UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





(Mark
One)




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




For the
fiscal year ended: December 31, 2009





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




For the
transition period from ____________ to _____________





Commission
File No. 000-52040





OMNIALUO,
INC.


(Name of
Small Business Issuer in Its Charter)





Delaware
            
            88-1581779(State
      or Other Jurisdiction of Incorporation or Organization)
            
            (I.R.S.
      Employer Identification No.)Room
      101, Building E6, Huaqiaocheng East Industrial Park,Nanshan
      District,Shenzhen
      518053, The People’s Republic of China(Address of
      Principal Executive Offices) (Zip
Code)





(+86)
755-8245-1808


(Registrant’s
Telephone Number, Including Area Code)





Securities
registered pursuant to Section 12(b) of the Act:  Common Stock, $0.01
par value





Name of
each exchange on which registered: N/A




Securities
registered under Section 12(g) of the Exchange Act:Common stock, $0.01 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  ̈   Nox





Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. ̈




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 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. Yesx   No ̈




Check if
disclosure of delinquent filers in response to Item 405 of Regulation S-K is not
contained in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ̈





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
definition of “accelerated filer, large accelerated filer and smaller reporting
company” in Rule 12b-2 of the Exchange Act (Check one):




Large Accelerated Filer   ̈    Accelerated
Filer   ̈    Non-Accelerated Filer   ̈   Smaller Reporting Company  x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ̈   Nox




The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant (assuming for these purposes, but without
conceding, that all executive officers and directors and 10% stockholders are
“affiliates” of the registrant), based on the closing price of $0.17 per shares
of the registrant’s Common Stock on December 31, 2009, the last business day of
the registrant’s most recently completed fiscal year as reported by the OTC
Bulletin Board, was approximately $1,629,156.




The
number of shares outstanding of the issuer's common stock as of March 31, 2010
is 22,840,000.




Documents
incorporated by reference:NONE.




- 1
-




OMNIALUO,
INC.





INDEX


PagePart
      I
                  3Item
      1
                  Business
                  3Item1A
                  Risk
      factors
                  19Item
      2
                  Properties
                  28Item
      3
                  Legal
      proceedings
                  29Item
      4
                  Reserved
                  29Part
      II
                  29Item
      5
                  Market
      for registrant’s common equity, related stockholder matters and issuer
      purchases of equity securities
                  29Item
      7
                  Management’s
      discussion and analysis of financial condition and results of
      operations
                  30Item
      7A
                  Quantitative
      and qualitative disclosures about market risk
                  40Item
      8
                  Financial
      statements and supplementary data
                  40Item
      9
                  Reserved
                  40Item
      9A (T)
                  Controls
      and procedures
                  40Part
      III
                  42Item
      10
                  Directors,
      executive officers and corporate governance
                  [__]Item
      11
                  Executive
      compensation
                  45Item
      12
                  Security
      ownership of certain beneficial owners and management and related
      stockholder matters
                  46Item
      13
                  Certain
      relationships and related transactions, and director
      independence
                  48Item
      14
                  Principal
      accountant fees and services
                  49Part
      IVItem
      15
                  Exhibits
      and financial statement schedules
                  50SignaturesExhibitsReport
      of independent registered public accounting firm
                  [__]Consolidated
      Balance Sheets as of December 31, 2009 and 2008
                  [__]Consolidated
      Statements of Operations and Comprehensive (Loss) Income for the Years
      Ended December 31, 2009 and 2008
                  [__]Consolidated
      Statements of Stockholders’ Equity for the Years Ended December 31, 2009
      and 2008
                  [__]Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009 and
      2008
                  [__]Notes
      to Consolidated Financial Statements
                  [__]




- 2
-





FORWARD-LOOKING
STATEMENTS




This
Annual Report on Form 10-K, including “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” contains forward-looking
statements that are based on the beliefs of our management, and involve risks
and uncertainties, as well as assumptions, that, if they ever materialize or
prove incorrect, could cause actual results to differ materially from those
expressed or implied by such forward-looking statements. The words “believe,”
“expect,” “anticipate,” “project,” “targets,” “optimistic,” “intend,” “aim,”
“will” or similar expressions are intended to identify forward-looking
statements. All statements, other than statements of historical fact, are
statements that could be deemed forward-looking statements, including statements
regarding new and existing products, technologies and opportunities, statements
regarding market and industry segment growth and demand and acceptance of
new and existing products, any projections of sales, earnings, revenue, margins
or other financial items, any statements of the plans, strategies and objectives
of management for future operations, any statements regarding future
economic conditions or performance, uncertainties related to conducting business
in China, any statements of belief or intention, any of the factors mentioned in
the “Risk Factors” section of this Form 10-K, and any statements of
assumptions underlying any of the foregoing. All forward-looking statements
included in this report are based on information available to us on the date of
this report. We assume no obligation and do not intend to update these
forward-looking statements, except as required by law.




USE
OF CERTAIN DEFINED TERMS




In this
report, unless indicated otherwise, references to:




“OmniaLuo”
      “the Company,” “we,” “us,” or “our” refer to the combined business of all
      the entities that form our consolidated business
    enterprise;




“China,”
      “Chinese” and “PRC” refer to the People’s Republic of
    China;




“BVI”
      refers to the British Virgin
Islands;




“SEC”
      refers to the United States Securities and Exchange
      Commission;




“Securities
      Act” refers to the Securities Act of 1933, as
  amended;




“Exchange
      Act” refers to the Securities Exchange Act of 1934, as
      amended;




“RMB”
      refers to Renminbi, the legal currency of China;
  and




“U.S.
      dollar,” “$”, “USD” and “US$” refer to the legal currency of the United
      States.




PART
I




ITEM
1. BUSINESS




Corporate
History





We were
originally incorporated in the State of Delaware on March 7, 2001 under the name
Wentworth II, Inc. We were formed as a vehicle to pursue a business combination,
which we effected through our recent reverse acquisition of Omnia BVI (“Omnia
BVI”), a company organized under the law of British Virgin Islands through a
reverse acquisition as described below.  We had no material
operations or revenue from operations prior to the reverse acquisition
described below. Our corporate name changed to OmniaLuo, Inc. in November 2007,
subsequent to the acquisition.





On
October 9, 2007, we entered into a share exchange agreement with Omnia BVI, the
shareholders of Omnia BVI and certain of our principal stockholders. Pursuant to
the share exchange agreement, we issued to the shareholders of Omnia BVI
16,800,000 shares of our common stock in exchange for all of the issued and
outstanding shares of Omnia BVI. As a result, Omnia BVI and its wholly-owned
subsidiary Shenzhen Oriental Fashion Co., Ltd., a company organized under the
laws of the PRC (“Oriental Fashion”) became our direct and indirect wholly-owned
subsidiaries, respectively, and the former shareholders of Omnia BVI became our
Company’s controlling stockholders. We amended our Certificate of Incorporation
in November 2007 to change our name from Wentworth II, Inc. to OmniaLuo,
Inc.




For
accounting purposes, the share exchange transaction was treated as a reverse
acquisition with Omnia BVI as the acquirer and the Company as the acquired
party. When we refer in this report to business and financial information for
periods prior to the consummation of the reverse acquisition, we are referring
to the business and financial information of Omnia BVI on a consolidated basis
unless the context suggests otherwise.




- 3
-


Concurrently
with the consummation of the reverse acquisition, we issued 4,920,000 shares of
the Company’s common stock and warrants to purchase an aggregate of 4,920,000
shares of the Company’s common stock for an aggregate purchase price of $6.15
million, to a total of 38 investors (of whom 29 were accredited investors and
nine were non-US residents who purchased shares and warrants in off-shore
transactions) in a private placement pursuant to Regulation D and a simultaneous
off-shore offering pursuant to Regulation S (collectively, the “2007 Private
Placement”). In connection with that private placement, we also issued warrants
to purchase 492,000 shares of the Company’s common stock to Keating Securities,
LLC (“Keating Securities”), as a financial advisory fee in partial consideration
of their services in connection with the private placement. Prior to
consummation of the reverse acquisition and 2007 Private Placement, we may be
deemed to have been an affiliate of Keating Securities by reason of the
ownership of shares of our common stock by principals and executives of Keating
Securities.





We
conduct all of our business operations through our indirectly wholly-owned
operating subsidiary Shenzhen Oriental Fashion Co., Ltd.





Description
of Business





Through
our operating subsidiary in China, Shenzhen Oriental Fashion Co., Ltd., we are
engaged in the business of  designing, marketing, distributing and
selling women’s clothing, with an emphasis on fashionable business casual wear.
All our apparel is marketed under the brand names of OMNIALO and OMNIALUO
(collectively referred to herein as the “OMNIALUO Brands” or “OMNIALUO brand
names”) through a network of 108 retail stores across China. We offer a complete
line of business casual women’s wear, including bottoms, tops, and outerwear, as
well as accessories, under the OMNIALUO brand names.





There are
three different types of retail stores that carry the OMNIALUO brands: (i)
company-owned stores, which stores are owned exclusively by the Company and
carry only the OMNIALUO brands, (ii) independent distributor stores, which
stores are owned exclusively by third parties and carry the OMNIALUO brands
exclusively, and (iii) co-owned stores, which stores are owned jointly by the
Company and a third party, and carry the OMNIALUO brands exclusively. All three
types of stores are located throughout China. As of December 31, 2009 and 2008,
our network of retail stores across China consisted of 108 and 208 stores,
respectively. Out of the 208 stores we had as of December 31, 2008, there were
27 Company-owned stores, 31 co-owned stores and 150 independent
stores.  Out of the 108 stores we had as of December 31, 2009, there
were 27 Company-owned stores, 8 co-owned stores and 73 independent distributor
stores.





Our
current target customers are “white-collar” and “pink-collar” urban females
between the ages of 25 to 35. In China, generally, “white-collar” individuals
are described as working professionals with after-tax annual income ranging from
$2,500 to $7,500 and “pink- collar” individuals are female working professionals
with after-tax annual income ranging from $7,500 to $22,500.




The
OMNIALUO brand of apparel has been awarded “China’s Best Women’s Wear Design” by
China Fashion Designers Association (“CFDA”) every year from 2002-2006. Ms.
Zheng Luo, a prominent designer in China, is our chief executive officer, chief
designer and the originator of the OMNIALUO brands. Ms. Zheng Luo was also the
founder and principal shareholder of Omnia BVI prior to our reverse acquisition
with Omnia BVI described above. Ms. Zheng Luo is currently our largest
individual shareholder.  Ms. Zheng Luo has won numerous prestigious
awards and was recently named by Cosmopolitan Magazine the "2008 Chinese Fashion
Designer of the Year". Under the leadership of Ms. Zheng Luo OMNIALUO sets its
goal to become the Chinese brand equivalent of Ralph Lauren, Vera Wang and Anna
Sui. The OMNIALUO brands benefit significantly from Ms. Zheng Luo’s professional
reputation.





Development
of the OMNIALUO Brands and Formation of Omnia BVI and Oriental
Fashion




In 1996,
Ms. Zheng Luo created the OMNIALO brand and founded Green’s Apparel Co., Ltd.
(“Green’s Apparel”) in Shenzhen, China, in which she owned a 95% equity
interest. Green’s Apparel manufactured women’s clothing.




In 1997,
the OMNIALO trademark was registered with the Chinese National Trademark Bureau
in both Chinese and English. The registrant and initial owner of such trademark
was Green’s Apparel.




In March
2003, Shenzhen Oumeng Industrial Co., Ltd. (“Oumeng”) was established. Ms. Zheng
Luo was the CEO and 50% equity owner of Oumeng. Also in March 2003, Oumeng
purchased inventory from Green’s Apparel, consisting of women’s apparel. Green’s
Apparel has not conducted any business after the transfer of inventory to Oumeng
in March 2003, and upon such transfer, Oumeng entered into all contracts with
Green’s Apparel’s existing suppliers, manufacturers and distributors, and
acquired the OMNIALO trademark in August 2003. In addition to marketing and
selling products under the OMNIALUO name, Oumeng also engaged in various other
businesses such as marketing and selling other apparel, electronics,
kitchenware and hardware. Oumeng also managed C-Luo Intuition, a luxury,
made-to-order evening dress brand, which brand was previously owned by Ms. Zheng
Luo prior to the sale of such brand to an independent third party. By the end of
August 2006, OMNIALUO brand apparel, under the management of Oumeng, was being
distributed through 100 retail stores in China.




- 4
-


In early
2006, Ms. Zheng Luo determined that the growth and development of the OMNIALUO
brands and its associated women’s apparel products could best be achieved by the
formation of a new company which would focus on the design, marketing,
distribution and sale of women’s business casual wear, without the potential
distraction and costs of operating other businesses. Therefore, in August 2006,
Ms. Zheng Luo, together with several other individual shareholders, formed Omnia
BVI under the laws of the British Virgin Islands. Shortly thereafter, in
September 2006, Omnia BVI formed a wholly owned subsidiary, Shenzhen Oriental
Fashion Co., Ltd., under the laws of the PRC. All rights in the OMNIALO
trademark were transferred from Oumeng to Ms. Zheng Luo, and Ms. Zheng Luo
resigned from her CEO position at Oumeng to devote her effort to Oriental
Fashion and Omnia BVI on a full-time basis. Subsequently, in April 2007, Ms.
Zheng Luo and her sister Ms. Xiaoyin Luo transferred their ownership of Oumeng
to their mother, Ms. Yuhua Sun, and to Ms. Yujuan Sun, an unrelated
party.





Principal
Products and Pricing Strategy




Principal
Products




We offer
a complete line of business casual women’s wear including bottoms, tops and
outerwear as well as accessories. All apparel is marketed under the OMNIALUO
brands through a network of retail stores across China. Our main product line is
“fashionable business casual,” which is suitable for both business and casual
environments. Fashionable business casual is clothing that can be worn to work
as well as outside the office environment. In recent years, fashionable business
casual has gained significant market share in the fashion industry. We also have
a smaller “business casual” product line.




Apparel
under the OMNIALUO brands is made of high quality materials, and many pieces
contain intricate and delicate craftwork. The designs are made to accentuate a
woman’s figure while providing a unique cut and stitching to the material, which
provide a slimming look. The majority of materials used are composed of tatting
and knitwear. Tatting and knitwear are soft fabrics and allow women’s skin to
“breathe” thus providing comfort in addition to style.




OMNIALUO
brand apparel and our chief designer, Ms. Zheng Luo, have consistently won top
fashion design awards in China since 2002. Most recently, Ms. Zheng Luo was
recognized by the Cosmopolitan Magazine as the “China Designer of the Year” in
2008.




With
respect to accessories, we released our accessories products in the third
quarter of 2007 and plan to release expanded new accessories products in the
next several fiscal quarters. Accessories have been identified as an important
product line for us and we have dedicated research and development efforts to
the creation of accessories. We believe that customers in China are interested
in purchasing a complete outfit, which includes clothing, accessories, and
shoes. As such, the availability of accessories coordinated with the clothing
line can effectively increase a customer’s total spending.




In the
fourth quarter of 2007, we started designing and developing “Omnialuo
Collections” to target “golden collar” female professionals in China. The
garments are generally priced from US$250 to US$400. We plan to produce only 100
to 200 pieces per style, so as to create a sense of exclusivity. We initially
introduced “Omnialuo Collections” to the market on a small scale in the fourth
quarter of 2007, we fully launched the product line in the third quarter of
2008.




Pricing




Our
design, marketing, and sales divisions are responsible for pricing our products.
The design, marketing, and sales divisions make internal evaluations of apparel
based on predicted market acceptance and then price the items accordingly. The
final price also takes into consideration competitive apparel price
levels.




Current
Pricing Strategy




The
retail price range of our products is between $40 to $300 per item, with the
majority of items priced between $60 and $150. In China, this price range is
considered the middle to upper-middle price range. The CGIR (or China Garment
Industry Report) released by CFDA (or China Fashion Designer Association) in
2006 forecasts that this middle to upper-middle price range will be the fastest
growing segment in the next five years, with an annual growth rate more than
25%.




Our full
retail price of apparel is typically five to six times our actual production
cost. For example, if a shirt costs $15 in raw materials and manufacturing, full
retail price will be $83, or 5.5 times production cost. However, only “new
arrival” apparel sells at full retail price. The “new arrival” period usually
lasts for two months. After such time, various discounts and promotions reduce
the actual selling price to between 60% to 80% of the full retail price, which
is equivalent to 3 to 4 times production cost.




In China,
the average selling price for similar apparel after the new arrival period is
60% to 70% of the full retail price. Our average is better than this average, as
we do not discount our products as much as other manufacturers, in part to
support our image as a premium brand. Our independent distributors do have some
latitude to deviate from our discount policies, but our experience to date is
that we provide greater discounts than do our independent
distributors.




- 5
-




New
Pricing Strategy





Over the
course of the next three years, we will be implementing our new pricing strategy
to increase the full retail price to eight to ten times our production cost, and
increase our average selling price to six to eight times our production cost. We
do not expect the price increase to result in a net reduction in sales as we
believe that (i) the price increase is in line with industry trends, and (ii)
our enhanced advertising campaign will raise brand recognition, thereby
increasing sales. The current average gross profit margin across all ranges of
our products is 50% and we expect to improve this gross profit margin to 55%
within the next three years.




Customers




In China,
professional women are generally divided into three categories, “white-collar”,
“pink-collar” and “golden-collar” (when accounting for purchasing-power
parity, the lifestyle of a household with annual income of $12,500 in China is
similar to the lifestyle of a household earning $40,000 annually in the United
States). (Source: National Bureau of Statistics of China; McKinsey Global
Institute Analysis 2006. Both the individual income and household income
referred to here are on an after-tax basis.)




Pink-collar
workers usually work in high-paying industries such as finance, consulting,
legal services, or assume senior positions in government agencies. Our business
casual collections as well as our fashionable business casual collection appeal
to pink-collar women.




White
collar workers usually work in junior or middle positions in an office
environment. This includes positions such as secretaries, administrators,
operators, IT staff, accounting staff and junior saleswomen. Usually, there is
no strict dress code for “white-collar” professionals in the office.
“White-collar” professionals can wear “relaxed” business style apparel instead
of business suits in their workplaces. In this sense, our fashionable business
casual can be worn by “white-collar” females both in and out of the work
environment.




“Golden-collar”
refers to the class of professionals with annual incomes over $22,500. They
typically hold executive positions in corporations or operate their own
businesses. “Golden-collar” females usually like to wear luxury brands. Our
brands will eventually target “golden-collar” females as well.





Our
current target customers are “white-collar” and “pink-collar” urban females
between the ages of 25 to 35. In China, “pink-collar” refers to women who
typically earn $7,500 to $22,500 annually “White-collar” refers to women who
typically earn $2,500 to $ 7,500 annually.




Our plan
has been to expand our target demographic to 35 to 45 year-old females by
offering premium and mature styles of apparel. Since 2007, our designs in the
spring/summer wear collection have reflected these new styles. Tapping into the
35 to 45 year-old female market is also intended to develop a large group of
loyal customers as well as increase revenues and profits. In China, the
wealthiest consumers are the 25 to 45 year-old group, much younger than the
highest earning group (45-54 years old) in the United States (McKinsey &
Company’s proprietary 2004 personal-financial-services surveys in China). A
study by Women’s Wear Daily (“In the Crosshairs”, an article written by Lisa
Movius, published in Women’s Wear Daily on March 22, 2005) indicated that
urban females aged between 25 to 35 in China demonstrate the highest
consumption needs in apparel, spending more than 20% of their disposable income
on clothing compared to the national average of 8% to 10%. Our strategy of
focusing on the 25 to 45 year-old urban female segment is intended to
capitalize on this consumption pattern.




Distribution
Network and Methods




Our
products are sold in the following types of stores: (i) company-owned stores,
which stores are owned exclusively by the Company, (ii) co-owned stores, which
stores are owned jointly by the Company and a third party, and (iii) independent
distributor stores, stores are owned exclusively by third parties. All three
types of stores carry the OMNIALUO brands exclusively. We refer to company-owned
stores and co-owned stores collectively as retail stores.  All three
types of stores are located throughout China. We also run special, limited-time
outlet sales in major malls to sell excess inventories at the end of each
season. We currently do not have franchisees or franchised stores.




- 6
-




The table
below summarizes the characteristics of our major distribution channels and the
number of stores we had as of December 31, 2009:





Sales
      Channel
                                    
                                    Sub
      Channel
                                    
                                    Location
                                    
                                    Objective
                                    
                                    Characteristics
                                    
                                    *Store
      Level
                                      Net
      Profit
                                      MarginCompany-owned
                                      Stores
      (27)
                                    
                                    Flagship
      Stores
                                    
                                    Major
      shopping malls in Tier 1 cities
                                    
                                    Showcase
      brand and attract customers and distributors
                                    
                                    Capital
      outlay: High
                                      Inventory
      risk: High
                                      Operating
      expenses: medium
                                    
                                    Medium-lowStandard
      Stores
                                    
                                    Key
      shopping malls in highly competitive Tier 1 & Tier 2
      cities
                                    
                                    Test
      market to gauge customer interest and increase sales
                                    
                                    Capital
      outlay: High
                                      Inventory
      risk: Medium
                                      Operating
      expenses: Medium
                                    
                                    MediumCo-owned
      Stores (8)
                                    
                                    Co-owned
      Stores
                                    
                                    Tier
      1 & Tier 2 cities
                                    
                                    Maximize
      sales and profit
                                    
                                    Capital
      outlay: Medium
                                      Inventory
      risk: High
                                      Operating
      expenses: Medium
                                    
                                    Medium-highIndependent
      Distributor Stores (73)
                                    
                                    Independent
      Distributor Stores
                                    
                                    Tier
      1, Tier 2 & Tier 3 cities
                                    
                                    Maximize
      sales and profit
                                    
                                    Capital
      outlay: Low
                                      Inventory
      risk: Low
                                      Operating
      expenses: Low
                                    
                                    High





*
In calculating the store level net profit margin, we take into consideration
related store expenses billed to us, including decoration, rent, payroll, mall
management fees, and utilities.




Company-owned
Stores





Company-owned
stores are retail stores owned 100% by us and which sell the OMNIALUO Brand
exclusively. We manage the daily operations of these stores, and pay all
operating expenses, including decoration, rent, payroll, and utilities. All
company-owned stores are located either within shopping malls or in independent
stores located on the street. There are two types of company-owned stores,
(1) flagship stores, and (2) standard stores. Flagship stores are high-profile
stores, located in key shopping malls of first-tier cities, such as Shanghai,
Beijing, and Shenzhen.  These stores are extravagantly decorated,
display a number of luxurious items and offer the complete OMNIALUO Brand
product line. The cost of opening and operating flagship stores is high, thus
making them the least profitable among all store types. Standard stores are well
decorated, however, they are less extravagant than the flagship stores, and
are operated in major shopping malls of the first-tier and second-tier
cities.  These stores are fashionably decorated and offer the most
complete product lines. These stores serve to showcase and promote the
OMNIALUO brands. In addition, the Company-owned stores are used to monitor
market trends and our products’ performance. Company-owned stores have the
lowest profitability among all our distribution channels. Nonetheless, we
believe that shopping malls are the best location for our stores as
according to the CGIR, in 2005, shopping malls and department stores represented
more than 55% of apparel sales in urban cities in China.





Co-owned
Stores





Co-owned
stores are owned jointly by us and a third party and sell the OMNIALUO Brand
exclusively. All co-owned stores are located in key shopping malls in first-tier
and second-tier cities. We are obligated to share revenues with the shopping
malls in which our stores are located. In some instances there are minimum
revenue payments to the landlord, or a threshold before revenue is split, or
both. On average, we must turn over 20% of the profits from each store to
the shopping mall in which such store is located. The co-ownership partner
receives 30% of the revenue from co-owned stores, after deducting the 20% due to
the shopping mall. Operating expenses are split evenly between us and the
co-ownership partners, however, 70% of the up-front investment is made by us. We
retain full ownership of the inventory delivered to the
co-owned stores. Co-owned stores serve as good complements to
Company-owned stores and independent distributor stores with a relatively high
net profit margin of 40%-50%.





As of
December 31, 2009 and 2008, we operated 35 and 58 retail stores, respectively,
of which there were 27 and 27 company-owned stores, respectively, in key
shopping malls in the first-tier and second-tier cities (see below under“Location of Retail Stores -
Markets” ), and 8 and 31 co-owned stores, respectively, in key shopping
malls located in first-tier and second-tier cities. The two types of stores
collectively accounted for approximately 34.9 of our total revenue in 2009 and
approximately 44.4% of our total revenue in 2008.




Independent Distributor
Stores




Independent
distributor stores are owned 100% by a third party and sell the OMNIALUO Brand
exclusively. Our products are sold to independent distributor stores at 35-40%
of the full retail price. We average approximately 50-55% net profit margin on
sales to the independent distributors. No items are sold on consignment. The
independent distributor stores make a 30% down payment upon ordering and pay the
balance before any shipment is sent. Hence, the independent distributor store
model generates a high profit margin for us, with no upfront investment, minimal
inventory risk and minimal cash flow shortage.




- 7
-




Independent
distributor stores are the most important distribution channel for our sales. As
of December 31, 2008 and December 31, 2009, we had 150 and 73 independent
distributor stores, respectively, across China. The independent distributor
stores represented approximately 55.6% of our total revenues in 2008, and
represent approximately 65.1% of our total revenues in 2009. Our future success
is to a large extent dependent on increasing the number of the independent
distributor stores.





During
2009, there was one customer who contributed 10% or more to the Company’s
consolidated revenue: Wuxi Langyi(24.78%).  During 2008, there was no
customer who contributed 10% or more to the Company’s consolidated
revenue.





Outlets & Special Sales
Promotions




Periodically,
we run outlet sales in major malls to dispose of excess inventory at the end of
each season. We earn a small profit from the outlet channel.





Dedicated
Support for Independent Distributors and Co-ownership Partners




We
provide assistance to our independent distributors and co-ownership partners. By
helping the independent distributors and co-ownership partners operate
efficiently and profitably, and rewarding independent distributors and
co-ownership partners that meet or exceed sales targets, we hope to encourage
successful distributors and co-ownership partners to open more stores. Many of
our top ten distributors have multiple independent or co-ownership
stores.




We
provide assistance to our independent distributors and co-ownership partners in
the following areas of operations.




(i) Setting
up: retail site selection, construction, provision of our retail infrastructure,
image conformity and organization of the operational systems.




(ii) Training:
continuing support on visual display, customer service and store
administration.




(iv) Advertisement
and promotion: coordinating system-wide advertising and promotional activities
to increase independent distributors’ and co-partners’ sales and profits. Beyond
discounts, promotional activities consist of loyalty clubs and members’ only
events, store and Company anniversary promotions, limited editions, gift items
and sales promotions coordinated with other suppliers of
accessories.




(v) Inventory
liquidation: helping independent distributors to move excess inventory by
exchanging inventories among stores and selling through outlets.




(vii) Financial
analysis and support: Our finance department can analyze each store’s financial
situation and recommend specific performance adjustments. It also administers
incentive systems to reward successful independent distributors and maintain the
highest standards of quality control.




Growth
Plan for Distribution Channels




Since our
formation in the third quarter of 2006, one of our growth strategies is to open
new stores, especially independent distributor stores and co-owned stores which
generally have higher margins than company-owned stores. As of November 12,
2008, we had 245 stores altogether. However, as a result of the global economic
recession and the presumed temporary but nonetheless marked decrease in Chinese
consumer spending, particularly in the fourth quarter 2008, we were forced to
close certain stores that did not make their pre-determined sales requirements.
We believe that it was necessary to remove non-performers from an otherwise
strong network of retail outlets. While formerly on pace to meets our goal of
250 stores by year-end 2008, it became necessary in the fourth quarter to cease
pursuit of this goal and trim store count for the long-term good of the Company.
As such, we closed 37stores by December 31, 2008.





In
January 2009, additional stores that did not meet performance requirements were
subsequently closed. As of January 31, 2009, we had 178 stores in total,
including 27 company-owned stores, 31 co-owned stores, and 120 independent
distributor stores. In February 2009, we closed another 13 stores that did not
meet performance requirements. As of February 28, 2009, we had 165 stores in
total, including 27 company-owned stores, 31 co-owned stores and 107 independent
distributor stores. We continued to close non-performing stores in the remaining
period of 2009 in order to better face global economic crisis. As of September
30, 2009 we had 135 stores in total, including 27 company-owned stores, 15
co-owned stores, and 93 independent distributor stores. As of December 31, 2009,
we had 108 stores in total, including 27 company-owned stores, 8 co-owned stores
and 73 independent distributor stores. The total store count is still subject to
change based on prevailing market conditions. Nevertheless, we believe that
there has been indication that the deterioration of the Chinese consumer market
has slowed down in recent months. If the market condition improves, we expect
that no more stores will be closed except those that need to be replaced by new
stores. Our goal is to have 150 stores in total by the end of 2010.




- 8
-




We
believe our focus in expanding independent distributor stores and co-owned
stores is generally feasible because we structure our independent distributor
stores and co-owned stores to require low startup costs. We are also prepared to
launch advertising campaigns and market promotions to boost our brand
recognition, when necessary, in conjunction with our expansion plan. We launched
advertising campaigns and market promotions of OmniaLuo in October 2007 that
continued into 2009. The advertising campaign features Ms. Zheng Luo and the
OMNIALUO brands in major fashion magazines in China such as Vogue, Harper’s
Bazaar and Cosmopolitan. We believe that the increased publicity will enhance
our brand image and result in increased interest from independent distributors
and co-partners.




Franchising




We will
be eligible to enter into franchise arrangements one year after our application
for a retail license is approved. However, we have no existing plans to enter
into such arrangements.




Location
of Our Stores - Markets




There is
significant regional disparity in China with respect to per capita GDP. China is
divided into five regions, the Eastern, Southern, Western, Northern and Central
regions. Eastern and Southern China are the richest regions and historically
represent approximately 36% of China’s population and approximately 56% of
China’s GDP.




In the
Eastern and Southern regions, the population had an average per capita GDP of
$2,400, above the national average of $1,000 in 2005 (National Bureau of
Statistics of China, 2006). In the Northern region, the per capita GDP averaged
$2,100, in the Central region, the per capita GDP averaged $1,100 and in the
Western region the per capita GDP averaged $680.




Our
OMNIALUO Brand apparel has been well-received in the Southern region, and also
has a certain level of market penetration in the Eastern and Central regions. We
are currently making efforts to strengthen our foothold in existing markets,
increase our sales in the Eastern and Southern regions, and develop a market in
the Northern region.




Cities in
China where Retail Stores are Located




Our
products are marketed and sold in cities in China that have the highest levels
of average disposable income. For marketing purposes, we classify cities into
five groups as follows:




(i)
              First-tier
      cities are cosmopolitan cities located in the center of each of the five
      geographic regions. Shanghai and Hangzhou (Eastern China), Shenzhen and
      Guangzhou (Southern China), Xi’an, Chengdu, and Chongqing (Western China),
      Beijing and Shenyang (Northern China), and Wuhan and Changsha (Central
      China) are first-tier cities.
 
 (ii)
              Second-tier
      cities are typically provincial capitals excluding the cities in tier one.
      In China, there are approximately 25 second-tier
  cities.
 
 (iii)
              Third-tier
      cities are major towns outside the provincial capitals. In China, there
      are over 265 third-tier cities, of which 50 have populations of over 1
      million.
 
 (iv)
              Fourth-tier
      cities are small cities distributed in hundreds of small
      counties.
 
 (v)
              Fifth-tier
      cities are small cities in rural and remote
  areas.




The
cities in the first three tiers account for less than 40% of the population in
China but more than 70% of the national disposable income.




- 9
-




Our
products are currently sold in first-, second- and third-tier cities. The tables
below provide geographical distribution of our sales channels as of December 31,
2008.




Company-Owned Stores and Co-Owned StoresRegion
                
                Main City
                
                Number of StoresEastern
      China
                
                Shanghai
                
                4Other
                
                0Southern
      China
                
                Shenzhen
                
                11Guangzhou
                
                5Other
                
                2Fujian
                
                3Western
      China
                
                Kunming
                
                4Central
      China
                
                Wuhan
                
                6Northern
      China
                
                Shenyang,
      Harbin, Beijing, Jinzhou, Qingdao
                
                0Total
                
                
                
                35





Independent Distributor StoresRegion
                
                Total Number of Stores
                
                Number of DistributorsEastern
      China
                
                27
                
                23Southern
      China
                
                37
                
                16Central
      China
                
                17
                
                11Western
      China
                
                16
                
                12Northern
      China
                
                11
                
                11Total
                
                108
                
                73





Product
Design, Research and Development




Designers




One of
our main strengths is our artistic design team led by Ms. Zheng Luo, who is our
chief designer, founder and chief executive officer. Ms. Zheng Luo is a
prominent designer in China’s fashion industry.  Our design team
consists of 14 designers, many of whom have been working with Ms. Zheng Luo for
several years. Ms. Zheng Luo’s ability to retain her design team provides for
consistent designs and greater brand loyalty.




Ms. Zheng
Luo and the OMNIALUO brands have been featured frequently in various popular
fashion magazines such asHarper’s Bazaar,L’Official,Marie Claire,Vogue,Jessica andCosmopolitan. Ms. Zheng Luo
has also been interviewed by many leading domestic and international media,
including China Central Television (“CCTV”), the largest TV network in China,
Hong Kong Phoenix TV, French Fashion TV, Italian Orbit TV, Vogue UK and
Washington Daily. In 2003, Ms. Luo was invited to present her design and hold a
fashion show for Fashion China Seminar in the Museum of Louvre.  In
September 2008, Ms Luo, as the only designer invited from China, held a fashion
show at the New York Fashion Week.  Recently, Ms. Zheng Luo was
acknowledged by the Cosmopolitan Magazine as the “China Designer of the Year”
for 2008.




Ms. Zheng
Luo’s designs have been worn by several Chinese media celebrities. In 2006, the
well-known Chinese movie star Ms. Ziyi Zhang, who starred in films such as
Memoirs of a Geisha, House of Flying Daggers , and Hero, wore one of her evening
dresses while attending a celebrity charity banquet. Ms. Luo’s fashion show
held in Beijing in November 2006 was attended by, among other notable attendees,
Ms. Bingbing Fan, who ranked as the 7th most famous person in China according to
Forbes . Ms Bingbing Fan wore Ms. Zheng Luo’s design to that Beijing
show.




We
conduct active training programs for our designers. Each of our designers
attends, on average, more than 10 training sessions ever year and visits the
Hong Kong SAR and other major cities in China regularly to see the latest
fashion trends and understand local tastes. Training sessions take various
forms, including attendance of fashion shows, fashion salons and fashion
seminars.




- 10
-




The table
below lists some of the awards Ms. Zheng Luo, her team members and the OMNIALUO
brand have received.


Awards
to Ms. Zheng Luo


2008
                
                Best
      Woman Fashion Designer of the Year, awarded by Cosmopolitan
      Magazine2007
                
                One
      of the Top 10 Outstanding Designers, awarded by CFDA2006
                
                Golden
      Peak Award in Beijing’s Fashion Show, awarded byChina Fashion Designers
      Association (CFDA, the highest authority in China’s fashion
      industry)
                  
                  Golden
      Peak is viewed as the most prestigious award in the Chinese fashion
      industry. Each year this award is given by the CFDA to one single designer
      in recognition of his/her overall outstanding achievements in the fashion
      design industry. Only “The Best Women’s Wear Designer” recipients in the
      preceding years are qualified to be nominated for the Golden Peak
      Award.2005
                
                Lycra
      in Style Designer Award, awarded byHarper’s
  Bazaar2005
                
                The
      Best Women’s Wear Designer, awarded by CFDA
                  
                  This
      award, granted by CFDA, is regarded as second only to the Golden Peak
      Award. Ms. Zheng Luo winning the “Best Women’s Wear Designer” award in
      China is comparable to Calvin Klein’s chief designer, Francisco Costa’s
      winning the Women’s Wear Designer of the Year in 2006 in the United
      States.2005
                
                One
      of the Top 10 Young Designers in China, awarded by CFDA2004
                
                The
      Best Women’ Wear Designer, awarded by CFDA2004
                
                The
      Outstanding Designer in Asia, trophy awarded by Moet &
      Chandon2003
                
                The
      NAUTICA Originality Foundation Platinum Prize, awarded by
      Nautica
                  
                  Ms.
      Zheng Luo, selected from among more than 1,000 other Chinese designers,
      won the Nautica prize, a prize awarded to the most talented Chinese
      designer in 2003.2003
                
                Invited
      to the Fashion China Seminar held in Paris’ Louvre Museum.
                  
                  Ms.
      Zheng Luo, together with five other talented Chinese designers, was
      invited to present a China-focused fashion show at the Louvre
      Museum.2002
                
                One
      of the Top Ten Fashion Designers in CHINA, awarded by
  CFDA2002
                
                #1
      among Top Ten Designers, awarded by CFDAAwards
      to the OMNIALUO Brand2006
                
                China
      Best Women’s Wear Design, awarded by CFDA2005
                
                China
      Best Women’s Wear Design, awarded by CFDA2004
                
                China
      Best Women’s Wear Design, awarded by CFDA2003
                
                China
      Best Women’s Wear Design, awarded by CFDA2002
                
                China
      Best Women’s Wear Design, awarded by CFDAAwards
      to Other Company Design Professionals2006
                
                Ms.
      Yi Zhou was awarded one of the top ten designers in Guangdong Province by
      CFDA




Product
Design Process




New
collections in the Chinese fashion industry are usually introduced twice each
year, one collection for Spring/Summer and one collection for
Fall/Winter.




In order
to stay on top of the latest fashion trends, starting in late 2006 we began
introducing new collections at trade shows or fashion shows four times a year.
Specifically, we now introduce our (i) spring collection in November, (ii)
summer collection in March, (iii) fall collection in May, and (iv) winter
collection in August.




- 11
-




We
typically receive, on average, 80% of our orders during these trade events. This
percentage is expected to be lower going forward due to our enhanced marketing
efforts outside of the trade events and we expect to obtain more orders from
other distributors who do not participate in the trade events. We completed the
implementation of a new information management system for product order
placements, to enhance our overall business process management, in Company-owned
and co-owned stores in 2007. We have also selected 20 independent distributors
for implementation of the system.




Our
design team currently develops more than 1,600 new products per year, but only
releases about 550 new products after careful selection of what to release to
the market. We constantly focus on improving the design and quality of the
garments we produce.




The
design process for each season requires approximately fifty to sixty days from
conceptualization to finalization, and can be roughly divided into three stages,
planning, design and sample making. The design process of one season will start
while that of the preceding season is still in progress.




(i)
              Planning.
      In the planning stage, our design team forecasts the upcoming seasons’
      fashion trends for Chinese women’s apparel. The goal is to integrate the
      latest North American fashion trends with the Chinese woman’s aesthetic
      sense. The design teams then develop four themes per collection. After
      deciding on the main themes, the design team decides how many product
      lines to introduce under each theme. The planning stage lasts
      approximately 20 days.
 
 (ii)
              Design.
      In the design stage, our designers collect original fabrics and
      accessories. The designers then prepare drawings for the individual items
      in each product line. The design process takes approximately 30 to 40
      days.
 
 (iii)
              Sample
      Making. Sample making is the last stage of the design process where
      pattern making, cutting, sewing, fitting and revision take place and
      usually lasts for approximately 2
days.




Procurement,
Suppliers, Manufacturing, and Quality Control




Procurement




We have a
purchasing department currently comprised of five employees. This department is
engaged in all procurement activities, such as specification and sample testing,
production capability verification, order placement, contract management, and
price and quantity negotiations. Final pricing for all orders are approved
by both our chief executive officer Ms. Zheng Luo and our vice
president.




We do not
use independent agents in our procurement activities. We believe that our
in-house personnel are better equipped to focus on and represent our interests,
to respond to our needs and, are more likely to build long-term relationships
with key vendors. We believe that these relationships will improve our access to
raw materials at favorable prices over the long-term.




The
entire process from searching for suppliers to reaching a procurement agreement
usually takes one week. In most cases, it takes 20 to 30 days to receive the
purchased raw materials. In case inventory is lower than required, we remedy
shortfalls by purchasing from the same suppliers to ensure the consistency of
quality. Manufacturers’ delivery dates are generally specified by contract to
ensure that products will be available in our warehouses when we need them. We
believe we have good relationships with our suppliers and, generally, there
are adequate sources to enable us to produce sufficient supply of apparel in a
timely manner. Once we purchase the material, those materials are delivered to
independent manufacturers for further processing and/or decoration.




Suppliers




The raw
materials required by us can be divided into two categories: (i) tatting and
knitwear, and (ii) woolen and leather-made garments. For tatting and knitwear
made garments, we purchase raw materials which are delivered to independent
manufacturers for further processing. For woolen and leather-made garments, we
purchase ready-to-wear clothes which require further design work and are also
delivered to independent manufactures for further processing and
decoration.




We
currently purchase a variety of materials from more than fifty vendors. We
believe that there is a sufficient number of suppliers for such materials in the
market. In 2009, Yi Sheng Fabric was the only supplier that accounted for more
than 5% of our total raw material and finished goods purchases. No supplier
accounted for more than 5% of our total raw material and finished goods
purchases in 2008.




- 12
-





Outsourced
Manufacturing




We do not
operate any manufacturing facilities, and we do not currently have any plans to
do so. Our apparel is produced by independent manufacturers that are selected,
monitored and coordinated by our quality control department to assure conformity
to our quality standards. We believe that the use of independent manufacturers
increases our production flexibility, enables us to focus on higher margin
business, and, at the same time substantially reduces capital expenditures and
avoids the costs of maintaining a large production workforce. We maintain
ownership of the raw materials and finished goods while such items are at our
independent manufacturers.




We
believe that our long-term, reliable and cooperative relationships with many of
our manufacturers provide a competitive advantage over many of our competitors.
Our merchandise is produced by approximately 15 independent manufacturers
located in Guangdong Province, China with close proximity to our headquarters in
Shenzhen, China. Xin Cai, one of the 15 contract manufacturers,
currently produces approximately 10.8%
of our annual manufactured garments in terms of dollar amount.




Although
there are no long-term agreements between us and any of our contractors or
suppliers, we believe our relationships with our suppliers and contract
manufacturers are excellent. In addition, we receive preferential treatment from
Yin Hu as the products manufactured by Yin Hu for us usually account for
over 90% of Yin Hu's production capacity. Yin Hu was 80% owned by Ms. Zheng
Luo, our founder and chief executive officer, until January 2007, at which time
she transferred her entire interest in Yin Hu to unrelated third
parties.




Quality
Control




We
monitor the quality of fabrics ordered and inspect samples of each product
before production begins. We also perform random quality control checks during
and after production before the garments leave our manufacturers. Our quality
control personnel visit all independent manufacturers’ facilities at least three
times a week. Final inspections occur when the garments are received in our
warehouse. After that, we distribute finished garments to retail stores
nation-wide. We employ two full-time quality control personnel, as well as an
additional three inspectors at our warehouse. Our quality control program is
designed to ensure that our products meet our high quality standards and that we
deliver high quality products to retail stores. As we further expand our stores
and increase our sales, we plan to hire more quality control
personnel.




Information
Management Systems




Since
January 2007, we have been implementing a new information management system.
This system is intended to enable us to procure raw materials on an economic
purchase order basis, keep track of raw materials stock on a real time basis and
monitor the production process. This system is intended to improve production
efficiency and reduce purchasing and storage costs. We have applied the
distribution function of the new system to our Company-owned stores and some of
our co-owned stores. By implementing the distribution function, we are able to
check our apparel stock in different categories, different sizes and colors on a
real-time basis. For example, if one company-owned store is in need of certain
inventory, we are able to immediately communicate to the other company-owned
store with excess inventory in that category and ensure a prompt
redistribution of inventory among both stores within one or two days. This new
distribution function is expected to reduce lost sales arising from inventory
shortages in particular stores and better allocate resources among different
stores across different regions. Currently, we are satisfied with the
implementation results of the new distribution function in the Company-owned
stores and our co-owned stores. We have started to extend the application of the
new system to selected independent distributor stores. As of December 31,
2009, 55 independent distributors are qualified to have access to the new
system, which accounted for more than half of our total independent distributors
stores at the end of 2009.


Inventory




We
generally receive the bulk of our orders from retail stores in trade or fashion
shows and usually fulfill these orders within three months. The orders are
non-cancelable, requiring in the case of orders from independent distributors a
30% down payment upon the order placement, with full payment due before delivery
of the goods. Once orders are placed, retail stores are allowed to exchange 10%
of the merchandise ordered for the first time but no exchanges are allowed in
subsequent orders for the same products.




Backlog




On
December 31, 2009, our backlog of unfilled firm orders for delivery was
approximately $2.5 million, compared with a backlog of unfilled firm orders for
delivery of approximately $4.0 million as of December 31, 2008. We believe that
our backlog at any specific point in time is not necessarily indicative of sales
and business results in the near future.





Employees




All of
our employees are employees of our wholly owned PRC operating subsidiary,
Oriental Fashion. As of December 31, 2009, we had approximately 150 full-time
employees. We consider our employee relationships to be satisfactory. We plan to
increase the number and level of our skilled executive management
executives.




- 13
-




Intellectual
Property




The
Company has two trademarks, OMNIALO and OMNIALUO, that are registered in the
PRC. Starting from November 17, 2009, such trademarks have also been registered
in the United States.




Omnialo. Oriental Fashion has
acquired rights of use to the Chinese and English OMNIALO trademarks, which were
assigned to it for nominal cost by Ms. Zheng Luo, until October 6, 2017. The
transfer of ownership of the trademarks has been approved by the Trademark
Office of State Administration for Industry and Commerce (the “Trademark
Office”). Ms. Zheng Luo has licensed use of these trademarks to Oriental
Fashion. These trademarks originally expired in September 2007 (for the Chinese
trademark) and October 2007 (for the English trademark), and applications
to extend their registration until 2013 were filed and were approved in
September 2007, resulting in new expiration dates of September 2017 (for the
Chinese trademark) and October 2017 (for the English trademark). Both Oumeng and
Ms. Zheng Luo have entered into agreements with Oriental Fashion agreeing not to
use the OMNIALO trademarks in the future.




Omnialuo. Oriental Fashion
has licensed, at nominal cost, rights of use to the Chinese and English OMNIALUO
trademarks, the registration of which Ms. Zheng Luo had initially applied for in
March 2005. These applications were approved by the trademark office on January
19, 2009. Ms. Zheng Luo transferred the Chinese and English OMNIALUO trademarks
to Oriental Fashion at nominal cost subsequent to registration of the OMNIALUO
trademarks by the Trademark Office. Both Oumeng and Ms. Zheng Luo have entered
into agreements with Oriental Fashion agreeing not to use the OMNIALUO
trademarks in the future.





Competition





The
women’s apparel market is highly fragmented in China. It is estimated by the
China Garment Industry Report that in 2005, the top ten women’s wear brands,
including international brands and domestic ones, totaled only 13.36% of the
total market. The market is extremely sensitive to fashion swings and
diversified consumer preferences.




Honoring
commitments made the World Trade Organization agreements, on December 11, 2004,
the Chinese government lifted all restrictions imposed on foreign enterprises
regarding their entry into China. Foreign retailers are allowed to establish
wholly owned foreign enterprises in China with no restrictions on registered
capital. Further, foreign retailers are allowed to open stores in any geographic
areas in China. Therefore, in addition to domestic competition, the Company is
subject to increasing competition from international brands.




Among our
competitors are well established domestic brands such as Moiselle and Pink Mary
and well established international brands such as Ports 1961 and others, most of
which have the same demographic focus as us. Many of our domestic competitors,
and most or all of our international competitors, are significantly larger
and have substantially greater distribution and marketing capabilities, capital
resources and brand recognition. We believe we can effectively compete with
other brands based on our attention to Chinese customers’ aesthetic tastes,
reflected through our design and use of materials, and the role in and
commitment to the Company of our chief designer, founder and principal
stockholder, Ms. Zheng Luo.




Growth
Strategy




We plan
to grow our sales and net profit margin based on the following
strategies:




Selectively
Expand Distribution Channels




Since our
formation in the third quarter of 2006, one of our growth strategies is to open
new stores, especially independent distributor stores and co-owned stores which
generally have higher margins than company-owned stores. As of November 12,
2008, we had 245 stores altogether. However, as a result of the global economic
recession and the presumed temporary but nonetheless marked decrease in Chinese
consumer spending, particularly in the fourth quarter 2008, we were forced to
close certain stores that did not make their pre-determined sales requirements.
We believe that it was necessary to remove non-performers from an otherwise
strong network of retail outlets. While formerly on pace to meets our goal of
250 stores by year-end 2008, it became necessary in the fourth quarter to cease
pursuit of this goal and trim store count for the long-term good of the Company.
As such, we closed 37stores by December 31, 2008. In 2009, we continued to close
non-performing stores in order to better better face global economic crisis. As
of December 31, 2009, we had 108 stores in total, including 27 company-owned
stores, 8 co-owned stores and 73 independent distributor stores. The total store
count is still subject to change based on prevailing market conditions.
Nevertheless, we believe that there has been indication that the deterioration
of the Chinese consumer market has slowed down in recent months. If the market
condition improves, we expect that no more stores will be closed except those
that need to be replaced by new stores. Our goal is to have 150 stores in total
by the end of 2010.





We
believe our focus in expanding independent distributor stores and co-owned
stores is generally feasible because we structure our independent distributor
stores and co-owned stores to require low startup costs. We are also prepared to
launch advertising campaigns and market promotions to boost our brand
recognition, when necessary, in conjunction with our expansion plan. We launched
advertising campaigns and market promotions of OmniaLuo in October 2007 that
continued into 2009. The advertising campaign features Ms. Zheng Luo and the
OMNIALUO brands in major fashion magazines in China such as Vogue, Harper’s
Bazaar and Cosmopolitan. We believe that the increased publicity will enhance
our brand image and result in increased interest from independent distributors
and co-partners.




- 14
-




Develop New Merchandise
Categories





Accessories
have been identified as an important future product line for the OMNIALUO Brand.
The new expanded accessories product line was released in the third quarter of
2007. In addition, in the first quarter of 2009, we applied to the Trademark
Office for a new trademark, OM WEEKEND.  The products with this
trademark will target female professionals in China who are 18-30 years old. We
intend for OM WEEKEND and OMNIALUO to develop into a more perfect brand
system, which we will then take “up market”.




Expand our Market Vertically and
Horizontally




We aim to
continue to target the 25 to 35 year old female demographic and vertically
extend into the 35 to 45 age group by offering premium and mature styled
apparel. The 35 to 45 year old female age group generally has higher brand
loyalty and purchasing power. Penetrating this age group is intended to develop
a large group of loyal customers and increase our profits. We will also seek to
expand our market horizontally by increasing our visibility in northern China by
offering apparel tailored to the local consumers’ dressing tastes. This is being
implemented by our designers who have an understanding of local northern China
preferences. These designs were included in our spring/summer 2009 product line
that was released in December 2008.




Regulatory
Matters




Franchise
Regulation




We will
be eligible to enter into franchise arrangements one year after our application
for a retail license is approved. However, we have no existing plans to enter
into such arrangements. Should we enter into such arrangements, we would be
required to comply with certain legal requirements, including owning at least
two Company-owned or co-owned stores in China for more than one year, having the
ability to provide long-term training services to the franchisee, having a goods
supply system that is stable and that can guarantee quality, and having a good
reputation in business operations, and we would be required to submit an
application to the relevant Chinese authorities.  Should we chose to
enter into franchise arrangements, we believe there would be little difficulty
in meeting these requirements.





Elimination of Restrictions on
International Competitors in China




Honoring
commitments in WTO agreements, on December 11, 2004, the Chinese government
lifted all restrictions imposed on foreign enterprises regarding their entry
into the retail market in China. Foreign retailers are allowed to establish a
wholly owned foreign enterprise in China with no restrictions on registered
capital. Further, foreign retailers are allowed to open any number of stores in
any geographic areas in China. This opens the door for substantial competition
from a number of larger international apparel retailing brands and companies.
See “Competition” above.




Industry
Overview




Economy in China




According
to the China Garment Industry Report, China has sustained 9%+ GDP growth for the
last 25 years and is likely to continue at 7% GDP growth in the next five years.
In 2005, China achieved a GDP of $2,314 billion and total consumption of $852
billion. The report further revealed that the Chinese people, in general, spend
8% to 10% of their disposable income on garments, and that the garment industry
in China saw overall sales of $87 billion. The report forecasted that the
garment industry in China will continue at more than a 20% annual growth rate
for the next 5 years.




Segments




The
garment industry in China can be divided into seven major categories, which are
women’s outerwear, men’s outerwear, kids’ outerwear, knitwear,
underwear/nightwear, accessories, and socks. Women’s outerwear is the biggest
sector in the Chinese garment industry and accounted for approximately 36% of
garment industry sales by dollar amount in 2005. In contrast, men’s
outerwear only represented approximately 22% of industry sales in the same
period. Underwear/nightwear is also a significant sector in garment industry in
China.




The below
diagram illustrates the percentage of sales for each garment category in 2005 in
China. Overall garment industry sales in China in 2005 were $87 billion (Source:
Chinese Garment Industry Report, 2005-2006).




- 15
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Concentration




Rates of
concentration differ from one garment sector to another. Men’s wear in China was
the most concentrated sector, with the top 10 sellers (both international brands
and Chinese domestic ones) occupying approximately 50% of collective sales in
men’s wear. Kids’ wear follows as the second most concentrated sector, with the
top 10 sellers representing approximately 35% of overall sales of kids’
wear. Women’s wear is the most fragmented sector, with then top ten sellers
only accounting for approximately 13.36% of sales. The garment industry is not
experiencing a major consolidation. Instead, it is undergoing a reshuffling with
quality brands, existing or new, taking market share from low quality and
non-branded products.




Distribution
Channels




In China,
urban dwellers do most of their shopping in shopping malls or department stores
because they feel brands displayed in big stores are more trustworthy with high
quality guarantees. CGIR indicated that, in 2005, 55% of garment purchases were
made in shopping malls or department stores, 23% in specialty stores such as
franchised stores, 13% in grocery stores, 6% in outlets and the remaining 3% in
other channels.




The
diagram below illustrated the percentage of Garment Sales in China by
Distribution Channels in 2005. Overall garment industry sales in 2005 in China
were $87 billion. (Source: Chinese Garment Industry Report,
2005-2006.)









Structural
Changes





The
Chinese apparel industry has experienced three stages. Before 1990, apparel was
purchased primarily for functional purpose and people were very price conscious
when making purchase decisions. From 1990 to 1999, people were shifting their
attention from being mainly price conscious to being more quality aware; they
liked to purchase clothes which were comfortable and durable. Since 1999,
people are increasingly brand aware and more inclined to purchase quality
brand apparel. This is especially true for young and middle aged urban females
who like to wear personalized and distinctive brands to appear
unique.




Market
Analysis




Market Segments





The
Chinese women’s apparel market can be segmented into different categories by
price, age, and style as indicated in the following tables.




- 16
-




Segments
by Garment Price





Price Category
                
                Full Retail
                  Price Range
                
                Customer’s Social
                  Status
                
                Customers’ Annual
                  Income
                
                Family’s Social
                  Class
                
                Family’s Annual
                  Household IncomeLow
      price
                
                $
                <
      37
                
                Blue-Collar
                
                $
                <
      1,500
                
                Poor
                
                $
                <
      $3,125Lower-middle
      price
                
                $
                37-$75
                
                Blue-White
      Collar
                
                $
                1,500-$2,500
                
                Lower-Middle
      Class
                
                $
                3,125-$5,000Middle
      price
                
                $
                75-$125
                
                White-collar
                
                $
                2,500
      - $7,500
                
                Upper-middle
      Class
                
                $
                5,000-$12,500Upper-middle
      price
                
                $
                125-$188
                
                Pink-collar
                
                $
                7,500-$22,500
                
                Mass
      Affluent
                
                $
                12,500-$25,000High
      price
                
                $
                188-$375
                
                Golden-collar
      I
                
                $
                22,500-$30,000
                
                Global
      Affluent
                
                $
                25,000-$50,000Luxury
      price
                
                $
                > 375
                
                Golden-collar
      II
                
                $
                >30,000
                
                Wealthy
                
                $
                >
      50,000




Note:
all income figures are after tax.





In 2005,
the upper-middle class and mass affluent class accounted for 9.4% and 0.5% of
the total urban population respectively. However, they represent 24.2% and 2.4%
of total urban disposable income. With the growing economy in China, the Chinese
urban population is undergoing structural changes. The McKinsey report projected
that by 2015, the percentage of upper-middle class could grow to 21.2% from
12.6% in 2005 and the mass affluent class could grow to 5.6% from 0.5% in 2005.
The report also projected that the two groups collectively would occupy 44.3% of
urban disposable income, compared to 26% in 2005.




Segments
by Consumer Age Group




Age Group
                    
                    Age Range
                    
                    % of Total
                      Female
                    
                    Group Size (‘000)<15
                    
                    Kids
                    
                    
                    18
                    %
                    111,42215-19
                    
                    Teenagers
                    
                    
                    9
                    %
                    52,67619-25
                    
                    Youth
                    
                    
                    7
                    %
                    40,44025-35
                    
                    Young
      Adults
                    
                    
                    17
                    %
                    103,90335-45
                    
                    Middle-age
      Adults
                    
                    
                    18
                    %
                    111,122>45
                    
                    Seniors
                    
                    
                    32
                    %
                    196,333




Source:
National Bureau of Statistics of China, 2005




The 25 to
45 year-old female group is the most heavily populated group in China. By the
end of 2004, this group had a population of 215 million, accounting for 35% of
the total Chinese female population, which is the wealthiest group in China. The
McKinsey report revealed that in China, the wealthiest consumers are in the 25
to 45 year-old group, much younger than the highest earners in the United States
who are in the 45 to 54 year-old group. Furthermore, 25 to 35 year-old females
have the strongest purchasing desire for apparel. It is reported that 25 to 35
year-old females spend more than 20% of their disposable income on clothing,
while average Chinese spend 8% to 10% (“In the Crosshairs”, an article
written by Lisa Movius, published inWomen’s Wear Daily  on
March 22, 2005).




Market
Size




In China,
women’s outerwear accounts for around 36% of total apparel consumption. In
shopping malls and department stores, women’s wear occupies 2 to 4 floors, while
men’s wear can hardly fill one floor. In 2005, the women’s apparel market in
China was $25 billion. In 2005, branded women’s apparel accounted for 12% of all
women apparel sales, or $3 billion in dollar terms, which is the market we
are addressing. The size of the market in 2005 is described in the following
chart.




- 17
-









Source:
Chinese Garment Industry Report 2005-2006




Target Market Growth




China’s
GDP growth is expected to be 7% in the next five years as China is emerging as a
major economic power. The increasing urbanization rate and a substantial annual
increase in per capita consumption are expected to fuel the growth in apparel
market. The CGIR forecasts that the apparel industry will continue to
grow for the next few years and the women’s apparel market is expected to
outpace the overall apparel industry. As consumption in the Chinese apparel
industry is undertaking structural changes from quality focus to quality brand
focus, the fastest growth segment will likely to take place in branded products
like the OMNIALUO brands.




The
Company targets white-collar and pink-collar females in China in the
upper-middle class and mass affluent class. As the economic growth continues,
growth in both of these classes and their disposable income is
expected.









Source:
National Bureau of Statistics of China; McKinsey Global Institute
analysis




- 18
-









Source:
National Bureau of Statistics of China; McKinsey Global Institute
analysis




ITEM
1A. RISK FACTORS




Investing
in our securities involves a material degree of risk. Before making an
investment decision, you should carefully consider the risk factors set forth in
this Annual Report, as well as other information we include in this Annual
Report. Although every effort has been made to anticipate possible risks,
unforeseen conditions and unexpected events may arise, and this list may not be
all-inclusive.




Risks
Related to Our Business




The
recent global financial crisis could negatively affect our business, results of
operations, and financial condition.





The
recent credit crisis and turmoil in the global financial system may have an
adverse impact on our business and our financial condition, and we may face
challenges if conditions in the financial markets do not improve.  Our
ability to access the capital markets may be restricted at a time when we would
like, or need, to raise capital, which could have an impact on our flexibility
to react to changing economic and business conditions.  In addition,
these economic conditions also impact levels of commercial and
consumer spending, which have recently deteriorated significantly and may remain
depressed for the foreseeable future.  It is uncertain how long the
global crisis in the financial services and credit markets will continue and how
much of an impact it will have on the global economy in general or the Chinese
economy in particular.  If demand for our products and services
fluctuates as a result of economic conditions or otherwise, our revenue and
gross margin could be harmed.





Our
business is highly sensitive to economic conditions and consumer spending and an
economic downturn could have a material adverse impact on us.




The
retail and apparel industries historically have been subject to substantial
cyclical variation. A recession in the general economy or a decline in consumer
spending in the apparel industry could have a material adverse effect on our
financial performance. Purchases of apparel and related merchandise tend to
decline during recessionary periods and may decline at other times. There can be
no assurance that a prolonged economic downturn would not have a material
adverse impact on us or that our customers could continue to make purchases
during a recession.





We
are highly dependent on our chief executive officer, founder and principal
stockholder and other key personnel and if we lose other key management or other
personnel, our business will suffer.




Our
future success will depend in part on the continued service of certain key
management and other personnel, particularly Ms. Zheng Luo, our chief executive
officer and chief designer, who is closely associated with our brand names.
Although Ms. Zheng Luo is our principal shareholder, and has entered into
non-competition agreements with us and our Chinese operating subsidiary,
none of these factors and arrangements ensure the continued availability of Ms.
Zheng Luo’s services to us. We currently have not obtained key-person life
insurance with respect to Ms. Zheng Luo. Even if we are to obtain such
key-person life insurance for Ms. Zheng Luo, such such insurance will only cover
certain risks relating to our dependency on Ms. Zheng Luo, and the amount of
such insurance may not be adequate to compensate for any loss of Ms. Zheng Luo’s
services.





In
addition, success will also depend on our ability to attract and retain
qualified managers, design, sales and marketing personnel. Competition for these
employees is intense. There is no assurance that we can retain our existing key
personnel or attract and retain sufficient numbers of qualified employees in the
future. The loss of key employees or the inability to hire or retain qualified
personnel in the future would have a material adverse effect on the development
of our business and our ability to develop, market and sell our
products.




- 19
-




The
relative lack of public company experience of our management team may put us at
a competitive disadvantage.





Our
management team lacks public company experience, which could impair our ability
to comply with legal and regulatory requirements such as those imposed by the
Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley.  Aside from our chief
financial officer, David Xuguo Wang, our senior management does not have
experience managing a publicly traded company.  Such responsibilities
include complying with federal securities laws and making required disclosures
on a timely basis.  Our senior management may be unable to implement
programs and policies in an effective and timely manner that adequately respond
to the increased legal, regulatory and reporting requirements associated with
being a publicly traded company.  Our failure to comply with all
applicable requirements could lead to the imposition of fines and penalties,
distract our management from attending to the management and growth of our
business, result in a loss of investor confidence in our financial reports and
have an adverse effect on our business and stock price.




As
a public company, we are obligated to maintain effective internal controls over
financial reporting. Our internal controls may not be determined to be
effective, which may adversely affect investor confidence in us and, as a
result, decrease the value of our Common Stock.




The PRC
has not adopted management and financial reporting concepts and practices
similar to those in the United States.  We may have difficulty in
hiring and retaining a sufficient number of qualified finance and management
employees to work in the PRC.  As a result of these factors, we may
experience difficulty in establishing and maintaining accounting and financial
controls, collecting financial data, budgeting, managing our funds and preparing
financial statements, books of account and corporate records and instituting
business practices that meet investors’ expectations in the United
States.





Rules
adopted by the Securities and Exchange Commission, or the Commission, pursuant
to Section 404 of Sarbanes-Oxley require annual assessment of our internal
controls over financial reporting, and attestation of this assessment by our
independent registered public accountants.  This requirement first
applied to our annual report on Form 10-K for the fiscal year ended
December 31, 2008 and the attestation requirement of management’s
assessment by our independent registered public accountants will first apply to
our annual report on Form 10-K for the fiscal year ended December 31,
2010.  The standards that must be met for management to assess the
internal controls over financial reporting as effective are relatively new and
complex and require significant documentation, testing and possible remediation
to meet the detailed standards. This assessment will need to include
disclosure of any material weaknesses identified by our management in our
internal control over financial reporting.  The process of compiling
the system and processing documentation necessary to perform the evaluation
needed to comply with Section 404 is costly and challenging. We may not be
able to complete our evaluation, testing and any required remediation in a
timely fashion. During the evaluation and testing process, if we identify one or
more material weaknesses in our internal control over financial reporting, we
will be unable to assert that our internal controls are effective. If we are
unable to conclude that our internal control over financial reporting is
effective. We could lose investor confidence in the accuracy and completeness of
our financial reports, which could harm our business and cause the price of our
Common Stock to decline.





If
we are unable to anticipate fashion trends in a timely manner and respond to
such trends, our reputation could be harmed and profitability could
decrease.




The
women’s apparel industry has many characteristics including changing consumer
preferences and shifting fashion trends. We believe that our success depends in
substantial part on our ability to anticipate emerging fashion trends and design
and customize our products to meet new trends and changing consumer demands in a
timely manner. There can be no assurance that we will continue to be successful
in this regard. Our failure to anticipate and respond to these changes could
result in lower sales, excess inventories and lower margins, which would have a
material adverse effect on our operations, business and financial
condition.




Our
business is highly seasonal and if we fall significantly short of our
anticipated earnings in one or more quarters, it will significantly decrease the
working capital available to us in the following quarters, which may adversely
affect our purchasing abilities.




Our
business is highly seasonal, with the highest proportion of sales and operating
income generally being generated in the fourth quarter of each year, lesser
proportions in the second and third quarter of each year, and the lowest
proportion of sales and operating income being generated in the first quarter of
each year. Our working capital requirements are likely to fluctuate during the
year, increasing substantially during one or more quarters as a
result of higher planned seasonal inventory levels and higher receivables.
If we fall significantly short of our anticipated earnings in one or more
quarters, it will significantly decrease the working capital available
to us in the following quarters. Due to limitations on borrowing levels, a
decrease in working capital may adversely affect our purchasing abilities which
would have a material adverse effect on our revenues.




- 20
-


Product
branding is important to us and if our brands are misappropriated our reputation
could be harmed, which could result in lower sales having a negative impact on
our financial results.




We rely
upon a combination of trademark, licensing and contractual covenants to
establish and protect the brand names of our products. We have registered two of
our trademarks and applied for registration of a third trademark in the
Trademark Office of China. In our market segments, our reputation is closely
related to our brand names. Monitoring unauthorized use of our brand names is
difficult, and we cannot be certain that the steps we have taken will prevent
their unauthorized use, particularly in foreign countries. Our brand names may
be misappropriated or utilized without our consent and such actions may have a
material adverse effect on our reputation and on the results of our
operations.




The legal
regime in China for the protection of intellectual property rights is still at
its early stage of development. Intellectual property protection became an
effort in China in 1979 when China began the registration of trademarks
nationwide, and also adopted the Criminal Law on the protection of trademarks.
Since then, China has adopted its Patent Law, Trademark Law and Copyright Law
and promulgated related regulations such as Regulation on Computer Software
Protection, Regulation on the Protection of Layout Designs of Integrated
Circuits and Regulation on Internet Domain Names. China has also acceded to
various international treaties and conventions in this area, such as the Paris
Convention for the Protection of Industrial Property, Patent Cooperation Treaty,
Madrid Agreement and its Protocol Concerning the International Registration of
Marks. In addition, when China became a party to the World Trade Organization in
2001, China amended many of its laws and regulations to comply with the
Agreement on Trade-Related Aspects of Intellectual Property Rights. Despite many
laws and regulations promulgated and other efforts made by China over the years
with a view to tightening up its regulation and protection of intellectual
property rights, private parties may not enjoy intellectual property rights in
China to the same extent as they would in many Western countries, including the
United States, and enforcement of such laws and regulations in China have
not achieved the levels reached in those countries. Both the administrative
agencies and the court system in China are not well-equipped to deal with
violations or handle the nuances and complexities between compliant innovation
and non-compliant infringement.




Many
of our competitors have substantially greater capabilities and resources and may
be able to market products more effectively, which would limit our ability to
generate revenue and cash flow.




Competition
in the women’s apparel industry is intense and we face increasing domestic and
international competition from several companies. Many of our competitors are
significantly larger and have substantially greater distribution and marketing
capabilities, capital resources and brand recognition. There is no assurance
that we will be able to compete successfully against present or future
competitors. Such failure to compete would have a material adverse effect on our
business and results of operations.




We
are uncertain as to our ability to effectively implement and manage our growth
strategy.




As part
of our growth strategy, we seek to expand our distribution network and introduce
new product lines like Omnia Collections and accessories. The success of our
growth strategy will depend on brand management, competitive conditions, our
ability to manage increased sales and distribution and, in the future, franchise
store expansion, the availability of desirable locations and the negotiation of
terms with distributor and franchise stores. There is no assurance that we will
be able to obtain terms as favorable to us as those under which we now operate
or that such terms will not adversely affect our ability to manage inventory
risk. There is also no assurance that our growth strategy will be successful or
that our sales or net income will increase as a result of the implementation of
such strategy.




Our
management and internal systems might be inadequate to handle our potential
growth.




Successful
implementation of our business strategy will require us to develop our
operations and effectively manage growth. Any growth will place a significant
strain on our systems, management, financial, product design, marketing,
distribution and other resources, which would cause us to face operational
difficulties. To manage future growth, our management must build operational and
financial systems and expand, train, retain and manage our employee base. For
instance, we will need to enhance our information systems and operations and
attract and retain qualified personnel. Our management may not be able to manage
our growth effectively if our systems, procedures, controls and resources are
inadequate to support operations. In such case, our expansion would be halted or
delayed and we may lose our opportunity to gain significant market share or the
timing advantage with which we would otherwise gain significant market share.
Any inability to manage growth effectively may harm our ability to implement and
execute out current or any subsequent business plans.





If
we are unable to effectively implement our new information management system and
data networks, our ability to mange our inventory would be
disrupted.




We are
implementing a new information management system and data networks. The system
has been fully operational in Company-owned stores and co-owned stores since the
end of 2007, and we have selected 60 independent distributor stores
for implementation of the system by December 31, 2009. Delays or other
difficulties in implementing this system could disrupt our ability to manage our
inventory effectively. In addition, we plan to establish five regional centers
to better monitor each region’s market dynamics, facilitate traffic flows,
ensure rapid response and provide partner support and supervision. There is no
assurance that this expansion will be completed on time or that it will be
successful. Any failure to manage growth effectively could have a material
adverse effect on our results of operations and financial
condition.




- 21
-




We
depend on others to manufacture our products and any disruption in manufacturing
could have a material adverse effect on our business.




Our
products are manufactured by approximately 15 independent manufacturers. We do
not operate any production facilities. One manufacturer engaged by us, Yin Hu
Company (“Yin Hu”), formerly a related party to us but unaffiliated with us
since early 2007, currently produces approximately 40% of our annual
manufactured garments in terms of dollar amount.. The inability of a
manufacturer to ship orders of our products in a timely manner or to meet
our quality standards could cause us to miss our customers’ delivery
requirements for those items. As a result, cancellation of orders, refusal to
accept deliveries or a reduction in purchase prices could have a material
adverse effect on us.




We enter
into purchase order commitments each season specifying a time frame for
delivery, method of payment, design and quality specifications and other
standard industry provisions. We do not have long-term contracts with any
manufacturer. In addition, we compete with other companies for the production
capacity of independent manufacturers and import quota capacity. Some of these
competing companies have substantially greater brand recognition, financials,
and other resources than we do and thus may have an advantage in the
competition for production and import quota capacities. Although Yin Hu has
recently committed 90% of its capacities to the production of OMNIALUO brand
products, none of our manufacturers produces our products
exclusively.




We
require our independent manufacturers to operate in compliance with applicable
laws and regulations. While we do not control our manufacturers or their labor
practices, our internal and vendor operating guidelines promote compliance with
laws and our sourcing personnel periodically visits and monitors the operations
of our independent manufacturers. The violation of labor or other laws by one of
our independent manufacturers, or the divergence of an independent
manufacturer’s labor practices from those generally accepted as ethical, could
result in adverse publicity for us and could have a material adverse effect on
us.




We
may be unable to effectively manage our inventory.




We place
orders for our products with our manufacturers prior to the time we have
received all of our customers’ orders and maintain an inventory of certain
products that we anticipate will be in greater demand. There is no assurance,
however, that we will be able to sell the products we have ordered from
manufacturers or our existing inventory at a profit or at all. Inventory levels
in excess of customer demand may result in inventory write-downs and the sale of
excess inventory at discounted prices, which would have a material adverse
effect on us and our results of operations.




We
depend to some extent on a high volume of mall traffic and the availability of
suitable lease space.




Many of
our stores are located in shopping malls. Sales at these stores are derived, in
part, from the volume of traffic in those malls. Our stores benefit from the
ability of the mall’s “anchor” tenants, generally large department stores, and
other area attractions to generate consumer traffic in the vicinity of our
stores and the continuing popularity of malls as shopping destinations. Sales
volume and mall traffic may be adversely affected by economic downturns in
a particular area, competition from non-mall retailers and other malls where we
do not have stores and the closing of anchor department stores. In addition, a
decline in the desirability of the shopping environment in a particular mall, or
a decline in the popularity of mall shopping among our target consumers, would
adversely affect our business.




Part of
our future growth is significantly dependent on our ability to operate stores in
desirable locations with capital investment and lease costs that allow us to
earn a reasonable return. We cannot be sure as to when or whether such desirable
locations will become available at reasonable costs.




We
have closed a significant number of stores in 2009 and cannot be certain that we
will be able to execute our plan to open additional stores or that such store
openings will be successful.




Since our
formation in the third quarter of 2006, one of our growth strategies is to open
new stores, especially independent distributor stores and co-owned stores which
generally have higher margins than company-owned stores. As of November 12,
2008, we had 245 stores altogether. However, as a result of the global economic
recession and the presumed temporary but nonetheless marked decrease in Chinese
consumer spending, particularly in the fourth quarter 2008, we were forced to
close certain stores that did not make their pre-determined sales requirements.
As of December 31, 2009, we had 108 stores in total, which is still subject to
change based on prevailing market conditions. Nevertheless, we believe that
there has been indication that the deterioration of the Chinese consumer market
may have slowed down in recent months. If the market condition improves, we
expect that no more stores will be closed except those that need to be replaced
by new stores. Our goal is to have 150 stores in total by the end of
2010.




However,
successful implementation of our company’s growth strategy depends on a number
of factors including, but not limited to, favorable economic conditions,
obtaining desirable store locations, negotiating acceptable leases, completing
projects on budget, supplying proper levels of merchandise and the hiring and
training of store managers and sales associates. We cannot assure you that all
these factors would exist in our favor for us to be able to execute our plan to
open additional stores.




- 22
-




In
addition, new stores may place increased demands on our company’s operational,
managerial and administrative resources, which could cause our company to
operate less effectively. Furthermore, there is a possibility that new stores
that are opened in existing markets may have an adverse effect on future
sales of previously existing stores in such markets. In addition, our failure to
predict accurately the demographic or retail environment at any future store
location could have a material adverse effect on our business, financial
condition and results of operations.




Our
expansion into new markets could adversely affect our financial condition and
results of operations.




Some of
our new stores will be opened in areas of China in which we currently have few
or no stores. The expansion into new markets may present competitive,
merchandising and administrative challenges that are different from those
currently encountered in our existing markets. Any of these challenges could
adversely affect our business, financial condition and results of operations. To
the extent our new store openings are in existing markets, we may experience
reduced net sales volumes in existing stores in those markets.




We
depend upon the success of our advertising and marketing programs.




Our
business depends on high customer traffic in our stores and effective marketing.
We have many initiatives in this area, and we frequently change our advertising
and marketing programs. There can be no assurance as to our continued ability to
effectively execute our advertising and marketing programs, and any failure to
do so could have a material adverse effect on our business and results of
operations.




We
may face labor shortages or increased labor costs which could adversely affect
our growth and operating results.




Labor is
a significant component in the cost of operating our stores. If we face labor
shortages or increased labor costs because of increased competition for
employees, higher employee turnover rates, increases in wages or increases in
other employee benefits costs, our operating expenses could increase and our
growth could be adversely affected. Our success depends in part upon our ability
to attract, motivate and retain a sufficient number of qualified
employees.




We
rely on third parties to distribute our merchandise. If these third parties do
not adequately perform this function, our business would be
disrupted.




The
efficient operation of our business depends on our ability to ship merchandise
through third-party carriers directly to our stores. Due to our reliance on
these parties for our shipments, interruptions in the ability of our vendors to
ship our merchandise or the ability of carriers to fulfill the distribution of
merchandise to our stores could adversely affect our business, financial
condition and results of operations. An increase in fuel prices may also
increase our shipping costs, which could adversely affect our business,
financial condition and results of operations.




Risks
Related to Doing Business in China




Changes
in China’s political or economic situation could harm us and our operational
results.




We
conduct all of our operations and generate all our revenues in China.
Accordingly, our business, financial condition, results of operations and
prospects are affected significantly by economic, political and legal
developments in China. Economic reforms adopted by the Chinese government have
had a positive effect on the economic development of the country, but the
government could change these economic reforms or any of the legal systems at
any time. This could either benefit or damage our 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;




·
            Changes
      in the development, or rate of development, of the market-oriented sector
      of the economy;




·
            Changes
      in the rapid growth rate of the overall
economy;




·
            Balance
      of payments position;




- 23
-




·
            International
      trade restrictions; and




·
            International
      conflict.




The
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD, in many ways. As
a result of these differences, we may not develop in the same way or at the same
rate as might be expected if the Chinese economy were similar to those of the
OECD member countries.




Our
business is largely subject to the uncertain legal environment in China and our
investors’ legal protection could be limited.




The
Chinese legal system is a civil law system based on written statutes. Unlike
common law systems, it is a system in which precedents set in earlier legal
cases are not generally used. The overall effect of legislation enacted over the
past 20 years has been to enhance the protections afforded to foreign invested
enterprises in China. However, these laws, regulations and legal requirements
are relatively recent and are evolving rapidly, and their interpretation and
enforcement involve uncertainties. These uncertainties could limit the legal
protections available to foreign investors, such as the right of foreign
invested enterprises (of which we are one) to hold licenses and permits such as
requisite business licenses. In addition, all of our executive officers and all
of our directors are residents of China and not of the U.S., and substantially
all the assets of these persons are located outside the U.S. As a result, it
could be difficult for investors to effect service of process in the U.S., or to
enforce a judgment obtained in the U.S. against us or any of these
persons.




The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities.




China
only recently has permitted provincial and local economic autonomy and private
economic activities. The Chinese government has exercised and continues to
exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership. Our ability to operate in China may be
harmed by changes in its laws and regulations, including those relating to
taxation, import and export tariffs, environmental regulations, land use rights,
property and other matters. We believe that our operations in China are in
material compliance with all applicable legal and regulatory requirements.
However, the central or local governments of these jurisdictions may impose new,
stricter regulations or interpretations of existing regulations that would
require additional expenditures and efforts on our part to ensure our compliance
with such regulations or interpretations.




Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof, and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.




Future
inflation in China may inhibit our ability to conduct business profitably in
China.




In recent
years, the Chinese economy has experienced periods of rapid expansion and high
rates of inflation. During the past ten years, the rate of inflation in China
has been as high as 20.7% and as low as -2.2%. These factors have led to the
adoption by the Chinese government, from time to time, of various corrective
measures designed to restrict the availability of credit or regulate growth and
contain inflation. High inflation may in the future cause the Chinese government
to impose controls on credit and/or prices, or to take other action, which
could inhibit economic activity in China, and thereby harm the market for our
products.




Any
recurrence of severe acute respiratory syndrome, or SARS, or another widespread
public health problem, could harm our operations.




A renewed
outbreak of SARS or another widespread public health problem in China, where our
operations are conducted, could have a negative effect on our operations. Our
operations may be impacted by a number of health-related factors, including the
following:




·
            quarantines
      or closures of some of our offices which would severely disrupt our
      operations,




·
            the
      sickness or death of our key officers and employees,
  and




·
            a
      general slowdown in the Chinese
economy.




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




- 24
-




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




The
majority of our revenues are and will be settled in RMB and U.S. Dollars, and
any future restrictions on currency exchanges may limit our ability to use
revenue generated in RMB to fund any future business activities outside China or
to make dividend or other payments in U.S. dollars. Although the Chinese
government introduced regulations in 1996 to allow greater convertibility of the
RMB for current account transactions, significant restrictions still remain,
including primarily the restriction that foreign-invested enterprises may only
buy, sell or remit foreign currencies after providing valid commercial
documents, at those banks in China authorized to conduct foreign exchange
business. In addition, conversion of RMB for capital account items, including
direct investment and loans, is subject to governmental approval in China,
and companies are required to open and maintain separate foreign exchange
accounts for capital account items. We cannot be certain that the Chinese
regulatory authorities will not impose more stringent restrictions on the
convertibility of the RMB.




Failure
to comply with PRC regulations relating to the establishment of offshore special
purpose companies by PRC residents may subject our PRC resident stockholders to
personal liability, limit our ability to acquire PRC companies or to inject
capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to
distribute profits to us or otherwise materially adversely affect
us.




In
October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued
the Notice on Relevant Issues in the Foreign Exchange Control over Financing and
Return Investment Through Special Purpose Companies by Residents Inside China,
generally referred to as Circular 75, which required PRC residents to register
with the competent local SAFE branch before establishing or acquiring control
over an offshore special purpose company, or SPV, for the purpose of engaging in
an equity financing outside China on the strength of domestic PRC assets
originally held by those residents. Amendments to registrations made under
Circular 75 are required in connection with any increase or decrease of capital,
transfer of shares, mergers and acquisitions, equity investment or creation of
any security interest in any assets located in China to guarantee offshore
obligations. In the case of an SPV which was established, and which acquired a
related domestic company or assets, before the implementation date of Circular
75, a retroactive SAFE registration was required to have been completed before
March 31, 2006. Failure to comply with the requirements of Circular 75, as
applied by SAFE, may result in fines and other penalties under PRC laws for
evasion of applicable foreign exchange restrictions. Any such failure could also
result in the SPV’s affiliates being impeded or prevented from distributing
their profits and the proceeds from any reduction in capital, share transfer or
liquidation to the SPV, or from engaging in other transfers of funds into or out
of China.





We
believe our stockholders who are PRC residents as defined in Circular 75 have
registered with the relevant branch of SAFE, as currently required, in
connection with their equity interests in us and our acquisitions of equity
interests in our PRC subsidiary. However, we cannot provide any assurances
that their existing registrations have fully complied with, and they have made
all necessary amendments to their registration to fully comply with, all
applicable registrations or approvals required by Circular 75. Moreover, because
of uncertainty over how Circular 75 will be interpreted and implemented, and how
or whether SAFE will apply it to us, we cannot predict how it will affect our
business operations or future strategies. For example, our present and
prospective PRC subsidiaries’ ability to conduct foreign exchange
activities, such as the remittance of dividends and foreign currency-denominated
borrowings, may be subject to compliance with Circular 75 by our PRC resident
beneficial holders. In addition, such PRC residents may not always be able to
complete the necessary registration procedures required by Circular 75. We also
have little control over either our present or prospective direct or indirect
stockholders or the outcome of such registration procedures. A failure by our
PRC resident beneficial holders or future PRC resident stockholders to comply
with Circular 75, if SAFE requires it, could subject these PRC resident
beneficial holders to fines or legal sanctions, restrict our overseas or
cross-border investment activities, limit our subsidiaries’ ability to make
distributions or pay dividends or affect our ownership structure, which could
adversely affect our business and prospects.




If
the China Securities Regulatory Commission, or CSRC, or another PRC regulatory
agency, determines that CSRC approval was required in connection with our recent
private placement, we may become subject to penalties.




On August
8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the
Regulation on Mergers and Acquisitions of Domestic Companies by Foreign
Investors, which became effective on September 8, 2006. This new regulation,
among other things, has certain provisions that require SPVs formed for the
purpose of acquiring PRC domestic companies and controlled by PRC individuals,
to obtain the approval of the CSRC prior to publicly listing their
securities on an overseas stock market. In our case, theformation in September
2006 by Omnia BVI of Oriental Fashion, and Oriental Fashion's subsequent,
limited acquisition of discrete assets from Oumeng, should not be seen as
an acquisition of a PRC domestic company as contemplated by the new regulation
and we therefore have not applied to the CSRC for approval under this
regulation. Nonetheless, if the CSRC or another PRC regulatory agency
subsequently determines that the CSRC’s approval was required for our recent
private placement or quotation on OTCBB, we may face sanctions by the CSRC or
another PRC regulatory agency. If this happens, these regulatory agencies may
impose fines and penalties on our operations in the PRC, limit our operating
privileges in the PRC, delay or restrict the repatriation of the proceeds from
that private placement into the PRC, restrict or prohibit payment or remittance
of dividends to us or take other actions that could have a material adverse
effect on our business, financial condition, results of operations, reputation
and prospects, as well as the trading price of our shares.




- 25
-




Recent
Chinese merger and acquisition regulations may limit our ability as to acquire
assets and equity interests of Chinese companies, which could hinder our ability
to expand in China and adversely affect our long-term
profitability.




The new
regulations which became effective on September 8, 2006 cover all acquisitions
of assets and equity interests of Chinese companies by foreign investors,
including overseas companies under the de facto control of Chinese persons or
entities. Depending on the structure of the transaction, these regulations will
require the target Chinese companies to make a series of applications to the
aforementioned agencies, some of which must be made within strict time limits
and depend on approvals from one or the other of the aforementioned agencies. If
obtained, approvals will have expiration dates by which a transaction must be
completed. It is expected that compliance with the regulations will be more time
consuming than in the past, will be more costly and will permit the government
much more extensive scrutiny and control over the terms of the transaction.
Therefore acquisitions in China may not be able to be completed because the
terms of the transaction may not satisfy aspects of the approval process and may
not be completed, even if approved, if they are not consummated within the time
permitted by the approvals granted. This may restrict our ability to implement
any acquisition we may decide to pursue and adversely affect our business and
prospects.




New
corporate income tax law could adversely affect our business and our net
income.




On March
16, 2007, the National People's Congress passed a new corporate income tax law,
which became effective on January 1, 2008. This new corporate income tax unifies
the corporate income tax rate, cost deductions and tax incentive policies for
both domestic and foreign-invested enterprises in China. According to the new
corporate income tax law, the applicable corporate income tax rate of Oriental
Fashion and any other future Chinese subsidiaries will incrementally increase to
25% over a five-year period. According to the Circular on the Implementation of
Preferential Policies concerning the EIT Transition issued by the State Council
on December 26, 2007, the enterprise income tax rate for companies
established in Shenzhen shall be 18% in 2008, 20% in 2009, 22% in 2010, 24%
in 2011 and 25% from 2012 onwards. By virtue of the New CIT Law and the
foregoing tax reduction, Oriental Fashion was subject to EIT rate of 10% during
2009.  During 2008, Oriental Fashion was subject to EIT rate of 18%,
with full tax exemption.





The
discontinuation of any special or preferential tax treatment or other incentives
could adversely affect our business and our net income.




Under
the New EIT Law, we may be classified as a “resident enterprise” of China. Such
classification will likely result in unfavorable tax consequences to us and our
non-PRC shareholders.
  China
passed a new Enterprise Income Tax Law, or the New EIT Law, and its implementing
rules, both of which became effective on January 1, 2008. Under the New EIT Law,
an enterprise established outside of China with “de facto management bodies”
within China is considered a “resident enterprise,” meaning that it can be
treated in a manner similar to a Chinese enterprise for enterprise income tax
purposes. The implementing rules of the New EIT Law define de facto management
as “substantial and overall management and control over the production and
operations, personnel, accounting, and properties” of the
enterprise.
  On April
22, 2009, the State Administration of Taxation issued the Notice Concerning
Relevant Issues Regarding Cognizance of Chinese Investment Controlled
Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria
of de facto Management Bodies, or the Notice, further interpreting the
application of the New EIT Law and its implementation non-Chinese enterprise or
group controlled offshore entities. Pursuant to the Notice, an enterprise
incorporated in an offshore jurisdiction and controlled by a Chinese enterprise
or group will be classified as a “non-domestically incorporated resident
enterprise” if (i) its senior management in charge of daily operation reside or
perform their duties mainly in China; (ii) its financial or personnel decisions
are made or approved by bodies or persons in China; (iii) its substantial
properties, accounting books, corporate chops, board and shareholder minutes are
kept in China; and (iv) 1⁄2 directors with voting rights or senior management
often resident in China. Such resident enterprise would be subject to an
enterprise income tax rate of 25% on its worldwide income and must pay a
withholding tax at a rate of 10% when paying dividends to its non-PRC
shareholders. However, it remains unclear as to whether the Notice is applicable
to an offshore enterprise incorporated by a Chinese natural person. Nor are
detailed measures on imposition of tax from non-domestically incorporated
resident enterprises are available. Therefore, it is unclear how tax authorities
will determine tax residency based on the facts of each case.
  However,
as our case substantially meets the foregoing criteria, there is a likelihood
that we are deemed to be a resident enterprise by Chinese tax
authorities. If the PRC tax authorities determine that we are a “resident
enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC
tax consequences could follow. First, we may be subject to the enterprise income
tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise
income tax reporting obligations. In our case, this would mean that income such
as interest on financing proceeds and non-China source income would be subject
to PRC enterprise income tax at a rate of 25%. Second, although under the New
EIT Law and its implementing rules dividends paid to us from our PRC
subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such
dividends will not be subject to a 10% withholding tax, as the PRC foreign
exchange control authorities, which enforce the withholding tax, have not yet
issued guidance with respect to the processing of outbound remittances to
entities that are treated as resident enterprises for PRC enterprise income tax
purposes. Finally, it is possible that future guidance issued with respect to
the new “resident enterprise” classification could result in a situation in
which a 10% withholding tax is imposed on dividends we pay to our non-PRC
shareholders and with respect to gains derived by our non-PRC shareholders from
transferring our shares. We are actively monitoring the possibility of “resident
enterprise” treatment for the 2008 tax year and are evaluating appropriate
organizational changes to avoid this treatment, to the extent
possible.
  If we
were treated as a “resident enterprise” by PRC tax authorities, we would be
subject to taxation in both the U.S. and China, and our PRC tax may not be
creditable against our U.S. tax.




The
value of our securities will be affected by the foreign exchange rate between
U.S. dollars and RMB.




The value
of our common stock will be affected by the foreign exchange rate between U.S.
dollars and RMB, 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. dollars into RMB for our operational needs and should the RMB
appreciate against the U.S. dollar at that time, our financial position, the
business of the company, and the price of our common stock may be harmed.
Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of
declaring dividends on our common stock or for other business purposes and the
U.S. dollar appreciates against the RMB, the U.S. dollar equivalent of our
earnings from our subsidiaries in China would be reduced.




Risks
Related to Our Common Stock




The
current market price of the common stock may not be indicative of future market
prices.




We
anticipate that the market price of our shares will fluctuate significantly in
response to numerous factors, many of which are beyond our control, including,
without limitation:




·
            the
      announcement of new products or product enhancements by our
      competitors;





·
            quarterly
      variations in our and our competitors’ results of
    operations;





·
            changes
      in financial estimates or recommendations by securities
      analysts;





·
            speculation
      about our business in the press or investment
  community;





·
            expiration
      of lock-up agreements; and





·
            general
      market conditions and other factors, including factors wholly unrelated to
      our own operations or performance.





There
is not now and there may never be an active liquid market for our common
stock.




We are
providing no assurances of any kind or nature whatsoever that an active liquid
market for our common stock will ever develop, on the OTCBB or elsewhere.
Investors should understand that there may be no alternative exit strategy for
them to recover or liquidate their investments in our common stock. Accordingly,
investors must be prepared to bear the entire economic risk of an investment in
the common stock for an indefinite period of time. If our revenues do not grow
or grow more slowly than we anticipate, if operating or capital expenditures
exceed our expectations and cannot be adjusted accordingly, or if some other
event adversely affects us, the market price of our common stock will
decline.




- 26
-




We
are subject to the reporting requirements of the United States securities laws,
which will require expenditure of capital and other resources.




We are a
public reporting company subject to the information and reporting requirements
of the Securities Exchange Act of 1934 and other federal securities laws,
including, without limitation, compliance with the Sarbanes-Oxley Act
(“Sarbanes”). The costs of preparing and filing annual and quarterly reports,
proxy statements and other information with the SEC and furnishing audited
reports to stockholders will cause our expenses to be substantially higher than
they would otherwise be if we were privately-held. It will be difficult, costly,
and time-consuming for us to develop and implement internal controls and
reporting procedures required by Sarbanes, and we will require additional staff
and third-party assistance to develop and implement appropriate internal
controls and procedures. If we fail to or are unable to comply
with Sarbanes, we will not be able to obtain independent accountant
certifications that the Sarbanes requires publicly-traded companies to
obtain.




Investor
confidence and market price of our shares may be adversely impacted if we or our
independent registered public accountants are unable to attest to the operating
effectiveness of our internal controls as of December 31, 2009, as required by
Section 404 of the U.S. Sarbanes-Oxley Act of 2002.




The SEC,
as directed by Section 404 of Sarbanes, adopted rules requiring public
companies, including us, to include a report of management of their internal
control structure and procedures for financial reporting in their annual reports
on Form 10-K that contains an assessment by management of the effectiveness of
their internal controls over financial reporting. We are subject to this
requirement commencing with our fiscal year ended December 31, 2010 and a report
of our management is included in this Annual Report on Form 10-K. In addition,
independent registered public accountants of these public companies must attest
to and report on the operating effectiveness of their internal
controls. However, this annual report does not include an attestation
report because under current law, we will not be subject to these requirements
until our annual report for the fiscal year ending December 31, 2009. Our
management may conclude that our internal controls over financial reporting are
not effective. Moreover, even if our management concludes otherwise, if our
independent registered public accountants are not satisfied with our internal
control structure and procedures, the level at which our internal controls are
documented, designed, operated or reviewed, or if the independent registered
public accountants interpret the requirements, rules or regulations differently
from us, they may decline to attest to our management’s assessment or may issue
a report that is qualified. Any of these possible outcomes could result in an
adverse reaction in the financial marketplace due to a loss of investor
confidence in the reliability of our financial statements, which could
negatively impact the market price of our shares.




We
may not be able to attract the attention of major brokerage firms or securities
analysts.




Security
analysts and major brokerage houses may not provide coverage of us, given that
our OTC Bulletin Board status provides little or no incentive to recommend the
purchase of our common stock. We may also not be able to attract any brokerage
houses to conduct secondary offerings with respect to our
securities.




We
are making no representations and are providing no assurances that our common
stock will become listed on NASDAQ, the American Stock Exchange or any other
securities exchange.




We
anticipate that we may seek to list our common stock on NASDAQ or the American
Stock Exchange. We are making no representations nor providing any assurances
that we will be able to meet the initial listing standards of either of those or
any other stock exchange. Therefore, investors may find it difficult to
dispose of shares or to obtain accurate quotations as to the market value of the
common stock. In addition, we will be subject to an SEC rule (Rule 15c2-11) that
imposes various requirements on broker-dealers who sell securities governed by
the rule to persons other than established customers and accredited investors.
The requirement that broker-dealers comply with this rule will deter
broker-dealers from recommending or selling our Company’s common stock, thus
further adversely affecting the liquidity and share price of the common stock,
as well as our ability to raise additional capital.




- 27
-




We
have never paid dividends and have no plans to pay dividends at any time in the
near or distant future.




We have
never paid dividends on our capital stock, and we do not anticipate paying any
dividends for the foreseeable or distant future. Our present business plan does
not include, for the foreseeable future and beyond, any payments of dividends to
stockholders. Stockholders’ sole strategy for any return on their
investments must therefore be the potential for the increase in the value of
their stock and the possibility of liquidating their stock positions at a
gain.




You
may experience immediate and substantial dilution if we obtain additional
financing.




If we
obtain additional financing, that financing may have a dilutive effect on the
holders of our securities.




The
Company adopted in the first quarter of 2008 an employee equity incentive plan
under which the Company’s officers, directors, consultants, and employees will
be eligible to receive, in relevant part, either securities or stock options
exercisable for the Company’s securities at exercise prices that must generally
be no less than the then prevailing fair market value of the Company’s common
stock on the date of grant. The Company has reserved five million (5,000,000)
shares of common stock for issuance under this plan.  Any issuance
under this equity incentive plan will have dilutive effect on the holders of our
securities.




We
will need to raise additional capital in order to achieve our long-term goals,
but as yet have not identified any sources for such capital.




We have
not yet identified sources for additional financing, and we may be unable to
raise sufficient funds on terms that are acceptable to us, or at all. If those
funds are not raised, the development of our products would be delayed, and the
scope of our operations would be substantially curtailed or completely
eliminated.




The
existence of the Warrants may adversely affect the market price of our shares,
and any future Warrant exercises may result in further dilution.




We
currently have issued outstanding warrants to purchase up to 5,704,752 shares of
our common stock, of which (i) warrants for up to 5,412,000 shares may be
exercised at $1.5625 per share at any time or from time to time until October 9,
2012, including warrants for 492,000 shares which may be exercised on a cashless
exercise basis, and (ii) warrants for up to 292,752 shares may be exercised at
$1.25 per share at any time or from time to time for a two-year period
commencing December 17, 2007. The total number of shares issuable upon exercise
of warrants is relatively high compared to the number of shares of our common
stock issued and outstanding. Therefore, the existence of these warrants, and
the continuing likelihood that they may exercised and the shares acquired upon
exercise sold from time to time in the public trading market for our common
stock, may have an adverse effect on the market price of our common
stock.




Any
of the above-identified risks, even if borne out only partially and not fully,
will adversely affect our business, our financial condition and our operating
results. If any of the events we have identified occur, in whole or in part, the
value of our common stock will likely decline, and an investor will lose all or
part of the funds paid to acquire our common stock with no opportunity to regain
any portion of those funds in return.





ITEM
2. DESCRIPTION OF PROPERTY




Properties
and Leases




As of
December 31, 2009, we have the following leased properties:




(1) we
operate our executive offices and showrooms in a leased location at No. E6 101#
Industrial District, Huaqiao City, Nanshan District, Shenzhen, China, with
approximately 11,132 square feet of space, under a lease expiring in 2011. The
expected payments under the lease are $7,893 per month from January 1, 2007 to
September 15, 2008, $8,287 per month from September 16, 2008 to September
15, 2009, $8,701 per month from September 16, 2009 to September 15, 2010, and
$9,137 per month from September 16, 2010 to September 15, 2011.





(2) we
operate another office and showroom in another leased location at No.6 6101#,
1718 Tianshan Road, Shishang Yuan, Shanghai, China, with approximately 2,960
square feet of space, under a lease expiring on October 31, 2013. The payments
under the lease are $30,377 per annum from 2005 to 2008. From 2009 to 2013, the
payment for each following year will increase by 5% based on the rent for the
immediately preceding year.





(3) We
operate our warehouse in a leased location at the 1st floor of No. 525,
Bagualing Industrial District, Bagua Er Road, Futian District, Shenzhen, China,
with approximately 1,399 square feet of space, under a lease expiring on
December 31, 2010. The payments under the lease are $1,931 per
month.




- 28
-




(4) We
rent an area in the Helen Shopping Mall located on the 2nd floor of sister building of
No. 3 and No. 4 of Baolicheng Garden, Nanhai Avenue, Nanshan District, Shenzhen,
China, with approximately 1,722 square feet of space, under a lease expiring on
July 14, 2011. The payments under the lease are $4,958 per month. From 2007 to
2011, and from 2009 to 2011, respectively, the payment for each following year
will increase by 5% based on the rent for the immediately preceding
year.




Total
rental expenses under operating leases of office and showroom space were
$452,256 for the period ended December 31, 2009, and $462,658 for the period
ended December 31, 2008.




We also
operate 27 company-owned stores and, jointly with third parties, 8 co-owned
stores in leased locations in various geographic areas in China.




We
believe that our existing facilities are adequate for our current needs and that
additional space will be available as needed.




We
maintain reasonable and customary property and disaster insurance coverage for
our properties.




ITEM
3. LEGAL PROCEEDINGS




From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties and an adverse result in these or other matters may arise
from time to time that may harm our business. We are currently not aware of
any such legal proceedings or claims that we believe will have a material
adverse affect on our business, financial condition or operating
results.




ITEM
4. RESERVED






PART
II




ITEM
      5.
            MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
      ISSUER PURCHASES OF EQUITY
SECURITIES.




Market
Information




Our
common stock is quoted under the symbol “OLOU.OB” on the Electronic Bulletin
Board maintained by the National Association of Securities Dealers, Inc., but
has not been traded in the Over-The- Counter market except on a limited and
sporadic basis. The CUSIP number is 68215N 107.




The
following table sets forth, for the periods indicated, the high and low closing
prices of our common stock. These prices reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent actual
transactions. Prior to January  2008, our stock was not trade, quoted
or listed. The following table reflects this absence of trading and the prices
on recorded on low trading volumes.








Quarter Ended
                      
                      High *
                      
                      
                      Low *03/31/2008
                      
                      $
                      2.15
                      
                      
                      $
                      1.1006/30/2008
                      
                      $
                      1.53
                      
                      
                      $
                      1.1009/30/2008
                      
                      $
                      1.40
                      
                      
                      $
                      0.8512/31/2008
                      
                      $
                      1.25
                      
                      
                      $
                      0.3603/31/2009
                      
                      $
                      0.34
                      
                      
                      $
                      0.3306/30/2009
                      
                      $
                      0.21
                      
                      
                      $
                      0.2109/30/2009
                      
                      $
                      0.20
                      
                      
                      $
                      0.2012/31/2009
                      
                      $
                      0.17
                      
                      
                      $
                      0.14




*
              The
      above table sets forth the range of high and low closing prices per share
      of our common stock as reported by  www.quotemedia.com for the
      period indicated.




Approximate
Number of Holders of Our Common Stock




On March
25, 2009, there were approximately 92 stockholders of record of our common
stock. The number of record holders does not include persons who held our common
stock in nominee or “street name” accounts through brokers.




- 29
-




Dividend
Policy




The
holders of shares of our common stock are entitled to dividends out of funds
legally available when and as declared by our board of directors. We have never
declared or paid cash dividends. Our board of directors does not anticipate
declaring a dividend in the foreseeable future. Should we decide in
the future to pay dividends, as a holding company, our ability to do so and
meet other obligations depends upon the receipt of dividends or other payments
from our operating subsidiaries and other holdings and investments. In addition,
our operating subsidiary, Oriental Fashion, from time to time may be subject to
restrictions on its ability to make distributions to us, including as a result
of restrictive covenants in loan agreements, restrictions on the conversion of
local currency into U.S. dollars or other hard currency and other
regulatory restrictions. In the event of our liquidation, dissolution or winding
up, holders of our common stock are entitled to receive, ratably, the
net assets available to stockholders after payment of all
creditors.




Securities
Authorized for Issuance under Equity Compensation Plans




The
Company adopted in the first quarter of 2008 an employee equity incentive plan
under which the Company’s officers, directors, consultants, and employees will
be eligible to receive, in relevant part, either securities or stock options
exercisable for the Company’s securities at exercise prices that must generally
be no less than the then prevailing fair market value of the Company’s
common stock on the date of grant. The Company has reserved five million
(5,000,000) shares of common stock for issuance under this plan.




Purchase
of Our Equity Securities
  No
repurchases of our common stock were made during the fiscal year
2009




ITEM
7. MANAGEMENT'S
DISCUSSION AND ANALYSIS


MANAGEMENT'S
DISCUSSION AND ANALYSIS
  MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
  The
following selected consolidated statements of operations and comprehensive
(loss) income data for the years ended December 31, 2008 and 2009, and the
consolidated balance sheet data as of December 31, 2008 and 2009 are derived
from the audited consolidated financial statements of the Company included in
this Annual Report. The data set forth below should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements and related notes
appearing elsewhere in this report. Our historical results are not necessarily
indicative of our results for any future periods.
 (All
amounts, other than per share data, in U.S. dollars)
 Statement
      of OperationsYear
      Ended
                      December
      2009
                    
                    
                    Year
      Ended
                      December
      2008Revenue
                    
                    $
                    9,349,878
                    
                    
                    $
                    11,902,404Gross
      Profit
                    
                    
                    574,910
                    
                    
                    
                    7,064,118Operating
      expenses
                    
                    
                    6,368,933
                    
                    
                    
                    5,646,050Total
      segment profit(1)
                    
                    
                    (4,946,980
                    
                    
                    
                    2,553,925(Loss)
      income from operations
                    
                    
                    (5,794,023)
                    
                    
                    
                    1,418,068Income
      taxes
                    
                    
                    —
                    
                    
                    
                    —Net
      (loss) income
                    
                    
                    (5,303,436)
                    
                    
                    
                    1,038,676Basic
      and Diluted (Loss) Earnings Per Share (2)
                    
                    $
                    (0.23)
                    
                    
                    $
                    0.05
  (1)
                    Oriental
      Fashion is the Company’s only operating subsidiary and is engaged in
      woman apparel design, manufacturing and distribution in China.
                      
                      For
      2009, this number is net income before deducting general and
      administrative expenses for $418,395 and Stock-based compensation for
      $304,642.(2)
                    Adjusted
      to reflect the recapitalization of the Company following the consummation
      of the share exchange with Omnia
BVI.
 
 - 30
-
 BALANCE
SHEET DATA
  At
                      December
      31,
                      2009
                    
                    
                    At
                      December
      31,
                      2008Working
      capital
                    
                    $
                    4,487,800
                    
                    
                    $
                    9,221,406Current
      assets
                    
                    
                    8,363,489
                    
                    
                    
                    14,199,593Total
      assets
                    
                    
                    9,179,778
                    
                    
                    
                    15,283,882Current
      liabilities
                    
                    
                    3,875,689
                    
                    
                    
                    4,978,187Total
      liabilities
                    
                    
                    3,875,689
                    
                    
                    
                    4,978,187Stockholders’
      equity
                    
                    
                    5,304,089
                    
                    
                    
                    10,305,695
  The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the notes
to those statements included elsewhere in this Annual Report. In addition to the
historical consolidated financial information, the following discussion and
analysis contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth under “Risk Factors” and elsewhere in this Annual
Report.
 
 Overview
 
 OmniaLuo,
Inc., the name of which was changed from Wentworth II, Inc. on November 16,
2007, is a holding company that conducts all of its business operations through
its direct wholly-owned subsidiary, Omnia BVI, established in August 2006, and
Omnia BVI’s Chinese subsidiary, Oriental Fashion, established in September 2006.
Oriental Fashion designs, develops, markets and distributes women’s apparel
under the brand names of OMNIALO and OMNIALUO through its network of retail
stores across the People’s Republic of China (“PRC” or “China”), which consisted
of 84 stores as of December 31, 2006, 103 stores as of March 31, 2007, 135
stores as of June 30, 2007, 154 stores as of September 30, 2007, 184 stores as
of December 31, 2007, 208 stores as of December 31, 2008, and  108 stores
as of December 31, 2009 in 29 provinces throughout China. Until our
acquisition of Omnia BVI on October 9, 2007, our operations were very
limited.
  Our
Background and History
 Our
corporate name changed to OmniaLuo, Inc. in November 2007. We were originally
incorporated in the State of Delaware on March 7, 2001 under the name Wentworth
II, Inc. We were formed as a vehicle to pursue a business combination. For
information regarding Wentworth II, Inc.’s corporate financing transactions
prior to our recent reverse acquisition with Omnia BVI, see Part II of our
registration statement on Form SB-2 filed with the Securities and Exchange
Commission on December 17, 2007.
 Background
and History of Omnia BVI and Oriental Fashion
 Development
of the OMNIALUO Brands
 In 1996,
Ms. Zheng Luo, our chief executive officer and chief designer, the founder and
principal shareholder of Omnia BVI prior to our reverse acquisition with Omnia
BVI, and currently our largest individual shareholder, created the OMNIALO brand
and founded Green’s Apparel Co., Ltd. (“Green’s Apparel”) in Shenzhen, China, in
which she owned a 95% equity interest. Green’s Apparel manufactured women’s
clothing.
 
 - 31
-
 In 1997
the trademark OMNIALO trademark was registered with the Chinese National
Trademark Bureau in both Chinese and English. The registrant and initial owner
of such trademark was Green’s Apparel.
 In March
2003, Shenzhen Oumeng Industrial Co., Ltd. (“Oumeng”) was established. Ms. Zheng
Luo was the CEO and 50% equity and controlling owner of Oumeng. Also in March
2003, Oumeng purchased inventory from Green’s Apparel, consisting of women’s
apparel. Green’s Apparel has not conducted any business after the transfer of
inventory to Oumeng in March 2003, and upon such transfer, Oumeng entered into
all contracts with Green’s Apparel’s existing suppliers, manufacturers and
distributors, and acquired the OMNIALO trademark in August 2003. In addition to
marketing and selling products under the OMNIALUO name, Oumeng also engaged in
various other businesses such as other apparel, electronics, kitchenware and
other hardware. Oumeng also managed C-Luo Intuition, a luxury made-to-order
evening dress brand, which brand was previous owned by Ms. Zheng Luo prior to
the sale of such brand to an independent third party. By the end of August 2006,
OMNIALUO brand apparel, under the management of Oumeng, was being distributed
through 100 retail stores in China.
 Ms. Zheng
Luo personally applied for the registration of the trademark OMNIALUO in March
2005 pending the approval of the Trademark Office.
 Formation
of Omnia BVI and Oriental Fashion
 In early
2006 Ms. Zheng Luo determined that the growth and development of the OMNIALUO
brands and its associated women’s apparel products could best be achieved by the
formation of a new company which would focus on the design, marketing,
distribution and sale of women’s business casual wear, without the potential
distraction and costs of operating other businesses. Therefore: (i) in August
2006, Ms. Zheng Luo, together with several other individual shareholders, formed
Omnia BVI; and (ii) in September 2006, Oriental Fashion was incorporated in
Shenzhen, China, with ownership held 100% by Omnia BVI, all rights in the
OMNIALO trademark were transferred from Oumeng to Ms. Zheng Luo, and Ms. Zheng
Luo resigned from her CEO position at Oumeng to devote her full-time effort to
Oriental Fashion and Omnia BVI. In April 2007 Ms. Zheng Luo and her sister Ms.
Xiaoyin Luo transferred their ownership of Oumeng to their mother, Ms. Yuhua
Sun, and to Ms. Yujuan Sun, an unrelated party.
 In
October 2006: (i) Ms. Zheng Luo licensed the trademark OMNIALO to Oriental
Fashion at nominal cost and executed an agreement assigning the registered
OMNIALO trademark to Oriental Fashion, and Ms. Zheng Luo and Oriental Fashion
commenced procedures to have the OMNIALO trademark assignments accepted and
officially recorded in the Trademark Office; and (ii) Ms. Zheng Luo licensed the
trademark OMNIALUO to Oriental Fashion at nominal cost and executed an agreement
assigning the registered pending application to register the OMNIALO trademark
to Oriental Fashion; Ms. Zheng Luo and Oriental Fashion commenced procedures to
have the OMNIALUO trademark assignments accepted and officially recorded in the
Chinese National Trademark Bureau once registration of the OMNIALUO trademarks
is approved by the Trademark Office.
 Financing
of Omnia BVI
 Pursuant
to preferred stock purchase and shareholders agreements dated as of December 17,
2006 and December 20, 2006, Omnia BVI had issued an aggregate of 2,147
convertible preferred shares (the “BVI Preferred Shares”) and detachable
warrants to purchase up to $365,940 in 1,074 ordinary shares, based on the
offering price in the next financing of Omnia BVI (the “BVI Warrants”), to a
private venture capital investment fund (the “Lead Investor”) and several
individual investors for a total cash investment of $729,980.
 Each BVI
Preferred Share was convertible into Omnia BVI’s ordinary shares at any time,
initially on a one-for-one basis, subject to “full-ratchet” adjustment for
certain issuances of shares less than the applicable conversion price, and to
adjustment for share splits, share dividends, subdivisions, or combinations. The
conversion price of BVI Preferred Shares held by the Lead Investor was also
subject to (i) weighted average adjustment for issuances reflecting a
pre-financing Omnia BVI valuation of less than $28 million and to (ii)
adjustment to yield an internal rate of return of 51% if the Qualified Listing
and Qualified Offering (each as defined below) occurred more than 12 months
after a “First Round Financing” and the then prevailing conversion price would
not otherwise provide such internal rate of return.
 
 - 32
-
 Each BVI
Preferred Share was to be automatically converted upon the later to occur of a
“Qualified Listing” and “Qualified Offering.” A “Qualified Listing” was defined
to mean (a) a firmly committed underwritten public offering of Omnia BVI’s
shares registered under the U.S. Securities Act, or (b) a firm commitment of a
registered market-maker who shall undertake responsibilities for the
quotation of Omnia BVI’s shares on the OTC Bulletin Board in the U.S. and/or
other comparable over-the-counter market overseas, in both cases, representing
at least 10% of Omnia BVI (post-offering) at an implied pre-offering valuation
of at least $28,000,000. A “Qualified Offering” was defined as a public or
private offering of Omnia BVI raising at least $3,000,000 following the First
Round Financing. “First Round Financing” meant the completion of issuance of up
to 4,413 BVI Preferred Shares pursuant to the agreements signed with investors
not later than six weeks after the date of the December 2006 agreements based on
a pre-money valuation of $17 million. The issuance of the BVI Preferred Shares
constituted a First Round Financing., and the 2007 Private Placement constituted
a Qualified Offering.
 The BVI
Preferred Shares had certain preferential rights upon liquidation of Omnia BVI
and certain preferential rights to dividends. The BVI Preferred Shares held by
the Lead Investor also had certain redemption rights.
 Each of
the BVI Warrants issued in connection with the issuance of BVI Preferred Shares
was exercisable, at any time, commencing with the later to occur of a Qualified
Listing and Qualified Offering, for a two-year period, in cash for the purchase
of Omnia BVI’s ordinary shares, at a per share exercise price equal to the per
share price paid pursuant to the next equity financing round of Omnia BVI
following completion of the First Round Financing. The exercise price of the BVI
Warrants was subject to adjustment for share subdivisions, share combinations or
mergers or consolidations.
 Omnia BVI
reimbursed the Lead Investor for certain expenses incurred by them, in addition
to its own costs in connection with this placement.
 By
agreements dated as of October 9, 2007 (a) among Omnia BVI, the Lead Investor,
Ms. Zheng Luo and another of our shareholders, and (b) among Omnia BVI, Ms.
Zheng Luo and each of the other holders of BVI Preferred Shares and Warrants,
effective upon the closing of the reverse acquisition:
 
 (1)
                    each
      BVI Preferred Share was converted into a specified number of ordinary
      shares of Omnia BVI, with each such ordinary share of Omnia BVI then being
      exchanged for 319.8294 shares of our common stock;
  and
 (2)
                    each
      BVI Warrant was exchanged for warrants to purchase our common stock,
      exercisable at any time during, for a two-year period, commencing on
      December 17, 2007, at a per share price of
  $1.25;
 (3)
                    the
      former holders of BVI Preferred Shares and BVI Warrants were granted
      certain rights to liquidated damages payments from Omnia BVI, if Omnia BVI
      (or, following the reverse acquisition, we) failed to have a registration
      statement covering the resale of their shares of our common stock
      effective within 180 days of the closing of the reverse acquisition, or if
      Omnia BVI (or, following the reverse acquisition, we) failed to meet our
      reporting obligations under the federal securities laws and as a
      consequence thereof the holders were unable to utilize SEC Rule 144 for
      resales of their shares;
 (4)
                    the
      reverse acquisition of the Company with Omnia BVI and the 2007 Private
      Placement were collectively deemed to constitute both a Qualified Offering
      and a Qualified Listing, notwithstanding the absence of a public market
      price quotation for our common stock;
and
 (5)
                    the
      Lead Investor, in consideration of its relinquishing certain rights, (a)
      retains certain put rights with respect to its shares as against Ms. Zheng
      Luo (but not as against us) if we do not obtain an OTCBB quotation or the
      Lead Investor’s shares are not registered for resale or otherwise eligible
      to be publicly resold by July 1, 2008 (update based on post-July 1
      activity), (b) received an additional 149,884 shares of our common stock
      from Ms. Zheng Luo and one or more other former Omnia BVI shareholders as
      part of the reverse acquisition, and (c) may be entitled to additional
      shares of our common stock if the make good or anti-dilution provisions
      applicable to investors in the 2007 Private Placement result in additional
      shares being transferred or issued to those
  investors.
  The
exercise price of the warrants issued in exchange for the BVI Warrants is
subject to adjustment for share subdivisions, share combinations or mergers or
consolidations.
 - 33
-
 Reverse
Acquisition with Omnia BVI and Related Equity Financing
 On
October 9, 2007, we entered into a share exchange agreement with Omnia BVI, the
shareholders of Omnia BVI and certain of our principal shareholders. Pursuant to
the share exchange agreement, we agreed, among other things, to issue to the
shareholders of Omnia BVI 16,800,000 shares of our common stock in exchange for
all of the issued and outstanding shares of Omnia BVI, which became our
wholly-owned subsidiary.
 On
October 9, 2007, we completed the reverse acquisition transaction with Omnia BVI
by issuing to the shareholders of Omnia BVI 16,800,000 shares of our common
stock in exchange for all of the issued and outstanding shares of Omnia BVI. As
a result, Omnia BVI became our wholly-owned subsidiary and the former
shareholders of Omnia BVI became our Company’s controlling stockholders. We
amended our Certificate of Incorporation in November 2007 to change our name
from Wentworth II, Inc. to OmniaLuo, Inc.
 For
accounting purposes, the share exchange transaction was treated as a reverse
acquisition with Omnia BVI as the acquirer and the Company as the acquired
party. When we refer in this report to business and financial information for
periods prior to the consummation of the reverse acquisition, we are referring
to the business and financial information of Omnia BVI on a consolidated basis
unless the context suggests otherwise.
 Concurrently
with the consummation of the reverse acquisition, we issued 4,920,000 shares of
the Company’s common stock and warrants to purchase an aggregate of 4,920,000
shares of the Company’s common stock for an aggregate purchase price of $6.15
million, to a total of 38 investors (of whom 29 were accredited investors and
nine were non-US residents who purchased shares and warrants in off-shore
transactions) in a private placement pursuant to Regulation D and a simultaneous
off-shore offering pursuant to Regulation S (collectively, the “2007 Private
Placement”). In connection with that private placement, we also issued warrants
to purchase 492,000 shares of the Company’s common stock to Keating Securities,
LLC (“Keating Securities”), as a financial advisory fee in partial consideration
of their services in connection with the private placement. Prior to
consummation of the reverse acquisition and 2007 Private Placement, we may be
deemed to have been an affiliate of Keating Securities by reason of the
ownership of shares of our common stock by principals and executives of Keating
Securities.
 Store
opening strategy and its result in 2009
 
 One of
our growth strategies is expanding store numbers whilst enlarging sales revenue.
Since our formation in the third quarter of 2006, we have continued to open new
stores. By December 31, 2007, we had opened 184 stores. In 2008, under the make
good escrow provisions we were more aggressive in producing more products and
opening new stores, by the end of 2008 we had already had 208 stores. However,
some of the stores were not well-perfomed.
 
 In 2009,
one of the main tasks in front of us was to cut the number of non-performing
stores. As such, we closed 100 stores through the year. As of December 31,
2009, we had 108 stores altogether.
 
 We
believe that the stores we have now are all well-performing. We will be more
cautious in opening new stores in 2010. We plan our store number to be 150 at
the end of 2010 in order to keep pace with our business growth
speed.
 
 Factors
Relevant to Evaluating Our Business and Financial Performance
 We
design, develop, and market a diversified selection of women’s wear with focus
on fashionable business casual style. We target moderate to premium priced
categories of the women’s wear market. In evaluating our performance, management
reviews certain key performance indicators, including:
 Gross margin - Gross margin
measures our ability to control direct costs associated with the manufacturing
and selling of our products. Gross margin is the difference between the net
sales and cost of sales, which is comprised of direct inventory costs for
merchandise sold, including all costs to transport merchandise from third-party
suppliers to our distribution center.
 - 34
-
 Operating income - Operating
income is a measure of our earning power from ongoing operations and is measured
as our earnings before interest and income taxes.
 
 Results
of Operations for the Years Ended December 31, 2008 and 2009
 Since our
formation in the third quarter of 2006, we have focused on implementing our
strategy of building a design and marketing workforce and an independent
distributor and retail store sales network to design, develop, market and
distribute “fashionable business casual wear,” our main product line. By the end
of December 2009, we had hired and established a design team of 15 designers. By
December 31, 2009 we operated or had distribution relationships with 108 stores,
comprising 27 Company-owned stores, 8 co-owned stores, and 73 independent
distributor stores, compared with 208 such stores as of December 31,
2008.
 
 In 2008,
under the make good escrow provisions we needed to fulfill our net income target
of $4.3 million. Consequently, we hired a new sales and marketing team to
execute this goal. The new sales and marketing team applied opening new
distributor stores, expanding production and increasing inventory methods to
fulfill this net income goal. As a result, the new store opening speed was very
fast. By March 31, 2008, we had 196 stores, and as of October 31, 2008, we
already had 245 stores. Due to the expansion of production but low sales speed
through those newly opened stores, we had accumulated a huge amount of
inventory, amounting to $6,460,621 as of December 31, 2008. This excessive
inventory dramatically reduced our inventory turnover speed and impacted our
cash flow. The financial crisis exacerbated this position.
 
 In 2009, managementtookdecisive action to handletheslow moving
inventories so as to ensure the smooth operation of the Companyand such
actions included timely disposal of slow moving andobsolete
items at high discount of over 60%, i.e.$5.11 million was sold for $2.2 million.
 
 Sales
 
 Sales
revenue for the year ended December 31, 2009 was $9,349,878 (among which$2.2 million was from selling
the previous year’s inventories), compared with $11,902,404for the
same-year period in 2008, representing 21.45% decrease. This decrease was mainly
due to the reason of cutting down all the non-performing stores. Compared with
2008, we had 108 stores left at the end of 2009, 100 non-performing stores were
closed. Consequently, the sales was affected to some extent. Besides, selling
inventories at high discount also accounted for the reason of low sales revenue.
In 2009, on the one hand, we sold our up-to-date products in regular price; on
the other hand, we did our best to get cash from those inventories left from
2008 by high discount. As a result, we gained $2.2 million by selling $5.11
million inventories.
 
 Cost of
revenues for the year ended December 31, 2009 was $8,774,968(among which$5.11million was from
selling the previous year’s inventoriesby high discount),
compared with $4,838,286for the
same-year period in 2008, representing 81.37% increase. Excluding the previous
year inventories selling down of $5.11 million, the cost of revenues should be
$3.66 million, which was 25.62% decreased.
 
 Revenue
from sales to distributors for the year ended December 31, 2009 was $6,087,807 (or 65.11%
of total sales revenue), a decrease of $528,376 (or 7.99%) compared with
$6,616,183 for the year ended December 31, 2008. Revenue from retail sales for
the year ended December 31, 2009, including sales from Company-owned and
co-owned stores, was $3,262,071 (or 34.89% of
total sales revenue), a decrease of $2,024,150 (or 38.29%) compared with
$5,286,221 for the year ended December 31, 2008. This decrease was mainly
because of two reasons: (1) We closed 23 co-owned stores in 2009; (2) In 2009,
most of the shopping malls did a lot of sale-off activities in order to
stimulate consumption, we had to take part in these activities and sell
up-to-date products at high discount, which dropped down our sales revenues from
the company-owned and co-owned stores.
 
 As of
December 31, 2009, inventories was $2,424,601, a decrease
of $4,036,020 (or 62.47%), compared with $6,460,621 as of December 31, 2008 due
to a selldown of inventories of 2008. In order to accomplish the 2008 sales
revenue target, higher level of inventories had been produced in expectation of
higher sales in the fourth quarter of 2008. However, global economic crisis of
2008 caused us to slow sales and the closure of 37 non-performing stores during
the second half of 2008. This also caused a substantial built up of ending 2008
inventory of $6,460,621which had to be disposed through deep discount in
2009.
 Overall
gross profit for the year ended December 31, 2009 was $574,910, compared with
$7,064,118 for fiscal year 2008, a decrease of 91.86% due to the same reason as
mentioned above of selling those inventories at high discount. If we exclude
this factor, our revenue for 2009 was $7.15 million, and the cost of revenues
was $3.66 million, the gross profit margin was $3.49 million, represent a gross
profit margin of 48.81%, compared with the gross profit margin of 59.35% in
2008, 4.11 percentage dropped. The decrease of gross profit margin was mainly
because of the reason that we took part in a lot of activities organized by
shopping malls in order to stimulate consumption, which affected our sales of
revenue because we had to sell at high discount.
 
 - 35
-
 
 General
and administrative expenses, which include rental expenses for our headquarters,
salary expenses for management and headquarters staff, and travel and
entertainment expenses, were $3,300,806 for the year ended December 31, 2009, an
increase of $480,864 (17.05% increased) compared with $2,819,942 in 2008. This
increase was mainly due to two reasons: (1) increase of allowance for doubtful
accounts. In 2009, we had $805,319 allowance for doubtful accounts, compared
with $3,696 in the previous year. (2) non-cash share-based compensation expense
of $304,642. In respect of share options granted on January 6, 2009 and January
20, 2009, $304,642 of non-cash expense was allocated to general and
administrative expenses.
 
 Selling
and marketing expenses, which include all costs associated with sales, marketing
and distribution functions, were $2,794,026 (29.88% of sales revenues) for the
year ended December 31, 2009, an increase of $179,833 (6.88% increased) compared
with $2,614,193 for the year ended December 31, 2008. Thanks to the reason of
closing those non-performing stores, we were abliged to write some of the
expense relating to rent, decoration expense into selling and marketing
expenses, so that the selling and marketing expenses in 2009 was higher than the
previous year even though the sales of revenue dropped.
 
 Loss from
operations for the year ended December 31, 2009 was $5,794,023 compared to an
income of $1,418,068 in 2008. In 2009, $146,610 government grant income was
received for our successful listing on the Over-the-Counter Bulletin Board and
private placement. After interest income, other income and finance cost, the net
loss for the year ended December 31, 2009 was
$5,303,436.
 
 Perspective of
2010
  2009 was a challenging year
for the management, especially in taking
decisive actions in enhancing the continuing operation of thecompanywith
emphasis on maintaining the cash flow with measures suchas disposing slow moving inventories at deep discounts.
With most of the non-performing stores already closed down in 2009, the
management has planned for strategic expansion of the operation on both a
geographical andproductlevel for 2010. Restructuringof the operation is expected to continue during 2010
with the sole objective of achieving profits and return again for shareholders.
 Liquidity
and Capital Resources
 As of
December 31, 2009, the Company’s net cash position was $869,495, compared with
$ 1,253,997 as of December 31, 2008, a decrease of $384,502. This decrease was
mainly attributed to repayment of a $ 439,830 bank loan in 2009.
 
 As of
December 31, 2009, trade receivables were $1,380,180, a decrease of $819,576
compared with trade receivables of $2,199,756 as of December 31, 2008 due to our
effort of collecting money faster than the previous year.
  Other
receivables and deposits as of December 31, 2009 was $3,322,414, a decrease of
$962,805 compared with $4,285,219 as of December 31,
2008.
 - 36
-
 Net cash
flows provided by operating activities for the year ended December 31, 2009 was
$62,193. Net cash used in operating activities for 2008 was
$1,846,672.
 
 The
Company’s investing activities to date have consisted mainly of the purchase of
property and equipment. For the year ended December 31, 2009, the net use of
cash in investing activities was $6,651 compared to $516,147 for the year ended
December 31, 2008.
 
 Our
estimated capital expenditure requirements for 2010 are approximately $2.0
million which we would seek bank loans, which will be used mainly for strategic
expansions to ensure the business developing in a rapid and stable way, the
management believe it would be sufficient for the normal operations of the
company in 2010.
 
 Depending
upon our future needs and changes and trends in the capital markets affecting
our shares and the Company, we may seek additional equity or debt financing in
the private or public markets. Additional financing, whether through public or
private equity or debt financing, arrangements with stockholders or other
sources to fund operations, may not be available, or if available, may be on
terms unacceptable to us.
  Obligations
Under Material Contracts
 The
following table summarizes our outstanding contractual obligations as of
December 31, 200(9) need to update:
 Total
                    
                    
                    Less
      than 1 year
                    
                    
                    1-3
      years
                    
                    
                    3-5
      yearsLong-term
      debt obligations
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —Capital
      lease obligations
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Operating
      lease obligations
                    
                    $
                    696,813
                    
                    
                    $
                    424,029
                    
                    
                    $
                    236,764
                    
                    
                    $
                    36,020Purchase
      obligations
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Other
      long term obligations
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
 
 Critical
Accounting Policies
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported in the
financial statements, including the notes thereto, and related disclosures of
commitments and contingencies, if any. We consider our critical accounting
policies to be those that require the more significant judgments and estimates
in the preparation of financial statements, including the
following:
 Use
of estimates.In
preparing financial statements in conformity withU.S.GAAP,
management makes estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosures of contingent assets and liabilities at
the dates of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting periods. These accounts and estimates
include, but are notlimited
to, the valuation oftrade
and otherreceivables,
inventories, deferred income taxes, provision for warranty and the estimation of
useful lives of property, plant and equipment. Management makes these estimates
using the best informationavailable
at the time the estimates are made; however, actual results could differ
materially from those estimates.
 Concentrations
of credit risk. Financial instruments that potentially subject the
Company to significant concentrations of credit risk consist principally of cash
and cash equivalents and trade receivables. As of December 31, 2008, the
Company’s cash and cash equivalents were held by major financial institutions
located in the PRC, Hong Kong and the United States, which management believes
are of high credit quality. With respect to trade receivables, the Company
extends credit based on an evaluation of the customer’s financial condition. The
Company generally does not require collateral for trade receivables and
maintains an allowance for doubtful accounts of trade
receivables.
 
 - 37
-
 
  Allowance for
doubtful accounts. The
Company establishes an allowance for doubtful accounts based on
management’s assessment of the collectability of
trade receivables. A
considerable amount of judgment is required in assessing the amount of the
allowance and the Company considers the historical level of credit losses and
applies percentages to aged receivable categories accordingly. The Company makes
judgments about the creditworthiness of
each customer based on ongoing credit evaluations, and monitors current economic
trends that might impact the level of credit losses in the future. If the
financial condition of the customersis todeteriorates, resulting in their inability to make payments,
a larger allowance may be required.Bad debts are written off when
identified.
 Inventories. Inventories are
stated at the lower of cost or market. Cost is determined on a FIFO basis and
includes all expenditures incurred in bringing the goods to the point of sale
and putting them in a saleable condition.
 Revenue recognition. Revenue
is recognized when it is probable that the economic benefits will flow to the
Company and when the revenue can be measured reliably, on the following
basis:
  (i)
                    revenue from sales of the
      Company’s products is recognized when the
      significant risks and rewards of ownershiphave been transferred to the buyer
      at the time of delivery and the sales price is fixed or determinable and
      collection is reasonably assured; and
                        
                        In respect of the revenue
      generated from the co-owned stores, the Company has reviewedFASB ASC 605and considers itself to fulfill
      the following indicators for gross revenue reporting: (i) the Company is
      the primary obligator to the customer as the Company is responsible for
      fulfillment and customer remedies in the event of dissatisfaction; (ii) the
      Company retains
      inventory risk of the unsold inventories in the co-owned stores; and (iii)
      the Company has complete latitude to set the prices
      for the products and the net amount to be earned varies with that selling
      price. Accordingly, the Company is the
      principal of these
      transactions according toASC 605and reports the revenue from
      co-owned stores on a gross basis. The payments (or commission) paid to the
      partners of the co-owned stores are recorded as the
      Company’sexpenses.
  (ii)
                    interest
      income is recognized on an accrual
basis.
 Property and
Equipment. Property 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
exiting use. Depreciation is provided on a straight-line basis over the
assets’estimated useful livesat the annual rate of 20%.
  Maintenance or repairs are chargedor credited to the
consolidatedstatements of
operations andcomprehensive (loss) incomeas incurred. 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
tothe consolidated
statement of operations.
  Income
Taxes. The Company uses the
asset and liability method
of accounting for income taxes.Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to temporary differences between the
financial statements carrying amounts of existing assets and liabilities and
loss carry forwards and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
totaxable income in the years in which
those temporary differences are expected to be recovered or settled.The effect ofdeferred tax assets and liabilities of
a change in tax rates is recognized in the consolidatedstatements of operations and
comprehensive (loss) income
in the periodthat includes
the enactment date.
 
 Oriental Fashion is subject to the PRC
Enterprise Income Tax (“EIT”).  As Oriental Fashion was a
wholly-foreign owned enterprise engaged in manufacture industry which was duly
approved by the PRC tax authority, it was entitled to two years’exemption, from the first profit making
calendar year of operations after offsetof accumulated taxable losses, followed
by 50% tax reduction for the immediate next three calendar
years.  This tax holiday commenced in the fiscal financial year
2007.
 
 On March 16, 2007, the National
People’s Congress of the PRC determined to
adopt the New corporate
income tax law (the “New
CIT Law”).  The
New CIT Law unifies the application scope, tax rates, tax deduction and
preferential policy for both domestic enterprises (“DE”) and foreign investment enterprises
(“FIE”).  The applicable tax rate ofDE and FIE will be 25% after their
preferential tax holidays and the transition period have
ended.  During the transition period, tax rates for the subject
entities are 20%, 22% and 24% for the calendar years 2009, 2010 and 2011,
respectively, before the application of applicable tax holidays or
other tax preferences.
 
 By virtue of the New CIT Law and the
above-mentioned tax reduction, Oriental Fashion was subject to EIT rate of 10%
during 2009. During 2008, Oriental Fashion was subject to EIT rate of 18%
with full tax
exemption.
 
 No provision for EIT has been made for
the year ended December 31, 2009 since Oriental Fashion had an operating
loss.
 
 Comprehensive
income. The Company has
adoptedASC 220
“Comprehensive
Income”, previously SFAS
No. 130,which establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Components of comprehensive income include netincome or lossand foreign currency translation
adjustments.
  - 38
-
 Foreign currency
translation. The functional
currenciesof the Company and its subsidiaries
includeUSD and RMB. TheCompany and its
subsidiaries maintain their respective financial statements in the functional
currency. 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
date. 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 ofincome or lossfor the respective
periods.
 
 For financial reporting purposes, the
financial statements of the subsidiaries which are prepared using RMB have been
translated intoUSD. 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 andstockholders’equity is translated at historical
exchange rates. Any resulting translation adjustments are not included in
determining netincomeor loss, but are included in foreign exchange
adjustmentstoaccumulatedother comprehensive income, a component
ofstockholders’equity. The exchange rates was
RMB1per $0.1467 as of December 31, 2009, and
RMB1 per$0.1467as of December 31, 2008. The average
exchange rates for the period ended December 31, 2009were RMB1per$0.1466and for the period ended December 31,
2008 were RMB1per$0.1442. Therewas no significant fluctuation in exchange
rate for the conversion of RMBtoUSDafter the balance sheet
date.
  Seasonality
 Our
business is likely to be seasonal, with the highest proportion of sales and
operating income likely being generated in the fourth quarter of each year,
lesser proportions in the second and third quarter of each year, and the lowest
proportion of sales and operating income being generated in the first quarter of
each year. Our working capital requirements are likely to fluctuate during the
year, increasing substantially during one or more quarters as a result of higher
planned seasonal inventory levels and higher receivables. If we fall
significantly short of our anticipated earnings in one or more quarters, it will
significantly decrease the working capital available to us in the following
quarters. Due to limitations on borrowing levels, a decrease in working capital
may adversely affect our purchasing abilities which would have a material
adverse effect on our revenues.
 Off-Balance
Sheet Arrangements
 We do not
have any off-balance sheet arrangements.
 - 39
-


ITEM 7A.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 Market
risk is the potential loss arising from adverse changes in market rates and
prices, such as interest rates and foreign currency exchange rates. Changes in
interest rates and changes in foreign currency exchange rates have an impact on
our results of operations.
 
 Our
sales, cost of manufacturing and marketing are transacted in Chinese
yuan.  Consequently, our costs, revenue and operating margins may be
affected by fluctuations in exchange rates, primarily between the U.S. dollar
and Chinese currencies. Proceeds from equity financings are one of our major
sources of working capital, which is denominated in U.S. dollars. Our financial
position and results of operations are also affected by fluctuations in exchange
rates between the functional currency (which is in U.S. dollars) and currencies
used in our foreign operations.As
currency exchange rates change, translation of the statements of operations of
our businesses outside the U.S. into U.S. dollars affects
year-over-year comparability. We generally have not hedged against these types
of currency risks because cash flows from the PRC operations have been
reinvested locally.
 
 ITEM 8.
              FINANCIAL
      STATEMENTS
  See the
index to our financial statements and our financial statements following the
Signature Page at the end of this Annual Report on Form 10-K.
  ITEM
      9.
              RESERVED
  None.
  ITEM
      9A
              (T).
      CONTROLS AND PROCEDURES
  Disclosure
Controls and Procedures




Our
management, with the participation of our chief executive officer and chief
financial officer, Ms. Zheng Luo and Mr. David Wang, respectively, evaluated the
effectiveness of our disclosure controls and procedures. The term “disclosure
controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act, means controls and other procedures of a company that are designed
to ensure that information required to be disclosed by a company in the reports,
such as this report, that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on that
evaluation, our management concluded that as of December 31, 2009, and as of the
date that the evaluation of the effectiveness of our disclosure controls and
procedures was completed, our disclosure controls and procedures were effective
in providing reasonable assurance of achieving their objectives for the year
ended December 31, 2009.




- 40
-




Internal
      Controls Over Financial Reporting




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




Section
404 of the Sarbanes-Oxley Act of 2002 requires that management document and test
the Company’s internal control over financial reporting and include in this
Annual Report on Form 10-K a report on management’s assessment of the
effectiveness of our internal control over financial reporting.




The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934. The Securities and
Exchange Act of 1934 defines internal control over financial reporting as a
process designed by, or under the supervision of, the Company’s principal
executive and principal financial officers and effected by the Company’s board
of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America and includes those
policies and procedures that:




·
            Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;




·
            Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with accounting
      principles generally accepted in the United States of America, and that
      receipts and expenditures of the Company are being made only in accordance
      with authorizations of management and directors of the Company;
      and




·
            Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.




All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




Under the
supervision and with the participation of our management, including Ms. Zheng
Luo and Mr. David Wang, our chief executive officer and chief financial officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting based upon the framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on that evaluation, our management concluded that our
internal control over financial reporting was effective, as of December 31,
2009.




Report
of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting





This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this annual
report.




Changes
in Internal Controls over Financial Reporting.




During
the fiscal year ended December 31, 2009, there were no changes in our internal
control over financial reporting identified in connection with the evaluation
performed during the fiscal year covered by this report that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.




- 41
-





PART
III




ITEM
      9.
              DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
      COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
  ACT




Directors
and Executive Officers




Set forth
below is information regarding our current directors and current executive
officers. Except as set forth below, there are no family relationships between
any of our directors or executive officers. Executive officers are elected
annually by our Board of Directors. Each executive offer holds his office until
he resigns or is removed by the Board or his successor is elected and qualified.
Directors are elected each year by our stockholders at the annual meeting. Each
director holds his office until his successor is elected and qualified or
until resignation or removal.




Name
              
              Age
              
              TitleZheng
      Luo
              
              39
              
              Chairwoman
      and Chief Executive OfficerDavid
      Wang
              
              43
              
              Acting
      Chief Financial OfficerXiaoyin
      Luo
              
              45
              
              DirectorQing
      Huang
              
              44
              
              DirectorFei
      Luo
              
              43
              
              DirectorTianhong
      Yu
              
              43
              
              DirectorCharles
      C. Mo
              
              58
              
              DirectorWenbin
      Fang
              
              42
              
              Director




Ms.
Zheng Luo, Chairwoman and CEO




Ms. Zheng
Luo is our founder, Chairwoman and chief executive officer, and is chief
executive officer and chief designer of Oriental Fashion. Before founding
Oriental Fashion, Ms. Zheng Luo was chairwoman and chief executive officer of
Oumeng (2003 - 2007) and chairwoman and chief executive officer of Green’s
Apparel (1996 - 2003). Ms. Zheng Luo has been active in the fashion design and
retail business for more than 10 years. She created the OMNIALUO brand in
1996. Ms. Zheng Luo is a renowned designer in the fashion industry who has won
various prestigious honors nationally and internationally and received broad
media coverage in China, Hong Kong, Paris and Italy. Ms. Zheng Luo earned a
Bachelor of Arts degree in International Finance from Shenzhen University in
1991.




Mr.
David Wang, Chief Financial Officer




Mr. David
Wang has more than 15 years experience in accounting, finance and investment
banking. From December 2007 to November 2008, Mr. Wang was Vice President of
Maxyee Group, an international company focused on real estate and
pharmaceuticals. From August 2006 to November 2007, Mr. Wang was Chief Financial
Officer of Sunway Global, Inc. ("Sunway"), a company engaged in the business of
designing, manufacturing and selling logistic transport systems and medicine
dispensing systems and equipment. Prior to joining Sunway, Mr. Wang served as an
accountant for Sinopec and prior to that worked as an investment banker for
various investment banking firms. Mr. Wang received a Masters Degree and PhD
degree in the field of Finance from Xiamen University in Fujian Province,
China.





Ms.
Xiaoyin Luo, Director




Ms. Luo
Xiaoyin Luo was appointed as a director in January 2008. Ms. Luo serves as
Director & General Manager of Hutchison Harbour Ring China, a subsidiary of
Hutchison Whampoa Limited (HWL). Ms. Xiaoyin Luo has more than 14 years of
service to HWL. Her main responsibilities are commercial property investment,
development, operation, and management. Some of her projects include The Center,
Westgate Mall, Harbour Ring Plaza and Huangpu Center in Shanghai, Metropolitan
Plaza in Chongqing, and Pacific Plaza in Qingdao. Since Hutchison Harbor is the
exclusive licensing agent of Warner Brothers Consumer Product Division (WBCP) in
China, Ms. Xiaoyin Luo is in charge of the product license and retail license
business development for Warner Bros. Studio Store Shanghai Flagship operation
management, retail network and distribution channel construction, and
sub-licensee development. Ms. Xiaoyin Luo holds a Bachelor of Economics degree
from Shenzhen University and holds an EMBA from China Europe International
Business School.




Mr.
Qing Huang, Director




Mr. Qing
Huang was appointed as a director in January 2008. Mr. Huang is engaged in
private equity financing activities in China as an investor and advisor. He is
currently a general partner of Mingly China Growth Fund, L.P. a private equity
fund focused on investing in growth companies in China. Mr. Huang has
participated in a large number of international financing transactions by
Chinese and non-Chinese companies, including private placement and public
offerings of corporate equity and debt. Mr. Huang worked as a lawyer and adviser
in the United States, Hong Kong and Shanghai and was associated with
international law firms Shearman & Sterling and Linklaters in Hong Kong
and Brown & Wood LLP in New York. Mr. Huang graduated from Columbia
University School of Law with a J.D. degree, from University of Chicago with a
Master’s degree in political science and from Beijing University with a
Bachelors’ degree in English and American literatures. He is a member of the New
York State Bar Association.




- 42
-




Mr.
Fei Luo, Director




Mr. Fei
Luo was appointed as a director in January 2008. He has served as a director of
IER Venture Capital Co., Ltd., a venture capital firm in China, since 2000. He
founded Beida Zongheng Financial Consulting Co., Ltd. in 1999 and serves as the
president and chairman of the board of Beida Zongheng. From 1997 to 1999, he
served as the managing director of Shenzhen Yanning Development Co., Ltd., in
charge of investment. From 1993 to 1996, he served as the vice chairman of
Shenzhen Anxing Financial Consulting Co., Ltd and vice chairman of Shenzhen
Anxing investing Co., Ltd. Mr. Fei Luo received his Master degree in Economics
from Peking University in 1999 and his BA in Economics from Peking University in
1988.




Mr.
Tianhong Yu, Director




Mr.
Tianhong Yu was appointed as a director in January 2008. Mr. Yu has served as a
vice president and managing director of Huayi Brothers & Taihe Film
Investment Co., Ltd., a leading motion picture and television production and
distribution company in China, since 2005. From 2003 to 2005, he had
planned and supervised a number of movie and TV series. Prior to that, he was
the senior manager of TOM Online Inc., a leading wireless internet company
in China. Mr. Yu also founded Beijing Modern Art Center and CHINALAW DATABASE,
the first law database in China. Mr. Yu received his Bachelor’s Degree in
Economic Law from Peking University in 1988.




Mr.
Charles Mo, Director





Mr.
Charles Mo began serving as a director of our company in January 2008. Mr. Mo is
a Certified Public Accountant with over twenty-five years of experience in
public and corporate accounting and finance and has held his CPA license since
1980.  Since June 2005, Mr. Mo has served as the General Manager of
Charles Mo & Co., a corporate consulting company, and focuses on general
management duties. From October 1999 to May 2005, Mr. Mo served as Chief
Operating Officer and Chief Financial Officer of Coca-Cola Shanghai, a beverage
company, and was responsible for sales, finance, logistics, production, and
general management. From December 1998 to September 1999, Mr. Mo served as
Finance Director of Fisher Rosemount Shanghai. From August 1996 to November
1998, Mr. Mo served as Chief Financial Officer of Nike China, an athletic goods
company, and was responsible for overseeing finance, human resources, and
logistics. From January 1995 to August 1996, Mr. Mo served as Controller and
Acting General Manager for Polaroid China, a camera and consumer electronics
company. From August 1982 to December 1994, Mr. Mo served as Audit Manager and
held various financial management positions for Wang Laboratories, a computer
company. From 1978 to 1982, Mr. Mo served as an Accountant and Auditor for the
accounting businesses of Ernst & Young and Thomas Allen, CPA.  Mr.
Mo has served as an independent director of China Ritar Power Corp. (Nasdaq GM:
CRTP), a manufacturer of lead-acid batteries in China, since August 2008, and
OmniaLuo, Inc. (OTCBB:OLOU), a manufacturer and seller of women’s clothing in
China, since January 2008.  Mr. Mo served as an independent director
and chairman of the audit committee of Benda Pharmaceutical Inc (BPMA.OB) from
September 14, 2007 to February 22, 2008. Mr. Mo resigned from the board of Benda
Pharmaceutical on February 22, 2008. Mr. Mo received a Bachelor of Arts degree
in Business Administration in 1974 from HK Baptist College and an MBA in
accounting in 1976 from California State University-Fullerton.  We
believe that Mr. Mo’s long and varied career exhibit his qualifications to sit
on our Board, including his more than 25 years of experience, expertise and
background with respect to accounting matters, his experience as a CPA and chief
financial officer of large corporations in China, and his understanding of U.S.
GAAP and financial statements.





Mr.
Wenbin Fang, Director




Mr.
Wenbin Fang was appointed as a director in January 2008. Mr. Fang has served as
general manager in Shen Zhen Meng Sa Di Ka Trading Company since 2003. From 2000
to 2002, Mr. Fang worked for ARTLEVA, an Italian company, where he was focused
on exportation of household goods and clothing products from China (including
Taiwan) to Italy, France and Germany. From 1998 to 2000, he worked for MAX,
where he was focused on exportation of household goods and clothing products
from China (including Hong Kong) to Italy and France. From 1993 to 1997, he
served as business manager for East Asia (including China) of R.P.R.
Clothing Machine Manufactory, an Italian Company. He earned his bachelor’s
degree in Industrial Design in Shangdong Design and Art College. He then spent a
year (1992-1993) in the Department of Industrial Design of Italy’s National
Design and Acting College.




Family
Relationships




Ms.
Xiaoyin Luo is the elder sister of Ms. Zheng Luo and the sister-in-law of Mr.
Wenbin Fang. Mr. Wenbin Fang is the husband of Ms. Zheng Luo. There are no other
family relationships between any of our directors and executives.




Board
Composition and Committees




The board
of directors is currently composed of seven members. All Board action requires
the approval of a majority of the directors in attendance at a meeting at which
a quorum is present.




Each of
Qing Huang, Fei Luo, Charles C. Mo and Tianhong Yu (collectively, the
“Independent Directors”) were elected to serve on the Board of Directors as an
“independent director” as defined by Rule 4200(a)(15) of the Marketplace Rules
of The Nasdaq Stock Market, Inc. (the “Nasdaq Marketplace Rules”), and the Board
of Directors has confirmed the “independent director” status under the Nasdaq
Marketplace Rules of each of the Independent Directors.




- 43
-




On
January 28, 2008, the full Board of Directors, including the Independent
Directors:




(1)
            approved
      the establishment of the Audit Committee, Compensation Committee, and
      Governance and Nominating Committee of the Board of Directors;
      and(2)
            appointed
      three of the Independent Directors to each of the Audit Committee,
      Compensation Committee, and Governance and Nominating Committee and
      appointed Mr. Mo as the Chair of the Audit Committee, Mr. Huang as the
      Chair of the Compensation Committee and Mr. Yu as the Chair of the
      Governance and Nominating
Committee.




Our Audit
Committee is primarily responsible for reviewing the services performed by our
independent auditors and evaluating our accounting policies and our system of
internal controls. The Nominating Committee is primarily responsible for
nominating directors and setting policies and procedures for the nomination of
directors. The Nominating Committee will also be responsible for overseeing
the creation and implementation of our corporate governance policies and
procedures. The Compensation Committee is primarily responsible for reviewing
and approving our salary and benefit policies (including stock options),
including compensation of executive officers.




Director
Compensation




We have
not paid our directors fees in the past for attending scheduled and special
meetings of our board of directors.




On
January 28,2008,
the full Board approved a form of Non-Officer Director’s Contract, which
includes indemnification provisions, for each of the Independent Directors,
Wenbin Fang and Xiaoyin Luo. Under the terms of the Non-Officer Director’s
Contracts, the Company agreed to pay the Independent Directorsan annual fee of $12,000
each,as
compensation for the services to be provided by them as directors and as
chairpersons of various board committees, as applicable. We also reimburse each
director for reasonable travel expenses related to such director’s attendance at
board of directors and committee meetings.





Under the
terms of the Non-Officer Director’s Contracts, the Company agreed to indemnify
the Independent Directors, Wenbin Fang and Xiaoyin Luo, against expenses,
judgments, fines, penalties or other amounts actually and reasonably incurred by
the directors in connection with any proceeding if such director acted in good
faith and in the best interests of the Company. This brief description of the
terms of the Non-Officer Director’s Contracts is qualified by reference to the
provisions of the form of agreement incorporated by reference as an exhibit to
Annual Report. We believe the terms of these agreements are reasonable and
customary and comparable to those entered into by other publicly-traded
companies in the United States.




Involvement
in Certain Legal Proceedings




To the
best of our knowledge, none of our directors or executive officers has been
convicted in a criminal proceeding, excluding traffic violations or similar
misdemeanors, or has been a party to any judicial or administrative proceeding
during the past five years that resulted in a judgment, decree or final order
enjoining the person from future violations of, or prohibiting activities
subject to, federal or state securities laws, or a finding of any violation of
federal or state securities laws, except for matters that were dismissed without
sanction or settlement. Except as set forth in our discussion below in “Certain
Relationships and Related Transactions,” none of our directors, director
nominees or executive officers has been involved in any transactions with us or
any of our directors, executive officers, affiliates or associates which are
required to be disclosed pursuant to the rules and regulations of the
SEC.


Section
16(a) Beneficial Ownership Reporting Compliance




Section
16(a) of the Exchange Act requires the Company's directors and executive
officers, and persons who own more than 10% of a registered class of our equity
securities, to file with the Commission initial reports of ownership and reports
of changes in ownership of common stock and our other equity securities. These
insiders are required by Commission regulations to furnish us with copies of all
Section 16(a) forms they file, including Forms 3, 4 and 5.




Commission
rules require disclosure in the Company’s Annual Report on Form 10-K of the
failure of an executive officer, director or 10% beneficial owner to file such
forms on a timely basis. Based upon a review of the filings made on their behalf
during 2009, as well as an examination of the Commission's EDGAR system Form 3,
4, and 5 filings and the Company's records, the following describes exceptions
to timely filings: Form 3 for David Wang, to report the appointment of him as
our Chief Financial Officer (principal financial and accounting officer) on
October 30, 2008; Form 5 for Xiaomei Liu to report her resignation as our Chief
Financial Officer on October 30, 2008 and will no longer be subject to Section
16 reporting obligations; Form 5 for all directors and officers for fiscal years
2008 and 2009, and Form 4 for Ms. Zheng Luo for the grant of 456,800 shares of
options on January 6th, 2009 and 228400 shares of option on January 20th,
2009.




- 44
-


Code
of Ethics




On
January 28, 2008, our board of directors adopted a code of ethics that applies
to all of our directors, officers and employees, including our principal
executive officer, principal financial officer and principal accounting officer.
The code of ethics addresses, among other things, honesty and ethical conduct,
conflicts of interest, compliance with laws, regulations and policies, including
disclosure requirements under the federal securities laws, confidentiality,
trading on inside information, and reporting of violations of the code. A copy
of the code of ethics has been filed as Exhibit 14.1 to our current report on
Form 8-K filed on February 1, 2008.




Audit
Committee and Audit Committee Financial Expert




The Board
of Directors has determined that Mr. Mo, an “independent director” as defined by
Rule 4200(a)(15) of the Nasdaq Marketplace Rules, possesses accounting or
related financial management experience that qualifies him as financially
sophisticated within the meaning of Rule 4350(d)(2)(A) of the Nasdaq Marketplace
Rules and that he is an “audit committee financial expert” as defined by the
rules and regulations of the Securities and Exchange Commission. Mr. Mo is
the Chairman of our Audit Committee.





ITEM
11. EXECUTIVE COMPENSATION




Summary
Compensation Table –  2009 and 2008




The
following table sets forth information concerning all compensation awarded to,
earned by or paid to each person serving as a principal executive officer for
services rendered in all capacities during fiscal years 2009 and 2008. No other
executive officers received compensation in excess of $100,000 in either fiscal
year.





Name and
                                Principal position
                              
                              Year
                              
                              Salary ($)(1)
                              
                              Bonus ($)
                              
                              Stock
                                Awards ($)
                              
                              
                              Option
                                Awards ($)
                              
                              Nonequity
                                incentive plan
                                compensation
                                ($)
                              
                              Nonqualified
                                deferred
                                compensation
                                earnings ($)
                              
                              All other
                                compensation
                                ($)Zheng
      Luo,
                                Chief
      Executive Officer
                              
                              2009
                              
                              
                              34,935
                              
                              
                              
                              $
                              414,199
                              (2)
                              
                              
                              128,000
                              (3)2008
                              
                              
                              75,000David
      Wang,
                                Chief
      Financial Officer (4)
                              
                              2009
                              
                              
                              68,6002008
                              
                              
                              26,000
                              **Michelle
      Xiaomei Liu
                                (former
      Chief Financial Officer) (5)
                              
                              2008
                              
                              
                              58,441
                              
                              0
                              
                              
                              0
                              
                              
                              
                              26,000
                              (5)
                              0
                              
                              0
                              
                              0





(1)
Calculated on the basis that $1 = RMB 7.7





(2) We
failed to meet the 2008 performance threshold under the securities purchase
agreement and the make good escrow agreement that we entered into with the
investors in the 2007 Private Placement. As a result, shares were released to
investors, Ms. Zheng Luo and another stockholder pursuant to the agreed terms
and formula. 767,035 shares of the Escrow Shares were estimated to be released
back to Ms. Luo. The release of shares from escrow to Ms. Luo constituted a
compensatory plan.  The per share closing price of the Company’s
common stock on December 31, 2008 of $0.54 was used to calculate the
compensation expenses.  The total expense recognized for the fiscal
year 2008 was $414,199. During the year ended December 31, 2009, 711,269 and
111,275 shares of Escrow Shares were released back to Ms. Zheng Luo and the
other stockholder. The release of shares from escrow to the other stockholder
did not constitute a compensatory plan as this stockholder did not hold and
currently does not hold any position in the Company and has no relationship to
the Company other than as a stockholder.





(3)
Compensation recognized in connection with the options to purchase (i) 456,800
shares of our Common Stock on January 6th, 2009 and (ii) 228400 shares of our
Common Stock on January 20th, 2009, each at the exercise price of $0.6 per
share.




(4) Mr.
David Wang joined the Company in September 2008 and was appointed CFO in
November 2008.





(5) Ms.
Michelle Xiaomei Liu resigned from her position as the CFO of the Company in
October 2008. Compensation recognizeed in connection with the grant of options
to purchase: 137,040 shares of our Common Stock on January 6th, 2009
at the exercise price of $1.25 per share.


- 45
-




Employment
Agreements




Each of
the executive officers and other individuals named above has entered into a
standard PRC form of employment contract with our operating subsidiary, Oriental
Fashion except for Mr. David Wang. Mr. David Wang does not currently have an
employment agreement with the Company.




T he terms
of Ms. Zheng Luo’s contract provide for a two year employment term, from January
1, 2009 through December 31, 2010, with an annual salary of $75,000 and monthly
deferred compensation payments totaling $4,800 annually. The Company
intends to renew Ms. Zheng Luo’s contract in the near future .




Director
Compensation




Historically,
we have not compensated our directors for their services as directors and we did
not compensate our directors during 2006 or 2007.




O n January
28,2008, the full
Board approved a form of Non-Officer Director’s Contract, which includes
indemnification provisions, for each of the Independent Directors, Wenbin Fang
and Xiaoyin Luo. Under the terms of the Non-Officer Director’s Contracts, the
Company agreed to pay the Independent Directorsan annual fee of $12,000
each,as
compensation for the services to be provided by them as directors and as
chairpersons of various board committees, as applicable. We also reimburse each
director for reasonable travel expenses related to such director’s attendance at
board of directors and committee meetings .





Outstanding
Equity Awards at Fiscal Year End





None of
our executive officers received any equity awards, including, options,
restricted stock or other equity incentives, during the fiscal year ended
December 31, 2008.





ITEM
      12.
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.




The
following table sets forth information regarding beneficial ownership of our
common stock as of March 25, 2009 (i) by each person who is known by us to
beneficially own more than 5% of our common stock or who may otherwise be deemed
to be “control persons” and affiliates of us; (ii) by each of our current
officers and current and proposed directors; and (iii) by all of our current
officers and current and proposed directors as a group. Unless otherwise
specified, the address of each of the persons set forth below is in care of
the Company, Room 101, Building E6, Huaqiaocheng, East Industrial
Park, Nanshan District, Shenzhen, 518053, The People’s Republic of
China.




Name and Address of Beneficial Owner
                    
                    Director or Officer
                    
                    Amount and
                      Nature of
                      Beneficial
                      Ownership (1)
                    
                    
                    Percentage
                      (2)Zheng
      Luo (3) (4)
                    
                    Director
      and Officer
                    
                    
                    6,703,427
                    (5)(6)
                    
                    
                    29.35
                    %Xiaoyin
      Luo (3)(4)
                    
                    Director
                    
                    
                    5,411,514
                    
                    
                    
                    23.69
                    %Wenbin
      Fang (3)(4)
                    
                    Director
                    
                    
                    1,141,791
                    (5)
                    
                    
                    5.00
                    %Qing
      Huang (4)
                    
                    Director
                    
                    
                    -0-
                    
                    
                    
                    -0-Fei
      Lou (4)
                    
                    Director
                    
                    
                    -0-
                    
                    
                    
                    -0-Tianhong
      Yu (4)
                    
                    Director
                    
                    
                    -0-
                    
                    
                    
                    -0-Charles
      Mo (4)
                    
                    Director
                    
                    
                    -0-
                    
                    
                    
                    -0-David
      Wang (4)
                    
                    Officer
                    
                    
                    -0-
                    
                    
                    
                    -0-JAIC-CROSBY
      Greater China
                      Investment
      Fund Limited (8)
                      P.O.
      Box 2081GT, Century
                      Yard,
      Cricket Square, Hutchins
                      Drive,
      George Town, Grand
                      Cayman,
      Cayman Islands
                    
                    
                    
                    
                    942,208
                    (6)(7)
                    
                    
                    4.09
                    %All
      current and proposed directors and current officers as a group (eight in
      the group)
                    
                    
                    
                    13,256,732
      shares
                    
                    
                    
                    58.04
                    %


*
      Less than 1%.
  - 46
-


1 Beneficial ownership is
determined in accordance with the rules of the SEC and generally includes voting
or investment power with respect to securities. Each of the beneficial owners
listed above has direct ownership of and sole voting power and investment power
with respect to the shares of our common stock.





2A total of
22,840,000 shares of our common stock are considered to be outstanding pursuant
to SEC Rule 13d-3(d)(1). For each Beneficial Owner above, any options
exercisable within 60 days have been included in the denominator.





3Ms. Xiaoyin Luo is
the elder sister of Ms. Zheng Luo and sister-in-law of Mr. Wenbin Fang. Mr.
Wenbin Fang is the husband of Ms.. Zheng Luo. Each disclaims beneficial
ownership of the shares held by the other.





4 The address for each of
the individuals shown is c/o Oriental Fashion.




5 Share amounts shown do
not include shares held by the individual’s spouse, as to which the individual
disclaims beneficial ownership.




6 Reflects the transfer by
Ms. Zheng Luo, as part of the reverse acquisition, of 140,891 shares of common
stock to JAIC-CROSBY Greater China Investment Fund Limited.




7 Includes warrants to
purchase 200,000 shares of our common stock, which may by their terms become
exercisable within 60 days of the date of this report.




8 JAIC-CROSBY Greater China
Investment Fund Limited was a “control person” and affiliate of Omnia prior to
the reverse acquisition and 2007 Private Placement by reason of the existence
and its exercise of its contractual rights under its preferred investment
documentation, and may now be deemed to be a “control person” and affiliate of
the Company.




Make-Good
Provision




In
connection with the 2007 Private Placement, Ms. Zheng Luo, the principal
stockholder and chief executive officer of the Company, and another stockholder
agreed to place 41.11% of the shares of Common Stock they collectively own
(including 40% of the shares owned by Ms. Luo) in escrow (the
“Escrow Shares”). The Escrow Shares represented approximately 19.79% of the
Company’s total post-reverse acquisition and pre-2007 Private Placement issued
and outstanding shares. If the Company failed to report net income of at least
$2.0 million under U.S. GAAP (before adjustments for non-cash and cash charges
related to the reverse acquisition and 2007 Private Placement, including any
liquidated damages payments under the registration rights agreement with the
2007 Private Placement investors (the “Registration Rights Agreement”) and any
expense relating to any issuance of shares by us prior to the reverse
acquisition and 2007 Private Placement, and for any charges related to the
release of the Escrow Shares, and before accounting for the impact on net income
of any equity incentive options or shares granted) for the fiscal year 2007, the
escrow agent was to transfer to the investors in the 2007 Private Placement the
number of Escrow Shares based on the following formula: (($2.0 million - 2007
adjusted reported net income)/$2.0 million) multiplied by the Escrow Shares,
subject to a maximum number of 50% of the Escrow Shares.





As the
Company’s reported net income under U.S. GAAP (before adjustments for non-cash
and cash charges, which include the RTO expenses described
below, related to the reverse acquisition and 2007 Private Placement,
including any liquidated damages payments under the registration rights
agreement with the 2007 Private Placement investors (the “Registration Rights
Agreement”) and any expense relating to any issuance of shares by us prior to
the reverse acquisition and 2007 Private Placement, and for any charges related
to the release of the Escrow Shares, and before accounting for the impact on net
income of any equity incentive options or shares granted) for the fiscal
year 2007 exceeded $2.0 million, 50% of the Escrow Shares are being returned by
the escrow agent to Ms. Luo and the other stockholder. The “RTO Expenses,”
which are general and administrative expenses for accounting purposes, totaled
$970,320 and were incurred in conjunction with the October 2007 reverse
acquisition, the October 2007 PIPE and the related SEC resale registration (the
“RTO Expenses”). The RTO expenses consist of shell company related expenses,
including certain fees paid to the placement agent and investor relations agency
($218,113), auditing fees ($67,293), legal fees ($301,403), entertainment
expenses related to the reverse acquisition and the October 2007 PIPE ($5,123),
travel expenses ($63,380), consultancy fees, which include fees paid for
RTO and PIPE related market research and consulting services ($233,763),
exchange loss relating to the payment of RTO expenses ($19,242) and other
expenses ($62,003).




If the
Company fails to report net income of at least $4.3 million under U.S. GAAP
(before adjustments for non-cash and cash charges related to the reverse
acquisition and 2007 Private Placement, including any liquidated damages
payments under the Registration Rights Agreement and any expense relating to any
issuance of shares by us prior to the reverse acquisition and 2007 Private
Placement, and for any charges related to the release of Escrow Shares, and
before accounting for the impact on net income of any equity incentive options
or shares granted) for the fiscal year 2008, the escrow agent shall transfer to
the investors in the 2007 Private Placement the lesser of: (1) the number of
Escrow Shares based on the following formula: ($4.3 million - 2008 adjusted
reported net income/$4.3 million) multiplied by the Escrow Shares; or (2) the
number of Escrow Shares still in escrow.





The
Company’s common stock began trading on the Over-the-Counter Bulletin Board on
January 10, 2008.  The per share closing price of the Company’s common
stock on January 10, 2008 of $1.5 was used to calculate the compensation
expense.  The total expense recognized for fiscal year 2007 was
$2,299,893.




- 47
-





During
the year ended December 31, 2008, the Company’s net income (before unallocated
expenses relating to the reverse acquisition, the 2007 Private Placement and
related SEC resale registration totaling $698,257), was $2,151,132, before the
make good provision of $414,199. Accordingly, the Company failed to report the
net income threshold for the fiscal year 2008 and the Escrow Shares
relating to the 2008 performance threshold will be released to the investors,
Ms. Luo and another stockholder pursuant to the agreed terms and
formula.





767,035
and 119,999 shares of the Escrow Shares will be released back to Ms. Luo and the
other stockholder. The release of shares from escrow to Ms. Luo constitutes a
compensatory plan. The per share closing price of the Company’s common stock on
December 31, 2008 of $0.54 was used to calculate the compensation expenses.
The total expenses recognized for the fiscal year 2008 is $414,199.





The
release of shares from escrow to the other stockholder does not constitute a
compensatory plan as this stockholder did not hold and currently does not hold
any position in the Company and has no relationship to the Company other than as
a stockholder. The release of shares held in escrow to the investors constitutes
a donation from Ms. Luo and the other stockholder to the Company.




Changes
in Control




We do not
currently have any arrangements which if consummated may result in a change of
control of our Company.




Securities
Authorized for Issuance under Equity Compensation Plans




Set forth
below is information with respect to our compensation plans as of December 31,
2009 under which our equity securities are authorized for issuance, aggregated
as follows:





PlanCategory
                
                Numberofsecuritiestobe
                  issueduponexerciseof
                  outstandingoptions,warrants
                  andrights
                
                
                Weighted-averageexercise
                  priceofoutstandingoptions,
                  warrantsandrights
                
                
                Numberofsecurities
                  remainingavailableforfuture
                  issuanceunderequity
                  compensationplans(excluding
                  securitiesreflectedincolumn
                  (a))(a)
                
                
                (b)
                
                
                (c)Equity
      compensation plan approved by security holders (1)
                
                
                1.369,840
                
                
                $
                0.665
                
                
                
                3,630,160Equity
      compensation plan not approved by equity compensation
    holders
                
                
                N/A
                
                
                
                N/A
                
                
                
                N/ATotal




(1)
              The
      Company adopted in the first quarter of 2008 an employee equity incentive
      plan under which the Company’s officers, directors, consultants, and
      employees will be eligible to receive, in relevant part, either securities
      or stock options exercisable for the Company’s securities at exercise
      prices that must generally be no less than the then prevailing fair market
      value of the Company’s common stock on the date of grant. The Company has
      reserved five million (5,000,000) shares of common stock or issuance
      under this plan.




ITEM
      13.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE




Transactions
with Related Persons




The
following includes a summary of transactions since the beginning of fiscal 2009,
or any currently proposed transaction, in which we were, or are, to be a
participant and the amount involved exceeded or exceeds $120,000, and in which
any related person had or will have a direct or indirect material interest
(other than compensation described under “Executive Compensation”). We believe
the terms obtained, or consideration that we paid or received, as applicable, in
connection with the transactions described below were comparable to terms
available or the amounts that would be paid or received, as applicable, in
arm’s-length transactions.




- 48
-




Bank
loan





As of
December 31, 2008, there was a bank loan of $440,100 (originally denominated in
RMB), which carried interest at 7.623% per annum. The bank loan was (i)
guaranteed by Ms. Zheng Luo, who did not receive any compensation for acting as
guarantor; and (ii) secured by a guarantee put up by a guaranty company, which
received $8,649 from the Company for issuing the guarantee. The loan was fully
repaid during the year.




Except as
set forth in our discussion above, none of our directors, director nominees or
executive officers has been involved in any transactions with us or any of our
directors, executive officers, affiliates or associates which are required to be
disclosed pursuant to the rules and regulations of the SEC.




Director
Independence




Each of
Qing Huang, Fei Luo, Charles C. Mo and Tianhong Yu (collectively, the
“Independent Directors”) were elected to serve on the Board of Directors as an
“independent director” as defined by Rule 4200(a)(15) of the Marketplace Rules
of The Nasdaq Stock Market, Inc. (the “Nasdaq Marketplace Rules”), and the Board
of Directors has confirmed the “independent director” status under the
Nasdaq Marketplace Rules of each of the Independent Directors.




ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES




Audit
Fees




T he
aggregate fees billed for professional services rendered by PKF, Certified
Public Accountants, Hong Kong, a member firm of  the PKF International
Limited network of legally independent firms, or PKF, for the audit of our
annual financial statements and review of the financial statements for the
fiscal years ended December 31, 2009 and 2008 were $79,000 and $79,000
respectively .




- 49
-




Audit-Related
Fees
  The
aggregate fees billed in each of the fiscal years ended December 31, 2009 and
2008 for assurance and related services by PKF that are reasonably related to
the performance of the audit or review of the registrant’s financial statements
and are not reported under the paragraph captioned “Audit Fees” above are $0 and
$0, respectively.
  Tax
Fees
  The
aggregate fees billed in each of the fiscal years ended December 31, 2009 and
2008 for professional services rendered by PKF for tax compliance, tax
advice, and tax planning were $0 and $0, respectively.




All
Other Fees




The
aggregate fees billed in each of the fiscal years ended December 31, 2009 and
2008 for products and services provided by PKF, other than the services reported
above under other captions of this Item 14 are $0 and $0,
respectively.




Pre-Approval
Policies and Procedures




Under the
Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our
auditors must be approved in advance by our Board to assure that such services
do not impair the auditors’ independence from us. In accordance with its
policies and procedures, our Board pre-approved the audit and non-audit service
performed by our auditor for our consolidated financial statements as of and for
the years ended December 31, 2009 and 2008, respectively.





PART
IV




ITEM
15. EXHIBITS, FINANCIAL STATE SCHEDULES




(a)
Financial Statements




The
following financial statements, including notes thereto and the independent
auditors' report with respect thereto, are filed as part of this Annual Report
on Form 10-K:




Report
      of Independent Registered Public Accounting FirmConsolidated
      Statements of Operations and Comprehensive (Loss) IncomeConsolidated
      Balance SheetsConsolidated
      Statements of Stockholders’ EquityConsolidated
      Statements of Cash FlowsNotes
      to Consolidated Financial Statements





(b)
Exhibits




- 50
-




Exhibit
              No.
            
            Description2.1
            
            Share
      Exchange Agreement, dated October 9, 2007, among the registrant, certain
      stockholders of the registrant signatory thereto, Omnia Luo Group Limited,
      and the shareholders of Omnia Luo Group Limited (filed as an exhibit to
      the Current Report of Wentworth II, Inc. on Form 8-K, as filed with the
      SEC on October 15, 2007, and incorporated herein by
      reference).*3.1
            
            Certificate
      of Incorporation of Wentworth II, Inc. as filed with the Secretary of
      State of Delaware (filed as an exhibit to the registration statement of
      Wentworth II, Inc. on Form SB-2, as filed with the SEC on December 12,
      2001, and incorporated herein by reference).*3.2
            
            Bylaws
      of Wentworth II, Inc. (filed as an exhibit to the registration statement
      of Wentworth II, Inc. on Form SB-2, as filed with the SEC on December 12,
      2001, and incorporated herein by reference).*4.1
            
            Form
      of Warrant to Purchase Common Stock issued by the registrant to certain
      investors, dated October 9, 2007 (filed as an exhibit to the Current
      Report of Wentworth II, Inc. on Form 8-K, as filed with the SEC on October
      15, 2007, and incorporated herein by reference).*4.2
            
            Form
      of Warrant to Purchase Common Stock issued by the registrant to certain of
      the former shareholders of Omnia Luo Group Limited in exchange for their
      warrants to purchase ordinary shares of Omnia Luo Group Limited, dated
      October 9, 2007 (filed as an exhibit to the Current Report of Wentworth
      II, Inc. on Form 8-K, as filed with the SEC on October 15, 2007, and
      incorporated herein by reference).*4.3
            
            Form
      of Common Stock Placement Agent Warrant issued by the registrant to
      Keating Securities, LLC, dated October 9, 2007 (filed as an exhibit to the
      Current Report of Wentworth II, Inc. on Form 8-K, as filed with the SEC on
      October 15, 2007, and incorporated herein by
  reference).*




- 51
-




4.4
            
            Form
      of Registration Rights Agreement by and among the registrant , investors
      and other stockholders signatory thereto, dated October 9, 2007 (filed as
      an exhibit to the Current Report of Wentworth II, Inc. on Form 8-K, as
      filed with the SEC on October 15, 2007, and incorporated herein by
      reference).*4.5
            
            Form
      of Lock-up Agreement among the registrant and certain stockholders, dated
      October 9, 2007 (filed as an exhibit to the Current Report of Wentworth
      II, Inc. on Form 8-K, as filed with the SEC on October 15, 2007, and
      incorporated herein by reference).*10.1
            
            Form
      of Securities Purchase Agreement by and among the registrant, and certain
      investors, dated October 9, 2007 (filed as an exhibit to the Current
      Report of Wentworth II, Inc. on Form 8-K, as filed with the SEC on October
      15, 2007, and incorporated herein by
  reference).*




10.2
            
            Form
      of Make Good Escrow Agreement by and among the registrant, Zheng Luo, Kong
      Amy Wai Man Ng, Keating Securities, LLC, as agent and Corporate Stock
      Transfer, Inc., as escrow agent, dated October 9, 2007 (filed as an
      exhibit to the Current Report of Wentworth II, Inc. on Form 8-K, as filed
      with the SEC on October 15, 2007, and incorporated herein by
      reference).*10.3
            
            First
      Amendment Agreement by and among the registrant, Omnia Luo Group Limited,
      Zheng Luo and JAIC-CROSBY Greater China Investment Fund Limited, dated as
      of October 4, 2007 (filed as an exhibit to the Current Report of Wentworth
      II, Inc. on Form 8-K, as filed with the SEC on October 15, 2007, and
      incorporated herein by reference).*10.4
            
            First
      Amendment Agreement by and among the registrant, Omnia Luo Group Limited,
      Zheng Luo and certain holders of Omnia Luo Group Limited preferred shares,
      dated as of October 4, 2007 (filed as an exhibit to the Current Report of
      Wentworth II, Inc. on Form 8-K, as filed with the SEC on October 15, 2007,
      and incorporated herein by reference).*10.5
            
            Agreement
      with Principal Shareholder, Chief Executive Officer and Director by and
      between the registrant and Zheng Luo, dated October 9, 2007 (filed as an
      exhibit to the Current Report of Wentworth II, Inc. on Form 8-K, as filed
      with the SEC on October 15, 2007, and incorporated herein by
      reference).*10.6
            
            Assignment
      and Assumption Agreement by and between Omnia Luo Group Limited and the
      registrant, dated October 9, 2007 (filed as an exhibit to the Current
      Report of Wentworth II, Inc. on Form 8-K, as filed with the SEC on October
      15, 2007, and incorporated herein by reference).*14.1
            
            Business
      Ethics Policy and Code of Conduct (Incorporated by reference to Exhibit
      14.1 to the registrant’s Current Report on Form 8-K filed on February 1,
      2008).*21
            
            Subsidiaries
      of the registrant (Incorporated by reference to Exhibit 21 to the
      registrant’s Current Report on Form 8-K filed on October 15,
      2007).*31.1
            
            Certification
      of Principal Executive Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.**31.2
            
            Certification
      of Principal Financial Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.**32.1
            
            Certification
      of Principal Executive Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.**32.2
            
            Certification
      of Principal Financial Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.**




*
Incorporated by reference.




** Filed
herewith.




- 52
-





SIGNATURES




In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





OMNIALUO,
      INC.Dated:
      March 31,
      2010
            By:
            /s/ Zheng LuoZheng
      Luo, Chief Executive Officer (Principal Executive
              Officer)




In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.




Each
person whose signature appears below hereby authorizes Zheng Luo or Xiaoyin Luo
as attorneys-in-fact to sign on his or her behalf, individually, and in each
capacity stated below, and to file all amendments and/or supplements to this
annual report on Form 10-K.




Signature
            
            Title/s/ Zheng Luo
            
            
            
            March
      31,
      2010Zheng
      Luo
            
            Chairwoman/s/ David Wang
            
            Chief
      Financial Officer (Principal
            
            March
      31,
      2010David
      Wang
            
            Financial
      and Accounting Officer)/s/ Wenbin Fang
            
            Director
            
            March
      31,
      2010Wenbin
      Fang/s/ Qing Huang
            
            Director
            
            March
      31,
      2010Qing
      Huang/s/ Fei Luo
            
            Director
            
            March
      31,
      2010Fei
      Luo/s/ Xiaoyin Luo
            
            Director
            
            March
      31,
      2010Xiaoyin
      Luo/s/ Charles C. Mo
            
            Director
            
            March
      31,2010Charles
      C. Mo/s/ Tianhong Yu
            
            Director
            
            March
      31,2010Tianhong
      Yu






- 53
-


OmniaLuo,
Inc.
  Consolidated
Financial Statements
 For
theyear
endedDecember
31,2009
 (Stated
in US dollars)
  F-1
  OmniaLuo,
Inc.
 Consolidated
Financial Statements
 For
theyear
endedDecember
31, 2009
 Index
to Consolidated Financial Statements
   PagesReport
      of Independent Registered Public Accounting Firm
              
              F-3Consolidated
      Statements ofOperationsand
      Comprehensive (Loss) Income
              
              F-4Consolidated
      Balance Sheets
              
              F-5Consolidated
      Statements of Stockholders’Equity
              
              F-6Consolidated
      Statements
      of Cash Flows
              
              F-7Notes
      to Consolidated Financial Statements
              
              F-8
      - F-28
  F-2
  Report
of Independent Registered Public Accounting Firm
  To
the Directors and Stockholders
of
 OmniaLuo,
Inc.
  We
have audited the accompanyingconsolidatedbalance
sheetsofOmniaLuo,
Inc. (the “Company”)
and its subsidiaries as of December 31, 2009and
2008,
and the related consolidated statements ofoperationsand
comprehensive (loss) income, stockholders’equity
and cash flowsforeach
ofthetwo
years in the period ended December
31, 2009.  These
financial statements are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
financial statements based on our audits.
  We
conducted our auditsin
accordance with the standards of thePublic
Company Accounting Oversight Board (United States).Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement
presentation.  We believe that our auditsprovide
a reasonable basis for our opinion.
  In
our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries
as of December 31, 2009and
2008,and
the consolidated results of their operations and their cash flows
foreach
of the two years in the period ended December 31, 2009in
conformity with accounting principles generally accepted in the United States
of
America.
   /s/
PKF
 Certified
Public Accountants
 Hong
Kong, China
 March
30,2010
  F-3
  OmniaLuo,
Inc.
 Consolidated
Statements ofOperationsand
Comprehensive(Loss)Income
 (Stated
in US Dollars)
   Year
      ended December 31,2009
              
              
              2008Revenues
      - Note
      3
              
              $
              9,349,878
              
              
              $
              11,902,404Cost
      of revenues
              
              
              (8,774,968
              )
              
              
              (4,838,286
              )Gross
      profit
              
              
              574,910
              
              
              
              7,064,118ExpensesGeneral
      and administrative
      expenses
              
              
              3,300,806
              
              
              
              2,819,942Depreciation
              
              
              274,101
              
              
              
              211,915Selling
      and marketing expenses
              
              
              2,794,026
              
              
              
              2,614,1936,368,933
              
              
              
              5,646,050(Loss)
      income from operations
              
              
              (5,794,023
              )
              
              
              1,418,068Interest
      income
              
              
              1,442
              
              
              
              12,278Other
      income
              
              
              55,684
              
              
              
              63,350Government
      grant income-
      Note 3
              
              
              146,610
              
              
              
              -Finance
      costs-
      Note 4
              
              
              (79,723
              )
              
              
              (40,821
              )Make
      good provision - Note 15
              
              
              -
              
              
              
              (414,199
              )(Loss)
      income before income taxes
              
              
              (5,670,010
              )
              
              
              1,038,676Income
      taxes - Note 5
              
              
              366,574
              
              
              
              -Net
      (loss) income
              
              $
              (5,303,436
              )
              
              $
              1,038,676Other
      comprehensive(loss)incomeForeign
      currency translation adjustments
              
              
              (2,812
              )
              
              
              537,109Comprehensive
      (loss) income
              
              $
              (5,306,248
              )
              
              $
              1,575,785(Loss)
      earningsper
      ordinary share - Note 6-     Basic
              
              $
              (0.23
              )
              
              $
              0.05-     Diluted
              
              $
              (0.23
              )
              
              $
              0.05Weighted
      average number ofsharesoutstanding-     Basic
              
              
              22,840,000
              
              
              
              22,840,000-     Diluted
              
              
              22,840,000
              
              
              
              22,841,215
  Seetheaccompanyingnotes
to consolidated financial statements.
  F-4
  OmniaLuo,
Inc.
 Consolidated
Balance Sheets
 (Stated
inUS
Dollars)
   As
      of December 31,2009
              
              
              2008ASSETSCurrent
      assetsCash
      and cash equivalents
              
              $
              869,495
              
              
              $
              1,253,997Trade
      receivables,
      net-
      Note 7
              
              
              1,380,180
              
              
              
              2,199,756Inventories,
      net-
      Note 8
              
              
              2,424,601
              
              
              
              6,460,621Other
      receivables
      and deposits -Note
      9
              
              
              3,322,414
              
              
              
              4,285,219Deferred
      tax asset-Note
      5
              
              
              366,799
              
              
              
              -Total
      current assets
              
              
              8,363,489
              
              
              
              14,199,593Property
      and equipment, net - Note 10
              
              
              816,289
              
              
              
              1,084,289TOTAL
      ASSETS
              
              $
              9,179,778
              
              
              $
              15,283,882LIABILITIES
      AND STOCKHOLDERS’EQUITYLIABILITIESCurrent
      liabilitiesBank
      loan - Note 12
              
              $
              -
              
              
              $
              440,100Trade
      payables
              
              
              521,581
              
              
              
              734,077Loan
      fromastockholder
      - Note 13
              
              
              7,862
              
              
              
              8,052Other
      payables, deposits received and
      accrued expenses-
      Note 14
              
              
              3,346,246
              
              
              
              3,795,958Total
      current liabilities
              
              
              3,875,689
              
              
              
              4,978,187TOTALLIABILITIES
              
              
              3,875,689
              
              
              
              4,978,187COMMITMENTS
      AND CONTINGENCIES-Note16STOCKHOLDERS’EQUITYCommonstock:
      par value $0.01 per shareAuthorized
      40,000,000 shares; issued and outstanding22,840,000
      shares
              
              
              228,400
              
              
              
              228,400Preferred
      stock: par value $0.01 per shareAuthorized
      10,000,000 shares; none issued and outstanding
              
              
              -
              
              
              
              -Additional
      paid-in capital
              
              
              9,198,231
              
              
              
              8,893,589Statutory
      reserve - Note 17
              
              
              512,709
              
              
              
              512,709Accumulated
      other comprehensive income
              
              
              831,019
              
              
              
              833,831Accumulated
      deficit
              
              
              (5,466,270
              )
              
              
              (162,834
              )TOTALSTOCKHOLDERS’EQUITY
              
              
              5,304,089
              
              
              
              10,305,695TOTAL
      LIABILITIES AND STOCKHOLDERS’EQUITY
              
              $
              9,179,778
              
              
              $
              15,283,882
  Seetheaccompanyingnotes
to consolidated financial statements.
  F-5
  OmniaLuo,
Inc.
 Consolidated
Statements of Stockholders’Equity
 (Stated
in US Dollars)
   AccumulatedAdditional
              
              
              
              
              
              otherCommon
      stock
              
              
              paid-in
              
              
              Statutory
              
              
              comprehensive
              
              
              AccumulatedNo.
      of shares
              
              
              Amount
              
              
              capital
              
              
              reserve
              
              
              income
              
              
              deficit
              
              
              TotalBalance,January
      1, 2008
              
              
              22,840,000
              
              
              $
              228,400
              
              
              $
              8,479,390
              
              
              $
              261,948
              
              
              $
              296,722
              
              
              $
              (950,749
              )
              
              $
              8,315,711Make
      good escrow arrangement
              
              
              -
              
              
              
              -
              
              
              
              414,199
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              414,199Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,038,676
              
              
              
              1,038,676Foreign
      currency translation adjustments
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              537,109
              
              
              
              -
              
              
              
              537,109Appropriation
      tostatutoryreserve
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              250,761
              
              
              
              -
              
              
              
              (250,761
              )
              
              
              -Balance,
      December 31, 2008
              
              
              22,840,000
              
              
              
              228,400
              
              
              
              8,893,589
              
              
              
              512,709
              
              
              
              833,831
              
              
              
              (162,834
              )
              
              
              10,305,695Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (5,303,436
              )
              
              
              (5,303,436
              )Share-based
      compensation for stock option plan
              
              
              -
              
              
              
              -
              
              
              
              304,642
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              304,642Foreign
      currency translation adjustments
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,812
              )
              
              
              -
              
              
              
              (2,812
              )Balance,
      December 31, 2009
              
              
              22,840,000
              
              
              $
              228,400
              
              
              $
              9,198,231
              
              
              $
              512,709
              
              
              $
              831,019
              
              
              $
              (5,466,270
              )
              
              $
              5,304,089
  Seetheaccompanyingnotes
to consolidated financial statements.
  F-6
  OmniaLuo,
Inc.
 Consolidated
Statementsof
Cash Flows
 (Stated
in US Dollars)
   Year
      ended December 31,2009
              
              
              2008Cash
      flows from operating activitiesNet
      (loss) income
              
              $
              (5,303,436
              )
              
              $
              1,038,676Adjustment
      to reconcile net (loss) income to net cash provided
    by(used
      in) operating activities:Depreciation
              
              
              274,101
              
              
              
              211,915Allowance
      fordoubtfulaccounts
              
              
              805,319
              
              
              
              3,696Allowance
      for (recovery
      of)obsolete
      inventories
              
              
              454,052
              
              
              
              (65,456
              )Bad
      debts written off
              
              
              392,834
              
              
              
              -Deferred
      income taxes
              
              
              (366,574
              )
              
              
              -Losson
      disposal of property and equipment
              
              
              386
              
              
              
              736Share-based
      compensation
              
              
              304,642
              
              
              
              -Make
      goodprovision
              
              
              -
              
              
              
              414,199Changes
      in operating assets and liabilities:Trade
      receivables
              
              
              (314,572
              )
              
              
              (510,651
              )Inventories
              
              
              3,579,491
              
              
              
              (3,546,376
              )Other
      receivables and deposits
              
              
              897,707
              
              
              
              (2,112,904
              )Trade
      payables
              
              
              (212,365
              )
              
              
              425,839Other
      payables, deposits received and accrued
      expenses
              
              
              (449,392
              )
              
              
              2,293,654Net
      cash flows provided by (used in) operating
    activities
              
              
              62,193
              
              
              
              (1,846,672
              )Cash
      flows from investing activitiesAcquisitionofpropertyand
      equipment
              
              
              (6,974
              )
              
              
              (520,466
              )Proceeds
      from disposal of property and equipment
              
              
              323
              
              
              
              4,319Net
      cash flows used in investing activities
              
              
              (6,651
              )
              
              
              (516,147
              )Cash
      flows from financing activities(Repaymentof)
      proceeds from bank loans
              
              
              (439,830
              )
              
              
              432,450Repayment
      of loans from stockholders
              
              
              (190
              )
              
              
              (6,242
              )Net
      cash flows (used in) provided by financing
    activities
              
              
              (440,020
              )
              
              
              426,208Effect
      of foreign currency translation on cash and cash
      equivalents
              
              
              (24
              )
              
              
              106,893Net
      decrease
      in cash and cash equivalents
              
              
              (384,502
              )
              
              
              (1,829,718
              )Cash
      and cash equivalents - beginning of year
              
              
              1,253,997
              
              
              
              3,083,715Cash
      and cash equivalents - end of year
              
              $
              869,495
              
              
              $
              1,253,997Supplemental
      disclosure for cash flow informationInterest
      paid
              
              $
              24,395
              
              
              $
              -Income
      taxes paid
              
              $
              -
              
              
              $
              -
  Seetheaccompanyingnotes
to consolidated financial statements.
  F-7
  OmniaLuo,
Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
   1.
              Corporate
      information
  (a)
              OmniaLuo,
      Inc.(the“Company”)
      was incorporated inthe
      State of Delaware onMarch
      7, 2001under
      the name ofWentworth
      II,
      Inc. for the purpose of pursuing a business combination.  OnNovember16,
      2007,
      the Company changed its name toOmniaLuo,
      Inc.
  TheCompany’s
common
stock began trading on the Over-the-Counter Bulletin Board under the ticker
symbol“OLOU”on
January 10, 2008.
  (b)
              On
      October 9, 2007, the Companyentered
      into a shareexchange
      agreement with Omnia Luo Group Limited (“Omnia
      BVI”),
      theshareholdersofOmnia
      BVI and certain ofthethen
      Company’sprincipalstockholders.  Pursuant
      to the share exchange agreement, theCompanyagreed
      to issue to the shareholders of Omnia BVI 16,800,000 shares of the
      Company’s
      common stock in exchange for all of the then issued
      andoutstandingshares
      of Omnia BVI.
  The
aforesaid share exchange transaction was completed on October 9, 2007 and
thereafter Omnia BVI became a wholly-owned subsidiary of theCompanyand
the former shareholders of Omnia BVI becamethemajoritystockholders
of theCompany.  This
transaction constituted a reverse takeover transaction (the“RTO”).
  Concurrent
with the consummation of the RTO, theCompanyissued
4,920,000 shares of its common stock and five-year warrants to purchase an
aggregate of 4,920,000
shares of theCompany’s
common stock at $1.5625 per share for an aggregate purchase price of $6.15
million, to a total of 38 investors in a private placement (the“2007
Private Placement”).  In
connection with this private placement, the Company issued
five-year warrants to purchase 492,000 shares of the Company’s
common stock at $1.5625 per share to Keating Securities, LLC (“Keating
Securities”),
as a financial advisory fee in partial consideration of their services in
connection with the private placement.  Prior
to theconsummationof
the RTO and the 2007 Private Placement, the Company was deemed to have been an
affiliate of Keating Securities by reason of the ownership of shares of the
Company’s
common stock byprincipalsand
executives of Keating Securities.  The
warrants issued to the investors and Keating Securities have been classified in
equity and were outstanding as of December 31, 2009and
2008.
  Omnia
BVIis
a business companyorganizedunder
the laws of the British Virgin Islands (the“BVI”)
onAugust11,
2006.  It has conducted no business and is a holding company whose
only asset isa
100% equity interestinShenzhen
Oriental Fashion Co., Ltd. (“Oriental
Fashion”).Oriental
Fashion was established on September 19, 2006 in the People’s
Republic
of China (the “PRC”).
  F-8
  OmniaLuo,
Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
   1.
              Corporate
      information(Cont’d)
  (c)
              Pursuant
      to preferred stock purchase and shareholders agreements dated as of
      December 15, 2006 and December
      20, 2006, Omnia BVI had issued an aggregate of 2,147 convertible preferred
      shares (the“BVI
      Preferred Shares”)
      and detachable warrants to purchase up to $365,940 in its ordinary shares,
      based on the offering price in the next financing of Omnia BVI
      (the“BVI
      Warrants”),
      to a private venture capital investment fund (the“Lead
      Investor”)
      and several individual investors for a total cash investment of
      $729,980.
  By
      agreements dated as of October 9, 2007: (i) among Omnia BVI, the Lead
      Investor, Ms. Zheng Luo
      (theprincipalstockholder
      and chief executive officer of the Company) and another of the
      Company’s
      stockholders, and (ii) among Omnia BVI, Ms. Zheng Luo and each of theotherholders
      of BVI Preferred Shares and Warrants, effective upon theclosingof
      the
      RTO, each BVI Preferred Shares was converted into a specified number of
      ordinary shares of Omnia BVI, with each such ordinary share of Omnia BVI
      then being exchanged for 319.8294 shares of theCompany’s
      common stock and each BVI Warrant was exchanged for
      warrants to purchase theCompany’s
      common stock, exercisable at any time during a two-year period commencing
      on December 17, 2007, at a per share price of
      $1.25.
  292,752
warrants were issued in exchange for the BVI Warrants.  Theirexerciseprice
issubjectto
adjustment for share subdivisions, share combinations, mergers or
consolidation.  These warrants have been classified in equity and were
outstanding as of December 31, 2008,
and expired during the current year.
  The
      Company’s
      common stock issuable
      under the aforementioned agreements were included in the 16,800,000 shares
      of the Company’s
      common stock issued in relation to the RTO as detailed in note 1(b) to the
      consolidated financial
  statements.
  2.
              Description
      of business
  Following
the RTO, theCompanycommenced
to beengaged
in the design,marketing,
distributionand
sales of women’s
apparel underthe
brand names of “OMNIALUO”and“OMNIALO”(collectively
referred to herein as the“OMNIALUO
Brands”)through
a network of over 108 retail stores across
the PRC.  The Company offers a complete line of business casual
women’s
wear, including bottoms, tops and outerwear, as well as
accessories.
  There
arecurrentlythree
different types of retail stores that carry theOMNIALUO
Brands:
(i) Company-ownedstores,
which stores are owned exclusively by the Company and carry only theOMNIALUO
Brands,
(ii) co-owned stores, which stores are owned jointly by the Company and a third
party, and carry theOMNIALUO
Brandsexclusively,
and (iii)independent
distributor
stores, which stores are owned exclusively by third parties and carry
theOMNIALUO
Brands
exclusively.
  3.
              Summary
      of significant accounting
policies
  Basis
of presentation
  The
accompanying consolidated financial statements of the Company and its
subsidiaries
have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S.
GAAP”).




F-9




OmniaLuo,
Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





3.
            Summary
      of significant accountingpolicies(Cont’d)




Principles
of consolidation




The
consolidated financial statements include the accounts of the Company and its
subsidiaries.  All significant inter-company accounts and transactions
have been eliminated in consolidation.




Use
of estimates




In
preparing financial statements in conformity with U.S. GAAP, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the dates of
the financial statements,
as well as the reported amounts of revenues and expenses during the reporting
periods.  These accounts and estimates include, but are not limited
to, the valuation of trade and other receivables,
inventories and deferred income taxesand
share-based
compensation,
provision for warranty and the estimation on useful lives of property and
equipment.  Management makes these estimates using the best
information available at the time the estimates are made; however, actual
results could differ materiallyfrom
these estimates.




Concentrations
of credit risk




Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents and trade
receivables.  As of December 31, 2009,theCompany’scash
and cash equivalents were held by major financial institutions located in the
PRC andHong
Kong,
which management believes are of high credit quality.  With respect to
trade receivables, the Company extends credit based on an evaluationof
the customer’s
financial condition.  The Company generally does not require
collateral for trade receivables and maintains an allowance for doubtful
accounts of trade receivables.




During
the year ended December 31, 2009, there was a customer whoserevenuerepresented
approximately 24% of the Company’s
totalrevenue.As
of December 31, 2009, there were three suppliers whose trade deposits
represented approximately 41%, 38% and 11% of the Company’s
total trade deposits paid to suppliers.




During
the yearended
December 31, 2008,
there wasnocustomerwho
contributed 10% or more to theCompany’s
totalrevenue.As
of December 31, 2008,
there werefivesuppliers
whose trade deposits represented approximately25%,
20%, 15%,14%
and 13%
of the Company’s
totaltrade
deposits paid to suppliers.




Cash
and cash equivalents




Cash
and cash equivalents include all cash, deposits in banks and other highly liquid
investments with initial maturities of three monthsor
less.  As
of December 31, 2009,
approximately80%
ofthe
cash and cash equivalents were denominated in Renminbi (“RMB”),
whichwere
not freely convertible into foreign currencies and the remittance of these funds
out of the PRCwassubject
to exchange control restrictions imposed by the PRC government.  Theremaining
balances of cash and cash equivalents denominated in United States dollars and
Hong Kong dollars were2%
and18%
respectively.




F-10




OmniaLuo,
Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





3.
            Summary
      of significant accounting
      policies(Cont’d)




Allowance
for doubtful accounts




The
Company establishes an allowance for doubtful accounts based on
management’s
assessment of the collectibility of trade receivables.  A considerable
amount of judgment is required in assessing the amount
of the allowance and the Company considers the historical level of credit losses
and applies percentages to aged receivablescategories.  The
Company makes judgments about the creditworthiness of each customer based on
ongoing credit evaluations, andmonitors
current economic trends that might impact the level of credit losses in the
future.  If the financial condition of the customers is to
deteriorate, resulting in their inability to make payments, a larger allowance
may be required.




Bad
debts arewritten
off when identified.  The Company extends unsecured credit to
customers ranging from30
to 45 daysin
the normal course of business.  The Company does not accrue interest
on trade receivables.




Allowance
fordoubtfulaccountsamounting
to $754,290and
$13,023wasrecognizedas
ofDecember31,
2009and
2008,
respectively.




Inventories




Inventories
are stated at the lower of cost or market.  Cost is determined on aFIFObasis
and includes all expenditures incurred in bringing the goods to the point
ofsale
and putting them in a saleable condition.




The
Company estimatesthenet
realizable value of inventories based on intended use, current market value and
inventory ageing analyses.  The Company writes down the inventories
for estimatedobsolescenceorunmarketable
inventories equivalentto
the difference betweenthecost
ofinventoriesand
theestimatedmarket
value based upon assumptions about future demand and marketconditions.




Allowance
for(recovery
of) obsolete inventories of $454,052and$(65,456)
were charged (credited) tothe
consolidatedstatementof
operationsand
comprehensive (loss) incomeduring
the years ended December 31, 2009and
2008,
respectively.




Property
and equipment


Property
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.




Depreciation
is provided on a straight-line basis over the assets’estimated
useful livesat
the annual rate of 20%.




Maintenance
or repairs are charged to expense as incurred.  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 tothe
consolidatedstatement
of operationsand
comprehensive (loss) income.




F-11




OmniaLuo,
Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





3.
            Summary
      of significant accounting policies(Cont’d)




Impairment
of long-lived assets




Long-lived
assets are
tested 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 exceedthe
future undiscounted cash flows attributable to such assets.  During
the reporting periods,
the Companydidnot
identify any indicators that would require testing for
impairment.




Revenue
recognition




Revenue
is recognized when it is probable that theeconomic
benefits will flow to the Company and when the revenue can be measured reliably,
on the following basis:




(i)
            revenue
      from sales of the Company’s
      products is recognized when the significant risks and rewards of ownership
      have been transferred to thebuyerat
      the time of deliveryand
      the sales price is fixed or determinable and collection is reasonably
      assured.




In
respect of the revenue generated from the co-owned stores, the Company has
reviewedFASB
ASC 605“Revenue
Recognition”and
considers itselfto
fulfill the following indicators for gross revenue reporting: (i) the Company is
the primary obligator to the customer as the Company is responsible for
fulfillment and customer remedies in the event of dissatisfaction; (ii) the
Company retains inventory
risk of the unsold inventories in the co-owned stores; and (iii) the Company has
complete latitude to set the prices for the products and the net amount to be
earned varies with that selling price. Accordingly, the Company is the principal
of these transactions
according toASC
605and
reportsthe
revenue from co-owned stores on a gross basis. The payments (or commission) paid
to the partners of the co-owned stores are recorded as the Company’s
expenses.




(ii)
            interest
      income is recognized on an accrualbasis.




Advertising
and transportation expenses




Advertising
and transportation expenses are charged to expense as
incurred.




Advertising
expenses amounting to $63,583 and $186,377 for the years ended December 31,
2009and
2008,respectively,wereincludedin
selling and marketing expenses.




Transportation
expenses amounting to $63,117and$31,051for
the years ended December 31, 2009
and 2008,respectively,wereincluded
in selling and marketing expenses.




Leases




Leases
are classified as finance leases whenever
the terms of the leases transfer substantially all the risks and rewards of
ownership to the lessee.  All other leases are classified as operating
leases.




Rentals
payable under operating leases are charged to theconsolidatedstatement
of operationsand
comprehensive (loss) incomeon
a straight-line basis over the terms of the relevant
leases.




F-12




OmniaLuo,
Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





3.
            Summary
      of significant accounting policies(Cont’d)




Warranty




The
Companymaintains
a policy ofproviding
after sales servicesfor
all productsby
way of a warranty program.  The
Company has assessed the amount of goods that would be returned fromcustomersand
concluded that no warranty reserve was necessary.  However,
theCompanywillperiodically
assess theestimationof
its warranty liability and recognize
thereservewhen
necessary based on the actual experience.




Stock-based
compensation


The
Company adopted the fair value method of accounting for share-based
compensation.
Under the fair value method, compensation cost related to employee stock options
or similar equity instruments which are equity-classified awards, is measured at
the grant date based on the value of the award and is recognized over the
requisite service
period, which is usually the vesting period. The cost of a liability-classified
award is measured based on its current fair
value.




Fair
value of share options granted is determined using the Black-Scholes model.
Under this model, certain assumptions, including
the risk-free interest rate, the expected life of the options and the estimated
fair value of the Company’s
common stock and expected volatility, are required to determine the fair value
of the options. If different assumptions had been used, thefair
value of the options would have been different from the amount the Company
computed and recorded, which would have resulted in either an increase or
decrease in the compensation expense.




Income
taxes




Income
taxes are accounted for under the asset and
liability method.  Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to temporary differences between
the financial statements carrying amounts of existing assets and liabilities and
loss carryforwards
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 be recovered or
settled. The effect on deferred taxassets
and liabilities of a change in tax rates is recognized in theconsolidatedstatement
of operationsand
comprehensive (loss) incomein
the period that includes the enactment date.




Off-balance
sheet arrangements




The
Company does not have any off-balance
sheet arrangements.




Government
grant income




Government
grant income consisted of receipt of funds to reward the Company’s
successful listingon
theOver-the-Counter
Bulletin Board and private placement.  No present or future obligation
arises from the
receipt of such amount.


Comprehensive
income




The
Company has adopted ASC 220 “Comprehensive
Income”,
previously SFASNo.130,
which establishes standards for reporting and display of comprehensive income,
its components and accumulated balances.  Components
of comprehensive income include net income/lossand
foreign currency translation adjustments.




F-13




OmniaLuo,
Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





3.
            Summary
      of significant accounting policies(Cont’d)




Foreign
currency
translation




The
functional currenciesofthe
Companyand
its subsidiaries include United
States dollars (“US$”)andRMB.The
Companyand
its subsidiariesmaintaintheirfinancial
statements in their
respectivefunctional
currency.  Monetary assets andliabilities
denominated in currencies other than the functional currency are translated
into
the functional currency at rates of exchange prevailing at the balance sheet
date.  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 incomeor
lossfor
the respective periods.




For
financial reporting purposes, the financial statements of thesubsidiariesthatare
prepared usingRMBhave
been translated into US$.  Assets and liabilities are translated at
the exchange rates at the balance sheet date and revenue and expenses
are
translated at the average exchange rates andstockholders’equity
is translated at historical exchange rates.  Any translation
adjustments resulting are not included in determining net incomeorlossbut
are included in foreigncurrency
translationadjustments
toaccumulatedother
comprehensive income,
a component ofstockholders’equity.  The
exchange rates in effect as
ofDecember
31, 2009 and 2008 were bothRMB1
for $0.1467.The
average exchange rates for theyearsended
December 31, 2009
and 2008wereRMB1
for $0.1466and$0.1442respectively.
Therewasno
significant fluctuation in the exchange rates for conversion of RMB to
US$after
the balance sheet date.




Fair
value of financial instruments




TheCompany
considers the carryingvaluesof
assets andliabilitiesreported
in the consolidated balancesheetand
qualifying as financial instruments approximate their fair valuesdue
to the short-term maturity of such
instruments.




It
isthemanagement’s
opinion that the Company is not exposed to significantinterest,
price,
foreign currencyor
credit risks arising from these financial
instruments.




Basic
and diluted(loss)earnings
per share




Basic(loss)earningsper
share is computed using the weighted average number of shares outstanding during
the periodspresented.  The
weighted average number of shares of the Company represents theaveragenumber
ofcommon
stockoutstanding
during thereporting
periods.




Diluted(loss)earnings
per share are computed using the sum of weighted average number of shares
outstanding
and dilutivepotential
sharesoutstandingduring
the periods presented.  During the year ended December 31, 2009, there
were no dilutive potential shares. Duringthe
year ended December 31, 2008, dilutive potential shares included warrants issuedto
investors.




F-14




OmniaLuo,
Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





3.
            Summary
      of significant accounting policies(Cont’d)




Recently
issued accounting pronouncements




FASB
Accounting Standards Codification (Accounting Standards
Update “ASU”No.
2009-1)




In
June 2009, the Financial Accounting Standard Board (“FASB”)
approved its Accounting Standards Codification (“Codification”)
as the single source of authoritative United States accounting and reporting
standards applicable for
all non-governmental entities, with the exception of the SEC and its staff. The
Codification is effective for interim or annual financial periods ending after
September 15, 2009 and impacts the Company’s
financial statements as all future references toauthoritative
accounting literature will be referenced in accordance with the Codification.
There have been no changes to the content of the Company’s
financial statements or disclosures as a result of implementing the
Codification.




As
a result of the Company’s
implementation of the Codification during the current year, previous references
to new accounting standards and literature are no longer applicable. In these
financial statements, the Company providesreference
to both new and old guidance to assistin
understanding the impacts of recently adopted accounting literature,
particularly for guidance adopted since the beginning of the current fiscal year
but prior to the Codification.




Noncontrolling
Interests (Included in amended Topic ASC 810 “Consolidation”,
previously SFAS No. 160 “Noncontrolling
Interests in Consolidated Financial Statements,
an amendment of ARB No. 51”)




The
amended topic establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation
of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is
an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. The adoption of this amended
topic hasno
material impact on the Company’s
financial statements.




Business
Combinations (Included in amended Topic ASC 805 “Business
Combinations”,
previously SFAS No. 141(R))




This
ASC guidance addresses the accounting and disclosure for identifiable assets
acquired,
liabilities assumed, and noncontrolling interests in a business combination. The
adoption of this amended topic has no material impact on the Company’s
financial statements.




Intangibles
- Goodwill and Other (Included in amended Topic ASC 350, previously
FASB Staff Position (“FSP”)
No. 142-3 “Determination
of the Useful Life of Intangible Assets”)




The
amended topic amends the factors an entity should consider in developing renewal
or extension assumptions used in determining the useful life of
recognized
intangible assets. This new guidance applies prospectively to intangible assets
that are acquired individually or with a group of other assets in business
combinations and asset acquisitions. The amended topic is effective for
financial statements issued
for fiscal years and interim periods beginning after December 15, 2008. Early
adoption is prohibited. The adoption of this amended topic has no material
effect on the Company's financial statements.




F-15




OmniaLuo,
Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





3.
            Summary
      of significant accounting policies (Cont’d)




Recently
issued accounting pronouncements (Cont’d)




Interim
Disclosures about Fair Value of Financial Instruments (Included in amended Topic
ASC 825 “Financial
Instruments”,
previously FSP SFAS No. 107-1)




This
guidance requires that the fair value disclosures required for all financial
instruments be included in interim financial statements. This guidance also
requires entities to disclose the method and significant assumptions
used to estimate the fair value of financial instruments on an interim and
annual basis and to highlight any changes from prior periods. The amended topic
was effective for interim periods ended after 15 September 2009. The adoption of
this amendedtopic
has no material impact on the Company’s
financial statements.




Business
Combinations (Included in amended Topic ASC 805, previously FSP No. 141R-1
“Accounting
for Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies”)




Amended
topic ASC 805 amends the requirements for the provisions for the initial
recognition and measurement, subsequent measurement and accounting, and
disclosures for assets and liabilities arising from contingencies in business
combinations.
The amended topic eliminates the distinction between contractual and
non-contractual contingencies, including the initial recognition and measurement
criteria and instead carries forward most of the provisions for acquired
contingencies. The amended topic
is effective for contingent assets and contingent liabilities acquired from
business combinations for which the acquisition data is on or as of December 15,
2008. The adoption of this amended topic has no material effect on the Company's
financial statements.




Fair
Value Measurements and Disclosures (Included in amended Topic ASC 820,
previously FSP No. 157-4 “Determining
Whether a Market is Not Active and a Transaction Is Not Distressed”)




The
amended topic clarifies when markets are illiquid or that market
pricing may not actually reflect the “real”value
of an asset. If a market is determined to be inactive and market price is
reflective of a distressed price then an alternative method of pricing can be
used, such as a present value technique to estimate
fair value. The amended topic identifies factors to be considered when
determining whether or not a market is inactive. The amended topic is effective
for interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending
after March 15, 2009 and shall be applied prospectively. The adoption of this
amended topic has no material effect on the Company's financial
statements.




Investments
- Debt and Equity Securities - Overall - Transition and Open Effective Date
Information
(Included in amended Topic ASC 320, previously FSP No. 115-2 and SFAS No. 124-2
“Recognition
and Presentation of Other-Than-Temporary Impairments”)




The
amended topic amends the other-than-temporary impairment guidance in U.S. GAAP
for debt securitiesthrough
increased consistency in the timing of impairment recognition and enhanced
disclosures related to the credit and noncredit components of impaired debt
securities that are not expected to be sold. In addition, increased disclosures
are required forboth
debt and equity securities regarding expected cash flows, credit losses, and
securities with unrealized losses. Theadoption
of this amended topic has no material impact on the Company’s
financial statements.




F-16




OmniaLuo,
Inc.


Notes
to Consolidated Financial
Statements


(Stated
in US Dollars)





3.
            Summary
      of significant accounting policies (Cont’d)




Recently
issued accounting pronouncements (Cont’d)




Subsequent
Events (Included in amended Topic ASC 855 “Subsequent
Events”,
previously SFAS No. 165)




The
amended
topic establishes accounting and disclosure requirements for subsequent events.
The amended topic details the period after the balance sheet date during which
the Company should evaluate events or transactions that occur for potential
recognition ordisclosure
in the financial statements, the circumstances under which the Company should
recognize events or transactions occurring after the balance sheet date in its
financial statements and the required disclosures for such
events.




In
February 2010,the
FASB issued ASU No. 2010-09, an update to this amended topic, which removed the
requirement, effective immediately, to disclose the date through which
subsequent events had been evaluated. The Company adopted this amended topic
upon its effective date.




Accounting
for Transfers of Financial Assets (Included in amended Topic ASC 860
“Transfers
and Servicing”,
previously SFAS No. 166 “Accounting
for Transfers of Financial Assets - an Amendment of FASB Statement No.
140”)




The
amended topic addresses information
a reporting entity provides in its financial statements about the transfer of
financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor’s
continuing involvement in transferred financial
assets. Also, the amended topic removes the concept of a qualifying special
purpose entity, limits the circumstances in which a transferor derecognizes a
portion or component of a financial asset, defines participating interest and
enhances the information
provided to financial statement users to provide greater transparency. The
amended topic is effective for the first annual reporting period beginning after
November 15, 2009 and will be effective for the Company as of January 1, 2010.
The managementis
in the process of evaluating the impact of adopting this amended topic on the
Company’s
financial statements.




Consolidation
of Variable Interest Entities - Amended (Included in amended Topic ASC 810
“Consolidation”,
previously SFAS 167 “Amendments
toFASB
Interpretation No. 46(R)”)




The
amended topic require an enterprise to perform an analysis to determine the
primary beneficiary of a variable interest entity; to require ongoing
reassessments of whether an enterprise is the primary beneficiary of a
variable
interest entity and to eliminate the quantitative approach previously required
for determining the primary beneficiary of a variable interest entity. The
amended topic also requires enhanced disclosures that will provide users of
financial statements
with more transparent information about an enterprise’s
involvement in a variable interest entity. The amended topic is effective for
the first annual reporting period beginning after November 15, 2009 and will be
effective for the Company as of January1,
2010. The management is in the process of evaluating the impact of adopting this
amended topic on the Company’s
financial statements.




F-17




OmniaLuo,
Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





3.
            Summary
      of significant accounting
      policies (Cont’d)




Recently
issued accounting pronouncements (Cont’d)




In
August 2009, the FASB issued ASU No. 2009-05, an update to ASC 820 “Fair
Value Measurements and Disclosures”.
This update provides amendments to reduce potential ambiguity in
financial
reporting when measuring the fair value of liabilities. Among other provisions,
this update provides clarification that in circumstances in which a quoted price
in an active market for the identical liability is not available, a reporting
entity isrequired
to measure fair value using one or more of the valuation techniques described in
ASU No. 2009-05. ASU No. 2009-05becameeffective
for the Company’s
annual financial statements for the year ending December 31, 2009.The
adoption of this amended topic
has no material impact on the Company’s
financial statements.




In
October 2009, the FASB issued ASU No. 2009-13 “Revenue
Recognition (Topic 605): Multiple Deliverable Revenue Arrangements - A Consensus
of the FASB Emerging Issues Task Force”.
This update
provides application guidance on whether multiple deliverables exist, how the
deliverables should be separated and how the consideration should be allocated
to one or more units of accounting. This update establishes a selling price
hierarchy for determining
the selling price of a deliverable. The selling price used for each deliverable
will be based on vendor-specific objective evidence, if available, third-party
evidence if vendor-specific objective evidence is not available, or estimated
selling priceif
neither vendor-specific or third-party evidence is available. The Company will
be required to apply this guidance prospectively for revenue arrangements
entered into or materially modified after January 1, 2011; however, earlier
application is permitted.
The management is in the process of evaluating the impact of adopting this ASU
on the Company’s
financial statements.




In
January 2010, the FASB issued ASU No. 2010-06 “Fair
Value Measurements and Disclosures (Topic 820): Improving Disclosures about
FairValue
Measurements”.
This updates requires some new disclosures and clarifies some existing
disclosure requirements about fair value measurement as set forth in
Codification Subtopic 820-10. The FASB’s
objective is to improve these disclosures and, thus,increase
the transparency in financial reporting. Specifically, ASU 2010-06 amends
Codification Subtopic 820-10 to now require:




-
            A
      reporting entity should disclose separately the amounts of significant
      transfers in and out of Level 1 and Level 2 fair valuemeasurements
      and describe the reasons for the transfers;
      and


-
            In
      the reconciliation for fair value measurements using significant
      unobservable inputs, a reporting entity should present separately
      information about purchases, sales, issuances, and settlements.




In
addition, ASU No. 2010-06 clarifies the requirements of the following existing
disclosures:




-
            For
      purposes of reporting fair value measurement for each class of assets and
      liabilities, a reporting entity needs to use judgment in determining the
      appropriate
      classes of assets and liabilities;
  and


-
            A
      reporting entity should provide disclosures about the valuation techniques
      and inputs used to measure fair value for both recurring and nonrecurring
      fair value measurements.




ASU
No. 2010-06 is effective forinterim
and annual reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements in the roll
forward of activity in Level 3 fair value measurements. Those disclosures are
effective forfiscal
years beginning after December 15, 2010, and for interim periods within those
fiscal years. Early application is permitted. The management is in the process
of evaluating the impact of adopting this amended topic on the
Company’s
financial statements.




F-18




OmniaLuo,
Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)






4.
                Finance
      costs




Year
      ended December 31,2009
            
            
            2008Interest
      expenses
            
            $
            24,395
            
            
            $
            -Bank
      charges and net exchange loss
            
            
            55,328
            
            
            
            40,821$
            79,723
            
            
            $
            40,821




5.
            Income
      taxes




United
States




The
Companyis
subject totheUnited
Statesof
America Tax lawat
tax rate of 34%.  Ithas
no assessable profit for theyears
ended December 31,2009and
2008.




The
Company has not recognized a deferred tax liability
for the undistributed earnings of its foreign subsidiary of approximatelyUS$80,000
andUS$4,661,000
as of December 31,2009
and2008,
respectively,because
the Company currently does not expect those unremitted earnings to reverse and
become taxableto
the Company in the foreseeable future. A deferred tax liability will be
recognized when the Company no longer plans to permanently reinvest
undistributed earnings. Calculation of related unrecognized deferred tax
liability is not practicable.




BVI




Omnia
BVI was incorporated in the BVI and, under the current laws of the BVI,is
not subject to income tax.




PRC




Oriental
Fashion is subject to the PRC Enterprise Income Tax (“EIT”).AsOriental
Fashion wasa
wholly-foreign owned enterprise engaged in manufacture
industrywhich
was dulyapproved
by thePRCtax
authority, itwasentitled
to two years’exemption,
from the first profit making calendar year of operations after offset of
accumulated taxable losses, followed by 50% tax reduction for the immediate
next
three calendar years.  This
taxholiday
commencedin
the fiscal financial year 2007.


On
March 16, 2007, the National People’s
Congress of the PRC determined to adopt the New corporate income tax law (the“New
CIT Law”).  The
New CIT Law unifies the application
scope, tax rates, tax deduction and preferential policy for both domestic
enterprises (“DE”)
and foreign investment enterprises (“FIE”).  The
applicable tax rate of DE and FIE will be 25% after their preferential tax
holidays and the transitionperiod
have ended.  During the transition period, tax rates for the subject
entities are 20%, 22% and 24% for the calendar years 2009, 2010 and 2011,
respectively, before the application of applicable tax holidays or other tax
preferences.




By
virtue of the
New CIT Lawand
the above-mentioned tax reduction,
Oriental Fashionwas
subject to EIT rate of 10% during 2009. During 2008, Oriental Fashionwas
subject to EIT rate of 18% with full tax
exemption.




No
provision for EIT has been made for the year endedDecember31,
2009 since Oriental Fashion had an operating
loss.




Income
tax benefit attributable to(loss)income
from operations consists ofdeferred
tax of $366,574 and $nil for the years endedDecember31,
2009 and 2008, respectively.




F-19




OmniaLuo,
Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





5.
            Income
      taxes(Cont’d)




The
effective income tax differs from thePRC
EIT tax rate of 10% and 18% for the years ended December 31, 2009 and
2008,respectively,
asfollows:




Year
      ended December
      31,2009
            
            
            2008(Benefit)
      provision
      for income taxes at10%
      (2008:
      18%)
            
            $
            (567,001
            )
            
            $
            186,962Non-deductible
      items for tax
            
            
            200,427
            
            
            
            264,408Tax
      holiday
            
            
            -
            
            
            
            (451,370
            )$
            (366,574
            )
            
            $
            -




Forthe
yearended
December 31,2008,
the amount of benefit from taxholidaywas$451,370and
the effect onearningsper
share was$0.02.




In July
2006, the FASB issued ASC 740 (previously Interpretation No. 48 “Accounting for
Uncertainty in Income Taxes”).  This interpretation requires
recognition and measurement of uncertain income tax positions using a
“more-likely-than-not” approach.  The management evaluated the
Company’s tax positions and considered that no additional provision for
uncertainty in income taxes is necessary as of December 31, 2009.




The
Company’s
temporary difference that givesrise
to deferred tax assetincludes
net operating loss carryforwards.The
Company has recorded a deferred tax asset of $366,799reflecting
the benefit of $3,665,741 in loss carryforwards, which expirethrough
to2014.
Realization is dependent on generating sufficient taxable income prior to
expiration of the loss carryforwards. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax
asset willbe
realized. The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income during
the carryforward period are reduced.




6.
            (Loss)
      earningsper
      share - basic and
diluted




The
following
table sets forth the computation of basic and diluted(loss)earningsper
share (“EPS”)for
the yearspresented:




Year
      ended December 31,2009
            
            
            2008Numerator:Net
      (loss) income
            
            $
            (5,303,436
            )
            
            $
            1,038,676Denominator:Weighted
      averagenumber
      ofshares
      used tocomputebasic
      EPS
            
            
            22,840,000
            
            
            
            22,840,000Dilutive
      potential shares from assumed exerciseofwarrants
            
            
            -
            
            
            
            1,215Weighted
      average number of shares used tocomputediluted
      EPS
            
            
            22,840,000
            
            
            
            22,841,215(Loss)
      earnings per share-Basic
            
            $
            (0.23
            )
            
            $
            0.05(Loss)
      earnings per share-Diluted
            
            $
            (0.23
            )
            
            $
            0.05




F-20




OmniaLuo,
Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)






6.
            (Loss)
      earningsper
      share-
      basic and diluted (Cont’d)




5,412,000warrants
issued to investors and Keating Securities, and options to purchase 1,369,840
sharesof
the Company’s
common stockgranted
to the Company’s
director and employees outstanding as of December 31, 2009 havenot
been included in the computation of diluted loss per share for the year then
ended because to do so would have an anti-dilutive effect. Accordingly, the
basic and diluted loss per share for the year ended December 31, 2009 are the
same.




5,412,000warrants
issued to investorsand
Keating Securitiesoutstanding
as of December 31, 2008 havenotbeen
included in the computation of diluted earnings per share for the year then
endedbecause
to do so would have an anti-dilutive effect. The dilutive potential
shares
included 292,752 warrants issued to investors.




7.
              Trade
      receivables




As
      ofDecember
      31,2009
            
            
            2008Trade
      receivables
            
            $
            2,134,470
            
            
            $
            2,212,779Allowance
      for doubtful accounts
            
            
            (754,290
            )
            
            
            (13,023
            )$
            1,380,180
            
            
            $
            2,199,756




Ananalysis
of the allowance for doubtful accounts for the years ended December 31, 2009 and
2008 are as follows:




Year
      ended December 31,2009
            
            
            2008Balance
      at beginning of year
            
            $
            13,023
            
            
            $
            8,656Addition
      of bad debt expense, net
            
            
            740,811
            
            
            
            3,696Translation
      adjustments
            
            
            456
            
            
            
            671Balance
      at end of year
            
            $
            754,290
            
            
            $
            13,023




8.
              Inventories




As
      of December 31,2009
            
            
            2008Raw
      materials
            
            $
            150,274
            
            
            $
            153,303Work
      in progress
            
            
            185,440
            
            
            
            -Finished
      goods
            
            
            2,563,147
            
            
            
            6,327,2472,898,861
            
            
            
            6,480,550Allowance
      forobsolete
      inventories
            
            
            (474,260
            )
            
            
            (19,929
            )$
            2,424,601
            
            
            $
            6,460,621




Allowance
for (recovery of) obsolete inventories of $454,052 and $(65,456)
wererecognized
for the years ended December 31, 2009
and 2008, respectively, andwereincluded
in cost of revenues.




F-21




OmniaLuo,
Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)






9.
              Other
      receivables anddeposits




As
      of December 31,2009
            
            
            2008Other
      receivables, rental,
      utilities
      and other deposits
            
            $
            334,820
            
            
            $
            301,214Allowance
      for doubtful accounts
            
            
            (64,548
            )
            
            
            -270,272
            
            
            
            301,214Trade
      depositsto
      suppliers
            
            
            3,052,142
            
            
            
            3,984,005$
            3,322,414
            
            
            $
            4,285,219




An
analysis of the allowance for doubtful accounts
for the years ended December 31, 2009 and 2008 are as
follows:




Year
      ended December 31,2009
            
            
            2008Balance
      at beginning of year
            
            $
            -
            
            
            $
            -Addition
      of bad debt expense, net
            
            
            64,508
            
            
            
            -Translation
      adjustments
            
            
            40
            
            
            
            -Balance
      at
      end of year
            
            $
            64,548
            
            
            $
            -




10.
            Property
      and equipment, net




As
      ofDecember
      31,2009
            
            
            2008Office
      equipment and computers
            
            $
            875,523
            
            
            $
            869,424Machinery
            
            
            15,466
            
            
            
            15,466Leasehold
      improvements
            
            
            542,469
            
            
            
            542,469Motor
      vehicles
            
            
            18,558
            
            
            
            18,5581,452,016
            
            
            
            1,445,917Accumulated
      depreciation
            
            
            (635,727
            )
            
            
            (361,628
            )Property
      and equipment, net
            
            $
            816,289
            
            
            $
            1,084,289




Depreciationfor
the years ended December 31, 2009and
2008was
$274,101and
$211,915, respectively.




During
the years ended December 31, 2009 and 2008, property and equipment with net book
value of $709 and $5,055were
disposed of at considerations of $323 and $4,319,
respectively, resulting in a loss of $386 and $736
respectively.




11.
            Trademarks


OrientalFashion
currently owns four trademarks, namely “Omnialuo”,
“Omnialo”,
“歐柏蘭羅”and
“歐柏蘭奴”which
were registered in the PRC. These trademarks were transferred to the subsidiary
from a major stockholder of the Company for nil consideration during
2006.




F-22




OmniaLuo,
Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





12.
            Bank
      loan




The
bank loan denominated in RMB was fully repaid during the year.  It
carried interest at 7.623% per annum.




The
bank loan was (i) guaranteed by Ms. Zheng Luo, whodid
not receive any compensation for acting as guarantor;and(ii)
secured by a guarantee put up bya
guaranty company,whichreceived
$8,649 from theCompany
for issuing the guarantee.




13.
            Loan
      from astockholder




Astockholder
extended a loan to the Company
in 2006, which isinterest-free,
unsecured and repayable on demand.  The Company repaid$190
and $6,242to
thestockholder
in2009
and2008,
respectively.




14.
            Other
      payables, deposits received and accrued
      expenses




As
      ofDecember
      31,2009
            
            
            2008Other
      payablesand
      accruals
            
            $
            611,266
            
            
            $
            247,754Amounts
      due to partners of co-owned stores
            
            
            302,599
            
            
            
            324,347Receipt
      in advancefrom
      customers
            
            
            1,408,284
            
            
            
            1,754,379Deposits
      received
            
            
            468,657
            
            
            
            783,220Business
      tax
      and value-added
      taxes payables
            
            
            555,440
            
            
            
            686,258$
            3,346,246
            
            
            $
            3,795,958




15.
            Make
      good escrow agreement




In
connection withthe2007
Private Placement, Ms. Zheng Luo and another stockholder agreed to place
3,546,268 shares of the Company’s
common stock theycollectivelyown
in escrow (the“Escrow
Shares”).  If
the Company fails to report netincomeof
at least $2.0 million under U.S. GAAP (beforeadjustmentsfor
non-cash and cash charges related to the RTO and the 2007 Private Placement,
including any liquidated damages
payments under the registration rights agreement with the 2007 Private Placement
investors (the“Registration
Rights Agreement”)
and any expense relating to anyissuanceof
shares by the Company prior to the RTO and the 2007 Private Placement, and for
anychargesrelated
to the release of the Escrow Shares, and before accounting for the impact on net
income of any equity incentive options or shares granted) for thefiscalyear
2007, the escrow agentshalltransfer
to the investors inthe2007
Private Placement
thenumberof
Escrow Shares based onthefollowing
formula: (($2.0 million - 2007 Adjusted reported net income)/$2.0 million)
multiplied by the Escrow Shares, subject to a maximum number of 50% of the
Escrow Shares.




F-23




OmniaLuo,
Inc.


Notes
to Consolidated
Financial Statements


(Stated
in US Dollars)





15.
            Make
      good escrow agreement (Cont’d)




If
the Company fails to report net income of at least $4.3 million under U.S. GAAP
(beforeadjustmentsfor
non-cash and cash charges related to the RTO and the 2007Private
Placement, including any liquidated damages payments under the Registration
Rights Agreement and any expense relating to any issuance of shares by the
Company prior to the RTO and the 2007 Private Placement, and for any charges
related to the release
of Escrow Shares, and before accounting for the impact on net income of any
equity incentive options or shares granted) for the fiscal year 2008, the escrow
agent shalltransferto
the investors inthe2007
Private Placement the lesser of: (i) thenumberof
Escrow Shares based on the following formula: (($4.3 million - 2008 Adjusted
reported new income)/$4.3 million) multiplied by the Escrow Shares; or (ii) thenumberof
Escrow Shares still in escrow.




As
overall
segment profit (before unallocated expenses
relating to the reverse acquisition, the 2007 Private Placement and related SEC
resale registration totaling $970,320,
but less other unallocated general and administrative expenses of $2,098relating
to corporate operations, not included in the segment
information) for the year ended December 31, 2007 was $2,176,827,the
Company achieved the net income threshold for the fiscal year 2007 and50%
of the Escrow Shares werereleased
back to Ms. Luo and the other stockholder.  Since Ms. Luo is also the
directorandchiefexecutiveofficer
of theCompany,
the release of shares from escrow to her constituted
a compensatory plan and was treated as an expense for the amount of the market
value of the shares as of the date the performance goals were met, i.e.
December
31, 2007.




The
Company’s
common stock began trading on the Over-the-Counter Bulletin Board on January 10,
2008.Theper
shareclosing
price of the Company’s
common stock on January 10, 2008 of  $1.5 was used to calculate the
compensation expense.  The
total expense recognized for the fiscal year 2007 was $2,299,893.




During
the year ended December 31, 2008, the Company’s
net income (before
unallocated expenses relating to the reverse acquisition, the 2007 Private
Placement and related SEC resale registration
totaling $698,257),was
$2,151,132, before the make good provision of $414,199.  Accordingly,
the Company failedto
report the net incomethresholdfor
the fiscal year 2008 and the Escrow Shares relating to the 2008 performance
thresholdwouldbereleased
to the investors, Ms. Luo and another stockholder pursuant to the agreed terms
and formula.




767,035
and 119,999 shares of the Escrow Shareswere
estimated tobe
released back to Ms. Luo andtheother
stockholder.  The release of shares from escrow
to Ms. Luoconstituteda
compensatory plan.  The per share closing price of the
Company’s
common stock on December 31, 2008 of $0.54 was used to calculate the
compensation expenses.The
total expense recognized
for the fiscal year 2008was
$414,199.During
the year ended December 31, 2009, 711,269 and 111,275 shares of Escrow Shares
were released back to Ms. Luo and the other
stockholder.




The
release ofshares
from escrowtotheotherstockholderdidnot
constitute a compensatory plan as thisstockholderdid
not hold and currently does not hold any position in the Company andhasno
relationship to the Company other than as a stockholder.




The
release of shares held in escrow to the investors constituteda
donation from Ms. Luo and the other stockholder
to the Company.




F-24




OmniaLuo,
Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





16.
            Commitmentsand
      contingencies




Operating
leasearrangements




TheCompany
leases office premises and showrooms under variousnon-cancelable
operatingleaseagreements
that expireat
various dates through years 2009to2013.  Theminimum
future commitments payable under theseagreementsas
of December 31, 2009was
$696,813.




Payable
      in:2010
            
            $
            424,0292011
            
            
            195,5982012
            
            
            41,1662013
            
            
            36,020$
            696,813




Rental
expenses under operating leases were $452,256 and $462,658 for the years
endedDecember
31, 2009 and 2008,respectively.




17.
            Statutory
      reserve




The
statutory reserve comprises the statutory reserve of Oriental
Fashion.  In accordance
with the relevant PRC regulations, Oriental Fashion is required to appropriate
10% of its net income determined in accordance with PRC GAAP each year, if any,
to fund the statutory reserve until the balance of the reserve reaches 50% of
the registered
capital.




The
statutory reserve is not distributable and can be used to make up cumulative
prior year losses.




18.
            Defined
      contribution plan




Pursuant
to the relevant PRC regulations, the
Company isrequired
to make contribution to a defined contribution
retirement scheme organized by a state-sponsored social insurance plan in
respect of the retirement benefits for the Company’s
employees. The only obligation of the Companywith
respect to retirement scheme is to make the required contributions under
theplan.  No
forfeited contribution is available to reduce the contribution payable in future
years.  The defined contribution plan contributions were charged to
the consolidated statement of operations.  The Companycontributed
$34,105 and $25,644 for the yearsendedDecember31,
2009
and 2008,respectively.




19.
            Stock
      option plan




On
April 23, 2008, the board of directors adopted the 2008 Equity Incentive Plan
(the“Plan”).  The
purposes of the Plan are to attract and retain the best available personnel
for
positions of substantialresponsibility,
to provide additional incentive to employees, directors and consultants, and to
promote the success of theCompany’s
business.  The maximum aggregate number of shares that may be issued
under the Plan is 5,000,000shares.




F-25




OmniaLuo,
Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





19.
            Stock
      option plan(Cont’d)




Pursuant
      to the Plan, on January 6, 2009, the Company granted options to purchase
      735,200 and 137,040 shares of common stock with an
      exercise price of $0.60and
      $1.25 per share, respectively, to a director and several employees of the
      Company. In accordance with the vesting provisions of the grants, 50% of
      the options were vested on the date of grant and 12.5% will vest
      thereafter oneach
      of the following March 31, June 30, September 30 and December 31, until
      fully vested. The options granted expire in ten years after the date of
      grant or are exercisable for 36 months after the optionee ceases to be a
      service provider to the
  Company.




Pursuant
      to the Plan, on January 20, 2009, the Company granted options to purchase
      497,600 shares of common stock with an exercise price of $0.60per
      share to a director and several employees of the Company. In accordance
      with the vesting provisions of thegrants,
      50% of the options will vest on the first anniversary date of the date of
      grant and 12.5% will vest thereafter on each of the following March 31,
      June 30, September 30 and December 31, until fully vested. The options
      granted expire in ten years after
      the date of grant or are exercisable for 36 months after the optionee
      ceases to be a service provider to the
      Company.




A
summary of share option plan activity for the year ended December 31, 2009 is
presented below:




Average
            
            Remaining
            
            AggregateNumber
      of
            
            
            exercise
      price
            
            contractual
            
            intrinsicshares
            
            
            per
      share
            
            term
            
            valueOutstanding
      as of January 1, 2009
            
            
            -
            
            
            $
            -Granted
            
            
            1,369,840
            
            
            
            0.67Exercised/Forfeited/Cancelled
            
            
            -
            
            
            
            -Outstanding
      as ofDecember31,
      2009
            
            
            1,369,840
            
            
            $
            0.67
            
            9
      years
            
            $
            -Exercisable
      as ofDecember31,
      2009
            
            
            872,240
            
            
            $
            0.70
            
            9
      years
            
            $
            -




#Aggregateintrinsicvalue
represents the value oftheCompany’s
closing stock price onDecember31,
2009 of $0.17in
excess of the
exercise price multiplied by the number of options outstanding or
exercisable.




The
weighted average grant-date fair value of options granted on January 6, 2009 and
January 20, 2009 was $0.27 and $0.32 per share respectively. The Company
recorded non-cash
share-based compensation expense of $304,642for
the year ended December31,
2009, in respect of share options granted on January 6, 2009 and January 20,
2009, which was allocated to general and administrative
expenses.




The
fair value of the above option
awards granted on January 6, 2009 and January 20, 2009 was estimated on the date
of grant using the Black-Scholes Option Valuation Model that uses the following
assumptions.




Expected
      volatility
            119.66%Expected
      dividends
            NilExpected
      life
            1.5
      years-2
      yearsRisk-free
      interest rate
            1%




As
of December 31, 2009, there were unrecognized compensation costs of
$82,746related
to the above non-vested share options. These costs are expected to be recognized
over a weighted average period of0.74years.




No
optionsweregranted
during the year ended December 31, 2008.




F-26




OmniaLuo,
Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





20.
            Related
      party transactions




Apart
from the transactions and information as disclosed innotes
12and
13 totheconsolidatedfinancial
statements,
the Companydid
not haveother
material transactionsduring
the year ended December 31, 2009.




During
the year ended December 31, 2008, the Companypurchasedfinishedgoods
of $540,900 fromShenzhen
OumengIndustrial
Co., Ltd. (“Oumeng”).Certain
of the Company’s
principal stockholders were also principal shareholders of Oumeng and a director
of Oriental Fashion, who is also the spouse of a principal stockholder of the
Company and director of Oriental Fashion,
managed part of the business of Oumeng during theyear
endedDecember31,
2008.  Therefore,
Oumengwasdeemed
to have been under common control with the Company during theyear
endedDecember31,
2008.The
Company believedthe
terms obtained and consideration
paid in connection with the transactions described above were no less favorable
than those that would have been obtained by the Company in arm’s-length
transactions with an unrelated party.




21.
            Segmentinformation




The
Company uses the “management
approach”in
determining reportable operating segments.  The management approach
considers the internal organization and reporting used by the
Company’s
chief operating decision maker for making operating decisions and assessing
performance as the source
for determining the Company’s
reportable segments.  Management, including the chief operating
decision maker, reviewstheoperating
results ofretail
sales (including Company-owned and co-owned stores) and sales todistributorsand
as such, the Company has
determined thatithastwooperating
segments as defined by ASC Topic 280 “Segment
Reporting”,
previously SFASNo.131.




Retail
      sales
            
            
            Sales
      to distributors
            
            
            Total2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008Revenue
      from external customers
            
            $
            3,262,071
            
            
            $
            5,286,221
            
            
            $
            6,087,807
            
            
            $
            6,616,183
            
            
            $
            9,349,878
            
            
            $
            11,902,404Gross
      profit(loss)
            
            
            1,464,067
            
            
            
            3,269,155
            
            
            
            (889,157
            )
            
            
            3,794,963
            
            
            
            574,910
            
            
            
            7,064,118Interest
      income
            
            
            501
            
            
            
            5,444
            
            
            
            934
            
            
            
            6,813
            
            
            
            1,435
            
            
            
            12,257Interest
      expenses
            
            
            8,511
            
            
            
            -
            
            
            
            15,884
            
            
            
            -
            
            
            
            24,395
            
            
            
            -Depreciation
            
            
            103,588
            
            
            
            100,797
            
            
            
            170,513
            
            
            
            111,118
            
            
            
            274,101
            
            
            
            211,915Segment
      (loss) profit
            
            
            (1,714,866
            )
            
            
            210,750
            
            
            
            (3,232,114
            )
            
            
            2,343,175
            
            
            
            (4,946,980
            )
            
            
            2,553,925Segment
      assets
            
            
            3,143,266
            
            
            
            6,550,246
            
            
            
            5,866,088
            
            
            
            8,198,225
            
            
            
            9,009,354
            
            
            
            14,748,471Expenditure
      for segment assets
            
            $
            2,433
            
            
            $
            231,155
            
            
            $
            4,541
            
            
            $
            289,311
            
            
            $
            6,974
            
            
            $
            520,466




F-27




OmniaLuo,
Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





21.
            Segmentinformation
      (Cont’d)




Areconciliation
is providedforunallocated
amounts relating
to corporate operationswhich
is not included in the segment information:




Year
      ended December 31,2009
            
            
            2008Total
      consolidated revenues
            
            $
            9,349,878
            
            
            $
            11,902,404Total(loss)profit
      for reportable segments
            
            $
            (4,946,980
            )
            
            $
            2,553,925Unallocated
      amounts relating tooperations:Interestincome
            
            
            7
            
            
            
            21General
      and administrative expenses
            
            
            (418,395
            )
            
            
            (1,101,071
            )Stock-based
      compensation
            
            
            (304,642
            )
            
            
            -Make
      good provision
            
            
            -
            
            
            
            (414,199
            )(Loss)
      incomebefore
      income
      taxes
            
            $
            (5,670,010
            )
            
            $
            1,038,676




As
      ofDecember
      31,2009
            
            
            2008AssetsTotal
      assets for reportable segments
            
            $
            9,009,354
            
            
            $
            14,748,471Cash
      and cash equivalents
            
            
            170,424
            
            
            
            535,411$
            9,179,778
            
            
            $
            15,283,882




All
of the Company’s
long-lived assets and customers are located in the PRC.Accordingly,
no geographic information is presented.




22.
            Subsequent
      events




The
Company has evaluatedits
activitiessubsequenttoDecember31,
2009 and has concluded that nosubsequent
eventshave
occurredthatwouldrequire
recognition or disclosure in the consolidatedfinancial
statements.




F-28