            12,895,579Weighted
      average shares used in basic computationBasic
            
            
            25,000,050
            
            
            23,041,021
            
            
            18,867,436Diluted
            
            
            25,000,050
            
            
            23,041,021
            
            
            18,867,436Earnings
      per share:Basic
            
            $
            1.06
            
            $
            0.61
            
            $
            0.68Diluted
            
            $
            1.06
            
            $
            0.61
            
            $
            0.68





At June
30, 2008, 576,425 warrants, whose exercise price is $5.76, are excluded from the
calculation of diluted earnings per share because of their antidilutive nature.
At June 30, 2008 and 2007, 613,206 warrants, whose exercise price is $4.21, are
excluded from the calculation because of their antidilutive nature.






See report of independent registered public accounting
firm.


F-15


ASIAN
FINANCIAL INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2008





Note 4 – Supplemental disclosure
of cash flow information





Interest
paid, net of capitalized, amounted to $816,735, $750,736 and $721,764 for the
years ended June 30, 2008, 2007 and 2006, respectively.





Income
tax paid amounted to $2,831,179, $1,355,095 and $0 for the years ended June 30,
2008, 2007 and 2006, respectively.





In fiscal
2008, the Company issued 576,425 warrants to settle the liquidated damages and
the related party penalties; warrants were valued using the black-scholes model
amounting to $1,377,947.





In fiscal
2006, the Company received land use rights totaling $224,965 that was prepaid in
prior year.




Note 5 – Related party
transactions





Mr.
Wenhua Guo is the Company’s controlling shareholder and chief executive. The
following is a summary of the amounts due related parties:





Other
      payable - related parties
            
            June 30, 2008
            
            June 30, 2007Duoyuan
      China Water Recycle Technology Industry Co., Ltd. - Mr. Wenhua Guo is the
      sole shareholder
            
            $
            -
            
            $
            369,564





The
Company leases office space from Duoyuan China Water Recycle Technology Industry
Co., a related party. See Note 9.




In
addition, the Company leased part of its manufacturing plant located in Langfang
Duoyuan to Duoyuan Water Treatment Equipment Manufacturing (Langfang) Co., Ltd,
a company 80% owned by Mr. Wenhua Guo, from October 1, 2004 to September 30,
2009. Total rental income for the years ended June 30, 2008, 2007 and 2006
amounted to $0, $447,247, and $434,697, respectively. On May 25, 2007, the
Company and Duoyuan Water Treatment Equipment Manufacturing (Langfang) Co., Ltd
terminated the lease pursuant to a termination agreement.




Note 6 – Lines of
credit





The lines
of credit represent amounts due to various banks which are due on demand or
normally within one year. These loans can be renewed with the banks. The Company
had a total of $11,380,200 and $12,887,000 outstanding on these lines of credit
as of June 30, 2008 and 2007, respectively. The loans consisted of the
following:





June
      30,
            
            June
      30,2008
            
            2007Loan
      from Bank of Agriculture, Chongwen branchdue
      March 13, 2009. Quarterly interest only payment at 8.570% per annum,
      secured by plant and machinery
            
            $
            1,459,000
            
            $
            1,315,000Loan
      from Bank of Agriculture, Chongwen branchdue
      June 29, 2008. Quarterly interest only payment at 6.732% per annum,
      secured by plant and machinery
            
            
            -
            
            
            2,630,000Loan
      from Bank of Agriculture, Chongwen branchdue
      July 12, 2008. Quarterly interest only payment at 6.732% per annum,
      secured by plant and machinery
            
            
            2,918,000
            
            
            2,630,000Loan
      from Bank of Agriculture, Chongwen branchdue
      July 19, 2008. Quarterly interest only payment at 7.227% per annum,
      secured by plant and machinery
            
            
            4,085,200
            
            
            3,682,000Loan
      from Bank of Agriculture, Chongwen branchdue
      July 26, 2008. Quarterly interest only payment at 7.227% per annum,
      secured by plant and machinery
            
            
            2,918,000
            
            
            2,630,000Totals
            
            $
            11,380,200
            
            $
            12,887,000






See report of independent registered public accounting
firm.


F-16


ASIAN
FINANCIAL INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2008





Total
interest expense, net of capitalized interest, for the years ended June 30,
2008, 2007 and 2006 amounted to $794,485, $750,736 and $721,764, respectively.





The loans
are secured by plant and machinery with a carrying value of $18,351,972 and
$17,629,450 as of June 30, 2008 and June 30, 2007, respectively.





Note 7 – Taxes
payable





Asian
Financial, Inc. was incorporated in the United States and has incurred net
operating losses for income tax purposes for the year ended June 30,
2008. The net operating loss carry forwards for United States income taxes is
$1,260,426, which may be available to reduce future years’ taxable income. These
carry forwards will expire, if not utilized, starting in 2027 through 2028.
Management believes that the realization of the benefits from these losses
appears uncertain due to the company’s limited operating history and continuing
losses for United States income tax purposes. Accordingly, the Company has
provided a 100% valuation allowance on the deferred tax asset benefit to reduce
the asset to zero. The valuation allowance at June 30, 2008 was $428,545.
Management reviews this valuation allowance periodically and makes adjustments
as warranted .





Taxes
payable consisted of the following:





June 30, 2008
            
            June 30, 2007VAT
      payable
            
            $
            359,725
            
            $
            256,175Income
      tax payable
            
            
            1,253,988
            
            
            751,081Others
            
            
            89,273
            
            
            71,247Total
      taxes payable
            
            $
            1,702,986
            
            $
            1,078,503





Note 8 – Statutory reserves and
dividends





The laws
and regulations of the People’s Republic of China require that before a foreign
invested enterprise can legally distribute profits, it must first satisfy all
tax liabilities, provide for losses in previous years, and make allocations in
proportions determined at the discretion of the board of directors, after the
statutory reserve. The statutory reserves include the surplus reserve fund and
the enterprise fund. Additionally, the Chinese government restricts
distributions of registered capital and the additional investment amounts
required by a foreign invested enterprise. Approval by the Chinese government
must be obtained before distributions of these amounts can be returned to the
shareholders.





Statutory surplus reserve
fund





The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital.






See report of independent registered public accounting
firm.




F-17


ASIAN
FINANCIAL INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2008





The
transfer to this reserve must be made before distribution of any dividends to
shareholders. For the years ended June 30, 2008, 2007 and 2006, the Company
transferred $2,717,489, $1,411,403 and $1,289,558 to this reserve. The reserve
represents 10% of the current year’s net income determined in accordance with
the PRC accounting rules and regulations. The surplus reserve fund is
non-distributable other than during liquidation and can be used to fund previous
years’ losses, if any, and may be utilized for business expansion or converted
into share capital by issuing new shares to existing shareholders in proportion
to their shareholding or by increasing the par value of the shares currently
held by them, provided that the remaining reserve balance after such issue is
not less than 25% of the registered capital.





Enterprise
fund





The
enterprise fund may be used to acquire fixed assets or to increase the working
capital to expend on production and operation of the business. No minimum
contribution is required and the Company has not made any contribution to this
fund.





Note 9 – Operating
leases





The
Company leases office space from Duoyuan China Water Recycle Technology Industry
Co., a related party, which Mr. Wenhua Guo is the sole shareholder on a calendar
year basis. The current lease agreement is from January 1, 2008 to December 31,
2008.





Total
lease expense for the years ended June 30, 2008, 2007 and 2006 was $154,784,
$143,992 and $136,022, respectively. Total future minimum lease payments at June
30, 2008, are as follows:





Year ended June 30,
            
            Amount2009
            
            $
            82,007Thereafter
            
            
            -





Note 10 – Employee
pension





The
employee pension in the Company generally includes two parts: the first to be
paid by the Company is 20% of the employee’s actual salary in the prior year.
The other part, paid by the employee, is 8% of the actual salary. The Company
made $2,327,600 contributions of employment benefits, including pension during
the year ended June 30, 2008. The Company made $1,111,749 in contributions of
employment benefits, including pension during the year ended June 30, 2007.





Note 11 – Shareholders'
equity





On
October 25, 2006, Asian Financial, Inc. entered into a definitive Security
Purchase Agreement with unrelated investors (the “Purchase Agreement”). The
transaction closed November 2, 2006. In accordance with the Purchase Agreement,
Asian Financial, Inc. issued 6,132,614 (post-split) shares of common stock for a
purchase price of approximately $3.84 (post-split) per share or a total of
$23,549,200.





As of
June 30, 2007, $2,097,490 of the proceeds was held in the escrow account. After
the Company appointed a majority of independent directors, the restricted cash
of $2,097,490 was released to the Company.





The
financing was conducted through a private placement to accredited investors and
is exempted from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended (the “Securities Act”). In conjunction with the private
placement, the Company agreed to register the shares with the Securities and
Exchange Commission within 90 days of the closing. The Company also agreed to
make the registration statement effective no later than the 150th day following
the closing date or the fifth trading day following the date on which the
Company is notified by the Securities and Exchange Commission that such
registration statement will not be reviewed or is no longer subject to further
review and comments, whichever date is earlier. If the registration statement is
not filed or declared effective pursuant to the above timeline or if the
registration statement ceases to be effective for more than an aggregate of 45
trading days, the Company will be required to pay the investors monthly
liquidated damages equal to 1% of the aggregate investment amount. The total
amount of the liquidated damages payable by the Company is capped at 8% of the
total investment amount paid by the investors. Penalties were expensed as
incurred and totaled $1,883,936 through December 31, 2007. During fiscal 2008,
the Company paid cash of $436,000 and issued 576,425 warrants valued at
$1,447,936, and the investors agreed to waive all future penalties under the
registration rights related to obtaining timely effectiveness of the
registration statement. The fair value of the warrants was calculated using the
Cox-Ross-Rubinstein binomial model with the following assumptions: market price
$5.76, 5 years term, volatility of 42%, risk free rate of 3.45% and no
dividends. Pursuant to SFAS 133 “Accounting for Derivatives”, warrants with
conversion feature denominated in a currency different in the functional
currency exposes the Company to foreign exchange risk and triggers liability
accounting. Therefore, the Company recorded $1,447,936 liability on December 31,
2007, the grant date, the Company revalued the warrants on June 30, 2008,
recording a gain of $73,112 for the changes of fair value.






See report of independent registered public accounting
firm.




F-18


ASIAN
FINANCIAL INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2008





Additionally,
pursuant to the Purchase Agreement, the Company agreed to cease all related
party transactions and to settle all outstanding balances due to or from related
parties by December 31, 2006. Failure to terminate the related party
transactions was to result in a monthly cash penalty of 1% of the proceeds with
a cap of 4%. The Company began accruing costs associated with this penalty in
January 2007. The 4% cap applies only to the penalty for having outstanding
related party transaction at December 31, 2006. Penalties were expensed as
incurred and totaled $941,968 through December 31, 2007. In November 2007, the
Company reached a settlement with investors who agreed to waive all penalties
due. Therefore, the Company reversed the accrual and recognized a gain of
$941,968 which is included in liquidated damages as a credit balance in the
accompanying financial statements.





Under the
terms of the Agreement, the Company is required to meet various performance
targets for the next two years. If the Company fails to meet those targets, the
Company’s controlling shareholder and CEO, agreed to transfer his personal
shares in the Company stock to each shareholder who is party to a Purchase
Agreement up to 112% of the number of shares issued to such shareholder in the
private placement. Management determined that the thresholds for the years ended
June 30, 2008, 2007 and 2006 have been met, the CEO does not required to
transfer his shares in the Company stock to each shareholder.





At
closing, as part of the compensation to the placement agent, Roth Capital
Partners, LLC, the Company issued to Roth Capital warrants to acquire 650,547
(post-split) shares of common stock, exercisable at any time after June 30,
2008. The warrants have a strike price equal to $1.57, have a term of five years
starting from July 1, 2008 and will permit cashless or net exercise at all
times. The shares underlying the warrants will have registration rights. The
warrant contains a standard antidilution provision for stock dividends, stock
splits, stock combination, recapitalization and a change of control transaction.
The warrants meet the conditions for equity classification pursuant to FAS 133
“Accounting for Derivatives” and EITF 00-19, “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock”. Therefore, these warrants were classified as equity and accounted as
common stock issuance cost.





Weighted
            
            AverageWarrants
            
            Warrants
            
            Average Exercise
            
            RemainingOutstanding
            
            Exercisable
            
            Price
            
            Contractual LifeBalance,
      June 30, 2006
            
            
            -
            
            
            -
            
            $
            -
            
            
            -Granted
            
            
            650,547
            
            
            -
            
            
            4.21
            
            
            5.00Forfeited
            
            
            -
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance,
      June 30, 2007
            
            
            650,547
            
            
            -
            
            $
            4.21
            
            
            5.00Granted
            
            
            576,425
            
            
            576,425
            
            
            5.76
            
            
            5.00Forfeited
            
            
            -
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance,
      June 30, 2008
            
            
            1,226,972
            
            
            576,425
            
            $
            4.95
            
            
            5.00






See report of independent registered public accounting
firm.


F-19


ASIAN
FINANCIAL INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2008





On July
17, 2007, the Company affected a 1-for-2.68189924 reverse stock split of its
common stock. All share and per share amounts used in the Company's financial
statements and notes thereto have been retroactively restated to reflect the
1-for-2.68189924 reverse stock split.





Note 12 – Subsequent
Events





On July
4, 2008, the Company renewed the $2,918,000 bank loan due on June 29, 2008 from
Bank of Agriculture, Chongwen branch. The new loan is due on July 3, 2009, with
an interest rate of 8.217% per annum, secured by plant and machinery.





On July
11, 2008, the Company renewed the $2,918,000 bank loan due on July 12, 2008 from
Bank of Agriculture, Chongwen branch. The new loan is due on July 10, 2009, with
an interest rate of 8.217% per annum, secured by plant and machinery.





On July
18, 2008, the Company renewed the $4,085,200 bank loan due on July 19, 2008 from
Bank of Agriculture, Chongwen branch. The new loan is due on July 17, 2009, with
an interest rate of 8.217% per annum, secured by plant and machinery.





On July
25, 2008, the Company renewed the $2,918,000 bank loan due on July 26, 2008 from
Bank of Agriculture, Chongwen branch. The new loan is due on July 24, 2009, with
an interest rate of 8.217% per annum, secured by plant and machinery.






See report of independent registered public accounting
firm.




F-20