UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
  FORM
10-Q
 x
              
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
the quarterly period ended March 31, 2009
  OR
 o
              
              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: 001-15643
  INFOSMART
GROUP, INC.
 (Exact
name of registrant as specified in its charter)
 California
                  
                  95-4597370(State
      or other jurisdiction of incorporation or
                    organization)
                  
                  (I.R.S.
      Employer Identification No.)5th
      Floor, QPL Industrial Building, 126-140 Texaco
                    Road,
                    Tsuen Wan, Hong Kong
                  
                  N/A(Address
      of principal executive offices)
                  
                  (Zip
      Code)
  Registrant’s
telephone number: (852) 2944-9905
  Securities
registered pursuant to Section 12(b) of the Act: None
 Securities
registered pursuant to Section 12(g) of the Act: Common Stock, no par
value
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes o No þ
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes o No þ
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
 
 Yes o        No
o
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained herein, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-Q or any amendment to this Form 10-Q. 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” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated
      filer  o
                Accelerated
      filer  oNon-accelerated
      filer  o
                Smaller
      reporting company  þ
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).   Yes o No þ
 
 Number of
shares of common stock outstanding as of March 31, 2009:
161,560,520
  
 
 TABLE OF CONTENTS
 TO
QUARTERLY REPORT ON FORM 10-Q
 FOR
PERIOD ENDED MARCH 31, 2009
 
 PagePART
      I
                FINANCIAL
      INFORMATIONItem
      1.
                Financial
      StatementsCondensed
      Consolidated Statements of Operations
                F-2Condensed
      Consolidated Balance Sheets
                F-3
      – F-4Condensed
      Consolidated Statements of Cash Flows
                F-5
      – F-6Notes
      to Condensed Consolidated Financial Statements
                F-7Item
      2.
                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                3Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                8Item
      4.
                Controls
      and Procedures
                8PART
      II
                OTHER
      INFORMATIONItem
      1.
                Legal
      Proceedings
                9Item
      1A.
                Risk
      Factors
                9Item
      2.
                Other
      Information
                19Item
      3.
                Exhibits
                20Signatures
                22Exhibits
  
  PART
I - FINANCIAL INFORMATION
 
 ITEM
      1.
              FINANCIAL
      STATEMENTS
 
 Infosmart
Group Inc.
 
 Condensed
Consolidated Financial Statements
 For
the three months ended March 31, 2009 and 2008
 (Stated
in US Dollars)
  
  
 INFOSMART
GROUP INC.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 Index to
financial statements
 
 PageCondensed
      Consolidated Statements of Operations
                    F-2Condensed
      Consolidated Balance Sheets
                    F-3
      – F-4Condensed
      Consolidated Statements of Cash Flows
                    F-5
      – F-6Notes
      to Condensed Consolidated Financial Statements
                    F-7
  
 
 INFOSMART
GROUP INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (Unaudited)
 (Stated
in US Dollars)
 
 Three
      months ended
                    March
      31,2009
                  
                  
                  2008Net
      sales
                  
                  $
                  6,896,490
                  
                  
                  $
                  7,560,447Cost
      of sales
                  
                  
                  (6,263,981
                  )
                  
                  
                  (6,498,617
                  )Gross
      profit
                  
                  
                  632,509
                  
                  
                  
                  1,061,830Administrative
      expenses
                  
                  
                  (898,829
                  )
                  
                  
                  (780,224
                  )Selling
      and distributing costs
                  
                  
                  (178,918
                  )
                  
                  
                  (72,867
                  )Income
      / (Loss) from operations
                  
                  
                  (445,238
                  )
                  
                  
                  208,739Other
      income
                  
                  
                  19,726
                  
                  
                  
                  813,960Interest
      expenses
                  
                  
                  (383,422
                  )
                  
                  
                  (138,407
                  )Income
      / (Loss) before income taxes
                  
                  
                  (808,934
                  )
                  
                  
                  884,292Income
      taxes - note 4
                  
                  
                  (476,484
                  )
                  
                  
                  (51,309
                  )Net
      income / (loss)
                  
                  
                  (1,285,418
                  )
                  
                  
                  832,983Non-controlling
      interest
                  
                  
                  28,123
                  
                  
                  
                  (4,963
                  )Net
      income / (loss) before dividend
                  
                  
                  (1,257,295
                  )
                  
                  
                  828,020Series
      B preferred dividend
                  
                  
                  -
                  
                  
                  
                  (79,345
                  )Net
      income / (loss) applicable to common shareholders
                  
                  
                  (1,257,295
                  )
                  
                  
                  748,675Earning
      / (loss) per share - note 9- basic
                  
                  $
                  (0.01
                  )
                  
                  $
                  0.01- dilutive
                  
                  $
                  (0.01
                  )
                  
                  $
                  0.01Weighted
      average shares outstanding- basic
                  
                  
                  161,560,520
                  
                  
                  
                  142,175,630- dilutive
                  
                  
                  166,517,522
                  
                  
                  
                  176,116,942
 
 See the
accompanying notes to condensed consolidated financial
statements
  F-2
  INFOSMART
GROUP INC.
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Unaudited)
 (Stated
in US Dollars)
 
 As
      ofMarch
      31,
                            
                            
                            December
      31,2009
                            
                            
                            2008(Unaudited)
                            
                            
                            (Audited)ASSETSCurrent
      assetsCash and cash
      equivalents
                            
                            $
                            348,687
                            
                            
                            $
                            449,089Trade receivables
                            
                            
                            6,337,346
                            
                            
                            
                            7,628,529Prepaid expenses and other
      receivables
                            
                            
                            4,732,040
                            
                            
                            
                            4,653,565Prepaid tax
                            
                            
                            1,636,985
                            
                            
                            
                            880,008Inventories (net of allowance for
      doubtful accounts of $Nil for 2009 AND 2008) - note 6
                            
                            
                            2,004,059
                            
                            
                            
                            1,906,445Advance
      to a related party
                            
                            
                            571,416
                            
                            
                            
                            -Total
      current assets
                            
                            
                            15,630,533
                            
                            
                            
                            15,517,636Deferred
      tax assets - note 4
                            
                            
                            -
                            
                            
                            
                            -Plant
      and equipment, net - note 7
                            
                            
                            28,980,867
                            
                            
                            
                            28,210,693Intangible
      assets
                            
                            
                            1,457,930
                            
                            
                            
                            1,528,475TOTAL
      ASSETS
                            
                            $
                            46,069,330
                            
                            
                            $
                            45,256,804LIABILITIES
      AND STOCKHOLDERS’ EQUITYLIABILITIESCurrent
      liabilitiesTrade payables
                            
                            $
                            4,828,736
                            
                            
                            $
                            4,613,815Other payables and accrued liabilities
                            
                            
                            1,393,273
                            
                            
                            
                            1,177,485Income tax payable
                            
                            
                            816,398
                            
                            
                            
                            242,862Current portion of bank borrowings
      - note 8
                            
                            
                            3,288,269
                            
                            
                            
                            5,465,309Finance lease payable
                            
                            
                            7,479
                            
                            
                            
                            11,373Current portion of other
      loans
                            
                            
                            4,359,892
                            
                            
                            
                            3,503,542Total
      current liabilities
                            
                            
                            14,694,047
                            
                            
                            
                            15,014,386Non-current
      portion of bank borrowings - note 8
                            
                            
                            -
                            
                            
                            
                            -Non-current
      portion of other loans
                            
                            
                            7,191,948
                            
                            
                            
                            7,191,948Advance
      from a related party
                            
                            
                            2,528,090
                            
                            
                            
                            929,751Deferred
      tax liabilities - note 4
                            
                            
                            2,396,706
                            
                            
                            
                            2,396,706TOTAL
      LIABILITIES
                            
                            $
                            26,810,791
                            
                            
                            $
                            25,532,791
  F-3
  INFOSMART
GROUP INC.
 CONDENSED
CONSOLIDATED BALANCE SHEETS (CONT’D)
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in US Dollars)
 
 As
      ofMarch
      31,
                                  
                                  
                                  December
      31,2009
                                  
                                  
                                  2008(Unaudited)
                                  
                                  
                                  (Audited)COMMITMENTS
      AND CONTINGENCIES – note 10STOCKHOLDERS’
      EQUITYCommon stock: No par value – note
      11Authorized: 300,000,000 shares;
      Issued and outstanding:2009 – 161,560,520 shares and
      2008 – 161,560,520 shares
                                  
                                  
                                  4,557,827
                                  
                                  
                                  
                                  4,557,827Additional
      paid-in-capital – note 11
                                  
                                  
                                  8,118,664
                                  
                                  
                                  
                                  8,118,664Accumulated
      other comprehensive income
                                  
                                  
                                  (3,480,094
                                  )
                                  
                                  
                                  (4,322,676
                                  )Retained earnings
                                  
                                  
                                  10,046,305
                                  
                                  
                                  
                                  11,303,600TOTAL
      STOCKHOLDERS’ EQUITY
                                  
                                  
                                  19,242,702
                                  
                                  
                                  
                                  19,657,415Non-controlling
      interest
                                  
                                  
                                  15,837
                                  
                                  
                                  
                                  66,59819,258,539
                                  
                                  
                                  
                                  19,724,013TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                                  
                                  $
                                  46,069,330
                                  
                                  
                                  $
                                  45,256,804
 
 See the
accompanying notes to condensed consolidated financial
statements
  F-4
  INFOSMART
GROUP INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (Unaudited)
 (Stated
in US Dollars)
 
 THREE
      MONTHS ENDED MARCH 31,2009
                            
                            
                            2008Cash
      flows from operating activitiesNet
      income / (loss)
                            
                            $
                            (1,285,418
                            )
                            
                            $
                            832,983Adjustments
      to reconcile net income / (loss) to net cash flowsprovided
      by operating activities:Depreciation
                            
                            
                            825,720
                            
                            
                            
                            420,811Deferred
      income taxes
                            
                            
                            476,484
                            
                            
                            
                            51,309Amortization
      of license usage right
                            
                            
                            70,545
                            
                            
                            
                            70,545Changes
      in operating assets and liabilities:Trade
      receivables
                            
                            
                            1,291,183
                            
                            
                            
                            18,424,967Prepaid expenses and
      other receivables
                            
                            
                            (78,475
                            )
                            
                            
                            276,163Inventories
                            
                            
                            (97,614
                            )
                            
                            
                            229,941Trade
      payables
                            
                            
                            214,921
                            
                            
                            
                            (19,987,419
                            )Income
      Tax payable
                            
                            
                            573,536
                            
                            
                            
                            (38,527
                            )Other payables and
      accrued liabilities
                            
                            
                            215,788
                            
                            
                            
                            (854,043
                            )Net
      cash flows provided by / (used in) operating activities
                            
                            
                            2,206,670
                            
                            
                            
                            (573,270
                            )Cash
      flows from investing activitiesPayment
      for acquisition of fixed assets
                            
                            
                            (1,027,091
                            )
                            
                            
                            (57,570
                            )Net
      cash flows used in investing activities
                            
                            
                            (1,027,091
                            )
                            
                            
                            (57,570
                            )Cash
      flows from financing activitiesDividend
      paid
                            
                            
                            -
                            
                            
                            
                            (79,345
                            )Issuance
      of common stock
                            
                            
                            -
                            
                            
                            
                            15,255Proceeds
      from other bank loans
                            
                            
                            -
                            
                            
                            
                            404,423Repayment
      of non-recurring bank loans
                            
                            
                            (553,472
                            )
                            
                            
                            (689,584
                            )Repayment
      of other bank loans
                            
                            
                            (1,619,000
                            )
                            
                            
                            -Proceeds
      from other loans
                            
                            
                            856,350
                            
                            
                            
                            132,917Repayment
      of other loans
                            
                            
                            -
                            
                            
                            
                            (24,908
                            )Decrease
      in bank overdrafts
                            
                            
                            (4,568
                            )
                            
                            
                            (88,457
                            )Net
      cash flows used in financing activities
                            
                            
                            (1,320,690
                            )
                            
                            
                            (329,699
                            )Effect
      of foreign currency translation on cash and cash
    equivalents
                            
                            
                            40,709
                            
                            
                            
                            251,794Net
      (decrease) / increase in cash and cash equivalents
                            
                            
                            (100,402
                            )
                            
                            
                            (708,745
                            )Cash
      and cash equivalents, beginning of period
                            
                            
                            449,089
                            
                            
                            
                            1,023,440Cash
      and cash equivalents, end of period
                            
                            $
                            348,687
                            
                            
                            $
                            314,695
  F-5
  INFOSMART
GROUP INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (Unaudited)
 (Stated
in US Dollars)
 
 Three months
      ended March 31,2009
                          
                          
                          2008Supplemental
      disclosures for cash flow information:Cash paid
      for:Interest
                          
                          $
                          374,170
                          
                          
                          $
                          136,964Income
      taxes
                          
                          
                          38,994
                          
                          
                          
                          100,040Non-cash
      investing and financing activities:Conversion
      of Series B Shares to common stock
                          
                          $
                          -
                          
                          
                          $
                          235,001
 
 See the
accompanying notes to condensed consolidated financial
statements
  F-6
 
 INFOSMART
GROUP INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (Unaudited)
 (Stated
in US Dollars)
 
 1.
              Basis
      of presentation
 
 The
accompanying condensed consolidated financial statements of the Company and its
subsidiaries have been prepared in accordance with generally accepted accounting
principles in the United States of America for interim consolidated financial
information.  Accordingly, they do not include all the information and
notes necessary for comprehensive consolidated financial
statements.
 
 In the
opinion of the management of the Company, all adjustments, which are of a normal
recurring nature, necessary for a fair statement of the results for the
three-month periods have been made.  Results for the interim period
presented are not necessarily indicative of the results that might be expected
for the entire fiscal year.  These condensed financial statements
should be read in conjunction with the consolidated financial statements and the
notes included in the 2008 annual report filed with the Securities and Exchange
Commission.
 
 2.
              Descriptions
      of business
 
 The
company is in the business of developing, manufacturing, marketing and sales of
recordable digital versatile disc (“DVDR”) media and recordable compact
discs (“CDR”). The company currently manufactures DVDRs as well as CDRs, and has
been developing its DVD-R manufacturing basis in both Hong Kong and Brazil to
capture the worldwide market.  As the “war” between high density
format DVDR (“HD-DVD”) and Blu-ray DVD formats has ended with the Blu-ray DVD
format surviving in the marketplace to become the latest format of DVD
recordable media, the company has a new perspective in business development in
the world market for the next 5 years.  The company has acquired the
first set of Blu-ray DVD replication systems in the China/Hong Kong region and
will devote more resources to developing the market for Blu-ray DVD replication
systems.  The company has customers in Western Europe, Australia,
China and South America.
  F-7
  INFOSMART
GROUP INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (Unaudited)
 (Stated
in US Dollars)
 
 3.           Summary
of significant accounting policies
 
 Basis
of presentation and consolidation
 
 The
accompanying consolidated financial statements of the Company have been prepared
in accordance with generally accepted accounting principles in the United States
of America.
 
 The
consolidated financial statements include the accounts of Infosmart Group Inc.
(the Company) and its subsidiaries (the Group). Significant intercompany
transactions have been elimination in consolidation.
 
 The
results of subsidiaries acquired or disposed of during the years are included in
the consolidated income statement from he effective date of acquisition or up
the effective date of disposal.
 
 As of
March 31, 2009, the particulars of the subsidiaries are as follows:
 
 Name
      of company
                      Place
      of incorporation
                      Date
      of incorporation
                      Attributable
      equity interest
                      Issued
      capitalInfosmart
      Group Limited
                      British
      Virgin Islands
                      March
      23, 2005
                      100%
                      US$1,427,794Infoscience
      Media Global Limited
                      British
      Virgin Islands
                      May
      17,
                        2007
                      100%
                      US$1Portabello
      Global Limited
                      British
      Virgin Islands
                      March
      21, 2007
                      100%
                      US$1Info
      Smart International
                        Enterprises
      Limited
                      Hong
      Kong
                      September
      26, 2003
                      100%
                      US$25.65
                        (HK$
      200)Info
      Smart Technology Limited
                      Hong
      Kong
                      December
      14, 2001
                      100%
                      US$618,075
                        (HK$4,820,000)Infoscience
      Media Limited
                      Hong
      Kong
                      September
      10, 2004
                      1000%
                      US$1,282
                        (HK$10,000)Infoscience
      Holdings Limited
                      Hong
      Kong
                      February
      23, 2004
                      100%
                      US$13
      (HK$100)Manwin
      International Limited
                      Hong
      Kong
                      April
      11, 2008
                      50%
                      US$0.24
                        (HK$2)Discobras
      Industria E Comercio De Electro Electronica Ltda
                      Brazil
                      March
      2006
                      99.42%
                      US$7,977,072
  F-8
 
 INFOSMART
GROUP INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (Unaudited)
 (Stated
in US Dollars)
 
 3.           Summary
of significant accounting policies (Cont’d)
 
 Basis
of presentation and consolidation (Cont’d)
 
 Non-controlling
Interests
 
 For the
development of the market in Brazil, the Company entered into an agreement on
March 20, 2006 with two independent third parties for setting up a subsidiary,
Discobrás Indústria E Comércio De Eletro Eletrônica Ltda (“Discobrás”), in
Brazil. Discobrás has a social capital of $8,046,281 (equivalent to
R$17,385,600) and 99.42% or $8,000,000 (equivalent to R$17,285,600) (“Investment
Cost”) of which has been subscribed by the Company. The minority interests have
been recognized in the accompanying financial statements.
 
 For the
development of the market in Blu-ray, the Company entered into an agreement on
April 11, 2008 with independent third parties for setting up a subsidiary,
Manwin International Limited (“Manwin”) in Hong Kong. Manwin has
a  capital of $0.24 (equivalent to HK$2) and 50% or US$0.12
(equivalent to HK$1) (“Investment Cost”) of which has been subscribed by the
Company. The non-controlling interests have been recognized in the accompanying
financial statements
 
 Use
of estimates
 
 In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting periods.  These accounts and estimates include, but are not
limited to, the valuation of accounts receivable, inventories, deferred income
taxes and the estimation on useful lives of property, plant and
equipment.  Actual results could differ from those
estimates.
 
 Intangible
assets
 
 Intangible
assets are license usage rights and stated at cost less accumulated
amortization.  Amortization is provided using the straight-line method
over the remaining term of the license obtained by one of the Company’s
subsidiaries, Infoscience Holdings Limited (“IHL”).
 
 Revenue
recognition
 
 Revenue
from sales of the Company’s products is recognized when the significant risks
and rewards of ownership have been transferred to the buyer at the time of
delivery and the sales price is fixed or determinable and collection is
reasonably assured.
 
 Income
taxes
 
 The
Company accounts for income tax using as asset and liability approach and allows
for recognition of deferred tax benefits in future years. Under the asset and
liability approach, deferred taxes are provided for the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. A
valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before the Group is able to realize
their benefits, or that future realization is uncertain.
  F-9
 
 Dividends
 
 Dividends
are recorded in the Company’s financial statements in the period in which they
are declared.
 
 The
Series B Convertible Preferred Stock carries dividends at 8% per annum payable
quarter in cash in US Dollars.
 
 Comprehensive
income
 
 The
Company has adopted SFAS 130, “Reporting Comprehensive Income”, which
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances.
 
 Accumulated
other comprehensive income represents the accumulated balance of foreign
currency translation adjustments of the Company.
 
 Foreign
currency translation
 
 The
functional currencies of the Company are Hong Kong dollars (“HK$”) and Brazil
dollars (Real$). The Company maintains its financial statements in the
functional currencies. Monetary assets and liabilities denominated in currencies
other than the functional currency are translated into the functional currency
at rates of exchange prevailing at the balance sheet dates. Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchanges rates prevailing at the dates of the
transaction. Exchange gains or losses arising from foreign currency transactions
are included in the determination of net income for the respective
periods.
 
 For
financial reporting purposes, the financial statements of the Company which are
prepared using the functional currency have been translated into United States
dollars. Assets and liabilities are translated at the exchange rates at the
balance sheet dates and revenue and expenses are translated at the average
exchange rates and stockholders’ equity is translated at historical exchange
rates. Any translation adjustments resulting are not included in determining net
income but are included in foreign currency translation adjustment to other
comprehensive income, a component of stockholders’ equity.
 
 The
exchange rates in effect at March 31, 2009 and 2008 were HK$1 for $0.1290 and
$0.1285 US dollars and Real$1 for $0.4464 and $0.5733 US dollars respectively.
The average exchange rates for 2009 and 2008 were HK$1 for $0.1286 and $0.1284
US dollars and Real$1 for $0.5160 and $0.5296 US dollars respectively. There is
no significant fluctuation in exchange rate for the conversion between Real
dollars, HK dollars and US dollars after the balance sheet
date.
  F-10
 
 INFOSMART
GROUP INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (Unaudited)
 (Stated
in US Dollars)
 
 3.           Summary
of significant accounting policies (cont’d)
 
 Fair
value of financial instruments
 
 The
carrying values of the Company’s financial instruments, including cash and cash
equivalents, restricted cash, trade and other receivables, deposits, trade and
other payables approximate their fair values due to the short-term maturity of
such instruments. The carrying amounts of borrowings approximate their fair
values because the applicable interest rates approximate current market
rates.
 
 It is
management’s opinion that the Company is not exposed to significant interest,
price or credit risks arising from these financial instruments.
 
 The
Company is exposed to certain foreign currency risk from export sales
transactions and recognized trade receivables as they will affect the future
operating results of the Company. The Company did not have any hedging
activities during the reporting period. As the functional currencies of the
Company are HK$ and Real$, the exchange difference on translation to US dollars
for reporting purpose is taken to other comprehensive income.
 
 Basic
and diluted earnings per share
 
 The
Company reports basic earnings per share in accordance with SFAS No. 128,
“Earnings Per Share”.  Basic earnings per share is computed using the
weighted average number of shares outstanding during the periods
presented.  The weighted average number of shares of the Company
represents the common stock outstanding during the period.
 
 Diluted
earning per share is based on the assumption that all dilutive convertible
shares and stock options were converted or exercised.  Dilution is
computed by applying the treasury stock method.  Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the
period.
 
 The
Company’s common stock equivalents at March 31, 2009 include the
following:
 
 Detachable
      common stock warrants
                        
                        
                        28,510,347Placement
      agent warrants
                        
                        
                        3,740,57732,250,924
 
 Cash
and cash equivalents
 
 Cash and
cash equivalents include all cash, deposits in banks and other highly liquid
investments with initial maturities of three months or less.
  F-11
 
 INFOSMART
GROUP INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (Unaudited)
 (Stated
in US Dollars)
 
 3.           Summary
of significant accounting policies (cont’d)
 
 Trade
receivables
 
 Trade
receivables are stated at original amount less allowance made for doubtful
receivables, if any, based on a review of all outstanding amounts at the period
end.  The Company extends unsecured credit to customers in the normal
course of business and believes all trade receivables in excess of the
allowances for doubtful receivables to be fully collectible.  Full
allowances for doubtful receivables are made when the receivables are overdue
for 1 year and an allowance is also made when there is objective evidence that
the Company will not be able to collect all amounts due according to the
original terms of receivables.  Bad debts are written off when
identified.  The Company does not accrue interest on trade accounts
receivable.
 
 Inventories
 
 Inventories
are valued at the lower of cost or market with cost determined on a first-in,
first-out basis.  In assessing the ultimate realization of
inventories, the management makes judgments as to future demand requirements
compared to current or committed inventory levels.  The Company’s
reserve requirements generally increase/decrease due to management projected
demand requirements, market conditions and product life cycle
changes.  During the reporting periods, the Company did not make any
allowance for slow-moving or defective inventories.
 
 Plant
and equipment
 
 Plant and
equipment are stated at cost less accumulated depreciation.  Cost
represents the purchase price of the asset and other costs incurred to bring the
asset into its existing use. Maintenance, repairs and betterments,
including replacement of minor items, are charged to expense; major additions to
physical properties are capitalized.
 
 Depreciation
of plant and equipment is provided using the straight-line method over their
estimated useful lives.  The principal annual rates are as
follows:-
 
 Production
      lines and equipment
                          10%
      with 30% residual valueLeasehold
      improvements and others
                          20%
 
 Upon sale
or disposition, the applicable amounts of asset cost and accumulated
depreciation are removed from the accounts and the net amount less proceeds from
disposal is charged or credited to income.
 
 Impairment
of long-live assets
 
 Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. The
Company recognizes impairment of long-lived assets in the event that the net
book values of such assets exceed the future undiscounted cashflows attributable
to such assets.  No impairment of long-lived assets was recognized for
any of the periods presented.
  F-12
  INFOSMART
GROUP INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (Unaudited)
 (Stated
in US Dollars)
 
 3.           Summary
of significant accounting policies (cont’d)
 
 Recent
accounting pronouncements
 
 In March
2008, the FASB issued SFAS No. 161, DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES (an amendment to SFAS No. 133). This statement is effective
for financial statements issued for fiscal year and interim periods beginning
after November 15, 2008 and requires enhanced disclosures with respect to
derivative and hedging activities. The Company will comply with the disclosure
requirements of this statement if it utilizes derivative instruments or engages
in hedging activities upon its effectiveness.
  In April
2008, the FASB issued FASB Staff Position No. 142-3, DETERMINATION OF THE USEFUL
LIFE OF INTANGIBLE ASSETS (“FSP No. 142-3”) to improve the consistency between
the useful life of a recognized intangible asset (under SFAS No. 142) and the
period of expected cash flows used to measure the fair value of the intangible
asset (under SFAS No. 141(R)). FSP No. 142-3 amends the factors to be considered
when developing renewal or extension assumptions that are used to estimate an
intangible asset’s useful life under SFAS No. 142. The guidance in the new staff
position is to be applied prospectively to intangible assets acquired after
December 31, 2008. In addition, FSP No.142-3 increases the disclosure
requirements related to renewal or extension assumptions. The Company does not
believe implementation of FSP No. 142-3 have a material impact on its financial
statements.
  In May
2008, the FASB issued statement No. 162, THE HIERARCHY OF GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES. This statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This statement 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”.
 
 In May
2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1 "Accounting
for Convertible Debt instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 requires the
issuer of certain convertible debt instruments that may be settled in cash (or
other assets) on conversion to separately account for the liability (debt) and
equity (conversion option) components of the instrument in a manner that
reflects the issuer's non-convertible debt borrowing rate. FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008 on a retroactive
basis. As we do not have convertible debt at this time, we currently believe the
adoption of FSP APB 14-1 will have no effect on our combined results of
operations and financial condition.
  In May
2008, the FASB issued Statement No. 163, ACCOUNTING FOR FINANCE GUARANTEE
INSURANCE CONTRACTS - AN INTERPRETATION OF FASB STATEMENT NO. 60. The premium
revenue recognition approach for a financial guarantee insurance contract links
premium revenue recognition to the amount of insurance protection and the period
in which it is provided. For purposes of this statement, the amount of insurance
protection provided is assumed to be a function of the insured principal amount
outstanding, since the premium received requires the insurance enterprise to
stand ready to protect holders of an insured financial obligation from loss due
to default over the period of the insured financial obligation. This Statement
is effective for financial statements issued for fiscal years beginning after
December 15, 2008.
  F-13
 
 INFOSMART
GROUP INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (Unaudited)
 (Stated
in US Dollars)
 
 3.           Summary
of significant accounting policies (cont’d)
 
 Recent
accounting pronouncements (cont’d)
 
 In June
2008, the FASB issued FASB Staff Position Emerging Issues Task Force (EITF) No.
03-6-1, DETERMINING WHETHER INSTRUMENTS GRANTED IN SHARE-BASED PAYMENT
TRANSACTIONS ARE PARTICIPATING SECURITIES (“FSP EITF No. 03-6-1”). Under FSP
EITF No. 03-6-1, unvested share-based payment awards that contain rights to
receive nonforfeitable dividends (whether paid or unpaid) are participating
securities, and should be included in the two-class method of computing EPS. FSP
EITF No. 03-6-1 is effective for fiscal years beginning after December 15, 2008,
and interim periods within those years, and is not expected to have a
significant impact on the Company’s financial statements.
  None of
the above new pronouncements has current application to the Company, but may be
applicable to the Company’s future financial reporting
  F-14
 
 INFOSMART
GROUP INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (Unaudited)
 (Stated
in US Dollars)
 
 4.           Income
taxes
 
 The components of the provision for
income taxes in Hong Kong are:
  Three
      months ended
                                March
      31,2009
                              
                              
                              2008(Unaudited)
                              
                              
                              (Unaudited)Current
      taxes
                              
                              
                              4,897
                              
                              
                              
                              103,627Deferred
      taxes
                              
                              
                              471,587
                              
                              
                              
                              (52,318
                              )476,484
                              
                              
                              
                              51,309




The
Company is subject to income tax in the United States.  No provision
for income tax in the United States has been made as the Company had no taxable
income for the three months and THREE MONTHS ENDED MARCH 31, 2009 AND
2008.  The statutory tax rate is 34%.
 
 The
Company’s subsidiary incorporated in the BVI is not subject to income taxes
under the current laws of BVI.
 
 The
Company’s subsidiaries operating in Hong Kong are subject to profits tax rate of
17.5% on the estimated assessable profits during the periods.
 
 Deferred
tax (assets) liabilities as of March 31, 2009 and December 31, 2008 are composed
of the following:
 As
      ofMarch
      31,
                        
                        
                        December
      31,2008
                        
                        
                        2008(Unaudited)
                        
                        
                        (Audited)Hong
      KongOperating
      losses available for future periods
                        
                        
                        
                        
                        
                        -Temporary
      difference on accelerated taxdepreciation
      on plant and equipment
                        
                        
                        2,396,706
                        
                        
                        
                        2,396,706The
      United StatesOperating
      losses available for future periods
                        
                        
                        (2,954,719
                        )
                        
                        
                        (2,740,553
                        )Valuation
      allowance
                        
                        
                        2,954,719
                        
                        
                        
                        2,740,553Deferred
      tax liabilities, net
                        
                        $
                        2,396,706
                        
                        
                        $
                        2,396,706Recognized
      in the balance sheet:Net
      deferred tax assets
                        
                        
                        -
                        
                        
                        
                        -Net
      deferred tax liabilities
                        
                        
                        2,396,706
                        
                        
                        
                        2,396,706$
                        2,396,706
                        
                        
                        $
                        2,396,706
  F-15
 
 INFOSMART
GROUP INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (Unaudited)
 (Stated
in US Dollars)
 
 5.           Comprehensive
income
 
 THREE
      MONTHS ENDED MARCH 31,2009
                    
                    
                    2008(Unaudited)
                    
                    
                    (Unaudited)Net
      income / (loss) applicable to common shareholders
                    
                    $
                    (1,257,295
                    )
                    
                    $
                    748,675Foreign
      currency translation adjustments
                    
                    
                    842,582
                    
                    
                    
                    5,681Total
      comprehensive income
                    
                    $
                    (414,713
                    )
                    
                    $
                    754,356
 
 6.           Inventories
 
 As
      ofMarch
      31,
                    
                    
                    December
      31,2009
                    
                    
                    2008(Unaudited)
                    
                    
                    (Audited)Raw
      materials
                    
                    $
                    663,712
                    
                    
                    $
                    1,270,204Work
      in progress
                    
                    
                    125,532
                    
                    
                    
                    141,350Finished
      goods
                    
                    
                    1,214,815
                    
                    
                    
                    494,891$
                    2,004,059
                    
                    
                    $
                    1,906,445
  F-16
 
 INFOSMART
GROUP INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (Unaudited)
 (Stated
in US Dollars)
 
 7.           Plant
and equipment
 
 As
      ofMarch
      31,
                        
                        
                        December
      31,2009
                        
                        
                        2008(Unaudited)
                        
                        
                        (Audited)CostsProduction lines and
      equipment
                        
                        $
                        39,868,960
                        
                        
                        $
                        38,285,587Leasehold
      improvements
                        
                        
                        2,094,066
                        
                        
                        
                        2,091,402Furniture, fixtures and office
      equipment
                        
                        
                        218,038
                        
                        
                        
                        212,399Motor vehicles
                        
                        
                        259,902
                        
                        
                        
                        255,61542,440,966
                        
                        
                        
                        40,845,003Accumulated
      depreciationProduction lines and
      equipment
                        
                        
                        11,985,521
                        
                        
                        
                        11,286,382Leasehold
      improvements
                        
                        
                        1,324,939
                        
                        
                        
                        1,220,333Furniture, fixtures and office
      equipment
                        
                        
                        83,839
                        
                        
                        
                        74,776Motor vehicles
                        
                        
                        65,800
                        
                        
                        
                        52,81913,460,099
                        
                        
                        
                        12,634,310NetProduction lines and
      equipment
                        
                        
                        27,883,439
                        
                        
                        
                        26,999,205Leasehold
      improvements
                        
                        
                        769,127
                        
                        
                        
                        871,069Furniture, fixtures and office
      equipment
                        
                        
                        134,199
                        
                        
                        
                        137,623Motor vehicles
                        
                        
                        194,102
                        
                        
                        
                        202,796$
                        28,980,867
                        
                        
                        $
                        28,210,693
  F-17
  INFOSMART
GROUP INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (Unaudited)
 (Stated
in US Dollars)
 
 7.           Plant
and equipment (cont’d)
 
 An
analysis of production lines and equipment pledged to banks for banking
facilities (note 8(a)) granted to the Company is as follows:
 
 Pledged
      for banking facilitiesAs
      ofMarch
      31,
                                
                                
                                December
      31,2009
                                
                                
                                2008(Unaudited)
                                
                                
                                (Audited)Costs
                                
                                $
                                14,724,398
                                
                                
                                $
                                14,724,398Accumulated
      depreciation
                                
                                
                                (4,935,492
                                )
                                
                                
                                (4,677,815
                                )Net
                                
                                $
                                9,788,906
                                
                                
                                $
                                10,046,583THREE
      MONTHS ENDED MARCH 31,2009
                                
                                
                                2008(Unaudited)
                                
                                
                                (Unaudited)Depreciation
      for the period
                                
                                $
                                257,677
                                
                                
                                $
                                235,237
 
 The
components of depreciation charged are:
 
 THREE
      MONTHS ENDED MARCH 31,2009
                      
                      
                      2008(Unaudited)
                      
                      
                      (Unaudited)Included
      in factory overheadsProduction lines and
      equipment
                      
                      $
                      701,892
                      
                      
                      $
                      356,958Included
      in operating expensesLeasehold
      improvements
                      
                      
                      103,628
                      
                      
                      
                      44,584Furniture, fixtures and office
      equipment
                      
                      
                      8,210
                      
                      
                      
                      6,224Motor vehicles
                      
                      
                      11,990
                      
                      
                      
                      13,045123,828
                      
                      
                      
                      63,853$
                      825,720
                      
                      
                      $
                      420,811
  F-18
  INFOSMART
GROUP INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (Unaudited)
 (Stated
in US Dollars)
 
 8.           Bank
borrowings
 
 As
      ofMarch
      31,
                      
                      
                      December
      31,2009
                      
                      
                      2008(Unaudited)
                      
                      
                      (Audited)Secured:Bank overdrafts repayable on
      demand
                      
                      $
                      253,855
                      
                      
                      $
                      258,423Repayable within one
      yearNon-recurring bank
      loans
                      
                      
                      1,539,048
                      
                      
                      
                      2,092,520Other bank
      borrowings
                      
                      
                      1,495,366
                      
                      
                      
                      3,114,366$
                      3,288,269
                      
                      
                      $
                      5,465,309
 
 The above
banking borrowings were secured by the following:-
 
 (a)
              first
      fixed legal charge over 17 DVDR production lines with carrying amounts of
      $9,788,906 (note 7); and
 
 (b)
              joint
      and several guarantees executed by two beneficial shareholders of the
      Company, a spouse of one of the beneficial shareholders and a director of
      the Company’s subsidiary.
  F-19
 
 INFOSMART
GROUP INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (Unaudited)
 (Stated
in US Dollars)
 
 9.           Earnings
per share
 
 The
Company’s potentially dilutive securities at March 31, 2009 include the
following:
 Detachable
      common stock warrants
                    
                    
                    28,510,347Placement
      agent warrants
                    
                    
                    3,740,57732,250,924
 
 10.           Commitments
and contingences
 
 Operating
leases commitments
 
 The
company leases office and factory premises under various non-cancelable
operating lease agreements that expire at 31 January 2012, with an option to
renew the lease. All leases are on a fixed repayment basis. None of the leases
include contingent rentals. Minimum future commitments under these agreements
payable as of March 31, 2009 are as follows:
 
 Period
      ending March 312010
                    
                    
                    349,2162011
                    
                    
                    349,2162012
                    
                    
                    291,013
 
 Continuance of operations
 
 These financial
statements have been prepared on a going concern basis. The Company has working
capital surplus of $936,486 at March 31, 2009 as compared with a surplus of
$503,250 in December 31, 2008.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern, which contemplates the realization
of assets and the liquidation of liabilities in the normal course of business.
The Company has incurred significant loss for the year ended December 31, 2008
and has a capital commitment of $5,000,000 to be repayable by monthly
installment of $366,666 for the period from June 2009 till Aug 2010. The Company
is therefore suffered by a heavily liquidity pressure.
 
 For
minimizing the cash flow shortage pressure, the Company had managed its
liquidity during this time through a serious of cost reduction initiatives,
capital markets transactions and seeking for new finance. At the same time, the
directors and shareholders of the Company agree to give full financial support
to the Company by realizing their personal assets to make all the operating
expenses and all the outstanding liabilities repayable when necessary for the
next twelve months.
 
 The
management of the Company is also currently engaged in negotiations with
financial institutions for new loans arrangements. By the date of this report,
the management of the Company has not yet reached an agreement with any
financial institutions. These negotiations are ongoing, and the management is
confident that a final loan agreement will be concluded in the near
future.
  F-20
 
 INFOSMART
GROUP INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (Unaudited)
 (Stated
in US Dollars)
 
 10.           Commitments
and contingences (Cont’d)
 
 Contingencies
 
 From time
to time, the Company is subject to legal claims and legal proceedings that arise
in the ordinary course of our business. In the opinion of management, the
ultimate outcome of claims and litigation of which management is aware will not
have a material adverse effect on our consolidated financial position or results
of operation. Management is not currently aware of any pending legal proceedings
against Infosmart Group.
 
 11.           Common
stock and convertible preferred stock
 
 Common
      stock
                    
                    
                    AdditionalNo.
      of
                    
                    
                    
                    
                    
                    paid-inshares
                    
                    
                    Amount
                    
                    
                    CapitalBalance,
      January 1, 2009 and March 31, 2009
                    
                    
                    161,560,520
                    
                    
                    $
                    4,557,827
                    
                    
                    $
                    8,118,664
 
 Common
Stock
 
 The
number of authorized shares of the Company’s common stock is 300,000,000 shares.
The shares have no par value.
 
 Additional paid-in
capital
 
 The
Company allocated the net proceeds ($6,885,000) between the Series B Preferred
Stock ($3,738,827) and the warrants ($3,146,173) based upon their relative fair
values as of the closing date. The Company determined the fair value of the
warrants (including Placement Agent Warrants which were valued at $644,800)
using the Black-Scholes option pricing model with the following assumptions: no
dividend yield; weighted average risk free rate of 5.05%; volatility of 368% and
contractual life of 5 years. The Company recorded the portion of the proceeds
attributable to the stock as mezzanine equity pursuant to EITF Topic D-98,
Classification and Measurement of Redeemable Securities after determining the
guidance in FAS 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity did not apply. The Company
determined that the warrants meet the definition of a derivative instrument as
defined in SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, but do not require derivative treatment pursuant to the scope
exception in paragraph 11(a) of SFAS 133.
 
 The
Company evaluated whether the embedded conversion feature in the stock required
bifurcation and determined that the economic characteristics and risks of the
embedded conversion feature in the stock were clearly and closely related to the
stock and concluded that bifurcation was not required under SFAS 133. The
Company calculated the intrinsic value of the beneficial conversion feature
embedded in the stock ($2,297,157) pursuant to the guidance in EITF 00-27,
Application of Issue No. 98-5 to Certain Convertible
Instruments.
  F-21


INFOSMART
GROUP INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008


(Unaudited)


(Stated
in US Dollars)





12.    
     Pension plans





The
Company participates in a defined contribution pension scheme under the
Mandatory Provident Fund Schemes Ordinance (“MPF Scheme”) for all its eligible
employees in Hong Kong.





The MPF
Scheme is available to all employees aged 18 to 64 with at least 60 days of
service in employment in Hong Kong.  Contributions are made by the
Company operating in Hong Kong at 5% of the participants’ relevant income with a
ceiling of $128.20 (equivalent of HK$1,000).  The participants are
entitled to 100% of the Company’s contributions together with accrued returns
irrespective of their length of service with the Company, but the benefits are
required by law to be preserved until the retirement age of 65. The only
obligation of the Company with respect to MPF Scheme is to make the
required contributions under the plan.





The
assets of the schemes are controlled by trustees and held separately from those
of the Company.  The Company fully complied the contribution
requirement and total pension cost was $19,250 and $25,740 for the three
months ended March 31, 2009 AND 2008 respectively.





13.     
    Segment Information





The
Company is engaged in the manufacture and distribution of DVDR, CDR and
non-diskette storage media (Flash card and Micro SD).  The nature of
the products, their production processes, the type of their customers and their
distribution methods are substantially similar.  Information for the
DVDR, CDR products, flash drive , memory card  and blu-ray are
disclosed under FAS 131, “Disclosures about Segments of an Enterprise and
Related Information” as below:-




Flash
      drive and memory card
                              
                              
                              DVDR
      and Related Products
                              
                              
                              CDR
                              
                              
                              Blu-rayThree months
      ended
                                March
      31
                              
                              
                              Three months
      ended
                                March
      31
                              
                              
                              Three
      months ended
                                March
      31
                              
                              
                              Three
      months ended
                                March
      312009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008(Unaudited)
                              
                              
                              (Unaudited)
                              
                              
                              (Unaudited)
                              
                              
                              (Unaudited)
                              
                              
                              (Unaudited)
                              
                              
                              (Unaudited)
                              
                              
                              (Unaudited)
                              
                              
                              (Unaudited)Revenue
      from external customers
                              
                              $
                              -
                              
                              
                              $
                              182,500
                              
                              
                              $
                              6,311,480
                              
                              
                              $
                              5,652,182
                              
                              
                              $
                              510,844
                              
                              
                              $
                              1,725,765
                              
                              
                              $
                              74,166
                              
                              
                              $
                              -Segment
      profit / (loss)
                              
                              $
                              -
                              
                              
                              $
                              60,919
                              
                              
                              $
                              (846,125
                              )
                              
                              
                              629,924
                              
                              
                              $
                              86,843
                              
                              
                              
                              193,449
                              
                              
                              $
                              (49,652
                              )
                              
                              $
                              -As
      of
                              
                              
                              As
      of
                              
                              
                              As
      of
                              
                              
                              As
      ofMarch
      31,
                              
                              
                              December
      31,
                              
                              
                              March
      31,
                              
                              
                              December
      31,
                              
                              
                              March
      31,
                              
                              
                              December
      31,
                              
                              
                              March
      31,
                              
                              
                              December
      31,2009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008(Unaudited)
                              
                              
                              (Audited)
                              
                              
                              (Unaudited)
                              
                              
                              (Audited)
                              
                              
                              (Unaudited)
                              
                              
                              (Audited)
                              
                              
                              (Unaudited)
                              
                              
                              (Audited)Segment
      assets
                              
                              $
                              -
                              
                              
                              $
                              282,331
                              
                              
                              $
                              43,976,700
                              
                              
                              $
                              42,768,465
                              
                              
                              $
                              510,844
                              
                              
                              $
                              396,008
                              
                              
                              $
                              1,581,786
                              
                              
                              $
                              1,810,000


F-22


INFOSMART
GROUP INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008


(Unaudited)


(Stated
in US Dollars)





Segment
Information (continued)





TotalThree
      months ended
                              March
      312009
                            
                            
                            2008(Unaudited)
                            
                            
                            (Unaudited)Revenue
      from external customers
                            
                            $
                            6,896,490
                            
                            
                            $
                            7,560,447Segment
      profit / (loss)
                            
                            $
                            (808,934
                            )
                            
                            $
                            884,292As
      ofMarch
      31,
                            
                            
                            December
      31,2009
                            
                            
                            2008(Unaudited)
                            
                            
                            (Audited)Segment
      assets
                            
                            $
                            46,069,330
                            
                            
                            $
                            45,256,804


F-23


INFOSMART
GROUP INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008


(Unaudited)


(Stated
in US Dollars)





13.    
    Segment Information (cont’d)





Other
than the production lines and equipment located in Brazil, which have carrying
amounts of $13,473,826 respectively (March 31, 2008: production lines and
equipment of $11,722,445), all of the Company’s long-lived assets are located in
Hong Kong. Geographic information about net sales, which are classified based on
location of the customers, is set out as follows:





Three months ended
                    March 31,2009
                  
                  
                  2008(Unaudited)
                  
                  
                  (Unaudited)Argentina
                  
                  
                  -
                  
                  
                  
                  149,024Australia
                  
                  
                  -
                  
                  
                  
                  129,147Brazil
                  
                  
                  4,152,479
                  
                  
                  
                  3,865,537China
      and Hong Kong
                  
                  
                  2,530,206
                  
                  
                  
                  2,865,174Philippine
                  
                  
                  62,869
                  
                  
                  
                  180,684South
      America
                  
                  
                  -
                  
                  
                  
                  30,046Thailand
                  
                  
                  -
                  
                  
                  
                  39,739United
      States
                  
                  
                  -
                  
                  
                  
                  255,816Other
      countries
                  
                  
                  150,936
                  
                  
                  
                  45,280Total
                  
                  
                  6,896,490
                  
                  
                  
                  7,560,447





14.        
Comparative amounts





Certain
amounts included in prior periods’ condensed consolidated statement of
operations have been reclassified to conform to the current period’s
presentation.  These reclassifications had no effect on reported total
assets, liabilities, shareholders’ equity, or net income.


F-24


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





Forward
Looking Statements





Certain
statements in the Management’s Discussion and Analysis (“MD&A”), other than
purely historical information, including estimates, projections, statements
relating to our business plans, objectives and expected operating results, and
the assumptions upon which those statements are based, are “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. These forward-looking statements generally
are identified by the words “believe,” “project,” “expect,” “anticipate,”
“estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,”
“will be,” “will continue,” “will likely result,” and similar expressions.
Forward-looking statements are based on current expectations and assumptions
that are subject to risks and uncertainties which may cause actual results to
differ materially from the forward-looking statements. A detailed discussion of
risks and uncertainties that could cause actual results and events to differ
materially from such forward-looking statements is included in the section under
“Risk Factors”. We undertake no obligation to update or revise publicly any
forward-looking statements, whether as a result of new information, future
events, or otherwise.




As
used in this Form 10-Q, unless the context requires otherwise, “we” or “us” or
the “Company” or “Infosmart” means Infosmart Group, Inc. and its
subsidiaries.




Overview





We are in
the business of developing, manufacturing, marketing and sales of recordable
digital versatile disc (“DVDR”) media and recordable compact discs (“CDR”).
We manufacture DVDRs with 8x and 16x writable speeds as well as CDRs with 52x
writable speeds, and have been developing our DVD-R manufacturing basis in both
Hong Kong and Brazil to capture the worldwide market. As the “war” between high
density format DVDR (“HD-DVD”) and Blu-ray DVD formats has ended with the
Blu-ray DVD format surviving in the marketplace to become the latest format of
DVD recordable media, we have a new perspective in business development in the
world market for the next five years. We acquired the first set of Blu-ray DVD
replication systems in China and Hong Kong and will devote more resources to
developing the market for Blu-ray DVD replication systems. A test order has
already been successfully produced on our newly installed Anwell Blu-ray®
equipment line.  As the only Blu-ray® producer in Hong Kong and the
first in China, we expect to see several future new orders as Blu-ray® begins to
dominate the visual media market.  Initial orders for short runs of a
Blu-ray® disk reproduction are used to confirm Blu-ray®’s high reproduction
standards are achieved prior to initiating production runs.  Blu-ray®
unit sales produce the highest margins of all the media the Company
produces.  We have customers in Western Europe, Australia, China, and
South America.





We
produce our products through our three main operational business subsidiaries,
Info Smart Technology Limited (“IS Technology”), Info Smart International
Enterprises Limited (“IS International”), and Infoscience Media Limited (“IS
Media”) at our state-of-the-art DVDR manufacturing facilities in Hong
Kong.





In March 2006, IS Media formed
Discobras, a Brazilian company, with a local partner, with registered capital of
US$8 million for our new Brazilian DVDR production facility. We relocated some
of our DVDR manufacturing equipment to Brazil in November 2006 and installed
them in January 2007. Trial production in Brazil began in March 2007, and
is currently producing at full capacity. In addition, the owners of the
technologies and intellectual property necessary for the production of our
products require that we obtain separate Patent Licenses for the use of
intellectual property in our new DVDR manufacturing facility in Brazil. We are
currently in the process of obtaining these Patent
Licenses.





In
December 2006, IS Media acquired 100% of the issued and outstanding common stock
of Infoscience Holdings Limited (“IS Holdings”). IS Media has a cooperation
agreement with IS Holdings wherein it manufactures its DVDRs using certain
patent licenses owned by IS Holdings. IS Media acquired IS Holdings to guarantee
the continuation of this cooperation agreement. We also have a Brazilian
subsidiary, Discobras Industria E Comercio de Electro Eletronica Limiteda
(“Discobras”), which was formed in March 2006 by IS Media and a local partner,
with registered capital of US$8 million for our new Brazilian DVDR production
facility. IS Media currently holds a 99.42% ownership interest in Discobras, and
the local partner holds the remaining 0.58% ownership interest in Discobras. In
addition, we incorporated a new subsidiary, Portabello Global Limited
(“Portabello”), for distributing and reselling our recordable digital versatile
discs and media to customers in South America.


3


Critical
Accounting Policies and Estimates





Principles of
consolidation.The condensed consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant inter-company
balances and transactions are eliminated on consolidation.





Non-controlling
Interests.For the development of the market in Brazil, the Company
entered into an agreement on March 20, 2006 with two independent third parties
for setting up a subsidiary, Discobrás, in Brazil. Discobrás has a social
capital of $8,046,281 (equivalent to R$17,385,600),of which 99.42% or $8,000,000
(equivalent to R$17,285,600) (“Investment Cost”) has been subscribed by the
Company. As of September 30, 2007, neither one of the two independent third
parties had fully satisfied their required capital contribution by any means.
The minority interests have been recognized in the accompanying financial
statements.  For the development of the market in Blu-ray, the Company
entered into an agreement on April 11, 2008 with independent third parties for
setting up a subsidiary, Manwin International Limited (“Manwin”) in Hong Kong.
Manwin has a capital of $0.24 (equivalent to HK$2) and 50% or US$0.12
(equivalent to HK$1) (“Investment Cost”) of which has been subscribed by the
Company. The minority interests have been recognized in the accompanying
financial statements.





Use of
estimates.In preparing financial
statements in conformity with accounting principles generally accepted in the
United States of America, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the dates of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting periods. These
accounts and estimates include, but are not limited to, the valuation of
accounts receivable, inventories, deferred income taxes and the estimation on
useful lives of property, plant and equipment. Actual results could differ from
those estimates.





Intangible
assets.Intangible assets arelicense
usage rights and stated at cost less accumulated amortization. Amortization is
provided using the straight-line method over the remaining term of the license
obtained by one of the Company’s subsidiaries, Infoscience Holdings Limited
(“IHL”).





Revenue
recognition.Revenue from sales of
the Company’s products is recognized when the significant risks and rewards of
ownership have been transferred to the buyer at the time of delivery and the
sales price is fixed or determinable and collection is reasonably
assured.





Stock-based
payment.The
Company adopted the SFAS No. 123R, "Share-Based Payment" ("SFAS 123R") using the
modified prospective method. Under SFAS 123R, equity instruments issued to
service providers for their services are measured at the grant-date fair value
and recognized in the statement of operations over the vesting
period.





Basic and diluted
earnings per share.The Company reports
basic earnings per share in accordance with SFAS No. 128, “Earnings Per Share”.
Basic earnings per share is computed using the weighted average number of shares
outstanding during the periods presented. The weighted average number of shares
of the Company represents the common stock outstanding during the periods
presented.





Diluted
earning per share is based on the assumption that all dilutive convertible
shares and stock options were converted or exercised. Dilution is computed by
applying the treasury stock method. Under this method, options and warrants are
assumed to be exercised at the beginning of the period (or at the time of
issuance, if later), and as if funds obtained thereby were used to purchase
common stock at the average market price during the period.




The
Company's common stock equivalents at March 31, 2009 include the
following:




Detachable
      common stock warrants
                  
                  
                  28,510,347Placement
      agent warrants
                  
                  
                  3,740,57732,250,924





Trade
receivables.Trade receivables are
stated at original amount less allowance made for doubtful receivables, if any,
based on a review of all outstanding amounts at the period end. The Company
extends unsecured credit to customers in the normal course of business and
believes all trade receivables in excess of the allowances for doubtful
receivables to be fully collectible. Full allowances for doubtful receivables
are made when the receivables are overdue for one (1) year and an allowance is
also made when there is objective evidence that the Company will not be able to
collect all amounts due according to original terms of receivables. Bad debts
are written off when identified. The Company does not accrue interest on trade
accounts receivable.


4


Inventories.Inventories are valued at the lower of cost or market with cost
determined on a first-in, first-out basis. In assessing the ultimate realization
of inventories, the management makes judgments as to future demand requirements
compared to current or committed inventory levels. The Company’s reserve
requirements generally increase/decrease due to management projected demand
requirements, market conditions and product life cycle changes. During the
reporting periods, the Company did not make any allowance for slow-moving or
defective inventories.





Plant and
equipment.Plant and equipment are
stated at cost less accumulated depreciation. Cost represents the purchase price
of the asset and other costs incurred to bring the asset into its existing use.
Maintenance, repairs and betterments, including replacement of minor items, are
charged to expense; major additions to physical properties are
capitalized.





Depreciation
of plant and equipment is provided using the straight-line method over their
estimated useful lives. The principal annual rates are as follows:





Production
      lines and equipment
              10%
      with 30% residual valueLeasehold
      improvements and others
              20%





Construction in
progress. Construction in progress represents a factory under
construction and production lines and equipment not ready for use, which are
stated at cost less any impairment losses, and are not depreciated. Construction
in progress is reclassified to the appropriate category of fixed assets when
completed and ready for use.





Impairment of
long-live assets.Long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable. The Company
recognizes impairment of long-lived assets in the event that the net book values
of such assets exceed the future undiscounted cashflows attributable to such
assets. No impairment of long-lived assets was recognized for any of the periods
presented.




Recent
accounting pronouncements.




In March
2008, the FASB issued SFAS No. 161, DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES (an amendment to SFAS No. 133). This statement is effective
for financial statements issued for fiscal year and interim periods beginning
after November 15, 2008 and requires enhanced disclosures with respect to
derivative and hedging activities. The Company will comply with the disclosure
requirements of this statement if it utilizes derivative instruments or engages
in hedging activities upon its effectiveness.




In April
2008, the FASB issued FASB Staff Position No. 142-3, DETERMINATION OF THE USEFUL
LIFE OF INTANGIBLE ASSETS (“FSP No. 142-3”) to improve the consistency between
the useful life of a recognized intangible asset (under SFAS No. 142) and the
period of expected cash flows used to measure the fair value of the intangible
asset (under SFAS No. 141(R)). FSP No. 142-3 amends the factors to be considered
when developing renewal or extension assumptions that are used to estimate an
intangible asset’s useful life under SFAS No. 142. The guidance in the new staff
position is to be applied prospectively to intangible assets acquired after
December 31, 2008. In addition, FSP No.142-3 increases the disclosure
requirements related to renewal or extension assumptions. The Company does not
believe implementation of FSP No. 142-3 have a material impact on its financial
statements.




In May
2008, the FASB issued statement No. 162, THE HIERARCHY OF GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES. This statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This statement 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”.




In May
2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1 "Accounting
for Convertible Debt instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 requires the
issuer of certain convertible debt instruments that may be settled in cash (or
other assets) on conversion to separately account for the liability (debt) and
equity (conversion option) components of the instrument in a manner that
reflects the issuer's non-convertible debt borrowing rate. FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008 on a retroactive
basis. As we do not have convertible debt at this time, we currently believe the
adoption of FSP APB 14-1 will have no effect on our combined results of
operations and financial condition.


5




In May
2008, the FASB issued Statement No. 163, ACCOUNTING FOR FINANCE GUARANTEE
INSURANCE CONTRACTS - AN INTERPRETATION OF FASB STATEMENT NO. 60. The premium
revenue recognition approach for a financial guarantee insurance contract links
premium revenue recognition to the amount of insurance protection and the period
in which it is provided. For purposes of this statement, the amount of insurance
protection provided is assumed to be a function of the insured principal amount
outstanding, since the premium received requires the insurance enterprise to
stand ready to protect holders of an insured financial obligation from loss due
to default over the period of the insured financial obligation. This Statement
is effective for financial statements issued for fiscal years beginning after
December 15, 2008.





In June
2008, the FASB issued FASB Staff Position Emerging Issues Task Force (EITF) No.
03-6-1, DETERMINING WHETHER INSTRUMENTS GRANTED IN SHARE-BASED PAYMENT
TRANSACTIONS ARE PARTICIPATING SECURITIES (“FSP EITF No. 03-6-1”). Under FSP
EITF No. 03-6-1, unvested share-based payment awards that contain rights to
receive nonforfeitable dividends (whether paid or unpaid) are participating
securities, and should be included in the two-class method of computing EPS. FSP
EITF No. 03-6-1 is effective for fiscal years beginning after December 15, 2008,
and interim periods within those years, and is not expected to have a
significant impact on the Company’s financial statements.




None of
the above new pronouncements has current application to the Company, but may be
applicable to the Company’s future financial reporting





Results
of Operations





Comparison
of Three Months Ended March 31, 2009 and 2008





Net
Sales.For the
three months ended March 31, 2009, net sales decreased relative to the three
months ended March 31, 2008, from $7,560,447 to $6,896,490. The decrease in net
sales is a decrease specifically in the sale of DVDRs in Hong Kong, which
resulted from our policy of geographical diversification and our shift of focus
from the lower margin Hong Kong markets to higher margin markets such as Asia
and Brazil.  Market trends show a growth slower than our expectation for
the new Blu-ray discs and a lower demand for DVDR discs.





Cost of
Sales.Cost of
sales decreased from $6,498,617, or approximately 86% of net sales for the three
months ended March 31, 2008, to $6,263,981, or approximately 90% of net sales
for the three months ended March 31, 2009. The decrease in cost of sales is
primarily due to a corresponding decrease in sales





Gross
Profit. Gross profit decreased approximately 40% from $1,061,830 for the
three months ended March 31, 2008 to $632,509 for the three months ended
March 31, 2009. This decrease in gross profit was primarily due to the decrease
in net sales.





Selling and
Distribution Costs. For the three months ended March 31, 2009, selling
and distribution costs increased approximately 145% from $72,867 to
$178,918 relative to the three months ended March 31, 2008. The increase was due
to our promotion in blu-ray business.




Administrative
Expenses.Administrative expenses included depreciation and amortization
charges, and was $898,829 and $780,224 for the three months ended March 31, 2009
AND 2008, respectively. This increase in administrative expenses was due to our
expansion in the administrative operation for the coming Blu-ray business and
higher interest for the financing arrangement.





Net
Income. Net
income decreased approximately 268% from $748,675 for the three months ended
March 31, 2008 to net loss of $1,257,295 for the three months ended March 31,
2009. This is due to the decrease in net sales and increased administrative
expenses.





Liquidity
and Capital Resources





Three MonthsEnded
      March 31,
                                                  
                                                  2009
                                                  
                                                  
                                                  2008
                                                  
                                                  
                                                  ChangeNet
      cash (used in) provided by operating activities
                                                  
                                                  $
                                                  2,206,670
                                                  
                                                  
                                                  $
                                                  (883,234
                                                  )
                                                  
                                                  $
                                                  3,089,904Net
      cash (used in) investing activities
                                                  
                                                  
                                                  (1,027,091
                                                  )
                                                  
                                                  
                                                  (368,097
                                                  )
                                                  
                                                  
                                                  (658,994
                                                  )Net
      cash (used in) provided by financing activities
                                                  
                                                  
                                                  (1,320,690
                                                  )
                                                  
                                                  
                                                  1,540,080
                                                  
                                                  
                                                  
                                                  (2,860,770
                                                  )


6


Net cash
provided by operating activities was $2,206,670 for the three months ended March
31, 2009 and Net cash used in operating activities was $883,234 for the three
months ended March 31, 2008. The increase in our net provided by operating
activities was mainly due to the decrease of our trade receivables and the
increase in trade payables.





Net cash
used in investing activities was $1,027,091 for the three months ended March 31,
2009and $368,097 for the three months ended March 31, 2008. The increase in net
cash used in investing activities is mainly related to an increase in
acquisitions of plant and equipment including the blu-ray machine.





Net cash used in financing activities
was $1,320,690 for the three months ended March 31, 2009 and net cash provided
by financing activities of $1,540,080 for the three months ended March 31, 2008.
The increase in our net cash provided by financing activities was mainly due to
the proceeds from other loan and repayment of bank
loan.





Off-Balance
Sheet Arrangements





A bank
guarantee was given by a bank to an electric utility company on Infosmart’s
behalf. This guarantee exempted Infosmart from the obligation of paying a
deposit required by the electric utility company. This off-balance sheet
arrangement has no effect on Infosmart’s liquidity, capital resources, market
risk support, or credit risk support, other than allowing Infosmart to retain a
$153,846 deposit that would have been required by the utility company. Infosmart
is not aware of any events, demands, commitments, trends, or uncertainties that
will result in, or reasonably likely to result in, the termination of this
arrangement.





Other
than the arrangement described above, we have not entered into any other
financial guarantees or other commitments to guarantee the payment obligations
of any third parties. We have not entered into any derivative contracts that are
indexed to our shares and classified as shareholder’s equity or that are not
reflected in our condensed consolidated financial statements. Furthermore, we do
not have any retained or contingent interest in assets transferred to an
unconsolidated entity that serves as credit, liquidity or market risk support to
such entity. We do not have any variable interest in any unconsolidated entity
that provides financing, liquidity, market risk, or credit support to us or
engages in leasing, hedging, or research and development services with
us.




Contractual
Obligations





We have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments. We have presented below a summary of the most
significant assumptions used in our determination of amounts presented in the
tables, in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash
flows.




The
following tables summarize our contractual obligations as of March 31, 2009, and
the effect these obligations are expected to have on our liquidity and cash
flows in future periods.




Payments Due by
      PeriodTotal
                                          
                                          Less than
                                            1 year
                                          
                                          1-3 Years
                                          
                                          3-5 Years
                                          
                                          5 Years +In
      ThousandsContractual
      Obligations:Bank
      Indebtedness
                                          $
                                          3,288
                                          
                                          $
                                          3,288
                                          
                                          $
                                          —
                                          
                                          $
                                          —
                                          
                                          $
                                          —Other
      Indebtedness
                                          
                                          
                                          11,551
                                          
                                          
                                          
                                          5,359
                                          
                                          
                                          
                                          6,192
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —Operating
      Leases
                                          
                                          
                                          989
                                          
                                          
                                          
                                          349
                                          
                                          
                                          
                                          640
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —Total
      Contractual Obligations:
                                          $
                                          15,828
                                          
                                          $
                                          8,996
                                          
                                          $
                                          6,832
                                          
                                          $
                                          —
                                          
                                          $
                                          —





Bank
indebtedness consists of secured and unsecured borrowings from our banking
facilities arrangements including letters of credit, bank overdrafts, and
non-recurring bank loans.


7


Other
indebtedness consists of loans and debt financing from independent third parties
for working capital and the acquisition of DVDR production lines and
equipment.





Operating
leases amounts include a lease for factory premises under non-cancelable
operating lease agreement that expires in year 2012, with an option to renew the
lease. The lease is on a fixed repayment basis and does not include contingent
rentals.





ITEM 3.
            QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET
RISK





Not
applicable.





ITEM 4.
            CONTROLS AND
      PROCEDURES





Disclosure
Controls and Procedures





As of the
end of the period covered by this quarterly report, we carried out an
evaluation, under the supervision of, and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the Company’s disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended) as of the end of the period covered by this report. Based
on that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective to enable us to record,
process, summarize and report information required to be included in our reports
that we file or submit under the Exchange Act within the time periods
required.





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 Securities Exchange Act of 1934, as
amended) during the quarter ended March 31, 2009 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.


8


PART
II - OTHER INFORMATION





ITEM 1.
            LEGAL
      PROCEEDINGS





W are
currently not involved in any litigation that we believe could have a material
adverse effect on our financial condition or results of operations. There is no
action, suit, proceeding, inquiry or investigation before or by any court,
public board, government agency, self-regulatory organization or body pending
or, to the knowledge of the executive officers of our company or any of our
subsidiaries, threatened against or affecting our company, our common stock, any
of our subsidiaries or of our companies or our subsidiaries’ officers or
directors in their capacities as such, in which an adverse decision could have a
material adverse effect.





ITEM 1A.
            RISK
      FACTORS





You
should carefully consider the risks described below together with all of the
other information included in this report before making an investment decision
with regard to our securities. The statements contained in or incorporated into
this offering that are not historic facts are forward-looking statements that
are subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements. If
any of the following risks actually occurs, our business, financial condition or
results of operations could be harmed. In that case, the trading price of our
common stock could decline, and you may lose all or part of your
investment.





Risks
Relating to Our Business





Our
limited operating history makes evaluation of our business
difficult.





We have a
limited operating history. Infosmart BVI was incorporated in the British Virgin
Islands on August 23, 2005, and IS Technology was founded in August 2002. These
limited operating histories and the unpredictability of our industry make it
difficult for investors to evaluate our business and future operating results.
An investor in our securities must consider the risks, uncertainties, and
difficulties frequently encountered by companies in new and rapidly evolving
markets. The risks and difficulties we face include challenges in accurate
financial planning as a result of limited historical data and the uncertainties
resulting from having had a relatively limited time period in which to implement
and evaluate our business strategies as compared to older companies with longer
operating histories.




We
continually seek to develop new products and standards, which may not be widely
adopted by consumers or, if adopted, may reduce demand by consumers for our
older products.





We
continually seek to develop new products and standards and enhance existing
products and standards with higher memory capacities and other enhanced
features. We cannot assure you that our new products and standards will gain
market acceptance or that we will be successful in penetrating the new markets
that we target. As we introduce new products and standards, it will take time
for these new products and standards to be adopted, for consumers to accept and
transition to these new products and standards, and for significant sales to be
generated from them, if this happens at all. Moreover, broad acceptance of new
products and standards by consumers may reduce demand for our older products and
standards. If this decreased demand is not offset by increased demand for our
new products and standards, our results of operations could be harmed. We cannot
assure you that any new products or standards we develop will be commercially
successful.




Our
future operating results may fluctuate and cause the price of our common stock
to decline.





We expect
that our revenues and operating results will continue to fluctuate significantly
from quarter to quarter due to various factors, many of which are beyond our
control. The factors that could cause our operating results to fluctuate
include, but are not limited to:





·
            price
      competition;·
            general
      price increases by suppliers and manufacturers;·
            our
      ability to maintain and expand our customer relationships;·
            the
      introduction of new or enhanced products and strategic alliances by us and
      our competitors;


9





·
            the
      success of our brand-building and marketing campaigns;





·
            consumer
      acceptance of our products and general shifts in consumer behavior with
      respect to our industry;





·
            our
      ability to maintain, upgrade, and develop our production facilities and
      infrastructure;·
            technical
      difficulties and system downtime;





·
            the
      amount and timing of operating costs and capital expenditures relating to
      expansion of our business, operations and
  infrastructure;





·
            general
      economic conditions as well as economic conditions specific to our
      industry; and·
            our
      ability to attract and retain qualified management and employees.




If our
revenues or operating results fall below the expectations of investors or
securities analysts, the price of our common stock could significantly
decline.





Our
ability to manage our future growth is uncertain.





We are
currently anticipating a period of growth as a result of our corporate growth
strategy, which aims to, among other things, further develop our manufacturing
capabilities, expand our product offerings, and reach new customers. In pursuing
these objectives, the resulting strain on our managerial, operational, financial
and other resources could be significant. Success in managing such expansion and
growth will depend, in part, upon the ability of senior management to manage
effectively. Any failure to manage the anticipated growth and expansion could
have a material adverse effect on our business.




Increased
product returns will decrease our revenues and impact
profitability.





We do not
make allowances for product returns in our financial statements based on the
fact that we have not had a material historical return rate. In order to keep
product returns low, we continuously monitor product purchases and returns and
may change our product offerings based on the rates of returns. If our actual
product returns significantly increase, especially as we expand into new product
categories, our revenues and profitability could decrease. Any changes in our
policies related to product returns may result in customer dissatisfaction and
fewer repeat customers.





Our
growth and operating results could be impaired if we are unable to meet our
future capital needs.





We may
need to raise additional capital in the future to:





·
            fund
      more rapid expansion;·
            acquire
      or expand into new facilities;·
            maintain,
      enhance, and further develop our manufacturing systems;·
            develop
      new product categories or enhanced
services;





·
            fund
      acquisitions; or·
            respond
      to competitive pressures.




If we
raise additional funds by issuing equity or convertible debt securities, the
percentage ownership of our stockholders will be diluted. Furthermore, any new
securities could have rights, preferences and privileges senior to those of our
preferred shares and the common stock into which our preferred shares are
convertible. We cannot be certain that additional financing will be available
when and to the extent required or that, if available, it will be on acceptable
terms. If adequate funds are not available on acceptable terms, we may not be
able to fund our expansion, develop or enhance our products or services or
respond to competitive pressures.


10


The
loss of key senior management personnel could negatively affect our
business.




We depend
on the continued services and performance of our senior management and other key
personnel, particularly Parker Seto, our Chief Executive Officer and President,
and Sebastian Tseng, our Regional Director for South America and V.P. of
Production and R&D. The loss of any of our executive officers or other key
employees could harm our business. Infosmart BVI currently has employment
agreements with its key personnel. Further, we expect to assume
the employment agreements our executive officers currently have
with Infosmart BVI.





Rapid
changes in technology could adversely affect our business and hurt our
competitive position.




We
believe that our ability to increase sales by developing appealing, innovative
products has an important role to play in our growth. However, it is extremely
difficult to predict future demand in the rapidly changing storage media
industry and develop new technologies to meet that demand. We may fail to
develop and supply in a timely manner attractive, new products with innovative
technologies for this industry and its markets. In the event that our management
misreads the industry and market and/or is slow in developing innovative
technologies on a cost competitive basis, actual earnings could differ
significantly from our forecasts. At the same time, we may cease to be able to
compete in markets, resulting in a significant adverse effect on our business
results and growth prospects.




The
patents required for manufacturing our DVDR products are owned by multiple
companies. Our failure to obtain all of the required patents to manufacture our
products may interfere with our current or future product development and
sales.





We have
never conducted a comprehensive patent search relating to the technology we use
in our products. The Patent Licenses held by IS Holdings with whom we have a
Cooperation Agreement were obtained through a joint patent licensing program
(the “DVDR Patent License Program”) that is administered by Koninklijke Philips
Electronics, N.V. (“Philips”). Parties acquiring the patent licenses through
this DVDR Patent License Program are allowed to use patents owned by companies
including Philips, Sony, Pioneer and/or Hewlett Packard (or for which such
companies have patent applications pending) that are essential for manufacturing
DVDR products. However, there may be other issued or pending patents owned by
third parties that are required for manufacturing our products for which IS
Holdings does not have a patent license. If so, we could incur substantial costs
defending against patent infringement claims, or we could even be blocked from
selling our products. We cannot determine with certainty whether any other
existing third party patents or the issuance of any new third party patents
would require us or IS Holdings to alter, or obtain licenses relating to, our
processes or products, or implement alternative non-infringing approaches, all
at a significant additional cost to the Company. There is no assurance that we
or IS Holdings will be able to obtain any such licenses on terms favorable to
us, if at all, and obtaining and paying royalties on new licenses might
materially increase our costs. Additionally, the fees in respect of existing
licenses could increase materially in the future when these licenses are
renewed, and such increase may have a significantly and adversely impact our
business.





Further,
the owners of the technologies and intellectual property necessary for the
production of our products require that we obtain separate patent licenses for
the use of intellectual property in our DVDR manufacturing facility in Brazil.
We are currently in the process of obtaining these Patent Licenses.




We
may be unable to retain our Hong Kong business customs license for our
manufacturing facilities in Hong Kong





The Hong
Kong government requires companies manufacturing DVDRs to obtain a business
license for the manufacture of optical Disc/Stampers (the “Hong Kong Business
License”) from the Customs and Excise Department of Hong Kong. We currently
manufacture our products under the Hong Kong Business License held by IS
Holdings under the Cooperation Agreement. If IS Holdings loses its Hong Kong
Business License or we lose our rights under the Cooperation Agreement, there is
no guarantee that we will be able to otherwise obtain the Hong Kong Business
Licenses necessary to operate our manufacturing facilities in Hong
Kong.




Our
business may suffer if we are sued for infringing upon the intellectual property
rights of third parties.





There may
be cases where it is alleged that our products infringe on the intellectual
property rights of third parties. As a result, we may suffer damages or may be
sued for damages. In either case, settlement negotiations and legal procedures
would be inevitable and could be expected to be lengthy and expensive. If our
assertions are not accepted in such disputes, we may have to pay damages and
royalties and suffer losses such as the loss of our market share. The failure to
prevent infringement on the rights of others could have a materially adverse
effect on our business development, business results and financial
condition.


11


We
are dependent on certain raw materials and other products, and our business will
suffer if we are unable to procure such materials and products.





Our
manufacturing systems are premised on deliveries of raw materials and other
supplies in adequate quality and quantity in a timely manner from many external
suppliers. In new product development, we may rely on certain irreplaceable
suppliers for materials. Because of this, there may be cases where supplies of
raw materials and other products to us are interrupted by an accident or some
other event at a supplier, supply being suspended due to quality or other
issues, or a shortage of or instability in supply due to a rapid increase in
demand for finished products that use certain materials and products. If any of
these situations becomes protracted, we may have difficulty finding substitutes
in a timely manner from other suppliers, which could have a significant, adverse
effect on our production and prevent us from fulfilling our responsibilities to
supply products to our customers. Furthermore, if an imbalance arises in the
supply-demand equation, there could be a spike in the price of raw materials. In
the event of these or other similar occurrences, there could be a material
adverse effect on our business results and financial condition.




We
compete in a highly competitive industry where some of our competitors are
larger and have more resources than we do.





We
operate in a highly competitive environment. We have competitors that are both
larger and smaller than we are in terms of resources and market share. The
marketplaces in which we operate are generally characterized by rapid
technological change, frequent new product introductions and declining prices.
In these highly competitive markets, our success will depend to a significant
extent on our ability to continue to develop and introduce differentiated and
innovative products and customer solutions successfully and on a timely basis.
The success of our product offerings is dependent on several factors including
understanding customer needs, strong digital technology, differentiation from
competitive offerings, market acceptance, and lower costs. Although we believe
that we can take the necessary steps to meet the competitive challenges of these
marketplaces, no assurance can be given with regard to our ability to take these
steps, the actions of competitors, some of which will have greater resources
than us, or the pace of technological changes.





Technology
in our industry evolves rapidly, potentially causing our products to become
obsolete, and we must continue to enhance existing systems and develop new
systems, or we will lose sales.




Rapid
technological advances, rapidly changing customer requirements and fluctuations
in demand characterize the current market for our products. Further, there are
alternative data storage media, and additional media is under development,
including high capacity hard drives, new CD-R/DVDR technologies, file servers
accessible through computer networks, and the internet. Our existing and
development-stage products may become obsolete if our competitors introduce
newer or more appealing technologies. If these technologies are patented by or
are proprietary to our competitors, then we may not be able to access these
technologies. We believe that we must continue to innovate and anticipate
advances in the storage media industry in order to remain competitive. If we
fail to anticipate or respond to technological developments or customer
requirements, or if we are significantly delayed in developing and introducing
products, our business will suffer in sales.





Our
market is becoming more competitive. Competition may result in price reductions,
lower gross profits, and loss of market share.




The
storage media industry is becoming more competitive, and we face the potential
for increased competition in developing and selling our products. Our
competitors may have or could develop or acquire significant marketing,
financial, development, and personnel resources. We cannot assure you that we
will be able to compete successfully against our current or future competitors.
The storage media industry has increased visibility, which may lead to large,
well-known, well-financed companies entering into this market. Increased
competition from manufacturers of systems or consumable supplies may result in
price reductions, lower gross profit margins, increased discounts to
distribution, and loss of market share, and could require increased spending by
us on research and development, sales and marketing, and customer
support.




If
we are unable to compete effectively with existing or new competitors, the loss
of our competitive position could result in price reductions, fewer customer
orders, reduced revenues, reduced margins, reduced levels of profitability, and
loss of market share.




We have
several competitors, which include the largest DVDR manufacturers in the world.
Certain of these competitors compete aggressively on price and seek to maintain
very low cost structures. Some of these competitors are seeking to increase
their market share, which creates increased pressure, including pricing
pressure, within the market. In addition, certain of the competitors have
financial and human resources that are substantially greater than ours, which
increases the competitive pressures we face. Customers make buying decisions
based on many factors, including among other things, new product and service
offerings and features, product performance and quality, ease of doing business,
a vendor’s ability to adapt to customers’ changing requirements, responsiveness
to shifts in the marketplace, business model, contractual terms and conditions,
vendor reputation, and vendor viability. As competition increases, each factor
on which we compete becomes more important and the lack of competitive advantage
with respect to one or more of these factors could lead to a loss of competitive
position, resulting in fewer customer orders, reduced revenues, reduced margins,
reduced levels of profitability, and loss of market share. We expect competitive
pressure to remain intense.


12


The
products we make have a life cycle. If we are unable to successfully time market
entry and exit and manage our inventory, we may fail to enter profitable markets
or exit unprofitable markets.




We
operate in a highly competitive, quickly changing environment. The victory of
the Blu-Ray format DVD over the HD-DVD may accelerate the phase-out and
technological obsolescence of our current DVDR production machine that produces
our current production lines, which would result in impairment in value. Also,
as the market has turned to the Blu-ray DVD, we must purchase new equipment to
produce Blu-ray DVDR discs, and thus our business and operating results could be
adversely affected. Further, if strong competitors challenge us in Brazil and
other key markets, we will need to quickly develop an adequate competitive
response. If we fail to accurately anticipate market and technological trends,
then our business and operating results could be materially and adversely
affected.




We must
also be able to manufacture the products at acceptable costs. This requires us
to be able to accurately forecast customer demand so that we can procure the
appropriate inputs at optimal costs. We must also try to reduce the levels of
older product inventories to minimize inventory write-offs. If we have excess
inventory, it may be necessary to reduce its prices and write down inventory,
which could result in lower gross margins. Additionally, our customers may delay
orders for existing 8x or 16x writable speed DVDR products in anticipation of
Blu-Ray product introductions. As a result, we may decide to adjust prices of
existing products during this process to try to increase customer demand for
these products. Our future operating results would be materially and adversely
affected if such pricing adjustments were to occur and we are unable to mitigate
the resulting margin pressure by maintaining a favorable mix of products, or if
we are unsuccessful in achieving input cost reductions, operating efficiencies,
and increasing sales volumes.




If we are
unable to timely develop, manufacture, and introduce new products in sufficient
quantity to meet customer demand at acceptable costs, or if we are unable to
correctly anticipate customer demand for our new and existing products, then our
business and operating results could be materially adversely
affected.





If
our products fail to compete successfully with other existing or newly developed
products for the storage media industry, our business will suffer.





The
success of our products depends upon end users choosing our DVDR technology for
their storage media needs. However, alternative data storage media exist, such
as high capacity hard drives, new CD-R/DVDR technologies, file servers
accessible through computer networks, and the internet, and additional media is
under development. If end users perceive any technology that competes with ours
as more reliable, higher performing, less expensive, or having other advantages
over our technology, the demand for our DVDR products could decrease. Further,
some of our competitors may make strategic acquisitions or establish cooperative
relationships with suppliers or companies that produce complementary products
such as cameras, computer equipment, software, or biometric applications.
Competition from other storage media is likely to increase. If our products do
not compete successfully with existing or new competitive products, our business
will suffer.




Our
products may have manufacturing or design defects that we discover after
shipment, which could negatively affect our revenues, increase our costs, and
harm our reputation.




Our
products may contain undetected and unexpected defects, errors, or failures. If
these product defects are substantial, the results could be product recalls, an
increased amount of product returns, loss of market acceptance, and damage to
our reputation, all of which could increase our costs and cause us to lose
sales. We do not carry general commercial liability insurance covering our
products. In addition, we are preparing to launch production of Blu-Ray format
DVDRs in Quarter 4 of 2008. HD and Blu-Ray format DVDR production will require
us to master new production techniques and modify existing or purchase new
machinery and equipment. It is possible that we may fail to achieve mastery of
these new techniques and production yields could suffer as a result. In early
June 2008, we successfully installed the first set of new machinery that can
produce Blu-Ray format DVDR in our Hong Kong factory. We are now proceeding with
the testing phase by producing sample orders and grasping the new techniques
gradually in order to build up high quality control and cost-effectiveness to
develop effective operations before proceeding with mass production of Blu-Ray
format DVDR discs.


13


The
development of digital distribution alternatives, including the copying and
distribution of music and video and other electronic data files, could decrease
the demand for our products.





We are
dependent on the continued viability and growth of the physical distribution of
music, video, and other electronic data through recordable media. Alternative
distribution channels and methods, both authorized and unauthorized, for
delivering music, video, and other electronic data may erode our volume of sales
and the pricing of our products. The growth of these alternatives is driven by
advances in technology that allow for the transfer and downloading of music,
video, and other electronic data files from the Internet. The proliferation of
this copying, use, and distribution of such files is supported by the increasing
availability and decreasing price of new technologies, such as personal video
recorders, DVD burners, portable MP3 music and video players, widespread access
to the internet, and the increasing number of peer-to-peer digital distribution
services that facilitate file transfers and downloading. We expect that file
sharing and downloading, both legal and illegal, will continue to exert downward
pressure on the demand for traditional DVDRs. As current technologies and
delivery systems improve, the digital transfer and downloading of music, video,
and other electronic data files will likely become more widespread. As the speed
and quality with which music, video, and other electronic data files can be
transferred and downloaded improves, file sharing and downloading may in the
future exert significant downward pressure on the demand for DVDRs. In addition,
our business faces pressure from emerging distribution alternatives such as
video on demand (“VOD”) and personal digital video recorders. As substantially
all of our revenues are derived from the sale of DVDRs, increased file sharing,
downloading, and piracy or the growth of other alternative distribution channels
and methods could materially adversely affect our business, financial condition,
and results of operations.





Our
revenues, cash flows, and operating results may fluctuate for a number of
reasons.




Future
operating results and cash flows will continue to be subject to quarterly
fluctuations based on a wide variety of factors, including seasonality. Although
our sales and other operating results can be influenced by a number of factors
and historical results are not necessarily indicative of future results, our
sequential quarterly operating results generally fluctuate downward in the
fourth quarter of each fiscal year when compared with the immediately preceding
quarter.





A
significant portion of our revenue depends on the success of our new venture in
Brazil.





A
significant portion of our revenues depend on the success of our Brazilian
venture. Prior to commencing our Brazilian venture, we had no manufacturing and
distribution experience in Brazil. We are relying on the local knowledge of our
Brazilian joint venture partner and the general knowledge of the South American
marketplace of our regional director Sebastian Tseng. Our results could suffer
should the relationship with either of these two parties
deteriorate.





We
are at risk of losing our significant investment in Brazil if we are unable to
obtain the intellectual property licenses required for our Discobras
manufacturing facility.





The
owners of the technologies and intellectual property necessary for the
production of our products require that we obtain separate patent licenses for
the use of intellectual property in our DVDR manufacturing facility in Brazil.
We have completed the required procedures in applying for the patent licenses
for use at the Discobras manufacturing facility and are now waiting for the
patent owners to complete their own procedures, including the submission of the
patent licenses to the Patent Office in Brazil for final approval. However, if
there is a substantial delay in obtaining approval for our use of the patent
licenses, then we may be unable to manufacture a sufficient amount of our
products to fill our sales orders, and this could cause us to lose substantial
revenues. Further, in the event we are unable to obtain the patent licenses, we
may not be able to manufacture our products in Brazil, placing us at risk of
losing our significant investment in the Brazilian venture.




Past
activities of the Company and its affiliates may lead to future liability for
the combined companies.





Prior to
the closing of our share exchange transaction in August 2006, the Company
engaged in businesses unrelated to that of our current operations. Any
liabilities relating to such prior businesses against which we are not
completely indemnified may have a material adverse effect on the
Company.




Risks
Relating To Doing Business in Hong Kong and Brazil





Adverse
changes in economic and political policies of the People’s Republic of China
government could have a material adverse effect on the overall economic growth
of Hong Kong, which could adversely affect our business.




A
substantial portion of our business operations is conducted in Hong Kong, a
special administrative region in the People’s Republic of China (“PRC”).
Accordingly, our results of operations, financial condition, and prospects are
subject to a significant degree to economic, political, and legal developments
in Hong Kong and the PRC. The PRC’s economy differs from the economies of most
developed countries in many respects, including with respect to the amount of
government involvement, level of development, growth rate, control of foreign
exchange, and allocation of resources. While the PRC economy has experienced
significant growth in the past 20 years, growth has been uneven across different
regions and among various economic sectors of China. The PRC government has
implemented various measures to encourage economic development and guide the
allocation of resources. Some of these measures benefit the overall PRC economy,
but may also have a negative effect on us.


14


You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in Hong Kong or China based on
United States or other foreign laws against us or our management.




We
currently conduct a substantial portion of our operations in Hong Kong, and a
substantial amount of our assets are located in Hong Kong. In addition, all of
our senior executive officers reside within Hong Kong. As a result, it may not
be possible to effect service of process within the United States or elsewhere
outside Hong Kong upon our senior executive officers, including with respect to
matters arising under U.S. federal securities laws or applicable state
securities laws. Moreover, neither the PRC nor Hong Kong have treaties with the
United States or many other countries providing for the reciprocal recognition
and enforcement of judgment of courts.





Fluctuation
in the value of the Hong Kong Dollar may have a material adverse effect on your
investment.




The value
of the Hong Kong dollar against the U.S. dollar and other currencies may
fluctuate and is affected by, among other things, changes in political and
economic conditions. Although the exchange rate between the Hong Kong dollar and
the U.S. dollar has been effectively pegged, there can be no assurance that the
Hong Kong dollar will remain pegged to the U.S. dollar, especially in light of
the significant international pressure on the Chinese government to permit the
free floatation of the RMB and the Hong Kong dollar, which could result in an
appreciation of RMB or the Hong Kong dollar against the U.S. dollar. Our
revenues and costs are mostly denominated in Hong Kong dollars, while a
significant portion of our financial assets are also denominated in Hong Kong
dollars. Any significant revaluation of the Hong Kong dollar may materially and
adversely affect our cash flows, revenues, earnings and financial position, and
the value of, and any dividends payable on, our stock in U.S.
dollars.




Changes
in Hong Kong’s or Brazil’s political or economic situation could harm our
operational results.





Economic
reforms adopted by the Chinese or Brazilian governments have had positive
effects on the economic development of these countries, but the governments
could change these economic reforms or any of the legal systems at any time.
This could either benefit or damage the Company’s operations and profitability.
Some of the things that could have this effect are:





·
            Level
      of government involvement in the
economy;





·
            Control
      of foreign exchange;





·
            Methods
      of allocating resources;





·
            Balance
      of payments position;




·
            International
      trade restrictions; and





·
            International
      conflict.




Any of
the foregoing events or other unforeseen consequences of public health problems
could damage the Company’s operations.





The
Brazilian government has historically exercised, and continues to exercise,
significant influence over the Brazilian economy. Brazilian political and
economic conditions will have a direct impact on our business and the market
price of our securities.




The
Brazilian government frequently intervenes in the Brazilian economy and
occasionally makes substantial changes in policy, as often occurs in other
emerging economies. The Brazilian government’s actions to control inflation and
carry out other policies have in the past involved wage and price controls,
currency devaluations, capital controls, and limits on imports, among other
things. Our business, financial condition, and results of operations may be
adversely affected by factors in Brazil including:


15





·
            Currency
      volatility;





·
            Inflation
      acceleration;





·
            Monetary
      policy and interest rate increases;·
            Fiscal
      policy and tax changes;·
            International
      trade policy including tariff and non-tariff trade
    barriers;




·
            Foreign
      exchange controls;





·
            Energy
      shortages; and




·
            Other
      political, social and economic developments in or affecting
      Brazil.





Inflation
and government measures to curb inflation may contribute significantly to
economic uncertainty in Brazil and to heightened volatility in the Brazilian
securities markets and, consequently, may adversely affect our business in
Brazil.




Brazil
has in the past experienced extremely high rates of inflation, with annual rates
of inflation reaching as high as 2,567% in 1993 (as measured by the Índice Geral de Preços do
Mercado published by Fundação Getúlio Vargas, or
IGP-M Index). More recently, Brazil’s rates of inflation were 10.4% in 2001,
25.3% in 2002, 8.7% in 2003, 12.4% in 2004, 1.2% in 2005, 3.8% in 2006, 3.5% in
2007 and 5.17% in 2008 (as measured by the IGP-M Index). Inflation, governmental
measures to combat inflation, and public speculation about possible future
actions have in the past had significant negative effects on the Brazilian
economy and have contributed to economic uncertainty in Brazil. If Brazil
experiences substantial inflation in the future, our costs may increase and our
operating and net margins may decrease. Inflationary pressures may also lead to
further government intervention in the economy, which could involve the
introduction of government policies that may adversely affect the overall
performance of the Brazilian economy.





Restrictions on currency exchange may
limit our ability to receive and use our revenues
effectively.





As we
have business operations in Brazil, some of our revenues are settled in the
Brazilian Real. Any future restrictions on currency exchanges may limit our
ability to use revenue generated in Reals to fund any future business activities
outside Brazil or to make dividend or other payments in U.S.
dollars.




The
value of our securities will be affected by the foreign exchange rate between
the U.S. dollar, the Hong Kong dollar, and the Real.





The value
of our common stock will be affected by the foreign exchange rate between U.S.
and Hong Kong dollars and Real, and between those currencies and other
currencies in which our sales may be denominated. For example, to the extent
that we need to convert U.S. or Hong Kong dollars into Real for our operational
needs and should the Real appreciate against the U.S. dollar at that time, our
financial position, our business, and the price of our common stock may be
harmed. Conversely, if we decide to convert our Reals into U.S. or Hong Kong
dollars for the purpose of declaring dividends on our common stock or for other
business purposes and the U.S. Dollar appreciates against the Real, the U.S. or
Hong Kong dollar equivalent of our earnings from our subsidiaries in Hong Kong
and Brazil would be reduced. We will engage in hedging activities to manage our
financial exposure related to currency exchange fluctuation. In these hedging
activities, we might use fixed-price, forward, futures, financial swaps, and
option contracts traded in the over-the-counter markets or on exchanges, as well
as long-term structured transactions when feasible.





We
will depend on Brazil’s foreign investment incentive programs, which provide
reductions in taxation or exemptions from taxation for our operations in Brazil.
The loss of the tax benefits from these incentive programs may substantially
affect our earnings.


16


Under the
State of Bahia’s investment incentive program, our Brazilian subsidiary,
Discobras, has been granted a reduction in the Value Added Tax (“VAT”) it is
required to pay for products. Discobras pays only 2.28%, as compared to VAT of
12% in Salvador, or 18% in São Paulo. This VAT reduction will be available to us
until June 2016. We will also avail ourselves of an incentive program for
foreign investment which exempts Discobras from paying Brazil’s ICMS taxes on
raw materials it imports for production in Brazil and create substantial tax
savings for Infosmart BVI. This tax exemption will last throughJune2016.
In the event that the VAT reduction program is no longer available to us or we
are unable to extend the ICMS tax-exemption, our after-tax earnings would
decline by the amount of the tax benefits, which may be
substantial.




Risks
Relating to Ownership of Our Securities





We
are a public company subject to evolving corporate governance and public
disclosure regulations that may result in additional expenses and continuing
uncertainty regarding the application of such regulations.




Changing
laws, regulations, and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 and related rules and
regulations, are creating uncertainty for public companies. We are presently
evaluating and monitoring developments with respect to new and proposed rules
and cannot predict or estimate the amount of the additional compliance costs we
may incur or the timing of such costs. These new or changed laws, regulations,
and standards are subject to varying interpretations, in many cases due to their
lack of specificity, and as a result, their application in practice may evolve
over time as new guidance is provided by courts and regulatory and governing
bodies. This could result in continuing uncertainty regarding compliance matters
and higher costs necessitated by ongoing revisions to disclosure and governance
practices. Maintaining appropriate standards of corporate governance and public
disclosure may result in increased general and administrative expenses and a
diversion of management’s time and attention from revenue-generating activities
to compliance activities. In addition, if we fail to comply with new or changed
laws, regulations, and standards, regulatory authorities may initiate legal
proceedings against us, and our business and our reputation may be
harmed.




Our
common stock may have limited liquidity.




A
substantial portion of our shares of common stock are closely held by certain
institutional and insider investors. Consequently, the public float for our
shares may be highly limited. As a result, you may encounter difficulty selling
large blocks of shares of our common stock or obtaining a suitable price at
which to sell such shares.




Our
common share stock price may be volatile, which may result in losses to our
shareholders.




The stock
markets have experienced significant price and trading volume fluctuations, and
the market prices of companies quoted on the Over-The-Counter Bulletin Board,
the stock market on which shares of our common stock are quoted, generally have
been very volatile and have experienced sharp share price and trading volume
changes. The trading price of our common stock is likely to be volatile and
could fluctuate widely in response to many of the following factors, some of
which are beyond our control:




·
            variations
      in our operating results;





·
            announcements
      of technological innovations, new services or product lines by us or our
      competitors;·
            changes
      in expectations of our future financial performance, including financial
      estimates by securities analysts and
  investors;





·
            changes
      in operating and stock price performance of other companies in our
      industry;





·
            additions
      or departures of key personnel; and





·
            future
      sales of our common stock.




Domestic
and international stock markets often experience significant price and volume
fluctuations. These fluctuations, as well as general economic and political
conditions unrelated to our performance, may adversely affect the price of our
common stock. In the past, following periods of volatility in the market price
of a public company’s securities, securities class action litigation has often
been initiated.


17


Our
Class A Warrants are quoted on the Over-the-Counter Bulletin Board, but an
active, liquid trading market has not yet developed.  Even if an
active public market for such warrants develops, we expect to experience
volatility in the price of such warrants, which may result in losses to
you.





Our Class
A Warrants are quoted on the Over-the-Counter Bulletin Board since September
2008.  An active trading market for our Class A Warrants may not
develop, though, due to a number of factors, including the fact that we are a
small company that is relatively unknown to stock analysts, stock brokers,
institutional investors, and others in the investment community that generate or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase of our Class
A Warrants until such time as we became more seasoned and viable. As a
consequence, there may be periods of several days or more when trading activity
in such warrants is minimal or non-existent, as compared to a seasoned issuer
which has a large and steady volume of trading activity that will generally
support continuous sales. We cannot give you any assurance that an active public
trading market for these warrants will develop or be sustained. You may not be
able to liquidate your Class A Warrants quickly or at the market price if
trading in our Class A Warrants is not active.





Even if
an active public market for the Class A Warrants develops, we expect the market
price of such warrants to fluctuate substantially for the indefinite future due
to a number of factors, including:




·
            variations
      in our operating results;





·
            announcements
      of technological innovations, new services or product lines by us or our
      competitors;·
            changes
      in expectations of our future financial performance, including financial
      estimates by securities analysts and
  investors;





·
            changes
      in operating and stock price performance of other companies in our
      industry;





·
            additions
      or departures of key personnel; and





·
            future
      sales of our common stock.





We
have broad discretion as to the use of funds from our commercial secured loan
transaction from April 2008 and may not use the funds effectively.





Our
management team have broad discretion as to the allocation and timing of the use
of funds from our commercial secured loan transaction that closed in April 2008
and may spend these proceeds in ways with which our shareholders may not agree.
The failure of our management to apply these funds effectively could result in
unfavorable returns and uncertainty about our prospects, each of which could
cause the price of our common stock to decline.




Our
officers and directors own a significant portion of our outstanding common
stock, which will enable them to influence many significant corporate actions
and in certain circumstances may prevent a change in control that would
otherwise be beneficial to our shareholders.





Certain
members of our board and management own a significant portion of our outstanding
shares of stock that are entitled to vote on all corporate actions. These
stockholders, acting together, could have a substantial impact on matters
requiring the vote of the shareholders, including the election of our directors
and most of our corporate actions. This control could delay, defer, or prevent
others from initiating a potential merger, takeover, or other change in our
control, even if these actions would benefit our shareholders and us. This
control could adversely affect the voting and other rights of our other
shareholders and could depress the market price of our common
stock.





A
large number of common shares are issuable upon exercise of outstanding common
share warrants. The exercise or conversion of these securities could result in
the substantial dilution of your investment in terms of your percentage
ownership in the Company as well as the book value of your common shares. The
sale of a large amount of common shares received upon exercise of these warrants
on the public market to finance the exercise price or to pay associated income
taxes, or the perception that such sales could occur, could substantially
depress the prevailing market prices for our shares.


18


As of
September 30, 2008, there are outstanding warrants entitling the holders to
purchase up to 28,510,347 common shares at an exercise price of $0.326 per
share. In the event of the exercise of these securities, you could suffer
substantial dilution of your investment in terms of your percentage ownership in
the Company as well as the book value of your common shares. In addition, the
holders of the common share purchase warrants may sell common shares in tandem
with their exercise of those options or warrants to finance that exercise, or
may resell the shares purchased in order to cover any income tax liabilities
that may arise from their exercise of the warrants.




As a public company, we are subject
to complex legal and accounting requirements that require us to incur
substantial expense and will expose us to risk of
non-compliance.





As
a public company, we are subject to numerous legal and accounting requirements
that do not apply to private companies. The cost of compliance with many of
these requirements is substantial, not only in absolute terms but, more
importantly, in relation to the overall scope of the operations of a small
company. Our inexperience with these requirements may increase the cost of
compliance and may also increase the risk that we will fail to comply. Failure
to comply with these requirements can have numerous adverse consequences
including, but not limited to, our inability to file required periodic reports
on a timely basis, loss of market confidence, delisting of our securities, and
governmental or private actions against us. We cannot assure you that we will be
able to comply with all of these requirements or that the cost of such
compliance will not prove to be a substantial competitive disadvantage vis-à-vis
our privately held competitors as well as our larger public
competitors.





If
we fail to maintain the adequacy of our internal controls, our ability to
provide accurate financial statements and comply with the requirements of the
Sarbanes-Oxley Act of 2002 could be impaired, which could cause our stock price
to decrease substantially.





We take
measures to address and improve our financial reporting and compliance
capabilities, and we plan to obtain additional financial and accounting
resources to support and enhance our ability to meet the requirements of being a
public company. We will need to continue to improve our financial and managerial
controls, reporting systems and procedures, and documentation thereof. If our
financial and managerial controls, reporting systems, or procedures fail, we may
be unable to provide accurate financial statements on a timely basis or comply
with the Sarbanes-Oxley Act of 2002 as it applies to us. Any failure of our
internal controls or our ability to provide accurate financial statements could
cause the trading price of our common stock to decrease
substantially.




We
do not anticipate paying any cash dividends.





We
presently do not anticipate that we will pay any dividends on any of our capital
stock in the foreseeable future. The payment of dividends, if any, would be
contingent upon our revenues and earnings, if any, capital requirements, and
general financial condition. The payment of any dividends will be within the
discretion of our board of directors. We presently intend to retain all
earnings, if any, to implement our business plan; accordingly, we do not
anticipate the declaration of any dividends in the foreseeable
future.





Item
2. Unregistered Sales of Equity Securities and Use of Proceeds




None.





Item
3. Defaults Upon Senior Securities.




None.




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




None.




Item
5. Other Information.




None




19


ITEM
6. EXHIBITS and Reports on Form 8-K.




Exhibit Number
                                                  
                                                  Description2.1
                                                  
                                                  Exchange
      Agreement by and among Cyber, KI Equity, Hamptons Investment Group, Ltd.,
      Prime and the Prime Shareholders dated July 7, 2006 (1)2.2
                                                  
                                                  First
      Amendment to the Exchange Agreement dated August 16, 2006 between Cyber,
      KI Equity Partners, LLC, Hamptons Investment Group, Ltd., Prime, Prime
      Shareholders, Infosmart Group Ltd. and the Infosmart BVI Shareholders
      (2)2.3
                                                  
                                                  Voting
      Agreement by and among the Infosmart BVI Stockholders and KI Equity dated
      August 16, 2006 (2)3.1
                                                  
                                                  Articles
      of Incorporation (3)3.2
                                                  
                                                  Bylaws
      (3)3.3
                                                  
                                                  Amendment
      to Bylaws (4)3.4
                                                  
                                                  Certificate
      Of Determination Of Rights, Preferences, Privileges And Restrictions Of
      Series A Convertible Preferred Stock
(2)
  3.5
                    
                    Certificate
      Of Determination Of Rights, Preferences, Privileges And Restrictions Of
      Series B Convertible Preferred Stock (2)4.1
                    
                    Lock-Up
      Agreement (5)4.2
                    
                    Specimen
      Stock Certificate for Shares of Common Stock of the Company
      (6)10.1
                    
                    Lease
      of registrant's facilities dated January 29, 2004 (7)10.2
                    
                    Lease
      of registrant's facilities dated March 22, 2006 (7)10.3
                    
                    Lease
      of registrant's facilities dated September 16, 2003 (7)10.4
                    
                    Lease
      of registrant's facilities dated July 25, 2003 (7)10.5
                    
                    Lease
      of registrant's facilities dated September 30, 2003 (7)10.6
                    
                    Placement
      Agent Agreement dated July 7, 2006 between the Registrant, Securities, LLC
      and Axiom Capital Management, Inc. (2)10.7
                    
                    Form
      of Subscription Agreement between the Registrant and the Investor to be
      identified therein (2)10.8
                    
                    Registration
      Rights Agreement (2)10.9
                    
                    Form
      of Common Stock Purchase Warrant (2)10.10
                    
                    Assignment
      and Assumption of Placement Agreement by an among Infosmart BVI, Cyber,
      Keating Securities, LLC and Axiom Capital Management, Inc. dated August
      16, 2006 (2)10.11
                    
                    Appointment
      Letter Agreement by and among Po Nei Sze and Infosmart Group Limited dated
      June 1, 2006 (2)10.12
                    
                    Appointment
      Letter Agreement by and among Andrew Chang and Infosmart Group Limited
      dated July 1, 2006 (2)10.13
                    
                    Appointment
      Letter Agreement by and among Chung Kwok and Infosmart Group Limited dated
      July 1, 2006 (2)10.14
                    
                    Cooperation
      Agreement by and among Infoscience Media Ltd. and Infoscience Holdings
      Ltd. dated December 1, 2005
(2)
  10.15
                                                
                                                Amendment
      Agreement by and among Info smart Technology Limited, Info Smart
      International Enterprises Limited, and Mega Century Ltd. dated January 1,
      2006 (2)10.16
                                                
                                                Banking
      Facilities Letter Agreement by and between Infoscience Media Limited
      and Hang Seng Bank Limited dated September 15, 2005
    (2)10.17
                                                
                                                General
      Banking Facilities Agreement by and between Info Smart Technology Ltd. and
      Chiyu Banking Corporation Limited dated November 28, 2003
    (2)


20





10.18
              
              Contract
      for two Automatic Dual Track DVDR Manufacturing Systems "Streamline II
      DVDR" between Infoscience Media Ltd. and ACME Cassette Manufacturing
      Limited dated September 15, 2004 (2)10.19
              
              Sale
      and Purchase Agreement between Infoscience Media Limited and New Passion
      Investments Limited dated December 1, 2006 (8)16.1
              
              Letter
      from PKF Hong Kong dated September 10, 2007 (9)21.1
              
              Subsidiaries
      *23.1
              
              Consent
      of Parker Randall CF (H.K.) CPA Limited *23.2
              
              Consent
      of Parker Randall CF (H.K.) CPA Limited *31.1
              
              Section 302
      Certification by the Corporation’s Chief Executive Officer
    *31.2
              
              Section 302
      Certification by the Corporation’s Chief Financial Officer
    *32.1
              
              Section 906
      Certification by the Corporation’s Chief Executive Officer
    *32.2
              
              Section 906
      Certification by the Corporation’s Chief Financial Officer
    *




* Filed
herewith.





(1)
            Filed
      on July 12, 2006 as an exhibit to the Company’s Current Report on Form 8-K
      and incorporated herein by
reference.





(2)
            Filed
      on August 24, 2006 as an exhibit to the Company’s Current Report on Form
      8-K and incorporated herein by
reference.




(3)
            Filed
      on May 6, 1999 as an exhibit to the Company's Registration Statement on
      Form SB-2 (File No. 333-60487), as amended, and incorporated herein by
      reference.





(4)
            Filed
      on May 15, 2007 as an exhibit to the Company’s Quarterly Report on Form
      10-QSB and incorporated herein by
reference.





(5)
            Filed
      on January 27, 2000 as an exhibit to the Company’s Form 8-A and
      incorporated herein by reference.





(6)
            Filed
      on September 29, 2000 as an exhibit to the Company's Annual Report on Form
      10-K and incorporated herein by
reference.





(7)
            Filed
      on September 15, 2006 as an exhibit to the Company's Registration
      Statement on Form SB-2 (File No. 333-137362) and incorporated herein by
      reference.





(8)
            Filed
      on April 2, 2007 as an exhibit to the Company’s Annual Report on Form
      10-KSB and incorporated herein by
reference.





(9)
            Filed
      on September 11, 2007 as an exhibit to the Company’s Current Report on
      Form 8-K/A and incorporated herein by
reference.




(b)         Reports
of Form 8-K




None.


21


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.





INFOSMART
      GROUP, INC.Dated:
      May 18, 2009
                By:
                /s/
      Parker SetoParker
      Seto, Chief Executive Officer and
President




Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.





Name
                    
                    Position
                    
                    Date/s/ Parker Seto
                    
                    Chief
      Executive Officer, President
                    
                    May
      18, 2009Parker
      Seto/s/ Po Nei Sze
                    
                    Chief
      Financial Officer, Treasurer, Secretary, Director
                    
                    May
      18, 2009Po
      Nei Sze/s/ Andrew Chung Yuen Chang
                    
                    Chairman
      of the Board of Directors
                    
                    May
      18, 2009Andrew
      Chung Yuen Chang/s/ Simon Lee
                    
                    Director
                    
                    May
      18, 2009Simon
      Lee/s/ Wai Chuen Leung
                    
                    Director
                    
                    May
      18, 2009Wai
      Chuen Leung/s/ Joseph Chang
                    
                    Director
                    
                    May
      18, 2009Joseph
      Chang/s/ Chi-Man Lam
                    
                    Director
                    
                    May
      18, 2009Chi-Man
      Lam/s/ Chen Chia Ju
                    
                    Director
                    
                    May  18,
      2009Chen
      Chia Ju




22