UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q
 
 (Mark
One)
 
 x
              QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
quarterly period ended June 30, 2010
 
  ̈
              TRANSITIONAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
transition period from ____________________ to
_________________________
 
 Commission
file number: 000-49852
  DAHUA INC.(Exact
      name of small business issuer as specified in its
  charter)
 
 Delaware
                  04-3616479State
      or other jurisdiction
                  (I.R.S.
      Employer Identification No.)of
      incorporation or organization)
 
 8th
      Floor, Officer Tower 3, Henderson Center, 18# Jianguomennei
      StreetDongcheng District, Beijing,
      China  100005(Address
      of principal executive
offices)
 
 86-10-6480-1527(Issuer's
      telephone number)
 
 N/A(Former
      name, former address and former fiscal year, if changed since last
      report)
 
 Check
whether the issuer: (1) filed all reports required to be filed by Section 13 or
15 (d) of the Exchange Act during the past 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
 Yes x    No
 ̈
 
 Indicate
by check mark whether the registrant 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).  The registrant has not been
phased into the Interactive Data reporting system.
 Yes  ̈  No   ̈
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company as
defined in Rule 12b-2 of the Exchange Act.
 Large
Accelerated Filer  ̈    Accelerated
Filer  ̈     Non-accelerated
Filer  ̈   Smaller
Reporting Company x
 
 APPLICABLE
ONLY TO CORPORATE ISSUERS
 
 State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: 25,015,000 shares of common stock, par value
$.0001, as of August 15, 2010
  
  DAHUA
INC.
 
 Table of
Contents
 
 Part
      I. Financial InformationItem1.  Financial
      StatementsConsolidated
      Balance Sheet as of June 30, 2010 (unaudited) andDecember
      31, 2009
                        3Consolidated
      Statements of Operations and Comprehensive Income (Loss)for
      the Three and Six Months Ended June 30, 2010 and 2009
      (Unaudited)
                        4Consolidated
      Statements of Cash Flows for the Six MonthsEnded
      June 30, 2010 and 2009 (Unaudited)
                        5Notes
      to Consolidated Financial Statements
                        6Item
      2. Management's Discussion and Analysis or Plan of
    Operation
                        14Item
      3. Qualitative and Quantitative Disclosures About Market
    Risk
                        17Item
      4T. Controls and Procedures
                        18Part
      II. Other InformationItem
      1.  Legal Information
                        18Item
      1A. Risk Factors
                        18Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds
                        24Item
      3.  Defaults Upon Senior Securities
                        24Item
      4.  (Removed and Reserved)
                        24Item
      5.  Other Information
                        24Item
      6.  Exhibits and Reports on Form 8-K
                        25Signatures
                        26
  - 2
-
  PART
I.   FINANCIAL INFORMATION
 
 ITEM
1.  Financial Statements
 
 DAHUA,
INC.
 Consolidated
Balance Sheets
 June30,2010
                        
                        
                        December31,2009unauditedASSETSCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        487,648
                        
                        
                        $
                        65,801Inventory-short-term
                        
                        
                        3,699,847
                        
                        
                        
                        3,615,644Prepaid
      expenses
                        
                        
                        18,039
                        
                        
                        
                        42,603Deferred
      taxes – current
                        
                        
                        589,694
                        
                        
                        
                        480,700Total
      Current Assets
                        
                        
                        4,795,228
                        
                        
                        
                        4,204,748Property,
      plant and equipment, net of accumulated depreciation
                        
                        
                        1,507,644
                        
                        
                        
                        1,574,567Construction
      in progress
                        
                        
                        157,386
                        
                        
                        
                        -Inventory-long-term
                        
                        
                        5,526,142
                        
                        
                        
                        3,278,726Net
      other receivables
                        
                        
                        8,242
                        
                        
                        
                        4Prepaid
      tax
                        
                        
                        605,811
                        
                        
                        
                        569,340Restricted
      cash
                        
                        
                        738,351
                        
                        
                        
                        734,317Total
      Assets
                        
                        $
                        13,338,804
                        
                        
                        $
                        10,361,702LIABILITIES
      AND EQUITYCurrent
      liabilities:Accounts
      payable
                        
                        $
                        851,764
                        
                        
                        $
                        423,940Customer
      deposits
                        
                        
                        3,858,251
                        
                        
                        
                        3,681,057Short-term
      loans - related parties
                        
                        
                        4,321,284
                        
                        
                        
                        1,683,423Accrued
      interest - short-term loans, related parties
                        
                        
                        305,903
                        
                        
                        
                        229,373Other
      accruals
                        
                        
                        197,304
                        
                        
                        
                        225,593Total
      Current Liabilities
                        
                        
                        9,534,506
                        
                        
                        
                        6,243,386Dahua
      Inc. stockholders' equity:Preferred
      stock: par value $0.0001; 20,000,000 shares authorized;none
      issued and outstanding
                        
                        
                        -
                        
                        
                        
                        -Common
      stock: par value $0.0001; 80,000,000 shares authorized;25,015,000
      shares issued and outstanding
                        
                        
                        2,502
                        
                        
                        
                        2,502Additional
      paid-in capital
                        
                        
                        3,131,200
                        
                        
                        
                        3,131,200Retained
      earnings (deficit)
                        
                        
                        (828,765
                        )
                        
                        
                        (560,814
                        )Accumulated
      other comprehensive income
                        
                        
                        805,061
                        
                        
                        
                        788,324Total
      Dahua Inc. stockholders' equity
                        
                        
                        3,109,998
                        
                        
                        
                        3,361,212Non-controlling
      interest
                        
                        
                        694,300
                        
                        
                        
                        757,104Total
      Equity
                        
                        
                        3,804,298
                        
                        
                        
                        4,118,316Total
      Liabilities and Equity
                        
                        $
                        13,338,804
                        
                        
                        $
                        10,361,702
 
 See
accompanying notes to unaudited consolidated financial statements
  - 3
-
  DAHUA,
INC.
 Consolidated
Statements of Operations and Comprehensive Income (Loss)
 (Unaudited)
 Three months ended June 30,
                    
                    
                    Six months ended June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Revenues:Sales
      revenues
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Cost
      of goods sold
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Gross
      profit
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Expenses:Advertising
                    
                    
                    17,491
                    
                    
                    
                    -
                    
                    
                    
                    17,491
                    
                    
                    
                    -Depreciation
                    
                    
                    37,959
                    
                    
                    
                    27,300
                    
                    
                    
                    76,747
                    
                    
                    
                    54,960Payroll
      expense
                    
                    
                    36,186
                    
                    
                    
                    32,818
                    
                    
                    
                    66,068
                    
                    
                    
                    45,077Other
      general and administrative
                    
                    
                    90,191
                    
                    
                    
                    83,630
                    
                    
                    
                    208,005
                    
                    
                    
                    180,608Total
      expenses
                    
                    
                    181,827
                    
                    
                    
                    143,748
                    
                    
                    
                    368,311
                    
                    
                    
                    280,645Income
      (loss) from operations
                    
                    
                    (181,827
                    )
                    
                    
                    (143,748
                    )
                    
                    
                    (368,311
                    )
                    
                    
                    (280,645
                    )Other
      income (expense)Interest
      expense
                    
                    
                    (59,844
                    )
                    
                    
                    
                    
                    
                    
                    (72,576
                    )
                    
                    
                    -Interest
      income
                    
                    
                    113
                    
                    
                    
                    1,051
                    
                    
                    
                    132
                    
                    
                    
                    2,349Total
      other income (expense)
                    
                    
                    (59,731
                    )
                    
                    
                    1,051
                    
                    
                    
                    (72,444
                    )
                    
                    
                    2,349Income
      before income taxes
                    
                    
                    (241,558
                    )
                    
                    
                    (142,697
                    )
                    
                    
                    (440,755
                    )
                    
                    
                    (278,296
                    )Income
      tax expense (benefit)
                    
                    
                    (56,017
                    )
                    
                    
                    (35,674
                    )
                    
                    
                    (105,816
                    )
                    
                    
                    (69,574
                    )Net
      income (loss)
                    
                    
                    (185,541
                    )
                    
                    
                    (107,023
                    )
                    
                    
                    (334,939
                    )
                    
                    
                    (208,722
                    )Less:
      Net income (loss) attributable to the noncontrolling
    interest
                    
                    
                    (37,108
                    )
                    
                    
                    (21,405
                    )
                    
                    
                    (66,988
                    )
                    
                    
                    (41,744
                    )Net
      income (loss) attributable to Dahua Inc.
                    
                    $
                    (148,433
                    )
                    
                    $
                    (85,618
                    )
                    
                    $
                    (267,951
                    )
                    
                    $
                    (166,978
                    )Earnings
      per share - basic and diluted:Net
      income attributable to Dahua Inc. common stockholders
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.00
                    )
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.01
                    )Weighted
      -average shares outstanding, basic and diluted
                    
                    
                    25,015,000
                    
                    
                    
                    25,015,000
                    
                    
                    
                    25,015,000
                    
                    
                    
                    25,015,000Dahua
      Inc. Comprehensive IncomeNet
      income (loss)
                    
                    $
                    (185,541
                    )
                    
                    $
                    (107,023
                    )
                    
                    $
                    (334,939
                    )
                    
                    $
                    (208,722
                    )Other
      comprehensive income (loss), net of taxForeign
      currency translation adjustment
                    
                    
                    19,786
                    
                    
                    
                    (47,162
                    )
                    
                    
                    20,922
                    
                    
                    
                    1,631Comprehensive
      income (loss)
                    
                    $
                    (165,755
                    )
                    
                    $
                    (154,185
                    )
                    
                    $
                    (314,017
                    )
                    
                    $
                    (207,091
                    )Comprehensive
      income (loss) attributable to the noncontrolling interest
                    
                    
                    33,151
                    
                    
                    
                    28,797
                    
                    
                    
                    62,804
                    
                    
                    
                    41,329Comprehensive
      income (loss) attributable to Dahua Inc.
                    
                    $
                    (132,604
                    )
                    
                    $
                    (125,388
                    )
                    
                    $
                    (251,213
                    )
                    
                    $
                    (165,762
                    )
 
 See
accompanying notes to unaudited consolidated financial statements.
  - 4
-
  DAHUA,
INC.
 Consolidated
Statements of Cash Flows
 (Unaudited)
 
 Six
      months ended June 30,2010
                      
                      
                      2009Cash
      Flows from Operating Activities:Net
      loss
                      
                      $
                      (334,939
                      )
                      
                      $
                      (208,722
                      )Adjustments
      to reconcile  net income to net cashProvided
      by operating activities:Depreciation
                      
                      
                      76,747
                      
                      
                      
                      54,960Changes
      in operating assets and liabilities:Inventory
                      
                      
                      (2,282,156
                      )
                      
                      
                      (144,449
                      )Deferred
      taxes - current
                      
                      
                      (105,816
                      )
                      
                      
                      (69,574
                      )Prepaid
      tax
                      
                      
                      (18,524
                      )
                      
                      
                      (3,063
                      )Prepaid
      expenses
                      
                      
                      10,022
                      
                      
                      
                      -Accounts
      payable
                      
                      
                      394,699
                      
                      
                      
                      (9,305
                      )Customer
      deposits
                      
                      
                      156,181
                      
                      
                      
                      92,016Accrued
      interest
                      
                      
                      74,890
                      
                      
                      
                      18,361Other
      accruals
                      
                      
                      (733
                      )
                      
                      
                      (52,585
                      )Net
      cash used in operating activities:
                      
                      
                      (2,029,629
                      )
                      
                      
                      (322,361
                      )Cash
      Flows from Investing Activities:Property,
      plant & equipment
                      
                      
                      (1,557
                      )
                      
                      
                      (2,037
                      )Construction
      in progress
                      
                      
                      (156,591
                      )
                      
                      
                      (133,320
                      )Proceeds
      from other receivables
                      
                      
                      -
                      
                      
                      
                      157,548Other
      receivables incurred
                      
                      
                      (8,197
                      )
                      
                      
                      -Due
      from related parties
                      
                      
                      -
                      
                      
                      
                      659Net
      cash provided by (used in) investing activities:
                      
                      
                      (166,345
                      )
                      
                      
                      22,850Cash
      Flows from Financing Activities:Net
      proceeds from loans payable - related parties
                      
                      
                      2,615,328
                      
                      
                      
                      833,009Net
      proceeds from other receivable
                      
                      
                      
                      
                      
                      
                      -Net
      cash provided  financing activities:
                      
                      
                      2,615,328
                      
                      
                      
                      833,009Effect
      of rate changes on cash
                      
                      
                      2,493
                      
                      
                      
                      141Increase
      (decrease) in cash and cash equivalents
                      
                      
                      421,847
                      
                      
                      
                      533,639Cash
      and cash equivalents, beginning of period
                      
                      
                      65,801
                      
                      
                      
                      176,935Cash
      and cash equivalents, end of period
                      
                      $
                      487,648
                      
                      
                      $
                      710,574Supplemental
      disclosure of cash flow information:Interest
      paid in cash
                      
                      $
                      -
                      
                      
                      $
                      -Income
      taxes paid in cash
                      
                      $
                      -
                      
                      
                      $
                      2,964
 
 See
accompanying notes to unaudited consolidated financial
statements
  - 5
-
  DAHUA
INC.
 
 NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
 1.   Nature
of operations
 
 Dahua,
Inc. (“Dahua”) was incorporated on March 8, 2002 in the State of Delaware as
Norton Industries Corp. (“Norton”). The name was changed to Dahua, Inc. on
February 7, 2005 as result of a reverse acquisition in which Norton acquired all
capital shares of Bauer Invest Inc. ("Bauer").  Incident to the
reverse acquisition the Company paid $100,000 to the previous shareholders of
Norton for shares of stock that were canceled. The acquisition was accounted for
as a reverse merger, as the post acquisition owners and control persons of Dahua
are substantially the same as the pre acquisition owners and control persons of
Bauer and the $100,000 paid to purchase and cancel the previous shares was
treated as an adjustment to paid in capital.
 
 Bauer
Invest Inc. was incorporated on December 10, 2003, under the laws of the
Territory of the British Virgin Islands (“BVI”). Bauer has had no operations
other than the acquisition of 80% of Beijing Dahua Real Estate Development, Ltd.
(“Beijing Dahua”) on May 25, 2004. The Subsidiary is a corporation established
on September 24, 2001 in the People’s Republic of China (“PRC”). The acquisition
was accounted for as a reverse merger, as the post acquisition owners and
control persons of Bauer are substantially the same as the pre- acquisition
owners and control persons of the subsidiary.
 
 Zhuolu
Dahua Real Estate Development, Ltd. (“Zhuolu Dahua”) was established on May 21,
2008 in the People’s Republic of China (“PRC”). It is the wholly-owned
subsidiary of Beijing Dahua Real Estate Development, Ltd.
 
 These
financial statements are essentially those of Beijing Dahua and Zhuolu Dahua
with a recapitalization to show the effects due to the reverse mergers. The
consolidated entity is hereafter referred to as ‘the Company’.
 
 The
Company engages in the development of real estate and the sale of commodity
housing.  The Company has completed the construction of the First
Phase of Dahua Garden and all of the houses are sold or available for sale.
The Company is now engaging in the development of real estate and the sale of
commodity housing in Zhuolu county in Hebei province. The company has got all
the permits needed and is now in the process of construction.
 
 2.   Basis
of Presentation
 
 The
consolidated financial statements include the accounts of Dahua, Inc., Bauer
Invest, Inc., Beijing Dahua Real Estate Development Ltd and Zhuolu Dahua Real
Estate Development Ltd. All inter-company accounts and transactions have been
eliminated in consolidation. The Company records non-controlling interest, which
reflects the 20% portion of the earnings of Beijing Dahua Real Estate
Development, Ltd. allocable to holders of the non-controlling
interest.
 
 The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America (“US
GAAP”). This basis differs from that used in the statutory accounts of the
Company, which were prepared in accordance with the accounting principles and
relevant financial regulations applicable to enterprises in the PRC. All
necessary adjustments have been made to present the financial statements in
accordance with US GAAP.
  - 6
-
  3.   Summary
of Significant Accounting Policies
 
 Economic and Political
Risks
 
 The
Company faces a number of risks and challenges as a result of having primary
operations and markets in the PRC. Changing political climates in the PRC could
have a significant effect on the Company’s business.
 
 Cash and Cash
Equivalents
 
 For
purposes of the statements of cash flows, cash and cash equivalents includes
cash on hand and demand deposits held by banks. Deposits held in financial
institutions in the PRC are not insured by any government entity or
agency.
 
 Trade Accounts
Receivable
 
 Trade
accounts receivable are recognized and carried at original invoice amount less
an allowance for any uncollectible amounts. An estimate for doubtful accounts is
made when collection of the full amount becomes questionable. The Company had no
trade accounts receivable at June 30, 2010.
 
 Inventories
 
 Inventories
consist primarily of land acquisition and development costs, engineering,
infrastructure, capitalized interest, and construction costs. The inventories
are valued at cost based on the level of completion using the weighted-average
method.
 
 Property, plant &
equipment
 
 Property,
plant & equipment are carried at cost less accumulated depreciation, which
is computed using the straight-line method over the useful lives of the assets.
Upon disposal of assets, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is included in
income.  Equipment is depreciated over their estimated useful lives as
follows:
 
 Computer
      equipment
                3
      yearsOffice
      equipment
                7
      yearsVehicles
                7
      yearsLand
      and Buildings
                20
      years
 
 Depreciation
expense for the six months periods ended June 30, 2010 and 2009 was $76,747 and
$54,960, respectively.
 
 Long-term
assets of the Company are reviewed annually to assess whether the carrying value
has become impaired, according to the guidelines established in the Accounting
Standards Codification (“ASC Topic”) 360. The Company also evaluates the periods
of amortization to determine whether subsequent events and circumstances warrant
revised estimates of useful lives. No impairment of long-term assets was
recorded in the periods reported.
  - 7
-
  Revenue
Recognition
 
 The
Company recognizes revenue on the sale of a house when the consummation of a
sale is evidenced by: 1) a contractual arrangement that is binding to both
parties; 2) the exchange of all consideration (i.e. the seller has transferred
to the buyer the usual risks and rewards of ownership and the buyer has made
payment in full to the seller); 3) the arrangement of all permanent financing
for which the seller is responsible and; 4) the performance of all conditions
precedent to closing. No revenue is recognized when the Company’s receivable is
subject to future subordination, as is the case when the Company guarantees a
bank loan for the period prior to the certification of title
transfer.
 
 Advertising
Expenses
 
 Advertising
costs are expensed as incurred. Advertising expense amounted to $17,491 and $0
for the six-month periods ended June 30, 2010 and 2009.
 
 Foreign Currency and
Comprehensive Income
 
 The
accompanying consolidated financial statements are presented in United States
(“US”) dollars. The functional currency is the Yuan Renminbi (“RMB”) of the PRC.
The consolidated financial statements are translated into US dollars from RMB at
period-end exchange rates for assets and liabilities, and weighted average
exchange rates for revenues and expenses. Capital accounts are translated at
their historical exchange rates when the capital transactions
occurred.
 
 RMB is
not freely convertible into the currency of other nations. All such exchange
transactions must take place through authorized institutions. There is no
guarantee the RMB amounts could have been, or could be, converted into US
dollars at rates used in translation.
 
 Taxes
 
 Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
reverse. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the statement of operations in the period that includes
the enactment date. A valuation allowance is provided for deferred tax assets if
it is more likely than not these items will either expire before the Company is
able to realize their benefits, or that future deductibility is
uncertain.
 
 Estimates
 
 The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
 
 Earnings per
Share
 
 Basic
earnings per common share ("EPS") are calculated by dividing net income
attributable to Dahua Inc. common stockholders by the weighted average number of
common shares outstanding during the year. Diluted EPS is calculated by
adjusting the weighted average outstanding shares, assuming conversion of all
potentially dilutive securities, such as stock options and warrants. The
numerators and denominators used in the computations of basic and diluted EPS
are presented in the following table:
  - 8
-
 
 For the six months endedJune 30, 2010
                          
                          
                          June 30, 2009NUMERATOR
      FOR BASIC AND DILUTED EPSNet
      income attributable to Dahua, Inc.common
      stockholders
                          
                          $
                          (267,951
                          )
                          
                          $
                          (166,978
                          )DENOMINATORS
      FOR BASIC AND DILUTED EPSWeighted
      average shares of common stock outstanding
                          
                          
                          25,015,000
                          
                          
                          
                          25,015,000Add:
      dilutive equity securities outstanding
                          
                          
                          -
                          
                          
                          
                          -Denominator
      for diluted EPS
                          
                          
                          25,015,000
                          
                          
                          
                          25,015,000EPS-Basic
                          
                          $
                          (0.01
                          )
                          
                          $
                          (0.01
                          )EPS-Diluted
                          
                          $
                          (0.01
                          )
                          
                          $
                          (0.01
                          )
 
 The
Company had no potentially dilutive securities outstanding at June 30,
2010.
 
 4.Inventory
 
 Inventories
consist primarily of compulsory land acquisition and removal compensation costs,
prophase engineering cost, infrastructure cost, capitalized interest, indirect
development costs, auxiliary public establishment costs and construction and
installation project costs, etc in Zhuolu Dahua and Dahua Phase II. It also
represents completed houses available for sale at June 30, 2010 in Beijing
Dahua. During 2005, the Company completed its housing construction of the First
Phase of Dahua Garden. As of June 30, 2010, 67 units were sold, 8 units were
reserved with clients’ deposits.
 
 As of
June 30, 2010, inventory in Beijing Dahua and project in Zhuolu was as
follows:
 
 Inventory in Beijing Dahua
                    
                    
                    Inventory in Zhuolu Dahua
                    
                    
                    Inventory in Beijing DahuaPhase I
                    
                    
                    
                    
                    
                    Phase IIJune
      30, 2010
                    
                    $
                    3,699,847
                    
                    
                    $
                    3,738,142
                    
                    
                    $
                    1,788,0003,699,847
                    
                    
                    
                    3,738,142
                    
                    
                    
                    1,788,000
  - 9
-
  5.
Construction in progress
 
 Construction
in progress represents the cost of the expansion of the new building, which was
transferred to fixed assets as Land and Buildings in 2009.  The
purpose of the expansion is to add an  interlayer in the building to
act as an exhibition hall of the company.  As of June 30, 2010, the
balance of construction in progress was $157,386( including capitalized
interest of $2,326).
 
 6.
Related Party Transactions
 
 Short-term
loans due to related parties had balances of $4,627,187 (including accrued
interest) at June 30, 2010.  The loans carry an annual interest rate
of 6 percent and are due on demand.  Interest accrued on the loans was
$305,903 for the six months periods ended June 30, 2010. The interest amounts,
which were accrued for the six months periods ended June 30, 2010, were partly
capitalized as construction in progress and the rest were expensed as interest
expenses.
 
 7.Customer
deposits
 
 Customer
deposits consist of down payments received on sales contracts for houses. When
all of the conditions set forth in the Company’s revenue recognition policy are
met, the Company will recognize the down payments as revenue. The aggregate of
the customers’ deposits at June 30, 2010 was $3,858,251. Of the 8
units reserved, one unit deposits are money received from bank arrangements (see
note 8) in the amounts of $518,341. Accordingly, the bank has liens against this
unit .
 
 8.  Off-Balance
Sheet Arrangements
 
 The
Company entered into an agreement with two banks that extended mortgage loans to
its home buyers, where the Company agrees to provide a certain limited
guarantee, which covers the risk before the conveyance of title upon closing.
Upon initiating the loan on behalf of the buyer for the down payment, the Banks
have withheld 5% of the loan, which was a percentage ranging from 5% to 20% in
June 2006, and deposited such funds into a segregated account in each bank. At
June 30, 2010, the balance of this separate account was $738,351. Since the
Company does not recognize revenue when its receivables are subject to future
subordination, the entire amount that could become payable to the bank under the
limited guarantee is recorded as a liability on the balance sheet and is
included in customer deposits, as is explained in note 7.
 
 9.
Tax
 
 Income
tax expense (benefit) consists of the following:
 
 Six months Ended June 30,2010
                            
                            
                            2009Current:Foreign
                            
                            $
                            -
                            
                            
                            $
                            --
                            
                            
                            
                            -Deferred:Foreign
                            
                            
                            (105,816
                            )
                            
                            
                            (69,574
                            )(105,816
                            )
                            
                            
                            (69,574
                            )Income
      tax expense (benefit)
                            
                            $
                            (105,816
                            )
                            
                            $
                            (69,574
                            )
  - 10
-
  A
reconciliation of income tax expense (benefit) to the amount computed using
statutory rates is as follows:
 Six months Ended June 30,2010
                      
                      
                      2009Tax
      at statutory rate
                      
                      $
                      (105,816
                      )
                      
                      $
                      (69,574
                      )Non-deductibe
      expenses
                      
                      
                      -
                      
                      
                      
                      -$
                      (105,816
                      )
                      
                      $
                      (69,574
                      )
 
 The
Company has implemented ASC Topic 740, which provides for a liability approach
to accounting for income taxes. Total deferred tax assets and liabilities as of
June 30, 2010 and December 31, 2009 are as follows:
 June30,2010
                    
                    
                    December31,2009Deferred tax assets - Tax NOL
                    
                    $
                    589,694
                    
                    
                    $
                    480,700Deferred
      tax liabilities
                    
                    
                    -
                    
                    
                    
                    -Net
      deferred tax asset (liability) - current
                    
                    $
                    589,694
                    
                    
                    $
                    480,700
 
 Deferred
income taxes result from the effect of transactions that are recognized in
different periods for financial and tax reporting purposes.
 
 Deferred
income taxes are recognized for the tax consequences of temporary differences by
applying statutory tax rates to differences between the financial reporting and
the tax bases of existing assets and liabilities.  These temporary
differences related primarily to bad debt provisions and losses on the sale of
property
 .
 The
company has a net operating loss carryforward of approximately $2,358,776
expiring in 2030 due to the reason that the company was in the process of
construction and didn’t recognize sales revenue in these two
years.  The tax benefit of these net operating loss carryforwards,
based on an effective tax rate of 25% is approximately $589,694.
 
 10.
Stock
 
 The
Company is authorized to issue up to 80,000,000 shares of common stock, $.0001
par value, and 20,000,000 shares of preferred stock, $.0001 par value per share.
As of June 30, 2010, there were 25,015,000 shares of common stock issued and
outstanding, and no shares of preferred stock were issued and
outstanding.
 
 11.
Contingencies
 
 The
Company has not, historically, carried any property or casualty insurance. No
amounts have been accrued for any liability that could arise from the lack of
insurance. Management feels the chances of such an obligation arising are
remote.
 
 Deposits
in banks in the PRC are not insured by any government entity or agency, and are
consequently exposed to risk of loss. Management believes the probability of a
bank failure, causing loss to the Company, is remote.
 
 12.
Others receivable
 
 Others
receivable primarily represent loans due from outside parties. As of June
30, 2010, the balance of net others receivable (including accrued interest)
was $8,242.  The loans due from outside parties carry an annual
interest rate of 6 percent and are due within two years.  The company made
a provision of $7,363 for bad-debts for other receivable for the reason that
collection of the full amount becoming questionable
  - 11
-
  13. Leases
  The
Company leased in 1997 a pond and filled it and leveled up for land exploitation
from an outside party for approximately $ 32,500 per year which will end in
2047. This lease is for an initial term of 50 years and requires fixed annual
payments. In the year ended December 31, 2009 the Company paid approximately
$38,061 for the lease payment. These leases contain renewal and right of first
refusal options and require the adherence to certain covenants and conditions.
Rental expense is recognized on the straight-line basis, although rental
payments vary over the lease terms. Future minimum lease payments are as
follows:
  Year
      ending December 31,2010
                      
                      $
                      32,5002011
                      
                      $
                      32,5002012
                      
                      $
                      32,5002013
                      
                      $
                      32,5002014
                      
                      $
                      32,500Thereafter
                      
                      $
                      1,072,500$
                      1,235,000
 
 14. Recent
Accounting Pronouncements
  In
February 2010 the FASB issued Update No. 2010-09 “Subsequent Events (Topic 855)”
(“2010-09”). 2010-09 clarifies the interaction of Accounting Standards
Codification 855 “Subsequent Events” (“Topic 855”) with guidance issued by the
Securities and Exchange Commission (the “SEC”) as well as the intended breadth
of the reissuance disclosure provision related to subsequent events found in
paragraph 855-10-50-4 in Topic 855. This update is effective for annual or
interim periods ending after June 15, 2010. Management is currently evaluating
whether these changes will have any material impact on its financial position,
results of operations or cash flows.
  In
February 2010 the FASB issued Update No. 2010-08 “Technical Corrections to
Various Topics” (“2010-08”). 2010-08 represents technical corrections to SEC
paragraphs within various sections of the Codification. Management is currently
evaluating whether these changes will have any material impact on its financial
position, results of operations or cash flows.
  In
January 2010 the FASB issued Update No. 2010-06 “Fair Value Measurements and
Disclosures—Improving Disclosures about Fair Value Measurements” (“2010-06”).
2010-06 requires new disclosures regarding significant transfers between Level 1
and Level 2 fair value measurements, and disclosures regarding purchases, sales,
issuances and settlements, on a gross basis, for Level 3 fair value
measurements. 2010-06 also calls for further disaggregation of all assets and
liabilities based on line items shown in the statement of financial position.
This amendment is effective for fiscal years beginning after December 15, 2010
and interim periods within those fiscal years. The Company is currently
evaluating whether adoption of this standard will have a material impact on its
financial position, results of operations or cash flows.
  In
January 2010 the FASB issued Update No. 2010-05 “Compensation—Stock
Compensation—Escrowed Share Arrangements and Presumption of Compensation”
(“2010-05”). 2010-05 re-asserts that the Staff of the Securities Exchange
Commission (the “SEC Staff”) has stated the presumption that for certain
shareholders escrowed share represent a compensatory arrangement. 2010-05
further clarifies the criteria required to be met to establish a position
different from the SEC Staff’s position. The Company does not believe this
pronouncement will have any material impact on its financial position, results
of operations or cash flows.
  In
January 2010 the FASB issued Update No. 2010-04 “Accounting for Various
Topics—Technical Corrections to SEC Paragraphs” (“2010-04”). 2010-04 represents
technical corrections to SEC paragraphs within various sections of the
Codification. Management is currently evaluating whether these changes will have
any material impact on its financial position, results of operations or cash
flows.
  - 12
-
  In
January 2010 the FASB issued Update No. 2010-02 “Accounting and Reporting for
Decreases in Ownership of a Subsidiary—a Scope Clarification” (“2010-02”) an
update of ASC 810 “Consolidation.” 2010-02 clarifies the scope of ASC 810 with
respect to decreases in ownership in a subsidiary to those of a subsidiary or
group of assets that are a business or nonprofit, a subsidiary that is
transferred to an equity method investee or joint venture, and an exchange of a
group of assets that constitutes a business or nonprofit activity to a
non-controlling interest including an equity method investee or a joint venture.
Management does not expect adoption of this standard to have any material impact
on its financial position, results of operations or operating cash flows.
Management does not intend to decrease its ownership in any of its wholly-owned
subsidiaries.
  In
January 2010 the FASB issued Update No. 2010-01 “Accounting for Distributions to
Shareholders with Components of Stock and Cash—a consensus of the FASB Emerging
Issues Task Force” (“2010-03”) an update of ASC 505 “Equity.” 2010-03 clarifies
the treatment of stock distributions as dividends to shareholders and their
affect on the computation of earnings per shares. Management does not expect
adoption of this standard to have any material impact on its financial position,
results of operations or operating cash flows.
 
 15.
Subsequent Events
 
 The
Company has evaluated all subsequent events through the date these financial
statements were issued.
  - 13
-
  Item
2    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
 
 The
discussion in this quarterly report on Form 10-Q contains forward-looking
statements. Such statements are based upon beliefs of management, as well as
assumptions made by and information currently available to management of the
Company as of the date of this report. These forward-looking statements can be
identified by their use of such verbs as "expect", "anticipate", "believe" or
similar verbs or conjugations of such verbs.  If any of these
assumptions prove incorrect or should unanticipated circumstances arise, the
actual results of the Company could materially differ from those anticipated by
such forward-looking statements. The Company assumes no obligation to update any
such forward-looking statements.
 
 Overview
 
 We,
through our subsidiary Beijing Dahua Real Estate Development Ltd., are engaged
in the business of development, construction and sale of luxury residential
single-family homes in Beijing, China. In July 2003, we began to develop our
first real estate project, Dahua Garden (the "First Phase"), which consists of
75 luxury residential units, all of which are single-family houses ranging from
approximately 2,000 to 5,000 square feet, each with 3 – 4 bedrooms. The
construction site is located at the northern skirt of Beijing, China. The
construction began in July 2003 and was completed in December 2005. As of June
30, 2010, out of 75 luxury residential units, 67 units have been sold and 8
units were reserved with clients' deposits.
 
 On May
21, 2008 we established Zhuolu Dahua Real Estate Development Ltd which was
wholly-owned by Beijing Dahua Real Estate Development Ltd. and engage in the
business of development, construction and sale of luxury residential
single-family homes in Zhuolu county, Hebei province which is about 140
kilometers faraway from Beijing. The first phase of the project which known as
Xuanyuan Lakefront will consist of 246 luxury residential units, all of which
are single-family houses ranging from approximately 2,000 to 5,000 square feet,
each with 3 – 4 bedrooms. We have got all the permits needed and are now in the
process of construction. The company wants to create a demonstration base of
ecological buildings circumjacent to Beijing.
 
 We are
also applying for the permits of the Second Phase of Dahua Garden. In the
newly-publicized layout of Changping district the purpose of the land on which
the Second Phase of Dahua Garden located has been recognized as residential
land. We are now in the process of applying for the first-degree development
right of this land.
 
 Results of
Operations
 
 For the Three Months Ended
June 30, 2010 and 2009
 
 Revenues
 
 We began
our First Phase of Dahua Garden construction, which consists of 75 luxury
residential units, in July 2003. The construction was completed in December
2005. For the three months ended June 30, 2010, no sales revenue was recognized
in this quarter. The following table sets forth certain information about our
sales of housing units:
  - 14
-
 
 Cumulative Balance as ofJune 30, 2010
                        
                        
                        March 31, 2010
                        
                        
                        December 31, 2009Units
      sold
                        
                        
                        67
                        
                        
                        
                        67
                        
                        
                        
                        67Units
      reserved with deposits
                        
                        
                        8
                        
                        
                        
                        8
                        
                        
                        
                        8Total
                        
                        
                        75
                        
                        
                        
                        75
                        
                        
                        
                        75
 
 Six
      months
                      
                      
                      Three
      months
                      
                      
                      Three
      monthsended
                      
                      
                      ended
                      
                      
                      endedJune 30, 2010
                      
                      
                      June 30, 2010
                      
                      
                      June 30, 2009Houses
      sold
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Houses
      reserved
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
 
 For the
three months ended June 30, 2010 and 2009, we didn’t recognized sales revenues
from the sale of our housing units.
 
 Cost of
Goods Sold
 
 Cost of
goods sold consists primarily of land acquisition and development costs,
engineering, infrastructure, capitalized interest, and construction costs. For
the three months ended June 30, 2010 and 2009, we didn’t recognize cost of goods
sold respectively.
 
 Operating
Expenses
 
 For the
three months ended June 30, 2010, our operating expenses were $181,827, an
increase of $38,079 or 26%, as compared to $143,748 for the same period of the
prior year mainly due to the increase of advertising expenses depreciation and
other general and administrative .
 
 Net
Income
 
 For the
three months ended June 30, 2010, we had a net loss of $148,433, or
$0.01 per share, as compared with a net loss of $85,618, or $0.00 per share, for
the same period of the prior year mainly due to the increase of interest expense
which increased from $0 to $59,844.
 
 For the Six Months Ended
June 30, 2010 and 2009
 
 Revenues
 
 We began
our First Phase of Dahua Garden construction, which consists of 75 luxury
residential units, in July 2003. The construction was completed in December
2005. For the six months ended June 30, 2010 and 2009, no sales revenue was
recognized by the company.
  - 15
-
  Cost of
Goods Sold
 
 Cost of
goods sold consists primarily of land acquisition and development costs,
engineering, infrastructure, capitalized interest, and construction costs. For
the six months ended June 30, 2010 and 2009, we didn’t recognize cost of goods
sold respectively.
 
 Operating
Expenses
 
 During
the six months ended June 30, 2010, our operating expenses were $368,311 as
compared to $280,645 during the six-month period in 2009, an increase of $87,666
or 31%, mainly due to the increase of advertising expenses and other general and
administrative expenses.
 
 Net
Income
 
 For the
six months ended June 30, 2010, we had a net loss of $267,951, or $0.01 per
share, as compared with a net loss of $166,978 or $0.01 per share, for the same
period of the prior year.
 
 Liquidity and Capital
Resources
 
 Since
inception, our operations have been primarily funded by equity capital,
unsecured short-term loans from Dahua Project Management Group ("Dahua Group"),
our affiliate, and customer deposits that we received from our pre-sale of
housing units.
 
 After
receiving the Residential Housing Pre-sale Permit issued by the government, we
are permitted to sell the residential units to be built to the public, which is
common practice in China. Upon execution of a binding purchase contract between
the developer and a homebuyer, a deposit and installment payments are required
to be made to the developer, which we use to construct our residential housing
units. As of June 30, 2010, our customer deposit balance was
$3,858,251.
 
 We also
borrow from time to time based on a verbal line of credit agreement from Dahua
Group, our affiliate. The funds borrowed are unsecured and there is no upper
limit on the amount of money that we can borrow as long as there are funds
available and we need it for our operations. The money we borrow under this
arrangement bears interest at an annual rate of 6%, repayable within 30 days
upon demand by the lender. As of June 30, 2010, the short-term loans due to
related parties had a balance of $4,321,284, and accrued interest of
$305,903.
 
 As of
June 30, 2010, we had cash and cash equivalents balance of $487,648. For the six
months ended June 30, 2010, our operating activities used $2,029,629 of net
cash. During the six months ended June 30, 2010, our investing activities used
$166,345 of net cash, mainly due to the construction in progress. For the same
period, the financing activities provided net cash of $2,615,328 as a result of
proceeds from related party loans.
 
 As of
December 31, 2005, our First Phase of Dahua Garden was completed. We are
currently applying with Beijing municipal and Changping district governmental
agencies for all the requisite licenses, permits, and approvals to start our
Second Phase of Dahua Garden. It is estimated that approximately $60.5 million
is needed to complete the Second Phase.
 
 We are
also now in the process of construction of the project in Zhuolu through our
subsidiary Zhuolu Dahua Real Estate Development Ltd. The first phase of Xuanyuan
Lakefront will consist of 246 luxury residential units. It is estimated that
approximately $17.5 million is needed to complete the First Phase.
 
 In
addition to customer deposits, and short-term loans (line of credit) from Dahua
Group, the proceeds generated from sale of the First Phase of Dahua Garden will
also be used to finance projects development. There are no material commitments
for capital expenditures.
  - 16
-
  While
there can be no assurance that we will have sufficient funds over the next
twelve months, we believe that funds generated from the sale of our First Phase
of Dahua Garden housing units, purchaser deposits from pre-sale contracts, and
the line of credit provided by our affiliate, Dahua Group, will be adequate to
meet our anticipated operating expenses, capital expenditure and debt
obligations for at least the next twelve months. Nevertheless, our continuing
operating and investing activities may require us to obtain additional sources
of financing. In that case, we may seek financing from institutional investors,
banks, or other sources of financing. There can be no assurance that any
necessary additional financing will be available to us on commercially
reasonable terms, if at all.
 
 Off-Balance Sheet
Arrangements
 
 We
entered into an agreement with two banks that extended mortgage loans to our
home buyers, where we agree to provide a certain limited guarantee, which covers
the risk before the conveyance of title upon closing. Upon initiating the loan
on behalf of the buyer for the down payment, the Bank has withheld a percentage
ranging from 5% to 20% of the loan and deposited such funds into a segregated
account in each bank. At June 30, 2010, the balance of this separate account was
$738,351. Since the Company does not recognize revenue when its receivables are
subject to future subordination, the entire amount that could become payable to
the bank under the limited guarantee is recorded as a liability on the balance
sheet and is included in customer deposits.
 
 Item 3.
QUALITATIVE AND QUANTITIVE DISCLOSURES ABOUT MARKET RISK
 
 The
Company is subject to the following market risks, including but not limit
to:
 
 General
Real Estate Risk
 
 (i) The
real estate development industry in general, and the residential luxury real
estate development industry in particular, is a high risk industry, subject to
changes in general economic conditions, fluctuating interest rates, and changing
demand for the types of developments being considered. Volatility in local and
regional land use demands, as well as changing supply and demand for the
specific uses for which the real property is being developed, are also factors
in assessing the relative risks of the business. The demand for residential real
estate development is particularly sensitive to changing interest rates and
shifting demographics. Both of these factors affecting the demand for
residential housing are highly unpredictable over both the short-and long-term.
If market conditions change dramatically and unfavorably to us, we may go out of
business.
 
 (ii)We
need permits, licenses or approvals from government authorities to begin our
construction of the second phase project. If we fail to obtain all required
licenses, permits, or approvals, our operations will be materially
impaired.
 
 (iii)Recent
PRC regulations relating to cutting down luxury single family house
constructions may limit our ability to implement our business plan. If no
consents and approvals are obtained, we may have to cease our second phase of
single luxury family house operations, and change our business plan to build
apartment buildings.
 
 Risk
Relating to Property Sales
 
 The
Company may not be able to sell a property at a particular time for our full
value, particularly in a poor market.
  - 17
-
  Foreign
Currency Exchange Rate Risk
 
 The
Company is doing all our business in P.R. China. All the revenue and profit is
denominated in RMB. When RMB depreciates, it may adversely affect the company's
financial performance.
 
 Item
4T.   CONTROLS AND PROCEDURES
 
 (i)
Evaluation of Disclosure Controls and Procedures
 
 Our
management evaluated, with the participation and under the supervision of our
Chief Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive
Officer and our Chief Financial Officer concluded that our disclosure controls
and procedures are effective to ensure that information we are required to
disclose in reports that we file or submit under the Securities Exchange Act of
1934, as amended, is accumulated and communicated to our management, including
our Chief Executive Officer and our Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosure and that such information
is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
 
 (ii)
Changes in Internal Control Over Financial Reporting
 
 There has
been no change in our internal control over financial reporting that occurred
during our last fiscal quarter that has materially affected or is reasonably
likely to materially affect our internal control over financial
reporting.
 
 PART
II.  OTHER INFORMATION
 
 Item
1.     Legal
Information:   None.
 
 Item 1A.
Risk Factors :
 
 Investing
in shares of our common stock involves a high degree of risk. You should
carefully consider the following risk factors, in addition to the other
information set forth in this report, before you purchase these shares. The
risks and uncertainties described below are those we have identified as
material. If any of the events contemplated by the following discussion of risks
should occur, our business, financial condition and results of operations may
suffer. As a result, the trading price of our common stock could decline and you
could lose part or all of your investment in our common stock.
  Risks
Related to Our Business
  WE LACK
AN OPERATING HISTORY UPON WHICH AN EVALUATION OF OUR FUTURE SUCCESS OR FAILURE
CAN BE MADE.
 
 We were
incorporated in March 2002 as a blank check company for the purpose of seeking
to complete a merger or business acquisition. We conducted virtually no business
until January 30, 2005, when we acquired Bauer Invest Ltd. Bauer is a holding
company, which conducts its business through its 80% owned subsidiary Beijing
Dahua Real Estate Development, Ltd., a private company operating in the People's
Republic of China (“Beijing Dahua Real Estate”). Dahua Real Estate was
incorporated on September 24, 2001, to engage in the development and sale of
luxury single-family houses in Beijing, China. The acquisition of Bauer was
accounted for as a recapitalization, rather than a business combination.
Accordingly, the historical operations of Bauer and its subsidiaries were
represented as our historical operations. Our limited operating history makes it
difficult for you to evaluate our business and future prospects.
  - 18
-
  WE WILL
NEED ADDITIONAL FINANCING TO CARRY OUT OUR SECOND PHASE PROJECT AND THE PROJECT
IN ZHUOLU. IF WE ARE UNABLE TO OBTAIN ADDITIONAL FINANCING, WE MAY HAVE TO DELAY
THE IMPLEMENTATION OF OUR PROJECTS, AND OUR ABILITY TO INCREASE REVENUE WILL BE
MATERIALLY IMPAIRED.
 
 Since
inception, we have been dependent on short-term loans and customer deposits to
meet our cash requirements. As of December 31, 2005 we completed the
construction of our First Phase of Dahua Garden project consisting of 75 luxury
single-family houses. Of 75 units, 67 houses were sold, 8 houses were reserved
with clients’ deposits at June 30, 2010. We are currently applying with Beijing
municipal and Changping district governmental agencies for the first-degree
development right of the Second Phase of Dahua Garden. To date we have not
received any licenses, permits or approvals from governmental authorities to
commence our Second Phase construction. It is estimated that we need
approximately $60.5 million in order to complete our Second Phase project. We
are also in the process of construction of Xuanyuan Lakefront in Zhuolu county
in Hebei province through our subsidiary Zhuolu Dahua Real Estate. It is
estimated that we needed approximately $17.5 in order to complete the project.
We intend to use (i) our proceeds from sales of our First Phase housing units
(ii) customer deposits from our pre-sale of the housing units in the Second
Phase and Xuanyuan Lakefront in Zhuolu,, and (iii) short-term borrowings from
Dahua Group, our affiliate, to finance our projects. At present we do not have
any arrangements for additional financing. If we are unable to obtain additional
financing on terms acceptable to us, we may have to delay or curtail our Second
Phase project, and our ability to increase revenue will be materially
impaired.
 
 IF WE
RAISE ADDITIONAL CAPITAL THE VALUE OF YOUR INVESTMENT MAY DECREASE.
 
 If we
need to raise additional capital to implement or continue operations, we will
likely issue additional equity or convertible debt securities. If we issue
equity or convertible debt securities, the net tangible book value per share may
decrease, the percentage ownership of our current stockholders may be diluted
and such equity securities may have rights, preferences or privileges senior to
or more advantageous than our common stockholders.
 
 WE NEED
PERMITS, LICENSES OR APPROVALS FROM GOVERNMENT AUTHORITIES TO BEGIN OUR
CONSTRUCTION OF THE SECOND PHASE PROJECT. IF WE FAIL TO OBTAIN ALL REQUIRED
LICENSES, PERMITS, OR APPROVALS, OUR OPERATION WILL BE MATERIALLY
IMPAIRED
 
 Before we
can develop a property, we must obtain a variety of approvals from local and
municipal governments with respect to such matters as zoning, density,
subdivision, traffic considerations, site planning and environmental issues.
Although there are currently no unfavorable rulings that would have a
significant adverse effect on the development of our proposed Second Phase of
Dahua Garden, there is no assurance that we will be able to obtain all required
licenses, permits, or approvals from government authorities. If we fail to
obtain all required licenses, permits, or approvals, our operation will be
materially impaired.
 
 RECENT
PRC REGULATIONS RELATING TO CUTTING DOWN LUXURY SINGLE FAMILY HOUSE
CONSTRUCTIONS MAY LIMIT OUR ABILITY TO IMPLEMENT OUR BUSINESS PLAN. IF NO
CONSENTS AND APPROVALS ARE OBTAINED, WE MAY HAVE TO CEASE OUR SECOND PHASE OF
SINGLE LUXURY FAMILY HOUSE OPERATIONS, AND CHANGE OUR BUSINESS PLAN TO BUILD
APARTMENT BUILDINGS.
 
 In August
2006, the Chinese government issued a series of rules and regulations in an
attempt to push down rising house prices in China by cutting down luxury single
family house constructions and supporting construction of apartment buildings.
Under the government’s new policy, (i) no single family houses can be built, if
the construction has not started, without special construction permits. All
permits issued previously have to be re-reviewed and re-approved; and (2) the
land previously acquired for luxury housing construction have to be revalued and
sold to the people who offer the most money for the land. Because of those new
government policies, we have incurred a long delay for obtaining the consents
and approvals to commence our construction for the second phase of Dahua Garden.
As of the date of this report, we don’t have any current plan or arrangements
for development of apartment buildings.
  - 19
-
  WE ACT AS
GENERAL CONTRACTOR ON OUR CONSTRUCTION PROJECTS, AND IF ANY OF OUR
SUBCONTRACTORS SHOULD FAIL TO COMPLETE THEIR JOBS ON TIME, OUR BUSINESS COULD BE
DISRUPTED.
 
 We act as
general contractor on our construction projects. We hire unaffiliated
subcontractors to do work for us. In the event that any of our subcontractors
should fail to complete their jobs on time, our business could be disrupted,
which will have an adverse effect on our results of operation and our financial
condition.
 
 WE DEPEND
ON KEY PERSONNEL FOR THE SUCCESS OF OUR BUSINESS. OUR BUSINESS MAY BE SEVERELY
DISRUPTED IF WE LOSE THE SERVICES OF OUR CEO OR FAIL TO SUCCESSFULLY RECRUIT
QUALIFIED MANAGERIAL PERSONNEL HAVING EXPERIENCE IN BUSINESS.
 
 Our
success is heavily dependent upon the continued service of Yonglin Du, our chief
executive officer. Mr. Du has valuable personal relationships with government
agencies and executive officers in the industry. A good personal relationship is
sometimes crucial for doing business in China. If Mr. Du is unable or unwilling
to continue in his position, we may not be able to easily replace him. Loss of
his services could delay our applications for construction permit and land
acquisition, and our business may be severely disrupted. We do not maintain
key-man insurance on the life of Mr. Du. In addition, in order to successfully
implement and manage our business plan, we will be dependent upon, among other
things, successfully recruiting qualified managerial personnel having experience
in business. Competition for qualified individuals is intense. There can be no
assurance that we will be able to retain existing employees or that we will be
able to find, attract and retain qualified personnel on acceptable
terms.
 
 OUR
OFFICERS AND DIRECTORS ARE SUBJECT TO CONFLICTS OF INTEREST, AND THERE IS A RISK
THAT THEY MAY PLACE THEIR INTERESTS AHEAD OF YOURS.
 
 We
believe that our officers and directors will be subject to conflicts of
interest. The conflicts arise from their relationships with our affiliate.
Yonglin Du, our chief executive officer, also serves as president and a director
of Dahua Project Management Group Co. Ltd. (“Dahua Group”), a Beijing Municipal
Government licensed construction project supervising business entity. Hua Meng,
our chief financial officer, and Qinna Zeng, our corporate secretary, are also
employed by Dahua Group. They may have conflicts of interest in allocating time,
services, and functions between us and Dahua Group, in which any of them are or
may become involved. Mr. Du anticipates devoting a minimum of twenty to
thirty-two hours per week of his business hours, and each of Ms. Meng and Ms.
Zeng fifteen to twenty hours of their business hours to our business activities.
If and when the business operations increase and a more extensive time
commitment is needed, they are prepared to devote more time to our affairs, in
the event that becomes necessary.
 
 To ensure
that potential conflicts of interest are avoided or declared to us and to comply
with the requirements of the Sarbanes-Oxley Act of 2002, our Board of Directors,
on January 30, 2005, adopted a Code of Business Conduct and Ethics, among other
things, to reduce potential conflicts of interest. Conflicts of interest must,
to the extent possible, be avoided, and any material transaction or relationship
involving a potential conflict of interest must be reviewed and approved in
advance by a majority of the board of directors, or, if required by law, a
majority of disinterested stockholders. No personal loans will be made to
executive officers and directors.
  - 20
-
  All our
transactions with affiliates have been and will be made on terms no less
favorable to us than could have been obtained from unaffiliated third parties.
Our policy is to require that a majority of board members approve all
transactions between us and our officers, directors, principal stockholders and
their affiliates.
 
 WE HAVE
NOT CARRIED PROPERTY OR CASUALTY INSURANCE. ANY BUSINESS
 DISRUPTION,
LITIGATION OR NATURAL DISASTER MIGHT RESULT IN SUBSTANTIAL COSTS AND DIVERSION
OF RESOURCES.
 
 The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products, and do not, to our
knowledge, offer business liability insurance. As a result, we do not have any
business liability insurance coverage for our operations.  Any
business property loss, natural disaster or litigation might result in
substantial costs and diversion of resources.
 
 OUR
QUARTERLY OPERATING RESULTS, REVENUES AND EXPENSES MAY FLUCTUATE SIGNIFICANTLY,
WHICH COULD HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF OUR COMMON
STOCK.
 
 Our
operating results, revenues and expenses may fluctuate significantly from
quarter to quarter due to a variety of factors including:
 
 o
              The
      timing, size and execution of sales contracts and home
      deliveries;
 
 o
              Lengthy
      and unpredictable sales cycles;
 
 o
              Changes
      in our operating expenses; and
 
 o
              Fluctuations
      in general economic conditions.
 
 We
believe that period-to-period comparisons of our results of operations are not a
good indication of future performance. It is possible that our operating results
will be below your expectations. In that event, the trading price of our common
stock may fall.
 
 MANY OF
OUR COMPETITORS ARE SIGNIFICANTLY LARGER THAN WE ARE, AND THEY HAVE GREATER
FINANCIAL RESOURCES AND HAVE MORE EXPERIENCED MANAGERS THAN WE DO.
 
 We are a
small company and have little market share in our target market. The market of
residential housing development in Beijing, China, is highly competitive. We
compete with numerous entities, many of which are significantly larger than we
are, and have greater financial resources and have more experienced managers
than we do. As a result, they may be able to respond more quickly to new or
emerging house plans or construction materials and changes in customer demands
or to devote greater resources to the development, promotion and sale of their
products or services than we can. If we cannot compete effectively, we may never
become profitable. Although no one of our competitors currently dominates or
significantly influences the market, they could adversely affect
us.
  - 21
-
  THE
RESIDENTIAL REAL ESTATE DEVELOPMENT INDUSTRY IS A HIGH RISK INDUSTRY. IF MARKET
CONDITIONS CHANGE DRAMATICALLY UNFAVORABLY TO US, WE MAY GO OUT OF
BUSINESS.
 
 The real
estate development industry in general, and the residential luxury real estate
development industry in particular, is a high risk industry, subject to changes
in general economic conditions, fluctuating interest rates, and changing demand
for the types of developments being considered. Volatility in local and regional
land use demands, as well as changing supply and demand for the specific uses
for which the real property is being developed, are also factors in assessing
the relative risks of the business. The demand for residential real estate
development is particularly sensitive to changing interest rates and shifting
demographics. Both of these factors affecting the demand for residential housing
are highly unpredictable over both the short-and long-term. If market conditions
change dramatically and unfavorably to us, we may go out of
business.
  Risks
Related to Doing Business in China
  POLITICAL
AND ECONOMIC POLICIES IN CHINA COULD AFFECT OUR BUSINESS IN UNPREDICTABLE
WAYS.
 
 Substantially
all of our assets are located in China and substantially all of our revenues are
expected to derive from our operations in China. Therefore, our results of
operations and prospects are subject, to a significant degree, to economic and
political developments in China. The economy of China differs from the economies
of most developed countries in many respects, including:
 
 o
              The
      extent of government involvement;
 
 o
              Level
      of development; and
 
 o
              Allocation
      of resources.
 
 The
economy of China has been in transition from a planned economy to a more
market-oriented economy. Although in recent years the Chinese government has
implemented measures emphasizing the utilization of market forces and the
reduction of state ownership of productive assets, a substantial portion of
productive assets in China is still owned by the Chinese government, which
continues to play a significant role in regulating China's economic development,
setting monetary policy and providing preferential treatment to particular
industries or companies. Political and economic policies in China could affect
our business in unpredictable ways. If there are any unfavorable changes in
government policies, such as government control over capital expenditures,
changes in monetary policy, or changes in planning and zoning policy, we may
experience delays or other problems in obtaining government permits or licenses
to start or complete our projects.
 
 OUR
ASSETS, OFFICERS AND DIRECTORS ARE LOCATED OUTSIDE OF THE U.S. IT IS DIFFICULT
TO EFFECT SERVICE OF PROCESS AND ENFORCEMENT OF LEGAL JUDGMENTS UPON US AND OUR
OFFICERS AND DIRECTORS.
 
 Our
assets, officers and directors are located in China. As a result, it may be
difficult to effect service of process within the United States and enforce
judgment of the US courts obtained against us and our executive officers and
directors. Particularly, our shareholders may not be able to:
 
 o      Effect
service of process within the United States on us or any of our executive
officers and directors;
 
 o      Enforce
judgments obtained in U.S. courts against us based upon the civil liability
provisions of the U.S. federal securities laws;
 
 o     Enforce,
in a court in China, judgments of U.S. courts based on the civil liability
provisions of the U.S. federal securities laws; and
  - 22
-
  o     Bring
an original action in a court in China to enforce liabilities against us or any
of our executive officers and directors based upon the U.S. federal securities
laws.
 
 GOVERNMENT
CONTROL OF CURRENCY CONVERSION MAY AFFECT OUR ABILITY TO PAY DIVIDENDS DECLARED,
IF ANY, IN FOREIGN CURRENCIES.
 
 It is
expected that a substantial portion of our revenues, if any, will be in “yuan”,
the national currency of China, which is currently not a freely convertible
currency. A portion of our revenues may have to be converted into US dollars to
make payment of dividends declared, if any, in respect of our common shares.
Under China's existing foreign exchange regulations, we will be able to pay
dividends in foreign currencies without prior approval from the State
Administration of Foreign Exchange of China by complying with certain procedural
requirements. However, the Chinese government may take measures at its
discretion in the future to restrict access to foreign currencies if foreign
currencies become scarce in China. We may not be able to pay dividends in
foreign currencies to our shareholders if the Chinese government restricts
access to foreign currencies for current account transactions.
 
 FLUCTUATIONS
IN THE EXCHANGE RATE BETWEEN THE CHINESE CURRENCY AND THE UNITED STATES DOLLAR
MAY BRING DOWN OUR OPERATING INCOME.
 
 The
functional currency of our operations in China is "Yuan." Results of our
operations are translated at average exchange rates into United States dollars
for purposes of reporting results. As a result, fluctuations in exchange rates
may adversely affect our expenses and results of operations as well as the value
of our assets and liabilities. On July 21, 2005, the Chinese government
changed its decade-old policy of pegging the value of yuan to the U.S. dollar.
Under the new policy, Yuan is permitted to fluctuate within a narrow and managed
band against a basket of certain foreign currencies. This change in policy has
resulted in an approximately17.6% appreciation of the yuan against the U.S.
dollar between July 21, 2005 and June 30, 2010. Our revenues and costs are
denominated in yuan, and our financial assets are also denominated in yuan. Any
significant fluctuations in the exchange rate between the yuan and the United
States dollar may bring down our operating income and lower our stock price. We
have no current plans to undertake any hedging activity to minimize exchange
rate fluctuations.
  Risks
Related to Investment in Our Securities
  OUR
COMMON STOCK IS QUOTED ON THE OVER-THE-COUNTER BULLETIN BOARD WHICH MAY MAKE IT
MORE DIFFICULT FOR STOCKHOLDERS TO SELL THEIR SHARES AND MAY CAUSE THE MARKET
PRICE OF OUR COMMON STOCK TO DECREASE.
 
 Because
our common stock is quoted on the OTC Bulletin Board, the liquidity of our
common stock is impaired, not only in the number of shares that are bought and
sold, but also through delays in the timing of transactions, and limited
coverage by security analysts and the news media of us.  As a result,
prices for shares of our common stock may be lower than might otherwise prevail
if our common stock was traded on NASDAQ or a national securities exchange, like
the American Stock Exchange.
  - 23
-
  THERE HAS
BEEN LOW VOLUME AND THEREFORE AN INACTIVE MARKET FOR OUR COMMON STOCK, OUR STOCK
PRICE MAY BE VOLATILE OR MAY DECLINE REGARDLESS OF OUR OPERATING PERFORMANCE,
AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE YOUR STOCK PURCHASE
PRICE.
 
 If you
purchase shares of our common stock, you may not be able to resell those shares
at or above your original purchase price. An active or liquid market in our
common stock may not develop or, if it does develop, it may not be sustainable.
The market price of our common stock may fluctuate significantly in response to
numerous factors, many of which are beyond our control.
 
 OUR
COMMON STOCK IS DEEMED A PENNY STOCK. AS A RESULT, TRADING OF OUR SHARES IS
SUBJECT TO SPECIAL REQUIREMENTS THAT COULD IMPEDE OUR SHAREHOLDERS' ABILITY TO
RESELL THEIR SHARES.
 
 The
shares in the Form 10Q constitute penny stock under the Securities Exchange Act
of 1934 (the “Exchange Act”). The shares will remain penny stock for the
foreseeable future. As defined in Rule 3a51-1 of the Exchange Act, penny stocks
generally are equity securities with a price of less than $5.00, other than
securities registered on certain national securities exchanges or quoted on the
NASDAQ system, provided that current price and volume information with respect
to transactions in such securities is provided by the exchange or
system.
 
 Section
15(g) of the Exchange Act and Rule 15g-2 of the Exchange Act require
broker-dealers dealing in penny stocks to provide potential investors with a
document disclosing the risks of penny stocks and to obtain a manually signed
and dated written receipt of the document before effecting any transaction in a
penny stock for the investor's account. Moreover, Rule 15g-9 of the Exchange Act
requires broker-dealers in penny stocks to approve the account of any investor
for transactions in such stocks before selling any penny stock to that investor.
This procedure requires the broker-dealer to:
 
 o       Obtain
from the investor information concerning his or her financial situation,
investment experience and investment objectives;
 
 o      Reasonably
determine, based on that information, that transactions in penny stocks are
suitable for the investor and that the investor has significant knowledge and
experience to be reasonably capable of evaluating the risks of penny stock
transactions;
 
 o      Provide
the investor with a written statement setting forth the basis on which the
broker-dealer made the determination in (ii) above; and
 
 o       Receive
a signed and dated copy of such statement from such investor, confirming that it
accurately reflects the investor's financial situation, investment experience
and investment objectives.
 
 Compliance
with these requirements may make it more difficult for investors in our common
stock to resell the shares to third parties or to otherwise dispose of
them.
 
 Item
2.     Unregistered Sales of Equity Securities and Use
of Proceeds:  None
 
 Item
3.     Defaults Upon Senior
Securities:   None.
 
 Item
4.     (Removed and Reserved)
 
 Item
5.     Other Information:  None.
  - 24
-
  Item
6.    Exhibits and Reports On Form 8-K.
 
 (a)  Exhibits
 
 Exhibit No.
                
                Description31.1
                
                Section
      302 Certification of CEO31.2
                
                Section
      302 Certification of CFO32.1
                
                Section
      906 Certification of CEO32.2
                
                Section
      906 Certification of CFO
 
 (b)  Reports
on Form 8-K:  None.
  - 25
-
  SIGNATURES
 
 In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 DAHUA,
INC.
 
 By:
                  
                  By:Yonglin
      Du, Chief Executive Officer and President
                  
                  Meng
      Hua, Chief Financial OfficerAugust
      15, 2010
                  
                  August
      15, 2010
  - 26
-