**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, 2007.**




**or**


o
            **Transition
                Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
                of 1934****For
                the transition period from __________ to __________.** ****


**Commission
      File Number 000-06217**





**DIGUANG
      INTERNATIONAL DEVELOPMENT CO., LTD.**


**(Exact
      name of registrant as specified in its charter)**




**Nevada**
            
            **22-3774845****(State
                or other jurisdiction of**
              **incorporation
                or organization)**
            
            **(I.R.S.
                Employer**
              **Identification
                No.)****23rd
                  Floor, Building A, Galaxy Century,**
                **No.3069,
                  Caitian Road, Futian District,**
                **Shenzhen,
                  the PRC**
            
            **518026****(Address
                of principal executive offices)**
            
            **(Zip
                Code)**




**Registrant’s
      telephone number, including area code 86-755-2655-3580**





**Securities
      registered pursuant to Section 12(b) of the Act:** **None**





**Securities
      registered pursuant to Section 12(g) of the Act:** **Common
      stock, $0.001 par value**




**Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.**o **Yes
      No**x





**Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or 15(d) of the
      Act.    Yes**o **No**x




**Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the
      registrant was required to file such reports), and (2) has been subject to
      such filing requirements for the past
      90 days.    Yes**x**No**o





**Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (§229.405 of this chapter) is not contained herein, and will
      not be contained, 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.**x





**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**o **Accelerated filer**o ****


**Non-accelerated
      filer**o ****x **Smaller
      reporting company**





**Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Act).    Yes**o **No**x





**Aggregate
      market value of voting and non-voting common equity held by non-affiliates
      of
      the registrant as of****June 30****, 2007, based upon
      the closing price of the common stock as reported by the OTC Bulletin Board
      under the symbol “DGNG” on such date, was approximately****$29,000,000**




**22,340,700
      shares of common stock outstanding as of February 29, 2008.**





**DOCUMENTS
      INCORPORATED BY REFERENCE**





**None.**







**DIGUANG
      INTERNATIONAL DEVELOPMENT CO., LTD.**


**FORM 10-K**


**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2007**





**INDEX**





**Table
      of Contents**





PagePART
                IItem
                1.
            Description
                of Business
            1Item
                1A.
            Risk
                Factors
            20Item
                1B.
            Unresolved
                Staff Comments
            35Item
                2.
            Property
            36Item
                3.
            Legal
                Proceedings
            37Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            37PART
                IIItem
                5.
            Market
                for Common Equity, Related Stockholder Matters and Issuer Purchases
                of
                Equity Securities
            37Item
                6.
            Selected
                Financial Data
            39Item
                7
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operation
            39Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market Risk
            58Item
                8.
            Financial
                Statements and Supplementary Data
            58Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            59Item
                9A.
            Controls
                and Procedures
            59Item
                9B
            Other
                Information
            62









PART
                IIIItem
                10.
            Directors
                and Executive Officers, Corporate Governance and Board
                Independence
            62Item
                11.
            Executive
                Compensation
            66Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            73Item
                13.
            Certain
                Relationships and Related Transactions
            74Item
                14.
            Principal
                Accountant Fees and Services
            77PART
                IVItem
                15.
            Exhibits,
                Financial Statement Schedules
            78Signatures
            80









Cautionary
      Statement




This
      Annual Report on Form 10-K contains forward-looking statements within the
      meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
      Securities Exchange Act of 1934.  These statements relate to future events
      or the Company’s future financial performance.  The Company has attempted
      to identify forward-looking statements by terminology including “anticipates,”
“believes,” “expects,” “can,” “continue,” “could,” “estimates,” “expects,”
“intends,” “may,” “plans,” “potential,” “predict,” “should” or “will” or the
      negative of these terms or other comparable terminology.  Such statements
      are subject to certain risks and uncertainties, including the matters set forth
      in this report or other reports or documents the Company files with the
      Securities and Exchange Commission from time to time, which could cause actual
      results or outcomes to differ materially from those projected.  Although
      the Company believes that the expectations reflected in the forward-looking
      statements are reasonable, the Company cannot guarantee future results, levels
      of activity, performance or achievements.  Undue reliance should not be
      placed on these forward-looking statements which speak only as of the date
      hereof.  The Company’s expectations are as of the date this Form 10-K is
      filed, and the Company does not intend to update any of the forward-looking
      statements after the date this Annual Report on Form 10-K is filed to confirm
      these statements to actual results, unless required by law.




**PART
      I**




**ITEM
      1.   DESCRIPTION OF BUSINESS.**




**Overview**




We
      specialize in the design, production and distribution of small to medium-sized
      Light Emitting Diode, or “LED”, and Cold Cathode Fluorescent Lamp, or “CCFL”,
      backlights for various Thin Film Transistor Liquid Crystal Displays, or
“TFT-LCD”, and Super-Twisted Nematic Liquid Crystal Display, or “STN-LCD”,
      Twisted Nematic Liquid Crystal Display, or “TN-LCD”, and Mono LCDs, taken
      together, these applications are referred to as “LCD” applications.  Those
      applications include color displays for cell phones, car televisions and
      navigation systems, digital cameras, televisions, computer displays, camcorders,
      PDAs and DVDs, CD and MP3/MP4 players, appliance displays and the
      like.





We
      conduct that business principally through the operations of Diguang Electronics
      and Dihao (Yangzhou) Co., Ltd., thereafter “Dihao”.  As of December 31,
      2007, Diguang Electronics has approximately 2,000 full-time employees, which
      changes from time to time as needed, Diguang is headquartered in Shenzhen,
      China, with additional offices and its backlight manufacturing operations in
      Dongguan, China. As of December 31, 2007, Dihao has approximately 330 full-time
      employees, which changes from time to time as needed. Dihao is a subsidiary
      of
      North Diamond, 65% of which was acquired by us on January 3, 2007. Wuhan Diguang
      Electronics Co., Ltd was established as in-house facilities mainly for a
      Taiwan-based customer with the capacity to provide large inches of TFT-LCD
      and
      it has approximately 240 employees as of December 31, 2007. Dongguan Diguang
      Electronics Science and Technology Co Ltd., or “Dongguan Diguang”, was
      established for the purpose to be used as the production base of Shenzhen
      Diguang Electronics Co Ltd. It is the legal owner of the land and buildings
      which has been rented to Diguang Electronics since March 30, 2005. As of
      December 31, 2007, Dongguan Diguang has approximately 10 full-time
      employees.





Well
      Planner is involved in the import of raw materials into China and export of
      finished products from China. Well Planner currently has no fixed
      assets.




1





Diguang
      Technology is directly involved with the international buying of raw materials
      and selling of backlight products for Diguang Electronics.  Diguang
      Technology purchases raw materials from international suppliers and acts as
      an
      international sales group for both Diguang Electronics and Well Planner.
 Diguang Technology has no fixed assets.





In
      2007,
      we generated revenues of $45.9 million, net loss of $2.9 million and cash flow
      from operations of $3.9 million. We have been profitable and cash flow positive
      each year since 1999 to 2006, and 2007 is the first time we have recorded a
      loss.





**Our
      Industry**





The
      backlight industry is closely associated with the consumer electronics industry.
      LCDs are used to present data and images in a wide variety of applications,
      ranging from cell phones to car navigation and entertainment systems to the
      larger displays used in flat panel televisions and computer monitors, including
      laptop computer screens.





LCD
      technology allows for a higher level of light output than other types of panel
      displays. It has become the mainstream technology in today’s display market with
      demand for such technology increasing by 10 to 15 percent per year. According
      to
      Displaybank, a reputable Korean based research firm, the global LCD display
      market was approximately $48.5 billion in 2004, and it is expected to grow
      to
      approximately $94 billion by 2010. This significant growth projection is being
      driven by an increase in the breadth of applications utilizing LCDs to take
      advantage of their increased brightness and clarity, the development of new
      LCD-related technologies and the growing use of LCDs in larger screen
      applications, e.g. television sets.





Generally,
      companies that manufacture backlights supply them as a component to other
      parties, which incorporate them into a finished display unit, which consists
      of
      a film, such as a thin film transistor, that bears the image and the case or
      shell that is used to hold the backlight and film in place. As a result, our
      customers are typically the assemblers of the LCD modules, although we have
      some
      customers who are the final assemblers of the products that are sold to
      consumers.





Until
      recently, the backlight industry was centered in Japan and Korea, where the
      majority of modules used in the production of LCD displays, such as Samsung
      and
      Toshiba, are located. Based on certain cost advantages, Taiwan has become a
      leading producer of backlights as well.





More
      recently, a large number of backlight manufacturers, both independent ones
      and
      operations associated with Japanese and Korean companies, have begun production
      in the PRC, including Diguang. This shift of backlight production to the PRC
      is
      based in large measure on the comparability of its technical workforce and
      facilities to those of the traditional Asian producers, together with
      significant labor cost advantages. Those factors have, to some extent, pulled
      the assembly of display units into the PRC as well, even though a relatively
      small amount of the modules used to make LCD displays are currently produced
      in
      the PRC.




We
      consider our industry to be one that is expanding, as electronics are
      incorporated into a growing number of products and devices that benefit from
      the
      display of information and images. We have benefited from certain cost and
      strategic advantages relative to our competitors, and those advantages have
      enabled us to maintain attractive margins on our products up to this point.
      However, as a growing percentage of backlight production shifts to the PRC
      from
      higher-cost countries, price competition will increase, and our ability to
      preserve margins will depend on our continuing to improve our product quality,
      production efficiency and customer services relative to our
      competitors.




2





**(a)
      General Development of Business Prior to the Share Exchange**




Online
      was organized under the laws of Nevada in 2000 as Online Processing, Inc.
 Online’s initial business was to provide Internet-based mortgage
      processing for mortgage brokers.  Online was never able to achieve
      profitability in that business, so it began searching for operating companies
      to
      acquire to increase shareholder value. On February 28, 2003, through a share
      exchange, Online acquired 100% of the issued and outstanding stock of CFS,
      a
      company incorporated in Nevada on September 19, 2002 and engaged in the business
      of providing installation, maintenance and servicing of communication
      technologies.  As a result of that transaction, CFS became Online’s
      wholly-owned subsidiary and CFS’ shareholders acquired a majority of Online’s
      voting stock.  During January, February and March, 2003, CFS managed the
      installation of wireless networks for telecommunication service providers.
      Its
      operations were focused in the State of California.  In March 2003, Online
      decided to cease commercial operations of CFS due to Online’s inability to
      secure funding needed to operate the business of CFS.  Thereafter, Online
      began the process of reviewing new business opportunities with the intention
      of
      maximizing shareholders' interest and looking for a merger or acquisition
      candidate for possible business acquisitions in North America and
      internationally.





On
      June
      24, 2003, Roger Henley resigned as Online’s Chief Executive Officer, President,
      Chief Financial Officer and a member of its board of directors.  Mr. Henley
      chose to pursue other interests because Online had ceased operations of CFS.
       Online’s Board of Directors  designated  Peter Bow Thorpe as the
      Chief Executive Officer and Chief Financial Officer and tasked  him with
      locating  and  reviewing  several  new business
      opportunities to maximize shareholders’ interest, including possible business
      acquisitions in North America and internationally. As part of this process,
      Online began negotiating a purchase of CFS by Roger Henley, so that it could
      pursue other opportunities.  On January 21, 2004, Online agreed to sell all
      of the stock of CFS to Roger Henley, in consideration for 2,934,000 of the
      3,260,000 shares of Online’s common stock, which Mr. Henley owned.





On
      January 21, 2004, Online also accepted the resignation of Peter Bowthorpe as
      its
      Chief Executive Officer, President and Chief Financial Officer and as a member
      of its board of directors, effective immediately. In conjunction with the sale
      of CFS, Mr. Bowthrope chose to pursue other interests. Online’s board of
      directors designated Terri Wonderly, as its Chief Executive Officer and Chief
      Financial Officer.   On July 6, 2004, Online’s board of directors was
      expanded to two members, and the Board elected Michael Kamps as the additional
      director.





On
      July
      9, 2004, Terri Wonderly exercised her right to require Online to repurchase
      410,000 shares of its common stock from her for $250,000, pursuant to that
      certain option agreement dated February 28, 2003, between herself and Online.
       Since Online did not have sufficient funds available to honor its
      obligations under the Option Agreement, it informed Ms. Wonderly of its default.
      Payment of Online’s obligations under the Option Agreement was secured by the
      shares of certain of its shareholders who had received shares pursuant to
      Online’s share exchange with CFS also on February 28, 2003. Under the terms of a
      Stock Pledge Agreement dated February 28, 2003 and amended on January 21, 2004,
      between these “Pledgors” and Ms. Wonderly, Online’s inability to purchase Ms.
      Wonderly’s shares pursuant to the Option Agreement constituted an event of
      default.  In the event of a default by Online under the Option Agreement,
      Ms. Wonderly was entitled to receive all of the Pledgors’ stock.  As a
      result of the transfer of the pledged stock, Ms. Wonderly came to own 8,281,000,
      84.67%, of the 9,779,900 shares of Online then outstanding.





On
      September 5, 2005, Online issued 1,333,333 shares of its common stock, 800,000
      on a post-Reverse Split basis, to Chardan Capital, LLC, pursuant to a consulting
      agreement, in exchange for Chardan’s consulting services provided to Online.
 The fair value of these shares was approximately $532,000 at a price of
      $0.40 per share, which was the market price on that day.  Pursuant to the
      signed consulting agreement, Chardan agreed to paid cash of $1,333.33 for those
      shares.   All of the shares were subject to Online’s right to repurchase
      them for the same amount Chardan paid in cash to acquire the stock if Online
      consummated a business combination with an operating company that Chardan did
      not introduce to Online.  Online acknowledges that Chardan introduced
      Diguang Holdings to Online.  Following the filing of a registration
      statement, that right of repurchase expired, and none of the restricted shares
      issued to Chardan are subject to repurchase.  The issuance of this stock
      was exempt from registration under Section 4(2) of the Securities Act of 1933,
      as amended, as being issued in a private transaction involving fewer than 35
      persons.




3





Pursuant
      to the placement agent agreement that Online entered into in September 2005
      in
      connection with the Offering, Online issued an aggregate of 405,000 shares
      of
      its common stock, 243,000 on a post-reverse split basis, in exchange for the
      placement service provided by two placement agents.  The fair value of
      these shares on the issuance date, December 21, 2005, was approximately
      $1,117,395 at a price of $2.76 per share, which was the market price on that
      day.  Pursuant to the signed placement agent agreement, the placement
      agents agreed to pay cash of $405 for those shares.  The issuance of this
      stock was exempt from the registration under Section 4(2) of the Securities
      Act
      and Rule 506 of Regulation D promulgated under the Securities Act.




**(b)
      The Acquisition of Diguang Holdings**




On
      January 10, 2006, Online entered into a share exchange agreement to acquire
      all
      of the issued and outstanding shares of the stock of Diguang Holdings in
      exchange for 18,250,000 shares of Online common stock.  In connection with
      the Share Exchange, Online’s name was changed to Diguang. References to “we”,
“us” and “our” in this section refers to Diguang, formerly known as Online. We
      also effected a 3-for-5 reverse split of our outstanding stock, which reduced
      the shares issued and outstanding from 11,518,233 to 6,910,940, and Terri
      Wonderly, our CEO, returned to us for cancellation 4,967,940 of our common
      stock
      that she owned.  As a result, the total outstanding shares of common stock
      immediately prior to the Share Exchange were 1,943,000.  Taking into
      account the shares issued in the Share Exchange and the private placement of
      $12
      million described below, the “Offering”, we now have 22,593,000 shares of common
      stock issued and outstanding, 18,250,000 of which are owned by Diguang Holdings’
former shareholders, with the balance being held by a combination of our
      shareholders prior to the Share Exchange and the investors in the Offering.





On
      March
      17, 2006, Online issued 2.4 million shares of its common stock in exchange
      for
      the gross proceeds of $12 million and issued another 18,250,000 shares of its
      common stock in exchange for 100% equity interest in Diguang Holdings, making
      Diguang Holdings a wholly-owned subsidiary of Online. Consummating the above
      two
      transactions simultaneously, Online and Diguang Holdings successfully fulfilled
      its contractual obligations, respectively, under the Stock Exchange Agreement
      on
      March 17,




The
      Share
      Exchange is regarded as a reverse merger, since Diguang Holdings’ former
      shareholders obtained control of us.  As a result, Diguang Holdings is
      considered to be the acquirer for accounting purposes.  Also as a result of
      the Share Exchange, we ceased being a shell company.





We
      now
      own 100% of the issued and outstanding stock of Diguang Holdings, which was
      incorporated in the British Virgin Islands on July 27, 2004 to hold the equity
      interest in the following entities:





·
            Shenzhen
                Diguang Electronics Co., Ltd., a China based entity, or “Diguang
                Electronics”;·
            Well
                Planner Limited, a Hong Kong based entity, or “Well Planner”;
                and·
            Diguang
                Science and Technology (HK) Limited, a British Virgin Islands based
                entity, or “Diguang Technology”.




4




These
      three companies, Diguang Electronics, Well Planner and Diguang Technology,
      together comprise all of Diguang’s subsidiaries.





The
      address of our executive and administrative offices is 8th Floor, Building
      64,
      Jinlong Industry District, Majialong, Nanshan District, Shenzhen, PRC. Our
      telephone number is 86-755-2655-3580.





As
      of
      March 17, 2006, Diguang Holdings was 100% owned by Sino Olympics, a British
      Virgin Island company that is owned by Yi Song and Hong Song, two of our
      directors and officers as of the close of the Share Exchange.  On March 17,
      2006, in a private transaction completed just prior to the Share Exchange,
      five
      accredited investors acquired a total of 876,941, 6.85%, of Diguang Holding’s
      shares from Sino Olympics for US$5,000,000, approximately $5.70 per share.
       Those five shareholders and Sino Olympics were the only shareholders of
      Diguang Holdings at the date of the Share Exchange.





Diguang
      Electronics is the principal operating subsidiary of Diguang.  Diguang
      Electronics was established as an equity joint venture in Shenzhen under the
      laws of China on January 9, 1996 with original registered capital of RMB
      1,380,000, approximately $170,160 at an exchange rate of 8.11 RMB per dollar,
      and an operating life of 20 years starting on that date.  Diguang
      Electronics was originally owned by three corporate entities, Shenzhen Diguang
      Engine & Equipment Co., Ltd., 13.8%; Shenzhen Jingfang Machinery &
Electric Co., Ltd., 39%; and Cinema Systems Inc., 47.2%, a United States
      entity.





On
      July
      22, 2003, Shenzhen Diguang Engine & Equipment acquired Shenzhen Jingfang
      Machinery & Electric’s equity interest at its carrying value. After changing
      the registration with the State Administration Bureau of Industry and Commerce,
      Yi Song and Hong Song, became the owner of this equity joint venture on August
      14, 2003. On September 8, 2003, the Board of Diguang Electronics resolved to
      increase its registered capital to RMB5 million by transferring retained
      earnings into capital and by infusing capital of $142,000 from Well Planner,
      which accounted for 23.4% of the above RMB5 million, and thereby causing Well
      Planner to became a new investor in this equity joint venture. Diguang
      Electronics’ management increased the registered capital to RMB5 million,
      approximate $616,000, by transferring retained earnings into capital. Well
      Planner invested $142,000 of the approximately $616,000, as a result of
      acquiring a 23.4% interest in this equity joint venture.





Diguang
      Electronics is now a wholly-owned subsidiary of Diguang as a result of a
      reorganization of Yi Song’s and Hong Song’s ownership interest in Diguang and
      Diguang’s subsidiaries in June 2005. On October 8, 2005, Diguang Electronics
      converted its retained earnings of RMB10 million, equivalent $1,236,445, into
      the registered capital resulting in a total registered capital amount of RMB15
      million, equivalent $1,840,845, which was approved by the relevant government
      agency and verified by a CPA firm. On April 30, 2006, Diguang Electronics
      increased its registered capital from RMB15 million to RMB85 million and the
      total investment from RMB15 million to RMB150 million, which was also approved
      by the relevant government agency.





Diguang
      Electronics designs, develops and manufactures LED and CCFL backlight units.
       These backlight units, as more fully described in the Narrative
      Description of Business Section, are essential components used in illuminating
      display panels such as TFT-LCD and color STN-LCD panels.  These display
      panels are used in products such as mobile phones, PDAs, digital cameras,
      computers or television displays and other household and industrial electronic
      devices.  Diguang Electronics’ customers are located in both China and
      overseas.  Diguang Electronics’ address is 8th Floor, Building 64, Jinlong
      Industry District Majialong, Nanshan District, Shenzhen, the PRC.





Well
      Planner was established under the laws of Hong Kong, Special Administrative
      Region on April 20, 2001.  Originally owned directly by Yi Song and Hong
      Song, it is now a wholly-owned subsidiary of Diguang as a result of a
      reorganization of the Songs’ ownership interests in Diguang and the Diguang
      subsidiaries in June 15, 2005.  Well Planner’s principal business is custom
      forwarding of Diguang Electronics’ products, which assists Diguang Electronics
      in meeting export and import requirements that apply to the international sale
      of its products and the importation into China of raw materials that Diguang
      Electronics uses in its manufacturing operations.  Well Planner performs
      these services under a service agreement that provides for a service fee of
      not
      less than 2% of the goods Well Planner has handled for Diguang Electronics.
      However, Well Planner’s only customer is Diguang Technology, making Well Planner
      essential a pass-through entity. Well Planner’s address is 10/F, 579 Nathan
      Road, Mongkok, Kowloon, Hong Kong SAR.




5





Diguang
      Technology was established under the laws of British Virgin Islands on August
      28, 2003. Originally owned directly by Yi Song and Hong Song, it is now a
      wholly-owned subsidiary of Diguang as a result of a reorganization of the Songs’
ownership interests in Diguang and the Diguang subsidiaries in June 2005.
 The business predecessor of Diguang Technology was an unlimited liability
      company named Diguang Electronics (Hong Kong) Co., which was established under
      Hong Kong laws on October 12, 1998, also owned directly by Yi Song and Hong
      Song.  Diguang Electronics (HK) was engaged in the business of distributing
      Diguang Electronics’ products and purchasing electronic components and raw
      materials for Diguang Electronics’ operations in international markets.  On
      October 31, 2003, all of the substantial business operations of Diguang
      Electronics (HK) were transferred to Cheer Top Capital Limited, a company
      incorporated in the British Virgin Islands that was acquired by the Songs for
      the purpose of basing those operations in the British Virgin Islands.  In
      June 2004 the name was changed to Diguang Science and Technology (HK) Limited.
       After businesses were transferred, a dividend of approximately $2.65
      million was distributed.  Diguang Technology’s address is Commonwealth
      Trust Limited, Drake Chambers, Tortola, British Virgin Islands.





Under
      a
      reorganization agreement entered on June 15, 2005, the owners of Diguang’s
      subsidiaries transferred their collective 100% equity interest in those three
      entities to Diguang Holdings in exchange for a 100% equity interest in Diguang
      Holdings.  Being a receiving entity under common control, Diguang Holdings
      recorded all the assets and liabilities transferred at their carrying amounts
      in
      the accounts of the three respective entities at the date of transfer under
      the
      guidance of SFAS No. 141, Appendix D.  The effective date for this
      reorganization was June 30, 2005. Prior to June 30, 2005, Diguang Holdings
      did
      not have any operations.  As a result of the reorganization described in
      the first sentence of this paragraph, Diguang Holdings became the 100% owner
      of
      Diguang’s subsidiaries, and the consolidated financial statements of Diguang
      Holdings and Diguang Holdings’ subsidiaries became Diguang Holdings’ historical
      financial statements.





Diguang
      Holdings had and since the Share Exchange, we have been conducting operations
      in
      only one business segment, hence, there is only a segment disclosure requirement
      based on geographical locations of the customers.





Diguang
      Electronics has approximately 1,460 employees and is headquartered in Shenzhen,
      China, with additional offices and its backlight manufacturing operations in
      Dongguan, China.  Our other subsidiaries only employ a few
      employees.




Historically, the
      capital expenditures have included the purchase of production equipment, office
      equipment and leasehold improvements, all within the PRC. In connection with
      the
      expansion and ramp-up of our PRC production capability and capacity, Diguang
      incurred capital expenditures of $4.85
      million $6.52 million and $6.17 million in 2005, 2006 and 2007,
      respectively. We depreciate our production equipment and office equipment on
      a
      straight-line basis over an estimated useful life of five to ten years.




6




Currently,
      Diguang does not have any capital expenditures or divestitures in progress.





Additional
      capital expenditures are being considered and may be made if the demand for
      our
      products justifies doing so.





**(c)
      Description of the Amended and Restated Share Exchange
      Agreement**




We
      filed
      a current report on Form 8-K on January 17, 2006 to disclose our entry into
      a
      definitive Share Exchange Agreement to acquire Diguang Holdings, a British
      Virgin Islands company with operating subsidiaries in the People’s Republic of
      China, Hong Kong and the British Virgin Islands.




The
      Share
      Exchange Agreement, which was filed as an exhibit to the 8-K, was amended and
      restated as of March, 17, 2006 to reflect a change in the structure of the
      transaction, principally the decision to leave Online domiciled in Nevada rather
      than converting it to a British Virgin Islands corporation.  Reference to
      the Share Exchange Agreement in this registration statement is to the Share
      Exchange Agreement as so amended and restated.




The
      transactions contemplated by the Share Exchange Agreement closed on March 17,
      2006.  As a result, Diguang Holdings became our wholly owned subsidiary. We
      had previously changed our name from Online Processing, Inc. to Diguang
      International Development Co., Ltd., “Diguang” or the “Company” or “we” or
“our”.  Pursuant to the name change, we have a new OTCBB trading symbol,
      DGNG, which we disclosed in a Form 8-KA filed on March 6, 2006.




As
      noted,
      our and Diguang Holdings management believed that it was in our interest to
      remain a Nevada corporation. Therefore, we and Diguang Holdings’ shareholders
      agreed to amend the Share Exchange Agreement to eliminate as a closing condition
      that Online redomicile to the British Virgin Islands.  Accordingly, our
      Articles of Incorporation and Bylaws, as amended, not the Association and
      Memorandum of Association that were attached as an exhibit to the January 17,
      2006 Form 8-K, will govern us. Our Articles of Incorporation, as amended, are
      attached as an exhibit to a previous SEC filing.





On
      March
      17, 2006, we accepted subscriptions from 94 accredited investors, and not 91
      as
      was previously reported on our Current Report filed on Form 8-K on March 21,
      2006, to acquire 2,400,000 shares of our common stock through a private offering
      at a per share price of $5.00, generating gross proceeds of $12,000,000.
 This private equity financing was made pursuant to the exemption from the
      registration provisions of the Securities Act provided by Section 4(2) of the
      Securities Act of 1933, as amended for issuances not involving a public offering
      and Rule 506 of Regulation D promulgated thereunder.





In
      addition to removing the closing condition that we convert to a British Virgin
      Islands company, the parties also modified the Share Exchange Agreement to
      provide for the assumption of an option plan adopted by Diguang Holdings prior
      to the closing of the Share Exchange. Diguang Holdings had issued options under
      that plan equivalent to approximately 540,000 shares of our stock to our
      independent directors and certain members of its management. This varied from
      the information regarding an option plan disclosed in the Current Report on
      8-K
      filed on January 17, 2006, which stated that an option plan would be adopted
      by
      us after closing, would reserve 1,500,000 shares for issuance under the plan
      and
      that no options would be issued prior to eighteen months following closing
      without the consent of the member of the Board of Directors not appointed by
      Diguang Holdings. The limit on options to be issued of 1,500,000 remains in
      place, so that under the assumed plan approximately 960,000 shares remain
      available for future issuance, and the grant of any of those options prior
      to 18
      months following the closing of the share exchange remains subject to the
      consent of the member of the board of directors not appointed by Diguang
      Holdings.




7





The
      parties had intended to increase the authorized stock of Online to 50,000,000
      shares as part of the process of converting to a British Virgin Islands
      corporation. This increase was needed to provide for the issuance of additional
      stock compensation to certain of Diguang Holdings’ shareholders in the event
      that we achieve certain after-tax earnings objectives for the fiscal years
      2006
      through 2009.  As the conversion to a British Virgin Islands corporation
      did not take place, we amended our certificate of incorporation to increase
      our
      authorized capital from 25,000,000 to 50,000,000 shares of common stock, thus
      satisfying that requirement of the Share Exchange Agreement.  The Share
      Exchange Agreement was also revised to require the parties to provide audited
      financial statements as of December 31, 2005, rather than audited financial
      statements as of December 31, 2004 and reviewed statements as of June 30, 2005.
      The Share Exchange Agreement is attached as an exhibit to this
      filing.





In
      the
      Share Exchange, we acquired all of Diguang Holdings’ issued and outstanding
      shares of common stock in exchange for 18,250,000 shares of our common stock.
      Prior to that, we effected a 3 for 5 reverse stock split, information regarding
      which was provided in Online’s January 17, 2006 Form 8-K and its Current Reports
      on Form 8-K filed on February 15, 2006 and February 24, 2006, and 4,967,940
      shares of our stock standing in the name of Terri Wonderly were cancelled.
       As a result of all of the foregoing and the issuance of 2,400,000 shares
      in the Offering, we now have 22,340,700shares of common stock issued and outstanding.  Of that amount,
      Diguang Holdings’ former shareholders own 80.8%, with the balance held by those
      who held Online’s shares prior to the Share Exchange and the investors in the
      Offering. As a result of the Share Exchange, Diguang Holdings’ former
      shareholders obtained control of Diguang, and Diguang Holdings’ officers and
      directors were appointed as Diguang’s officers and directors.




In
      accordance with the Share Exchange Agreement, our shareholders will be granted
      certain incentive shares if we, post reverse merger, meet certain financial
      performance criteria. The incentive shares and financial performance criteria
      are as follows:




Total
                Incentive Shares
            
            2006
            
            2007
            
            2008
            
            2009Sino
                Olympics Industries Limited
            
            
            6,000,000
            
            
            500,000
            
            
            1,500,000
            
            
            2,000,000
            
            
            2,000,000After-tax
                Profit Target (in million) (1)
            
            
            
            
            $
            15.7
            
            $
            22.8
            
            $
            31.9
            
            $
            43.1





(1)
      After-tax profit targets shall be the income from operation, less taxes paid
      or
      payable with regard to such income, excluding the effect on income from
      operations, if any, resulting from issuance of incentive shares in any year.
      By
      way of example, if the incentive shares for 2006 are earned and issued in 2007
      with an aggregate value of $7 million, and as a result the income from
      operations for 2007 is reduced by $7 million, the determination of whether
      the
      after-tax profit targets are hit for 2007 will be made without deducting the
      $7
      million from income from operations. That is, if income from operations was
      $20
      million after the charge for issuance of the incentive shares, for purpose
      of
      issuance of incentive shares for 2007, income from operations will be deemed
      to
      be $27 million, and whether the target is hit will be determined by deducting
      from $27 million the amount of taxes that would have been paid or payable had
      income from operations actually been $27 million.





We
      account for the transactions of issuing these incentive shares based on the
      fair
      value of grant date in accordance with SFAS 123R. Under SFAS 123R, the grant
      date was effective March 17, 2006. Accordingly, the compensation expense has
      been calculated, but will be recorded over the period (in which the shareholders
      of Diguang can earn any of the amounts each year) only if meeting the prescribed
      target in the Share Exchange Agreement is probable.




8





We
      did
      not meet the 2006 and 2007 after-tax profit target. No incentive shares have
      been issued to date.





**(d)
      Financial Information About Geographic Areas**





***Total
      revenues by category of activity and geographic market***





We
      currently operate only in one business segment and generate revenues only from
      the sale of CCFL and LED backlights for LCDs.  Since our major production
      base is in China, and since export revenue and net income in overseas entities
      accounted for a significant portion of total consolidated revenue and net
      income, management believes that the following table presents useful information
      for measuring business performance, financing needs, and preparing our corporate
      budget, among other things.





**Years
                Ended December 31,****2005**
            
            **2006**
            
            **2007**Sales
                to China domestic customers
            
            $
            4,921,563
            
            $
            2,714,184
            
            $
            7,297,447Sales
                to overseas customers
            
            
            30,726,555
            
            
            31,528,433
            
            
            38,611,809$
            35,648,118
            
            $
            34,242,617
            
            $
            45,909,256




***Financial
      Information about Geographic Areas***





During
      2005, 2006 and 2007, we derived $4,921,563, $2,714,184
      and $7,297,447 respectively, of our revenues from external customers in China,
      includingHong Kong and Taiwan, the domicile of our principal operating subsidiary,
      Diguang Electronics.





Revenues
      from customers outside of China for 2005,
      2006 and 2007totaled $30,726,555, $31,528,433 and $38,611,809
      respectively. We attribute sales to individual foreign countries based on the
      destination to which we ship the products.





There
      are
      certain risks associated with the concentration of our operations in China.
      These include currency risks and political risks. See ***Risk
      Factors*** **** below *.* Until
      recently, the Chinese government pegged its currency, the renminbi (RMB) to
      the
      United States dollar, adjusting the relative value only slightly and on
      infrequent occasion. Many people viewed this practice as leading to a
      substantial undervaluation of the RMB relative to the dollar and other major
      currencies, providing China with a competitive advantage in international trade.
      China now allows the RMB to float to a limited degree against a basket of major
      international currencies, including the dollar, the Euro and the Japanese yen.
      This change in policy produced a cumulative revaluation of the RMB of about
      16%
      so far.





This
      16%
      increase in the value of the RMB is not expected to produce a material effect
      on
      our business or our financial performance.  However, if the Chinese
      government allows significant further revaluations of the RMB in the near
      future, it could have adverse consequences on our ability to compete
      internationally. In particular, such a revaluation would make our products
      relatively more expensive in markets outside of China than before the
      revaluation, representing about 88% of our product revenues, including those
      from Hong Kong, which could slow or eliminate our anticipated
      growth.




9





Offsetting
      this risk to some degree is the fact that if further revaluation of the RMB
      does
      occur, it will result in an increase to our profits when stated in dollar terms
      for a given level of profit in RMB. It is difficult to tell which of these
      effects, if either will be more significant, and therefore we cannot know
      whether the revaluation of the RMB would have an overall negative or positive
      effect on the value of our business.





From
      a
      political standpoint, only recently has China moved away from a centrally
      planned economy toward a market driven economy. It is not possible to predict
      how rapidly the move to a market economy will continue, or if it will continue
      at all or even reverse. Similarly, the government has recently been encouraging
      the development and growth of privately owned enterprises. Both of those
      political trends have benefited our expansion. Should the government modify
      or
      reverse those policies, it could prove detrimental to us.





Additionally,
      China has historically been indifferent to the enforcement of intellectual
      property rights, on which we currently depend and expect to continue to depend
      to a significant degree. As a condition to its admission to the World Trade
      Organization, China committed to improve the enforcement of intellectual
      property rights, and there is evidence to show that it has done so, including
      increased prosecutions of intellectual property pirates. Should China reverse
      that policy, it could be detrimental to our business prospects due to our
      Chinese competitors’ infringement on our intellectual property.





It
      is not
      yet clear to us whether our three-year geographic financial information is
      indicative of our current or future operations, particularly with regard to
      our
      sources of revenues. Several factors make it difficult to tell whether we will
      derive more or less of our revenues from countries other than China going
      forward. This includes our rapid growth, the anticipated rapid rate of growth
      of
      businesses in China that make products incorporating our backlight products
      and
      our development of larger backlights. However, we do not anticipate a material
      effect on our business if a shift in the geographic distribution of our sales
      occurs.





**(e)
      Narrative Description of Business**





Prior
      to
      entering into the memorandum of understanding with Diguang Holdings, we had
      not
      had any operations since March 2003. As a result of the Share Exchange, the
      operations of Diguang Holdings’ subsidiaries became our principal operations,
      and therefore all of the information provided below relates to the operations
      of
      Diguang Holdings’ subsidiaries.





We
      specialize in the design, production and distribution of small to medium-sized
      Light Emitting Diode and Cold Cathode Fluorescent Lamp backlights for various
      Thin Film Transistor Liquid Crystal Displays, or “TFT-LCD”, and Super-Twisted
      Nematic Liquid Crystal Display, or “STN-LCD”, Twisted Nematic Liquid Crystal
      Display, or “TN-LCD”, and Mono LCDs, taken together, these applications are
      referred to as “LCD” applications. Those applications include color displays for
      cell phones, car televisions and navigation systems, digital cameras,
      televisions, computer displays, camcorders, PDAs and DVDs, CD and MP3/MP4
      players, appliance displays and the like.





We
      conduct that business principally through the operations of Diguang Electronics,
      headquartered in Shenzhen, China, with additional offices and its backlight
      manufacturing operations in Dongguan, China. Diguang Electronics has
      approximately 2,000 full-time employees, although the figure changes from time
      to time as production demands require.





Well
      Planner is involved with the import of raw materials into China and export
      of
      finished products from China. Well Planner currently has no fixed
      assets.




10





Diguang
      Technology is directly involved with the international buying of raw materials
      and selling of backlight products for Diguang Electronics. Diguang Technology
      purchases raw materials from international suppliers and acts as an
      international sales group for both Diguang Electronics and Well Planner. Diguang
      Technology has no fixed assets.





Between
      them, Well Planner and Diguang Technology have only 4 employees.





LCDs
      consist of a top layer that uses electronic impulses, filters and liquid crystal
      molecules to create an image, often in color. However, the LCD component itself
      generates relatively little in the way of luminance or light output, making
      the
      image on the screen impractical to use on its own under most conditions. A
      second component to these displays is backlights, which provide the luminance
      that enables viewers to see a distinct image on the screen in a wide variety
      of
      lighting conditions. In that sense, they operate much in the same way the bulb
      in a film projector or a slide projector does, converting the dark image on
      the
      film to a bright image that can be readily viewed.





We
      achieved some success in expanding our customer base and our geographic markets
      during 2007. Sales to our largest customer generated 16% of our revenues for
      2007 compared with 24% in 2006. Sales to our three largest customers increased
      to 39% of 2007 revenue compared to 52% in 2006. Our
      top
      three customers in 2007 are ALCO Electronics, Hot Tracks International Ltd
      and
      Transcend Optronics.We are continuing our efforts to diversify and
      broaden our customer base to become less reliant on these customers, including
      the development of new products, such as backlights for flat panel
      televisions.





Diguang
      Electronics is one of the first companies in China to use patented light guide
      panel technology by mould injection method to produce backlight units. We have
      received various awards and accolades, including the Shenzhen Science and
      Technology Progress Award in 2003. Additionally, Diguang’s products, namely CCFL
      backlights and white LED backlights, were included in the National Important
      New
      Products Project, and we received the “Important New Products” certificate in
      2003.





Diguang
      Electronics caters to the global demand for backlight products on the basis
      of
      quality, cost and order fulfillment time. Diguang Electronics’ focus on product
      quality includes the use of quality materials obtained from selected
      international suppliers, and thorough quality control inspection of raw
      materials prior to use in production and finished products prior to shipment.
      Diguang Electronics also strives to offer its products at a lower cost than
      most
      competitors. This is made possible through Diguang Electronics’ skilled labor
      force of 1,500 people that, due to China’s low wage scale, is very low
      cost. Existing economies of scale also contribute to keeping costs low. Diguang
      Electronics also has the ability to deliver its initial run of products within
      15 to 30 days from the time an order is placed, while many of its competitors
      can require more time. This rapid fulfillment capability is possible because
      of
      Diguang Electronic’s large and skilled product development team, and it provides
      an important advantage to Diguang Electronics in this competitive
      market.





Diguang
      Electronics’ commitment to quality is evidenced by the fact that in 1999,
      Diguang Electronics received from Shenzhen Quality Certification Centre ISO9002
      certification, in 2002 it received from Moody International Certification QS9000
      certification and in 2005 from The TUVCERT Certification Body ISO9001
      certification and in 2006 it received the certification from the ISO/TS16949.
      These certifications signify that Diguang Electronics has established and
      adheres to high quality standards in the conduct of its product design and
      manufacturing operations.





As
      a
      full-service manufacturer of CCFL and LED backlights for LCDs, Diguang
      Electronics works with its customers to design the proper backlight to meet
      the
      customers’ specifications for a particular product and application. Nearly all
      of Diguang Electronics’ products are customized in terms of customers’ specific
      applications. Diguang Electronics currently co-develops 30-50 new products
      with
      customers each month. Diguang Electronics has developed or co-developed more
      than 2,600 different products and over 2300 sets of molds for LED/CCFL
      backlights meeting different customer specifications to date and has put more
      than 2,000 LED/CCFL products meeting unique customer specifications into mass
      production. Diguang Electronics typically does not receive direct payments
      from
      customers to develop products, but it does include the costs of developing
      products to meet customer specifications into its pricing.




11





Our
      sales
      are obtained either through our internal workforce, our Well Planner and Diguang
      Technology subsidiaries or through commissioned sales agents that represent
      us
      in locations outside of China.





Historically,
      the majority of the world’s backlight production was located in Japan and Korea,
      although due to low cost advantages and recent improvements in product quality,
      Taiwan and Mainland China have emerged as significant areas of backlight
      production. By conducting our business related to the design, production and
      distribution of backlights in China, principally through the operations of
      Diguang Electronics, we are able to take advantage of the low labor and other
      costs in China relative to other countries.





Our
      business is subject to slight seasonal fluctuation. Many of the products that
      incorporate our backlights are popular household electronic consumer goods
      such
      as home entertainment equipment and cellular phones, which enjoy a higher rate
      of retail sales in the fourth calendar quarter compared with other times of
      the
      year. However, the varying lead times associated with those products and the
      inclusion of many product lines that are not seasonal in nature, such as home
      appliances and office equipment, limit the seasonal nature of our business.
      Overall, we do not consider our business to vary from quarter to quarter to
      the
      extent that would justify describing us as a seasonal business.





There
      are
      no practices in our industry that have a significant effect on working capital
      requirements. Most of our business is done on a relatively short cycle time
      (on
      average, less than a month from customer order to initial fulfillment and
      between 1 to 3 months for payment). The capital costs associated with product
      development are relatively small on an individual product basis, although the
      aggregate of such costs is meaningful given the large number of products that
      we
      develop on an ongoing basis. Molds meeting customers’ size specifications are
      needed to form the housings for the backlights, but these molds are not costly,
      and we have accumulated approximately 2,300 of them during our years of
      operation, many of which can be reused to make a new product with little or
      no
      adjustment. A significant aspect of our business model is providing a rapid
      response to customer orders, which helps to minimize the amount of inventory
      we
      must carry. We also do not need to carry large amounts of raw material
      inventories because raw materials have been readily available from a number
      of
      suppliers.





The
      principal raw materials used in a LED backlight consist of LED chips, or SMD,
      reflectors, brightness enhancing films, silica gels and plastics, PMMA or PC
      etc. Those materials are available from numerous suppliers, most of them based
      in Asia, such as Nanjing Longguang Electronics Co. Ltd., HI SPEED Company,
      Toryota, Nicha, Kimoto, Hong Kong Panac Company, Global Trading Company and
      Advanced OPTO Company, etc. We purchase our raw materials from over 20 suppliers
      in Asia and from two United States based companies, 3M and Cree. We follow
      a
      practice of obtaining each of our raw materials from multiple suppliers as
      a
      means of ensuring supply, protecting against fluctuations in price, whether
      producer or currency related, and making certain that our quality standards
      are
      consistently met.





**(f)
      Significant Recent Events**





On
      April
      21, 2006, we entered into an option agreement with two of our major shareholders
      and corporate officers, Yi Song, President and CEO, and Hong Song, COO, to
      obtain an option to acquire the interest held by the Song Brothers in North
      Diamond, which is a British Virgin Islands based company. North Diamond
      established a wholly-owned subsidiary named Dihao Electronic (Yangzhou) Co.,
      Ltd. in Yangzhou, Jiangsu Province, China on June 11, 2004, with registered
      capital of $5 million. This wholly-owned foreign enterprise, or “WOFE”, in China
      started operation in early 2006.




12





Sino
      Olympics committed to infuse $3.25 million, accounting for 65% interest, to
      North Diamond and the other investors committed to infuse $1.75 million,
      accounting for a 35% interest, to North Diamond. As of June 30, 2006, Sino
      Olympics has infused capital of $1 million, increasing its capital contribution
      up to $1.4875 million, accounting for a 59.5% interest. The other investors
      infused $1.0125 million, accounting for a 40.5% interest in North Diamond.
      On
      September 19, 2006, Sino Olympics infused another $392,857. By doing so, it
      obtained the expected 65% equity ownership of North Diamond before exercising
      the purchase option. On September 19, 2006, the 65% versus 35% equity interest
      in North Diamond satisfied the original capital commitment.





Pursuant
      to the signed option agreement, the Company has the right to acquire the 32.5%
      interest currently held by the Song Brothers in North Diamond, in exchange
      for
      cash payment of $487,500 plus interest at 6% per annum from the date of capital
      infused to the date of acquisition actually taken place. The Company also
      obtained an option to acquire the entire 65% interest from Sino Olympics with
      the expectation that the total investment could reach $3.25 million plus
      interest at 6% per annum from the date at which the Song brothers infused their
      capital into North Diamond to the date the Company exercises this acquisition
      option. If the Company exercises, solely based on the Company’s discretion, the
      aforementioned option, the Company will assume the obligation to contribute
      $3.25 million of the registered capital of $5 million into this
      WOFE.





On
      May
      12, 2006, the option agreement mentioned above was amended. Pursuant to the
      new
      purchase option agreement, the purchase price for the equity Interest and the
      additional 32.5% interest should be the amount paid by Optionor for the Equity
      Interest and $487,500, plus interest at the rate of 6% per annum which should
      be
      applied to both of the equity Interest and the additional 32.5% interest, and
      assumption of any remaining obligation of Optionor to contribute the registered
      capital to North Diamond. The interest at the rate of 6% per annum shall
      commence on the date of payment made by Optionor towards its registered capital
      of North Diamond and shall end on the date of the Exercise Notice.





On
      January 3, 2007, we exercised the option and the purchase price determined
      in
      accordance with the Amended and Restated Purchase Option Agreement was
      $1,977,864, of which $97,507 was the interest paid at an interest rate at 6%.





On
      November 18, 2006, Shenzhen Diguang Electronics Co., Ltd., or “Diguang
      Electronics”, and Diguang International Holdings Limited, or “Diguang Holdings”,
      entered into a Sino-Foreign Equity Joint Venture Agreement, or the “Joint
      Venture Agreement”, for the establishment of Wuhan Diguang Electronics Co.,
      Ltd., or “Wuhan Diguang”. Pursuant to the Joint Venture Agreement, Diguang
      Electronics and Diguang Holdings shall set up Wuhan Diguang in Wuhan, Hubei
      Province, the People’s Republic of China, with a registered capital of $1
      million, of which 70% shall be infused by Diguang Electronics and the remaining
      30% by Diguang Holdings. The business scope of Wuhan Diguang shall be
“manufacture and sale of flat panel display, LED optical-electronic parts, fuse,
      LCD module, back light and electronic spare parts”.





Wuhan
      Diguang was then established on March 13, 2007 and its business license issued
      by Wuhan Municipal Administrative Bureau for Industry and Commerce is valid
      for
      20 years expiring on March 12, 2027. In accordance with the Joint Venture
      Agreement, the registered capital of Wuhan Diguang shall be contributed in
      three
      installments, with the first installment of $150,000 made in three months after
      the issuance of the business license, the second installment of $300,000 made
      in
      twelve months after the issuance of the business license, and the last
      installment of $550,000 made in eighteen months after the issuance of the
      business license.




13





As
      of December 31, 2007, $700,000 has been infused by Diguang Electronics, and
      $300,000 has been infused by Diguang Holdings.





On
      June
      29, 2007, in accordance with the Board resolution, the Company made $2,198,992,
      or RMB17 million, of investment for purchasing the land usage rights of 34,930
      square meters of industrial land in Guangming High-Tech Industry Park in
      Shenzhen, PRC, for 50 years, which was shown in Property and equipment. The
      land
      must be mainly used for developing and producing New-style Efficiency
      Semiconductor, TFT-LCD, in accordance with agreement of High-Tech Industry
      Park
      Office.




On
      December 29, 2007, Diguang International Holdings Ltd., or “Diguang
      International Holdings”, our wholly-owned subsidiary, entered into a sale and
      purchase agreement, or the “Agreement”, with Sino Olympics Industrial Limited,
      or “Sino Olympics”, and Shenzhen Diguang Engine & Equipment Co., Ltd., or
“Shenzhen Diguang”, to acquire a 100% interest in Dongguan Diguang Electronics
      Science and Technology Co. Ltd., or “Dongguan S&T”. The closing date of the
      acquisition was December 30, 2007, which was deemed to be the date for the
      purpose of financial consolidation. Pursuant to local law, the acquisition
      is
      not effective until the registration of change of shareholders is approved
      by
      the Industrial and Commercial Bureau in Donggu an,
      Administration of Foreign investment in enterprises in Dongguan and State
      Administration in Foreign Exchange. Such approval is expected to be obtained
      within six months.




The
      above
      acquisition was approved by the independent directors of the Registrant at
      the
      board of directors’ meeting held on November 28, 2007.





According
      to the Agreement dated December 29, 2007, the consideration for the sale and
      purchase is US$4,200,000 and the initial payment is US$2,000,000, which was
      paid by the end of 2007, followed by four equal installments of
      US$550,000 payable on June 30, 2008, December 31, 2008, March 31, 2009 and
      June
      30, 2009 respectively.





***Research
      and Development***





In
      addition to our product development work, taking existing, available technology
      and adapting it to the specific needs of a customer for a particular product,
      we
      engage in research and development, which involves developing new, proprietary
      techniques or products.  Our growth rate is attributable to a number of
      patents, especially in the area of light guides and other innovations that
      improve the quality, a combination of brightness, evenness, color of the light
      generated, and durability, of our products relative to other backlight
      manufacturers.





We
      are
      engaged in efforts to develop some technologies that reduce energy consumption
      and other environmental impacts of our devices.  The innovations can be
      used for a variety of applications in screens of almost all sizes. Management
      believes that many of our new technologies will be patentable, and we expect
      to
      file for and maintain both Chinese and/or international patents where the value
      of the invention warrants the expense and effort of doing so.





We
      have
      spent $727,000, $786,000 and $1,054,000 for the years ended 2005, 2006 and
      2007
      respectively on research and development efforts to improve existing products
      and processes and to develop new products, not including the expenses to develop
      particular backlight products utilizing existing technology to meet customer
      specifications for products.





Our
      major
      manufacturing processes are “dry,” meaning that they do not involve significant
      quantities of solvents, plating solutions or other types of materials that
      lead
      to the generation of large amounts of hazardous wastes, process wastewater
      discharges or air pollutant emissions.  We have only recently moved into
      our state-of-the-art manufacturing facility in Dongguan, and as a result we
      do
      not anticipate any material capital expenditures for pollution control equipment
      for 2006.  We are contemplating the construction or acquisition of
      additional manufacturing facilities if our current projections for increased
      product demand are met, but environment-related costs are not expected to be
      a
      material portion of the costs of constructing that facility, given the nature
      of
      our processes.




14





***Customers***





Our
      customer base consists of many large and medium sized companies, which include
      PVI,  ALCO, HOT TRACKS, HANNSTAR,TPV, Transcend
      Optronics, LG Philips, IZTECHNOLOGY, Gree, Tianma, Seiko, Midea,
      Affitronics, Samsung, CCT, Ellipse, Secure, Archos and Wintek, etc.  In
      2007, our largest customer by sales volume accounted for approximately 16%
      of
      total revenues.  Our top two customers accounted for approximately 28% of
      revenues and collectively, our top three customers that year generated about
      39%
      of revenues.  Our top three customers included Transcend
      Optronics, ALCO and HOT TRACKS. As a result, the loss of one or more of
      our top customers or a significant decrease in the volume of business that
      we do
      with those customers would have a material adverse effect on our business.
       To help protect against that risk, we continually seek to diversify our
      customer base, in particular by expanding our international sales efforts.
       We also expect to introduce new backlight technologies for a variety of
      applications that will help expand and diversify our customer base.





Due
      to
      our current modest utilization of our production capacity and our practice
      of
      rapid turnaround of customer orders, we do not maintain a large backlog of
      orders relative to our annual revenue figures.  Also, because nearly all of
      our products are custom made to customer specifications, experience has shown
      that nearly our entire order backlog is firm; virtually all orders that are
      placed are completed and delivered.





We
      do not
      do any business directly with governments, although many of our customers may
      make products for sale to governments around the world.





***Competition***





The
      display backlight market is highly competitive.  It has traditionally been
      centered in Japan and Korea, where the majority of LCDs and related components
      continue to be made.  Due to cost advantages and an increase in product
      quality, Taiwan has recently emerged as a significant producer of backlights,
      and China is growing in importance as a source of backlights.





To
      management’s knowledge, there are no independently published industry statistics
      that can be used to measure our market share among China-based companies
      accurately.  However, based on its general knowledge of the Chinese
      backlight industry, management believes that we are one of the largest and
      fastest growing manufacturers of backlight units in China.




Taking
      into consideration factors such as geographic market, product mix and customer
      base, we believe the following companies are our main competitors: Shian Yih
      Electronics Ind. Co. Ltd. (Taiwan), Wai Chi Electronics Ltd. (Hong Kong),
      Radiant Opto-Electronics Corporation (Taiwan) and K-Bridge Electronics Co.
      Ltd.
      (Taiwan) etc.  Even though these competitors are based outside China, each
      has significant manufacturing operations in China.  Due to the advancements
      that Taiwanese and Chinese producers have made within this industry, our main
      competitors are no longer Japanese or Korean producers.





As
      with
      most other products, competitive advantages in backlights derive from a
      favorable combination of price, quality and customer service.  We believe
      that we are well-positioned to compete effectively in all three of those areas.
       We have only recently moved into a new state-of-the-art manufacturing
      facility, which provides us with significant efficiencies and the space to
      increase our output from 100,000 small and medium units per day to
      200,000-300,000 units per day (depending on size).  In addition, China’s
      well-known labor cost advantages relative to Japan, Korea and Taiwan have
      enabled us to put price pressure on our foreign rivals, thereby helping us
      to
      gain market share while maintaining profitability and margins, as our financial
      results show.  We currently expect that growth to continue.  However,
      as more of the world’s backlight production shifts to China, our comparative
      advantage due to lower costs relative to other Asian countries will
      diminish.




15





Our
      quality enhancements include innovations in light guide technology with a
      corresponding increase in backlight life.  The improved overall performance
      resulting from these enhancements is one of the reasons we have enjoyed a
      history of rapid growth.  We believe, based on our familiarity with other
      products in the market, that we have a technological advantage relative to
      other
      producers.  We expect that this existing technological advantage, combined
      with our anticipated development of additional patented technology, will
      continue to give us a competitive advantage.





Another
      important factor in our ability to compete is our relative short cycle time
      from
      the receipt of a customer’s order to the initial delivery of products to the
      customer.  On average, this is a 15- to 30- day process for us, while many
      of our competitors take longer to reach the same result.  Our short cycle
      time is due to, among other things, our modern facilities and equipment, along
      with our large and skilled product development staff.





***Intellectual
      Property***





Diguang
      Electronics owns 1 current patent. The patent transfer agreement for seven
      unexpired Chinese is in the process of being drafted as we are discussing with
      Mr. Yi Song, the owner of the patents and Diguang’s Chairman and CEO, whether or
      not any consideration, either cash or stock or both, would be paid for the
      contemplated patents transfer. However, prior to the completed patent transfer,
      Yi Song by way of a written license allowed Diguang Electronics to use his
      backlight patents free of charge until the relevant patents have been
      transferred to Diguang Electronics. Two of these patents expire in March 2008
      and October 2009, which are not significant to our operation, respectively,
      and
      the remaining six have expiration dates ranging from 2010 to 2013.




16





These
      patents include:


***Patent
                  Name***
              
              ***Patent
                  Number***
              
              ***Holder***
              
              ***Effective date
                  of Patents***
              
              ***Expiry
                  date of Patents***1
              Uniformly
                  Effective Front Backlight
              
              ZL
                  99 2 48884.2
              
              Yi
                  Song
              
              28/10/1999
              
              27/10/20092
              Efficiency
                  Backlight and front Backlight of Side radiation
              
              ZL
                  00 2 33726.6.
              
              Yi
                  Song
              
              12/05/2000
              
              11/05/20103
              Efficiency
                  Photosensitive Sensor for Graphic Content
              
              ZL
                  01 2 01714.0
              
              Yi
                  Song
              
              20/01/2001
              
              19/01/20114
              Efficiency
                  Uniform Illuminance Equipment
              
              ZL
                  02 2 05116.3
              
              Yi
                  Song
              
              10/02/2002
              
              9/02/20125
              Efficiency
                  Uniform Backlight of Side radiation
              
              ZL
                  98 2 01487.2
              
              Yi
                  Song
              
              02/03/1998
              
              01/03/20086
              Advanced
                  Efficiency Backlight of Side radiation
              
              ZL
                  01 2 19472.7
              
              Yi
                  Song
              
              13/04/2001
              
              12/04/20117
              Efficiency
                  Uniform Backlight of Front Backlight and White Backlight radiation
              
              ZL
                  01 2 71009.1
              
              Yi
                  Song
              
              19/11/2001
              
              18/11/20118
              High
                  Efficiency of Light Source for Planar Fluorescent Lamp
              
              ZL
                  200420006645.8
              
              Yi
                  Song
              
              11/03/2004
              
              10/03/20149
              Improved
                  Uniform and Luminous Side Backlight Device with High
                  Efficiency
              
              ZL
                  090220868
              
              Yi
                  Song
              
              30/11/2001
              
              29/11/201110
              Efficiency
                  Fluorescent Lamp of New Model
              
              ZL
                  200320130305.1
              
              Diguang
                  Electronics
              
              23/12/2003
              
              22/12/201311
              Efficiency
                  Photosensitive Sensor for Graphic Content
              
              Taiwan
                  Patent
              
              Yi
                  Song
              
              22/03/2001
              
              22/03/201112
              LED
                  Optic Display
              
              ZL200410074672.3
              
              Yi
                  Song
              
              13/09/2004
              
              13/09/202413
              LED
                  Grouping with Parallel Connected Backlight Modules for Big Sized
                  TFT-LCD
                  TV
              
              ZL200620120892.X
              
              Diguang
                  Electronics
              
              11/07/2006
              
              11/07/201614
              LED
                  backlight moduel with adiabatic euphotic material radiator system
              
              ZL200720005429.5
              
              Diguang
                  Electronics
              
              23/04/2007
              
              23/04/201715
              Backlight
                  Modules with LED Reflect Concave
              
              ZL200620120893.4
              
              Diguang
                  Electronics
              
              11/07/2006
              
              11/07/201616
              arrayed
                  LED backlight moduels with direct type
              
              ZL200620120894.9
              
              Diguang
                  Electronics
              
              11/07/2006
              
              11/07/201617
              Lightings
                  and Lamps
              
              ZL200720001219.9
              
              Diguang
                  Electronics
              
              09/01/2007
              
              09/01/201718
              Inserted
                  CCFL Backlight Module
              
              ZL200620139418.1
              
              Diguang
                  Electronics
              
              30/12/2006
              
              30/12/2017




17





Almost
      all of our products incorporate technology from one or more of the above
      patents.  As these patents expire, the technology that they represent will
      become available to other backlight manufacturers. The expiration of one patent
      in 2007 will not have material adverse impact on our operation results.
 However, the pace of change in this field will generally mean that the
      technology represented by the expired patents is out-of-date.  Our efforts
      will remain directed toward the development of new patents for leading-edge
      technologies that will help us to maintain our technological advantage.  We
      also intend to patent our new inventions both in China and internationally,
      and
      we continue to work closely with leading Chinese universities and research
      institutions in the development of such technology.





Management
      is not aware of any current or previous infringement of the existing patents.
       If any infringement occurs, management will vigorously prosecute actions
      to halt the infringement and recover damages if the value of the patent is
      judged at the time to be sufficient to justify that effort.





**DOING
      BUSINESS IN CHINA**




**CHINESE
      LEGAL SYSTEM**




The
      practical effect of the Chinese legal system on the Company’s business
      operations in China can be viewed from two separate but intertwined
      considerations.  First, as a matter of substantive law, the Foreign
      Invested Enterprise Laws provide significant protection from government
      interference.  In addition, these laws guarantee the full enjoyment of the
      benefits of corporate articles and contracts to Foreign Invested Enterprise
      participants.  These laws, however, do impose standards concerning
      corporate formation and governance, which are not qualitatively different from
      the general corporation laws of the several provinces.  Similarly, the
      Chinese accounting laws mandate accounting practices, which are not consistent
      with US Generally Accepted Accounting Principles.  The Chinese accounting
      laws require that an annual “statutory audit” be performed in accordance with
      Chinese accounting standards and that the books of account of Foreign Invested
      Enterprises be maintained in accordance with Chinese accounting laws. 
Article 14 of the People’s Republic of China Wholly Foreign-Owned Enterprise Law
      requires a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal
      reports and statements to designated financial and tax authorities. 
Otherwise there is risk that its business license will be revoked.




Second,
      while the enforcement of substantive rights may appear less clear than those
      in
      the United States, the Foreign Invested Enterprises and Wholly Foreign-Owned
      Enterprises are Chinese registered companies which enjoy the same status as
      other Chinese registered companies in business dispute resolution.  Because
      the terms of the Company’s various Articles of Association provide that all
      business disputes pertaining to Foreign Invested Enterprises will be resolved
      by
      the Arbitration Institute of the Stockholm Chamber of Commerce in Stockholm,
      Sweden applying Chinese substantive law, the Chinese minority partner in the
      Company’s joint venture companies will not assume any advantageous position
      regarding such disputes.  Any award rendered by this arbitration tribunal
      is, by the express terms of the various Articles of Association, enforceable
      in
      accordance with the “United Nations Convention on the Recognition and
      Enforcement of Foreign Arbitral Awards (1958).”  Therefore, as a practical
      matter, although no assurances can be given, the Chinese legal infrastructure,
      while different from its United States counterpart, should not present any
      significant impediment to the operation of Foreign Invested
      Enterprises.




18




**ECONOMIC
      REFORM ISSUES**




Although
      the Chinese Government owns the majority of productive assets in China, in
      the
      past several years the Government has implemented economic reform measures
      that
      emphasize decentralization and encourage private economic activity. 
Because these economic reform measures may be inconsistent or ineffectual,
      there
      is no assurance that:




· The
        Company will be able to capitalize on economic reforms


· The
        Chinese Government will continue its pursuit of economic reform
        policies;
  · The
        economic policies, even if pursued, will be successful;




·    Economic
      policies will not be significantly altered from time to time; and




·    Business
      operations
      in China will not become subject to the risk of nationalization.




Negative
      impact on economic reform policies or nationalization could result in a total
      investment loss in the Company’s common stock.




Since
      1979, the Chinese Government has reformed its economic systems.  Because
      many reforms are unprecedented or experimental, they are expected to be refined
      and readjusted.  Other political, economic and social factors, such as
      political changes, changes in the rates of economic growth, unemployment or
      inflation, or in the disparities in per capita wealth between regions within
      China, could lead to further readjustment of the reform measures.  This
      refining and readjustment process may negatively affect the Company’s
      operations.




Over
      the
      last few years, China’s economy has registered a high growth rate. 
Recently, there have been indications that the rate of inflation has
      increased.  In response, the Chinese Government recently has taken measures
      to curb the excessively expansive economy.  These measures included
      implementation of a unitary and well-managed floating exchange rate system
      based
      on market supply and demand for the exchange rates of Renminbi, restrictions
      on
      the availability of domestic credit, reduction of the purchasing capability
      of
      certain of its citizens, and centralization of the approval process for
      purchases of certain limited foreign products.  These austerity measures
      alone may not succeed in slowing down the economy’s excessive expansion or
      control inflation, and may result in severe dislocations in the Chinese
      economy.  The Chinese Government may adopt additional measures to further
      combat inflation, including the establishment of freezes or restraints on
      certain projects or markets.




To
      date
      reforms to China’s economic system have not adversely affected the Company’s
      operations and are not expected to adversely affect the Company’s operations in
      the foreseeable future; however, there can be no assurance that reforms to
      China’s economic system will continue or that the Company will not be adversely
      affected by changes in China’s political, economic, and social conditions and by
      changes in policies of the Chinese Government, such as changes in laws and
      regulations, measures which may be introduced to control inflation, changes
      in
      the rate or method of taxation, imposition of additional restrictions on
      currency conversion and remittance abroad, reduction in tariff protection and
      other import restrictions.




19




**ITEM
      1A.   RISK FACTORS.**




The
      Company’s business, financial conditions and results of operations could be
      materially and adversely affected by many risk factors.  Because of these
      risk factors, actual results might differ significantly from those projected
      in
      the forward-looking statements.  Factors that might cause such differences
      include, among others, the following:




***Risks
      Related to our Business***




***Adverse
      trends in the electronics industry, such as an overall decline in price or
      a
      shift away from products that incorporate our backlights, may reduce our
      revenues and profitability.***




Our
      business depends on the continued vitality of the electronics industry, which
      is
      subject to rapid technological change, short product life cycles and profit
      margin pressures. In addition, the electronics industry historically has been
      cyclical and subject to significant downturns characterized by diminished
      product demand, accelerated erosion of average selling prices and production
      over-capacity. **** It
      is also characterized by sudden upswings in the cycle, which can lead to
      shortages of key components needed for our business, for which there is not
      always an alternative source. Economic conditions affecting the electronics
      industry in general or our major customers may adversely affect our operating
      results by reducing the level of business that they furnish to us or the price
      they are willing to pay for our products.   If our customers’ products
      fail to gain widespread commercial acceptance, become obsolete or otherwise
      suffer from low sales volume, our revenues and profitability may stagnate or
      decline.




***If
      OLED technology matures, it may lessen the demand for LCDs and LED/CCFL
      Backlights, which could reduce our revenues and profits.***




Organic
      Light Emitting Diode technology is an alternative to traditional LED technology
      that is still in the development phase, with companies attempting to create
      an
      OLED solution for cell phones and other small size applications.  This
      technology has the potential to supplant traditional LEDs in many applications,
      but it still faces many performance issues related to the life span, processing
      technology, restrictions of sizes, etc. and for many applications it is still
      cost prohibitive.  If development of this technology overcomes those
      drawbacks, it will compete with existing LCD display technologies and may reduce
      the demand for LCDs and the backlights that we supply to the makers of LCDs.
       Our client base is currently diverse and involved with manufacturing
      products in a variety of different sizes and for many different applications.
       Due to the current diverse product base of our customers, a currently
      perceived growing demand for our backlights in medium and large size
      applications and enhancements in LCD technology, we believe that OLED technology
      will have little or no short term or medium-term effect on our levels of LCD
      backlight sales.  However, if the OLED technology matures or our current
      beliefs or understandings materially change, it may lessen the demand for LCDs
      and related components, leading to a reduction of our revenues or profits or
      both.




***A
      few customers and applications account for a significant portion of our sales,
      and the loss of any one of these customers may reduce our revenues and profits.***




A
      significant portion of our revenue is generated from a small number of
      customers.  The aggregate percentage of the revenue contributed by our top
      three customers in the
      year
      ended December 31, 2007 was 39%,
      with roughly 28% coming from the two largest customers.  Under present
      conditions, the loss of any of these customers, or a significant reduction
      in
      our level of sales to any or all of them, could have a material adverse effect
      on our business and operating results.





***We
      do not have long-term purchase commitments from our customers and may have
      to
      rely on customer forecasts in making production decisions, and any cancellation
      of purchase commitments or orders may result in the waste of raw materials
      or
      work in process associated with those orders, reducing both our revenues and
      profitability.***




20




As
      a
      backlight manufacturer, we must provide increasingly rapid product turnaround.
      A
      variety of conditions, both specific to individual customers and generally
      affecting the demand for these products, may cause customers to cancel, reduce
      or delay orders. Cancellations, reductions or delays by a significant customer
      or by a group of customers would result in a material reduction in revenue.
       Those customer decisions could also result in excess and obsolete
      inventory and/or unabsorbed manufacturing capacity, which could reduce our
      profits or impair our cash flow. On occasion, customers require rapid increases
      in production, which can strain our resources, leading to a reduction in our
      margins as a result of the additional costs necessary to meet those demands.




Our
      customers generally do not provide us with firm, long-term volume purchase
      commitments. In addition, industry trends over the past five years have led
      to
      dramatically shortened lead times on purchase orders, as rapid product cycles
      have become the norm. Although we sometimes enter into manufacturing contracts
      with our customers, these contracts principally clarify order lead times,
      inventory risk allocation and similar matters, rather than providing for firm,
      long-term commitments to purchase a specified volume of products at a fixed
      price. As a result, customers can generally cancel purchase commitments or
      reduce or delay orders at any time. The large percentage of our sales to
      customers in the electronics industry, which is subject to severe competitive
      pressure, rapid technological change and product obsolescence, increases our
      inventory and overhead risks, among others, as we must maintain inventories
      of
      raw materials, work in process and finished goods to meet customer delivery
      requirements, and those inventories may become obsolete if the anticipated
      customer demand does not materialize.




We
      also
      make significant decisions, including determining the levels of business that
      we
      will seek and accept, production schedules, component procurement commitments,
      facility requirements, personnel need, and other resource requirements, based
      upon our estimates of customer requirements. The short-term nature of our
      customers’ commitments and the possibility of rapid changes in demand for these
      products reduce our ability to estimate accurately the future requirements
      of
      those customers. Because many of our costs and operating expenses are fixed,
      a
      reduction in customer demand can reduce our gross margins and operating results.
      In order to transact business, we assess the integrity and creditworthiness
      of
      our customers and suppliers and we may, based on this assessment, incur design
      and development costs that we expect to recoup over a number of orders produced
      for the customer.  Such assessments are not always accurate and expose us
      to potential costs, including the write off of costs incurred and inventory
      obsolescence if the orders anticipated do not materialize. We may also
      occasionally place orders with suppliers based on a customer’s forecast or in
      anticipation of an order that is not realized. Additionally, from time to time,
      we may purchase quantities of supplies and materials greater than required
      by
      customer orders to secure more favorable pricing, delivery or credit terms.
      These purchases can expose us to losses from cancellation costs, inventory
      carrying costs or inventory obsolescence, and hence adversely affect our
      business and operating results.




***Failure
      to optimize our manufacturing potential and cost structure could materially
      increase our overhead, causing a decline in our margins and profitability.*** **




We
      strive
      to utilize the manufacturing capacity of our facilities fully but may not do
      so
      on a consistent basis. Our factory utilization is dependent on our success
      in
      accurately forecasting demand, predicting volatility, timing volume sales to
      our
      customers, balancing our productive resources with product mix, and planning
      manufacturing services for new or other products that it intends to produce.
      Demand for contract manufacturing of these products may not be as high as we
      expect, and we may fail to realize the expected benefit from our investment
      in
      our manufacturing facilities. Our profitability and operating results are also
      dependent upon a variety of other factors, including: utilization rates of
      manufacturing lines, downtime due to product changeover, impurities in raw
      materials causing shutdowns, and maintenance of contaminant-free operations.
      Failure to optimize our manufacturing potential and cost structure could
      materially and adversely affect our business and operating results.




21




Moreover,
      our cost structure is subject to fluctuations from inflationary pressures in
      China and other geographic regions where we conduct business. China is currently
      experiencing dramatic growth in its economy. This growth may lead to continued
      pressure on wages and salaries that may exceed increases in productivity. In
      addition, these may not be compensated for and may be exacerbated by currency
      movements.




***We
      face intense competition, and many of our competitors have substantially greater
      resources than we have.  Increased competition from these competitors may
      reduce our revenues or decrease our margins, either or both of which would
      reduce our profitability and could impair cash flow.*** **




We
      operate in a competitive environment that is characterized by price deflation
      and technological change. We compete with major international and domestic
      companies. Our major competitors include Shian Yih Electronics Ind. Co. Ltd.,
      Wai Chi Electronics Ltd., Radiant Opto-Electronics Corporation, K-Bridge
      Electronics Co. Ltd., etc. and other similar companies primarily located in
      Japan, Taiwan, Korea, Hong Kong and China Mainland. Our competitors may have
      greater market recognition and substantially greater financial, technical,
      marketing, distribution, purchasing, manufacturing, personnel and other
      resources than we do.  Furthermore, some of our competitors have
      manufacturing and sales forces that are geographically diversified, allowing
      them to reduce transportation expenses, tariff costs and currency fluctuations
      for certain customers in markets where their facilities are located.  Many
      competitors have production lines that allow them to produce more sophisticated
      and complex devices than we currently do and to offer a broader range of display
      devices to our target customers. Other emerging companies or companies in
      related industries may also increase their participation in the display and
      display module markets, which would intensify competition in our markets. We
      might lose some of our current or future business to these competitors or be
      forced to reduce our margins to retain or acquire that business, which could
      decrease our revenues or slow our future revenue growth and lead to a decline
      in
      profitability.




***We
      depend on the market acceptance of our customers’ products, and significant
      slowdown in demand for those products would reduce our revenues and our profits.*** **




Currently,
      we do not sell products to end users. Instead, we design and manufacture various
      display product solutions that our customers incorporate into their products.
      As
      a result, our success depends almost entirely upon the widespread market
      acceptance of our customers’ products. Any significant slowdown in the demand
      for our products would likely reduce our revenues and profits.  Therefore,
      we must identify industries that have significant growth potential and establish
      strong, long-term relationships with manufacturers in those industries. Our
      failure to identify potential growth opportunities or establish these
      relationships would limit our revenue growth and profitability.




***We
      extend credit to our customers and may not be able to collect all receivables
      due to us, and our inability to collect such receivables may have an adverse
      effect on our immediate and long-term liquidity.***




We
      extend
      credit to our customers based on assessments of their financial circumstances,
      generally without requiring collateral.  As of December 31, 2007, our
      accounts receivable, after deducting an allowance for bad debts, was nearly
      $12.7 million.  Our overseas customers may be subject to economic cycles
      and conditions different from those of our domestic customers. We may also
      be
      unable to obtain satisfactory credit information or adequately secure the credit
      risk for some of these overseas customers.  The extension of credit
      presents an exposure to risk of uncollected receivables.  Additionally, we
      may not realize from receivables denominated in a foreign currency the
      anticipated amounts in United States dollar terms due to fluctuations in
      currency values. Our inability to collect on these accounts may reduce on our
      immediate and long term liquidity.




22




***The
      growth of our business depends on our ability to finance new products and
      services and these increased costs may reduce our cash flows and, if the
      products and services in which we have invested do not succeed, it would reduce
      our profitability.*** **




We
      operate in the consumer electronics industry, which is characterized by rapid
      change.  New technologies are appearing with increasing frequency to
      supplant existing technologies.  In order to capture increased market
      share, manufacturers are adopting a shorter product life cycle from a cosmetic,
      if not functional, standpoint, but those cosmetic changes generally have a
      direct effect on the backlight products that the new designs incorporate.
      Technological advances, the introduction of new products, new designs and new
      manufacturing techniques could render our inventory obsolete, or it could shift
      demand into areas where we are not currently engaged.  If we fail to adapt
      to those changing conditions in a timely and efficient manner, our revenues
      and
      profits would likely decline. To remain competitive, we must continue to incur
      significant costs in product development, equipment and facilities and to make
      capital investment. These costs may increase, resulting in greater fixed costs
      and operating expenses. As a result, we could be required to expend substantial
      funds for and commit significant resources to the following:




·
            
            research
                and development activities on existing and potential product solutions;·
            
            additional
                engineering and other technical personnel;·
            
            advanced
                design, production and test equipment;·
            
            manufacturing
                services that meet changing customer needs;·
            
            technological
                changes in manufacturing processes; and·
            
            expansion
                of manufacturing capacity.




Our
      future operating results will depend to a significant extent on our ability
      to
      continue to provide new product solutions and electronic manufacturing services
      that compare favorably on the basis of time to market, cost and performance
      with
      the design and manufacturing capabilities and competing third-party suppliers
      and technologies. Our failure to increase our net sales sufficiently to offset
      these increased costs would reduce our profitability.




***We
      are subject to lengthy sales cycles, and it could take longer than we anticipate
      before our sales and marketing efforts result in revenue.***




Our
      focus
      on developing a customer base that requires custom displays and devices means
      that it may take longer to develop strong customer relationships. Moreover,
      factors specific to certain industries have an impact on our sales cycles.
      In
      particular, those customers who operate in or supply to the medical and
      automotive industries require longer sales cycles, as qualification processes
      are longer and more rigorous, often requiring extensive field audits. These
      lengthy and challenging sales cycles may mean that it could take longer before
      our sales and marketing efforts result in revenue to us, if at all.  As a
      result, the return on the time and effort invested in developing these
      opportunities may be deferred, or may not be realized at all, reducing our
      profitability.




23




***Products
      we manufacture may contain design or manufacturing defects, which could result
      in reduced demand for our services and customer claims, causing us to sustain
      additional costs, loss of business reputation and legal liability.***




We
      manufacture products to our customers’ requirements, which can be highly complex
      and may at times contain design or manufacturing errors or failures. Any defects
      in the products we manufacture, whether caused by a design, manufacturing or
      component failure or error, may result in returns, claims, delayed shipments
      to
      customers or reduced or cancelled customer orders. If these defects occur,
      we
      will incur additional costs, and if in they occur in large quantity or
      frequently, we may sustain additional costs, loss of business reputation and
      legal liability.




***We
      could become involved in intellectual property disputes, resulting in
      substantial costs and diversion of our management resources.  Such disputes
      could materially and adversely affect our business by increasing our expenses
      and limiting the resources that we can devote to expansion of our business,
      even
      if we ultimately prevail.*** ** ******




Diguang
      Electronics currently possesses two Chinese patents, and we utilize the
      additional patented technologies that are material to our business, which are
      in
      the process of being transferred to Diguang Electronics from Yi Song, referred
      to in our prior filings as Song Yi to conform to Chinese convention of last
      name
      first, our Chairman, CEO and the current owner of the patents. If the patents
      are not successfully transferred, we will not be able to use the same patents,
      which would hamper our production and this would have a material and adverse
      effect on our business and revenues. If a patent is infringed upon by a third
      party, we may need to devote significant time and financial resources to attempt
      to halt the infringement. We may not be successful in defending the patents
      involved in such a dispute. Similarly, while we do not knowingly infringe on
      patents, copyrights or other intellectual property rights owned by other
      parties; we may be required to spend a significant amount of time and financial
      resources to resolve any infringement claims against us.  We may not be
      successful in defending our position or negotiating an alternative remedy.
       Any litigation could result in substantial costs and diversion of our
      management resources and could reduce our revenues and profits.




***Our
      customers may decide to design and/or manufacture the products that they
      currently purchase from us, which may reduce our revenues and profits, as we
      may
      not be able to compete successfully with these in-house developments.***




Our
      competitive position could also be adversely affected if one or more of our
      customers decide to design and/or manufacture their own backlights and display
      modules. We may not be able to compete successfully with these in-house
      developments by our customers, which would tend to favor their in-house supply
      over us, even in cases where price and quality may not be comparable. ****




***We
      may develop new products that may not gain market acceptance, and our
      significant costs in designing and manufacturing services for new product
      solutions may not result in sufficient revenue to offset those costs or to
      produce profits.***




We
      operate in an industry characterized by frequent and rapid technological
      advances, the introduction of new products and new design and manufacturing
      technologies.  As a result, we may be required to expend funds and commit
      resources to research and development activities, possibly requiring additional
      engineering and other technical personnel; purchasing new design, production,
      and test equipment; and continually enhancing design and manufacturing processes
      and techniques. We may invest in equipment employing new production techniques
      for existing products and new equipment in support of new technologies that
      fail
      to generate adequate returns on the investment due to insufficient productivity,
      functionality or market acceptance of the products for which the equipment
      may
      be used. We could, therefore, incur significant sums in design and manufacturing
      services for new product solutions that do not result in sufficient revenue
      to
      make those investments profitable.  Furthermore, customers may change or
      delay product introductions or terminate existing products without notice for
      any number of reasons unrelated to us, including lack of market acceptance
      for a
      product. Our future operating results will depend significantly on our ability
      to provide timely design and manufacturing services for new products that
      compete favorably with design and manufacturing capabilities and third party
      suppliers.




24




***Our
      component and materials suppliers may fail to meet our needs, causing us to
      experience manufacturing delays, which may harm our relationships with current
      or prospective customers and reduce sales.***




We
      do not
      have long term supply contracts with the majority of our suppliers or for
      specific components. This generally serves to reduce our commitment risk but
      does expose us to supply risk and to price increases that we may not be able
      to
      pass on to our customers.  In our industry, at times, there are shortages
      of some of the materials and components that it uses. If we are unable to obtain
      sufficient components on a timely basis, we may experience manufacturing delays,
      which could harm our relationships with current or prospective customers and
      reduce sales.  Moreover, some suppliers may offer preferential terms to our
      competitors, who may have greater buying power or leverage in negotiations.
       That would place us at a competitive disadvantage.




***We
      may be affected by power shortages, causing delays in delivery of products
      to
      our customers, resulting in possible loss of business or claims against us
      and
      cause us to lose future business from those or other customers.*** **




Our
      Dongguan factory consumes a significant amount of electricity, and there are
      a
      significant number of industrial facilities in the area where this factory
      is
      located.  Therefore, power shortages may occur and the facility may be
      deprived of electricity for undetermined periods of time.  This may result
      in longer production timeframes and delays in delivery of product to our
      customers.  Failure to meet delivery deadlines may result in the loss of
      business or claims against us, which may have a material and adverse effect
      on
      our business, profitability and reputation.




***Our
      financial performance could be harmed if compliance with new environmental
      regulations becomes too burdensome.***




Although
      we believe that we are operating in compliance with applicable Chinese
      government environmental laws, there is no assurance that we will be in
      compliance consistently, as such laws and regulations or their interpretation
      and implementation change. Failure to comply with environmental regulation
      could
      result in the imposition of fines, suspension or halting of production or
      closure of manufacturing operations.




***We
      may not be able to secure financing needed for future operating needs on
      acceptable terms, or on any terms at all.*** **




From
      time
      to time, we may seek additional equity or debt financing to provide the capital
      required to maintain or expand our design and production facilities and
      equipment and/or working capital, as well as to repay outstanding loans if
      cash
      flow from operations is insufficient to do so. We cannot predict with certainty
      the timing or amount of any such capital requirements. If such financing is
      not
      available on satisfactory terms, we may be unable to expand our business or
      to
      develop new business at the rate desired.




25




***Failure
      to manage growth effectively could result in inefficiencies that could increase
      our costs, reducing our profitability.***




We
      have
      increased the number of our manufacturing and design programs and intend to
      expand further the number and diversity of our programs.  The number of
      locations where we manufacture may also increase.  Our ability to manage
      our planned growth effectively will require us to:




·
            
            enhance
                quality, operational, financial and management systems;





·
            
            expand
                facilities and equipment; and





·
            
            successfully
                hire, train and motivate additional employees, including the technical
                personnel necessary to operate our production facilities.




An
      expansion and diversification of our product range, manufacturing and sales
      will
      result in increases in our overhead and selling expenses. We may also be
      required to increase staffing and other expenses as well as expenditures on
      plant, equipment and property in order to meet the anticipated demand of our
      customers. Customers, however, generally do not commit to firm production
      schedules for more than a short time in advance. Any increase in expenditures
      in
      anticipation of future orders that do not materialize would adversely affect
      our
      profitability. Customers also may require rapid increases in design and
      production services that place an excessive short-term burden on our resources
      and reduce our profitability.




***Potential
      strategic alliances may not achieve their objectives, which could lead to wasted
      effort or involvement in ventures that are not profitable and could harm our
      company’s reputation.***




We
      are
      currently exploring strategic alliances designed to enhance or complement our
      technology or to work in conjunction with our technology, increase our
      manufacturing capacity, provide additional know-how, components or supplies,
      and
      develop, introduce and distribute products and services utilizing our technology
      and know-how. Any strategic alliances entered into may not achieve their
      strategic objectives, and parties to our strategic alliances may not perform
      as
      contemplated.  As a result, the alliances themselves may run at a loss,
      which would reduce our profitability, and if the products or customer service
      provided by such alliances were of inferior quality, our reputation in the
      marketplace could be harmed, affecting our existing and future customer
      relationships.




***We
      may not be able to retain, recruit and train adequate management and production
      personnel.  We rely heavily on those personnel to help develop and execute
      our business plans and strategies, and if we lose such personnel, it would
      reduce our ability to operate effectively.***




Our
      success is dependent, to a large extent, on our ability to retain the services
      of our executive management, who have contributed to our growth and expansion
      to
      date.  The executive directors play an important role in our operations and
      the development of our new products. Accordingly, the loss of their services,
      in
      particular Messrs. Yi Song and Hong Song, referred to in our prior filings
      as
      Song Hong to conform to Chinese convention of last name first, without suitable
      replacements, will have an adverse affect on our business generally, operating
      results and future prospects.




26




In
      addition, our continued operations are dependent upon our ability to identify
      and recruit adequate management and production personnel in China. We require
      trained graduates of varying levels and experience and a flexible work force
      of
      semi-skilled operators. Many of our current employees come from the more remote
      regions of China as they are attracted by the wage differential and prospects
      afforded by Shenzhen and our operations. With the economic growth currently
      being experienced in China, competition for qualified personnel will be
      substantial, and there can be no guarantee that a favorable employment climate
      will continue and that wage rates we must offer to attract qualified personnel
      will enable us to remain competitive internationally. Inability to attract
      such
      personnel may or the increased cost of doing so could reduce our competitive
      advantage relative to other backlight producers, reducing or eliminating our
      growth in revenues and profits.




***Mr.
      Yi Song, our Chief Executive Officer, controls approximately 69% of our
      outstanding common shares and may have conflict of interest with our minority
      shareholders.***




Mr.
      Yi
      Song, our Chief Executive Officer, beneficially owns approximately 69% of the
      outstanding shares of our common stock.  As a result of being the majority
      shareholder, for transactions that require shareholders approval, he has control over decisions to enter into any of them,
      which could result in the approval of transactions that might not maximize
      shareholders’ value, and has the ability to prevent entry into any of
      them.  In addition, he can control the election of members of the Company’s
      board, have the ability to appoint new members to the Company’s management team
      and control the outcome of matters submitted to a vote of the holders of the
      Company’s common  stock. 
      The interests of Mr. Yi Song may at times conflict with the interests of our
      other shareholders.




***Risks
      Related to International Operations***




***If
      China does not continue its policy of economic reforms, it could, among other
      things, result in an increase in tariffs and trade restrictions on products
      we
      produce or sell following a business combination, making our products less
      attractive and potentially reducing our revenues and profits.***




China’s
      government has been reforming its economic system since the late 1970s. The
      economy of China has historically been a nationalistic, “planned economy,”
meaning it has functioned and produced according to governmental plans and
      pre-set targets or quotas.




However,
      in recent years, the Chinese government has implemented measures emphasizing
      the
      utilization of market forces for economic reform and the reduction of state
      ownership in business enterprises. Although we believe that the changes adopted
      by the government of China have had a positive effect on the economic
      development of China, additional changes still need to be made. For example,
      a
      substantial portion of productive assets in China are still owned by the Chinese
      government. Additionally, the government continues to play a significant role
      in
      regulating industrial development. We cannot predict the timing or extent of
      any
      future economic reforms that may be proposed, but should they occur, they could
      reduce our operating flexibility or require us to divert our efforts to products
      or ventures that are less profitable than those we would elect to pursue on
      our
      own. ****




A
      recent
      positive economic change has been China’s entry into the World Trade
      Organization, the global international organization dealing with the rules
      of
      trade between nations. It is believed that China’s entry will ultimately result
      in a reduction of tariffs for industrial products, a reduction in trade
      restrictions and an increase in trading with the United States.  However,
      China has not fully complied with all of its WTO obligations to date, including
      fully opening its markets to American goods and easing the current trade
      imbalance between the two countries. If actions are not taken to rectify these
      problems, trade relations between the United States and China may be strained,
      and this may have a negative impact on China's economy and our business by
      leading to the imposition of trade barriers on items that incorporate our
      products, which would reduce our revenues and profits.




27




***We
      are dependent on our Chinese manufacturing operations to generate the majority
      of our income and profits, and the deterioration of any current favorable local
      conditions may make it difficult or prohibitive to continue to operate or expand
      the manufacturing facilities in China.***




Our
      current manufacturing operations are located in China, our administrative
      offices are in the United States and we have additional establishments in Hong
      Kong and the British Virgin Islands. The geographical distances between these
      facilities create a number of logistical and communications challenges,
      including time differences and differences in the cultures in each location,
      which makes communication and effective cooperation more difficult.  In
      addition, because of the location of the manufacturing facilities in China,
      we
      could be affected by economic and political instability there, including
      problems related to labor unrest, lack of developed infrastructure, variances
      in
      payment cycles, currency fluctuations, overlapping taxes and multiple taxation
      issues, employment and severance taxes, compliance with local laws and
      regulatory requirements, greater difficulty in collecting accounts receivable,
      and the burdens of cost and compliance with a variety of foreign laws. Moreover,
      inadequate development or maintenance of infrastructure in China, including
      adequate power and water supplies, transportation, raw materials availability
      or
      the deterioration in the general political, economic or social environment
      could
      make it difficult, more expensive and possibly prohibitive to continue to
      operate or expand the manufacturing facilities in China.





***The
      Chinese government could change its policies toward, or even nationalize,
      private enterprise, which could leave us unable to use the assets we have
      accumulated for the purpose of generating profits for the benefit of our
      shareholders.***




Over
      the
      past several years, the Chinese government has pursued economic reform policies,
      including the encouragement of private economic activities and decentralization
      of economic regulation. The Chinese government may not continue to pursue these
      policies or may significantly alter them to our detriment from time to time
      without notice. Changes in policies by the Chinese government that result in
      a
      change of laws, regulations, their interpretation, or the imposition of
      confiscatory taxation, restrictions on currency conversion or imports and
      sources of supply could materially reduce the value of our business by making
      us
      uncompetitive or, for example, by reducing our after-tax profits. The
      nationalization or other expropriation of private enterprises by the Chinese
      government could result in the total loss of our investment in China, where
      a
      significant portion of our profits are generated.




***The
      Chinese legal system may have inherent uncertainties that could materially
      and
      adversely impact our ability to enforce the agreements governing our operations.***




The
      performance of the agreements and the operations of our factories are dependent
      on our relationship with the local government. Our operations and prospects
      would be materially and adversely affected by the failure of the local
      government to honor our agreements or an adverse change in the laws governing
      them. In the event of a dispute, enforcement of these agreements could be
      difficult in China. China tends to issue legislation, which is followed by
      implementing regulations, interpretations and guidelines that can render
      immediate compliance difficult. Similarly, on occasion, conflicts arise between
      national legislation and implementation by the provinces that take time to
      reconcile. These factors can present difficulties in our ability to achieve
      compliance. Unlike the United States, China has a civil law system based on
      written statutes in which judicial decisions have limited precedential value.
      The Chinese government has enacted laws and regulations to deal with economic
      matters such as corporate organization and governance, foreign investment,
      commerce, taxation and trade. However, our experience in implementing,
      interpreting and enforcing these laws and regulations is limited, and our
      ability to enforce commercial claims or to resolve commercial disputes in China
      is therefore unpredictable. These matters may be subject to the exercise of
      considerable discretion by agencies of the Chinese government, and forces and
      factors unrelated to the legal merits of a particular matter or dispute may
      influence their determination.




28




***Because
      our operations are international, we are subject to significant worldwide
      political, economic, legal and other uncertainties that may make collection
      of
      amounts owed to us difficult or costly, or conducting operations more difficult
      should materials needed from certain places be unavailable for an indefinite
      or
      extended period of time.***




We
      have
      subsidiaries in the British Virgin Islands, China and Hong Kong. Because we
      manufacture all of our products in China, substantially all of the net book
      value of our total fixed assets is located there. However, we sell our products
      to customers worldwide, with concentrations of customers in Taiwan, Hong Kong,
      North America, Europe, Japan, Southeast Asia and China Mainland.  As a
      result, we will have receivables from and goods in transit to those locations.
      Protectionist trade legislation in the United States or foreign countries,
      such
      as a change in export or import legislation, tariff or duty structures, or
      other
      trade policies, could adversely affect our ability to sell products in these
      markets, or even to purchase raw materials or equipment from foreign suppliers.
      Moreover, we are subject to a variety of United States laws and regulations,
      changes to which may affect our ability to transact business with certain
      customers or in certain product categories.





We
      are
      also subject to numerous national, state and local governmental regulations,
      including environmental, labor, waste management, health and safety matters
      and
      product specifications. We are subject to laws and regulations governing our
      relationship with our employees, including: wage and hour requirements, working
      and safety conditions, citizenship requirements, work permits and travel
      restrictions. These include local labor laws and regulations, which may require
      substantial resources for compliance. We are subject to significant government
      regulation with regard to property ownership and use in connection with our
      leased facilities in China, import restrictions, currency restrictions and
      restrictions on the volume of domestic sales and other areas of regulation,
      all
      of which can limit our ability to react to market pressures in a timely or
      effective way, thus causing us to lose business or miss opportunities to expand
      our business.




***Fluctuation
      of the Renminbi could make our pricing less attractive, causing us to lose
      sales, or could reduce our profitability when stated in terms of another
      currency, such as the U.S. dollar.***




The
      value
      of the Renminbi, the main currency used in China, fluctuates and is affected
      by,
      among other things, changes in China’s political and economic conditions. The
      conversion of Renminbi into foreign currencies such as the dollar has been
      generally based on rates set by the People’s Bank of China, which are set daily
      based on the previous day's interbank foreign exchange market rates and current
      exchange rates on the world financial markets. The official exchange rate had
      remained stable over the past several years. However, China recently adopted
      a
      floating rate with respect to the Renminbi, with a 0.3% fluctuation. As a
      result, the exchange rate of the Renminbi rose to 7.29 against the dollar as
      at
      December 31, 2007, amounting to a 6.5% appreciation of the Renminbi within
      one
      year. This floating exchange rate, and any appreciation of the Renminbi that
      may
      result from such rate, could have various effects on our business, which include
      making our products more expensive relative to those of our competitors than
      has
      been true in the past, or increasing our profitability when stated in dollar
      terms.  It is not possible to predict if the net effects of the
      appreciation of the Renminbi, if it occurred, would be positive or negative
      for
      our business.




29




***Changes
      in foreign exchange regulations in China may affect our ability to pay dividends
      in foreign currency or conduct other business for which we would need access
      to
      foreign currency exchange.***




Renminbi,
      or RMB, is not currently a freely convertible currency, and the restrictions
      on
      currency exchanges may limit our ability to use revenues generated in RMB to
      fund business activities outside China or to make dividends or other payments
      in
      United States dollars. The Chinese government strictly regulates conversion
      of
      RMB into foreign currencies.  For example, RMB cannot be converted into
      foreign currencies for the purpose of expatriating the foreign currency, except
      for purposes such as payment of debts lawfully owed to parties outside of China.
       Over the years, foreign exchange regulations in China have significantly
      reduced the government’s control over routine foreign exchange transactions
      under current accounts.




The
      State
      Administration for Foreign Exchange, or “SAFE”, regulates the conversion of the
      RMB into foreign currencies. Currently, Foreign Invested Enterprises, or “FIE”,
      are required to apply for “Foreign Exchange Registration Certificates,” which
      permit the conversion of RMB into foreign exchange for the purpose of
      expatriating profits earned in China to a foreign country.  Our China
      subsidiary, Diguang Electronics, is a FIE that has obtained the registration
      certifications, and with such registration certifications, which need to be
      renewed annually, Diguang Electronics is allowed to open foreign currency
      accounts including a “current account” and “capital account.” Currently,
      conversion within the scope of the “current account”, e.g. remittance of foreign
      currencies for payment of dividends, etc., can be effected without requiring
      the
      approval of SAFE. However, conversion of currency in the “capital account”, e.g.
      for capital items such as direct investments, loans, securities, etc., still
      requires the approval of SAFE.  In accordance with the existing foreign
      exchange regulations in China, Diguang Electronics is able to pay dividends
      in
      foreign currencies, without prior approval from the SAFE, by complying with
      certain procedural requirements.




Although
      we have not experienced any difficulties in the repatriation of our profits
      out
      of China or in meeting our foreign exchange needs to date, there can be no
      assurance that the current foreign exchange measures will not be changed in
      a
      way that will make payment of dividends and other distributions outside of
      China
      more difficult or unlawful. As a result, if we intend to distribute profits
      outside of China, there can be no assurance that we will be able to obtain
      sufficient foreign exchange to do so.




In
      addition, on October 21, 2005, SAFE promulgated Notice 75, Notice on Issues
      concerning Foreign Exchange Management in People’s Republic of China Residents’
Financing and Return investments through Overseas Special Intention Company.
      Notice 75 provides that Chinese residents shall apply for Foreign Exchange
      Investment Registration before establishing or controlling an OSIC, which is
      defined by Notice 75 as a foreign enterprise directly established or indirectly
      controlled by Chinese residents for foreign equity capital financing with their
      domestic enterprise assets and interests.




Notice
      75
      further requires that Chinese residents shall process the modification of
      foreign investment exchange registration for the interests of net assets held
      by
      Chinese residents in an OSIC and its alteration condition, if Chinese residents
      contributed their domestic assets or shares into the OSIC, or processed foreign
      equity capital financing after contributing their domestic assets or shares
      into
      the OSIC.




Pursuant
      to Notice 75, Chinese residents are prohibited, among other things, from
      distributing profits or proceeds from a liquidation, paying bonuses, or
      transferring shares of the OSIC outside of China if Chinese residents have
      not
      completed or do not maintain the Foreign Investment Exchange Registration.




Yi
      Song
      and Hong Song, our principals, have filed the requisite application for foreign
      investment exchange registration under the relevant laws of China and the
      regulations of Notice 75, and their registration application has been approved
      by SAFE. Their foreign investment exchange registration is valid, legal and
      effective for the purpose of Notice 75.




30




However,
      we cannot provide any assurance that Chinese regulatory authorities will not
      impose further restrictions on the convertibility of the RMB. Since our
      subsidiary in China generates a significant proportion of our revenue and these
      revenues are denominated mainly in RMB, any future restrictions on currency
      exchanges may limit our ability to repatriate such revenues for the distribution
      of dividends to our shareholders or for funding our other business activities
      outside China.




***We
      are subject to various tax regimes, which may adversely affect our profitability
      and tax liabilities in the future.***




Diguang
      Development has subsidiaries and/or operations or other presence in the U.S.,
      China, Hong Kong and the British Virgin Islands, and it will be subject to
      the
      tax regimes of these countries.  Although virtually all of Diguang
      Development’s profits will be earned outside of the U.S., under U.S. tax laws it
      is possible that some or much of Diguang Development’s earnings will be subject
      to U.S. taxation.  That may be true even if Diguang Development does not
      repatriate any of its foreign earnings to the U.S.  If that occurs, Diguang
      Development’s after-tax profits could decrease significantly.  Diguang
      Development will attempt to structure its operations in a manner that minimizes
      its overall corporate tax costs, but there is no assurance that it will be
      able
      to avoid having to pay significantly higher taxes than we have paid
      historically.




As
      we
      were established under the laws of the state of Nevada, we are subject only
      to
      federal income tax and state income tax. Because our main operating activities
      are located outside the U.S., the taxable income outside the U.S. may not be
      able to offset the taxable loss generated in the U.S. We may have accumulated
      certain net operation loss carry forwards; however, due to the changes in
      ownership, the use of these net operation loss carry forward may be limited
      in
      accordance with the U.S. tax laws.




In
      addition, any change in tax laws and regulations or the interpretation or
      application thereof, either internally in one of those jurisdictions or as
      between those jurisdictions, may adversely affect Diguang Development’s
      profitability and tax liabilities in the future.




***Cessation
      of the income tax exemption for Diguang Electronics may have an adverse impact
      on our net profits.***




Diguang
      Electronics is currently enjoying a reduced rate of income tax under the central
      government and provincial government laws.  Under Chinese income tax law,
      Diguang Electronics, as a Foreign Investment Enterprise, or “FIE”, would
      ordinarily be subject to the PRC central government and local income tax rates
      of 30.0% and 3.0%, respectively.  However, Chinese income tax law also
      provides that any FIE engaged in manufacturing that is scheduled to operate
      for
      not less than 10 years shall receive an exemption from the entire central
      government income tax for the two years beginning with its first profitable
      year
      and receive a 50.0% reduced income tax in the third through fifth years.




Normally,
      the concession rate for the central government income tax for FIEs established
      in special economic zones is 15.0%.  The concession rate for the central
      government income tax for FIEs of a production nature is 24.0% if they are
      established in coastal economic open zones or in the old urban districts of
      cities where the special economic zones or the economic and technological
      development zones are located. However, because Diguang’s subsidiary, Diguang
      Electronics, is recognized as a high-tech enterprise by the Shenzhen Science
      and
      Technology Bureau, it is entitled to a 50% reduction in the central government
      income tax for an additional three years, i.e., in the sixth through eighth
      years, subject to a minimum central government income tax rate of 10% in each
      of
      these years, pursuant to the Rules for the Implementation of the Income Tax
      law
      of the PRC for Enterprises with Foreign Investment and Foreign Enterprises.
       In fact, Diguang Electronics received a 100% exemption for the first two
      years, in 1999 and 2000, and a 50% exemption of the central government income
      tax for the next three years, from 2001 through 2003.




31




Although
      local tax authorities in China are responsible for collecting the applicable
      central government income tax as well as provincial government income tax,
      these
      authorities often follow local practices in tax collection matters.  Like
      most high-tech enterprises in Shenzhen, Diguang Electronics paid total income
      tax at a rate of 7.5% in 2005 and 2006 whereas, the applicable minimum required
      central government income tax rate was 10% for 2005 and 2006, respectively.
       The Shenzhen tax authority had accepted without objection Diguang
      Electronics’ tax filings and payments for 2005 and 2006.  Diguang
      Electronics paid income tax at a rate of 15% for 2007 because of local tax
      practices implemented by local tax authority.  Diguang Electronics believes
      the risk of application of a retroactive additional 2.5% tax and related
      penalties, if any, for 2005 and 2006 to be minimal.  However, there can be
      no assurance that Diguang Electronics will not be required to pay the deficient
      tax and any related penalty in the future.




In
      order
      to buffer the reform’s impact and shift to the new regime smoothly, a five-year
“grandfathering” period shall be granted for FIEs established before the
      promulgation of the EIT law, which was 16 March, 2007. Practice [2007]No. 59,
      issued by the Ministry of Commerce on 23 April 2007, further defines the cut-off
      date as the date of approval of the set-up by the Ministry of
      Commerce.




FIE
      enjoying the reduced tax rate of 15 % or 24 % under the existing law will be
      eligible for a five year transition period during which the tax rate will
      gradually phase up to the unified tax rate of 25 %.




Manufacturing
      FIE that have not yet used their five-year tax holiday will be allowed to
      continue to enjoy the holiday during the grandfather period. If the five-year
      tax holiday has not yet begun due to accumulated losses, the holiday will be
      deemed to commence upon the effective date of the EIT law, i.e. 1 January
      2008.




Furthermore,
      enterprises are entitled to receive a government subsidy sourcing from the
      proceeds collected as the central government income tax imposed on profits
      generated by certain products that have been approved for inclusion within
      the
      National (and/or Provincial) Important New Products Project.  Diguang
      Electronics needs to apply for this kind of government subsidies for three
      years
      from the date a product receives this approval.  Two of Diguang
      Electronics’ products, its color CCFL backlight for TFT-LCD TV and its white LED
      backlight have received this approval and are included in the National (and/or
      Provincial) Important New Products Project. Under the local incentive program
      implemented by Shenzhen Treasury Department financial fund assistance, Diguang
      Electronic had applied for receiving this kind of government subsidies based
      on
      50% income tax imposed on the profit related to the above two products. Pursuant
      to the relevant approvals, Diguang Electronics received the subsidies for the
      income tax imposed on the profit generated by these two products from the local
      government.  Diguang Electronics has been noticed through governmental
      circular that it had received the subsidy for 2006 because one  product
      named New Type High Efficiency CCFL/LED Backlight (TFT-LCD Backlight) was listed
      on the National (and/or Provincial) Important New Products Project by the
      relevant local government. Diguang Electronics intends to apply for continued
      inclusion of this one product within the National (and/or Provincial) Important
      New Products Project in October 2006 for the 2006 subsidy; if the application
      is
      approved, Diguang Electronics will be entitled to receive this kind of subsidy
      until at least October 2007.  However, there is no assurance that Diguang
      Electronics’ application will be approved.  If Diguang Electronics’
application is not successful, the subsidy income of tax refund may be reduced
      and its after tax profits may be adversely affected.




32





***Cessation
      of value added tax refund for Diguang Electronics may have an adverse impact
      on
      our net profits.***




Normally,
      Diguang Electronics would be required to pay a value added tax, or the
      difference between the VAT it pays and collects.  Based on the fact that
      two of Diguang Electronics’ products, its color CCFL backlight for TFT-LCD TV
      and its white LED backlight, are included in the National (and/or Provincial)
      Important New Products Project, Diguang Electronics is entitled to receive
      financial support according to the Rules for the Implementation of Financial
      Preferential Treatment on Shenzhen Important New Products.  In accordance
      with the detailed explanation provided by relevant government agencies, Diguang
      Electronics applied to receive government subsidy based on a 50% of the local
      portion of the VAT (which represents 25% of the total VAT) or VAT paid x 25%
      x
      50%, in relation to these two products approved by Shenzhen Treasury Department
      financial fund assistance.  This application should be effective for three
      years from the date a product receives approval to be included in the National
      (and/or Provincial) Important New Products Project. Pursuant to the relevant
      approvals, Diguang Electronics received the subsidies for the income tax imposed
      on the profit generated by these two products from the local government. 
 Diguang Electronics has been noticed through governmental circular that it
      is entitled to receive subsidy for 2006 because one  product named New Type
      High Efficiency CCFL/LED Backlight (TFT-LCD Backlight) was listed on the
      National (and/or Provincial) Important New Products Project by the relevant
      local government.   Diguang Electronics intends to apply for continued
      inclusion of this one product within the National (and/or Provincial) Important
      New Products Project in October 2006 for the 2006 subsidy; if the application
      is
      approved, Diguang Electronics will be entitled to the VAT refund until at least
      October 2007.  However, there is no assurance that Diguang Electronics’
application will be approved.  If Diguang Electronics’ application is not
      successful, the subsidy of VAT tax refund, may be reduced and its after tax
      profits may be adversely affected.




***Because
      Chinese law will govern almost all of our material agreements after the Share
      Exchange, we may not be able to enforce our legal rights within China or
      elsewhere, which could result in a significant loss of business, business
      opportunities, or capital.***




Chinese
      law will govern almost all of our material agreements after the Share Exchange.
      We cannot assure you that we will be able to enforce any of our material
      agreements or that remedies will be available outside of China. The system
      of
      laws and the enforcement of existing laws in China may not be as certain in
      implementation and interpretation as in the United States.  The Chinese
      judiciary is relatively inexperienced in enforcing corporate and commercial
      law,
      leading to a higher than usual degree of uncertainty as to the outcome of any
      litigation. The inability to enforce or obtain a remedy under any of our future
      agreements could result in a significant loss of business, business
      opportunities or capital.





Additionally,
      substantially all of our assets will be located outside of the United States
      and
      most of our officers and directors will reside outside of the United States.
       As a result, it may not be possible for United States investors to enforce
      their legal rights, to effect service of process upon our directors or officers
      or to enforce judgments of United States courts predicated upon civil
      liabilities and criminal penalties of our directors and officers under Federal
      securities laws. Moreover, we have been advised that China does not have
      treaties providing for the reciprocal recognition and enforcement of judgments
      of courts with the United States.  Further, it is unclear if extradition
      treaties now in effect between the United States and China would permit
      effective enforcement of criminal penalties of the Federal securities laws.




33





***It
      will be extremely difficult to acquire jurisdiction and enforce liabilities
      against our officers, directors and assets based in China.***




Because
      most of our officers and directors reside outside of the United States, it
      may
      be difficult, if not impossible, to acquire jurisdiction over those persons
      if a
      lawsuit is initiated against us and/or our officers and directors by a
      shareholder or group of shareholders in the United States.  Also, because
      our officers will likely be residing in China at the time such a suit is
      initiated, achieving service of process against such persons would be extremely
      difficult.  Furthermore, because the majority of our assets are located in
      China it would also be extremely difficult to access those assets to satisfy
      an
      award entered against us in United States court. Moreover, we have been advised
      that China does not have treaties with the United States providing for the
      reciprocal recognition and enforcement of judgments of courts.




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




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




***Imposition
      of trade barriers and taxes may reduce our ability to do business
      internationally, and the resulting loss of revenue could harm our profitability.***




We
      may
      experience barriers to conducting business and trade in our targeted emerging
      markets in the form of delayed customs clearances, customs duties and tariffs.
      In addition, we may be subject to repatriation taxes levied upon the exchange
      of
      income from local currency into foreign currency, substantial taxes of profits,
      revenues, assets and payroll, as well as value-added tax. The markets in
      which we plan to operate may impose onerous and unpredictable duties, tariffs
      and taxes on our business and products, and there can be no assurance that
      this
      will not reduce the level of sales that we achieve in such markets, which would
      reduce our revenues and profits.




***There
      can be no guarantee that China will comply with the membership requirements
      of
      the World Trade Organization, which could leave us subject to retaliatory
      actions by other governments and reduce our ability to sell our products
      internationally.***




China
      has
      agreed that foreign companies will be allowed to import most products into
      any
      part of China.  In the sensitive area of intellectual property rights,
      China has agreed to implement the trade-related intellectual property agreement
      of the Uruguay Round. There can be no assurances that China will implement
      any
      or all of the requirements of its membership in the World Trade Organization
      in
      a timely manner, if at all.  If China does not fulfill its obligations to
      the World Trade Organization, we may be subject to retaliatory actions by the
      governments of the countries into which we sell our products, which could render
      our products less attractive, thus reducing our revenues and
      profits.




***There
      can be no guarantee that our management will continuously meet its obligations
      under Chinese law to enable distribution of profits earned in China to entities
      outside of China.***




A
      circular recently promulgated by the State Administration of Foreign Exchange,
      or “SAFE”, has increased the ability of foreign holding companies to receive
      distributions of profits earned by Chinese operating subsidiaries.  We
      qualify for this treatment, but remaining qualified for it will require the
      Chinese principals involved, Yi Song and Hong Song to meet annual filing
      obligations.  While they have agreed to meet those annual requirements, it
      is possible that they will fail to do so, which could limit our ability to
      gain
      access to the profits earned by Diguang Electronics.  The result could be
      the inability to pay dividends to our stockholders or to deploy capital outside
      of China in a manner that would be beneficial to our business as a whole.




34




***Risks
      Related to our Securities.***




***The
      market price of our shares is subject to significant price and volume
      fluctuations.***




The
      markets for equity securities have been volatile. The price of our common shares
      may be subject to wide fluctuations in response to variations in operating
      results, news announcements, trading volume, general market trends both
      domestically and internationally, currency movements and interest rate
      fluctuations or sales of common shares by our officers, directors and our
      principal shareholders, customers, suppliers or other publicly traded companies.
      Certain events, such as the issuance of common shares upon the exercise of
      our
      outstanding stock options, could also materially and adversely affect the
      prevailing market price of our common shares. Further, the stock markets in
      general have recently experienced extreme price and volume fluctuations that
      have affected the market prices of equity securities of many companies and
      that
      have been unrelated or disproportionate to the operating performance of such
      companies. These fluctuations may materially and adversely affect the market
      price of our common shares and the ability to resell shares at or above the
      price paid, or at any price.




***There
      may not be an active, liquid trading market for our common stock.***




Our
      common stock is currently traded on the Over the Counter Bulletin Board, and
      we
      intend to file an application for listing on The NASDAQ Market as soon as
      practicable. Although we intend on meeting all of the necessary requirements
      as
      stated by NASDAQ Marketplace Rule 4420(a), there is no guarantee that our
      application will be accepted.  If we do not succeed in securing a listing
      on the NASDAQ Market, it could limit the ability to trade our common stock
      and
      result in a reduction of the price that can be obtained for shares being sold.




Compliance
      with all of the provisions of the Sarbanes-Oxley Act may be a further condition
      of continued listing or trading. There is no assurance that if we are granted
      a
      listing on the NASDAQ Market we will always be able to meet the NASDAQ Market
      listing requirements, or that there will be an active, liquid trading market
      for
      our common stock in the future. Failure to meet the NASDAQ Market listing
      requirements could result in the delisting of our common stock from the NASDAQ
      Market, which may adversely affect the liquidity of our shares, the price that
      can be obtained for them or both.




***We
      may not pay dividends.***




We
      may
      not pay dividends in the future. Instead, we expect to apply earnings toward
      the
      further expansion and development of our business. The likelihood of our paying
      dividends is further reduced by the fact that, in order to pay dividends, we
      would need to repatriate profits earned outside of the U.S., and in doing so
      those profits would become subject to U.S. taxation.  Thus, the liquidity
      of your investment is dependent upon your ability to sell stock at an acceptable
      price, rather than receiving an income stream from it. The price of our stock
      can go down as well as up, and fluctuations in market price may limit your
      ability to realize any value from your investment, including recovering the
      initial purchase price.




**ITEM
      1B.   UNRESOLVED STAFF COMMENTS.**




Not
      Applicable.




35




**ITEM
      2.   PROPERTY.**




Neither
      we, Diguang, Well Planner nor Diguang Technology own or lease any property.
       Our indirect subsidiary, Diguang Electronics, was previously headquartered
      in Shenzhen, China where it leased office space, 1,002.6 square meters, with
      a
      monthly rental of RMB15,052 plus maintenance fee of RMB 1,504, or approximately
      $2,080. Diguang Electronics moved to new office space in Shenzhen in
      early 2007 and the old lease was terminated and we moved out during 2007





The
      new
      office space, approximately 1,200 square meters, which is self-owned and located
      in Futian District, Shenzhen, China has been handed over to the Company from
      the
      developer and the office relocation was completed in 2007.





On
      December 20, 2004, Diguang Electronics entered into a lease agreement with
      Dongguan Diguang Electronic Science & Technology Ltd., 92% of which is owned
      by Diguang Electronics (Hong Kong) and 8% is owned by Shenzhen Diguang Engine
      & Equipment Co., Ltd., to rent the plant with rental of RMB440,000 plus
      maintenance fee of RMB80,000 per month for the first two years. The subsequent
      rental will be subject to change in line with the market price. The lease terms
      starts from January 20, 2005 and expire on January 19, 2010. On February 23,
      2005, both parties agreed that the rental for three months from February to
      April 2005 shall be waived as Diguang Electronic had to finish its interior
      remodeling during this period. On March 30, 2005, both parties agreed that
      the
      rental shall be RMB380,000 per month including all maintenance fee based on
      the
      prevailing market price for the similar facility to be leased in Dongguan area
      and that the lease terms start from February 1, 2005 to January 31, 2010. There
      were no other changes under the lease agreement. Based on the above amendments,
      the Company recorded the monthly rental of RMB361,000 on a straight-line
      basis.





Following
      the acquisition of Dongguan Diguang on December 30, 2007, the
      lease
      agreement and lease commitment were deemed terminated. The
      lease
      commitment within the group were deemed terminated.





On
      October 8, 2006, The Company entered into a lease agreement with Wuhan Hannstar
      Technology Ltd., or “Wuhan Hannstar”, to rent equipment with rental of
      RMB235,200, approximately $30,996, per month from December 1, 2006 to December
      31, 2008. But the original lease agreement was cancelled in 2007 and a new
      lease
      agreement was entered into between Wuhan Diguang and Wuhan Hannstar on June
      6,
      2007. The new lease agreement lasted only for approximately six months ended
      December 31, 2007, with rental of RMB235,200, approximately $30,996, per month.
      It was agreed that the lease agreement should be renewed every year. Pursuant
      to
      this particular clause, both partied entered into a new lease agreement for
      2008
      on October 29, 2007, on which the rental was RMB200,000, approximately $27,418,
      per month for the year ended December 31, 2008. Also on October 8, 2006, the
      Company entered into a lease agreement with Wuhan TPV Display Technology Co.,
      Ltd., or “Wuhan TPV”, to rent the factory with rental of RMB37,431,
      approximately $4,933, per month from December 1, 2006 to December 31, 2008.





Future
      minimum payments required under the lease agreement with Wuhan
      Hannstar and Wuhan TPV that has
      an initial or a remaining lease term in excess of one year at December 31,
      2007
      are as follows:





Year
                Ended December 31,
            
            Amount2008
            
            $
            390,586






36





In
      October 2007, Dihao entered into a renewed lease agreement with Transcend
      Optronics (Yangzhou) Co, Ltd., to rent the factory premises for the period
      from
      October 1, 2007 to September 30, 2009 with rental of RMB 96,747, (approximately
      $12,750 ),
      per
      month.





Future
      minimum payments required under the lease agreement for the manufacturing
      facilities of Dihao that has an initial or a remaining lease term in excess
      of
      one year at December 31, 2007 are as follows:





Years
                Ended December 31,
            
            Amount2008
            
            
            159,1542009
            
            
            119,365Total
            
            $
            278,519




**ITEM
      3.   LEGAL PROCEEDINGS.**




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





Neither
      we nor any of our subsidiaries is a party to any administrative or judicial
      proceeding arising under federal, state or local environmental laws or their
      Chinese counterparts.




**ITEM
      4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS**




None




**PART
      II**




**ITEM
      5.   MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
      ISSUER PURCHASES OF EQUITY SECURITIES.**




**(a)
      MARKET PRICES OF COMMON STOCK**




Our
      common stock currently trades in the over-the-counter market on the OTC Bulletin
      Board under the symbol “DGNG”.  Since our fiscal year 2005 and until the
      announcement regarding our entry into a memorandum of understanding with Diguang
      Holdings and its stockholders on September 30, 2005, Online’s stock traded only
      sporadically or not at all.  The day prior to that announcement, the bid
      price of our common stock was $1.01. Prior to the Share Exchange, Diguang’s
      stock did not trade in any public markets. The following table shows for the
      periods indicated the high and low bid quotations for Diguang’s common stock, as
      reported by financial reporting services. These quotations are believed to
      represent inter-dealer quotations without adjustment for retail mark-up,
      mark-down or commissions, and may not represent actual transactions.





PERIOD
            
            HIGH
                BID
            
            LOW
                BIDFISCAL
                2006First
                Quarter
            
            $
            18
            
            $
            5.083Second
                Quarter
            
            $
            14.50
            
            $
            10.50Third
                Quarter
            
            $
            11.60
            
            $
            6.25Fourth
                Quarter
            
            $
            7.00
            
            $
            3.50FISCAL
                2007First
                Quarter
            
            $
            4.5
            
            $
            2.2Second
                Quarter
            
            $
            3
            
            $
            1.3Third
                Quarter
            
            $
            1.9
            
            $
            1.2Fourth
                Quarter
            
            $
            2.8
            
            $
            1.15




37




**(b)
      STOCKHOLDERS**




The
      Company’s common shares are issued in registered form.  Signature Stock
      Transfer, Inc. in Plano, Texas is the registrar and transfer agent for the
      Company’s common stock.  As of December 31, 2007, there were
      22,340,700 shares of the Company’s common stock outstanding and the Company had
      approximately 138 stockholders of record as
      of
      November 27, 2007.




**(c)
      DIVIDENDS**




The
      Company has never declared or paid any cash dividends on its common stock and
      it
      does not anticipate paying any cash dividends in the foreseeable future. 
The Company currently intends to retain future earnings, if any, to finance
      operations and the expansion of its business.  Any future determination to
      pay cash dividends will be at the discretion of the Board of Directors and
      will
      be based upon the Company’s financial condition, operating results, capital
      requirements, plans for expansion, restrictions imposed by any financing
      arrangements and any other factors that the Board of Directors deems relevant.




(d)
      SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN




The
      securities authorized for issuance under equity compensation plan are as
      follows:




**Plan
                Category**
            
            
            **Number
                of securities to be**
              **issued
                upon exercise of**
              **outstanding
                options,**
              **warrants
                and rights**
            
            
            **Weighted
                  average**
                **exercise
                  price of**
                **outstanding
                  options,**
                **warrants
                  and rights**
            
            
            **Number
                  of**
                **securities**
                **remaining**
                **available
                  for**
                **future
                  issuance**Equity
                Compensation Plan approved by security holders
            
            
            407,417
            
            
            5.00
            
            
            934,000—
            
            
            —
            
            
            —




As
      of
      December 31, 2007, 407,417 of our common stock are subject to outstanding
      options. This is because approximately 540,000 shares of our common stock were
      issued under the Diguang 2006 Option Plan, and during 2007, additional 26,000
      shares of our common stock were granted. None of these options has been
      exercised. But 158,583 shares subject to the option were forfeited due to
      resignation of staff. Pursuant to the terms of the Amended and Restated Share
      Exchange Agreement, we assumed Diguang’s outstanding 2006 stock incentive plan
      covering options totaling the equivalent of 1,500,000 shares of our common
      stock. The exercise price for each of these options is $5.00 per share. The
      commencement date for these options is March 1, 2006, with monthly vesting
      at
      the end of each month after March 1, 2006, for the three independent directors
      andyearly vesting for the chief financial officer and other employees of
      Diguang; The options that have been issued expire ten years from their grant
      date (which date is February 25, 2006 or the date the optionee commences his
      or
      her service relationship with us, whichever is the later date).




38




**ITEM
      6. SELECTED FINANCIAL DATA**




The
      following selected financial data reflects the results of operations and cash
      flows.  The data below should be read in conjunction with, and is qualified
      by reference to, “Management’s Discussion and Analysis of Financial Condition
      and Results of Operations” and the consolidated financial statements and notes
      thereto included elsewhere in this report.  The financial information
      presented may not be indicative of our future performance.


Years
                  Ended December 31,2003
              
              2004
              
              2005
              
              2006
              
              2007**S****tatement
                  of Income data:**Total
                  revenues
              
              $
              6,156,408
              
              $
              24,483.222
              
              $
              35,648,118
              
              $
              34,242,617
              
              $
              45,909,256Income
                  from operation
              
              
              1,080,230
              
              
              6,895,560
              
              
              8,708,622
              
              
              2,079,852
              
              
              (2,913,922
              )Net
                  income
              
              
              1,045,640
              
              
              6,619.557
              
              
              8,513,883
              
              
              1,664,816
              
              
              (2,905,337
              )Weighted
                  average shares outstanding
              
              
              -
              
              
              18,250,000
              
              
              18,250,000
              
              
              21,383,960
              
              
              22,531,384


At
                  December 31,2003
              
              2004
              
              2005
              
              2006
              
              2007**Balance
                  Sheet data:**Cash
                  and cash equivalents
              
              $
              1,241,033
              
              $
              5,352,758
              
              $
              10,561,516
              
              $
              20,550,032
              
              $
              16,250,727Working
                  capital
              
              
              1,418,879
              
              
              7,966,958
              
              
              10,546,457
              
              
              21,095,836
              
              
              11,784,522Total
                  assets
              
              
              7,940,920
              
              
              14,158,413
              
              
              30,098,458
              
              
              46,966,828
              
              
              56,579,792Long-term
                  debt
              
              
              483,284
              
              
              483,296
              
              
              -
              
              
              -
              
              
              1,345,730Minority
                  interests
              
              
              -
              
              
              -
              
              
              452,895
              
              
              1,043,035
              
              
              1,475,361Stockholders’
                  equity
              
              
              1,353,763
              
              
              7,974,764
              
              
              17,912,951
              
              
              33,739,804
              
              
              27,291,108




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




The
      following is management’s discussion and analysis of certain significant factors
      which have affected the Company’s financial position and operating results
      during the periods included in the accompanying consolidated financial
      statements, as well as information relating to the plans of its current
      management.  This report includes forward-looking statements.  These
      statements relate to future events or the Company’s future financial
      performance.  The Company has attempted to identify forward-looking
      statements by terminology including “anticipates,” “believes,” “expects,” “can,”
“continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,”
“potential,” “predict,” “should” or “will” or the negative of these terms or
      other comparable terminology.  Such statements are subject to certain risks
      and uncertainties, including the matters set forth in this report or other
      reports or documents the Company files with the Securities and Exchange
      Commission from time to time, which could cause actual results or outcomes
      to
      differ materially from those projected.  Although the Company believes that
      the expectations reflected in the forward-looking statements are reasonable,
      the
      Company cannot guarantee future results, levels of activity, performance or
      achievements.  Undue reliance should not be placed on these forward-looking
      statements which speak only as of the date hereof.  The Company undertakes
      no obligation to update these forward-looking statements.  The Company’s
      expectations are as of the date this Form 10-K is filed, and the Company does
      not intend to update any of the forward-looking statements after the date this
      Annual Report on Form 10-K is filed to confirm these statements to actual
      results, unless required by law.




39




The
      following discussion and analysis should be read in conjunction with the
      Company’s consolidated financial statements and the related notes thereto and
      other financial information contained elsewhere in this Form 10-K.




**Business
      Overview**





We
      specialize in the design, production and distribution of small to medium-sized
      Light Emitting Diode, or “LED”, and Cold Cathode Fluorescent Lamp, or “CCFL”,
      backlights for various Thin Film Transistor Liquid Crystal Displays, “TFT-LCD”,
      and Super-Twisted Nematic Liquid Crystal Display, “STN-LCD”, Twisted Nematic
      Liquid Crystal Display, “TN-LCD”, and Mono LCDs, taken together, these
      applications are referred to as “LCD” applications.  Those applications
      include color displays for cell phones, car televisions and navigation systems,
      digital cameras, televisions, computer displays, camcorders, PDAs and DVDs,
      CD
      and MP3/MP4 players, appliance displays and the like.





We
      conduct that business principally through the operations of Diguang Electronics
      and Dihao (Yangzhou) Co., Ltd., thereafter “Dihao”.  As of December 31,
      2007, Diguang Electronics has approximately 2,000 full-time employees, which
      changes from time to time as needed, Diguang is headquartered in Shenzhen,
      China, with additional offices and its backlight manufacturing operations in
      Dongguan, Guangdong Province, China. As of December 31, 2007, Dihao has
      approximately 330 full-time employees, which changes from time to time as
      needed. Dihao is a subsidiary of North Diamond, 65% of which was acquired by
      us
      on January 3, 2007. Wuhan Diguang Electronics Co., Ltd was established as
      in-house facilities mainly for a Taiwan-based customer with the capacity to
      provide large inches of TFT-LCD and it has approximately 240 employees as of
      December 31, 2007. Dongguan Diguang Electronics Science and Technology Co Ltd.,
      or “Dguan Diguang S&T”, was established for the purpose to be used as the
      production base of Shenzhen Diguang Electronics Co Ltd. It is the legal owner
      of
      the land and buildings which has been rented to Diguang Electronics since March
      30, 2005. As of December 31, 2007, Dongguan Diguang S&T has approximately 10
      full-time employees.





Well
      Planner is involved in the import of raw materials into China and export of
      finished products from China. Well Planner currently has no fixed
      assets.





Diguang
      Science and Technology (HK) Limited, or “Diguang S&T”, is directly involved
      with the international buying of raw materials and selling of backlight products
      for Diguang Electronics.  Diguang S&T purchases raw materials from
      international suppliers and acts as an international sales group for both
      Diguang Electronics and Well Planner.  Diguang S&T has no fixed
      assets.




40





Well
      Planner and Diguang S&T have only a few employees.





**Critical
      Accounting Policies and Estimates**





The
      discussion and analysis of our financial condition presented in this section
      are
      based on our financial statements, which have been prepared in accordance with
      the generally accepted accounting principles in the United States. During the
      preparation of our financial statements we are required to make estimates and
      judgments that affect the reported amounts of assets, liabilities, revenue
      and
      expenses, and related disclosure of contingent assets and liabilities. On an
      ongoing basis, we evaluate our estimates and judgments, including those related
      to sales, returns, pricing concessions, bad debts, inventories, investments,
      fixed assets, intangible assets, income taxes and other contingencies. We base
      our estimates on historical experience and on various other assumptions that
      we
      believe are reasonable under current conditions. Actual results may differ
      from
      these estimates under different assumptions or conditions.





In
      response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding
      Disclosure about Critical Accounting Policy,” we identified the most critical
      accounting principles upon which our financial status depends. We determined
      that those critical accounting principles are related to the use of estimates,
      inventory valuation, revenue recognition, income tax and impairment of
      intangibles and other long-lived assets. We present these accounting policies
      in
      the relevant sections in this management’s discussion and analysis, including
      the Recently Issued Accounting Pronouncements discussed below.





**Revenue
      Recognition**





Revenue
      generated from sales of backlight units to customers is recognized when
      persuasive evidence of an arrangement exists, delivery of the products has
      occurred, the significant risks and rewards of the ownership have been
      transferred to the customer, the price is fixed or determinable and
      collectibility is reasonably assured. Revenue presented on the Company’s income
      statements is net of sales taxes.





**Accounts
      Receivable**





During
      the normal course of business, we extend unsecured credit to our customers.
      Typical credit terms require payment to be made within 90 or 120 days of the
      invoice date. We do not require collateral from our customers.





We
      regularly evaluate and monitor the creditworthiness of each customer on a
      case-by-case basis. We include any account balances that are determined to
      be
      uncollectible in the allowance for doubtful accounts. After all attempts to
      collect a receivable have failed, the receivable is written off against the
      allowance. Based on the information available to management, the Company
      believes that its allowance for doubtful accounts as of December 31, 2006 and
      2007 was adequate, respectively. However, actual write-off might exceed the
      recorded allowance.





**Inventories**





Inventories
      are composed of raw materials and components, work in progress and finished
      goods, all of which are related to backlight products. Inventories are valued
      at
      the lower of cost, based on weighted average method, and the market. Our
      industry is characterized by rapid technological change, short-term customer
      commitments and rapid changes in demand. We make provisions for estimated
      excessive and obsolete inventory based on our regular reviews of inventory
      quantities on hand and the latest forecasts of product demand and production
      requirements from our customers. We write down inventories that are not
      saleable, excessive or obsolete, whether raw materials, work-in-process or
      finished goods, by charging such write-downs to cost of sales. In addition
      to
      write-downs based on newly introduced parts and statistics, judgments are used
      for assessing provisions for the remaining inventory based on salability and
      obsolescence.




41





**Income
      Taxes**





We
      account for income taxes in accordance with Statement of Financial Accounting
      Standards No 109, “Accounting for Income Taxes”, “SFAS No. 109”. SFAS No. 109
      requires an entity to recognize deferred tax liabilities and assets. Deferred
      tax assets and liabilities are recognized for the future tax consequence
      attributable to the difference between the tax bases of assets and liabilities
      and their reported amounts in the financial statements. Deferred tax assets
      and
      liabilities are measured using the enacted tax rate 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 tax assets and liabilities of
      a
      change in tax rates is recognized in income in the period that included the
      enactment date.





Effective
      January 1, 2007, the Company adopted the FASB’s Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the
      accounting for uncertainty in income taxes recognized in an enterprise’s
      financial statements in accordance with SFAS No. 109, “Accounting for Income
      Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. FIN 48 also provides guidance on
      de-recognition of tax benefits, classification on the balance sheet, interest
      and penalties, accounting in interim periods, disclosure, and transition. In
      accordance with FIN 48, the Company performed a self-assessment based on the
      information available and concluded that there were no significant uncertain
      tax
      positions requiring recognition in its financial statements. The Company
      classifies interest and/or penalties as part of income tax provision, which
      was
      zero during the year ended December 31, 2007.





Well
      Planner is subject to corporate income tax under Hong Kong Inland Revenue
      jurisdiction. However, Well Planner does not have Hong Kong sourced income.
      In
      accordance with Hong Kong tax regulation, Well Planner has not been taxed since
      its inception.





There
      is
      no income tax for the companies domiciled in the BVI. Accordingly, Diguang
      Holdings, Diguang Technology and North Diamond have not presented any income
      tax
      provision related to British Virgin Islands tax jurisdiction.





Diguang
      Electronics is registered at Shenzhen and subject to a favorable income tax
      rate
      at 15% comparing to a statutory income tax rate of 33%, 30% for the central
      government and 3% for the local government, under the current Chinese tax laws
      because Shenzhen is a special zone designated by Chinese central government
      to
      attract foreign investments. Diguang Electronics has been deemed as a high-tech
      company by Shenzhen Bureau of Science, Technology & Information. Under this
      category, Diguang Electronics has been entitled to enjoy a 50% exemption from
      corporate income tax at the rate of 15% for three years from January 1, 2004
      to
      December 31, 2006. However, in accordance with the Rules for the Implementation
      of the Income Chinese Tax law for Enterprises with Foreign Investment and
      Foreign Enterprises prescribed by the central government, the minimum corporate
      income tax rate should be 10% within three years ended December 31, 2004, 2005,
      and 2006. We recorded the income tax provision based on 10% of corporate income
      tax rate for the years ended December 31, 2004, 2005 and 2006 considering that
      the difference between the 7.5% rate implemented by the Chinese local tax
      authority and the 10% rate in terms of the rules prescribed by the Chinese
      central government should be recognized as income tax payable for conservative
      consideration.




42





Dihao
      is
      registered at Yangzhou and subject to a favorable income tax rate at 24%
      comparing to a statutory income tax rate of 33%, 30% for the Chinese central
      government and 3% for the local government, under the current tax laws of PRC
      because Yangzhou Development Zone is a special zone designated by Chinese
      central government to attract foreign investments. Dihao has been a high-tech
      company by Yangzhou Bureau of Science, Technology and Information. Under this
      category, Dihao entitled to enjoy a 100% exemption of corporate income tax
      for
      the first two years from the first profit-making year and a 50% exemption of
      corporate income tax for the following three years in accordance with the
      preferential rules established by Yangzhou local tax authority on August 2,
      1999. 2007 is the second year for Dihao to enjoy the 100% exemption in
      corporation income tax. Therefore, there is no income tax for
      Dihao.





Wuhan
      Diguang Electronics Co., Ltd. ,or “Wuhan Diguang”, has been a foreign investment
      company. Under this category, Wuhan Diguang entitled to enjoy a 100% exemption
      of corporate income tax for the first two years from the first profit-making
      year and a 50% exemption of corporate income tax for the following three years
      in accordance with the preferential rules established by Wuhan local tax
      authority. Therefore, there is no income tax for Wuhan Diguang in the year
      of
      2007. After the favorable income tax period, Wuhan Diguang will subject to
      a
      statutory income tax rate of 33%, 30% for the Chinese central government and
      3%
      for the local government.





Dongguan
      Diguang Electronic Science and Technology Co., Ltd., or “Dongguan Diguang
      S&T”, is registered at Dongguan City Development Zone, Guangdong Province,
      China and subject to a favorable income tax at 27% comparing to a statutory
      income tax rate of 33%,30% for the Central Government and 3% for the local
      government, under the current income tax laws of PRC because Dongguan
      Development Zone is a coastal economic development zone designated by Chinese
      Central Government to attract foreign investments.


On
        March
        16, 2007, the National People’s Congress of China passed the new Enterprise
        Income Tax Law, (“EIT Law”), and on December 6, 2007, the State Council of China
        issued the Implementation Regulations for the EIT Law which took effect on
        January 1, 2008. The EIT Law imposes a unified EIT of 25% on all
        domestic-invested enterprises and foreign invested enterprises unless these
        foreign investment enterprises qualify under certain grand-father rules.
        The
        Detailed Implementation Rules provides detailed instruction for implementation
        purpose. We believe that all of our entities in China are qualified under
        the
        grand-father rules. The current income tax holiday we have enjoyed will be
        phased out in the five years since January 1, 2008. The newly acted EIT and
        its
        Detailed Implementation Rules have no impact on the operating result of
        2007.


Diguang
      International Development Co., Ltd. was established under the laws of the State
      of Nevada and is subject to U.S. federal income tax and one state income tax.
      For U.S. income tax purposes no provision has been made for U.S. taxes on
      undistributed earnings of overseas subsidiaries with which the Company intends
      to continue to reinvest. It is not practicable to estimate the amount of
      additional tax that might be payable on the foreign earnings if they were
      remitted as dividends, or lent to the Company, or if the Company should sell
      its
      stock in the subsidiary. The predecessor company accumulated certain net
      operation loss carry forwards; however, due to the changes in ownership, the
      use
      of these net operation loss carry forwards may be limited in accordance with
      the
      U.S. tax laws.







43





**Impairment
      of Long-Lived Assets**





We
      adopt
      the provisions of Statement of Financial Accounting Standard No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
      No.144”). SFAS No.144 requires that long-lived assets be reviewed for impairment
      whenever events or changes in circumstances indicate that the carrying amount
      of
      an asset may not be recoverable through the estimated undiscounted cash flows
      expected to result from the use and eventual disposition of the assets. Whenever
      any such impairment exists, an impairment loss will be recognized for the amount
      by which the carrying value exceeds the fair value. The impairment loss for
      the
      years ended December 31, 2005, 2006, and 2007 was $0, $0, and $622,194,
      respectively. The impairment loss was related to the investment in Huaxia
      (Yangzhou) Integrated O/E System Inc., which was accounted for under the cost
      method.





The
      investment in Yangzhou Huaxia Integaration is our long term strategy for
      upstream integration for LED development.





**Share-Based
      Payments**





We
      adopted Statement of Financial Accounting Standards No 123(R): “Share-Based
      Payments” (SFAS 123R) effective January 1, 2006. SFAS 123R amends existing
      accounting pronouncements for share-based payment transactions in which an
      enterprise receives employee and certain non-employee services in exchange
      for
      (a) equity instruments of the enterprise or (b) liabilities that are
      based on the fair value of the enterprise’s equity instruments or that may be
      settled by the issuance of such equity instruments. SFAS 123R generally requires
      such transactions be accounted for using a fair-value-based method. As we have
      never issued any stock options and warrants before January 1, 2006 and issued
      certain stock options on March 1, 2006, we accounted for the stock option
      granted using a fair-value-based method in accordance with SFAS No.
      123R.




**Retrospective
        Restatement of Historical Consolidated Financial
        Statements**
 
 On
        January 3, 2007, the Company acquired 65% interest of North Diamond by
        exercising a purchase option, which was entered into between the Company
        and the Song brothers who are the holders of these 65% interest in North
        Diamond
        because North Diamond is conducting the same business as the Company. On
        December 29, 2007, Diguang Holdings entered into a sale and purchase agreement
        with Sino Olympics Industrial Limited, “Sino Olympics” thereafter, and Shenzhen
        Diguang Engine & Equipment Co., Ltd. to acquire a 100% interest in Dongguan
        Diguang S&T. The closing date of the acquisition was December 30, 2007.
        These two transactions were accounted for as assets exchanged between the
        entities under common control in accordance with Appendix D of SFAS No. 141,
        as
        the owners of Dongguan Diguang S&T and the 65% interest of North Diamond
        also own more than 50% interest of the Company.
 
 In
        accordance with Paragraphs D16 and D17 in Appendix D of SFAS No. 141, the
        above
        two transactions changed the basis of presentation regarding the Company’s
        historical consolidated financial statements; therefore, all of the Company’s
        historical consolidated financial statements for the years ended December
        31,
        2005 and 2006 have been retrospectively restated to include the financial
        data
        of two previously separate entities, which are under the common control,
        since
        January 1, 2005 for the purpose of furnishing comparative information and
        the
        cash disbursements for the purchase prices paid and the obligations committed
        to
        pay were deemed as dividends distributed and declared in 2007. Accordingly,
        previously reported related party transactions associated with these two
        entities were eliminated during the retrospective restatement process. The
        following management discussion and analysis are based on the retrospectively
        restated historical financial statements.
 
 **Results
        of Operations**
 
 ***Comparison
        of Years Ended December 31, 2007 and 2006***
 
 **Revenue**
 
 Net
        revenue was approximately $45.9 million for the year ended December 31, 2007,
        an
        increase of $11.7 million, or 34%, compared with $34.2 million for the prior
        year. Of the $11.7 million increase, $4.4 million came from the sales of
        both
        mid-size LED and CCFL products manufactured at Yangzhou facility and $4.2
        million came from the sales of CCFL products at Wuhan facilities which started
        operation on July 1, 2007. The backlight products manufactured at Yangzhou
        facility were delivered mainly to Taiwanese customers located in
        the Eastern China region, particularly in Shanghai where certain famous
        international and domestic LCD module manufacturers reside. The backlight
        products manufactured at Wuhan facilities were delivered mainly to certain
        top
        TFT-LCD panel makers for the higher-priced 19” CCFL products. The remaining
        increase of $3.1 million in revenue was attributed to Diguang Electronics.
        The
        increase in revenue generated by Diguang Electronics was due mainly to the
        maiden sales to new customers. To meet new market demands in backlight industry,
        management has changed the product mix in favor of higher-priced products
        in the
        categories such as CCFL for automobile TV and large size CCFL for TFT-LCD,
        especially shifting from CCFL mid-size to LED mid-size products despite the
        fact
        that the backlight products were under pressure to cut down the unit price
        due
        to price erosion in the LCD monitor-end market. As a general trend, many
        multinational companies have shifted their procurement chain to China seeking
        low cost solution so that we are facing a great opportunity and challenge
        in
        terms of cost competition.
  44
 
 Our
        total
        net revenue can be divided into international sales and domestic sales as
        follows:
 
 Years
                  Ended December 31,2006
              
              2007International
                  sales
              
              
              31,528,000
              
              
              38,612,000Domestic
                  sales
              
              
              2,714,000
              
              
              7,297,000Total
              
              
              34,243,000
              
              
              45,909,000
 
 Sales
        to
        international customers totaled $38.6 million for the year ended December
        31,
        2007, an increase of $7.1 million, or 23%, compared with $31.5 million for
        the
        prior year. The increase in revenue was due primarily to the global demand
        for
        the digital display products such as automobile TV, portable DVD, MP3 and
        MP4
        and LCD product series, particularly resulting in the surge in demand for
        the
        LED backlight. Of the $7.1 million increase, approximately $3.2 million was
        attributable to sales to Taiwanese customers generated at Wuhan and Yangzhou
        facilities netting the $2.8 million decrease in sales to Hong Kong customers
        by
        Diguang Electronics. The sales to major Korean customers increased to $4.7
        million for 2007, an increase of $3.9 million, or 493%, compared with $793,000
        for 2006. Of the sales of $4.7 million to Korea customers, Diguang Electronics
        delivered its maiden sales to a Korean-based customer in Southern China
        amounting to $3.9 million during 2007. Our new Korean customers have
        demonstrated to management that China is becoming a major country of
        manufacturing TFT-LCD products as most of the top and secondary tier LCD
        panel
        makers have shifted their sources of supply to China from their existing
        upstream and midstream vendor chain due to China’s low labor cost and other
        competitive advantages. Accordingly, we believe that this shift would provide
        a
        vast opportunity for us to venture into the larger size of CCFL backlight,
        which
        is our core competency, and probably the related industries such as LED TV
        backlight and LCD assembly. The sales to Hong Kong customers were $14.2 million
        for 2007, a decrease of $2.8 million, or 16%, compared with $17 million for
        2006.
  Sales
        to
        domestic customers were $7.3 million for 2007, an increase of $4.6 million,
        or
        170%, compared with $2.7 million for 2006. The increase in domestic sales
        was
        attributable to our new customers and the increase of orders from our
        existing customers even though we faced the pressure to reduce our product
        unit
        price due to market competition. The increase of domestic sales arose from
        Diguang Electronics, in which there was an increase of $4 million generated
        from
        sales to existing customers and the remaining increase of $0.6 million from
        new customers.
  We
        have
        three manufacturing facilities located in the East China region (Yangzhou),
        Central China region (Wuhan), and Southern China region (Dongguan). Especially,
        there are various capacities in the principal manufacturing facility located
        in
        Dongguan to serve our customers which are LCD TV and monitor manufacturers
        and
        LCD assembly firms. Based on three manufacturing facilities, we believe that
        we
        have strategically deployed our production capacity in China for our long
        term
        growth.
  Because our
          current accounting system was unable to capture all relevant information
          with
          regard to the product size, volume and price changes in a systematic way,
          we
          were unable to discuss the financial impact of changes in volume and changes
          in
          product price here.
  45
  From
        the
        product mix aspect, our sales can be divided into two main categories: CCFL
        and
        LED products as follows.
 
 Years
                  Ended December 31,2006
              
              2007CCFL
              
              
              24,212,000
              
              
              26,188,000LED
              
              
              10,031,000
              
              
              19,721,000Total
              
              
              34,243,000
              
              
              45,909,000
 
 During
        the year ended December 31, 2007, CCFL products accounted for 57% of our
        total
        sales revenue, compared with 71% for 2006. Sales of CCFL backlights totaled
        $26.2 million for the year ended December 31, 2007, an increase of $2 million,
        or 8%, compared with $24.2 million for 2006. The change of the product mix
        was a
        result of adapting ourselves to the market pressure to reduce our product
        price
        and the shortage of TFT-LCD raw materials supply experienced in the first
        six
        months of 2007. We lost approximately $2.8 million sales to Hong Kong customers
        and approximately $1.2 million sales to other customers whereas we obtained
        $6
        million increase in sales generated at our Wuhan and Yangzhou facilities
        by
        selling higher-priced products within the CCFL category in 2007. Moreover,
        the
        demand for CCFL products from a Korean customer started in 2007.
 
 LED
        backlight products accounted for the remainder of the total sales revenues.
        Sales of LED backlight products totaled $19.7 million for 2007, an increase
        of
        $9.7 million, or 97%, compared with $10 million for 2006. The proportion
        of LED
        products, primarily small to medium sizes of backlight, accounted for 43%
        for
        2007, which was 14% higher than 29% in 2006. The increase was due
        mainly to the rise of LED products demanded by new and existing customers
        in
        global market for more small inches of LCD products. Mobile phones and
        electrical products require LED backlight; therefore, there is a significant
        increase in LED products ranging from 4” to 10.5” delivered to our customers.
        Yangzhou Dihao commenced to deliver LED products to our customers from the
        second quarter ended June 30, 2007 onwards and the revenue contributed to
        $2.7
        million, or 14%, of the total LED revenue for 2007.
 
 We
        expect
        our LED shipments will continue to grow and be more sustainable as the
        transition from CCFL to LED backlights is becoming more compelling due to
        its
        superior performance in contrast ratio, color gamut, localized dimming and
        low
        power consumption.
 
 **Cost
        of Sales**
 
 Since
        the
        basic materials for all backlight products are similar, we discuss cost of
        sales
        in the aggregate for all products. Cost of sales was $38.1 million for 2007,
        an
        increase of $15 million, or 65%, compared with $23.1 million for 2006. The
        increase in cost of sales for 2007 was higher than the increase of 34% in
        total
        revenue for the year due mainly to the decrease in sales price and the increase
        in cost of raw materials.
  46
  Raw
        material cost was $30.6 million for 2007, an increase by $13.2 million, or
        76%,
        compared with $17.4 million for 2006. The increase in raw materials cost
        for
        2007 was mainly attributable to the increase of sales volume. Furthermore,
        we
        were unable to decrease the procurement cost in the same percentage as the
        reduction in the unit price pressured by market force as a general trend
        because
        the supplies of certain components were limited. Regarding the increase of
        raw
        material cost, management noted that the increase of large size CCFL product
        volume accounted for the increase of raw material cost as the material used
        for
        CCFL products had a much higher cost tag attached than the cost of raw materials
        used on other products. As a result, a percentage of material cost to total
        revenue, raw material cost accounted for 67% for 2007, compared with 51%
        for
        2006. Facing this kind of situation, we tried very hard to develop new customers
        through tough negotiation in order for us to become one of their vendors.
        In
        addition, to decrease the working capital requirement in relation to purchasing
        raw materials used for large size of CCFL backlight, we processed the products
        for one of our key Taiwanese customers in Wuhan on an OEM basis.
 
 Labor
        cost was $4.7 million for 2007, representing an increase of $1.3 million,
        or
        38%, compared with $3.4 million for 2006. Compared with 65% increase in cost
        of
        sales, the increase of 38% in labor cost was lower. As a percentage of labor
        cost to revenue, the labor cost accounted for 10% of total net revenue for
        2007,
        compared with 10% of total net revenue for 2006. The same percentage of labor
        cost to total revenue demonstrated our efforts to control labor cost through
        improving our productivity. In addition, the increase in the production of
        large
        inches of CCEL products did not require as much labor cost as producing the
        small and medium size of CCFL products.
 
 Production
        overhead was $2.8 million for 2007, an increase of $0.6 million, or 27%,
        compared with $2.2 million for 2006. As the result of an increase in production
        volume, there was an increase for indirect overhead such as water and
        electricity expense, depreciation charges for new addition of machineries,
        repairs and maintenance expenses for new manufacturing facilities in Wuhan
        and
        Yangzhou. Compared with the increase of 65% in cost of sales, the increase
        proportion in production overhead was lower as the production overhead was
        semi-variable in nature. As a percentage of production overhead to total
        revenue, it accounted for 6% of total revenue in 2007, compared with 7% of
        total
        revenue in 2006.
 
 **Gross
        Margin**
 
 The
        overall gross margin for 2007 was 17%, a 15% decrease, compared with 32%
        gross
        margin for 2006. During 2007, we suffered a significant price reduction pressure
        on similar products compared with the unit price we got in 2006. We were
        unable
        to transfer the price reduction pressure to our suppliers, which meant that
        we
        still paid the market price to procure our raw materials. The sales volume
        for
        19” CCFL LCD increased dramatically in 2007, amounting to 9.3 million, which
        had
        an average gross margin of only 5.28%. Furthermore, in order to move into the
        high-end products, the price of certain components contained in the customers’
specification was higher than the price of the same type of components used
        in
        the low-end products, which reduced our gross margin. Similarly, we were
        unable
        to pass the entire burden to our customers in order to maintain our market
        share
        in this industry. On the other hand, as the products made in Wuhan were on
        an
        OEM basis to lessen our working capital requirement whereas the low gross
        margin
        of the products manufactured in Wuhan has pushed our gross margin downwards.
        To
        the extent we were able to purchase our raw materials at lower prices consistent
        with the general trend of that product market, we did everything possible
        to
        take the advantage of the lower prices, which mitigated the price pressure
        from
        our customers. At the same time, our strategy to shift to LED products with
        a
        gross margin of 20% in 2007 also contributed a positive impact to our gross
        margin during 2007.
  47
  Management
        believes that the pressure to reduce the product unit price from market will
        continue in 2008. Accordingly, management intends to improve gross margin
        through focusing on the following aspects: enhancing our research and
        development to provide customers with alternative solutions, lowering purchasing
        cost and expending customer base, and forming internal strategic business
        units.
        Accordingly, management plans to design and implement standard operating
        procedures together with definite and full documentation in 2008 within the
        entire organization for the ultimate goal to enhance our productivity and
        profitability.
 
 Regarding
        international sales, our gross margin was approximately 16% for 2007, a 15%
        decrease, compared with 31% for 2006 due to the price reduction pressure
        from
        end users who are LCD panel makers. Regarding domestic sales, our gross margin
        was approximately 24%, a 21% decrease, compared with 45% for 2006.
 
 **Selling
        Expenses**
 
 Selling
        expenses were $2.6 million for 2007, an increase of approximate $1 million,
        or
        64%, compared with $1.6 million for 2006. Of the approximate $1 million of
        increase, commission expense accounted for $480,000 due to the fact that
        more
        sales in 2007 were commission-based sales; transportation expense accounted
        for
        $218,000 due to the increase in sale volume; payroll expense accounted for
        $223,000 due to the increase in headcounts; meal and entertainment and other
        accounted for approximately $70,000 related to the extended sale effort
        exercised by us; travel, show and exhibition expenses accounted for $49,000
        due
        to the extended effort exercised by us; telecommunication expense decreased
        by
        $29,000 in conjunction with the decrease in other minor items. As a percentage
        of total revenue, selling expenses were approximately 5.6% for 2007 and 4.6%
        for
        the prior year, respectively.
 
 **Research
        and Development Expenses**
 
 The
        net
        research and development expenses were $1,054,000 for 2007, an increase of
        $268,000, or 34%, compared with $786,000 for 2006. The increase was mainly
attributableto the increase in payroll expense of $471,000 related to our engineers
        performing research and development functions. The increase was offset by
        the
        decrease in $180,000 mainly comprising of net mould charges and raw materials
        for design and development usage netting against the reimbursement of mould
        charges from customers, which demonstrated that we were able to deliver our
        new
        products in 2007 for the development made in 2006. Other fluctuation include:
        the decrease in patent expense and training expense of $80,000 and increase
        in
        government fund and others of $57,000. As a percentage of total sales revenue,
        research and development expenses were approximately 2.3% and 2.3% for 2007
        and
        2006, respectively.
  48
  **General
        and Administrative Expenses**
 
 General
        and administrative expenses were $6.5 million for 2007, a decrease of $180,000,
        or 3%, compared with $6.7 million for 2006. In terms of the components of
        general and administrative expenses, share-based compensation decreased by
        $928,000, or 43%, compared with $2,134,000 for 2006. The decrease was
        attributable to the resignation of former CFO and two independent directors
        in
        2007. Professional service fees decreased by almost $389,000, or 46%, compared
        to the amount of $1,236,000 for 2006. The decrease should be attributable
        to
        less financing and reorganization activities taking place in 2007 compared
        to
        the level of activities incurred in 2006. Payroll expense was increased by
        $440,000 in connection with the increase in headcounts and pay scale increase.
        The start-up expenses for Wuhan entity accounted for $293,000 whereas there
        was
        no such expense for 2006. In addition, bad debt allowance increased by $386,000
        as a result of the increase of receivables with aging older than one year,
        compared to $271,000 for 2006. The last $17,000 increase was related to office
        expense, compared to $1.59 million for 2006. As a percentage of total sales
        revenue, general and administrative expenses represented 14% and 19% for
        2007
        and 2006, respectively. Excluding the stock compensation expense, the remaining
        general and administrative expense for 2007 and 2006 represented 11% and
        13% of
        total revenue, respectively.
 
 **Interest
        Income**
 
 The
        net
        interest income was $122,000 for 2007, representing a decrease of $37,000,
        or
        23%, compared with $159,000 for 2006. The decrease in net interest income
        was due to the fact that more cash was occupied by financing the business
        expansion and the new manufacturing facility in Wuhan in 2007 whereas more
        net
        interest income was earned during 2006 on cash generated from operations
        and
        unused proceeds from the private placement that took place on March 17, 2006.
        Interest income for 2007 and 2006 represented 0.27% and 0.46% of total revenue,
        respectively.
 
 **Investment
        Income**
 
 The
        investment income was $483,000 for 2007, represented an increase of $429,000,
        or
        794%, compared with $54,000 for 2006. The increase was attributable to the
        high
        yield from the investment fund placed with the Bank in China which was redeemed
        in December 2007. Compared with investment income of $54,000 for 2006, which
        was
        attributable to the yield from the cash proceeds from the private placement
        placed as short-term deposit in Hong Kong during 2006, we did much better
        in
        2007. Investment income for the years ended December 31, 2007 and 2006
        represented 1.05% and 0.16% of the total revenue, respectively.
 
 **Other
        expenses**
 
 Other
        expense was $168,000 for 2007, representing an increase of $68,000, or 68%,
        compared with $100,000 for 2006. The increase was due primarily to the increase
        in exchange losses incurred in working capital. Other expenses for 2007 and
        2006
        represented 0.37% and 0.29% of total revenue, respectively.
  49
  **Income
        Tax Provision**
 
 Income
        tax provision for 2007 was approximately $94,000, a decrease of $359,000,
        compared with $453,000 for 2006. The decrease in income tax provision was
        attributable mainly to decrease of the taxable income at Diguang Electronics.
        The taxable income at Diguang Electronics was $619,000 for 2007, compared
        with
        the taxable income of $4.5 million for 2006, considering the fact that the
        applicable tax rate for Diguang Electronics was 15% for 2007 and 10% for
        2006,
        respectively. In addition, we did not provide any US federal income tax
        provision for 2006 as there was no taxable income in the U.S. whereas we
        recorded US federal income tax provision of approximately $33,000 for 2007
        as a
        result of subpart F income generated by Diguang S&T (HK) during 2007 in
        accordance with relevant US IRS codes. As a percentage of net revenue, income
        tax provision was 0.21% and 1.32% for the years ended December 31, 2007 and
        2006, respectively.
 
 **Net
        Loss**
 
 Net
        loss
        was $2,905,000 for 2007, compared with net income of $1,665,000 for 2006,
        representing a decrease of approximately $4.6 million in net income, or 275%.
        Minority interest portion of net income generated at North Diamond was $335,000
        for 2007 and $75,000 for 2006, which represent 11% of net loss for 2007 and
        4.5%
        of net income for 2006. The decrease in net income was due mainly to the
        decrease in gross margin, the increase in operating expenses, which was
        attributable mainly to the increase in selling expenses, the increase in
        research and development expense, the increase in impairment loss related
        to a
        long-term investment, and the increase in non-operating loss as a result
        of the
        weak dollar value as our international sales were mainly denominated by US
        dollars. As a percentage of total revenue, net loss for 2007 accounted for
        6.3%
        whereas net income for 2006 accounted for 4.9%, representing a decrease of
        11.2%.
 
 **Earnings
        per Share**
 
 The
        basic
        loss per share was $0.13 for 2007, compared with basic earnings per share
        of
        $0.08 for 2006. Basic earning per share for 2007 were negatively impacted
        by
        $0.21 per share due to the significant decrease in gross margin, the increase
        in
        operating expenses, the incurrence of impairment loss in a long term investment,
        and the increase in non-operating loss. In addition, the weighted average
        common
        shares outstanding were increased to 22,531,000 shares for 2007, as compared
        with 21,384,000 shares for 2006.
 
 ***Comparison
        of Years Ended December 31, 2006 and 2005***
 
 **Revenue**
 
 Net
        revenue was approximately $34.2 million for the year ended December 31, 2006,
        a
        decrease of $1.4 million, or 4%, compared with $35.6 million for the prior
        year.
        The major reason of the revenue decline was the pricing pressure in the
        backlight industry. CCFL products were under more pricing pressure than LED
        products because CCFL backlights were mostly applied to middle size (7”-10.4”)
        displays that are newer products and are, therefore, subject to more price
        erosion in the earlier stage of the product life cycle. In such an environment,
        our strategy was to improve our product mix in favor of higher-priced products
        in the CCFL category. This strategy mitigated the impact of the pricing pressure
        on our financial results.
  50
  Our
        total
        net revenue can be divided into international sales and domestic sales as
        follows:
 
 Years
                  Ended December 31,2005
              
              2006International
                  sales
              
              
              30,727,000
              
              
              31,528,000Domestic
                  sales
              
              
              4,921,000
              
              
              2,714,000Total
              
              
              35,648,000
              
              
              34,243,000
 
 Sales
        to
        international customers totaled $31.5 million for 2006, a decrease of $800,000,
        or 2.6%, compared with $30.7 million for the prior year. Sales to Taiwanese
        customers were $9.4 million for 2006, a decrease of $360,000, or 4%, compared
        with $9.8 million for the prior year. The remaining decease of $440,000 was
        related to other small international customers. However, sales to Hong Kong
        customers were $17 million for 2006, an increase of $1.5 million, or 9.5%,
        compared with $15.5 million for the prior year. This was attributable to
        the
        sales of CCFL backlights for 19" displays to a new Hong Kong based customer
        with
        the sales of $1.4 million. We were further selected as one of the major in-house
        suppliers to supply higher-priced products of 19" CCFL and to start in 2007
        in
        Wuhan.
 
 Sales
        to
        domestic customers were $2.7 million for 2006, a decrease of $2.2 million,
        or
        45%, compared with $4.9 million for the prior year. The decrease in domestic
        sales was primarily a result of reducing product price under the market pressure
        and the physical product volume did not decrease.
 
 Due
        to
        the fact that our current accounting system was unable to capture all relevant
        information with regard to the product size, volume and price changes in
        a
        systematical way, we were unable to discuss the financial impact of changes
        in
        volume and changes in product price at here.
  From
        the
        product mix aspect, our sales can be divided into two main categories: CCFL
        and
        LED products as follows.
 
 Years
                  Ended December 31,2005
              
              2006CCFL
              
              
              24,290,000
              
              
              24,211,000LED
              
              
              11,358,000
              
              
              10,031,000Total
              
              
              35,648,000
              
              
              34,242,000
 
 During
        the year ended December 31, 2006, CCFL products accounted for 71% of total
        revenue, compared with 68% for the prior year. Sales of CCFL backlights totaled
        $24.2 million for 2006, which is similar to the sales of $24.3 million in
        2005.
        Whiling facing the price reduction pressure on CCFL products from the market,
        we
        increased the sales of higher-priced products within the CCFL category, such
        as
        backlights for portable DVDs and automobile TV.
  51
  LED
        backlight products accounted for the remainder of total revenues. Sales of
        LED
        backlight products totaled $10 million for 2006, a decrease of $1.4 million,
        or
        11.6%, compared with $11.4 million for the prior year. The decrease is due
        to
        the fact that LED technology cannot economically used to produce backlight
        products for monitor larger than three inches. Therefore, the sales volume
        of
        LED products dropped; however the unit price for certain existing products
        did
        not decline as significantly as the price of CCFL products, which indicated
        that
        we sold higher price-to-performance products to our customers.
 
 **Cost
        of Sales**
 
 Since
        the
        basic materials for all backlight products are similar, we discuss cost of
        sales
        in aggregate of all products. Cost of sales was $23.1 million for 2006, a
        decrease of $78,000, or 0.3%, compared with $23 million for the prior year.
        The
        decrease in cost of sales for 2006 was lower than 4% decrease in total revenue
        for 2006.
 
 Raw
        material cost was $17.4 million for 2006, a decrease of $1.5 million, or
        8%,
        compared with $18.9 million for the prior year. The 8% reduction of raw material
        cost was a key contributor to our accomplishment of a higher gross margin
        in a
        very challenging market environment. The decrease in raw material costs was
        attributed to the re-engineering of product designs that aimed at maximizing
        the
        luminous efficiency of products while minimizing the material input, reducing
        unit cost of raw materials purchased, and enhancing the efficiency in the
        production process.
 
 Labor
        cost was $3.4 million for 2006, compared with $2.5 million for the prior
        year.
        The 36% increase in labor cost was attributed to the significant increase
        in
        headcount of employees as well as increase in employee benefits. The increase
        in
        headcounts resulted from establishing the film cutting and LED assembling
        lines
        to bring these functions in-house.
 
 Production
        overhead was $2,249,000 for 2006, an increase of $580,000, or 35%, compared
        with
        $1,669,000 for the prior year. The 35% increase in production overhead was
        attributable to the additional depreciation expense from the newly established
        production lines for the 15”-19” CCFL products. The increase in production
        overhear was in exchange for the improvement of our production efficiency
        by
        setting up all production lines in one location. The benefit will be
        materialized in the long run.
 
 **Gross
        Margin**
 
 The
        overall gross margin for 2006 was 32.7%, a 2.7% decrease, compared with 35.4%
        gross margin for the prior year. Facing the significant pressure to reduce
        the
        product unit price on our exiting products, we managed to maintain our gross
        margins through changing product mix in favor of higher-margin products,
        re-engineering product designs to reduce material consumption, and enhancing
        product quality. In addition, we developed know-how to produce more types
        of
        components in-house at lower costs than purchasing them from outside suppliers.
        Facing the unfavorable price reduction pressure on product sales, we also
        took
        advantage of purchasing components and raw materials at a lower price in
        the
        same time. The lower purchase cost significantly offset the negative impact
        of
        the price reduction during 2006. However, the saving in purchasing cost was
        also
        offset by increase in labor cost and production overhead, respectively, and
        the
        inventory provision recorded at the yearend of 2006.
  52
  Regarding
        international sales, our gross margin was approximately 33%, a 3% decrease,
        compared with 36% for the prior year due to the price reduction pressure
        from
        end users who are LCD panel makers. Regarding domestic sales, our gross margin
        was approximately 31%, a 1% decrease, compared with 32% in 2005.
 
 **Selling
        Expenses**
 
 Selling
        expenses were $1,575,000 for 2006, an increase of $95,000, or 6%, compared
        with
        $1,480,000 for 2005. Among the components of selling expense, commission
        expense
        decreased by $317,000 due to the fact that more sales were generated by our
        employees and less sales generated on the commission basis in 2006, compared
        to
        $1 million for 2005. Office expense decreased by $127,000 due to the fact
        that
        office function was moved into the headquarter office since March 2006. Payroll
        expense was increased by $120,000 in 2006 due to the increase in headcounts.
        Transportation expense increased by $155,000 due to the increase in volume
        shipped in 2006, compared to $123,000 for 2005. Meal and entertainment and
        other
        expenses increased by $164,000 as a result of sales employees’ marketing
        effort. Travel, show and exhibition, and advertising expense increased by
        $45,000 in 2006. In addition, telecommunication expense was increased by
        $50,000
        along as marketing efforts in conjunction with minor increase in other items.
        As
        a percentage of total sales revenue, selling expenses were approximately
        4.6%
        for 2006 and 4.2% for 2005.
 
 **Research
        and Development**
 
 For
        the
        year ended December 31, 2006, the net research and development expenses were
        $786,000, an increase of $59,000, or 8%, compared with $727,000 for the prior
        year. Before offset by government subsidies for research and development
        in the
        form of value-added tax rebate, the gross research and development expenses
        were
        $949,000 and $930,000 for the year ended December 31, 2006 and 2005,
        respectively. The government subsidies we received were $163,000 and $203,000
        for the year ended December 31, 2006 and 2005, respectively. This increase
        of
        merely $19,000 reflected our efforts in researching and developing new products,
        such as the 15”-19” backlights for monitors and LED backlight application for
        televisions. The increase was mainly incurred in the expansion of the research
        and development team as well as the compensation levels of our engineers.
        Moreover, the consumption of mould and the material for experiments and sample
        products also experienced a meaningful increase. As a percentage of total
        sales
        revenue, research and development expenses were approximately 2.3% and 2.0%
        for
        the year ended December 31, 2006 and 2005, respectively.
 
 **General
        and Administrative Expenses**
 
 General
        and administrative expenses were $6.7 million for 2006, an increase of
        approximate $5 million, or 294%, compared with $1.7 million for 2005. In
        terms
        of the components of general and administrative expense, share-based
        compensation accounted for $2.1234 million resulting from granting 540,000
        stock
        options on March 1, 2006 whereas there was no such expense in 2005. The increase
        almost accounted for 43% of total increase in 2006. Profession service fee
        increased by $840,000 as a result of conducting reverse merger with a shell
        company in the U.S. and private placement to raise $12 million and becoming
        a
        publicly traded company on OTCBB. Payroll expense increased by $910,000 due
        to
        the increase in headcounts and pay scale and significant increase in employee
        benefit. In addition, we provided allowance for doubtful account by $272,000,
        which did not incur in 2005. By centralizing office function including rental,
        business travel and other miscellaneous items, office expense increased by
        837,000 for 2006. As a percentage of total revenue, general and administrative
        expenses represented 19% and 5% for the year ended December 31, 2006 and
        2005,
        respectively.
  53
  **Interest
        Income**
 
 The
        net
        interest income was $159,000 for 2006, representing an increase of $191,000,
        or
        597%, compared to a net interest expense of $32,000 for 2005. During the
        year
        ended December 31, 2005, we had a term bank loan of $494,000 outstanding
        and
        corresponding interest incurred during 2005. That bank loan was paid off
        on
        October 28, 2005. We had no interest-bearing debt outstanding during 2006.
        Interest income was earned on cash proceeds from the private placement that
        took
        place on March 17, 2006. Interest income for 2006 represented 0.5% of total
        revenue.
 
 **Income
        Tax Provision**
 
 Income
        tax provision for 2006 was approximately $453,000, a decrease of $80,000,
        or 2%,
        compared with $533,000 for the prior year. The decrease in income tax provision
        was attributable mainly to the decrease in taxable income at Diguang
        Electronics. The taxable income in Diguang Electronics for was $4.5 million,
        compared to $5.3 million for the prior year. Diguang Electronics has been
        entitled to enjoy a 50% exemption from corporate income tax at the rate of
        15%
        for the three years from January 1, 2004 to December 31, 2006, which means
        that
        the income tax rate should be 7.5% for these three years. However, in accordance
        with the Rules for the Implementation of the Income Tax law of the PRC for
        Enterprises with Foreign Investment and Foreign Enterprises prescribed by
        the
        central government, the minimum corporate income tax rate should be 10% for
        the
        three years ended December 31, 2004, 2005, and 2006. Therefore, the tax
        provision was based at a rate of 10% for both periods, respectively. As a
        percentage of net revenue, income tax provision was 1.4% and 1.5% for the
        years
        ended December 31, 2006 and 2005, respectively.
 
 **Net
        Income**
 
 Net
        income was $1.7 million for 2006, a decrease of $6.8 million, or 80%, from
        $8.5
        million for the prior year. Minority interest portion of net income at North
        Diamond was $75,000 for 2006 and net loss of $84,000 for 2005. The decrease
        in
        net income was attributable to $1.4 million decrease in total revenue, the
        decrease in gross margin, more than $5 million increase in operating expenses,
        and the decrease in non-operating income. As a percentage of total revenue,
        net
        income fell to 5% for 2006 from 24% for 2005.
 
 **Earnings
        per Share**
  54
  The
        basic
        earnings per share were $0.08 for 2006, a decrease of $0.39 per share, or
        83%,
        compared with $0.47 for 2005. The decrease in earnings per share was due
        to the
        decrease in net income attributable to common shareholders. In addition,
        the
        weighted average common shares outstanding increased to 21.4 million shares
        for
        2006, compared to 18.3 million shares for 2005.
 
 **Liquidity
        and Capital Resources**
 
 As
        of
        December 31, 2007, we had total assets of $56.6 million, of which cash amounted
        to $16.3 million, accounts receivable amounted to $12.7 million and inventories
        amounted to $7.5 million. Our working capital was approximately $11.8 million
        and our equity was $28.8 million compared with working capital of $21.01 million
        and equity of $33.74 million on December 31, 2006. Our quick ratios were
        approximately 1.16:1 and 2.37:1 at December 31, 2007 and 2006, respectively.
 
 We
        believe that the current liquidity and capital resources are sufficient to
        sustain operations through at least the next 12 months, primarily due to
        cash
        expected to be generated from continuing operations. Our ability to generate
        adequate amount of cash to meet our future capital requirements will depend
        primarily on operating cash flow. If sales or cash collections are reduced
        from
        current expectations, or if expenses and cash requirements are increased,
        we may
        require additional financing. We expect to obtain a line of credit from the
        commercial banks in China.
 
 Working
        capital decreased by $9.3 million to $ 11.8
        million at
        December 31, 2007 from $21.1
        million at
        December 31, 2006. The ratio of current assets to current liabilities at
        December 31, 2007 and 2006 was 1.45 and 2.73, respectively. The decrease
        in
        working capital is primarily due to an
        increase of accounts payable, amount due to a related party and amount due
        to
        stockholders, and offsetting by the increase of accounts receivable and
        inventories. Accounts payable increased $10.8 million, which was attributable
        to
        the rise of inventory level in Dihao and Wuhan at the end of 2007 and extended
        credit terms by vendors. Amount due to a related party and amount due to
        stockholders increased $167,000 and $1,100,000, respectively, as a result
        of
        acquiring 100% interest of Dongguan Diguang S&T. Accounts receivable and
        inventories increased $6,3 million and $3.1 million, respectively. The increase
        in accounts receivable was a result of the increase in sales generated by
        Yangzhou and Wuhan facilities and the longer credit terms granted to new
        customers in 2007. The increase in inventories was primarily related to the
        expectation of the increase in sales in 2008 generated in Yangzhou and Wuhan
        facilities.
 
 ***Comparison
        of Years Ended December 31, 2007 and 2006***
 
 Cash
        position decreased $4.3 million, or 21%, from $20.6 million at December 31,
        2006
        to $16.3 million at December 31, 2007
 
 Net
        cash
        provided by operating activities was $3.9 million for 2007, compared with
        the
        net cash provided by the operating activities of $3.6 million for
        2006.
  55
  Non-cash
        items added approximately $4,261,000 back to cash outflow from operating
        activities for 2007, compared with total non-cash items of $3,773,000 for
        2006.
        Of the non-cash items for 2007, approximately $1,206,000 was from share-based
        compensation, $928,000 lower than $2,134,000 for 2006 due mainly to the
        resignation of former CFO and two independent directors and other management
        team members. Depreciation was $1,198,000 for 2007, with an increase of
        $432,000, compared with $766,000 for 2006, due primarily to the addition
        of
        equipment and machinery for our new product lines, such as backlights for
        computer monitors and cell phones, and new office building in Shenzhen that
        was
        purchased during 2006 and put into use in March of 2007. Inventory provision
        was
        $296,000 for 2007, $250,000 lower than $546,000 for 2006. Minority interest
        was
        $335,000 for 2007, compared with $75,000 for 2006 due to the increase net
        income
        generated by North Diamond for 2007. Before we wrote off our allowance for
        doubtful accounts against accounts receivables, bad debt allowance was $604,000
        for 2007, $345,000 higher than $259,000 for 2006. There was no imputed interest
        and deferred tax assets impact for 2007, compared with a positive $80,000
        of
        imputed interest and a negative $87,000 of deferred tax assets for 2006.
        In
        addition, there was impairment loss of $622,000 related to a long term
        investment accounting for under cost method in 2007.
 
 The
        impact of the changes in operating assets and liabilities on cash flow was
        explained as follows. The accounts receivable during 2007 was increased by
        approximately $6,508,000, compared with a $542,000 decrease in 2006. Inventory
        level increased by $3,170,000 during 2007, compared with a $1,222,000 increase
        during 2006. Other receivables increased by $249,000 during 2007, compared
        with
        a $152,000 increase for 2006. Deposits, prepayment and other assets decreased
        by
        $460,000 during 2007, compared with a $638,000 increase in deposits, prepayment
        and other assets for 2006. VAT recoverable increased by $185,000 during 2007,
        compared with a $220,000 increase for 2006.
  Advances
        from customers increased by $296,000 during 2007, compared with a $158,000
        decrease in 2006. In addition, tax payable increased by $88,000 for 2007,
        compared with a decrease of $228,000 for 2006. Accounts payable increased
        by
        approximately $10 million during 2007, compared with a $735,000 increase
        during
        for 2006. Accruals and other payables increased by $1,732,000, compared with
        the
        increase of $611,000 for 2006. The following summarized the impact of changes
        in
        operating assets and liabilities on cash flow between year ended December
        31,
        2007 and 2006:
 
 ·
            $5,966,000
                from Accounts receivable (negative impact) ·
            $1,949,000
                from inventory (negative impact) ·
            $1,001,000
                from other receivable, prepayments and other assets (positive
                impact) ·
            $35,000
                from VAT recoverable (positive impact) ·
            $9,341,000
                from accounts payable (positive impact) ·
            $1,121,000
                from accruals and other payable (positive
                impact) ·
            $453,000
                from advance from customers (positive
                impact) ·
            $316,000
                from taxes payable (positive impact) 
 The
        total
        positive impact from above non-cash items and changes in operating assets
        and
        liabilities was approximately $4.4 million.
  56
  Net
        cash
        used in investing activities amounted to $10.2 million for 2007, an increase
        of
        $4.8 million, or 89%, compared with the $5.4 million cash used in investing
        activities for 2006. During 2007, we invested $6.2 million in plant, property
        and equipment, an increase of $3.0 million, or 94%, compared with $3.2 million
        during 2006. The long-term investment during 2006 was $1.5 million whereas
        there
        was no cash disbursement for long term investment during 2007. During 2006,
        we
        redeemed $1.1 million marketable securities and paid deposit of $1.8 million
        for
        the new office building where we moved in 2007. During 2007, we acquired
        65%
        interest of North Diamond and 100% interest of Dongguang Diguang S&T by
        paying cash of $1.98 million and $2.0 million, respectively.
 
 Net
        cash
        used in the financing activities for 2007 was $34,000, compared with $11
        million
        net cash provided by financing activities for 2006. There was no private
        placement in 2007 which generates cash proceeds of $12 million during 2006
        accounting for the total decrease. During 2006, the owners of North Diamond
        infused a total of $1.4 million of capital into Yangzhou facility whereas
        there
        was no such capital infusion in 2007. Compared with the cash proceeds from
        private placement incurred in 2006 and capital infusion of $1.4 million in
        2006,
        the cash disbursement for related parties was immaterial whereas there was
        a
        positive cash flow from amount due to related parties during 2007. Also during
        2007, we repurchased 252,000 shares of common stock with a total cost of
        $429,000. Meanwhile, we had obtained the research funding of $236,000, which
        was
        granted by Chinese government and shared with other companies. If our research
        activities fail, we would have to pay back to the Chinese government. However,
        if our research activities are successful, the fund received will be deemed
        as
        government subsidies.
  ***Comparison
        of Years Ended December 31, 2006 and 2005***
 
 As
        of
        December 31, 2006, our cash position had a net increase of $10 million as
        compared with cash position of $11 million at December 31, 2005.
 
 Net
        cash
        generated by operating activities was $3.6 million for 2006, a decrease of
        $6
        million, or 63%, from the $9.6 million for 2005.
 
 Non-cash
        items added approximately $3,773,000 back to cash flow from operating activities
        for 2006, compared with total non-cash items of $528,000 for 2005. Of the
        non-cash items for 2006, approximately $2.1 million was the share-based
        compensation whereas there was no such expense for 2005. Depreciation was
        $766,000 for 2006, $267,000 higher than the $499,000 for 2005, due primarily
        to
        the additions of equipment and machinery for our new product lines, such
        as
        backlights for computer monitors, during 2006. Bad debts allowance for 2006
        was
        $259,000, $227,000 higher than the $32,000 for 2005. Inventory provision
        was
        $545,000 for 2006 whereas there was no inventory provision for 2005. The
        cash
        impact of deferred tax assets was a negative $87,000 for 2006 whereas there
        was
        no such impact from deferred tax assets for 2005. The impact of changes in
        non-cash items on cash flow from operating activities between 2006 and 2005
        was
        approximately $3.3 million positive.
 
 The
        impact of the changes in operating assets and liabilities on cash flow was
        explained for as follows. The accounts receivable during 2006 increased by
        approximately $542,000 compared with the $1.3 million increase in accounts
        receivable for 2005. Inventory level increased by $1.2 million during 2006,
        a
        decrease of $800,000 or 40% less than the $2 million increase in inventory
        for
        2005. Other receivables increased by $152,000 during 2006, $71,000, or 32%
        less
        than the $223,000 increase for 2005. VAT recoverable during 2006 increased
        by
        $220,000 whereas there was no such change for 2005. Deposits, prepayment
        and
        other assets during 2006 increased by $638,000, compared with the $25,000
        decrease in the same category for 2005.
  57
  Advances
        from customers decreased by $158,000 during 2006, compared with the $19,000
        increase in the same category for 2005. In addition, tax payable decreased
        by
        $228,000 for 2006, compared with an increase of $348,000 for 2005. Accounts
        payable decreased by $735,000 for 2006, compared with the $3.3 million increase
        for 2005. Accruals and other payables increased by $611,000 during
        2006, $193,000, or 46%, more than the $418,000 increase for 2005. The
        following summarized the impact of changes in operating assets and liabilities
        on cash flow between years ended December 31, 2006 and 2005:
 
 ·
            $765,000
                from accounts receivable (positive impact) ·
            $824,000
                from inventory(positive impact) ·
            $71,000
                from other receivable (positive impact) ·
            $220,000
                from VAT recoverable (negative impact) ·
            $663,000
                from deposits, prepayment and other assets (negative
                impact) ·
            $2,570,000
                from of accounts payable (negative
                impact) ·
            $193,000
                from accruals and other payable (positive
                impact) ·
            $177,000
                from advance from customers (negative
                impact) ·
            $576,000
                from taxes payable (negative impact) 
 The
        total
        impact from above non-cash items and the changes in operating assets and
        liabilities was approximately $2.4 million.
 
 Net
        cash
        used in investing activities amounted to $5.5 million for 2006, a decrease
        of
        $263,000, or 5%, compared with the $5.7 million cash used in investing
        activities for 2005. During 2006, we invested $3.2 million into plant, property
        and equipment as a result we added new production lines in Dongguan facility
        whereas we relocated our production lines to Dongguan facility during 2005.
        During 2005, we incurred investment of approximately $4.1 million into plant,
        property and equipment for future business expansion. The majority of the
        $4.1
        million investment in fixed assets during 2005 was spent on adding equipment
        and
        machinery to Dongguan facility. During 2006, we disposed of marketable
        securities with proceeds of approximately $1.1 million, compared with the
        purchase of marketable securities by $765,000 during 2005. During 2006, we
        made
        cash payment of $1.8 million for a new office space which was not put into
        use
        as of December 31, 2006, compared with the deposit of $722,000 made during
        2005.
        During 2006, we made a $1.5 million investment in Huaxia (Yangzhou) Integrated
        O/E System Inc. for 15% of its equity interest whereas we did not have such
        investment activity in 2005. During 2006, due from related parties was decreased
        by $22,000 whereas we incurred cash disbursement of 97,000 to related
        parties.
 
 Net
        cash
        generated by financing activities for 2006 was approximately $11 million.
        The
        primary source of cash flow for 2006 was from a private placement incurred
        in
        March 2006 through which we received cash proceeds of $12 million in connection
        with effecting a reverse merger with Online Processing, Inc. Offering expenses
        paid in 2006 amounted to approximately $1.74 million in addition to $26,000
        paid
        in 2005. The net funds raised will be used to financing our next phase of
        expansion resulting from our new product offerings. The increase in cash
        used in
        financing activities for 2006 was due to the repayment to related parties,
        which
        was a negative cash flow of $470,000, a decrease of $605,000 compared with
        a
        positive cash flow of $135,000 for 2005. We paid dividends of approximately
        $111,000 during 2006, which was the remaining balance at December 31, 2005
        whereas there were no dividends paid for 2005.
 
 Our
        primary source of funds for 2006 was from operating cash flows and the remaining
        cash proceeds from private placements incurred in March 2006.


**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





Not
      required for smaller reporting companies.




**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**




(a)
      Financial Statements




The
      following financial statements are set forth at the end hereof.




1.     Report
      of Independent Registered
      Public Accounting Firm




2.     Consolidated
      Balance Sheets as of December 31, 2007 and 2006




3. Consolidated
      Statements of  Income
      andComprehensive Income (Loss) for the years ended December 31, 2007,
      2006 and 2005




58




4.     Consolidated
      Statements of  Stockholders’ Equity for the years ended December 31, 2007,
      2006 and 2005




5.     Consolidated
      Statements of Cash Flows for the years ended December 31, 2007, 2006 and
      2005




6.     Notes
      to Consolidated Financial Statements.




**ITEM
      9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**




Due
      to a
      recent reorganization by BDO International, the Company's auditors, BDO Reanda,
      were no longer part of the BDO International network. In order to assure the
      continuity of audit services rendered by BDO International, the Company decided,
      effective October 22, 2007, to select BDO Shenzhen as its independent auditor,
      beginning with the review for the third quarter ending September 30, 2007.




The
      Audit
      Committee approved the resignation of BDO Reanda and the appointment of BDO
      Shenzhen Dahua
      Tiancheng CPAseffective October 22, 2007.




The
      change in auditors was not the result of any disagreement with BDO Reanda,
      and
      the Company's management team would like to take this opportunity to express
      our
      cordial thanks to BDO Reanda for their valuable professional services to the
      Company.




This
      information was previously reported in our Current Report on Form 8-K filed
      on
      October 26, 2007.


**ITEM
        9A. CONTROLS AND PROCEDURES**
 (a)
                Evaluation
                    of disclosure controls and
                    procedures:
 The
          Company maintains disclosure controls and procedures designed to ensure
          that
          information required to be disclosed in the reports the Company files or
          submits
          under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is
          recorded, processed, summarized and reported within the time periods specified
          in the Securities and Exchange Commission's (“SEC”) rules and forms, and that
          such information is accumulated and communicated to the Company's management,
          including its chief executive officer (“CEO”) and chief financial officer
          (“CFO”), as appropriate, to allow timely decisions regarding required financial
          disclosure.
 
 In
          connection with the preparation of this annual report on Form 10-K (“Form
          10-K”), the Company carried out an evaluation as of December 31, 2007, under
          the
          supervision and with the participation of the Company's management, including
          the CEO and CFO, of the effectiveness of the design and operation of the
          Company's disclosure controls and procedures, as such term is defined in
          Rules
          13a-15(e) and 15d-15(e) under the Exchange Act. Based upon this evaluation,
          the
          CEO and CFO concluded that as of December 31, 2007 the Company's disclosure
          controls and procedures were not effective because of the material weaknesses
          described below under “Management's Annual Report on Internal Control over
          Financial Reporting.”
 
 To
          address these material weaknesses, the Company performed additional analyses
          and
          other procedures (described below under the subheading “Interim Measures”) to
          ensure that the Company’'s consolidated financial statements were prepared in
          accordance with generally accepted accounting principles in the United
          States
          (“GAAP”). Accordingly, Company management believes that the consolidated
          financial statements included in this Form 10-K fairly present in all material
          respects the Company’s financial condition, results of operations and cash flows
          for the periods presented and that this Form 10-K does not contain any
          untrue
          statement of a material fact or omit to state a material fact necessary
          to make
          the statements made, in light of the circumstances under which such statements
          were made, not misleading with respect to the periods covered by this report.
  (b)
              Management’s
                  report on internal control over financial
                  reporting.
  Management
        is responsible for establishing and maintaining adequate internal control
        over
        financial reporting for the Company, as such term is defined in
        Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over
        financial reporting is a process designed to provide reasonable assurance
        regarding the reliability of financial reporting and the preparation of
        financial statements for external reporting purposes in accordance with GAAP.


59


Management
        has conducted an assessment, including testing, of the effectiveness of the
        Company's internal control over financial reporting as of December 31,
        2007. In making its assessment, management used the criteria in *Internal
        Control—Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission
        ("COSO").
  A
        material weakness is a deficiency, or a combination of deficiencies, in internal
        control over financial reporting, such that there is a reasonable possibility
        that a material misstatement of the Company's
        annual or interim financial statements will not be prevented or detected
        on a
        timely basis. The following material weaknesses in internal control over
        financial reporting have been identified as of December 31,
        2007.
  1.
              Entity
                  level material weaknesses-control
                  environment
  We
        did
        not have an appropriate level of control consciousness as it relates to the
        establishment and maintenance of policies and procedures with respect to
        key
        internal controls. Effective controls were not designed and in place over
        the
        process related to identifying and accumulating all required information
        to
        ensure the completeness and accuracy of consolidated financial statements
        and
        disclosures as required by Rule 3-10 of Regulation S-X.
  2.
              Insufficient
                  resources for US GAAP compliance
 The
          Company currently lacks finance and accounting personnel who possess sufficient
          skills and experience to ensure that all transactions are accounted for
          in
          accordance with US GAAP.  In addition, we do not have sufficient internal
          financial policies and procedures to ensure that the existing personnel
          are
          capable of fulfilling the requirements of US GAAP reporting.  Amongst
          those deficiencies, revenue and cost recognition were affected most as
          evidenced
          by their significant adjustments as compared to our preliminary consolidated
          financial statements.
 3.
                Ineffective
                    information technology general control
 The
            Company currently does not have a formal documentation on the information
            technology general controls, including program development, program changes,
            computer operations, access to programs and data. ****
  60


Remediation
        Measures of Material Weaknesses
  To
        remediate the material weaknesses described above in “Management’s Report over
        Financial Reporting”, we have implemented or plan to implement the following
        measures, and will continue to evaluate and may in the future implement
        additional measures.
  1.
              We
                  planned remediation measures of hiring and training of personnel
                  who will
                  address these material weaknesses generally as we will have sufficient
                  personnel with knowledge, experience and training in the application
                  of
                  U.S. GAAP commensurate with our financial reporting
                  requirements;
 2.
              Audit
                  Committee and management will prioritize improvement of our internal
                  control over financial reporting. We
                  have a comprehensive training program in financial reporting on
                  U.S.G.A.A.P internally and our staff have enrolled in professional
                  accounting seminars.
 3.
              We
                  continue to retain the services of outside U.S. counselor to advise
                  on SEC
                  disclosure requirements and
                  at the same time, we have the staff training plan on the disclosure
                  requirement either internally or enrolment in professional
                  courses.
 4.
                The
                    Company is in the progress of implementing an ERP system which
                    we
                    considered would enable the Company to enhance its management
                    capability
                    on monitoring the Company's business operations. Besides, we
                    are in the
                    process of establishing a comprehensive IT short term development
                    plan and
                    long term strategic plan that are appropriately aligned with
                    business
                    objectives and include the following:
 ·
              IT
                  short term development plan: Business departments will initialize
                  the
                  information technology requests in accordance with their business
                  workflow, and senior management will develop implementation plans
                  and
                  procedures;
 ·
              IT
                  long term strategic plan: IT long term strategic plan development
                  is based
                  on corporate strategic requirement, including the IT goal and mission,
                  guidance, objectives and the Company’s actions.  The IT mission and
                  guidance drive how IT should implement and align with the Company’s
                  strategic goals;
 ·
              Senior
                  management of the Company will review and approve the IT strategic
                  plan.
  We
        also
        planned to develop an appropriate IT Organization and Relationships program
        to
        regulate IT organizational structure that adequately supports critical systems
        and segregation of duties, including the following:
  ·
              IT
                  managers to have adequate knowledge and experience to fulfill their
                  responsibilities to deliver high quality IT services;
 ·
              Significant
                  IT processes, controls and activities documented;
 ·
              Job
                  roles and responsibilities within the IT organization clearly defined
                  and
                  documented;
 ·
              IT
                  personnel to understand and accept their responsibilities regarding
                  internal controls; and
 ·
              IT
                  management to implement a division of roles and responsibilities,
                  segregation of duties, that reasonably prevents a single individual
                  from
                  subverting a critical process.
  We
        expect
        that the overall ERP implementation, together with the above mentioned policies
        and procedures, will be completed before September 2008.
  We
        believe that we are taking the steps necessary for remediation of the material
        weaknesses identified above, and we will continue to monitor the effectiveness
        of these steps and to make any changes that our management deems
        appropriate.
  This
        annual report does not include an attestation report of the Company’s registered
        public accounting firm regarding internal control over financial
        reporting.  Management’s report was not subject to attestation by the
        Company’s registered public accounting firm pursuant to temporary rules of
        the Securities and Exchange Commission that permit the Company to provide
        only
        management’s report in this annual report.
  (c)
        Changes in internal controls over financial reporting:
 
 For
        the
        fourth quarter ended December 31, 2007, there has been no change in the
        Company’s internal control over financial reporting that has materially
        affected, or is reasonably likely to materially affect, its internal control
        over financial reporting.


61


(d)
        Inherent Limitations on Effectiveness of Controls
 
 The
        Company’s management, including the CEO and CFO, does not expect that our
        disclosure controls or our internal control over financial reporting will
        prevent or detect all error and all fraud. A control system, no matter how
        well
        designed and operated, can provide only reasonable, not absolute, assurance
        that
        the control system’s objectives will be met. The design of a control system must
        reflect the fact that there are resource constraints, and the benefits of
        controls must be considered relative to their costs. Further, because of
        the
        inherent limitations in all control systems, no evaluation of controls can
        provide absolute assurance that misstatements due to error or fraud will
        not
        occur or that all control issues and instances of fraud, if any, within the
        Company have been detected. These inherent limitations include the realities
        that judgments in decision-making can be faulty and that breakdowns can occur
        because of simple error or mistake. Controls can also be circumvented by
        the
        individual acts of some persons, by collusion of two or more people, or by
        management override of the controls. The design of any system of controls
        is
        based in part on certain assumptions about the likelihood of future events,
        and
        there can be no assurance that any design will succeed in achieving its stated
        goals under all potential future conditions. Projections of any evaluation
        of
        controls effectiveness to future periods are subject to risks. Over time,
        controls may become inadequate because of changes in conditions or deterioration
        in the degree of compliance with policies or procedures.
  **ITEM
        9B. OTHER INFORMATION**
  None.


**PART
      III**




**ITEM
      10. DIRECTORS AND EXECUTIVE OFFICERS, CORPORATE GOVERNANCE AND BOARD
      INDEPENDENCE**




The
      following table and text set forth the names and ages of all directors and
      executive officers of the Company as of December 31, 2007  The Board of
      Directors is comprised of only one class.  All of the directors will serve
      until the next annual meeting of stockholders and until their successors are
      elected and qualified, or until their earlier death, retirement, resignation
      or
      removal. Also provided herein are brief descriptions of the business experience
      of each director and executive officer during the past five years and an
      indication of directorships held by each director in other companies subject
      to
      the reporting requirements under the federal securities laws.




Name
            
            
            Age
            
            
            PositionYi
                Song
            
            
            50
            
            Board
                Chairman and CEOHong
                Song
            
            
            44
            
            Director
                and COOKeith
                Hor
            
            
            43
            
            Chief
              Financial Officer (appointed as of March 7, 2007)Fong
                Heung Sang
            
            
            48
            
            Independent
              Director (appointed as of August 8, 2007)Hoi
                S. Kwok
            
            
            56
            
            Independent
              Director (appointed as of August 8, 2007)Tuen-Ping
                Yang
            
            
            61
            
            Independent
                Director




***Yi
      Song, Board Chairman, President and Chief Executive
      Officer*** ,
      established Diguang Electronics in 1996 and has been its chairman since
      inception. Mr. Song started his career in 1976 when he joined Hubei Wei Te
      Engine Factory as a technician. He was subsequently promoted to the position
      of
      engineer and thereafter, director of technology. From 1978 to 1979, he conducted
      research in the detecting fuse tube system of mathematical control together
      with
      a team of researchers from Wuhan Wireless Research Institute. From 1990 to
      1996,
      he worked in the field of the marketing and sales operation in Shenzhen Nanji
      Electromechanical Company Ltd. under Aidi (Group) Corporation of China. Mr.
      Song
      is one of the members of SID, or Society for Information Display, the Deputy
      Director (Commissioner) of Working Committee of Shenzhen Electronics
      Communication Experts, one of the members of China Flat Plate Display
      Association, and Deputy Director of Shenzhen Optoelectronic Industry
      Association. In 2003, he was awarded Excellent Entrepreneur by Shenzhen
      Government and in 2006 he was again awarded the same title. Mr. Song cooperated
      with Wuhan University to research and develop the computer detecting project
      of
      Motor Automation Control Engineering. Mr. Song has completed a CEO course from
      Tsinghua University that focused on International Enterprise Management and
      is
      now working towards receiving his MBA for the University of Southern Queensland.
      Mr. Song is Hong Song's older brother and Tuen-Ping Yang's nephew.




62





***Hong
      Song, Chief Operating Officer*** ,
      joined
      Diguang Electronics in January 2001 and became Chief Operating Officer in 2006.
      Prior to joining Diguang Electronics, Mr. Song was an engineer involved in
      the
      design of mining engineering equipment at Beijing Engineering Design &
Research Institute for Nonferrous Metals Industry (ENFI) from 1983 to 1990,
      where he was later promoted to project chief designer. Mr. Song has also held
      management positions at China National Non-Ferrous Metals Industry Corporation
      (CNNC) from 1990 to 1998. He obtained a degree in Mechanical Engineering from
      Xi’an Construction Technology University in 1983 and participated in
      post-graduate studies in Project Economic Analysis at Paris Mineral Industries
      University in Paris, France from 1998 to 1999. Mr. Song received his MBA from
      Peking University in 2001. Mr. Song is Yi Song’s younger brother and Tuen-Ping
      Yang’s nephew.





***Keith
      Hor*** , ***Chief
      Financial Officer,*** was
      our
      financial controller from October 2006 to March 2007, overseeing the corporate
      strategic planning, financial and accounting functions and he was appointed
      chief financial officer on March 7, 2007 followed the resgination of former
      chief financial officer on teh same date. Mr. Hor has extensive experience
      in
      corporate finance, treasury, accounting, auditing and financial planning
      experience in multi-national corporations. From April 2004 to September 2006,
      he
      was the group financial controller of and company secretary for Asia Tiger
      Group
      Ltd, a company listed in the Mainboard of Singapore Stock Exchange Ltd. and
      principally engaged in the trading and manufacturing of office equipment
      products and digital cameras with manufacturing facilities in Shenzhen, China.
      Prior to that, Mr. Hor had been the Vice President-Finance and
      Administration (Hong Kong & China) for five years in Jardine Logistics (HK)
      Ltd., a company principally engaged in air and sea forwarding services,
      warehouse, supply chain, inventory management and third party logistics
      services. He was a certified practicing accountant in Price Waterhouse from
      1988 to 1993. Mr. Hor obtained his Master of Finance from the Bernard M.
      Baruch College, the City University of New York and his Professional Diploma
      of
      Accountancy from the Hong Kong Polytechnic University. He is a fellow member
      of
      the Chartered Association of Accountants, UK and an associate member of Hong
      Kong Society of Accountants.




***Fong
      Heung Sang, Independent Director,*** appointed
      as of August 8, 2007, is a US Certified Public Accountant, and since December
      2006 has served as the Executive Vice President for Corporate Development of
      Fuqi International, Inc.(Nasdaq: FUQI) From January 2004 to November 2006,
      Mr.
      Fong served as the managing partner of Iceberg Financial Consultants, a
      financial advisory firm based in China that advises Chinese clients on raising
      capital in the United States. From March 2002 to March 2004, Mr. Fong served
      as
      Chief Financial Officer of Pacific Systems Control Technology, Inc. (NASDAQ:
      PFSY), a Chinese company listed on NASDAQ and later on OTCBB. From December
      2001
      to December 2003, Mr. Fong was the Chief Executive Officer of Holley
      Communications, a Chinese company that engaged in CDMA chip and cell phone
      design. Mr. Fong currently serves as an independent director and audit committee
      member of Universal Technology Holdings Limited (HK Stock Code 8091), a Hong
      Kong public company, and as an independent director and chairman of the audit
      committee of Kandi Technologies, Inc., a U.S. public company (Nasdaq: KNDI).
      Mr.
      Fong graduated from the Baptist University with a diploma in history in 1982.
      He
      has a MBA from the University of Nevada at Reno and a Masters in Accounting
      from
      the University of Illinois at Urbana-Champagne, and is a member of the American
      Institute of Certified Public Accountants (AICPA) appointed
      as of August 8, 2007, is a Certified Public Accountant, and since December
      2006
      has served as the Executive Vice President for Corporate Development of Fuqi
      International, Inc. From January 2004 to November 2006, Mr. Fong served as
      the
      managing partner of Iceberg Financial Consultants, a financial advisory firm
      based in China that advises Chinese clients on raising capital in the United
      States. From March 2002 to March 2004, Mr. Fong served as Chief Financial
      Officer of Pacific Systems Control Technology, Inc. (NASDAQ: PFSY), a Chinese
      company listed on NASDAQ and later on OTCBB. From December 2001 to December
      2003, Mr. Fong was the Chief Executive Officer of Holley Communications, a
      Chinese company that engaged in CDMA chip and cell phone design. Mr. Fong
      currently serves as an independent director and audit committee member of
      Universal Technology Holdings Limited (HK Stock Code 8091), a Hong Kong public
      company, and as an independent director and chairman of the audit committee
      of
      Stone Mountain Resources, Inc., a U.S. public company (OTCBB: SMOU). Mr. Fong
      graduated from the Baptist University with a diploma in history in 1982. He
      has
      a MBA from the University of Nevada at Reno and a Masters in Accounting from
      the
      University of Illinois at Urbana-Champagne.





63




***Hoi
      S. Kwok, Independent Director,*** appointed as of August 8, 2007, is the Dr. William Mong Endowed Chair Professor
      of Nanotechnology at the Hong Kong University of Science and Technology. He
      has
      served as a consultant to numerous companies, and currently for Bona Fide
      Instruments, Ltd (Hong Kong), Integrated Micro-displays Limited (Hong Kong),
      and
      Himax Displays (Taiwan). He has founded four companies, and most recently eLite
      Displays (Hong Kong) in 2004. He received his B.S. in Electrical Engineering
      from Northwestern University in 1973, and received his B.S. and Ph.D. in Applied
      Physics from Harvard University in 1974 and 1978, respectively





***Tuen-Ping
      Yang, Independent Director,*** has been
      the President of Cinema Systems, Inc. located in California since 1992.
      Previously, from 1984 to 1986, Mr. Yang served as the President of World
      Television Network and a Director of the Los Angeles National Bank. He has
      also
      been an Assistant Professor at Chinese Culture University, and a Manager of
      CMPC
      Taipei, Taiwan. He received his first Golden House Award (Taiwan’s Oscar Award)
      as the Best Film Director in 1972, and has received that award an additional
      three times since that date. He received his bachelor's degree from the National
      Taiwan University of Arts in 1967 and his master’s degree of Fine Arts from the
      University of California, Los Angeles, U.S. in 1976. Mr. Yang is Yi Song’s and
      Hong Song’s uncle.





***Significant
      Employees***





The
      following are employees of Diguang Electronics who are not executive officers,
      but who are expected to make significant contributions to our business:





***Gangyi
      Luo, General Manager of Large Sized LED Backlight SBU, Diguang
      Electronics,*** joined
      Diguang Electronics in 2000 as a Sales Engineer, the departmental manager and
      later Superintendent of Sales & Marketing.  He was a lecturer from 1996
      to 2000 at Kunming Railway Equipment School before joining Diguang Electronics
      in the Sales and Marketing Department as a Sales Engineer.  Based on his
      performance, Luo Gangyi was promoted to the position of Departmental Manager,
      then Superintendent of Sales and Marketing.  Luo Gangyi studied from 1992
      to 1996 in Southwest Jiaotong University and obtained an Engineering
      degree.





***Huade
      Zuo, General Manager of Small Sized Backlight SBU, Diguang
      Electronics,*** joined
      Diguang Electronics in 1999 as an engineer, manager, deputy chief engineer
      and
      later as Technology Superintendent. He is responsible for our technology,
      especially for the new technology and products.  From 1981 to 1999, he
      worked with Hubei Wei Te Engine Factory, where he was involved in product
      development. He has extensive experience in the design and production of moulds.
       Mr. Zou Huade graduated from Wuhan Wireless Industries College in 1981,
      specializing in the design and production of moulds.





***Maoshan
      Ding, General Manager of Conventional Backlight SBU, Diguang
      Electronics,*** joined
      Diguang Electronics in 2001 as R&D Engineer, R&D manager and later R
& D Superintendent. He was also a director of Diguang Electronics at the
      beginning of 2005.  He was engaged in working at Hu Bei Wei Te Engine
      Factory, as Technology Section Chief and Engineer from 1980 to 1988.  He
      was engaged in working on R&D fields for engine products, Honghu Mechanical
      Electronic Research Institute from 1988 to 2001.  He graduated from Hubei
      Electronic Industrial School with a major in Semi-conductors.




64





***Chen
      Rongguo, Director of Management Center, Diguang
      Electronics*** ,
      joined
      Diguang Electronics in 2003 as deputy chief economist and production manager
      and
      later as budget & control superintendent.  From 1980 to 1989, he worked
      with Hubei Wei Te Engine Factory where he held various positions in production,
      finance and corporate management functions.  In 1989, he joined Wan Ma
      Company as an assistant to the general manager where he was involved in the
      day-to-day operations of the Company.  In 1995, he was transferred to the
      holding company, Ji Li Group Company, as logistics control manager.  Mr.
      Chen studied economic management by remote learning in Beijing Institute of
      Economic Management from 1983 to 1986.





***Chao
      Guo, General Manager of Medium Sized Backlight SBU, Diguang
      Electronics*** ,
      jointed
      Diguang Electronics in January 2003.  From January 2003 up to now he
      worked as manager in Diguang Electronics for overseas sales in charge of
      Korea and Europe market development and because of his good achievements he
      was promoted as General Manager of Medium Sized backlight SBU on September
      1,
      2007. From July 2002 to December 2002 he worked for Dongguan Tailian Manufacture
      Co, LTD as PMC dept Assistant. Mr.Guo studied  in Xi An
      Europe Asia Foreign Language University, China  in July 2002 with
      Major as International Trade.




***Audit
      Committee Financial Expert***




The
      Company has a separately-designated a standing Audit Committee of the Board
      of
      Directors established in accordance with Section 3(a)(58)(A) of the Exchange
      Act, as amended. The Audit Committee consists of the following individuals,
      all
      of whom the Company considers to be independent, as defined under the SEC’s
      rules and regulations and the Nasdaq’s definition of independence: Fong Heung
      Sang, Hoi
      S.
      Kwokand Tuen-Ping Yang.  Mr. Fong
      Heung Sangis the Chairman of the Audit Committee. The Board has
      determined that Mr. Fong Heung Sang is the Audit Committee financial expert,
      as
      defined in Item 407(d0(5)of Regulation S-K, serving on the Company’s audit
      committee.




***Compensation
      Committee***




The
      Company has a separately-designated standing Compensation Committee of the
      Board
      of Directors. The Compensation Committee is responsible for determining
      compensation for the Company’s executive officers.  The Company’s three
      independent directors, as defined under the SEC’s rules and regulations and the
      Nasdaq’s definition of independence, Fong Heung Sang, Hoi
      S.
      Kwokand Tuen-Ping Yang serve on the Compensation Committee. Mr Hoi
      S.
      Kwokis the Chairman of the Compensation Committee.




***Nominating
      Committee***




The
      Company has a separately-designated standing Nominating Committee of the Board
      of Directors. Director candidates are nominated by the Nominating
      Committee.  The Nominating Committee will consider candidates based upon
      their business and financial experience, personal characteristics, expertise
      that is complementary to the background and experience of other Board members,
      willingness to devote the required amount of time to carrying out the duties
      and
      responsibilities of Board membership, willingness to objectively appraise
      management performance, and any such other qualifications the Nominating
      Committee deems necessary to ascertain the candidates ability to serve on the
      Board.  In general, in order to provide sufficient time to enable the
      Nominating Committee to evaluate candidates recommended by stockholders, the
      Corporate Secretary must receive the stockholder's recommendation no later
      than
      thirty (30) days after the end of the Company's fiscal year.  The Company’s
      independent directors, as defined under the SEC’s rules and regulations and the
      Nasdaq’s definition of independence, Fong Heung Sang, Hoi
      S.
      Kwok and Tuen-Ping Yang serve on the Nominating Committee.  Mr. Tuen
      Ping Yang is the Chairman of the Nominating Committee.




65




***Stockholders
      Communication***




Stockholders
      interested in communicating directly with the Board of Directors, or specified
      individual directors, may email the Company’s independent directors and they
      will review all such correspondence and will regularly forward to the Board
      copies of all such correspondence that deals with the functions of the Board
      or
      committees thereof or that he otherwise determines requires their
      attention.  Directors may at any time review all of the correspondence
      received that is addressed to members of the Board of Directors and request
      copies of such correspondence.  Concerns relating to accounting, internal
      controls or auditing matters will immediately be brought to the attention of
      the
      Audit Committee and handled in accordance with procedures established by the
      Audit Committee with respect to such matters.




***Code
      of Ethics and Conduct***




The
      Board
      of Directors has adopted a Code of Ethics and Conduct which is applicable to
      all
      officers directors and employees.  The Code of Ethics and Conduct filed
      herewith is incorporated by reference from the Code of Ethics filed as an
      exhibit to the Registration Statement on Amendment No. 1 to Form S-1 filed
      with
      the Commission on October 30, 2006.




***Section
      16(a) Beneficial Ownership Compliance***




Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
      executive officers and directors and persons who own more than 10% of a
      registered class of the Company’s equity securities to file with the Securities
      and Exchange Commission initial statements of beneficial ownership, reports
      of
      changes in ownership and annual reports concerning their ownership of common
      stock and other of the Company’s equity securities, on Forms 3, 4 and 5
      respectively. Executive officers, directors and greater than 10% stockholders
      are required by Commission regulations to furnish the Company with copies of
      all
      Section 16(a) reports they file.  To the best of the Company’s knowledge
      (based solely upon a review of the Form 3, 4 and 5 filed), no officer, director
      or 10% beneficial shareholder failed to file on a timely basis any reports
      required by Section 16(a) of the Securities Exchange Act of 1934, as
      amended.




**ITEM
      11. EXECUTIVE COMPENSATION**




The
      Company’s Compensation Committee is empowered to review and approve the annual
      compensation and compensation procedures for the executive officers of the
      Company. The
      primary goals of the Compensation Committee of our board of directors with
      respect to executive compensation are to attract and retain the most talented
      and dedicated executives possible and to align executives’ incentives with
      stockholder value creation. The Compensation Committee evaluates individual
      executive performance with a goal of setting compensation at levels the
      committee believes are comparable with executives in other companies of similar
      size and stage of development operating in similar industry while taking into
      account our relative performance and our own strategic goals.




We
      have
      not retained a compensation consultant to review our policies and procedures
      with respect to executive compensation. We conduct an annual review of the
      aggregate level of our executive compensation, as well as the mix of elements
      used to compensate our executive officers. Based on the compensations committee
      general industry knowledge of various companies in the electronics industry,
      we
      believe the salaries and bonuses of the key officers and employees of Diguang
      are fair and reasonable.




66




**Elements
      of Compensation**




Executive
      compensation consists of following elements:




***Base
      Salary.*** Base
      salaries for our executives are established based on the scope of their
      responsibilities, taking into account competitive market compensation paid
      by
      other companies for similar positions. Generally, we believe that executive
      base
      salaries should be targeted near the median of the range of salaries for
      executives in similar positions with similar responsibilities at comparable
      companies, in line with our compensation philosophy. Base salaries are reviewed
      annually, and adjusted from time to time to realign salaries with market levels
      after taking into account individual responsibilities, performance and
      experience. The last meeting of the Compensation Committee was held on March
      20,
      2007.





***Discretionary
      Annual Bonus.*** The
      Compensation Committee has the authority to award discretionary annual bonuses
      to our executive officers under the Compensation Committee Charter. So far,
      no
      discretionary bonus has been awarded. Bonuses, if they are awarded, are intended
      to compensate officers for achieving financial and operational goals and for
      achieving individual annual performance objectives. These objectives vary
      depending on the individual executive, but relate generally to strategic factors
      such as the financial performance, results of operation and per share
      performance of our common stock.





Our
      chief
      executive officer and chief operating officer are eligible for a discretionary
      annual bonus, the specific amount of which will be determined by the
      Compensation Committee. The actual amount of discretionary bonus is determined
      following a review of each executive’s individual performance and contribution
      to our strategic goals conducted during the first quarter of each fiscal year.
      The Compensation Committee has not fixed a maximum payout for any officers’
annual discretionary bonus.




***Long-Term
      Incentive Program.*** We
      believe that long-term performance is achieved through an ownership culture
      that
      encourages such performance by our key employees through the use of stock
      options. Our stock compensation plan has been established to provide certain
      of
      our employees with incentives to help align those employees’ interests with the
      interests of stockholders. The Compensation Committee believes that the use
      of
      stock options offers the best approach to achieving our compensation goals.
      We
      have not adopted stock ownership guidelines, and our stock compensation plan
      has
      provided the principal method for our key employees to acquire equity interests
      in our company. We believe that the annual aggregate value of these awards
      should be set near competitive median levels for comparable
      companies.




***Options.*** Our
      2006 Stock Incentive Plan authorizes us to grant options to purchase shares
      of
      common stock to our employees, directors and consultants. Our Compensation
      Committee was the administrator of the stock option plan until the authority
      was
      delegated by the Board to our chief operating officer, Song Hong in 2007. Stock
      option grants were made on February 25, 2006 or at the commencement of
      employment. The board of directors reviewed and approved the stock option to
      our
      key employees, including our chief financial officer, and our independent
      directors on February 25, 2006 and the granting of stock options subsequent
      to
      that was administered and approved by the Compensation Committee, based upon
      a
      review of the competitive compensation of the key officers and the key
      employees, its assessment of individual performance, a review of each
      executive’s existing long-term incentives, and retention considerations. In
      2006, our former chief financial officer, the only named executive officer,
      was
      awarded stock options in the amounts indicated in the section entitled “Grants
      of Plan Based Awards”. These grants were made to encourage an ownership culture
      among our employees. Neither the chief executive officer nor the chief operating
      officer has been granted any stock options. Stock options granted by us have
      an
      exercise price of $5.00 per share , expire
      ten years after the date of grant and with
      monthly vesting at the end of each month after March 1, 2006 for the three
      independent directors and yearly vesting for the chief financial officer and
      other employees; the options issued to the independent directors
      and the chief financial officerand our other employees vest at a rate of
      1/36th per month, and 1/4th per year, respectively. During 2007, the former
      chief financial officer and two former independent directors resigned and all
      option awards had been expired as of December 31, 2007, except
      20,000 shares have vested with the former chief financial officer at the time
      of
      her resignation on March 8, 2007. In 2007, our current chief financial
      officer, the only named executive officer, was award stock options in the
      amounts indicated in the section entitled “Grants of Plan Based
      Awards”.




67





***2006
      Stock Incentive Plan.*** Our
      2006 Stock Incentive Plan authorizes us to grant incentive stock option,
      nonstatutory stock option, stock options, cash awards and stock awards to our
      employees, directors and consultants. Mr. Song Hong, our chief operating
      officer, is the administrator of the plan. If and when stock option awards
      are
      granted, they will be made on March 1 annually and, occasionally, to meet other
      special retention or performance objectives. Mr. Song Hong will provide the
      stock option award plans to the Compensation Committee on the executive officers
      and other key employees, etc. based upon the competitive compensation of the
      key
      officers and the key employees, its assessment of individual performance, a
      review of each executive’s existing long-term incentives, and retention
      considerations. Periodic stock option award plan to eligible employees, etc.
      will be regularly prepared by Mr. Song Hong for the approval of the Compensation
      Committee.




***Stock
      Appreciation Rights.*** We
      currently do not have any Stock Appreciation Rights Plan that authorizes us
      to
      grant stock appreciation rights.




***Other
      Compensation.*** Our
      chief executive officer and chief operating officer who were parties to
      employment agreements prior to the filing of this annual report will continue
      to
      be parties to such employment agreements in their current form until such time
      as the Compensation Committee determines in its discretion that revisions to
      such employment agreements are advisable. There has been no employment agreement
      with our previous chief financial officer. Other than the annual salary
      stipulated in the employment agreements of our chief executive officer and
      chief
      operating officer and the bonus that may be awarded to them at the discretion
      of
      the Compensation Committee, and other than the annual salary and the stock
      options granted to our chief financial officer, we do not have any other
      benefits and perquisites for our executive officers; however, the Compensation
      Committee in its discretion may provide benefits and perquisites to these
      executive officers if it deems it advisable. We currently have no plans to
      change the employment agreements (except as required by law or as required
      to
      clarify the benefits to which our executive officers are entitled as set forth
      herein) or to extend benefits and perquisites.


**SUMMARY
        COMPENSATION TABLE**




Name
                and principal position
              (a)
            
            Year
              (b)
            
            Salary
              ($)
              (c)
            
            Bonus
              ($)
              (d)
            
            Stock
                awards
              ($)
              (e)
            
            Option
                awards1
              ($)
              (f)
            
            Non-equity
                incentive plan compensation
              ($)
              (g)
            
            Change
                in pension value and non-qualified deferred compensation
                earnings
              ($)
              (h)
            
            All
                other compensation
              ($)
                2
              (i)
            
            Total
              ($)
              (j)Yi
                Song
              Chief
                Executive Officer and Chairman of the Board
            
            
            2007
              2006
              2005
            
            
            218,660
              250,000
              16,890
            
            
            -
              -
              -
            
            
            -
              -
              -
            
            
            -
              -
              -
            
            
            -
              -
              -
            
            
            -
              -
              -
            
            
            -
              -
              -
            
            
            218,660
              250,000
              16,890Keith
                Hor
              Chief
                Financial Officer
              (appointed
                on March 8, 2007)
            
            
            2007
              2006
              2005
            
            
            117,283
              -
              -
            
            
            
            
            
            
            
            
            16,795
            
            
            
            
            
            
            
            
            
            
            
            134,078
              -
              -Jackie
                You Kazmerzak
              Chief
                Financial Officer
              (resigned
                on March 8, 2007)
            
            
            2007
              2006
              2005
            
            
            27,599
              100,000
              -
            
            
            -
              -
              -
            
            
            -
              -
              -
            
            
            36,991
              184,954
              -
            
            
            -
              -
              -
            
            
            -
              -
              -
            
            
            -
              -
              -
            
            
            64,590
              284,954
              -Hong
                Song
              Chief
                Operating Officer
            
            
            2007
              2006
              2005
            
            
            174,554
              200,000
              13,122
            
            
            -
              -
              -
            
            
            -
              -
              -
            
            
            -
              -
              -
            
            
            -
              -
              -
            
            
            -
              -
              -
            
            
            -
              -
              -
            
            
            174,554
              200,000
              13,122




Jackie
          You Kazmareck resigned as CFO on March 8,2007 and 60,000 shares were forfeited
          and 20,000 shares were vested at the time of termination under the Stock
          Option
          Plan . The fair value of the vested 20,000 shares was $221,945 and its
          remaining
          balance of $36,991 was amortized in 2007.


68




Mr
      Yi
      Song entered into an employment letter agreement with us as of April 19, 2006,
      to serve as our Chief Executive Officer from March 17, 2006 through March 17,
      2009, the “Initial Term”, and shall continue after that for an unspecified term.
      During the Initial Term, the employment relationship may be terminated by:
      (i)
      Yi Song for any reason upon 30 days notice, or (ii) us without cause, as defined
      in the employment agreement, upon 30 days notice or (iii) us for cause, as
      defined in the employment agreement, with immediate effect. Following the
      Initial Term, the employment relationship may be terminated by Yi Song or us
      according to our policies at the time of termination. Yi Song shall receive
      a
      monthly base salary of US$20,833.33, which is the RMB equivalent of $250,000
      on
      an annualized basis, which may be increased during the Initial Term on each
      anniversary of March 17, 2006.




69




Mr
      Hong
      Song entered into an employment letter agreement with us as of April 19, 2006,
      to serve as our Chief Operating Officer from March 17, 2006 through March 17,
      2009, the “Initial Term”, and shall continue after that for an unspecified term.
      During the Initial Term, the employment relationship may be terminated by:
      (i)
      Hong Song for any reason upon at least 30 days written notice, or (ii) us
      without cause, as defined in the employment agreement, upon 30 days written
      notice, or (iii) us for cause, as defined in the employment agreement, with
      immediate effect. Following the Initial Term, the employment relationship may
      be
      terminated by Hong Song or us according to our policies at the time of
      termination. Hong Song shall receive a monthly base salary of US$16,666.67,
      which is the RMB equivalent of US$200,000 on an annualized basis, which may
      be
      increased during the Initial Term on each anniversary of March 17,
      2006.




Mr.Keith
      Hor entered into an employment agreement, (the "Employment Agreement"), on
      March
      7, 2007, to serve as our Chief Financial Officer with effect from March 8,
      2007.
      Pursuant to the Employment Agreement, Mr. Hor shall receive a salary of
      US$10,000 per month, payable pursuant to our normal payroll practices. In
      addition, Mr. Hor was granted options to purchase the equivalent of 20,000
      of
      our shares under our 2006 Stock Incentive Plan. The vesting schedule of his
      options is as follows: 25% of the shares subject to the stock options shall
      vest
      on each of the first four anniversary of March 1, 2008.




We
      shall
      also pay Messrs. Yi Song , Hong Song and Keith Hor such bonuses as may
      be determined from time to time by our Compensation Committee. The amount of
      annual bonus payable to them may vary at the discretion of the Compensation
      Committee. In determining the annual bonus to be paid to them, the Compensation
      Committee may, consider all factors they deem to be relevant and
      appropriate.




Grants
      of
      Plan-Based Awards





Estimated
                  future payouts under non-equity incentive plan awards
              
              
              Estimated
                  future payouts under equity incentive plan awards
              
              
              All
                  other stock awards; number of shares of
              
              
              All
                  other option awards; number of securities
              
              
              Exercise
                  or base price of
              
              
              Grant
                    date fair value of stockName
              
              
              Grant
                date
              
              
              Threshold
                ($)
              
              
              Target
                ($)
              
              
              Maxi-mum
                ($)
              
              
              Threshold
                (#)
              
              
              Target
                (#)
              
              
              Maxi-mum
                (#)
              
              
              stock
                or
                  units
                (#)
              
              
              underlying
                options
                (#)
              
              
              option
                  awards
                ($/Sh)
              
              
              and
                  option awards(a)
              
              
              (b)
              
              
              (c)
              
              
              (d)
              
              
              (e)
              
              
              (f)
              
              
              (g)
              
              
              (h)
              
              
              (i)
              
              
              (j)
              
              
              (k)
              
              
              (l)Song
                  Yi
                Chief
                  Executive Officer and Chairman of the Board
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Keith
                  Hor
                Chief
                  Financial Officer
              
              
              March
                  1, 2007
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              20,000
              
              
              
              
              $
              5
              
              $
              5Jackie
                  You Kazmerzak
                Chief
                  Financial Officer
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Song
                  Hong
                Chief
                  Operating Officer
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -




70




Outstanding
      Equity Awards at Fiscal
      Year-End




Option
                awards
            
            
            Stock
                awardsNumber
                of securities underlying
            
            
            Number
                of securities underlying
            
            
            Equity
                incentive plan awards: number of
                securities
            
            
            
            
            
            
            
            
            Number
                of shares or units of stock
            
            
            Market
                value of shares or units of stock
            
            
            Equity
                incentive plan awards: number of unearned
                shares units or other
            
            
            Equity
                incentive plan awards: market or payout
                value of unearned shares, units or other rightsName2
            
            
            unexercised
                options exercisable
              (#)
            
            
            unexercised
              options
              unexercisable
              (#)
            
            
            underlying
              unexercised unearned options
              (#)
            
            
            Option
                exercise price
              ($)
            
            
            Option
                expiration
              date
            
            
            that
                have not vested
              (#)
            
            
            that
                have not vested
              ($)
            
            
            rights
                that have not vested(#)
            
            
            that
              have not vested
              ($)(a)
            
            
            (b)
            
            
            (c)
            
            
            (d)
            
            
            (e)
            
            
            (f)
            
            
            (g)
            
            
            (h)
            
            
            (i)
            
            
            (j)Song
                Yi
              Chief
                Executive Officer and Chairman of the Board
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Keith
                Hor
              Chief
                Financial Officer
            
            
            5,000
            
            
            -
            
            
            15,000
            
            
            5
            
            
            February
                28, 2017
            
            
            
            
            
            
            
            
            15,000
            
            
            32,700Jackie
                You Kazmerzak
              Chief
                Financial Officer
            
            
            20,000
            
            
            -
            
            
            -
            
            
            5
            
            
            February
                25, 2016
            
            
            -
            
            
            -
            
            
            -
            
            
            -Song
                Hong
              Chief
                Operating Officer
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -




Pursuant
      to the terms of the Amended and Restated Share Exchange Agreement, we assumed
      Diguang’s outstanding 2006 stock incentive plan covering options totaling the
      equivalent of 1,500,000 shares of our common stock. Options equivalent to
      approximately 566,000 shares of our common stock were issued under the Diguang
      2006 Option Plan before the Share Exchange closed as follows: the equivalent
      of
      20,000 and 80,000 shares were granted to Diguang’s current and former chief
      financial officer in 2007 Agreement, as of March 7, 2007, the date the former
      chief financial officer resigned, 20,000 of her options have been vested and
      are
      exercisable but none of them has been exercised as of March 7, 2007. Under
      the
      Stock Option Agreement, the remaining of the 60,000 shares subject to the option
      that were unvested and hence unexercisable shall terminate and expire effective
      immediately on March 7, 2007, the date of her resignation. Under the Stock
      Option Agreement, 16,795 of his options have been vested and are exercisable
      but
      none of them has been exercised as March 1, 2008 . Neither the Chief Executive
      Officer nor the Chief Operating Officer was or is granted any
      options. ****




71




Director
        Compensation




Name3
            
            
            Fees
                earned or paid in cash
              ($)
            
            
            Stock
                awards
              ($)
            
            
            Option
                awards1
              ($)
            
            
            Non-equity
                incentive plan compensation7
              ($)
            
            
            Change
                in pension value and nonqualified deferred compensation
                earnings8
            
            
            All
                other compensation2
              ($)
            
            
            Total
              ($)(a)
            
            
            (b)
            
            
            (c)
            
            
            (d)
            
            
            (e)
            
            
            (f)
            
            
            (g)
            
            
            (h)Remo
                Richli
            
            
            18,300
            
            
            30,824
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            49,124Gerald
                Beemiller
            
            
            12,467
            
            
            30,824
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            43,291Tuen-Ping
                Yang
            
            
            24,000
            
            
            50,962
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            74,962Fong
                Heung Sang
            
            
            18,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            18,000Hoi
                S. Kwok
            
            
            12,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            12,000


72




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




As
      used
      in this section, the term beneficial ownership with respect to a security is
      defined by Rule 13d-3 under the Securities Exchange Act of 1934, as amended,
      as
      consisting of sole or shared voting power, including the power to vote or direct
      the vote, and/or sole or shared investment power, including the power to dispose
      of or direct the disposition of, with respect to the security through any
      contract, arrangement, understanding, relationship or otherwise, subject to
      community property laws where applicable.




As
      of
      December 31, 2006, we had a total of 22,593,000 shares of common stock
      outstanding, which are our only issued and outstanding voting equity securities.
       As of December 2007, we had repurchased a total of 252,300 shares and we
      had a total of 22,340,700 shares of common stock outstanding.




The
      following table sets forth, as of Februrary
      28, 2008: (a) the names and addresses of each beneficial owner of more
      than five percent (5%) of our common stock known to us, the number of shares
      of
      common stock beneficially owned by each such person, and the percent of our
      common stock so owned; and (b) the names and addresses of each director and
      executive officer, the number of shares our common stock beneficially owned,
      and
      the percentage of our common stock so owned, by each such person, and by all
      of
      our directors and executive officers as a group. Each person has sole voting
      and
      investment power with respect to the shares of our common stock, except as
      otherwise indicated. Beneficial ownership consists of a direct interest in
      the
      shares of common stock, except as otherwise indicated.





**Name
                of Beneficial Owner**
            
            **Amount
                of Beneficial Ownership**
            
            **Percentage
                Ownership****(1)****Sino
                Olympics Industrial Limited**
            
            
            15,590,000
            
            
            69
            %**Yi
                Song (2)**
            
            
            15,590,000
            
            
            69
            %**Hong
                Song**
            
            
            *
            
            
            ***Tuen-Ping
                Yang**
            
            
            *
            
            
            ***Fong
                Heung Sang (appointed on August 8, 2007)****Hoi
                S. Kwok (appointed on August 8, 2007)****Remo
                Richli (resigned on June 20, 2007)**
            
            
            *
            
            
            ***Gerald
                Beemiller (resigned on June 22, 2007)**
            
            
            *
            
            
            ***Jackie
                You Kazmerzak (resigned on March 8, 2007)**
            
            
            *
            
            
            ***Keith
                Hor (appointed on March 8, 2007)**All
                Officers & Directors as a Group
            
            
            15,590,000
            
            
            69
            %





(1)All percentages have been rounded up to the nearest one hundredth
                of one
                percent.
              
              (2)Mr. Yi Song is the majority stockholder of Sino Olympics, as such
                he may
                be viewed as having beneficial ownership over all 15,590,000 shares
                owned
                by Sino Olympics.





73


*
      Individual owns less than 1% of our securities.




Pursuant
      to the terms of the Share Exchange, and as described above, we assumed Diguang’s
      2006 Option Plan, which includes a total of 1,500,000 shares.  Employees,
      as well as officers and directors, will be eligible to receive shares under
      Diguang’s 2006 Option Plan.




**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**




***Transaction
      with management and others***





Prior
      to
      the Share Exchange, Diguang Holdings paid a dividend in the amount $0.1624
      per
      share of common stock, an aggregate of $2,078,744. On December 12, 2005, the
      Board of Diguang Technology resolved to distribute dividend of $2.1 million
      from
      its retained earnings to Sino Olympics. According to the board resolution,
      Sino
      Olympics will receive the payment of approximately $111,140, after netting
      the
      amount due from and to related parties, at the end of February 2006 to holders
      of its common stock.  The record date for the dividend was December 12,
      2005.  As of that date, Diguang’s officers and directors beneficially owned
      all of its stock.





As
      part
      of the Share Exchange, Sino Olympics received 17,000,000 shares of our common
      stock in exchange for its shares of Diguang Holdings’ common stock.  Yi
      Song and Hong Song, two of our officers and directors as of the close
      of the Share Exchange, own Sino Olympics.




We
      are
      continually looking for opportunities to expand our business through either
      internal growth or by merger and acquisition.  During the process of
      understanding Diguang Holdings’ business operation, we noted that Sino Olympics
      owns currently owns a 32.5% interest in North Diamond, Ltd., a British Virgin
      Islands corporation, which owns a wholly foreign owned enterprise. Sino Olympics
      also has an option to acquire an additional 32.5% interest in North Diamond
      common stock from another stockholder for a total purchase price of $487,500.
      The wholly foreign owned enterprise will produce backlight products which are
      different from those we currently produce, but which we would like to produce
      in
      the near future. Thus, we entered into a Purchase Option Agreement, the “Option
      Agreement”, with Sino Olympics, Diguang Electronics, and Yi Song and Hong Song,
      the “Songs”, giving us the right to acquire the interests held in North Diamond
      from Sino Olympics. Under the Option Agreement, we have the right to purchase
      from Sino Olympics its entire equity interest in North Diamond, including the
      option to acquire the additional 32.5% ownership, for a period of one year
      from
      the date of the Option Agreement. The consideration to be paid for the exercise
      of the option is the amount that Sino Olympics paid for its interest, plus
      interest at the rate of 6% per annum, plus the assumption of any remaining
      obligation of Sino Olympics to contribute registered capital to North Diamond.
      In consideration for the Sino Olympics' entry into the Option Agreement, we
      and
      Shenzhen Diguang Electronics Co., Ltd. have agreed to allow Yi Song and
      Hong Song to devote such time and attention to the business of North Diamond
      as
      they deem appropriate, subject to the oversight of the independent members
      of
      our board of directors. In view of the possibility that we are going to own
      a
      significant interest in this joint venture, we believe that it is in our best
      interest to have Yi Song and Hong Song devote a portion of their business time
      and efforts to the joint venture.




74





On
      May
      12, 2006, we entered into an Amended and Restated Purchase Option Agreement,
      the
“Amended Agreement”, which superceded the Option Agreement. The parties to, and
      the terms and conditions of, the Amended Agreement are wholly identical to
      the
      Option Agreement except in the following respects. First, Sino Olympics’s
      current ownership of a 32.5% equity interest, “the Equity Interest”, in North
      Diamond is in exchange for a total contribution of $487,500 in registered
      capital, and not as was stated in the Option Agreement, in exchange for a total
      contribution of $20,000,000 in authorized capital. Second, Sino Olympics granted
      us the option to purchase, on or before May 12, 2007, all of the Equity
      Interest, including the option to acquire the additional 32.5% ownership in
      North Diamond, and not as was stated in the Option Agreement, on or before
      April
      21, 2007. Third, the interest at the rate of 6% per annum which forms part
      of
      the consideration applies to both the Equity Interest and the additional 32.5%
      interest in North Diamond. Furthermore, the Amended Agreement elaborated that
      the interest at the rate of 6% per annum shall commence on the date of payment
      made by Sino Olympics towards its registered capital of North Diamond and shall
      end on the date we exercise the option. Finally, the Amended Agreement shall
      terminate if we fail to exercise the option prior to May 12, 2007, and not
      as
      stated in the Option Agreement, prior to April 21, 2007.





As
      of
      March 31, 2006, Sino Olympics infused only $487,500 into North Diamond,
      accounting for 32.5% interest whereas the other investor infused $1.0125
      million, accounting for 67.5% interest based on the actually infused capital.
      On
      June 27, 2006, Sino Olympics injected an additional $1 million in North Diamond.
      So far Sino Olympics has made a total of $1,487,500 investment, accounting
      for
      59.5% ownership out of $2.5 million of infused capital in North Diamond. As
      of
      September 30, 2006, Sino Olympics has injected another $392,857 and so
      reached its targeted 65% current equity ownership of North Diamond before the
      exercise of the purchase option.





On
      May
      15, 2006, our board of directors, which included all the independent directors,
      passed resolutions to approve our acquisition of the Equity Interest and Sino
      Olympics’s additional 32.5% ownership in North Diamond.





On
      January 3, 2007, we exercised the option and the purchase price determined
      in
      accordance with the Amended and Restated Purchase Option Agreement was
      $1,977,864.





On
      July
      18, 2006, Yi Song entered into a license agreement with us to grant us the
      right
      to use his patents free of charge pending the transfer of the patents to
      us.




75




During
      the normal course of business, transactions involving the movement of funds
      among certain related parties have occurred from time to time. The details
      of
      amounts due from and due to related parties are summarized as follows:





**Related
      Party Relationships**


**Name
                  of Related Parties**
              
              **Relationship
                  with the Company**Mr.
                  Yi Song
              
              One
                  of the shareholders of the CompanyMr.
                  Hong Song
              
              One
                  of the shareholders of the CompanyShenzhen
                  Diguang Engine & Equipment Co., Ltd., a China based
                  entity
              
              80%
                  owned by Mr. Yi Song and 20% owned by Mr. Hong SongSino
                  Olympics Industrial Limited
              
              The
                  representative of Song’s
                  brothers


The
        roll
        forward details of amount due to related parties were summarized as
        follows:
 
 **Amount
                  due to**
              
              Diguang
                  Engine
              
              Stockholders
              
              TotalBalance
                  at January 1 , 2006
              
              $
              1,706,165
              
              $
              -
              
              $
              1,706,165Loan
              
              
              1,358,261
              
              
              -
              
              
              1,358,261Accrued
                  interest
              
              
              13,738
              
              
              -
              
              
              13,738Payments
                  made
              
              
              (1,779,705
              )
              
              -
              
              
              (1,779,705
              )Translation
                  adjustment
              
              
              16
              
              
              -
              
              
              16Balance
                  at December 31, 2006
              
              $
              1,298,475
              
              $
              -
              
              $
              1,298,475Accrued
                  interest
              
              
              77,113
              
              
              -
              
              
              77,113Purchase
                  price for acquisition of 65% interest
                in
                  North diamond
              
              
              -
              
              
              1,977,864
              
              
              1,977,864Purchase
                  price for acquisition of 100% interest in Dongguan Diguang
                  S&T
              
              
              -
              
              
              4,200,000
              
              
              4,200,000Purchase
                  price paid
              
              
              -
              
              
              (3,977,864
              )
              
              (3,977,864
              )Translation
                  adjustment
              
              
              90,202
              
              
              -
              
              
              90,202Balance
                  at December 31, 2007
              
              $
              1,465,790
              
              $
              2,200,000
              
              $
              3,665,790
  On
        December 29, 2007, Diguang International Holdings Ltd., or “Diguang
        International Holdings”, our wholly-owned subsidiary, entered into a sale and
        purchase agreement, or the “Agreement”, with Sino Olympics Industrial Limited,
        or “Sino Olympics”, and Shenzhen Diguang Engine & Equipment Co., Ltd., or
“Shenzhen Diguang”, to acquire a 100% interest in Dongguan Diguang Electronics
        Science and Technology Co. Ltd., or “Dongguan S&T”. The closing date of the
        acquisition was December 30, 2007, which was deemed to be the date for the
        purpose of financial consolidation. Pursuant to local law, the acquisition
        is
        not effective until the registration of change of shareholders is approved
        by
        the Industrial and Commercial Bureau in Donggu an,
        Administration of Foreign investment in enterprises in Dongguan and State
        Administration in Foreign Exchange. Such approval is expected to be obtained
        within six months.
  The
        above
        acquisition was approved by the independent directors of the Registrant at
        the
        board of directors’ meeting held on November 28, 2007.
 
 According
        to the Agreement dated December 29, 2007, the consideration for the sale
        and
        purchase is US$4,200,000 and the initial payment is US$2,000,000, followed
        by 4
        equal installments of US$550,000 payable on or before June 30,
        2009.




76




**ITEM
      14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.**


The
          following table sets forth the aggregate fees for professional audit services
          rendered by BDO Shenzhen Dahua Tiancheng, BDO Reanda for the audit of the
          Company’s annual financial statements for the fiscal years 2007 and 2006
          respectively, and fees billed for other services provided by BDO Shenzhen
          Dahua
          Tiancheng and Chiu & Wang, Inc., BDO Reanda and Chiu & Wang, Inc. for
          fiscal years 2007 and 2006 respectively, and other fees also include the
          404
          consulting fee provided by E&Y in 2007. The Audit Committee has approved all
          of the following fees.
 Fiscal
                    Year Ended2007
                
                2006Audit
                    Fees
                
                $
                275,090
                
                $
                207,700Audit
                    related Fees
                
                
                40,000
                (1)
                
                176,000Tax
                    Fees
                
                
                36,600
                (2)
                
                5,000404
                    consulting Fees
                
                
                95,500
                
                
                -Total
                    Fees
                
                $
                447,250
                
                $
                388,700
  (1)
                  Includes
                      accounting and reporting consultations related to
                      acquisition.
  (2)
                Includes
                    fees for service related to tax compliance services, preparation
                    and
                    filing of tax returns and tax consulting
                    services.
 
 77




**Audit
      Committee’s Pre-Approval Policy**




During
      fiscal year ended December 31, 2007, the Audit Committee of the Board of
      Directors adopted policies and procedures for the pre-approval of all audit
      and
      non-audit services to be provided by the Company’s independent auditor and for
      the prohibition of certain services from being provided by the independent
      auditor.  The Company may not engage the Company’s independent auditor to
      render any audit or non-audit service unless the service is approved in advance
      by the Audit Committee or the engagement to render the service is entered into
      pursuant to the Audit Committee’s pre-approval policies and procedures.  On
      an annual basis, the Audit Committee may pre-approve services that are expected
      to be provided to the Company by the independent auditor during the fiscal
      year.  At the time such pre-approval is granted, the Audit Committee
      specifies the pre-approved services and establishes a monetary limit with
      respect to each particular pre-approved service, which limit may not be exceeded
      without obtaining further pre-approval under the policy.  For any
      pre-approval, the Audit Committee considers whether such services are consistent
      with the rules of the Securities and Exchange Commission on auditor
      independence. There was no audit committee for the fiscal year ended
      2005.




**PART
      IV**




**ITEM
      15.   EXHIBITS AND FINANCIAL STATEMENT
      SCHEDULES.**




(a) **List
      of Financial Statements/Schedules**




**** **** ***Consolidated
      Financial Statements***




Consolidated **** Balance
      Sheets





Consolidated **** Statements
      of Income and Comprehensive Income





Consolidated **** Statements
      of Stockholders’ Equity





Consolidated **** Statements
      of Cash Flows





Notes
      to
      Consolidated Financial Statements




(b) **Exhibits**




The
      following is a list of exhibits filed as part of this Annual Report on Form
      10-K. Where so indicated by footnote, exhibits that were previously filed are
      incorporated by reference.




**Exhibit
                No.**
            
            **Description**2.1
            
            Amended
                and Restated Share Exchange Agreement with Online, Diguang, Terri
                Wonderly, Sino Olympics, JLF Partners I, LP, JLF Partners II, LP,
                JLF
                Offshore Fund, Ltd., Craig Samuels and Hilltop Holdings Company,
                LP, dated
                March 17, 2006 (incorporated by reference from Form 8-K filed on
                March 21,
                2006)3.1(i)
            
            Amended
                and Restated Articles of Incorporation (incorporated by reference
                from
                Form S-1/A filed on October 30, 2006)3.1(ii)
            
            Amended
                and Restated By-laws (incorporated by reference from Form S-1/A filed
                on
                October 30, 2006)4.1
            
            Amended
                and Restated Share Exchange Agreement with Online, Diguang International
                Holdings Limited, Terri Wonderly, Sino Olympics, JLF Partners I,
                LP, JLF
                Partners II, LP, JLF Offshore Fund, Ltd., Craig Samuels and Hilltop
                Holdings Company, LP dated March 17, 2006 (Exhibit 2.1)




78


4.2
            
            Placement
                Agent Agreement with Online, Chardan Capital Markets, LLC and Maxim
                Group,
                LLC dated September 27, 2005 (incorporated by reference from Form
                S-1
                filed on June 16, 2006)4.3
            
            Amended
                and Restated Form of Registration Rights Agreement dated January
                16, 2006
                (incorporated by reference from Form S-1 filed on June 16, 2006)10.1
            
            Production
                Building Lease Contract with Dongguan Diguang Electronics Science
&
                Technology Co., Ltd. and Shenzhen Diguang Electronics Co. dated March
                30,
                2005 (incorporated by reference from Form S-1 filed on June 16, 2006)10.2
            
            Employment
                Agreement of Yi Song (incorporated by reference from Form 8-K filed
                on
                April 21, 2006)10.3
            
            Employment
                Agreement of Hong Song (incorporated by reference from Form 8-K filed
                on
                April 21, 2006)10.4
            
            Amended
                and Restated Purchase Option Agreement dated May 12, 2006 (incorporated
                by
                reference from Form 10-QSB filed on May 15, 2006)10.5
            
            Lease
                Agreement between Wuhan Diguang Electronics Co. Ltd. and TPV
                Technology (Wuhan) Co. Ltd dated November 18, 200610.6
            
            Employment
                Agreement of Keith Hor dated March 7 2007 (incorporated by reference
                from
                Form 8-K filed on March 13, 2007)10.7
            
            Lease
                Agreement between Dihao Electronics (Yangzhou) Co. Ltd andTranscend
                Optronics (Yangzhou) Co., Ltd dated October 1,
                200710.8
            
            Lease
                Agreement between Wuhan Diguang Electronics Co. Ltd and Wuhan Hannstar
                Technology Co. Ltd dated October 29, 200710.9
            
            Sale
                and Purchase Agreement relating to 100% interest in Dongguan Diguang
                Science & Technology Limited dated December 29, 2007 (incorporated by
                reference from Form 8-K filed on January 4, 200814.1
            
            Code
                of Ethics (incorporated by reference from Form S-1/A filed on October
                30,
                2006)21.1
            
            Subsidiaries
                of the registrant (incorporated by reference from Form S-1 filed
                on June
                16, 2006)31.1
            
            Rule
                13a-14(a) Certification*31.2
            
            Rule
                13a-14(a) Certification*32.1
            
            Section
                1350 Certification*32.2
            
            Section
                1350 Certification*





*
                Filed herewith


79




SIGNATURES




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




**Diguang
                International Development Co., Ltd.**
                (Registrant)/s/ Keith
                HorBy:
                Keith HorTitle:
                Chief Financial Officer
              (Principal
                Financial Officer)




Pursuant
      to the requirements of the Securities Act of 1933, this report has been signed
      by the following persons in the capacities and on the dates
      indicated.




Dated:
                April 14,
                2008
            
            /s/
                Yi SongYi
                SongChairman
                of the Board and Chief Executive Officer
              (Director
                and Principal Executive Officer)Dated:
                April 14, 2008
            
            /s/
                Hong SongHong
                SongDirectorDated:
                April 14, 2008
            
            /s/
                Fong
                Heung SangFong
                    Heung SangDirectorDated:
                April 14, 2008
            
            /s/
                Hoi
                S. KwokHoi
                  S. KwokDirectorDated:
                April 14, 2008
            
            /s/
                Tuen-Ping YangTuen-Ping
                YangDirector




80


**FINANCIAL
        STATEMENTS**
  **DIGUANG
        INTERNATIONAL DEVELOPMENT CO., LTD.**
  **CONTENTS**
  **Reports
                    of Independent Registered Public Accounting Firm**
                
                
                F-2*Consolidated
                    Financial Statements*Consolidated****Balance
                    Sheets
                
                
                F-5Consolidated****Statements
                    of Income and Comprehensive Income
                
                
                F-6Consolidated****Statements
                    of Stockholders’ Equity
                
                
                F-7Consolidated****Statements
                    of Cash Flows
                
                
                F-8**Notes
                    to Consolidated Financial Statements**
                
                
                F-9
  
  **Report
        of Independent Registered Public Accounting Firm**
   The
        Board
        of Directors
 Diguang
        International Development Co., Ltd
   We
        have
        audited the accompanying consolidated balance sheets of Diguang International
        Development Co., Ltd (the “Company”) as of December 31, 2007, and the related
        statements of income and comprehensive income, stockholders’ equity and cash
        flows for the year ended December 31, 2007. 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 audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements and schedule are free of material misstatement. The Company is
        not
        required to have, nor were we engaged to perform, an audit of its internal
        control over financial reporting. Our audits included consideration of internal
        control over financial reporting as a basis for designing audit procedures
        that
        are appropriate in the circumstances, but not for the purpose of expressing
        an
        opinion on the effectiveness of the Company’s internal control over financial
        reporting. Accordingly, we express no such opinion. An audit also includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements, assessing the accounting principles used and
        significant estimates made by management, as well as evaluating the overall
        presentation of the financial statements. We believe that our audits provide
        a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of Diguang International Development
        Co., Ltd, as of December 31, 2007, the results of its operations and its
        cash
        flows for the year ended December 31, 2007, in conformity with accounting
        principles generally accepted in the United States of America.
 
 
 /s/
          BDO Shenzhen Dahua Tiancheng CPAs
 BDO
        Shenzhen Dahua Tiancheng CPAs
 
 Shenzhen,
        PRC
 April12,
        2008
 
 F-2
  **Report
        of Independent Registered Public Accounting Firm**
 
 The
        Board
        of Directors
 Diguang
        International Development Co., Ltd
 
 We
        have
        audited the accompanying consolidated balance sheets of Diguang International
        Development Co., Ltd (the “Company”) as of December 31, 2006, and the related
        statements of income and comprehensive income, stockholders’ equity and cash
        flows for each of the years in the two-year period ended December 31, 2006.
        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 did not audit the financial statements of Dongguan Diguang
        Electronic Science and Technology Co., Ltd., a wholly-owned subsidiary, those
        statements include assets which represent 16% of the consolidated assets
        as of
        December 31, 2006, and revenues which represent 0% and 0% of the consolidated
        revenues for each of the years in the two-year period ended December 31,
        2006.
        Those statements were audited by other auditors whose report has been furnished
        to us, and our opinion, insofar as it relates to the amounts included for
        Dongguan Diguang Electronic Science and Technology Co., Ltd., is based solely
        on
        the report of the other auditors.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements and schedule are free of material misstatement. The Company is
        not
        required to have, nor were we engaged to perform, an audit of its internal
        control over financial reporting. Our audits included consideration of internal
        control over financial reporting as a basis for designing audit procedures
        that
        are appropriate in the circumstances, but not for the purpose of expressing
        an
        opinion on the effectiveness of the Company’s internal control over financial
        reporting. Accordingly, we express no such opinion. An audit also includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements, assessing the accounting principles used and
        significant estimates made by management, as well as evaluating the overall
        presentation of the financial statements. We believe that our audits and
        the
        report of the other auditors provide a reasonable basis for our
        opinion.
 
 In
        our
        opinion, based on our audits and the report of other auditors, the financial
        statements referred to above present fairly, in all material respects, the
        financial position of Diguang International Development Co., Ltd, as of December
        31, 2006, the results of its operations and its cash flows for each of the
        years
        in the two-year period ended December 31, 2006, in conformity with
        accounting principles generally accepted in the United States of
        America.
 
 
 /s/
        BDO Reanda
 BDO
        Reanda
 
 Beijing,
        PRC
 March
        23,
        2007
 
 F-3
  **Report
        of Independent Registered Public Accounting Firm**
 
 
 The
        Board
        of Directors
 Diguang
        International Development Co., Ltd
 
 
 We
        have
        audited the accompanying balance sheets of Dongguan Diguang Electronic Science
        and Technology Co., Ltd (“Dongguan Diguang S&T”) as of December 31, 2005 and
        2006, and the related statements of operations and comprehensive income (loss),
        stockholders’ equity and cash flows for each of the years in the two-year period
        ended December 31, 2006. These financial statements are the responsibility
        of Dongguan Diguang S&T’s management. Our responsibility is to express an
        opinion on these financial statements based on our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. Dongguan Diguang S&T is not
        required to have, nor were we engaged to perform, an audit of its internal
        control over financial reporting. Our audits included consideration of internal
        control over financial reporting as a basis for designing audit procedures
        that
        are appropriate in the circumstances, but not for the purpose of expressing
        an
        opinion on the effectiveness of Dongguan Diguang S&T’s internal control over
        financial reporting. Accordingly, we express no such opinion. An audit also
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the financial statements, assessing the accounting principles
        used and significant estimates made by management, as well as evaluating
        the
        overall presentation of the financial statements. We believe that our audits
        provide a reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of Dongguan Diguang Electronics
        Science and Technology Co., Ltd, as of December 31, 2005 and 2006, the results
        of its operations and its cash flows for each of the years in the two-year
        period ended December 31, 2006, in conformity with accounting principles
        generally accepted in the United States of America.
 
 
 /s/
        BDO Shenzhen Dahua Tiancheng CPAs
 BDO
        Shenzhen Dahua Tiancheng CPAs
 
 Shenzhen,
        PRC
 December
        28, 2007
  F-4
  **DIGUANG
          INTERNATIONAL DEVELOPMENT CO., LTD.**
 **CONSOLIDATED
          BALANCE SHEETS**
 **(In
          US Dollars)**
 December
                  31,2006
              
              2007**ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              20,550,032
              
              $
              16,250,727Accounts
                  receivable, net of allowance for doubtful account $751,145 and
                  $680,784
              
              
              6,384,253
              
              
              12,713,705Inventories,
                  net of provision $545,446 and $841,518
              
              
              4,396,247
              
              
              7,499,768Other
                  receivables, net of provision $0 and $102,574
              
              
              243,334
              
              
              389,764VAT
                  recoverable
              
              
              220,793
              
              
              407,376Advance
                  to suppliers
              
              
              1,398,594
              
              
              904,203Deferred
                  tax asset
              
              
              86,572
              
              
              86,572Total
                  current assets
              
              
              33,279,825
              
              
              38,252,115Investment,
                  net of impairment $0 and $622,194
              
              
              1,500,000
              
              
              877,806Property
                  and equipment, net
              
              
              8,321,004
              
              
              17,449,871Construction
                  in progress
              
              
              1,896,537
              
              
              -Prepayment
                  for purchasing office space
              
              
              1,969,462
              
              
              -Total
                  assets
              
              $
              46,966,828
              
              $
              56,579,792**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              8,033,367
              
              $
              18,855,416Advance
                  from customers
              
              
              177,184
              
              
              464,281Accruals
                  and other payables
              
              
              1,991,603
              
              
              3,358,199Accrued
                  payroll and related expense
              
              
              347,688
              
              
              795,690Income
                  tax payable
              
              
              335,672
              
              
              428,217Amount
                  due to related parties
              
              
              1,298,475
              
              
              1,465,790Amount
                  due to stockholders - current
              
              
              -
              
              
              1,100,000Total
                  current liabilities
              
              
              12,183,989
              
              
              26,467,593Research
                  funding advanced
              
              
              -
              
              
              245,730Amount
                  due to stockholders
              
              
              -
              
              
              1,100,000Total
                  non-current liabilities
              
              
              -
              
              
              1,345,730Total
                  liabilities
              
              
              12,183,989
              
              
              27,813,323Minority
                  interest
              
              
              1,043,035
              
              
              1,475,361Stockholders’
                  equity:Common
                  stock, par value $0.001 per share, 50 million shares authorized,
                  22,593,000 shares and 22,593,000 issued, 22,593,000 shares and
                  22,340,700
                  outstanding
              
              
              22,593
              
              
              22,593Additional
                  paid-in capital
              
              
              18,468,478
              
              
              20,028,955Treasury
                  stock at cost
              
              
              -
              
              
              (429,295
              )Appropriated
                  earnings
              
              
              1,294,578
              
              
              1,949,839Retained
                  earnings
              
              
              12,865,572
              
              
              3,127,110Translation
                  adjustment
              
              
              1,088,583
              
              
              2,591,906Total
                  stockholders’ equity
              
              
              33,739,804
              
              
              27,291,108Total
                  liabilities and stockholders' equity
              
              $
              46,966,828
              
              $
              56,579,792
  *See
        accompanying notes to financial statements*
  F-5
 **DIGUANG
          INTERNATIONAL DEVELOPMENT CO., LTD.**
 **CONSOLIDATED
          STATEMENTS OF INCOME AND COMPREHENSIVE INCOME**
 **FOR
          THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(In
          US Dollars)**
 Years
                  Ended December 31,2005
              
              2006
              
              2007Revenues:Revenues,
                  net
              
              $
              35,648,118
              
              $
              34,242,617
              
              $
              45,909,256Cost
                  of sales
              
              
              23,066,958
              
              
              23,145,450
              
              
              38,087,919Gross
                  profit
              
              
              12,581,160
              
              
              11,097,167
              
              
              7,821,337Selling
                  expense
              
              
              1,480,229
              
              
              1,574,524
              
              
              2,582,456Research
                  and development
              
              
              727,302
              
              
              786,322
              
              
              1,054,367General
                  and administrative
              
              
              1,664,094
              
              
              6,656,469
              
              
              6,476,242Loss
                  on disposing assets
              
              
              913
              
              
              -
              
              
              -Impairment
                  loss
              
              
              -
              
              
              -
              
              
              622,194Income
                  (loss) from operations
              
              
              8,708,622
              
              
              2,079,852
              
              
              (2,913,922
              )Interest
                  income (expense), net
              
              
              (32,075
              )
              
              158,699
              
              
              122,251Investment
                  income (loss)
              
              
              (7,405
              )
              
              53,676
              
              
              483,311Other
                  income (loss)
              
              
              293,341
              
              
              (99,908
              )
              
              (168,017
              )Income
                  (loss) before income taxes
              
              
              8,962,483
              
              
              2,192,319
              
              
              (2,476,377
              )Income
                  tax provision
              
              
              532,927
              
              
              452,562
              
              
              94,343Net
                  income (loss) before minority interests
              
              
              8,429,556
              
              
              1,739,757
              
              
              (2,570,720
              )Minority
                  interests
              
              
              (84,327
              )
              
              74,941
              
              
              334,617Net
                  income (loss)
              
              $
              8,513,883
              
              $
              1,664,816
              
              $
              (2,905,337
              )Weighted
                  average common shares outstanding - basic
              
              
              18,250,000
              
              
              21,383,960
              
              
              22,531,384Earnings
                  (loss) per share - basic
              
              
              0.47
              
              
              0.08
              
              
              (0.13
              )Weighted
                  average common shares outstanding - diluted
              
              
              18,250,000
              
              
              21,383,960
              
              
              22,531,384Earning
                  (loss) per shares - diluted
              
              
              0.47
              
              
              0.08
              
              
              (0.13
              )Other
                  comprehensive income :Net
                  income
              
              $
              8,513,883
              
              $
              1,664,816
              
              $
              (2,905,337
              )Translation
                  adjustments
              
              
              234,630
              
              
              851,488
              
              
              1,857,709Comprehensive
                  income (loss)
              
              $
              8,748,513
              
              $
              2,516,304
              
              $
              (1,047,628
              )
 
 *See
        accompanying notes to financial statements.*
  F-6
  **DIGUANG
          INTERNATIONAL DEVELOPMENT CO., LTD.**
 **CONSOLIDATED
          STATEMENTS OF STOCKHOLDERS’ EQUITY**
 **FOR
          THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(In
          US Dollars)**
  Common
                      StockShares
                  
                  Amount
                  
                  Treasury
                      Stock
                  
                  Additional
                      Paid-in Capital
                  
                  Appropriated
                      Earnings
                  
                  Retained
                      Income Loss)
                  
                  Accumulated
                      Comprehensive Income (Loss)
                  
                  TotalBalance
                      at January 1, 2005
                  
                  
                  18,250,000
                  
                  $
                  18,250
                  
                  $
                  -
                  
                  $
                  3,846,144
                  
                  $
                  133,507
                  
                  $
                  7,184,389
                  
                  $
                  2,465
                  
                  $
                  11,184,755Retained
                      earnings converted to capital
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,236,445
                  
                  
                  -
                  
                  
                  (1,236,445
                  )
                  
                  -
                  
                  
                  -Appropriation
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  368,326
                  
                  
                  (368,326
                  )
                  
                  -
                  
                  
                  -Dividends
                      declared
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (2,100,000
                  )
                  
                  -
                  
                  
                  (2,100,000
                  )Imputed
                      interest on stockholder loans
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  79,683
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  79,683Net
                      income for the year
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  8,513,883
                  
                  
                  -
                  
                  
                  8,513,883Translation
                      adjustment
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  234,630
                  
                  
                  234,630Balance
                      at December 31, 2005
                  
                  
                  18,250,000
                  
                  
                  18,250
                  
                  
                  -
                  
                  
                  5,162,272
                  
                  
                  501,833
                  
                  
                  11,993,501
                  
                  
                  237,095
                  
                  
                  17,912,951Reorganization
                      and recapitalization
                  
                  
                  1,943,000
                  
                  
                  1,943
                  
                  
                  -
                  
                  
                  (44,425
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (42,482
                  )Common
                      shares issued
                  
                  
                  2,400,000
                  
                  
                  2,400
                  
                  
                  -
                  
                  
                  10,256,976
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  10,259,376Offsetting
                      offering expenses
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (25,718
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (25,718
                  )Fair
                      value of stock options granted
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  2,134,342
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  2,134,342Capital
                      infused in two previously separate entities
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  905,357
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  905,357Imputed
                      interest on stockholder loans
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  79,674
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  79,674Net
                      income for the year
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,664,816
                  
                  
                  -
                  
                  
                  1,664,816Appropriation
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  792,745
                  
                  
                  (792,745
                  )
                  
                  -
                  
                  
                  -Translation
                      adjustments
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  851,488
                  
                  
                  851,488Balance
                      at December 31, 2006
                  
                  
                  22,593,000
                  
                  
                  22,593
                  
                  
                  -
                  
                  
                  18,468,478
                  
                  
                  1,294,578
                  
                  
                  12,865,572
                  
                  
                  1,088,583
                  
                  
                  33,739,804Fair
                      value of stock options granted
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  
                  
                  1,206,091
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,206,091Net
                      income for the year
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (2,905,337
                  )
                  
                  -
                  
                  
                  (2,905,337
                  )Appropriation
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  655,261
                  
                  
                  (655,261
                  )
                  
                  -
                  
                  
                  -Treasury
                      stock
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (429,295
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (429,295
                  )Translation
                      adjustment converted into capital
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  354,386
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (354,386
                  )
                  
                  -Deemed
                      dividend distribution
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (6,177,864
                  )
                  
                  -
                  
                  
                  (6,177,864
                  )Translation
                      adjustments
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,857,709
                  
                  
                  1,857,709Balance
                      at December 31, 2007
                  
                  
                  22,593,000
                  
                  $
                  22,593
                  
                  $
                  (429,295
                  )
                  $
                  20,028,955
                  
                  $
                  1,949,839
                  
                  $
                  3,127,110
                  
                  $
                  2,591,906
                  
                  $
                  27,291,108
  *See
        accompanying notes to financial statements*
  F-7
  **DIGUANG
          INTERNATIONAL DEVELOPMENT CO., LTD.**
 **CONSOLIDATED
          STATEMENTS OF CASH FLOWS**
 **FOR
          THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 ( **The
          Increase or Decrease in Cash and Cash Equivalents** )
 **(In
          US Dollars)**
 Years
                  Ended December 31,2005
              
              2006
              
              2007Cash
                  flows from operating activities:Net
                  income(loss)
              
              $
              8,513,883
              
              $
              1,664,816
              
              $
              (2,905,337
              )Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Minority
                  interests
              
              
              (84,327
              )
              
              74,941
              
              
              334,617Depreciation
              
              
              499,203
              
              
              766,141
              
              
              1,197,819Imputed
                  interest
              
              
              79,683
              
              
              79,674
              
              
              -Bad
                  debts allowance
              
              
              32,061
              
              
              259,237
              
              
              604,258Inventory
                  provision
              
              
              -
              
              
              545,446
              
              
              296,072Impairment
                  of long-term investment
              
              
              -
              
              
              -
              
              
              622,194Loss
                  on disposing assets
              
              
              913
              
              
              -
              
              
              -Stock
                  compensation
              
              
              -
              
              
              2,134,342
              
              
              1,206,091Deferred
                  tax asset
              
              
              -
              
              
              (86,572
              )
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (1,306,417
              )
              
              (541,888
              )
              
              (6,507,856
              )Inventory
              
              
              (2,046,095
              )
              
              (1,221,802
              )
              
              (3,170,378
              )Other
                  receivables
              
              
              (222,967
              )
              
              (152,056
              )
              
              (248,711
              )VAT
                  recoverable
              
              
              -
              
              
              (219,860
              )
              
              (184,913
              )Prepayments
                  and other assets
              
              
              25,421
              
              
              (638,015
              )
              
              459,832Accounts
                  payable
              
              
              3,303,643
              
              
              734,551
              
              
              10,075,059Accruals
                  and other payable
              
              
              417,810
              
              
              610,856
              
              
              1,732,009Advance
                  from customers
              
              
              19,196
              
              
              (157,525
              )
              
              295,936Taxes
                  payable
              
              
              347,510
              
              
              (228,046
              )
              
              88,034Net
                  cash provided by (used in) operating activities
              
              
              9,579,517
              
              
              3,624,240
              
              
              3,894,726Cash
                  flows from investing activities:Purchase
                  of fixed assets
              
              
              (4,124,520
              )
              
              (3,214,600
              )
              
              (6,172,666
              )Cash
                  paid for acquisition of two entities
              
              
              -
              
              
              -
              
              
              (3,977,864
              )Long
                  term investment
              
              
              -
              
              
              (1,500,000
              )
              
              -Disposal
                  (purchase) of marketable securities
              
              
              (765,370
              )
              
              1,056,122
              
              
              -Deposit
                  for office building
              
              
              (721,928
              )
              
              (1,808,773
              )
              
              -Due
                  from related parties
              
              
              (96,659
              )
              
              21,538
              
              
              -Net
                  cash used in investing activities
              
              
              (5,708,477
              )
              
              (5,445,713
              )
              
              (10,150,530
              )Cash
                  flows from financing activities:Common
                  share issued
              
              
              -
              
              
              12,000,000
              
              
              -Stock
                  repurchase
              
              
              -
              
              
              -
              
              
              (429,295
              )Offering
                  expenses
              
              
              (25,718
              )
              
              (1,740,624
              )
              
              -Due
                  to related parties
              
              
              135,319
              
              
              (469,590
              )
              
              158,876Capital
                  infused by owners of North Diamond
              
              
              -
              
              
              1,392,857
              
              
              -Research
                  funding advanced
              
              
              -
              
              
              -
              
              
              236,225Payments
                  for a long-term bank loan
              
              
              (470,941
              )
              
              -
              
              
              -Dividend
                  paid
              
              
              -
              
              
              (111,140
              )
              
              -Net
                  cash provided by (used in) financing activities
              
              
              (361,340
              )
              
              11,071,503
              
              
              (34,194
              )Effect
                  of changes in foreign exchange rates
              
              
              183,415
              
              
              738,486
              
              
              1,990,693Net
                  increase (decrease) in cash and cash equivalents
              
              
              3,693,115
              
              
              9,988,516
              
              
              (4,299,305
              )Cash
                  and cash equivalents, beginning of the year
              
              
              6,868,401
              
              
              10,561,516
              
              
              20,550,032Cash
                  and cash equivalents, end of the year
              
              $
              10,561,516
              
              $
              20,550,032
              
              $
              16,250,727
  *See
        accompanying notes to financial statements*
  F-8
  **DIGUANG
          INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        1 ─ REORGANIZATION AND RECAPITALIZATION**
 
 On
        January 10, 2006, Online Processing, Inc. (“Online” thereafter) entered into a
        stock exchange agreement with Diguang International Holdings Limited (“Diguang
        Holdings” thereafter). Pursuant to the stock exchange agreement, without raising
        $12 million, the reverse acquisition will not be effective, vice versa, without
        reverse acquisition being effective, the private placement will be not
        closed.
 
 On
        March
        17, 2006, Online issued 2.4 million shares of its common stock in exchange
        for
        the gross proceeds of $12 million and issued another 18,250,000 shares of
        its
        common stock in exchange for 100% equity interest in Diguang Holdings, making
        Diguang Holdings a wholly owned subsidiary of the Online. Consummating the
        above
        two transactions simultaneously, Online and Diguang Holdings successfully
        fulfilled its contractual obligations, respectively, under the Stock Exchange
        Agreement on March 17, 2006.
 
 Online
        Processing Inc. was organized under the laws of the State of Nevada in 2000.
         Its initial business was to provide Internet-based mortgage processing for
        mortgage brokers.  It had never been able to achieve profitability in that
        business so it began searching for operating companies to acquire in order
        to
        increase shareholders’ value.
 
 In
        February 2003, through a share exchange, it acquired 100% of the issued and
        outstanding stock of Communication Field Services, Inc. (“CFS”), a Nevada
        corporation engaged in the business of providing installation, maintenance
        and
        servicing of communication technologies.  Online’s plan was to secure
        additional financing to expand the CFS’ business, but it was unable to do so. In
        March 2003, Online decided to cease commercial operations in CFS.  Since
        then, there were no real meaningful operating activities by Online. Thereafter,
        it began the process of reviewing new business opportunities with the intention
        to maximize shareholders’ interest, looking at possible business acquisitions in
        North America and internationally. In accordance with the Stock Exchange
        Agreement, Online implemented a reverse split of 3-for-5 making the total
        outstanding shares from 11,518,233 at December 31, 2005 into 6,910,940 shares.
        Then its CEO, Terri Wonderly, agreed to cancel 4,697,940 shares of common
        stock
        that she owned. Consequently, Online ended up with having 1,943,000 shares
        issued and outstanding right before the effectiveness of the aforementioned
        stock exchange transaction and fund raising transaction. Of the 1,943,000
        shares
        issued and outstanding, 900,000 shares are owned by the existing shareholders
        of
        Online, 800,000 shares are owned by Chardan Capital, the financial consultant,
        and the remaining 243,000 shares are owned by the placement agents.
 
 Diguang
        Holdings was established under the law of the British Virgin Islands on July
        27,
        2004 by Sino Olympics (which is controlled by the song brothers) for the
        purpose
        of holding 100% of the equity interest in the following entities:
 
 ·
              Well
                  Planner Limited (a Hong Kong based entity);
                  and
 ·
              Diguang
                  Science and Technology (HK) Limited (a British Virgin Islands based
                  entity).
 ·
              Shenzhen
                  Diguang Electronics Co., Ltd. (a China based
                  entity);
 
 Well
        Planner Limited (“Well Planner” thereafter), was established under the laws of
        Hong Kong Special Administrative Region on April 20, 2001 and has been doing
        business in custom forwarding related to export and import activities conducted
        by Diguang Electronics for a service fee based on a service agreement, pursuant
        to which service fees should not be less than 2% of the goods Well Planner
        has
        sold. However, Well Planner makes sales only to Diguang Science and Technology
        (HK) Limited. In essence, Well Planner is a pass-through entity among all
        three
        entities.
  F-9
 **DIGUANG
          INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        1 ─ REORGANIZATION AND RECAPITALIZATION (Continued)**
 
 Diguang
        Science and Technology (HK) Limited (“Diguang Technology” thereafter) was
        established under the laws of the British Virgin Islands on August 28, 2003
        and
        has handled all sales to international customers and procurements of electronic
        components and materials for Diguang Electronics.
 
 Both
        Well
        Planner and Diguang Technology do not have any office space leased in Hong
        Kong
        and British Virgin Islands.
 
 Shenzhen
        Diguang Electronics Co. Ltd.( “Diguang Electronics” thereafter), was established
        as an equity joint venture in Shenzhen under the laws of the People’s Republic
        of China (the “PRC”) on January 9,1996 with the registered capital of RMB85
        million (equivalent $10,573,615) as of December 31, 2006 and an operating
        life
        of 20 years starting on that date. Diguang Electronics designs, develops
        and
        manufactures LED and CCFL backlight units. These backlight units are essential
        components used in illuminating display panels such as TFT-LCD and color
        STN-LCD
        panels. These display panels are used in products such as mobile phones,
        PDAs,
        digital cameras, liquid crystal computer or television displays and other
        household and industrial electronic devices. Diguang Electronics’ customers are
        located in both China and overseas.
 
 The
        above
        stock exchange transaction enabled those shareholders of Diguang Holdings
        to
        obtain a majority voting interest in Online. Generally accepted accounting
        principles in the United States of America require that the company whose
        shareholders retain the majority interest in a combined business be treated
        as
        the acquirer for accounting purposes. Based on the fact that the above two
        transactions were consummated simultaneously, the two transactions have been
        accounted for as a reverse acquisition with a shell company with cash as
        Diguang
        Holdings has acquired controlling equity interest in Online as of March 17,
        2006. The reverse acquisition process utilizes the capital structure of Online
        and the assets and liabilities of Diguang Holdings are recorded at historical
        cost.
 
 Diguang
        Holdings is the continuing operating entity for financial reporting purposes
        and
        the financial statements prior to March 17, 2006 represent Diguang Holdings’
financial position and results of operations. As of March 17, 2006, Online
        had
        no assets, $42,482 of liabilities, and the corresponding negative shareholders’
equity with 1,943,000 shares of common stock issued and outstanding, all
        of
        which were included in the consolidated financial statements of Diguang Holdings
        as of December 31, 2006. Please see the stockholders’ equity statement for the
        period from January 1, 2006 to December 31, 2006. And note that this
        reorganization transaction was deemed a non-cash transaction for cash flow
        statement purposes. Although Diguang Holdings is deemed to be the acquiring
        corporation for financial accounting and reporting purposes, the legal status
        of
        Online as the surviving company did not change.
 
 On
        November 18, 2006, Diguang Electronics and Diguang Holdings entered into
        a
        Sino-Foreign Equity Joint Venture Agreement, for the establishment of Wuhan
        Diguang Electronics Co., Ltd., (“Wuhan Diguang” thereafter). Pursuant to the
        Joint Venture Agreement, Diguang Electronics and Diguang Holdings set up
        Wuhan
        Diguang in Wuhan, Hubei Province, China, with a registered capital of $1
        million, of which 70% was infused by Diguang Electronics and the remaining
        30%
        by Diguang Holdings. Wuhan Diguang was then established on March 13, 2007
        and
        its business license issued by Wuhan Municipal Administrative Bureau for
        Industry and Commerce is valid for 20 years expiring on March 12, 2027. Wuhan
        Diguang manufactures and sells LED and CCFL backlight units in Middle of
        China
        region. Wuhan Diguang started operation on July 1, 2007, and its operating
        results have been included in the consolidation financial statements of the
        Company for the year ended December 31, 2007.
  F-10
 **DIGUANG
          INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        2 ─ BASE OF PRESENTATION**
 
 **Acquiring
        65% Interest of North Diamond Limited**
 
 On
        January 3, 2007, the Company acquired 65% interest of North Diamond by
        exercising a purchase option, which was entered between the Company and Song’s
        brothers who are the holders of these 65% interest in North Diamond because
        North Diamond is conducting the same business as the Company. The purchase
        price determined
        in accordance with the Amended and Restated Purchase Option Agreement was
        $1,977,864. North Diamond is a holding company of Dihao
        (Yangzhou) Co., Ltd. (“Dihao” thereafter) ,
        an
        operating entity, which is registered in the Yangzhou City Development Zone, Jiangsu Province, China. Dihao
        conducts business activities developing, manufacturing and marketing backlight
        products for large size electronic display devices and provides relevant
        technical services in China. Of the $ 1,977,864  the
        purchase price was $1,880,357 and the balance $97,507 was the interest paid
        at a
        rate of 6% per annum in line with the amount of capital infused and the time
        length in which the capital was infused. This transaction was accounted for
        as
        assets exchanged between the entities under common control in accordance
        with
        Appendix D of SFAS No. 141, as the owners of the 65% interest of North Diamond
        also own greater than 50% interest of the Company.
 
 **Acquiring
        100% Interest of Dongguan Diguang Electronic Science and Technology Co.,
        Ltd.**
 
 On
        December 29, 2007, Diguang Holdings entered into a sale and purchase agreement
        with Sino Olympics
        Industrial Limited (“Sino Olympics” thereafter) and Shenzhen Diguang Engine
& Equipment Co., Ltd (“Diguang Engine” thereafter) to acquire a 100%
        interest in Dongguan Diguang Electronics Science and Technology Co. Ltd.
        (“Dongguan Diguang S&T” thereafter). The closing date of the acquisition is
        December 30, 2007. Pursuant
        to local law, the acquisition is not effective until the registration of
        change
        of shareholders is approved by the Industrial and Commercial Bureau in Dongguan,
        Administration of Foreign Investment Enterprises in Dongguan, and State
        Administration Bureau of Foreign Exchange Control. Such approval is expected
        to
        be obtained within six
        months since December 30, 2007. The consideration for the purchase transaction
        was $4.2 million and the initial payment was $2 million, which was paid by
        the
        end of 2007, followed
        by four equal installments of $550,000 payable on June 30, 2008,
        December  31,
        2008,
        March 31, 2009 and June 30, 2009, respectively. The outstanding interest
        shall
        be paid together with each principal installment in aggregate sum, whereas
        the
        interest shall be calculated on the outstanding balance at the prevailing
        market
        rate quoted by the People’s Bank of China. Dongguan
        Diguang S&T was established under the laws of the People’s Republic of China
        on February 16, 2004 and has been used by Diguang Electronics as the production base ever since. This
        transaction was accounted for as assets exchanged between the entities under
        common control in accordance with Appendix D of SFAS No. 141, as the owners
        of
        Dongguan Diguang S&T also own greater than 50% interest of the
        Company.
 
 **Retrospective
        Restatement of Historical Consolidated Financial
        Statements**
 
 In
        accordance with Paragraph D16 and D17 in Appendix D of SFAS No. 141, the
        above
        two transactions changed the basis of presentation regarding the Company’s
        historical consolidated financial statements; therefore, all of the Company’s
        historical consolidated financial statements for the years ended December
        31,
        2005 and 2006 have been retrospectively restated to include the financial
        data
        of two previously separate entities, which are under the common control,
        since
        January 1, 2005 for the purpose of furnishing comparative information and
        the
        cash disbursements for the purchase prices paid and the obligations committed
        to
        pay were deemed as dividends distributed and declared in 2007. Accordingly,
        previously reported related party transactions associated with these two
        entities were eliminated during the retrospective restatement
        process.
  F-11
  **DIGUANG
          INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        3 ─ SUMMARY OF ACCOUNTING POLICIES**
 
 **Principles
        of Consolidation**
 
 The
        financial statements include the accounts of the Company and its wholly-owned
        subsidiaries. All significant inter-company accounts and transactions have
        been
        eliminated. All of the consolidated financial statements have been prepared
        based on generally accepted accounting principles in the United
        States.
 
 **Foreign
        Currency Translations and Transactions**
 
 The
        Renminbi (“RMB”), the national currency of PRC, is the primary currency of the
        economic environment in which the operations of four subsidiaries, Diguang
        Electronics, Dihao, Wuhan Diguang, and Dongguan Diguang S&T, are conducted.
        Hong Kong dollar is the primary currency of the economic environment in which
        the operations of one of subsidiaries, Well Planner, are conducted. U.S dollar
        is the functional currency in which Diguang Technology, one subsidiary
        established under the laws of the British Virgin Islands, recorded all its
        activities. The Company uses the United States dollars (“U.S. dollars”) for
        financial reporting purposes.
 
 The
        Company translates the above five subsidiaries’ assets and liabilities into U.S.
        dollars using the rate of exchange prevailing at the balance sheet date,
        and the
        statement of income is translated at average rate during the reporting period.
        Adjustments resulting from the translation of subsidiaries’ financial statements
        from the functional currency into U.S. dollars are recorded in shareholders'
        equity as part of accumulated comprehensive income (loss) - translation
        adjustments. Gains or losses resulting from transactions in currencies other
        than the functional currency are reflected in the statements of income for
        the
        reporting periods.
 
 **Revenue
        Recognition**
 
 Revenue
        generated from sales of backlight units to customers is recognized when
        persuasive evidence of an arrangement exists, delivery of the products has
        occurred, the significant risks and rewards of the ownership have been
        transferred to the customer, the price is fixed or determinable and
        collectibility is reasonably assured. Revenue presented on the Company’s income
        statements is net of sales taxes.
 
 **Cash
        and Cash Equivalents**
 
 The
        Company considers all highly liquid investments with maturity of three months
        or
        less to be cash equivalents.
 
 **Short
        Term Deposits**
 
 Short
        term deposits consist of certificates of deposit having maturity of three
        to
        twelve months. These short term deposits are renewable when they mature and
        interest rates are subject to change in line with the market interest rates
        available when they are renewed.
  F-12
 **DIGUANG
          INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        3 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)**
 
 **Accounts
        Receivable and Concentration of Credit Risk**
 
 During
        the normal course of business, the Company extends unsecured credit to its
        customers. Typically credit terms require payment to be made within 90 days
        of
        the invoice date. The Company does not require collateral from its customers.
        The Company maintains its cash accounts at credit worthy financial institutions
        and closely monitors the movements of its cash positions.
 
 The
        Company regularly evaluates and monitors the creditworthiness of each customer
        on a case-by-case basis. The Company includes any accounts balances that
        are
        determined to be uncollectible in the allowance for doubtful accounts. After
        all
        attempts to collect a receivable have failed, the receivable is written off
        against the allowance. Based on the information available to management,
        the
        Company believes that its allowance for doubtful accounts as of December
        31,
        2005, 2006 and 2007 were adequate, respectively. However, actual write-off
        might
        exceed the recorded allowance.
 
 The
        following table presents allowance activities in accounts
        receivable.
 
 December
                  31,2005
              
              2006
              
              2007Beginning
                  balance
              
              $
              491,908
              
              $
              491,908
              
              $
              751,145Additions
                  charged to expense
              
              
              -
              
              
              259,237
              
              
              501,684Recovery
              
              
              -
              
              
              -
              
              
              -Write-off
              
              
              -
              
              
              -
              
              
              (572,045
              )Ending
                  balance
              
              $
              491,908
              
              $
              751,145
              
              $
              680,784
 
 **Inventories**
 
 Inventories
        are composed of raw materials and components, work in progress, and finished
        goods, all of which are related to backlight products. Inventories are valued
        at
        the lower of cost (based on weighted average method) and the
        market.
 
 **Property
        and Equipment**
 
 Properties
        and equipment are recorded at historical cost, net of accumulated depreciation.
        The Amount of depreciation is determined using the straight-line method over
        the
        shorter of the estimated useful lives and the remaining contractual life
        related
        to leasehold improvements, as follows:
 
 Land
                  usage right
              
              
              48.5-50
                  yearsMachinery
                  and equipment
              
              
              5-10
                  yearsFurniture
                  and office equipment
              
              
              5
                  yearsAccounting
                  Software
              
              
              2
                  yearsVehicles
              
              
              5-10
                  yearsSoftware
              
              
              2-5
                  yearsLeasehold
                  improvement
              
              
              5
                  years
  F-13
 **DIGUANG
          INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        3 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)**
 
 **Property
        and Equipment (Continued)**
 
 Maintenance
        and repairs are charged directly to expense as incurred, whereas betterment
        and
        renewals are generally capitalized in their respective property accounts.
        When
        an item is retired or otherwise disposed of, the cost and applicable accumulated
        depreciation are removed and the resulting gain or loss is recognized and
        reflected as an item before operating income (loss).
 
 **Impairment
        of Long-Lived Assets**
 
 The
        Company adopts the provisions of Statement of Financial Accounting Standard
        No.
        144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
        No.144”). SFAS No.144 requires that long-lived assets be reviewed for impairment
        whenever events or changes in circumstances indicate that the carrying amount
        of
        an asset may not be recoverable through the estimated undiscounted cash flows
        expected to result from the use and eventual disposition of the assets. Whenever
        any such impairment exists, an impairment loss will be recognized for the
        amount
        by which the carrying value exceeds the fair value. The impairment loss for
        the
        years ended December 31, 2005, 2006, and 2007 was $0, $0, and $622,194,
        respectively. In accordance with APB 18, an impairment loss of $622,194 in
        2007
        was related to an investment, which was accounted for under the cost method.
 
 **Income
        Taxes**
 
 The
        Company accounts for income taxes in accordance with Statement of Financial
        Accounting Standards No 109, “Accounting for Income Taxes” (“SFAS No. 109”).
        SFAS No. 109 requires an entity to recognize deferred tax liabilities and
        assets. Deferred tax assets and liabilities are recognized for the future
        tax
        consequence attributable to the difference between the tax bases of assets
        and
        liabilities and their reported amounts in the financial statements. Deferred
        tax
        assets and liabilities are measured using the enacted tax rate 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 tax assets and liabilities
        of
        a change in tax rates is recognized in income in the period that included
        the
        enactment date.
 
 Diguang
        Electronics is registered at Shenzhen and subject to a favorable income tax
        rate
        at 15% comparing to a statutory income tax rate of 33% (30% for the central
        government and 3% for the local government) under the current tax laws of
        PRC
        because Shenzhen is a special zone designated by the Chinese central government
        to attract foreign investments. Diguang Electronics has been deemed as a
        high-tech company by Shenzhen Bureau of Science, Technology & Information.
        Under this category, Diguang Electronics has been entitled to enjoy a 50%
        exemption from corporate income tax at the rate of 15% for the three years
        from
        January 1, 2004 to December 31, 2006. However, in accordance with the Rules
        for
        the Implementation of the Income Tax law of the PRC for Enterprises with
        Foreign
        Investment and Foreign Enterprises prescribed by the central government,
        the
        minimum corporate income tax rate should be 10% within the three years ended
        December 31, 2004, 2005, and 2006. The Company recorded the income tax provision
        based on 10% of corporate income tax rate for the years ended December 31,
        2004,
        2005 and 2006 considering that the difference between the 7.5% rate implemented
        by the local tax authority and the 10% rate in terms of the rules prescribed
        by
        the central government should be recognized as income tax payable for
        conservative consideration.
  F-14
  **DIGUANG
          INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        3 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)**
 
 **Income
        Taxes (Continued)**
 
 Well
        Planner is subject to a favorable income tax rate at 17.5% under Hong Kong
        Inland Revenue jurisdiction. However, Well Planner does not have Hong Kong
        sourced income. In accordance with Hong Kong tax regulation, Well Planner
        has
        not been taxed since its inception. There is no income tax for the companies
        domiciled in the BVI. Accordingly, the Company’s financial statements do not
        present any income tax provision related to the British Virgin Islands tax
        jurisdiction.
 
 Dihao
        is
        registered at Yangzhou and subject to a favorable income tax rate at 24%
        comparing to a statutory income tax rate of 33%, 30% for the Chinese central
        government and 3% for the local government, under the current tax laws of
        PRC
        because Yangzhou Development Zone is a special zone designated by Chinese
        central government to attract foreign investments. Dihao has been deemed
        as
        a high-tech company by Yangzhou Bureau of Science, Technology and Information.
        Under this category, Dihao entitled to enjoy a 100% exemption of corporate
        income tax for the two years from January 1, 2006 to December 31, 2007 and
        a 50%
        exemption of corporate income tax for the following three years from January
        1,
        2008 to December 31, 2010 in accordance with the preferential rules established
        by Yangzhou local tax authority on August 2, 1999. Therefore, there is no
        income tax for Dihao for the year ended 31 December 31, 2007.
 
 Wuhan
        Diguang is a foreign investment company. Under this category, Wuhan Diguang
        entitled to enjoy a 100% exemption of corporate income tax for the first
        two
        years from the first profit-making year and a 50% exemption of corporate
        income
        tax for the following three years in accordance with the preferential rules
        established by Wuhan local tax authority. Wuhan Diguang has suffered a loss
        for
        the year ended December 31, 2007 since its operation started from July 1,
        2007.
        After the favorable income tax period, Wuhan Diguang will subject to a statutory
        income tax rate of 25%, the unified income tax rate under the newly enacted
        corporate tax law.
 
 Dongguan
        Diguang S&T is registered at Dongguan City Development Zone, Guangdong
        Province, China and subject to a favorable income tax at 27% comparing to
        a
        statutory income tax rate of 33% (30% for the Central Government and 3% for
        the
        local government) under the current income tax laws of PRC because Dongguan
        Development Zone is a coastal economic development zone designated by Chinese
        Central Government to attract foreign investments.
 
 Diguang
        International Development Co., Ltd. was established under the laws of the
        State
        of Nevada and is subject to U.S. federal income tax and one state income
        tax.
        For U.S. income tax purposes no provision has been made for U.S. taxes on
        undistributed earnings of overseas subsidiaries with which the Company intends
        to continue to reinvest. It is not practicable to estimate the amount of
        additional tax that might be payable on the foreign earnings if they were
        remitted as dividends, or lent to the Company, or if the Company should sell
        its
        stock in the subsidiary. The predecessor company accumulated certain net
        operation loss carry forwards; however, due to the changes in ownership,
        the use
        of these net operation loss carry forwards may be limited in accordance with
        the
        U.S. tax laws.
 
 Because
        the consolidated financial statements were based on the respective entities’
historical financial statements, the respective effective income tax rate
        for
        the periods reported represents the effect of actual income tax provisions
        incurred to Diguang Electronics, Dihao, Wuhan Diguang and Diguang International
        Development Co., Ltd.
  F-15
 **DIGUANG
          INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        3 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)**
 
 **Adoption
        of FIN 48**
 
 Effective
        January 1, 2007, the Company adopted FASB Interpretation No. 48,
        "Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement
        No. 109," (thereafter FIN 48). FIN 48 prescribes a recognition threshold
        and measurement attribute for the financial statement recognition and
        measurement of a tax position taken in a tax return. A company must determine
        whether it is "more-likely-than-not" that a tax position will be sustained
        upon
        examination, including resolution of any related appeals or litigation
        processes, based on the technical merits of the position. Once it is determined
        that a position meets the more-likely-than-not recognition threshold, the
        position is measured to determine the amount of benefit to recognize in the
        financial statements. The Company did not report any impact of adopting FIN
        48
        for the year ended December 31, 2007.
 
 **Retained
        Earnings**
 
 It
        is the
        intention of the Company to reinvest earnings generated from the operations
        of
        its foreign subsidiaries and retained in those foreign subsidiaries.
        Accordingly, no provision has been made for U.S. income and foreign withholding
        taxes that would result if such earnings were repatriated. These taxes are
        undeterminable at this time. The amount of earnings retained in foreign
        subsidiaries was $15,832,985 and $15,638,576 at December 31, 2006 and 2007,
        respectively.
 
 **Fair
        Value of Financial Instruments**
 
 The
        carrying amount of cash, accounts receivable, other receivables, advance
        to
        vendor, accounts payable and accrued liabilities are reasonable estimates
        of
        their fair value because of the short maturity of these items. The fair value
        of
        amounts due from/to related parties and stockholders are reasonable estimate
        of
        their fair value as the amounts will be collected and paid off in a period
        less
        than one year.
 
 **Value
        Added Tax**
 
 Diguang
        Electronics, Dihao and Wuhan Diguang are subject to value added tax (VAT)
        imposed by the PRC government on its domestic product sales. VAT rate for
        the
        Company is 17%. The input VAT can be offset against the output VAT. VAT payable
        or receivable balance presented on the Company’s balance sheets represents
        either the input VAT less than or larger than the output VAT. The debit balance
        represents a credit against future collection of output VAT instead of a
        receivable.
 
 **Research
        and Development**
 
 Research
        and development costs are expensed as incurred. The actual research and
        development expense incurred for the years ended December 31, 2005, 2006
        and
        2007 was $869,792, $1,286,527 and $1,214,684, respectively. After offsetting
        against the government subsidies and other revenue, which were specified
        as
        supporting research and development efforts via the proceeds collected from
        value added tax, the net research and development expenses for the years
        ended
        December 31, 2005 ,2006, and 2007 was $727,302, $786,322 and $1,054,367,
        respectively.
 
 F-16
  **DIGUANG
          INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        3 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)**
 
 **Use
        of Estimates**
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reporting period. Actual results could differ materially from
        those
        estimates.
 
 **Comprehensive
        Income (Loss)**
 
 The
        Company adopted Statement of Financial Accounting Standard No. 130, “Reporting
        Comprehensive Income” (“SFAS No. 130”), issued by the Financial Accounting
        Standards Board (“FASB”). SFAS No. 130 establishes standards for reporting and presentation
        of comprehensive income (loss) and its components in a full set of
        general-purpose financial statements. The Company has chosen to report
        comprehensive income (loss) in the statements of income and comprehensive
        income. Comprehensive income (loss) is comprised of net income and all changes
        to stockholders’ equity except those due to investments by owners and
        distributions to owners.
 
 **Earnings
        (Loss) Per Share**
 
 The
        Company presents earnings per share in accordance with the Statement of
        Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”).
        SFAS No. 128 replaces the calculation of primary and fully diluted earnings
        (loss) per share with basic and diluted earnings (loss) per share. Basic
        earnings (loss) per share includes no dilution and is computed by dividing
        income (loss) available to common shareholders by the weighted average number
        of
        common shares outstanding during the period. Diluted earnings (loss) per
        share
        reflects the potential dilution of securities that could share in the earnings
        of an entity, similar to fully diluted earnings (loss) per share. The Company
        granted stock options to purchase 540,000 shares of its common stock on March
        1,
        2006. The outstanding shares subject to the options at December 31, 2006
        and
        2007 were 506,000 and 407,417 shares
        respectively. The stock options granted during 2006 and 2007 did not have
        impact
        on determination of the diluted EPS for the year ended December 31, 2006
        and
        2007 as they were anti-diluted. As of December 31, 2007, t he
        Company had repurchased 242,300 shares of stock at average price of $1.77
        per
        share, resulting in 22,350,700 shares of common stock outstanding, which
        was
        used as the basis of computation of earnings per share.
 
 **Share-Based
        Payments**
 
 The
        Company adopted Statement of Financial Accounting Standards No 123(R):
“Share-Based Payments” (SFAS 123R) effective January 1, 2006. SFAS 123R amends
        existing accounting pronouncements for share-based payment transactions in
        which
        an enterprise receives employee and certain non-employee services in exchange
        for (a) equity instruments of the enterprise or (b) liabilities that are
        based
        on the fair value of the enterprise’s equity instruments or that may be settled
        by the issuance of such equity instruments. SFAS 123R generally requires
        such
        transactions be accounted for using a fair-value-based method. As the Company
        did not grant any stock options and warrants before January 1, 2006 and granted
        stock options to purchase 540,000 shares of its common stock on March 1,
        2006,
        the Company accounted for the stock option granted using a fair-value-based
        method in accordance with SFAS No. 123R.
  F-17
  **DIGUANG
          INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        3 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)**
 
 **Appropriations
        to Statutory Reserve**
 
 Under
        the
        corporate law and relevant regulations in China, the subsidiary of the Company
        located in the mainland China (Diguang Electronics) is required to appropriate
        a
        portion of its retained earnings to statutory reserve. It is required to
        appropriate 10%(the proportion is 15% before 2006) of its annual after-tax
        income each year to statutory reserve until the statutory reserve balance
        reaches 50% of the registered capital. In general, the statutory reserve
        shall
        not be used for dividend distribution purpose.
 
 **Recently
        Issued Accounting Pronouncements**
 
 In
        September 2006, the FASB issued SFAS No. 157, *“* ***Fair
        Value Measurements*** *”* (SFAS
        No.
        157). SFAS No. 157 defines fair value, establishes a framework for
        measuring fair value in generally accepted accounting principles and expands
        disclosures about fair value measurements. SFAS No. 157 applies under other
        accounting pronouncements that require or permit fair value measurements.
        The
        Company is required to adopt SFAS No. 157 effective at the beginning of
        2008. The Company is evaluating the impact that the adoption of this statement
        may have on its consolidated financial statements.
 
 In
        February 2007, the FASB issued SFAS No. 159, *“* ***The
        Fair Value Option for Financial Assets and Financial Liabilities, including
        an
        amendment of FASB Statement No. 115*** *”* (SFAS
        No.159). SFAS No. 159 permits companies to choose to measure many financial
        instruments and certain other items at fair value that are not currently
        required to be measured at fair value and establishes presentation and
        disclosure requirements designed to facilitate comparisons between companies
        that choose different measurement attributes for similar types of assets
        and
        liabilities. The provisions of SFAS No. 159 become effective as of the
        beginning of 2008. The Company is evaluating the impact that the adoption
        of
        this statement may have on its consolidated financial statements.
 
 In
        December 2007, the FASB issued Statement of Financial Accounting Standards
        No. 141 (revised 2007), “ ***Business
        Combinations*** ”
        (“SFAS No. 141(R)”). SFAS 141(R) changes accounting for acquisitions
        that close beginning in 2009. SFAS No. 141R broadens the guidance of SFAS
        No.
        141, extending its applicability to all transactions and other events in
        which
        one entity obtains control over one or more other businesses. It broadens
        the
        fair value measurement and recognition of assets acquired, liabilities assumed,
        and interests transferred as a result of business combinations. SFAS No.
        141R
        expands on required disclosures to improve the statement users’ abilities to
        evaluate the nature and financial effects of business combinations.
        SFAS No. 141R is effective for fiscal years beginning on or after
        December 15, 2008 (fiscal year beginning July 1, 2009 for the Company). The
        Company is currently assessing the impact that the adoption of SFAS No.
        141R may have on its financial position, results of operations, and cash
        flows.
 
 In
        December 2007, the FASB issued Statement of Financial Accounting Standards
        No. 160, “ ***Noncontrolling
        Interests in Consolidated Financial Statements, An Amendment of ARB
        No. 51*** ”
        (“SFAS No. 160”). SFAS No. 160 requires that a noncontrolling interest in a
        subsidiary be reported as equity and the amount of consolidated net income
        specifically attributable to the noncontrolling interest be identified in
        the
        consolidated financial statements. It also calls for consistency in the manner
        of reporting changes in the parent’s ownership interest and requires fair value
        measurement of any noncontrolling equity investment retained in a
        deconsolidation. SFAS No. 160 requires retroactive adoption of the
        presentation and disclosure requirements for existing minority interests.
        The
        Company is currently assessing the impact that the adoption of SFAS No. 160
        may have on its financial position, results of operations, and cash flows.
  F-18
  **DIGUANG
          INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        4 ─ INVENTORIES**
 
 The
        inventories are as follows:
 
 December
                  31,2006
              
              2007Raw
                  materials
              
              $
              2,097,996
              
              $
              3,631,197Work
                  in progress
              
              
              972,008
              
              
              1,603,662Finished
                  goods
              
              
              1,367,489
              
              
              1,802,523Consignment
                  goods
              
              
              522,571
              
              
              1,303,904$
              4,960,064
              
              $
              8,341,286Provision
              
              
              (563,817
              )
              
              (841,518
              )Inventories,
                  net
              
              $
              4,396,247
              
              $
              7,499,768
 
 **NOTE
        5 ─ PROPERTY, PLANT AND EQUIPMENT**
 
 A
        summary
        of property, plant and equipment at cost is as follows:
 
 December
                  31,2006
              
              2007Land
                  usage rights
              
              $
              584,455
              
              $
              2,993,885Plant
                  and office buildings
              
              
              4,532,021
              
              
              10,505,835Machinery
              
              
              2,837,082
              
              
              4,090,772Office
                  equipment
              
              
              593,330
              
              
              937,505Vehicles
              
              
              186,108
              
              
              277,925Software
              
              
              13,698
              
              
              111,260Leasehold
                  improvement
              
              
              1,090,071
              
              
              1,322,5379,836,765
              
              
              20,239,719Accumulated
                  depreciation
              
              
              (1,515,761
              )
              
              (2,789,848
              )$
              8,321,004
              
              $
              17,449,871
 
 The
        depreciation and amortization for the years ended December 31, 2005, 2006
        and
        2007, were $499,203, $766,141 and $1,197,819, respectively.
 
 The
        office space of 1,220 square meters acquired by Diguagn Electronics at a
        cost of
        RMB15,369,877 (equivalent of $2,107,021) was put in use in May 2007 as the
        office building of Diguang International Development Co., Ltd. and Diguang
        Electronics.
 
 Pursuant
        to the Board resolution of Diguang Electronics dated June 28, 2007, it was
        resolved that Diguang Electronics would acquire an land usage right of a
        34,930
        square meters land in Shenzhen at a total cost of RMB17,278,052 (equivalent
        of
        $2,368,609). On June 29, 2007, an acquisition agreement was entered into
        between
        Diguang Electronic and Shenzhen Municipal Bureau of Land Resources and Housing
        Management. Diguang Electronics had made full payment of RMB17,278,052 and
        the
        land had not been put in use as of December 31, 2007.
  F-19
  **DIGUANG
          INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        6 ─ RELATED PARTY TRANSACTIONS**
 
 **Related
        Party Relationships**
 
 Name
                  of Related Parties
              
              
              Relationship
                  with the CompanyMr.
                  Yi Song
              
              
              One
                  of the shareholders of the CompanyMr.
                  Hong Song
              
              
              One
                  of the shareholders of the CompanyShenzhen
                  Diguang Engine & Equipment Co., Ltd. (a China based
                  entity)
              
              
              80%
                  owned by Mr. Yi Song and 20% owned by Mr. Hong SongSino
                  Olympics Industrial Limited
              
              
              The
                  representative of Song’s brothers
 
 The
        break-down details of due to related parties were summarized as
        follows:
 
 **Amount
                  due to**
              
              Diguang
                  Engine
              
              Stockholders
              
              TotalBalance
                  at January 1 , 2006
              
              $
              1,706,165
              
              $
              -
              
              $
              1,706,165Loan
              
              
              1,358,261
              
              
              -
              
              
              1,358,261Accrued
                  interest
              
              
              13,738
              
              
              -
              
              
              13,738Payments
                  made
              
              
              (1,779,705
              )
              
              -
              
              
              (1,779,705
              )Translation
                  adjustment
              
              
              16
              
              
              -
              
              
              16Balance
                  at December 31, 2006
              
              $
              1,298,475
              
              $
              -
              
              $
              1,298,475Accrued
                  interest
              
              
              77,113
              
              
              -
              
              
              77,113Purchase
                  price for acquisition of 65% interest
                in
                  North diamond
              
              
              -
              
              
              1,977,864
              
              
              1,977,864Purchase
                  price for acquisition of 100% interest in Dongguan Diguang
                  S&T
              
              
              -
              
              
              4,200,000
              
              
              4,200,000Purchase
                  price paid
              
              
              -
              
              
              (3,977,864
              )
              
              (3,977,864
              )Translation
                  adjustment
              
              
              90,202
              
              
              -
              
              
              90,202Balance
                  at December 31, 2007
              
              $
              1,465,790
              
              $
              2,200,000
              
              $
              3,665,790
 
 **Shenzhen
        Diguang Engine & Equipment Co., Ltd**
 
 As
        of
        December 31, 2005, Shenzhen Diguang Electronics owed $2,339 to Shenzhen Diguang
        Engine and Equipment, which was paid off by the Company during the year of
        2006.
 
 Dongguan
        Diguang S&T entered into a loan agreement with Shenzhen Diguang Engine and
        Equipment on October 20, 2006. Pursuant to the loan agreement, Shenzhen Diguang
        Engine and Equipment committed to make a loan of RMB10 million to Dongguan
        Diguang S&T through a bank at the current market rate for this type of loan.
        On October 20, 2006, Diguang Engine and Equipment advanced RMB10 million
        being
        the principal with a 5.5% interest rate to Dongguan S&T through China
        Merchants Bank, Shenzhen Nanyou Branch. And on December 31, 2007, the cumulative
        interest for the aforementioned loan was RMB692,352. The accrued interest
        will
        be paid together with the repayment of principal when the loan matures. The
        loan
        will be matured on November 30, 2008.
  F-20
  **DIGUANG
          INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        6 ─ RELATED PARTY TRANSACTIONS (Continued)**
  **Stockholders**
 
 During
        the process of acquiring 100% interest of Dongguan Diguang Science and
        Technology (Dongguan Diguang S&T), Sino Olympics Industrial Limited (Sino
        Olympics) owns 92% of interest and Shenzhen Diguang Engine & Equipment owns
        the remaining 8% of interest at Dongguan Diguang S&T. Accordingly, the
        entire consideration of $4.2 million was allocated $3,864,000 to Sino Olympics
        and $336,000 to Shenzhen Diguang Engine & Equipment. Based on the fact that
        Mr. Song brothers are the owners of both Sino Olympics and Shenzhen Diguang
        Engine & Equipment, the entire consideration of the $4.2 million was treated
        as amount due to Mr. Song Brothers. Of the $4.2 million acquisition price,
        $2
        million was paid in cash before the end of 2007 and the remaining balance
        of
        $2.2 million was recorded as a portion of liabilities of the Company. 50%
        of
        $2.2 million was classified as a portion of current liabilities and the
        remaining 50% of $2.2 million was classified as a portion of long term
        liabilities on the Company’s balance sheet as of December 31, 2007.
 
 The
        purchase price $1,977,864 for
        acquiring 65% interest in North Diamond was paid out before December 31,
        2007.
 
 **NOTE
        7 ─ LONG-TERM INVESTMENT**
 
 The
        investment in the following limited liability companies was accounted for
        under
        the cost method. Regarding investment in Huaxia (Yangzhou) Integrated O/E
        System
        Inc. (“Huaxia (Yangzhou)” thereafter), whose main product is the chips used to
        make backlight units, the Company committed to invest up to 15% interest
        by
        contributing cash of $3 million. At July 6, 2006, the Company contributed
        investment of $1.5 million to Huaxia (Yangzhou), and planed to inject additional
        capital of $1.5 million in two years after Huaxia (Yangzhou) changes the
        Business Registration Certificate. On June 6, 2007, the Company decided to
        transfer out $0.54 million of its capital commitment of $3 million to other
        investors. After the transference, the Company’s remaining capital commitment to
        Huaxia (Yangzhou) is $2.46 million, accounting for 12.3% of the total registered
        capital of the company. On November 30, 2007, Huaxia (Yangzhou) increased
        its
        paid-in capital to $15.6 million by investment from the other investors.
        The
        Company did not increase its investment accordingly; consequently, the Company
        held only 9.62% of total paid-in capital in Huaxia (Yangzhou).
 
 Since
        Huaxia (Yangzhou) suffered net loss for two consecutive years ended December
        31,
        2006 and 2007, the Company carried out an impairment review of the long-term
        investment based on the estimation that the carrying value of the net assets
        of
        Huaxia (Yangzhou) is deemed to be the net realizable value of the investment.
        The carrying amount of $1.5 million of the long-term investment is higher
        than
        the Company’s share of the estimated net realizable value; consequently, an
        impairment loss of $622,194 was recognized as of December 31, 2007 in accordance
        with APB 18.
  F-21


**DIGUANG
        INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**NOTE
        8 ─ INCOME TAXES**
 
 The
        income before income taxes in 2005, 2006 and 2007, respectively, was as
        following:
 
 Years
                  Ended December 31,2005
              
              2006
              
              2007Income
                  (Loss) in China entities
              
              $
              4,909,765
              
              $
              4,592,817
              
              $
              249,932Income
                  (Loss) in non-China and non-US entities
              
              
              4,338,675
              
              
              329,004
              
              
              (714,511
              )Income
                  (Loss) in U.Sentity
              
              
              -
              
              
              (2,632,239
              )
              
              (2,246,205
              )Elimination
                  during consolidation process
              
              
              (285,957
              )
              
              (97,263
              )
              
              234,407Income
                  (Loss) before income taxes
              
              $
              8,962,483
              
              $
              2,192,319
              
              $
              (2,476,377
              )
 
 The
        income tax provision was as follows:
 
 Years
                  Ended December 31,Current:
              
              2005
              
              2006
              
              2007China
              
              $
              532,927
              
              $
              538,334
              
              $
              60,829Federal
              
              
              -
              
              
              -
              
              
              32,714State
              
              
              -
              
              
              800
              
              
              800532,927
              
              
              539,134
              
              
              94,343Deferred:China
              
              
              -
              
              
              (86,572
              )
              
              -The
                  U.S.
              
              
              -
              
              
              -
              
              
              -$
              532,927
              
              $
              452,562
              
              $
              94,343
 
 Deferred
        tax assets and liabilities reflect the net tax effects of temporary differences
        between carrying amounts of assets and liabilities for financial reporting
        purposes and the amounts used for income tax purposes. Significant components
        that give rise to deferred tax assets as of December 31, 2006 and 2007 were
        as
        follows:
  December
                  31,Current:
              
              2006
              
              2007Bad
                  debt allowance
              
              $
              32,027
              
              $
              66,782Inventory
                  provision
              
              
              54,545
              
              
              126,228Accrued
                  salary
              
              
              -
              
              
              30,64386,572
              
              
              223,653Non-current:Net
                  operating loss carry-forwards
              
              
              4,255
              
              
              -State
                  tax impact
              
              
              157
              
              
              -4,411
              
              
              -Total
              
              
              90,983
              
              
              223,653Valuation
                  allowance
              
              
              (4,411
              )
              
              (137,081
              )Net
                  deferred tax assets:
              
              $
              86,572
              
              $
              86,572
 
 The
        difference between the effective income tax rate and the expected federal
        statutory rate was as follows:
 F-22
 **DIGUANG
            INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
        8 ─ INCOME TAXES (Continued)**
 Years
                    Ended December 31,2005
                
                2006
                
                2007Statutory
                    rate
                
                
                34.0
                %
                
                34.0
                %
                
                (34.0
                )%Income
                    tax rate reduction
                
                
                (24.0
                )
                
                (58.0
                )
                
                (41.3
                )Permanent
                    differences
                
                
                (0.0
                )
                
                47.1
                
                
                71.6Valuation
                    allowance
                
                
                -
                
                
                0.2
                
                
                5.4Other
                
                
                (4.1
                )
                
                (2.7
                )
                
                2.1Effective
                    income tax rate
                
                
                5.9
                %
                
                20.6
                %
                
                3.8
                %
 **NOTE
        9** **─** **EQUITY TRANSACTIONS**
 
 Under
        China laws and regulations, Diguang Electronics is required to appropriate
        a
        portion of its retained earning to a general reserve, which cannot be used
        for
        dividend distribution purpose. In the years ended December 31, 2005, 2006
        and
        2007, the appropriation was $368,326, $792,745 and $655,261, respectively,
        which
        was deemed a non-cash transaction for cash flow statement purpose.
 
 On
        October 8, 2005, Diguang Electronics converted its retained earnings of RMB10
        million (equivalent $1,236,445) into the registered capital resulting in
        a total
        registered capital amounting RMB15 million (equivalent $1,840,845), which
        was
        approved by relevant government agency and verified by a CPA firm and was
        deemed
        as a non-cash transaction for cash flow reporting purpose.
 
 On
        December 12, 2005, the Board of Diguang Technology resolved to declare dividend
        of $2.1 million from its retained earnings to Sino Olympics Industrial Limited.
        According to the board resolution, Sino Olympics Industrial Limited will
        receive
        the only cash payment of approximately $111,140 at the end of February 2006,
        after netting of amount of $1,988,860 of due from stockholders, which was
        deemed
        as a non-cash transaction for cash flow statement purpose.
 
 As
        of
        March 17, 2006 right before the reverse merger and private placement took
        place,
        Online had 11,518,233 shares of common stock outstanding. The board of directors
        and majority shareholders of Online resolved to implement a 3-for-5 reverse
        split. Consequently, the total outstanding share number after the reverse
        split
        was 6,910,940. Terry Wonderly, the majority shareholder, agreed to cancel
        4,967,940 shares of common stock she owned. After this cancellation, Online
        had
        1,943,000 shares of common stock outstanding right before reverse merger
        and
        private placement. Of the 1,943,000 shares of common stock issued and
        outstanding, Chardan Capital LLC (the consultant of Online for the reverse
        merger and private placement) accounted for 800,000 shares and Chardan Capital
        Markets and Maxim (two placement agents) accounted for 243,000
        shares.
 
 On
        March
        17, 2006, in connection with the reverse acquisition between Diguang
        International Holdings and Online, the Company issued 2.4 million shares
        of its
        common stock to 91 accredited investors at $5.00 per share to raise cash
        of $12
        million. After deducting the offering expenses of $1,647,124 paid by cash
        and
        the accrued offering expense of $93,500, the Company recorded the net proceeds
        of $10,259,376. The Company also deducted from additional paid-in capital
        the
        offering expenses of $25,718 incurred in 2005 and presented as a deferred
        expense on the balance sheet as of December 31, 2005. This deduction was
        deemed
        as a non-cash transaction for cash flow statement purpose.
 
  F-23
 **DIGUANG
          INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
        9 ─ EQUITY TRANSACTIONS (Continued)**
 
 In
        accordance with the signed Share Exchange Agreement, the shareholders of
        Diguang
        International Holdings Limited will be granted certain incentive shares if
        the
        Company (post reverse merger) meets certain financial performance criteria.
        The
        incentive shares and financial performance criteria are as follows:
 
 Total
                Incentive
                Shares
              
              2006
              
              2007
              
              2008
              
              2009Sino
                  Olympics Industries Limited
              
              
              6,000,000
              
              
              500,000
              
              
              1,500,000
              
              
              2,000,000
              
              
              2,000,000After-tax
                  Profit Target (in million) (1)
              
              
              
              
              $
              15.7
              
              $
              22.8
              
              $
              31.9
              
              $
              43.1
 
 (1)
        After-tax profit targets shall be the income from operations, less taxes
        paid or
        payable with regard to such income, excluding the effect on income from
        operations, if any, resulting from issuance of Incentive Shares in any year.
        By
        way of example, if the Incentive Shares for 2006 are earned and issued in
        2007
        with an aggregate value of $7 million, and as a result the income from
        operations for 2007 is reduced by $7 million, the determination of whether
        the
        after-tax profit targets are hit for 2007 will be made without deducting
        the $7
        million from income from operations. That is, if income from operations was
        $20
        million after the charge for issuance of the Incentive Shares, for purposes
        of
        issuance of Incentive Shares for 2007, income from operations will be deemed
        to
        be $27 million, and whether the target is hit will be determined by deducting
        from $27 million the amount of taxes that would have been paid or payable
        had
        income from operations actually been $27 million.
 
 The
        Company accounts for the transactions of issuing these incentive shares based
        on
        the fair value on the grant date. Under SFAS 123R, the Company assesses whether
        it is probable at the grant date the awards would be earned and if it is
        probably the expense would be recorded over the period (which in this case
        is
        specified as the shareholders of Diguang
        International Development Co., Ltd. can earn
        any of the amounts each year). The after-tax profit target for the year ended
        December 31, 2006 and 2007, respectively, had not been met and the Company
        did
        not record any share-based compensation for Song Brothers during this reporting
        period.
 
 In
        accordance with the board resolution of the Company dated February 21, 2007,
        the
        Company appointed Chardan Capital Markets, LLC, (“Chardan”), as the agent to
        purchase back up to $5 million of the Company’s common shares on behalf of the
        Company pursuant to Rule 10b-18 and 10b-5. As of December 31, 2007, the
        Company had repurchased 252,300 shares of stock at average price of $1.77
        per
        share, resulting in 22,340,700 shares of common stock outstanding as of December
        31, 2007. The repurchased shares at cost were presented in line of treasury
        stock in the stockholders’ equity section on the balance sheet as of December
        31, 2007.
 
 Due
        to
        the acquisition of two previously separate entities, at the respective effective
        date, the Company reclassified $74,258, which was 65% accumulated translation
        adjustment in North Diamond at December 31, 2006 and $280,128, which was
        100%
        translation adjustment at Dongguan Diguang S&T at December 30, 2007 as
        additional paid-in capital as result of the fact that the Company paid cash
        to
        acquire 65% interest in North Diamond and 100% interest of Dongguan Diguang
        S&T so that the accumulated translation adjustment in the respective entity
        became part of the Company’s operating assets, which will be included in the
        process of determining net income in accordance with SFAS No. 52.
  F-24
 **DIGUANG
          INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
        10 ─ STOCK OPTIONS**
 
 Effective
        on January 1, 2006, the Company adopted the fair value recognition provisions
        of
        Statement of Financial Accounting Standards (SFAS) No. 123 (R), *“Share-Based
        Payments.”* The
        Company recognized the share-based compensation cost based on the grant-date
        fair value estimated in accordance with the new provisions of SFAS No. 123
        (R).
        There were no stock options issued before January 1, 2006.
 
 For
        the
        years ended December 31, 2006 and 2007, the Company issued stock options
        to
        purchase 540,000 shares at $5 per share and 26,000 shares at $5 per share,
        respectively. The Company applied the Black-Scholes option pricing model to determine the fair value of stock options
        on each of the grant dates. The fair value was $5,592,509 for 540,000 stock
        options granted in 2006 at $11.10 per share and $56,680 at $2.18 per share
        for
        26,000 stock options granted in 2007. The
        share-based compensation recognized for stock options granted was $2,134,342
        and
        $1,206,091 for the years ended December 31, 2006 and 2007,
        respectively.  No tax benefit was recognized for the share-based
        compensation due to the stock options granted.
 
 **Assumptions**
 
 The
        disclosure of the above fair value for these awards was estimated using the
        Black-Scholes option pricing model with the assumptions listed
        below:
 
 Years
                  Ended December 31,2006
              
              2007Expected
                  volatility
              
              
              48.04
              %
              
              105.04
              %Weighted
                  average volatility
              
              
              N/A
              
              
              N/AExpected
                  life
              
              
              7
                  years
              
              
              7
                  yearsRisk
                  free interest rate
              
              
              4.60
              %
              
              4.51
              %
 
 The
        expected volatilities are essentially based on the historical volatility
        of the
        Company’s stock. The observation was made on a daily basis. The periods of
        observation covered were from January 1, 2005 through March 1, 2006 for options
        granted on March 1, 2006 and from January 1, 2005 through March 1, 2007 for
        options granted on March 1, 2007. The expected terms of stock options are
        based
        on the average vesting period and the contractual life of stock options granted.
        The 400,000 shares of stock options granted to employees vest on each of
        the
        first four anniversaries of the granting date. The 60,000 shares of stock
        options granted to directors vest at the end of each month starting from
        the
        grant date for 36 months in order to match the term of directorship. The
        80,000
        shares of stock options granted to the former Chief Financial Officer vest
        at
        the end of each month starting from the grant date for 48 months. The 26,000
        shares of stock options granted in 2007 vest on each of the first four
        anniversaries of the granting date. The risk-free rates are consistent with
        the
        expected terms of stock option and based on the U.S. Treasury yield curve
        i n
        effect
        at the time of grant. The Company estimated the forfeiture rate of its stock
        options was 6.13%.
 
 **Stock
        Option Plan**
 
 The
        Company’s 2006 Stock Incentive Plan (the “2006 Plan”), which is
        shareholder-approved, permits the grant of stock options to its employees
        up to
        1,500,000 shares of common stock. The Company believes that such awards better
        align the interests of its employees with those of its shareholders. Option
        awards are generally granted with an exercise price per share equal to the
        market price of the grant date. These options have up to ten-year contractual
        life term.
 
 F-25
 
 **DIGUANG
              INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        10 ─ STOCK OPTIONS (Continued)**
 
 Awards
        generally vest over four years in equal installments on the next four succeeding
        anniversaries of the grant date. The share-based compensation will be recognized
        based on graded vesting method over the four years or over the three years
        regarding the options granted to directors in order to match their directorship
        terms. A summary of option activities under the 2006 Plan during the years
        ended
        December 31, 2006 and 2007 is presented as follows:
 Stock
                    Options
                
                Shares
                
                Weighted-
                    Average Exercise Price
                
                Weighted
                    - Average Remaining Contractual TermOutstanding
                    at Janaury1, 2006
                
                
                -
                
                $
                -
                
                
                -Granted
                
                
                540,000
                
                
                5.00
                
                
                9.17Exercised
                
                
                -
                
                
                -
                
                
                -Forfeited
                    or expired
                
                
                (34,000
                )
                
                -
                
                
                -Outstanding
                    at December 31, 2006
                
                
                506,000
                
                
                5.00
                
                
                9.17Exercisable
                    at December 31, 2006
                
                
                33,333
                
                $
                5.00
                
                
                9.17Granted
                
                
                26,000
                
                
                5.00
                
                
                9.17Exercised
                
                
                -
                
                
                -
                
                
                -Forfeited
                    or expired
                
                
                (124,583
                )
                
                -
                
                
                -Outstanding
                    at December 31, 2007
                
                
                407,417
                
                
                5.00
                
                
                8.22Exercisable
                    at December 31, 2007
                
                
                145,389
                
                $
                5.00
                
                
                8.20
  The
        trading price of the Company stock at December 31, 2006 and 2007 was $4.50
        and
        $2.50 per share, respectively. Consequently, no intrinsic value was reported.
        A
        summary of the Company’s non-vested stock options during the years ended
        December 31, 2006 and 2007 is presented below:
 
 Non-vested
                  Options
              
              Shares
              
              Weighted-Average
                Grant
                  Date Fair ValueNon-vested
                  at January 1, 2006
              
              
              -
              
              $
              -Granted
              
              
              540,000
              
              
              11.10Vested
              
              
              (33,333
              )
              
              11.10Forfeited
              
              
              (34,000
              )
              
              11.10Non-vested
                  at December 31, 2006
              
              
              472,667
              
              $
              11.10Granted
              
              
              26,000
              
              
              2.18Vested
              
              
              (112,056
              )
              
              11.10Forfeited
              
              
              (124,583
              )
              
              10.67Non-vested
                  at December 31, 2007
              
              
              262,028
              
              $
              10.66
  F-26
  **DIGUANG
        INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
        11 ─ COMMITMENTS AND CONTINGENCIES**
 
 **Operating
        Leases**
 
 On
        October 8, 2006, The Company entered into a lease agreement with Wuhan Hanstarr
        Technology Ltd. (“Wuhan Hanstarr” thereafter), to rent equipment with rental of
        RMB235,200 (approximately $30,996) per month from December 1, 2006 to December
        31, 2008. But the original lease agreement was cancelled in 2007 and a new
        lease
        agreement was entered into between Wuhan Diguang and Wuhan Hanstarr on June
        6,
        2007. The new lease agreement lasted only for approximately six months ended
        December 31, 2007, with rental of RMB235,200 (approximately $30,996) per
        month.
        It was agreed that the lease agreement should be renewed every year. Pursuant
        to
        this particular clause, both partied entered into a new lease agreement for
        2008
        on October 29, 2007, on which the rental was RMB200,000 (approximately $27,418)
        per month for the year ended December 31, 2008. Also on October 8, 2006,
        the
        Company entered into a lease agreement with Wuhan TPV Display Technology
        Co.,
        Ltd. (“Wuhan TPV” thereafter) to rent the factory with rental of
        RMB37,431(approximately $4,933) per month from December 1, 2006 to December
        31,
        2008.
 
 Future
        minimum payments required under the lease agreement with Wuhan
        Hanstarr and Wuhan TPV that has
        an initial or a remaining lease term in excess of one year at December 31,
        2007
        are as follows:
 
 Year
                  Ended December 31,
              
              Amount2008
              
              $
              390,586
 
 On
        October 31, 2005 and August 4, 2006, Dihao entered into two lease agreements
        with Transcend Optronics (Yangzhou) Co, Ltd. to rent the factory premises
        for
        the period from October 1, 2005 to September 30, 2007. In October 2007, Dihao
        and Transcend Optronics (Yangzhou) Co, Ltd. renewed the lease agreement to
        rent
        the factory premises for the period from October 1, 2007 to September 30,
        2009
        with rental of RMB 96,747(approximately $12,750) per month.
 
 Future
        minimum payments required under the lease agreement for the manufacturing
        facilities of Dihao that has an initial or a remaining lease term in excess
        of
        one year at December 31, 2007 are as follows:
 
 Years
                  Ended December 31,
              
              Amount2008
              
              $
              159,1542009
              
              
              119,365Total
              
              $
              278,519
 
 **Long-term
        Investment Commitment**
 
 The
        Company has committed to invest additional $0.96 million of cash to Huaxia
        (Yangzhou). Please refer to Note 7 for details.
  F-27
  **DIGUANG
        INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
        12 ─ EARNINGS PER SHARE**
 
 The
        following table sets forth the computation of basic and diluted net earnings
        per
        share for the periods as indicated:
 Years
                    Ended December 31,2005
                
                2006
                
                2007**Numerator:**Net
                    income (loss) attributable to common shareholders
                
                $
                8,513,883
                
                $
                1,664,816
                
                $
                (2,905,337
                )Net
                    income (loss) used in computing diluted earnings per share
                
                $
                8,513,883
                
                $
                1,664,816
                
                $
                (2,905,337
                )**Denominator:**Weighted
                    average common shares outstanding - basic
                
                
                18,250,000
                
                
                21,383,960
                
                
                22,531,384Potential
                    diluted shares from stock options granted
                
                
                -
                
                
                -Weighted
                    average common share outstanding - diluted
                
                
                18,250,000
                
                
                21,383,960
                
                
                22,531,384Basic
                    earnings per share
                
                $
                0.47
                
                $
                0.08
                
                $
                (0.13
                )Diluted
                    earnings per share
                
                $
                0.47
                
                $
                0.08
                
                $
                (0.13
                )
  **NOTE
        13 ─ GOVERNMENT SUBSIDIES**
 
 The
        local
        government in Shenzhen provided government subsidies sourcing from the proceeds
        of value added tax and corporate income tax collected to encourage Diguang
        Electronics’ research and development efforts. All
        subsidies were accounted for based on the hard evidence that Diguang Electronics
        should be entitled to receive these subsidies or that cash has been received. Government
        subsidies received with specification to support the research and development
        efforts were first offset against Diguang Electronics’ research and development
        expense and the remaining balance, if any, together with proceeds from other
        subsidy programs, were recognized as other income in accordance with
        internationally prevailing practice. The government subsidies for the years
        ended December 31, 2005, 2006, and 2007 were $203,012, $163,121 and $160,317,
        respectively.
 
 **NOTE
        14 ─ RESEARCH FUNDING ADVANCED**
 
 On
        April
        23, 2007, Diguang Electronics entered a fund sharing agreement with Skyworth
        LCD
        Technology Co., Ltd. (“Skyworth LCD” thereafter) to share aggregate funding of
        RMB3 million (approximately $411,263) granted by the Department of Science
        and
        Technology of Guangdong Province to support the research of large size TFT
        back
        light technology. According to the sharing agreement, Diguang Electronics
        will
        receive 42.4% or RMB1,275,000 (approximately $174,787) of the total fund
        available in two installment payments. On May 23, 2007 Diguang Electronics
        received the first installment of RMB892, 500 (approximately $122,350). In
        accordance with the government grant, if the final product resulting from
        the
        research and development project conducted by Diguang Electronics failed
        to meet
        the standards established by the designated government authorities at the
        appropriate level in this particular filed, the amount of fund received by
        the
        Company shall be returned in full.
 
 On
        June
        22, 2007 Diguang Electronics entered a fund sharing agreement with Hisense
        Electric Co., Ltd. (“Hisense” thereafter) to share aggregate funding of RMB3.77
        million (approximately $516,821) granted by the Ministry of Science and
        Technology of the People’s Republic of China for supporting technology research
        of LED back light products. According to the sharing agreement, Diguang
        Electronics will receive 40% or RMB1,508,000 (approximately $206,728) of
        the
        total amount available in three installment payments. On May 23, 2007 Diguang
        Electronics received the first installment payment of RMB900, 000 (approximately
        $123,370). In accordance with the government grant, if the final product
        resulting from the research and development project conducted by Diguang
        Electronics failed to meet the standards established by the designated
        government authorities at the appropriate level in this particular filed,
        any
        amount of fund received by the Company shall be returned in full.
 F-28
  **DIGUANG
          INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
        14 ─ RESEARCH FUNDING ADVANCED (Continued)**
 
 As
        of
        December 31, 2007, these two research projects were still in progress and
        no
        revenue had been generated and cost incurred was expensed. In accordance
        with
        EITF 07-01, “Accounting for Collaborative Arrangements,” the Company believes
        that it does not have any significant business and financial risk associated
        with the participation in the above two collaborative arrangements other
        than
        the fact that it may have the obligation to pay back the entire amount of
        fund
        received if the result of research projects conducted by the Company would
        not
        satisfy the standards established by the designated government authority
        at the
        appropriated level in this particular field. Therefore, the amount of fund
        received was presented as part of liabilities until the ultimate results
        would
        pass the test successfully.
 
 **NOTE
        15 ─ CONCENTRATION OF CUSTOMERS AND VENDORS**
 
 Customers
        and vendors who accounts for 10% or more of revenues, accounts receivable,
        purchases, and accounts payable are presented as follows:
 
 Accounts
              
              
              
              AccountsRevenue
              
              Receivable
              
              Purchases
              
              Payable**2005**Customer
                  A
              
              
              31
              %
              
              6
              %
              
              -
              
              
              -Customer
                  B
              
              
              6
              %
              
              16
              %
              
              -
              
              
              -Customer
                  C
              
              
              25
              %
              
              12
              %
              
              -
              
              
              -Vendor
                  D
              
              
              -
              
              
              -
              
              
              7
              %
              
              11
              %Vendor
                  E
              
              
              -
              
              
              -
              
              
              23
              %
              
              16
              %**2006**Customer
                  F
              
              
              4
              %
              
              14
              %Customer
                  C
              
              
              10
              %
              
              0
              %Customer
                  A
              
              
              28
              %
              
              3
              %Customer
                  H
              
              
              10
              %
              
              19
              %Vendor
                  G
              
              
              
              
              
              
              
              
              10
              %
              
              0
              %Vendor
                  E
              
              
              
              
              
              
              
              
              8
              %
              
              16
              %**2007**Customer
                  C
              
              
              11
              %
              
              7
              %Customer
                  A
              
              
              12
              %
              
              3
              %Customer
                  H
              
              
              16
              %
              
              11
              %Customer
                  I
              
              
              9
              %
              
              18
              %Customer
                  J
              
              
              8
              %
              
              13
              %Vendor
                  E
              
              
              
              
              
              
              
              
              11
              %
              
              11
              %
  F-29
  **DIGUANG
        INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
        16 ─ SEGMENT REPORTING**
 
 The
        Company currently operates only in one business segment. As the Company’s major
        production base is in China while export revenue and net income in overseas
        entities is accounted for a significant portion of total consolidated revenue
        and net income, management believes that the following tables present useful
        information to chief operation decision makers for measuring business
        performance, financing needs, and preparing corporate budget, etc.
 
 Years
                  Ended December 31,2005
              
              2006
              
              2007Sales
                  to China domestic customers
              
              $
              4,921,563
              
              $
              2,714,184
              
              $
              7,297,447Sales
                  to international customers
              
              
              30,726,555
              
              
              31,528,433
              
              
              38,611,809$
              35,648,118
              
              $
              34,242,617
              
              $
              45,909,256
 
 Domestic
              
              InternationalCustomers
              
              Customers
              
              Total**2005**Revenue
              
              $
              4,921,563
              
              $
              30,726,555
              
              $
              35,648,118Gross
                  margin
              
              
              32
              %
              
              36
              %
              
              35
              %Receivable
              
              
              2,006,595
              
              
              4,074,832
              
              
              6,081,427Inventory
              
              
              3,722,087
              
              
              -
              
              
              3,722,087Property
                  and equipment
              
              
              7,694,541
              
              
              -
              
              
              7,694,541Expenditures
                  for long-lived assets
              
              
              4,846,448
              
              
              -
              
              
              4,846,448**2006**Revenue
              
              $
              2,714,184
              
              $
              31,528,433
              
              $
              34,242,617Gross
                  margin
              
              
              45
              %
              
              31
              %
              
              32
              %Receivable
              
              
              1,039,279
              
              
              5,074,974
              
              
              6,384,253Inventory
              
              
              4,396,247
              
              
              -
              
              
              4,396,247Property
                  and equipment
              
              
              8,321,004
              
              
              -
              
              
              8,321,004Expenditures
                  for long-lived assets
              
              
              6,523,373
              
              
              -
              
              
              6,523,373**2007**Revenue
              
              $
              7,297,447
              
              $
              38,611,809
              
              $
              45,909,256Gross
                  margin
              
              
              21
              %
              
              16
              %
              
              17
              %Receivable
              
              
              1,948,355
              
              
              10,765,350
              
              
              12,713,705Inventory
              
              
              7,499,768
              
              
              -
              
              
              7,499,768Property
                  and equipment
              
              
              17,449,871
              
              
              -
              
              
              17,449,871Expenditures
                  for long-lived assets
              
              
              6,172,666
              
              
              
              
              
              6,172,666
 F-30
  **DIGUANG
          INTERNATIONAL DEVELOPMENT CO., LTD.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
        17 ─ SUPPLEMENTARY INFORMATION ABOUT CASH FLOWS**
 Years
                    Ended December 31,2005
                
                2006
                
                2007**Cash
                    Paid**Interest
                
                $
                29,982
                
                $
                -
                
                $
                -Income
                    Tax
                
                
                185,417
                
                
                689,049
                
                
                (5,598
                )
  **Non-Cash
                    Transactions**
                
                Years
                    Ended December 31,2005
                
                2006
                
                2007Dividend
                    payable
                
                $
                111,140
                
                $
                -
                
                $
                -Amount
                    due to stockholders
                
                
                -
                
                
                -
                
                
                2,200,000Common
                    stock
                
                
                -
                
                
                1,943
                
                
                -Additional
                    paid-in capital
                
                
                1,236,445
                
                
                (27,661
                )
                
                354,386Appropriation
                
                
                368,326
                
                
                792,745
                
                
                655,261Retain
                    Earnings
                
                
                (1,715,911
                )
                
                (792,745
                )
                
                (2,855,261
                )Deferred
                    offering expense
                
                
                -
                
                
                25,718
                
                
                -Translation
                    adjustments
                
                
                -
                
                
                -
                
                
                (354,386
                )
  **NOTE
        18 ─** **Quarterly
        Financial Data (Unaudited)**
 
 Summarized
        quarterly financial data for 2006 and 2007 is as follows:
 
 **Quarterly
                  Financial Data****2007**
              
              First
              
              Second
              
              Third
              
              FourthNet
                  sales
              
              $
              6,762,087
              
              $
              8,896,421
              
              $
              15,719,648
              
              $
              14,531,100Gross
                  profit
              
              
              1,381,167
              
              
              1,211,739
              
              
              3,013,322
              
              
              2,215,109Net
                  income (loss)
              
              
              (1,080,391
              )
              
              (654,926
              )
              
              774,115
              
              
              (1,944,135
              )Basic
                  earnings per share
              
              $
              (0.05
              )
              $
              (0.03
              )
              $
              0.03
              
              $
              (0.09
              )**2006**
              
              
              First
              
              
              Second
              
              
              Third
              
              
              FourthNet
                  sales
              
              $
              9,366,290
              
              $
              9,603,108
              
              $
              8,867,131
              
              $
              6,482,159Gross
                  profit
              
              
              3,256,332
              
              
              3,443,770
              
              
              3,233,901
              
              
              1,257,215Net
                  income (loss)
              
              
              1,948,927
              
              
              832,933
              
              
              668,845
              
              
              (1,785,889
              )Basic
                  earnings per share
              
              $
              0.10
              
              $
              0.04
              
              $
              0.03
              
              $
              (0.08
              )
  F-31