UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington, D.C.
20549




FORM 10-K




(Mark One)


x
            Annual
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934





For
      the fiscal year ended December 31,
2009.




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 3152




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. Yeso
Nox




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. Yesx
Noo




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
      oNon-accelerated filer
      o
            Smaller reporting companyx





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




Aggregate
market value of voting and non-voting common equity held by non-affiliates of
the registrant as of December 31, 2009, 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 $5.9 million




22,072,000
shares of common stock outstanding as of February 28, 2010.





DOCUMENTS INCORPORATED BY
REFERENCE





None.









DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.


FORM 10-K


FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2009





INDEX





Table
of Contents


PagePART
      I
                4Item
      1.
                Description
      of Business
                4Item
      1A.
                Risk
      Factors
                16Item
      1B.
                Unresolved
      Staff Comments
                27Item
      2.
                Property
                27Item
      3.
                Legal
      Proceedings
                28Item
      4.
                Reserved
                28PART
      II
                28Item
      5.
                Market
      for Common Equity, Related Stockholder Matters and Issuer Purchases of
      Equity Securities
                28Item
      6.
                Selected
      Financial Data
                29Item
      7
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                29Item
      7A.
                Quantitative
      and Qualitative Disclosures About Market Risk
                39Item
      8.
                Financial
      Statements and Supplementary Data
                39Item
      9.
                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                39Item
      9A.
                Controls
      and Procedures
                40Item
      9B
                Other
      Information
                43


2




PART
      III
                44Item
      10.
                Directors
      and Executive Officers, Corporate Governance and Board
      Independence
                44Item
      11.
                Executive
      Compensation
                47Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                52Item
      13.
                Certain
      Relationships and Related Transactions
                53Item
      14.
                Principal
      Accountant Fees and Services
                54PART
      IV
                55Item
      15.
                Exhibits
      and Financial Statement Schedules
                55Signatures
                57


3





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




The
Company specializes in the design, production and distribution of 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 as well as the LED lighting,
LED displays and Notebook, which are widely developed in production, taking
together, these applications are referred to as “LCD” applications. Those
applications not only 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 display and the
like, but also include indoor and outdoor lighting, home and office use with
energy saving and environmental protections.





The
Company conducts that business principally through the operations of Shenzhen
Diguang Electronics, based in Shenzhen, thereafter “Diguang Electronics”, along
with its main backlight manufacturing operation in Dongguan, Guangdong Province
of China, Dihao (Yangzhou) Co., Ltd., based in Yangzhou, thereafter “Dihao”, and
Wuhan Diguang Electronics Co., Ltd, based in Wuhan, thereafter “Wuhan Diguang”.
As of December 31, 2009, Diguang Electronics has approximately 1,512 full-time
employees, which changes from time to time as needed; Diguang Electronics is
headquartered in Shenzhen, China, with its backlight manufacturing operations in
Dongguan, China. As of December 31, 2009, Dihao has approximately 179 full-time
employees, which changes from time to time as needed. Dihao is a subsidiary of
North Diamond, 65% of which was acquired by the Company on January 3, 2007.
Wuhan Diguang was established as in-house facilities mainly for a Taiwan-based
customer with the capacity to provide large inches TFT-LCD and it has
approximately 221 employees as of December 31, 2009.





DongguanDiguang Electronics Science
andTechnologyCo., Ltd.,thereafter“Dongguan Diguang S&T”,was established underthe laws of the People’s
Republic ofChinain 2004asthe production base ofDiguang Electronics.Dongguan Diguangcompleted its construction
ofPlant No. 1 and
Dormitory Nos. 1 and2
in2005, whichwere subsequently rented to
Diguang Electronics in 2005.The construction ofPlant No. 3 and Dormitory No. 3wascompletedin 2007and the total acreage of the
property is67,176 m2.Dongguan Diguang hasbecome a newmanufacturing base for
backlight, LED lighting R&D andproduction after it was
acquired on December 30, 2007 and theexpendedspace of the plantprovidesa vast opportunity to enlarge
the production capacity for business expansion.Dongguan
Diguang S&T started its own manufacturing activities since the second half
year of 2008.As of December 31 2009,Dongguan Diguang has
approximately64full-timeemployees.


4


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
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 2009,
the Company generated revenues of $44.1 million, net loss of $7.2 million and
cash flow used by operations of $9.1 million. The Company has been profitable
and cash flow positive each year since 1999 to 2006, and 2007 to 2009 are the
years it has recorded a loss.





The
Company’s 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, the
Company’s customers are typically the assemblers of the LCD modules,
although the Company has 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.




The
Company considers its 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. The Company has benefited from certain cost
and strategic advantages relative to its competitors and those advantages have
enabled it to maintain certain margins on the Company’s 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 the
Company’s ability to preserve margins will depend on its continuing to improve
its product quality, production efficiency and customer services relative to its
competitors.


5


Online
was organized under the laws of Nevada in 2000 as Online Processing,
Inc.




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 refer to Diguang, formerly known as Online. 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”, the Company
now has 22,593,000 shares of common stock issued and 22,072,000 shares
outstanding.





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.




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





The
Company now owns 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”.





These
three companies, Diguang Electronics, Well Planner and Diguang Technology,
comprise all of Diguang’ subsidiaries, at that time.




The
address of the Company’s executive and administrative offices is 23rd Floor,
Building A, Galaxy Century, No. 3069, Caitian Road, Futian District, Shenzhen,
the PRC. The Company’s telephone number is 86-755-2655-3152.





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 the
Company’s 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 $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
RMB1,380,000, approximately $170,160 at an exchange rate of 8.11 RMB per dollar,
and an operating life of 20 years starting on that date. 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, approximately $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. 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 23rd Floor, Building A, Galaxy Century, No. 3069,
Caitian Road, Futian District, Shenzhen, the PRC.


6





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. 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. Well Planner mainly sells to Diguang Technology and has
smaller sales to third-party customers since 2008. Well Planner’s address is
10/F, 579 Nathan Road, Mongkok, Kowloon, Hong Kong SAR.




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. 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. 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.





The
Company has been conducting operations in only one business segment; hence,
there is only a segment disclosure which is based on geographical locations of
the customers.





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 the Company’s PRC production capability and capacity,
Diguang incurred capital expenditures of $6.17 million, $2.61 million and $0.16
million in 2007, 2008 and 2009, respectively. The Company depreciates its
production equipment and office equipment on a straight-line basis over an
estimated useful life of five to ten years, and land usage right and plant and
buildings over 20 to 50 years.





The
Company plans to construct a manufacturing facility for production of large size
LED products with a total capital commitment of $10.5 million. Please refer to
Note 4 ─ Plant, Property and Equipment to Financial
Statements.


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




Description
of the Amended and Restated Share Exchange Agreement




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





On March
17, 2006, the Company accepted subscriptions from 94 accredited investors to
acquire 2,400,000 shares of its 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.





The
parties 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. No option issued by the Company has been exercised and total
outstanding options amounted to 1,201,917 shares as of December 31, 2009. As the
limit on the total options to be issued remains at 1,500,000 shares, under the
assumed plan approximately 298,083 shares remain available for future
issuances.


7





In the
Share Exchange, the Company acquired all of Diguang Holdings’ issued and
outstanding shares of common stock in exchange for 18,250,000 shares of its
common stock. Prior to that, the Company effected a 3 for 5 reverse stock split
and 4,967,940 shares of the Company’s 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, the Company now has 22,593,000 shares of
common stock issued.




In
accordance with the Share Exchange Agreement, the Company’s 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 would 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.





The
Company accounts 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.




The
Company did not meet the 2006, 2007, 2008 and 2009 after-tax profit target. No
incentive shares have been issued to date.





Financial
Information about Geographic Areas





Total revenues by category
of activity and geographic market





The
Company currently operates mainly in
backlight production with portions of new products of LED monitor, LED general
lighting, and LED TV sets assembly. Since the Company’s 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 the Company’s
corporate budget, among other things.





Years Ended December 31,2007
                
                
                2008
                
                
                2009Sales
      to China domestic customers
                
                $
                7,297,447
                
                
                $
                15,002,027
                
                
                $
                17,785,350Sales
      to overseas customers
                
                
                38,611,809
                
                
                
                40,428,654
                
                
                
                26,289,899$
                45,909,256
                
                
                $
                55,430,680
                
                
                $
                44,075,249





Financial Information about
Geographic Areas





During
2007, 2008 and 2009 the Company derived $7,297,447, $15,002,027 and $17,785,350
respectively, of its revenues from customers in China, excluding Hong Kong and
Taiwan, the domicile of the Company’s four principal operating subsidiaries,
Diguang Electronics, Dihao, Wuhan Diguang and Dongguan Diguang .





Revenues
from customers outside of China for 2007, 2008 and 2009 totaled $38,611,809,
$40,428,654 and $26,289,899 respectively. The Company attributes sales to
individual foreign countries based on the destination to which it ships the
products.





There are
certain risks associated with the concentration of the Company’s 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
17.7% so far.


8





This
17.7% increase in the value of the RMB has produced certain effect on the
Company’s business or its financial performance. If the Chinese government
allows significant further revaluations of the RMB in the near future, it could
have adverse consequences on the Company’s ability to compete internationally.
In particular, such a revaluation would make the Company’s products relatively
more expensive in markets outside of China than before the revaluation,
representing about 60% of the Company’s product revenues, including those from
Hong Kong, which could slow or eliminate the Company’s anticipated
growth.





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 the Company’s 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 the Company
cannot know whether the revaluation of the RMB would have an overall negative or
positive effect on the value of its 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 the Company’s 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 the Company currently depends and expects 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 the Company’s business prospects due to
its Chinese competitors’ infringement on the Company’s intellectual
property.





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





Narrative
Description of Business





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





The
Company specializes 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 as well as the LED lighting,
LED displays and Notebook, which are widely developing in the production, taken
together, these applications are referred to as “LCD” applications. Those
applications not only 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, but also include the indoor and outdoor lighting, the home and office use
with the energy saving and environmental protections. The Company conducts that
business principally through the operations of Diguang Electronics, Dihao, and
Wuhan Diguang.





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.





The
Company achieved some success in expanding its customer base and its geographic
markets during 2009. Sales to the Company’s largest customer generated 11% of
its revenues for 2009 compared with 20% in 2008. Sales to the Company’s three
largest customers decreased to 22% of 2009 revenue compared to 42% in 2008. The
Company’s top three customers in 2009 are Hannstar-TPV Display (Wuhan) Corp.,
Shinco Group and Action Asia (Shenzhen) Co. Ltd. The Company is continuing its
efforts to diversify and broaden its customer base to become less reliant on
these customers, including the development of new products, such as backlights
for flat panel televisions.


9





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. The
Company has 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 the Company 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 with a relative lower labor cost level after the enactment and
effectiveness of the new labor law in China on April 1, 2008. 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 may require more
time. This rapid fulfillment capability is possible because of Diguang
Electronics’ 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 ISO9002 certification from Shenzhen Quality
Certification Centre; in 2002 it received QS9000 certification from Moody
International Certification, ISO9001 certification from the TUVCERT
Certification Body in 2005, and the certification of ISO/TS16949 in 2006. 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, 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 includes such costs of developing products to
meet customers’ specification in current period expenses and takes consideration
of the costs in its pricing with the customers.




The
Company’s sales are obtained either through its internal workforce, its
subsidiaries of Well Planner and Diguang Technology, or through commissioned
sales agents that represent the Company 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 the Company’s business related to the design,
production and distribution of backlights in China, principally through the
operations of Diguang Electronics, the Company is able to take advantage of the
low labor and other costs in China relative to other countries.





The
Company’s business is subject to slight seasonal fluctuation. Many of the
products that incorporate its 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 the Company’s business. Overall, the Company does not consider its business
to vary from quarter to quarter to the extent that would justify describing it
as a seasonal business.





There are
no practices in the Company’s industry that have a significant effect on working
capital requirements. Most of the Company’s 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 the Company develops 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 the Company has accumulated approximately 2,300
of them during its years of operation, many of which can be reused to make a new
product with little or no adjustment. A significant aspect of the Company’s
business model is providing a rapid response to customer orders, which helps to
minimize the amount of inventory the Company must carry. The Company also does
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. The Company purchased its raw materials from over 20
suppliers in Asia and from two United States based companies, 3M and Cree. The
Company follows a practice of obtaining each of its 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 the
Company’s quality standards are consistently met.


10





Significant
Recent Events





Credit
facilities provided by banks





1. 
    On July 1, 2008, Diguang Electronics entered into a Facility
Agreement, the “Facility Agreement”, with Shenzhen Ping An Bank Co. Ltd., “Ping
An Bank”, as lender, pursuant to which, Ping An Bank would provide Diguang
Electronics with bank loan facilities for up to RMB40,000,000, or
$5,863,000.





The
facilities under the Facility Agreement, the “Facilities”, consist of (i) a
RMB30,000,000, or $4,397,000, term loan that was available until June 30, 2009
at a prevailing benchmark interest rate stipulated by the People’s Bank of China
and (ii) a RMB10,000,000, or $1,466,000, bankers’ acceptance. The Facilities
were expected to be used in connection with the purchase of raw materials
relating to Diguang Electronics’ business and would mature on December 1, and 2,
2009 respectively.





To renew
bank loans of RMB30 million with Shenzhen Ping’an Bank, Diguang Electronics
repaid RMB30 million on December 1 and December 2, 2009 respectively when the
loans fell due. Diguang Electronics received RMB10 million, equivalent to
$1,465,008 as of December 31, 2009 from the Bank on December 25, 2009 and the
remaining RMB20 million was received on January 6, 2010. The renewed bank loan
will mature in one year. Pursuant to the renewed loan agreements, the plant in
Dongguan Diguang S&T with net book value of $4,409,253 was put as pledge and
the prevailing annual standard rate was 5.46% under the stipulation from the
People's Bank of China.





The
abovementioned RMB30 million loans were borrowed under the RMB30 million bank
loan facilities provided by Shenzhen Ping’an Bank. Diguang Electronics also
received pledged import financing loans from Shenzhen Ping’an Bank. The import
financing loans were guaranteed by equivalent deposit of cash.





The
Company borrowed bank loans of $2,194,175 and $2,159,475 for import financing
purposes from Shenzhen Ping’an Bank on May 15, 2009 and June 12, 2009,
respectively. The loans will mature in one year and have annual rates of 1.68%
and 1.9425%. The proceeds of the above $4,353,650 loans were received in U.S.
Dollars, and Diguang Electronics was required to repay the loans in RMB at fixed
exchange rate of 6.8354 and 6.8336 between U.S. Dollar and RMB respectively when
the loans mature. The impact of change in exchange rate on the loan is
immaterial as of December 31, 2009. The loans were guaranteed by an equivalent
cash deposit in local currency of RMB 29,631,994, with an annual deposit rate of
2.25%.





On
January 12, 2010, Diguang Electronics received import financing loan of
$2,996,989 from Shenzhen Ping’an Bank with annual interest of 2.31%, which will
mature on January 12, 2011. Diguang Electronics was required to repay the loan
in RMB at the fixed exchange rate of 6.7601 between U.S. Dollar and RMB when the
loan matures. The cash deposit to guarantee the loan was RMB20,461,641,
equivalent to $2,997,018 as of December 31, 2009 with an annual deposit rate of
2.25%.





2. 
    On May 18, 2009, the Board of Directors of the Company approved
the application of Diguang Electronics for banking facilities of RMB100 million
from China Development Bank Co., Ltd. The banking facilities will be used in
connection with the construction of the new facility located on the land owned
by Diguang Electronics in Guangming District of Shenzhen City. The application
of RMB100 million bank facilities had been approved by China Development Bank
Co., Ltd.





On June
25, 2009, before the application procedures were finalized, Diguang Electronics
entered into a loan agreement with China Development Bank Co., Ltd. to borrow
RMB30 million, which will be included in the aforementioned RMB100 million
facilities when the final approval procedures are completed. Diguang Electronics
received RMB30 million from China Development Bank Co., Ltd. on July 3, 2009.
The loan bears an annual rate of 5.31%, the current benchmark interest rate
pronounced by the People's Bank of China, and will mature in one
year.





The
RMB100 million banking facilities are secured by the followings: two joint and
several personal guarantees from Mr. Song Yi and Mr. Song Hong, directors of the
Company; a collateral placed on the office space owned by Diguang Electronics
with a carrying amount of $2,253,525.44; a collateral placed on the land use
rights on a piece of land located in the Guangming District of Shenzhen with a
carrying amount of $2,400,967.





On
December 30, 2009, Diguang Electronics paid RMB3 million to China Development
Bank as 5 years’ guarantee expense for the RMB100 million bank facilities and
the bank facilities formally became effective then. Diguang Electronics received
RMB30 million from the bank on January 5, 2010 and repaid RMB25 million of the
abovementioned RMB30 million bank loans on the same day. On February 1, 2010,
Diguang Electronics received a further RMB15 million from the bank and repaid
the remaining RMB5 million of the RMB30 million loan.


11





Research and
Development





In
addition to the Company’s product development work, taking existing, available
technology and adapting it to the specific needs of a customer for a particular
product, the Company engages in research and development, which involves
developing new, proprietary techniques or products. The Company’s 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 its products relative
to other backlight manufacturers.





The
Company is engaged in efforts to develop some technologies that reduce energy
consumption and other environmental impacts of its devices. The innovations can
be used for a variety of applications in screens of almost all sizes. Management
believes that many of the Company’s new technologies will be patentable, and the
Company expects 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.





The
Company has spent $1,214,684, $1,610,329 and $3,049,703 for the years ended
2007, 2008 and 2009 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.





The
Company’s 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. The Company has moved
into its state-of-the-art manufacturing facility in Dongguan in 2005, and is now
constructing a new manufacturing facilities in Guangming District of Shenzhen
City. But environment-related costs are not expected to be a
material portion of the costs of constructing that facility, given the nature of
the Company’s processes.




Customers





The
Company’s customer base consists of many large and medium sized companies, which
include Hannstar-TPV Display (Wuhan) Corp., ALCO, HOT TRACKS, Transcend
Optronics , LG Philips, Shinco, Action Asia( Shenzhen) Co Ltd., LG Philips,
DLong Group, IZ Technology, GREE, Shanghai Tianma, Zhejiang Tianle Group, Konka
Group, Arima Display Corporation etc In 2009, the Company’s largest customer by
sales volume accounted for approximately 11% of total revenues. The Company’s
top three customers accounted for approximately 22% of revenues and
collectively. The Company’s top three customers included Hannstar-TPV Display
(Wuhan) Corp., Shinco Group and Action Asia (Shenzhen) Co Ltd. As a result, the
loss of one or more of the Company’s top customers or a significant decrease in
the volume of business that the Company does with those customers would have a
material adverse effect on its business. To help protect against that risk, the
Company continually seeks to diversify its customer base, in particular by
expanding its international sales efforts. The Company also expects to introduce
new backlight technologies for a variety of applications that will help expand
and diversify its customer base.





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





The
Company does not do any business directly with governments, although many of its
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 the Company’s market share among China-based
companies accurately. However, based on its general knowledge of the Chinese
backlight industry, management believes that the Company is 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, the Company believes the following companies are its 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, the
Company’s main competitors are no longer Japanese or Korean
producers.


12





As with
most other products, competitive advantages in backlights derive from a
favorable combination of price, quality and customer service. The Company
believes that it is well-positioned to compete effectively in all three of those
areas. The Company has moved into a new state-of-the-art manufacturing facility,
which provides it with significant efficiencies and the space to increase its
output from 100,000 small and medium units per day to 200,000-300,000 units per
day, depending on size of products. In addition, China’s well-known labor cost
advantages relative to Japan, Korea and Taiwan have enabled the Company to put
price pressure on its foreign rivals, thereby helping the Company to gain market
share while maintaining certain margins. The Company currently expects that
growth to continue. However, as more of the world’s backlight productions shift
to China, the Company’s comparative advantage of lower costs comparing to other
Asian countries will diminish.




The
Company’s 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 the Company
has enjoyed a history of rapid growth. The Company believes, based on its
familiarity with other products in the market, that it has a technological
advantage relative to other producers. The Company expects that this existing
technological advantage, combined with its anticipated development of additional
patented technology, will continue to give it a competitive
advantage.





Another
important factor in the Company’s ability to compete is its 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 the Company’s competitors take longer to reach the same result. The Company’s
short cycle time is due to, among other things, its modern facilities and
equipment, along with its large and skilled product development
staff.





Intellectual
Property





Diguang
Electronics owns 28 current patents. The patent transfer agreement for seven
unexpired Chinese is in the process of being drafted as the Company is
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 the Company’s operation,
respectively, and the remaining six have expiration dates ranging from 2010 to
2013.




These
patents include:





Patent Name
                                
                                Patent Number
                                
                                Holder
                                
                                Effective date of
                                  Patents
                                
                                Expiry date of Patents1
                                Efficiency
      Backlight and front Backlight of Side radiation
                                
                                ZL
      00 2 33726.6.
                                
                                Yi
      Song
                                
                                12/05/2000
                                
                                11/05/20102
                                Efficiency
      Photosensitive Sensor for Graphic Content
                                
                                ZL
      01 2 01714.0
                                
                                Yi
      Song
                                
                                20/01/2001
                                
                                19/01/20113
                                Efficiency
      Uniform Illuminance Equipment
                                
                                ZL
      02 2 05116.3
                                
                                Yi
      Song
                                
                                10/02/2002
                                
                                9/02/20124
                                Advanced
      Efficiency Backlight of Side radiation
                                
                                ZL
      01 2 19472.7
                                
                                Yi
      Song
                                
                                13/04/2001
                                
                                12/04/20115
                                Efficiency
      Uniform Backlight of Front Backlight and White Backlight
      radiation
                                
                                ZL
      01 2 71009.1
                                
                                Yi
      Song
                                
                                19/11/2001
                                
                                18/11/20116
                                High
      Efficiency of Light Source for Planar Fluorescent Lamp
                                
                                ZL
      200420006645.8
                                
                                Yi
      Song
                                
                                11/03/2004
                                
                                10/03/20147
                                Improved
      Uniform and Luminous Side Backlight Device with High
      Efficiency
                                
                                ZL
      090220868
                                
                                Yi
      Song
                                
                                30/11/2001
                                
                                29/11/20118
                                Efficiency
      Fluorescent Lamp of New Model
                                
                                ZL
      200320130305.1
                                
                                Diguang
      Electronics
                                
                                23/12/2003
                                
                                22/12/20139
                                Efficiency
      Photosensitive Sensor for Graphic Content
                                
                                Taiwan
      Patent
                                
                                Yi
      Song
                                
                                22/03/2001
                                
                                22/03/2011


13





10
                                                                                                                                            LED
      Optic Display
                                                                                                                                            
                                                                                                                                            ZL200410074672.3
                                                                                                                                            
                                                                                                                                            Yi
      Song
                                                                                                                                            
                                                                                                                                            13/09/2004
                                                                                                                                            
                                                                                                                                            13/09/202411
                                                                                                                                            LED
      Grouping with Parallel Connected Backlight Modules for Big Sized TFT-LCD
      TV
                                                                                                                                            
                                                                                                                                            ZL200620120892.X
                                                                                                                                            
                                                                                                                                            Diguang
      Electronics
                                                                                                                                            
                                                                                                                                            11/07/2006
                                                                                                                                            
                                                                                                                                            11/07/201612
                                                                                                                                            LED
      backlight module with adiabatic euphotic material radiator
      system
                                                                                                                                            
                                                                                                                                            ZL200720005429.5
                                                                                                                                            
                                                                                                                                            Diguang
      Electronics
                                                                                                                                            
                                                                                                                                            23/04/2007
                                                                                                                                            
                                                                                                                                            23/04/201713
                                                                                                                                            Backlight
      Modules with LED Reflect Concave
                                                                                                                                            
                                                                                                                                            ZL200620120893.4
                                                                                                                                            
                                                                                                                                            Diguang
      Electronics
                                                                                                                                            
                                                                                                                                            11/07/2006
                                                                                                                                            
                                                                                                                                            11/07/201614
                                                                                                                                            arrayed
      LED backlight modules with direct type
                                                                                                                                            
                                                                                                                                            ZL200620120894.9
                                                                                                                                            
                                                                                                                                            Diguang
      Electronics
                                                                                                                                            
                                                                                                                                            11/07/2006
                                                                                                                                            
                                                                                                                                            11/07/201615
                                                                                                                                            Lightings
      and Lamps
                                                                                                                                            
                                                                                                                                            ZL200720001219.9
                                                                                                                                            
                                                                                                                                            Diguang
      Electronics
                                                                                                                                            
                                                                                                                                            09/01/2007
                                                                                                                                            
                                                                                                                                            09/01/201716
                                                                                                                                            Inserted
      CCFL Backlight Module
                                                                                                                                            
                                                                                                                                            ZL200620139418.1
                                                                                                                                            
                                                                                                                                            Diguang
      Electronics
                                                                                                                                            
                                                                                                                                            30/12/2006
                                                                                                                                            
                                                                                                                                            30/12/201617
                                                                                                                                            LED
      Light Source System with Heat Conduction and Heat Dissipation
      System
                                                                                                                                            
                                                                                                                                            200710305676.1
                                                                                                                                            
                                                                                                                                            Diguang
      Electronics
                                                                                                                                            
                                                                                                                                            19/12/2007
                                                                                                                                            
                                                                                                                                            19/12/202718
                                                                                                                                            Side
      Lighting Backlight with Integrated Light Guide Plate and Braced
      Frame
                                                                                                                                            
                                                                                                                                            ZL200720156070.1
                                                                                                                                            
                                                                                                                                            Diguang
      Electronics
                                                                                                                                            
                                                                                                                                            26/07/2007
                                                                                                                                            
                                                                                                                                            26/07/201719
                                                                                                                                            LED
      Lightings (Streetlight)
                                                                                                                                            
                                                                                                                                            ZL200720126525.5
                                                                                                                                            
                                                                                                                                            Diguang
      Electronics
                                                                                                                                            
                                                                                                                                            08/08/2007
                                                                                                                                            
                                                                                                                                            08/08/201720
                                                                                                                                            Direct
      Type Backlight
                                                                                                                                            
                                                                                                                                            ZL200510090917.6
                                                                                                                                            
                                                                                                                                            Diguang
      Electronics
                                                                                                                                            
                                                                                                                                            19/08/2005
                                                                                                                                            
                                                                                                                                            19/08/202521
                                                                                                                                            Lightings
      and Lamps
                                                                                                                                            
                                                                                                                                            ZL200720177852.3
                                                                                                                                            
                                                                                                                                            Diguang
      Electronics
                                                                                                                                            
                                                                                                                                            12/10/2007
                                                                                                                                            
                                                                                                                                            12/10/201722
                                                                                                                                            Video
      Controlled LED Backlight and Its Controlling Calculation
                                                                                                                                            
                                                                                                                                            200610090989.5
                                                                                                                                            
                                                                                                                                            Diguang
      Electronics
                                                                                                                                            
                                                                                                                                            06/07/2006
                                                                                                                                            
                                                                                                                                            06/07/202623
                                                                                                                                            Efficiency
      Planar Light Source
                                                                                                                                            
                                                                                                                                            ZL200410039145.9
                                                                                                                                            
                                                                                                                                            Diguang
      Electronics
                                                                                                                                            
                                                                                                                                            12/02/2004
                                                                                                                                            
                                                                                                                                            12/02/202424
                                                                                                                                            High-Efficient
      Flat Fluorescent Light Source
                                                                                                                                            
                                                                                                                                            ZL200420006645.8
                                                                                                                                            
                                                                                                                                            Yi
      Song
                                                                                                                                            
                                                                                                                                            11/3/2004
                                                                                                                                            
                                                                                                                                            11/3/201425
                                                                                                                                            TFT-LCD
      Use LED Backlight Module
                                                                                                                                            
                                                                                                                                            ZL200610127036.1
                                                                                                                                            
                                                                                                                                            Diguang
      Electronics
                                                                                                                                            
                                                                                                                                            21/09/2006
                                                                                                                                            
                                                                                                                                            21/09/2026-26
                                                                                                                                            LED
      Light Source Product
                                                                                                                                            
                                                                                                                                            ZL200510103516.X
                                                                                                                                            
                                                                                                                                            Diguang
      Electronics
                                                                                                                                            
                                                                                                                                            19/09/2005
                                                                                                                                            
                                                                                                                                            19/09/202527
                                                                                                                                            PCB
      Structure of Downward-Type LED Backlight Module
                                                                                                                                            
                                                                                                                                            ZL200820117364.8
                                                                                                                                            
                                                                                                                                            Diguang
      Electronics
                                                                                                                                            
                                                                                                                                            23/06/2008
                                                                                                                                            
                                                                                                                                            23/06/201828
                                                                                                                                            Slim
      Type Integrated TFT-LCD Display
                                                                                                                                            
                                                                                                                                            ZL200820124984.4
                                                                                                                                            
                                                                                                                                            Diguang
      Electronics
                                                                                                                                            
                                                                                                                                            31/07/2008
                                                                                                                                            
                                                                                                                                            31/07/201829
                                                                                                                                            LED
      Dynamic Backlight Control Circuit
                                                                                                                                            
                                                                                                                                            ZL200610150425.6
                                                                                                                                            
                                                                                                                                            Diguang
      Electronics
                                                                                                                                            
                                                                                                                                            27/10/2006
                                                                                                                                            
                                                                                                                                            27/10/202630
                                                                                                                                            Strip
      Shape LED PCB and LED Light Source Structure
                                                                                                                                            
                                                                                                                                            ZL200820133517.8
                                                                                                                                            
                                                                                                                                            Diguang
      Electronics
                                                                                                                                            
                                                                                                                                            29/08/2008
                                                                                                                                            
                                                                                                                                            29/08/201831
                                                                                                                                            LED
      Light with Function of Landscape Lighting
                                                                                                                                            
                                                                                                                                            ZL200820131088.0
                                                                                                                                            
                                                                                                                                            Diguang
      Electronics
                                                                                                                                            
                                                                                                                                            02/09/2008
                                                                                                                                            
                                                                                                                                            02/09/201832
                                                                                                                                            Double
      Screen Notebook
                                                                                                                                            
                                                                                                                                            200920135543.9
                                                                                                                                            
                                                                                                                                            Diguang
      Electronics
                                                                                                                                            
                                                                                                                                            13/03/2009
                                                                                                                                            
                                                                                                                                            13/03/2019


14





33
                                        Double
      Screen Display
                                        
                                        200920135540.5
                                        
                                        Diguang
      Electronics
                                        
                                        13/03/2009
                                        
                                        13/03/201934
                                        LED
      Dynamic Backlight Control Calculation Method
                                        
                                        200610170237.X
                                        
                                        Diguang
      Electronics
                                        
                                        21/12/2006
                                        
                                        21/12/202635
                                        LED
      Sensor Light (Type A)
                                        
                                        200930001801.X
                                        
                                        Diguang
      Electronics
                                        
                                        07/01/2009
                                        
                                        07/01/201936
                                        LED
      Sensor Light (Type C )
                                        
                                        200930001802.4
                                        
                                        Diguang
      Electronics
                                        
                                        07/01/2009
                                        
                                        07/01/201937
                                        Video-controlled
      Dynamic LED Backlight Components
                                        
                                        ZL200920149307.2
                                        
                                        Diguang
      Electronics
                                        
                                        08/04/2009
                                        
                                        08/04/201938
                                        Ultra
      Slim LCD Device Which Dissipates Heat Efficiently
                                        
                                        ZL200920132753.2
                                        
                                        Diguang
      Electronics
                                        
                                        12/06/2009
                                        
                                        12/06/2019





Almost
all of the Company’s 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 two patents
in 2008 and 2009 did not have material adverse impact on the Company’s
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. The
Company’s efforts will remain directed toward the development of new patents for
leading-edge technologies that will help the Company to maintain its
technological advantage. The Company also intends to patent its new inventions
both in China and internationally, and it continues 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.


15


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.





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 the Company’s Business




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




The
Company’s 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
the Company’s business, for which there is not always an alternative source.
Economic conditions affecting the electronics industry in general or the
Company’s major customers may adversely affect the Company’s operating results
by reducing the level of business that they furnish to the Company or the price
they are willing to pay for the Company’s products. If the Company’s customers’
products fail to gain widespread commercial acceptance, become obsolete or
otherwise suffer from low sales volume, its revenues and profitability may
stagnate or decline.


16




If
OLED technology matures, it may lessen the demand for LCDs and LED/CCFL
Backlights, which could reduce the Company’s 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 the Company supplies to the makers of LCDs. The
Company’s 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 the Company’s customers, a currently
perceived growing demand for the Company’s backlights in medium and large size
applications and enhancements in LCD technology, the Company believes that OLED
technology will have little or no short term or medium-term effect on its levels
of LCD backlight sales. However, if the OLED technology matures or the Company’s
current beliefs or understandings materially change, it may lessen the demand
for LCDs and related components, leading to a reduction of the Company’s
revenues or profits or both.





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





A
significant portion of the Company’s revenue is generated from a small number of
customers. 22% of the total revenue was generated from top three customers in
the year ended December 31, 2009. Roughly 11% of the total revenue comes from
one largest customer. Under present conditions, the loss of any of these
customers, or a significant reduction in the Company’s level of sales to any or
all of them, could have a material adverse effect on the Company’s business and
operating results.





The
Company does not have long-term purchase commitments from its 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 its
revenues and profitability.





As a
backlight manufacturer, the Company 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
the Company’s profits or impair the Company’s cash flow. On occasion, customers
require rapid increases in production, which can strain the Company’s resources,
leading to a reduction in the Company’s margins as a result of the additional
costs necessary to meet those demands.





The
Company’s customers generally do not provide the Company with firm, long-term
volume purchase commitments. In addition, industry trends over the past five
years have led to dramatically shortened lead time on purchase orders, as rapid
product cycles have become the norm. Although the Company sometimes enters into
manufacturing contracts with its customers, these contracts principally clarify
order lead time, 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 the
Company’s sales to customers in the electronics industry, which is subject to
severe competitive pressure, rapid technological change and product
obsolescence, increases the Company’s inventory and overhead risks, among
others, as the Company 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.





The
Company also makes significant decisions, including determining the levels of
business that it will seek and accept, production schedules, component
procurement commitments, facility requirements, personnel need, and other
resource requirements, based upon its estimates of customer requirements. The
short-term nature of the Company’s customers’ commitments and the possibility of
rapid changes in demand for these products reduce the Company’s ability to
estimate accurately the future requirements of those customers. Because many of
the Company’s costs and operating expenses are fixed, a reduction in customer
demand can reduce the Company’s gross margins and operating results. In order to
transact business, the Company assesses the integrity and creditworthiness of
its customers and suppliers and it may, based on this assessment, incur design
and development costs that it expects to recoup over a number of orders produced
for the customer. Such assessments are not always accurate and expose the
Company to potential costs, including the write off of costs incurred and
inventory obsolescence if the orders anticipated do not materialize. The Company
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, the Company 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 the Company to losses from cancellation costs,
inventory carrying costs or inventory obsolescence, and hence adversely affect
the Company’s business and operating results.


17


Failure
to optimize the Company’s manufacturing potential and cost structure could
materially increase the Company’s overhead, causing a decline in the Company’s
margins and profitability.





The
Company strives to utilize the manufacturing capacity of its facilities fully
but may not do so on a consistent basis. The Company’s factory utilization is
dependent on its success in accurately forecasting demand, predicting
volatility, timing volume sales to its customers, balancing its 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 the Company expects, and it may fail to realize
the expected benefit from its investment in its manufacturing facilities. The
Company’s 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 the Company’s
manufacturing potential and cost structure could materially and adversely affect
its business and operating results.





Moreover,
the Company’s cost structure is subject to fluctuations from inflationary
pressures in China and other geographic regions where the Company conducts
business. China's economy is currently growing. 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.





The
Company faces intense competition, and many of its competitors have
substantially greater resources than the Company has. Increased competition from
these competitors may reduce the Company’s revenues or decrease its margins,
either or both of which would reduce its profitability and could impair cash
flow.





The
Company operates in a competitive environment that is characterized by price
deflation and technological change. The Company competes with major
international and domestic companies. The Company’s 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. The Company’s competitors may have greater market recognition and
substantially greater financial, technical, marketing, distribution, purchasing,
manufacturing, personnel and other resources than the Company does. Furthermore,
some of the Company’s 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 the Company
currently does and to offer a broader range of display devices to the Company’s
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 the Company’s markets. The Company might
lose some of its current or future business to these competitors or be forced to
reduce its margins to retain or acquire that business, which could decrease its
revenues or slow its future revenue growth and lead to a decline in
profitability.





The
Company depends on the market acceptance of its customers’ products, and
significant slowdown in demand for those products would reduce its revenues and
the Company’s profits.





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





The
Company extends credit to its customers and may not be able to collect all
receivables due to it, and its inability to collect such receivables may have an
adverse effect on its immediate and long-term liquidity.





The
Company extends credit to its customers based on assessments of their financial
circumstances, generally without requiring collateral. As of December 31, 2009,
the Company’s accounts receivable, after deducting an allowance for bad debts,
was $14 million. The Company’s overseas customers may be subject to economic
cycles and conditions different from those of its domestic customers. The
Company 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, the Company may not realize from receivables denominated in a
foreign currency the anticipated amounts in United States dollar terms due to
fluctuations in currency values. The Company’s inability to collect on these
accounts may reduce on the Company’s immediate and long term
liquidity.


18





The
growth of the Company’s business depends on its ability to finance new products
and services and these increased costs may reduce its cash flows and, if the
products and services in which the Company has invested do not succeed, it would
reduce the Company’s profitability.





The
Company operates 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 the Company’s inventory obsolete, or it could shift
demand into areas where the Company is not currently engaged. If the Company
fails to adapt to those changing conditions in a timely and efficient manner,
its revenues and profits would likely decline. To remain competitive, the
Company 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,
the Company 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.





The
Company’s future operating results will depend to a significant extent on the
Company’s 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. The Company’s failure to
increase its net sales sufficiently to offset these increased costs would reduce
the Company’s profitability.





The
Company is subject to lengthy sales cycles, and it could take longer than the
Company anticipates before its sales and marketing efforts result in
revenue.





The
Company’s 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 the Company’s
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 the Company’s 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 the
Company’s profitability.





Products
the Company manufactures may contain design or manufacturing defects, which
could result in reduced demand for its services and customer claims, causing it
to sustain additional costs, loss of business reputation and legal
liability.





The
Company manufactures products to its customers’ requirements, which can be
highly complex and may at times contain design or manufacturing errors or
failures. Any defects in the products 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, the Company will incur additional costs, and if in they occur in
large quantity or frequently, it may sustain additional costs, loss of business
reputation and legal liability.





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





Diguang
Electronics currently possesses 38 Chinese patents, and the Company utilizes the
additional patented technologies that are material to its business, which are in
the process of being transferred to Diguang Electronics from Yi Song, referred
to in its prior filings as Song Yi to conform to Chinese convention of last name
first, its Chairman, CEO and the current owner of the patents. If the patents
are not successfully transferred, the Company will not be able to use the same
patents, which would hamper the Company’s production and this would have a
material and adverse effect on its business and revenues. If a patent is
infringed upon by a third party, the Company may need to devote significant time
and financial resources to attempt to halt the infringement. The Company may not
be successful in defending the patents involved in such a dispute. Similarly,
while the Company does not knowingly infringe on patents, copyrights or other
intellectual property rights owned by other parties; it may be required to spend
a significant amount of time and financial resources to resolve any infringement
claims against it. The Company may not be successful in defending its position
or negotiating an alternative remedy. Any litigation could result in substantial
costs and diversion of the Company’s management resources and could reduce the
Company’s revenues and profits.


19


The
Company’s customers may decide to design and/or manufacture the products that
they currently purchase from the Company, which may reduce its revenues and
profits, as it may not be able to compete successfully with these in-house
developments.





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





The
Company may develop new products that may not gain market acceptance, and its
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.





The
Company operates in an industry characterized by frequent and rapid
technological advances, the introduction of new products and new design and
manufacturing technologies. As a result, the Company 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. The Company 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. 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 the
Company, including lack of market acceptance for a product. The Company’s future
operating results will depend significantly on its ability to provide timely
design and manufacturing services for new products that compete favorably with
design and manufacturing capabilities and third party suppliers.




The Company’s
component and materials suppliers may fail to meet its needs, causing it to
experience manufacturing delays, which may harm its relationships with current
or prospective customers and reduce sales.





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





The
Company may be affected by power shortages, causing delays in delivery of
products to its customers, resulting in possible loss of business or claims
against it and cause it to lose future business from those or other
customers.





The
Company’s 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 the Company’s
customers. Failure to meet delivery deadlines may result in the loss of business
or claims against the Company, which may have a material and adverse effect on
its business, profitability and reputation.





The
Company’s financial performance could be harmed if compliance with new
environmental regulations becomes too burdensome.





Although
the Company believes that it is operating in compliance with applicable Chinese
government environmental laws, there is no assurance that the Company 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.





The
Company 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, the Company may seek additional equity or debt financing to provide the
capital required to maintain or expand its 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. The Company cannot predict with
certainty the timing or amount of any such capital requirements. If such
financing is not available on satisfactory terms, the Company may be unable to
expand its business or to develop new business at the rate desired.





Failure
to manage growth effectively could result in inefficiencies that could increase
the Company’s costs, reducing the Company’s profitability.





The
Company has increased the number of its manufacturing and design programs and
intends to expand further the number and diversity of its programs. The number
of locations where the Company manufactures may also increase. The Company’s
ability to manage its planned growth effectively will require the Company
to:


20





·
            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 the Company’s production
  facilities.





An
expansion and diversification of the Company’s product range, manufacturing and
sales will result in increases in its overhead and selling expenses. The Company
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 its 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 the Company’s profitability. Customers also may require rapid
increases in design and production services that place an excessive short-term
burden on the Company’s resources and reduce its 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 the
Company’s reputation.





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





The
Company may not be able to retain, recruit and train adequate management and
production personnel. The Company relies heavily on those personnel to help
develop and execute its business plans and strategies, and if the Company loses
such personnel, it would reduce its ability to operate effectively.





The
Company’s success is dependent, to a large extent, on its ability to retain the
services of its executive management, who have contributed to its growth and
expansion to date. The executive directors play an important role in the
Company’s operations and the development of its new products. Accordingly, the
loss of their services, in particular Mr. Yi Song without suitable replacements,
will have an adverse affect on the Company’s business generally, operating
results and future prospects.





In
addition, the Company’s continued operations are dependent upon its ability to
identify and recruit adequate management and production personnel in China. The
Company requires trained graduates of varying levels and experience and a
flexible work force of semi-skilled operators. Many of the Company’s current
employees come from the more remote regions of China as they are attracted by
the wage differential and prospects afforded by Shenzhen and the Company’s
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
the Company must offer to attract qualified personnel will enable it to remain
competitive internationally. Inability to attract such personnel may or the
increased cost of doing so could reduce the Company’s competitive advantage
relative to other backlight producers, reducing or eliminating the Company’s
growth in revenues and profits.





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





Mr. Yi
Song, the Company’s Chief Executive Officer, beneficially owns approximately 69%
of the outstanding shares of the Company’s 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 the
Company’s other shareholders.


21





The
Company may be subject to fines and legal sanctions imposed by State
Administration of Foreign Exchange(SAFE) or other Chinese government authorities
if it or its Chinese directors or employees fail to comply with recent Chinese
regulations relating to employee share options or shares granted by offshore
listed companies to Chinese domestic individuals





On
December 25, 2006, the People’s Bank of China, or PBOC, issued the
Administration Measures on Individual Foreign Exchange Control, and the
corresponding Implementation Rules were issued by SAFE on January 5, 2007.
Both of these regulations became effective on February 1, 2007. According
to these regulations, all foreign exchange matters relating to employee stock
holding plans, share option plans or similar plans with Chinese domestic
individuals’ participation require approval from the SAFE or its authorized
branch. On March 28, 2007, the SAFE issued the Application Procedure of
Foreign Exchange Administration for Domestic Individuals Participating in
Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Company, or
the Stock Option Rule. Under the Stock Option Rule, Chinese domestic individuals
who are granted share options or shares by an offshore listed company are
required, through a Chinese agent or Chinese subsidiary of the offshore listed
company, to register with the SAFE and complete certain other procedures. As the
Company is an offshore listed company, its Chinese domestic directors and
employees who may be granted share options or shares shall become subject to the
Stock Option Rule. Under the Stock Option Rule, employees stock holding plans,
share option plans or similar plans of offshore listed companies with Chinese
domestic individuals’ participation must be filed with the SAFE. After the
Chinese domestic directors or employees exercise their options, they must apply
for the amendment to the registration with the SAFE. The Company is reviewing
the procedures for such SAFE registration. If the Company or its Chinese
domestic directors or employees fail to comply with these regulations, the
Company or its Chinese domestic directors or employees may be subject to fines
or other legal sanctions imposed by the SAFE or other Chinese government
authorities.





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 the
Company produces or sells following a business combination, making its products
less attractive and potentially reducing its 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 the Company believes 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. The Company cannot
predict the timing or extent of any future economic reforms that may be
proposed, but should they occur, they could reduce the Company’s operating
flexibility or require it to divert its efforts to products or ventures that are
less profitable than those it would elect to pursue on its 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 the Company’s business by
leading to the imposition of trade barriers on items that incorporate the
Company’s products, which would reduce the Company’s revenues and
profits.





The
Company is dependent on its Chinese manufacturing operations to generate the
majority of its 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.





The
Company’s current manufacturing operations are located in China, its
administrative offices are in the United States and the Company has 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, the Company 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 the Company unable to use the assets the
Company has accumulated for the purpose of generating profits for the benefit of
its 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 the Company’s 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 the Company’s business by
making it uncompetitive or, for example, by reducing the Company’s after-tax
profits. The nationalization or other expropriation of private enterprises by
the Chinese government could result in the total loss of the Company’s
investment in China, where a significant portion of the Company’s profits are
generated.


22





The
Chinese legal system may have inherent uncertainties that could materially and
adversely impact the Company’s ability to enforce the agreements governing its
operations.





The
performance of the agreements and the operations of the Company’s factories are
dependent on its relationship with the local government. The Company’s
operations and prospects would be materially and adversely affected by the
failure of the local government to honor the Company’s 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 the
Company’s 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, the
Company’s experience in implementing, interpreting and enforcing these laws and
regulations is limited, and its 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.





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





The
Company has subsidiaries in the British Virgin Islands, China and Hong Kong.
Because the Company manufactures all of its products in China, substantially all
of the net book value of its total fixed assets is located there. However, the
Company sells its products to customers worldwide, with concentrations of
customers in Taiwan, Hong Kong, North America, Europe, Japan, Southeast Asia and
China Mainland. As a result, the Company 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 the
Company’s ability to sell products in these markets, or even to purchase raw
materials or equipment from foreign suppliers. Moreover, the Company is subject
to a variety of United States laws and regulations, changes to which may affect
its ability to transact business with certain customers or in certain product
categories.





The
Company is also subject to numerous national, state and local governmental
regulations, including environmental, labor, waste management, health and safety
matters and product specifications. The Company is subject to laws and
regulations governing its relationship with its 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. The Company is subject
to significant government regulation with regard to property ownership and use
in connection with its 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 the Company’s ability to react to market
pressures in a timely or effective way, thus causing it to lose business or miss
opportunities to expand its business.





Fluctuation
of the Renminbi could make the Company’s pricing less attractive, causing it to
lose sales, or could reduce the Company’s 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, Chinese Government
recently adopted a floating rate with respect to the value of Renminbi against
foreign currencies, with a 0.3% fluctuation. As a result, the exchange rate was
slightly increased to RMB 6.83 against the dollar at December 31, 2009,
accounting for a 0.05% increase of 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 the Company’s business, which include making
its products more expensive relative to those of its competitors than has been
true in the past, or increasing the Company’s 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
the Company’s business.


23


Changes
in foreign exchange regulations in China may affect the Company’s ability to pay
dividends in foreign currency or conduct other business for which the Company
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 the Company’s 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. The Company’s 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
the Company has not experienced any difficulties in the repatriation of its
profits out of China or in meeting its 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 the Company intends to
distribute profits outside of China, there can be no assurance that the Company
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, the Company’s 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.





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





The
Company is subject to various tax regimes, which may adversely affect its
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 the Company have paid historically.





As the
Company was established under the laws of the state of Nevada, the Company is
subject only to federal income tax and state income tax. Because the Company’s
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. The Company 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.


24





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 the Company’s net profits.





Diguang
Electronics is registered in Shenzhen and was subject to a favorable income tax
rate of 15% compared to a statutory income tax rate of 33%, 30% for the central
government and 3% for the local government. Diguang Electronics has been deemed
a high-tech company by Shenzhen Bureau of Science, Technology & Information.
Diguang Electronics was subject to an income tax rate of 15% since January 1,
2007 according to the old tax law. A newly enacted enterprise income tax law
(“EIT Law”) was effective 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.
For enterprises like Diguang Electronics which were taxed under the privileged
preferential income tax rate of 15% under the old tax law, the applicable income
tax rate should transit to 25% in 5 years, that is, 18% in the year ended
December 31, 2008, 20%, 22%, 24% and 25% in the following four years ending
December 31, 2009, 2010, 2011 and 2012, and 25% thereafter. So the applicable
income tax rate for Diguang Electronics is 20% for the year ended December 31,
2009.





Cessation
of value added tax refund for Diguang Electronics may have an adverse impact on
the Company’s 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 the Company’s material agreements after
the Share Exchange, the Company may not be able to enforce its 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 the Company’s material agreements after the Share
Exchange. The Company cannot assure you that the Company will be able to enforce
any of its 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 the Company’s future agreements could result in a significant loss of
business, business opportunities or capital.





Additionally,
substantially all of the Company’s assets will be located outside of the United
States and most of its 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 the Company’s
directors or officers or to enforce judgments of United States courts predicated
upon civil liabilities and criminal penalties of the Company’s directors and
officers under Federal securities laws. Moreover, the Company has 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.


25





It
will be extremely difficult to acquire jurisdiction and enforce liabilities
against the Company’s officers, directors and assets based in
China.





Because
most of the Company’s 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 the Company and/or its officers
and directors by a shareholder or group of shareholders in the United States.
Also, because the Company’s 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 the Company’s
assets are located in China it would also be extremely difficult to access those
assets to satisfy an award entered against the Company in United States court.
Moreover, shave been advised that China does not have treaties with the United
States providing for the reciprocal recognition and enforcement of judgments of
courts.





The
Company may have difficulty establishing adequate management, legal and
financial controls in China, which could impair its planning processes and make
it difficult to provide accurate reports of its 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. The Company 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, the Company 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 the Company’s
operations accurately at all times.





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





The
Company may experience barriers to conducting business and trade in its targeted
emerging markets in the form of delayed customs clearances, customs duties and
tariffs. In addition, the Company 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 the Company plans to operate may
impose onerous and unpredictable duties, tariffs and taxes on its business and
products, and there can be no assurance that this will not reduce the level of
sales that the Company achieves in such markets, which would reduce the
Company’s revenues and profits.





There
can be no guarantee that China will comply with the membership requirements of
the World Trade Organization, which could leave the Company subject to
retaliatory actions by other governments and reduce the Company’s ability to
sell its 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, the Company may be subject to retaliatory actions by the
governments of the countries into which the Company sells its products, which
could render its products less attractive, thus reducing its revenues and
profits.





There
can be no guarantee that the Company’s 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. The Company
qualifies 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 the Company’s ability
to gain access to the profits earned by Diguang Electronics. The result could be
the inability to pay dividends to the Company’s stockholders or to deploy
capital outside of China in a manner that would be beneficial to the Company’s
business as a whole.





Risks
Related to the Company’s Securities.





The
market price of the Company’s shares is subject to significant price and volume
fluctuations.





The
markets for equity securities have been volatile. The price of the Company’s
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 its officers, directors and its
principal shareholders, customers, suppliers or other publicly traded companies.
Certain events, such as the issuance of common shares upon the exercise of the
Company’s outstanding stock options, could also materially and adversely affect
the prevailing market price of the Company’s 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 the Company’s common shares and the ability to resell
shares at or above the price paid, or at any price.


26





There
may not be an active, liquid trading market for the Company’s common
stock.





The
Company’s common stock is currently traded on the Over the Counter Bulletin
Board. If the Company does not succeed in securing a listing on the NASDAQ
Market, it could limit the ability to trade the Company’s 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 the Company is
granted a listing on the NASDAQ Market it will always be able to meet the NASDAQ
Market listing requirements, or that there will be an active, liquid trading
market for the Company’s common stock in the future. Failure to meet the NASDAQ
Market listing requirements could result in the delisting of the Company’s
common stock from the NASDAQ Market, which may adversely affect the liquidity of
its shares, the price that can be obtained for them or both.





The
Company may not pay dividends.





The
Company may not pay dividends in the future. Instead, the Company expects to
apply earnings toward the further expansion and development of its business. The
likelihood of the Company’s paying dividends is further reduced by the fact
that, in order to pay dividends, the Company 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 the Company’s stock can go down as well as up, and
fluctuations in market price may limit the Company’s ability to realize any
value from your investment, including recovering the initial purchase
price.





The
Company may not raise funds in the equity market for future
expansion





The stock
price of the Company may plunge to its bottom price during times
of economic recession and may not recover for a long time. This will
affect its ability to raise fund in the stock market as the stock price cannot
rebound from the prospective investors' perspective.





Though a
company's nominal share price by itself may not provide much assistance in
judging its business prospects, however, stocks at low levels can
negatively impact investors' psychology and therefore it will limit such
company ’ s ability to raise new equity capital or make acquisitions using stock
as currency, and it limits institutional ownership and brokerage research
coverage. In addition, some brokerages discourage customers from buying lowly
priced stocks.





With a
fundamental recovery in the underlying business, of course, not
all stocks can snap back to their reasonable levels. Moreover, history
shows that certain stocks can languish in low single digits for years once they
fall to that range and it will trade at low price-earnings multiple for
years which will adversely affect its expansion.





The
Company may face severe operating environment during times of global
economic recession.





The sales
volume of the Company’s core products is largely influenced by the demand
for its end products which are mostly sold in US and European markets. The
global economic crisis in 2008, triggered by the US subprime problem, led to a
drastic drop in demand for electronic consumer goods. The Company’s direct
customers had excessive inventory which hindered its production capacity.
Moreover, the uncertain customers’ requirement and the changes in supply-demand
balance would affect the Company’s capital expenditure and innovation pace. They
may lower the Company’s new product development which can adversely impact the
Company’s financial performance and operating efficiencies when these
occurred during the times of soft economy.





ITEM
1B. UNRESOLVED STAFF COMMENTS





Not
Applicable.





ITEM
2. PROPERTY





Neither
the Company, Diguang Holdings, Well Planner nor Diguang Technology own or lease
any property. The Company’s indirect subsidiary, Diguang Electronics, was
headquartered in Shenzhen, China. Diguang Electronics acquired an office space
of 1,220 square meters at a cost of RMB15,369,877, or approximately equivalent
to $2,252,822, and occupied the office in May 2007 as the office building of the
Company and Diguang Electronics. On June 29, 2007, Diguang Electronics acquired
a land with land usage right of 34,930 square meters in Shenzhen, at a total
cost of RMB17,278,052, or approximately equivalent to $2,532,510.





Dongguan
Diguang S&T owned property with a cost of RMB67,718,277, or approximately
equivalent to $9,925,728, which was constructed by Dongguan Diguang S&T in
the year 2005 and 2007. The property of Dongguan Diguang S&T was used as
production base for Diguang Electronics.


27





On
October 29, 2007, Wuhan Diguang entered into a lease agreement with Hannstar-TPV
Display (Wuhan) Corp. to rent machinery from Hannstar-TPV Display (Wuhan) Corp.
The lease agreement was revised on September 10, 2008. The revised agreement
lasted from January 2008 to September 2008 with a yearly rental of RMB800,000,
or approximately $117,259. And on the same day, a new lease agreement was signed
with an annual rental of RMB 800,000, or approximately $117,259, for the period
from October 2008 to December 2010.





Wuhan
Diguang also entered into a lease agreement with Wuhan TPV Display Technology
Co., Ltd. to rent office place at RMB37,431, or approximately $5,486, per month
from January to December of 2009.





Future
minimum payments required under the lease agreement with Hannstar-TPV Display
(Wuhan) Corp. and Wuhan TPV that has an initial or a remaining lease term in
excess of one year at December 31, 2009 are as follows:





Year Ended December 31,
                    
                    Amount2010
                    
                    $
                    183,096





In
October 2007, Dihao entered into a lease agreement with Transcend Optronics
(Yangzhou) Co, Ltd. to rent the factory at a rental of RMB 96,747, or
approximately $12,750, per month for the period from October 1, 2007 to
September 30, 2009. The monthly rental increased to RMB 99,713, or approximately
$14,336, from June 1, 2008. The new lease rental is RMB 120,882, or
approximately $17,379 per month, which started from October 2009.





ITEM
3. LEGAL PROCEEDINGS.





Neither
the Company nor any of its direct or indirect subsidiaries is a party to, nor is
any of its 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 the Company’s officers, directors, promoters
or control persons are adverse to it or any of the Company’s subsidiaries or in
which they are taking a position or have a material interest that is adverse to
it or any of its subsidiaries.





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





ITEM
4. RESERVED





PART
II





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





(a)
MARKET PRICES OF COMMON STOCK





The
Company’s common stock currently trades in the over-the-counter market on the
OTC Bulletin Board under the symbol “DGNG. 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
      2008First
      Quarter
                    
                    $
                    2.5
                    
                    
                    $
                    0.95Second
      Quarter
                    
                    $
                    1.30
                    
                    
                    $
                    0.75Third
      Quarter
                    
                    $
                    1.0
                    
                    
                    $
                    0.46Fourth
      Quarter
                    
                    $
                    0.95
                    
                    
                    $
                    0.06FISCAL
      2009First
      Quarter
                    
                    $
                    0.28
                    
                    
                    $
                    0.06Second
      Quarter
                    
                    $
                    0.60
                    
                    
                    $
                    0.16Third
      Quarter
                    
                    $
                    0.60
                    
                    
                    $
                    0.30Fourth
      Quarter
                    
                    $
                    0.40
                    
                    
                    $
                    0.24


28





(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, 2009 there were 22,593,000 shares of the
Company’s common stock issued and 22,072,000 shares outstanding and the Company
had approximately 100 stockholders of record as of December 31,
2009.





(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($/sh)
                    
                    
                    Number
                      of
                      securities
                      remaining
                      available
                      for
                      future
                      issuanceEquity Compensation
      Plan approved by security holders
                    
                    
                    1,201,917
                    
                    
                    
                    1.77
                    
                    
                    
                    298,083





As of
December 31, 2009, 1,201,917 of the Company’s common stock are subject to
outstanding options. This is because approximately 540,000, 26,000, 888,000 and
50,000 shares of option of the Company’s common stock were granted in 2006,
2007, 2008 and 2009 respectively, under the Diguang 2006 Option Plan. None of
these options has been exercised. But 302,083 shares subject to the option were
forfeited due to staff resignation. Pursuant to the terms of the Amended and
Restated Share Exchange Agreement, the Company assumed Diguang’s outstanding
2006 stock incentive plan covering options totaling the equivalent of 1,500,000
shares of the Company’s common stock. The exercise price for each of these
options is $5 per share for 566,000 shares, $1.19 per share for 40,000 shares,
$0.12 per share for 548,000 shares, $0.10 per share for 300,000 shares and $0.51
for 50,000 shares. Awards generally vest over four years in equal installments
on the next four succeeding anniversaries of the grant date, but options granted
to independent directors vest monthly at the end of each month, options granted
to chief operating officer vest quarterly at the beginning of each quarter over
three years, and options granted in 2009 vested immediately. The options that
have been issued expire ten years from their grant date.





ITEM
6. SELECTED FINANCIAL DATA





Not
required for smaller reporting companies.





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





This
Report contains forward-looking statements, including statements that include
the words "believes," "expects," "estimates," "anticipates" or similar
expressions. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the Company’s actual results,
performance or achievements to differ materially from those expressed or implied
by such forward-looking statements. Risk factors include, but are not limited
to, costs associated with financing new products; the Company’s ability to
cost-effectively manufacture its products on a commercial scale; the
concentration of the Company’s current customer base; competition; the Company’s
ability to comply with applicable regulatory requirements; potential need for
expansion of the Company’s production facility; the potential loss of a
strategic relationship; inability to attract and retain key personnel;
management's ability to effectively manage the Company’s growth; difficulties
and resource constraints in developing new products; protection and enforcement
of the Company’s intellectual property and intellectual property disputes;
compliance with environmental laws; climate uncertainty; currency fluctuations;
control of the Company’s management and affairs by principal
shareholders


29





The
reader should carefully consider, together with the other matters referred to
herein, the information contained under the caption "Risk Factors" in the
Company’s current Report on Form 8-k filed with the commission on March 21, 2006
for a more detailed description of these significant risks and uncertainties.
The Company cautions the reader, however, not to unduly rely on these
forward-looking statements.





RISK
FACTORS




Investment
in the Company’s common stock involves risk. You should carefully consider the
investing risks before deciding to invest. The market price of the Company’s
common stock could decline due to any of these risks, in which case you could
lose all or part of your investment. In assessing these risks, you should also
refer to the other information included in this report, including the Company’s
consolidated financial statements and the accompanying notes. You should pay
particular attention to the fact that the Company is a holding company with
substantial operations in China and is subject to legal and regulatory
environments that in many respects differ from that of the United States. The
Company’s business, financial condition or results of operations could be
affected materially and adversely by any of the risks discussed in this report
and any others not foreseen. This discussion contains forward-looking
statements.




Business
Overview





The
Company specializes in the design, production and distribution of Light Emitting
Diode, “LED”, and Cold Cathode Fluorescent Lamp, “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. The Company started its trial run of
producing LED TV sets with two sizes in later 2009.





The
Company’s Headquarter is located in Shenzhen, China. The Company conducts its
business principally through the operations of Shenzhen Diguang Electronics,
based in Shenzhen, thereafter “Diguang Electronics”, along with its main
backlight manufacturing operation in Dongguan, Guangdong Province, China, Dihao
(Yangzhou) Co., Ltd., based in Yangzhou, thereafter “Dihao”, and Wuhan Diguang
Electronics Co., Ltd, based in Wuhan, thereafter “Wuhan Diguang”.





Diguang
Electronics 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. As
of December 31, 2009, Diguang Electronics had approximately 1,512 full-time
employees.





Dihao is
a 100% wholly owned subsidiary of North Diamond. We gained controlling interest
of Dihao by acquiring 65% of North Diamond on January 3, 2007. As of December
31, 2009, Dihao has approximately 179 full-time employees.





Wuhan
Diguang was established on March 13, 2007 and commenced its operation on July 1,
2007. Wuhan Diguang was established with the capacity to provide large inches of
TFT-LCD which are mainly sold to its customers from Taiwan. Wuhan Diguang had
approximately 221 employees as of December 31, 2009.





Dongguan
Diguang Electronics Science and Technology Co. Ltd., “Dongguan Diguang S&T”,
was originally established to be the production base of Diguang Electronics. It
became a wholly-owned subsidiary of Diguang Holdings since December 30, 2007
upon acquisition. Dongguan Diguang S&T started its own manufacturing
activities since the second half year of 2008. As of December 31, 2009, Dongguan
Diguang S&T has approximately 64 full-time employees.





Well
Planner is involved in the import of raw materials into China and export of
finished products from China. It established a wholly owned subsidiary in 2009
named Shenzhen
Optimum, a China based entity focusing on sales of LED TV sets in China
in 2010.





Diguang
Science and Technology Limited, based in Hong Kong, thereafter “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.





Critical
Accounting Policies and Estimates





The
discussion and analysis of the Company’s financial condition presented in this
section are based on the Company’s financial statements, which have been
prepared in accordance with the generally accepted accounting principles in the
United States. During the preparation of its financial statements the Company is
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, the Company evaluates its estimates
and judgments, including those related to sales, returns, pricing concessions,
bad debts, inventories, investments, fixed assets, intangible assets, income
taxes and other contingencies. The Company bases its 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.


30


In
response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding
Disclosure about Critical Accounting Policy,” the Company identified the most
critical accounting principles upon which its financial status depends. The
Company 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. The Company presents
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
collectability is reasonably assured. The Company will sign sales order (or
purchase order prepared by customers) with customers for each sales transaction.
A sales order signed by both parties is deemed to be persuasive evidence for
revenue recognition. Sales terms of products are usually “FOB destination” and
the delivery is deemed to occur when the products have been delivered to the
sites prescribed by customers. Revenue is recognized when the Company receives
customers’ confirmation of transaction statements. Due to the nature of
backlight products, when the products have quality issue, the Company will
replace these products and the products with quality issue are brought back.
Accordingly, no provision has been made for returnable goods. Revenue presented
on the Company’s income statements is net of sales taxes.





Certain
sales are subject to the ultimate usage of the products by the Company’s
customers. Revenue is not recognized on these transactions until the period in
which the Company is able to determine that the products shipped have been used
by its customers.





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,
2007, 2008 and 2009 were adequate, respectively. However, actual write-off might
exceed the recorded allowance.





Inventories





Inventories
are composed of raw materials and components, work in progress, finished goods
and consignment goods, most of which are related to backlight products. The
consignment goods are owned by the Company as inventory and are stored at a
customer’s place.





Inventories
are valued at the lower of cost (based on weighted average method) and the
market. Full amount provisions were made for obsolete inventories which are
difficult to estimate future utilization. Once the inventory cost is written
down, the written-down costs are treated as a new cost basis for the inventory,
and are not adjusted back up to the previous cost basis in future periods. For
inventories which will be used in ordinary course of production or sales, the
net realizable value of the inventories is compared with their carrying value,
if the net realizable value is lower than the carrying value, a provision for
the difference between the net realizable value and the carrying value of the
inventories was recognized. Net realizable value is determined based on the most
recent selling price of these inventories less the estimated cost to
sell.





Income
Taxes





The
Company recognizes deferred tax liabilities and assets when accounts for income
taxes. 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 in Shenzhen and was subject to a favorable income tax
rate at 15% compared to a statutory income tax rate of 33%, 30% for the central
government and 3% for the local government. And Diguang Electronics has been
deemed 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 enterprise income tax at the rate of 15% for the years from
January 1, 2004 to December 31, 2006. Diguang Electronics was subject to an
income tax rate of 15% since January 1, 2007 according to the old tax law. A
newly enacted enterprise income tax law (“EIT Law”) was effective 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. For enterprises like
Diguang Electronics which enjoyed a privileged preferential income tax rate of
15% under the old tax law, the applicable income tax rate should transit to25% in 5 years, that
is, 18% in the year ended December 31, 2008, 20%, 22%, 24% and 25% in the
following four years ending December 31, 2009, 2010, 2011 and 2012, and 25% ever
after. So the applicable income tax rate for Diguang Electronics is 20% for the
year ended December 31, 2009.


31





Well
Planner is subject to an 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.





Diguang
Technology is a BVI registered company. There is no income tax for the company
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 in Yangzhou and has been deemed a high-tech company by Yangzhou
Bureau of Science, Technology and Information. Under this category, Dihao was
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. Under the new EIT Law, the income tax rate for
Dihao is 25%; the applicable income tax rate for Dihao is 12.5% for the three
years ending December 31, 2010.





Wuhan
Diguang is registered in Wuhan. As a manufacturing company with foreign
investment set up before March 16, 2007, Wuhan Diguang is entitled to enjoy a
100% exemption of corporate income tax for the first two years of operations
with a profit position and a 50% exemption of corporate income tax for the
following three years. After the five-year exemption period, Wuhan Diguang will
be subject to the unified income tax rate of 25% in accordance with the new EIT
Law. It is the second year for Wuhan Diguang to enjoy 100% exemption of income
tax in 2009.





Dongguan
Diguang S&T is registered in Dongguan of Guangdong Province and was entitled
to enjoy a 100% exemption of corporate income tax for the first two years of
operation and a 50% exemption of corporate income tax for the following three
years and will be subject to the unified income tax rate of 25% after the
five-year exemption period. Dongguan Diguang S&T has used up its two years’
100% exemption in the year 2008 and 2007, even though it suffered losses in
these two years. It is the first year for Dongguan Diguang S&T to enjoy 50%
exemption of income tax in 2009.





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 by Diguang Electronics, Dihao, Wuhan Diguang, Dongguan Diguang S&T
and Diguang International Development Co., Ltd.





Impairment
of Long-Lived Assets





The
Company review long-lived assets 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.





Impairment
of Financial Investments





The
Company accounts for its investments in common stocks using the cost method.
Other than temporary impairment loss is recognized when a series of operating
losses of an investee or other factors indicate a decrease in value of
investments.





Share-Based
Payments





The
Company receives employee and certain non-employee services in exchange for (a)
equity securities of the Company or (b) liabilities that are based on the fair
value of the Company’s equity securities or that may be settled by the issuance
of such equity securities. The Company uses a fair-value-based method to
calculate and account for above mentioned transactions.


32


Recently
Issued Accounting Pronouncements Adopted





FASB
Accounting Standards Codification





The
issuance of FASB Accounting Standards Codification (“FASB ASC”) on July 1, 2009
(effective for interim or annual reporting periods ending after September 15,
2009) establishes the FASB Accounting Standards Codification as the sole source
of authoritative generally accepted accounting principles. Pursuant to the
provisions of FASB ASC, the Company has updated references to U.S. GAAP in its
financial statements issued for the period ended September 30, 2009. The
adoption of FASB ASC did not impact the Company’s financial position or results
of operations.





FASB ASC
805





Effective
January 1, 2009, the Company adopted FASB ASC 805, “Business
Combinations.”  FASB ASC 805 changed accounting for acquisitions that
close beginning in 2009. FASB ASC 805 extends 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. FASB ASC 805 expands on required disclosures to improve
the statement users’ abilities to evaluate the nature and financial effects of
business combinations. The adoption of FASB ASC 805 did not have a material
impact on the Company’s financial statements.





FASB ASC
805-20





Effective
January 1, 2009, the Company adopted FASB ASC 805-20, “Noncontrolling Interests
in Consolidated Financial Statements.” FASB ASC 805-20 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. FASB ASC 805-20 requires retroactive
adoption of the presentation and disclosure requirements for existing minority
interests.





FASB ASC
815




Effective
January 1, 2009, the Company adopted FASB ASC 815, “Disclosures about Derivative
Instruments and Hedging Activities.” FASB ASC 815 requires enhanced disclosures
about (i) how and why the Company uses derivative instruments, (ii) how the
Company accounts for derivative instruments and related hedged items, and (iii)
how derivative instruments and related hedged items affect the Company’s
financial results. The adoption FASB ASC 815 did not have any impact on the
Company’s financial statements.





FASB ASC
350-30




Effective
January 1, 2009, the Company adopted FASB ASC 350-30, “Determination of the
Useful Life of Intangible Assets.” FASB ASC 350-30 amended the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset. The adoption of FASB
ASC 350-30 did not have material impact on the Company’s financial
statements.





FASB ASC
470-20




Effective
January 1, 2009, the Company adopted FASB ASC 470-20, “Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement).” FASB ASC 470-20 requires entities to
account separately for the liability and equity components of a convertible debt
security by measuring the fair value of a similar nonconvertible debt security
when interest cost is recognized in subsequent periods. FASB ASC 470-20 requires
entities to retroactively separate the liability and equity components of such
debt on the entities’ balance sheets on a fair value basis. The adoption of FASB
ASC 470-20 did not have any impact on the Company’s financial
statements.




FASB ASC
860




In June
2009, the FASB issued ASC 860, which eliminates the concept of a qualifying
special-purpose entity, creates more stringent conditions for reporting a
transfer of a portion of a financial asset as a sale, clarifies other
sale-accounting criteria, and changes the initial measurement of a transferor’s
interest in transferred financial assets. FASB ASC 860 will be effective for
transfers of financial assets in years beginning after November 15, 2009 and in
interim periods within those years with earlier adoption prohibited. The
adoption of ASC 860 is not expected to have a material impact on the Company’s
consolidated financial position or results of operations.


33


FASB ASU
2009-05




In August
2009, the FASB issued Accounting Standards Update ("ASU") No. 2009-05,
"Measuring Liabilities at Fair Value," which amends the guidance in ASC 820,
Fair Value Measurements and Disclosures, to provide guidance on fair value
measurement of liabilities. If a quoted price in an active market is not
available for an identical liability, ASU 2009-05 requires companies to compute
fair value by using quoted prices for an identical liability when traded as
an asset, quoted prices for similar liabilities when traded as an asset or
another valuation technique that is consistent with the guidance in ASC 820. ASU
2009-05 will be effective for interim and annual periods beginning after its
issuance. The Company will adopt this ASU 2009-05 on January 1, 2010 and expects
that the adoption will not have a material impact on the Company’s consolidated
financial position or results of operations.




FASB ASU
2009-13




In
October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition:
Multiple-Deliverable Revenue Arrangements” (ASU 2009-13). This update removes
the criterion that entities must use objective and reliable evidence of fair
value in separately accounting for deliverables and provides entities with a
hierarchy of evidence that must be considered when allocating arrangement
consideration. The new guidance also requires entities to allocate arrangement
consideration to the separate units of accounting based on the deliverables’
relative selling price. The provisions will be effective for revenue
arrangements entered into or materially modified in our year 2011 and must be
applied prospectively. The Company is currently evaluating the impact of the
provisions of ASU 2009-13.




FASB ASU
2009-17





In
November 2009, the FASB issued ASU 2009-17, “Consolidations (Topic 810) –
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities,” which codifies FASB Statement No. 167, “Amendments to FASB
Interpretation No. 46(R).” The ASU changes how a reporting entity determines
when an entity that is insufficiently capitalized or is not controlled through
voting (or similar rights) should be consolidated. The determination of whether
a reporting entity is required to consolidate another entity is based on, among
other things, the other entity’s purpose and design and the reporting entity’s
ability to direct the activities of the other entity that most significantly
impact the other entity’s economic performance. These provisions are effective
January 1, 2010, for a calendar year-end entity, with early application not
being permitted. Adoption of these provisions is not expected to have a material
impact on the Company’s consolidated financial statements.





Results
of Operations





Comparison
of Years Ended December 31, 2009 and 2008





Revenue





Net
revenue was approximately $44.1 million for the year ended December 31, 2009, a
decrease of $11.3 million, or 20%, compared with $55.4 million for the prior
year. The decrease in sales revenue was primarily due to the negative impact of
reduced demand in backlight end products as a result of the global financial
crisis which began from the third quarter of 2008. From the third quarter of
2009, the market showed a slow upward trend and the Company expanded sales
revenue both on its traditional products and newly developed products of large
size LED backlights and LED monitors. Among the total decrease of $11.3 million
in sales revenue, $3.7 million, $3.4 million and $4.2 million came from the
Company’s three manufacturing facilities in Dongguan, Yangzhou and Wuhan,
respectively.





The total
net revenue can be divided into international sales and domestic sales as
follows:





Years Ended December 31,2008
                    
                    
                    2009International
      sales
                    
                    
                    40,429,000
                    
                    
                    
                    26,290,000Domestic
      sales
                    
                    
                    15,002,000
                    
                    
                    
                    17,785,000Total
                    
                    
                    55,431,000
                    
                    
                    
                    44,075,000





Domestic
sales amounted to 40% of total sales revenue for 2009, compared with 27% in
2008. The increase trend in proportion of domestic sales reflected both the
heavier adverse impact of the worldwide financial crisis in the international
market and management’s effort in developing the domestic market.





Sales to
international customers totaled $26.3 million for the year ended December 31,
2009, a decrease of $14.1 million, or 35%, compared with $40.4 million for the
prior year. The international sales revenue was affected significantly by the
global recession. The significant decrease of international sales was primarily
due to weakened market demand for the digital display products such as
automobile TV, portable DVD, MP3 and MP4 and LCD products. Diguang Electronics
lost sales revenue of $5.7 million and $4.2 million from its three major
customers in Korea and Hong Kong respectively, primarily due to these three
customers losing their orders of portable DVD and digital photo frame products.
Wuhan Diguang and Dihao together lost sales revenue of $7.8 million from their
major Taiwanese customers. With large customers reducing their orders, the
Company managed to increase sales revenue to other customers. The $10.9 million
decrease in sales to big customers was mitigated by the increase of $3.1 million
in sales to other customers.


34





The
Company has tried its best to develop new customers in both the international
and domestic markets throughout 2009 to offset the negative impact of losses of
sales orders from existing big customers.





Sales to
domestic customers were $17.8 million for 2009, an increase of $2.8 million, or
19%, compared with $15 million for 2008. The increase of domestic sales revenue
was the result of management’s strategy to develop the domestic market. The
Company recognized sales revenue of $7.5 million all from new domestic customers
in 2009; among which, sales to the largest new customer amounted to $3.5 million
in Diguang Electronics. On the other hand, the domestic revenue from sales of
small to mid size LED products decreased by $4.7 million in 2009, because the
Company chose to cease producing some small to media size products with lower
gross margin.





The
Company has thousands of categories of products and the product mixtures are
constantly changing in order to adapt to market demands during 2009 and 2008. As
the sale prices are quite different for different categories of products, it is
almost impossible to discuss the impact of changes in volume and changes in
product price here.





The
Company already has three manufacturing facilities located in the East China
region (Yangzhou), Central China region (Wuhan), and Southern China region
(Dongguan). There are various capacities in the principal manufacturing facility
of Dongguan to serve the customers which are LCD TV and monitor manufacturers
and LCD assembly enterprises. The Company commenced to produce LED general light
products in the Dongguan facility since June 2008 and large size LED backlights
and monitors from 2009. Yangzhou factory used to focus on producing small and
mid size CCFL and LED backlight products and began to produce new products of
large size LCM products since the fourth quarter of 2009. Wuhan facility solely
manufactures large size CCFL backlight products. The Company plans to set up
another new manufacturing facility in Shenzhen of Southern China. This new
facility will be used to manufacture large size LED back light products and LED
TV sets. Based on these manufacturing facilities, the Company believes that it
has strategically deployed its production capacity in China for its long term
growth.





From the
product mix aspect, the sales can be divided into six main categories: LED
backlight, CCFL backlight, LCM, Mini-notebook assembly products, LED general
light and LED monitor as follows.





Years Ended December 31,2008
                  
                  
                  2009LED
      backlight
                  
                  
                  25,756,000
                  
                  
                  
                  21,359,000CCFL
      backlight
                  
                  
                  27,319,000
                  
                  
                  
                  11,133,000LED
      LCM
                  
                  
                  604,000
                  
                  
                  
                  6,055,000CCFL
      LCM
                  
                  
                  852,000
                  
                  
                  
                  4,200,000Mini-notebook
      assembly
                  
                  
                  413,000
                  
                  
                  
                  267,000LED
      general lights
                  
                  
                  487,000
                  
                  
                  
                  566,000LED
      monitors
                  
                  
                  —
                  
                  
                  
                  495,000Total
                  
                  
                  55,431,000
                  
                  
                  
                  44,075,000





The
Company’s product mix changed significantly during 2009. For 2009, sales of
total LED products, including LED backlight, LED LCM, Mini-notebook, LED general
lights and LED monitors, amounted to $28.7 million, representing 65% of total
sales revenue; sales of CCFL products, including CCFL backlight and CCFL LCM,
amounted $15.3 million, representing only 35% of total sales revenue. It is the
first time that sales proceeds of LED products exceeded CCFL products. Except
for traditional superiority in contrast ratio, color gamut, localized dimming
and low power consumption, now the market has enlarged demand to the
environmental protection products world-widely, and LED products have satisfied
the market requirement especially for the small to mid size of LED backlights
with advantages of lower cost than the same size of CCFL products. The Company
has concentrated in research and development of LED products in recent years and
began to enjoy result of significantly increased sales revenue in LED products
since the fourth quarter of 2009.





Sales of
CCFL backlights totaled $11.1 million for the year ended December 31, 2009, a
decrease of $16.2 million, or 59%, compared with $27.3 million for 2008. The
dramatic drop in sales of CCFL backlights represented the accelerated
replacement of CCFL products by LED products and the Company’s effort on
expanding sales of LED products.





Sales of
LED products totaled $21.4 million for the year ended December 31, 2009, a
decrease of $4.4 million, or 17% from $25.8 million in the prior year. The
Company tried hard to expand its share in the LED backlight market under the
depressed situation of worldwide financial crisis. The Company upgraded its
small size LED backlight products used in mobile phones and abandoned the old
small size products with low or negative gross margin; accompanying with an
increase of gross margin, sales revenue of upgraded small size LED backlights
used for cell phones increased by $2.1 million to $6.1 million in 2009 from $4
million in 2008. The Company launched new products of large size LED backlight
in the fourth quarter of 2009 and recognized sales revenue of $1.4 million.
Facing the deeply depressed economy, the increase in sales of upgraded small
size and new product of large size LED backlights could not mitigate the overall
decrease of $7.9 million in sales of traditional small to mid size LED
backlights.


35





The
Company had penetrated into the LCM assembly in 2008. Total sales revenue from
LED and CCFL LCM increased from $1.5 million in 2008 to $10.3 million in 2009,
representing an increase of $8.8 million, or 587%. LED LCM and CCFL LCM sales
revenue was $6.1 million and $4.2 million, respectively, in 2009, representing
59% and 41% of total LCM revenue in 2009, compared with 41% and 59%,
respectively, in 2008. The change of LED and CCFL proportion was in line with
the overall trend of backlight segment in display industry. In provision of LCM
products, the TFT-LCD glass substitute is supplied by the Company’s customers on
an OEM basis. The significant increase of LCM sales represented the success of
the Company’s downstream integration strategy.





LED
monitor is another new product launched in 2009. Sales of LED monitors began to
expand in the fourth quarter of 2009 and the Company expects further expansion
on sales of LED monitors in the near future.





The
Company has not promoted its products of LED general lights and mini note-book
successfully in 2009 as expected. In fact, the Company has decided to cease
production of mini note-books. But the Company still has confidence on LED
general lights market and will continue to promote its products in the
future.





The
Company expects the overall LED product shipments will continue to grow and be
more sustainable as the transition from CCFL to LED backlights become more
compelling due to its high performance in all aspects.





Cost
of Sales





Since the
basic materials for all backlight products are similar, the Company discusses
cost of sales in the aggregate for all products. Cost of sales was $40.5 million
for 2009, a decrease of $10.2 million, or 20%, compared with $50.7 million for
2008. The 20% decrease in cost of sales is parallel to the 20% decrease in sales
revenue. Under the worldwide depressed economic circumstances in late 2008 and
early 2009, some customers of the Company cancelled their purchase orders and
inventories prepared for those cancelled orders became obsolete. The Company has
recognized provision of $1.7 million for obsolete and slow-moving inventories,
which counted for 4% of total cost of sales in 2009.





Raw
material cost was $33.9 million for 2009, representing a decrease of $7 million,
or 17%, compared with $40.9 million for the prior year. The decrease in raw
material cost was mainly attributable to the decrease of sales revenue. The
percentage of raw material cost to total cost of sales was 84% for 2009,
compared with 81% for 2008; the increase of this percentage was the result of
changes in the product mix. The Company began to put into scale production for
new products of large size LED backlights and LED monitors; and these new
products have higher raw material tie-up since the unit purchase price of raw
materials used in new products is higher than traditional products. Raw
materials cost accounted for 77% and 74% of total sales revenue in 2009 and
2008, respectively.





Labor
cost was $3.3 million for 2009, representing a decrease of $3.2 million, or 49%,
compared with $6.5 million for 2008. The percentage of labor cost to total cost
of sales was 8% for 2009, compared with 13% for 2008. The decrease in sales
revenue was one reason of decrease in labor cost; but the Company’s effort in
improving management controls on labor cost counts most in reduction of labor
cost. The Company has concentrated on cutting down expenses including labor
costs ever since the last quarter of 2008 and began to adopt new labor cost
control methods and incentive system to improve the workers’ productivity since
October of 2009. The Company expected more efficiency in labor cost. Labor cost
accounted for 8% and 12% of total sales revenue in 2009 and 2008
respectively.





Production
overhead was $3.3 million for 2009, a decrease of $0.1 million, or 3%, compared
with $3.4 million for 2008. The production overhead includes depreciation
charges for fixed assets and amortization for building improvement, water and
electricity expenses, repair expenses, and rentals, etc. Due to the
semi-variable nature of production overhead, the decrease of production overhead
is not necessarily directly associated with the decrease of cost of sales. The
production overhead accounted for 7% and 6% of total revenue for 2009 and 2008,
respectively.





Gross
Margin





The
overall gross margin for 2009 was 8%, a 1% decrease, compared with 9% gross
margin for 2008. The Company’s effort in expanding sales of new or upgraded
products with higher gross margin has to some extent smoothed the decrease trend
of gross margin due to drops in overall sales volume.





The gross
margin of LED products increased from 5% in 2008 to 8% in 2009. The Company has
increased gross margin for nearly all categories of the LED products. The
Company upgraded its small to mid size of LED backlight products used in mobile
phones to increase its gross margin; gross margin on sales of such products was
close to break even in 2009, compared with a negative 17% in 2008. Most
importantly, the new products of large size LED backlights had a high gross
margin of 27% and sales of these large size LED products accounted for 5% of the
total LED products sales revenue in 2009.


36





Gross
margin of CCFL products fell to 7% in 2009 from 11% in 2008. The decrease was
primarily due to aggressive market competition on traditional CCFL
products.





The gross
margin for LCM had a significant increase from 3% in 2008 to 9% in 2009. The
increase of gross margin mainly came from LED LCM products manufactured at
Diguang Electronics and the Yangzhou facility. Launched in 2008, LED LCM
products reached mass production in 2009 with total sales revenue of $6.1
million; which resulted in an increase in gross margin. But for CCFL LCM, the
gross margin was in a decrease trend in 2009, which was in line with the change
in gross margin for overall CCFL products.





Regarding
international sales, the Company’s gross margin was approximately 8% for 2009, a
2% decrease, compared with 10% for 2008 due to the price reduction pressure from
end users who are LCD panel makers. Regarding domestic sales, gross margin was
approximately 8%, a 4% increase, compared with 4% for 2008. The increase of
gross margin from domestic customers was due mainly to upgrade of small to mid
size LED backlights used for mobile phones and launch of large size LED
backlights.





Selling
Expenses





Selling
expenses were $2.3 million for 2009, an increase of approximate $482,000, or
25%, compared with $1.9 million for 2008. The increase of selling expenses was
primarily due to increased promotion activities for new products in 2009 and
payroll expenses increased with the increase of headcounts of sales
personnel.





As a
percentage of total revenue, selling expenses were approximately 5.3% for 2009
and 3.4% for 2008, respectively.





Research
and Development Expenses





Net
research and development expenses for 2009 were $3 million for 2009, an increase
of $1.8 million, or 150%, compared with $1.2 million for 2008. Research and
development expense increases were parallel to the Company’s efforts of
upgrading products and launching new products. The increase in research and
development expenses was attributable primarily to mould charges; the Company
developed a series of new products including large size LED backlights, LED
monitors and large size LCM products, and the mould charges increased
approximately by $1.2 million in 2009 compared to the same type of expense in
2008.





The
percentage of research and development expenses to total sales revenue was
approximately 6.9% and 2.1% for 2009 and 2008, respectively.





General
and Administrative Expenses





General
and administrative expenses were $4.4 million for 2009, a decrease of $1.1
million, or 20%, compared with $5.5 million for 2008. General and administrative
expenses mainly included payroll, provision for bad debts, professional service
fee, rentals, share-based compensation and depreciation, etc. Payroll and
share-based compensation decreased by $795,000 and $290,000, respectively, in
2009 compared with the same types of expense in the prior year. With
management’s efforts in cutting costs, nearly all the expenses were reduced to
some extents.





The
percentages of general and administrative expenses to total sales revenue were
approximately 10% for both 2009 and 2008.





Interest
Expense





Net
interest expenses were $367,000 for 2009, representing an increase of $107,000,
or 41%, compared with $260,000 for 2008. With continuous losses through its
operating activities, the Company had to seek more funds from bank loans to
support its working capital demands. As of December 31, 2008, the loan from bank
balance was $4.4 million. During 2009, bank loans actually used by the Company
increased about $4.4 million. The interest expenses increased in line with the
increase in bank loans.





Net
interest expenses for 2009 and 2008 represented 0.8% and 0.5% of total sales
revenue, respectively.





Other
Expenses (Income)





Other
income was $160,000 for 2009, representing an increase of $351,000, compared
with expense of $191,000 for 2008. The increase in other expenses came primarily
from foreign currency exchange gains due to changes in exchange rate between RMB
and US dollars.





As a
percentage to the total sales revenue, other income represented 0.4% and other
expenses accounted 0.3% in 2009 and 2008 respectively.


37





Income
Tax Provision





Income
tax provision for 2009 was approximately $42,000, a decrease of $149,000,
compared with $191,000 for 2008. Income tax provision for 2009 was accrued in
Yangzhou Dihao and included reversal of deferred tax assets recognized in the
prior year and minor adjustment to current income tax of the prior year. Income
tax provision for 2008 was mainly accrued by Diguang Electronics and Yangzhou
Dihao.





As a
percentage to the total sales revenue, income tax provision represented 0.1% and
0.4% in 2009 and 2008 respectively.





Net
Loss





Net loss
was $7.2 million for 2009, compared with net loss of $4.7 million for 2008,
representing an increase of $2.5 million, or 53%, in net loss. The increase in
net loss suffered by the Company in 2009 was mainly due to the decrease in sales
revenue, and increase of selling expense and research and development expenses
as a result of the Company’s strategy in development and promotion of new LED
products.





As a
percentage of total revenue, net loss for 2009 and 2008 accounted for 16.3% and
8.5% respectively.





Losses
per Share





The basic
loss per share was $0.33 for 2009, compared with $0.21 for 2008. Increase in
basic losses per share was due to increase of net loss occurred in 2009. The
number of weighted average common shares outstanding was 22,072,000 and
22,156,000 for 2009 and 2008 respectively.





Liquidity
and Capital Resources





Comparison
of Years Ended December 31, 2009 and 2008





As of
December 31, 2009, the Company had total assets of $52.0 million, of which cash
amounted to $6.2 million and restrict cash amounted to $4.3 million, accounts
receivable amounted to $14.0 million and inventories amounted to $7.4 million.
The working capital was $2.8 million and the equity was $17.7 million on
December 31, 2009, compared with $7.9 million and $24.8 million, respectively,
on December 31, 2008. The quick ratios were approximately 0.85 and 1.02 on
December 31, 2009 and 2008, respectively.





As of
December 31, 2009, the cash position had a net decrease of $8.8 million as
compared with cash position of $15 million as of December 31, 2008. The Company
received further $1.5 million bank loans (net of guarantee deposit) to
supplement its cash used in operating activities during 2009. In January and
February of 2010, the Company received RMB20 million of loans from Shenzhen
Ping’an Bank and RMB15 million out of RMB70 million bank facilities from China
Development Bank; and the other RMB55 million bank facilities from China
Development Bank will be available on demand of the Company. The Company
estimated it has no minimum cash requirementsfor
$16.5 million in 2010, $7.5 million for capital investment in construction of
new manufacturing facility and $9 million for supplement of working
capital. The Company believes that the total cash on hand and the
current available credit line will be sufficient to meet its capital investment
and working capital needs.





Net cash
used in operating activities was $9.1 million for 2009, compared with $2.9
million for 2008. The increase in cash used in operating activities was
primarily due to increased operating loss and increased cash occupied by working
capital, especially accounts receivable. Cash of $7.1 million was tied up in
working capital during 2009, among which increase of accounts receivable
occupied cash of $4.9 million.





Non-cash
items added approximately $5,281,000 back to cash flow in operating activities
for 2009, increase of $1,200,000, compared with total non-cash items of
$4,080,000 for 2008. Of the non-cash items of 2009, bad debt allowance was
$869,000 for 2009, an increase of $648,000, compared with $221,000 for 2008.
Inventory provision was $1.75 million for 2009, $510,000 higher than $1.24
million for 2008. Impairment loss from long term investment in Yangzhou Huaxia
was $721,000 and $157,000 for 2009 and 2008, respectively. Due to the negative
net assets in Yangzhou Huaxia, the Company wrote down investment in Yangzhou
Huaxia to zero as impairment loss in 2009. Depreciation was $1,602,000 for 2009,
a decrease of $231,000, compared with $1,833,000 for 2008. Approximately
$281,000 was from share-based compensation, $291,000 lower than $572,000 for
2008.





The
impact of the changes in operating assets and liabilities on cash flow was
explained as follows.  The accounts receivable increased $4,899,000,
compared with $3,080,000 decrease for 2008. Increase in accounts receivable was
mainly due to increased sales volume in the fourth quarter of 2009 compared with
the same period of the prior year.  Inventory increased by $1,903,000
during 2009, compared to a $1,073,000 increase in inventory for the same period
of the prior year.  Higher level inventory was stocked up for sales
orders received for the first quarter of 2010.   Deposits,
prepayment and other receivables increased by $228,000, compared with the
$452,000 decrease for 2008. VAT recoverable decreased $30,000, compared with a
$292,000 decrease for 2008.





Accounts
payable decreased by $196,000, compared with a $4,013,000 decrease in the 2008.
Accruals and other payables increased by $258,000, compared to a 1,274,000
decrease for 2008. Advances from customers decreased by $236,000, compared with
an $80,000 increase for 2008. Tax payable decreased $6,000, compared with a
decrease of $23,000 for the same period of the prior year. The following
summarized the impact of changes in operating assets and liabilities on cash
flow between 2009 and 2008:


38





·
            $7,979,000
      from Accounts receivable (negative
impact)





·
            $830,000
      from inventory(negative impact)





·
            $680,000
      from deposits, prepayment and other receivable (negative
      impact)





·
            $262,000
      from VAT recoverable (negative
impact)





·
            $3,817,000
      from accounts payable (positive
impact)





·
            $1,532,000
      from accruals and other payable (positive
  impact)





·
            $316,000
      from advance from customers (negative
impact)





·
            $17,000
      from taxes payable (positive
impact)





The total
impact from above non-cash items and changes in operating assets and liabilities
was approximately $4.7 million (negative impact).





Net cash
used in investing activities amounted to $241,000 for 2009, a decrease of
$3,559,000, or 94%, compared to $3.8 million in 2008. During 2008, the Company
paid $1.2 million as acquisition consideration of ND and Dongguan S&T and
paid $2.6 million to purchase plant, property and equipment, but the Company
only paid $110,000 as acquisition consideration and $160,000 to purchase plant,
property and equipment in 2009.





Net cash
provided by financing activities amounted to $649,000 for 2009, compared with
$4,554,000 for 2008. Net proceeds from bank loan were $1.5 million and $4.4
million for 2009 and 2008 respectively. Capital from non-controlling interest
was $738,000 in 2008 compared with none in 2009. The Company repurchased its
common stocks for a total sum of $245,000 during 2008 but did not repurchase any
stock in 2009. Repayment to related parties was $691,000 and $727,000 during
2009 and 2008, respectively. The prepaid deposit for long-term loan was $440,000
in 2009, which was not refundable by the Bank. As an exchange of loan facilities
with a commercial bank, the Company had to make a deposit of $4.34 million as
collateral, which reduced the fund sources available to the
Company.





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, 2009 and 2008





3.  Consolidated
Statements of Income and Comprehensive Income (Loss) for the years ended
December 31, 2009 and 2008





4.  Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2009 and
2008





5.  Consolidated
Statements of Cash Flows for the years ended December 31, 2009 and
2008





6.  Notes
to Consolidated Financial Statements.




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




None
..


39




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, the “SEC”, rules and forms, and
that such information is accumulated and communicated to the Company's
management, including its chief executive officer, the “CEO”, and chief
financial officer, the “CFO”, as appropriate, to allow timely decisions
regarding required financial disclosure.





In
connection with the preparation of this annual report on Form 10-K, the “Form
10-K”, the Company carried out an evaluation as of December 31, 2009, 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, 2009 the Company's disclosure
controls and procedures were not effective because of the material weaknesses
described below under “Management's 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, 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.





Management
has conducted an assessment, including testing, of the effectiveness of the
Company's internal control over financial reporting as of December 31,
2009. 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, 2009. In light of the material
weaknesses, management concluded that the Company’s internal control over
financial reporting was not effective as of December 31, 2009.





1.
            Entity level material
      weaknesses-control
environment





In the
definitions under the Sarbanes-Oxley Act, “A key control is a control that, if
it fails, means there is at least a reasonable likelihood that a material error
in the financial statements would not be prevented or detected on a timely
basis”.





The
Company 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 Regulation S-X:-





·
            Control over Information and
      Communication.The Company lacks effective
      communication of the importance of internal control over financial
      reporting across its structure, and management failed to set adequate
      tone to increase the awareness of control
      consciousness.


·
            Control environment.The Company lacks an effective
      anti-fraud program, including an effective whistle-blower program,
      designed to detect and prevent fraud.The Company fails to conduct
      consistent background checks of personnel in positions of responsibility
      and establish an ongoing program to manage identified fraud
      risks.


40





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, the Company does 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 the
Company’s preliminary consolidated financial statements.





3.
            Ineffective information
      technology general control





The
Company currently does not have any formal documentation on the information
technology general controls, including program development, program changes,
computer operations and access to programs and data, which would have an impact
on application-level controls and financial statements:-





(i)
              Impact
      on application-level
controls





Many
control procedures are programmed into an entity’s computer system. For example,
the process of matching a vendor to a database of preapproved vendors may be
completely computerized. A user may submit an invoice for payment, the computer
performs the match, and, if the vendor is on the list, processing is allowed to
continue. The user is informed only when the computer detects an error, namely,
that the vendor has not been preapproved. It is then the user’s
responsibility to take the appropriate follow-up action. Again, the follow-up of
the identified errors is a critical component of the control.





Ultimately,
the effectiveness of computer application controls will depend on the
effectiveness of relevant computer general controls, including:-





·Systems development. The application was properly developed and tested to
make sure that the control functions as designed.





·Access. Access to the program is monitored to ensure that unauthorized
changes to the program cannot be made.





The
control objectives for computer application controls are the same as the
objectives for manual controls—information must remain complete and accurate at
all phases, from initiation (data input) through processing.





(ii)Impact on financial
statements





When
designing the documentation of internal control, the Company is considering to
include the following functional features in the future:-





·Maintainability. The documentation should facilitate easy updating and
maintenance as business processes and controls change over time.





·Ease of review. The documentation of internal control should be designed
in a user-friendly fashion. For compliance purposes, the project team is the
primary user, and so the documentation should allow for these individuals
to:-





-Easily assess the effectiveness of the
design of internal control





-Facilitate the design of tests of
controls





·Information gathering. To create new or update existing documentation
will require people to gather information about the Company’s business processes
and controls. The documentation methods should recognize this need and, to the
extent possible, make it easy to gather and input the information required to
create appropriate documentation.





·Scalability. The documentation techniques should be equally adept at
handling processes with many control points and those with only a
few.





PCAOB
Auditing Standard No. 5 requires the following information to be included
in the documentation of routine transactions:-


41




-The design of controls over all relevant
assertions related to all significant accounts and disclosures in the financial
statements. The documentation should include the five components of internal
control over financial reporting.





-Information about how significant
transactions are initiated, authorized, recorded, processed, and
reported.





-Sufficient information about the flow of
transactions to identify the points at which material misstatements due to error
or fraud could occur.





-Controls designed to prevent or detect
fraud, including who performs the controls and the related segregation of
duties.





Remediation
Measures of Material Weaknesses





To
remediate the material weaknesses described above in “Management’s Report on
Internal Control over Financial Reporting”, the Company has implemented or
planned to implement the following measures, and will continue to evaluate and
may in the future implement additional measures:-





1.
            The Company planned remediation
      measures of hiring and training of personnel who will address these
      material weaknesses generally as it will have sufficient personnel with
      knowledge, experience and training in the application of U.S. GAAP
      commensurate with the Company’s financial reporting
      requirements;





2.
            TheAudit Committee and management
      will prioritize improvement of the Company’s internal control over
      financial reporting. The Company has a comprehensive training program in
      financial reporting on U.S.GAAP internally and the Company’s
      staff have enrolled in professional accounting
      seminars.





3.
            The Company continues to retain
      the services of outside U.S. counselor to advise on SEC disclosure
      requirements and at the same time, the Company has 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 it considered would enable it to enhance
      its management capability on monitoring the Company's business operations.
      Besides, the Company is 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;
      and





 ̈
              Senior management of the
      Company will review and approve the IT strategic
      plan.





The
Company 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.


42




The
overall ERP implementation was performed on a continuous basis during 2009. To
cope with the operation and control requirements, new modules of MRP and product
cost control were implemented, and together with the above mentioned policies
and procedures, will be completed before September 2010.





Subsequent
to year end, the Company has taken the following actions to remedy the material
weaknesses:-





To
compensate for the lack of effective communication across the departments,
meetings were held regularly to review the progress of the internal control
implementation and remedial actions were taken. For example, the essential
workflows and information were circularized on the Office Automation System to
all employees. Simultaneously, training courses were conducted regularly to
enhance the importance of internal controls.





Preventive
and detective controls on anti-fraud





An
Anti-fraud program was designed to prevent and detect kick-backs on procurement.
The prohibition on fraud was clearly defined in the Company’s staff handbook and
the Company encourages the whistle-blowers plan and checks were imposed by
internal audit departments to investigate any possible frauds and
irregularities.





Effective
from the end of 2007, the Company has implemented the ERP system which includes
financial reporting module and supply chain management module. It is an
integrated system which currently allows the Company to generate a great deal of
financial and operational information in a timely fashion to facilitate strict
monitor of business transactions. However, the Company did not possess high
level of formal documentation on the information technology general controls
(ITGC), including program development, program changes, computer operations, and
access to programs and data. Consequently, it might lessen the reliability and
timeliness of the application control, including input and output control,
processing control and eventually it might affect the financial statements
generated from the system.





Subsequent
to December 31, 2009, the Company is taking steps to document the IT general
control, including the systematic control system amendments and establishment of
database defaults. All these were to ensure the application system ongoing
effectiveness.





The
Company believes that it is taking the steps necessary for remediation of the
material weaknesses identified above, and it will continue to monitor the
effectiveness of these steps and to make any changes that its 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, 2009, 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.





(d)
Inherent Limitations on Effectiveness of Controls





The
Company’s management, including the CEO and CFO, does not expect that the
Company’s disclosure controls or the Company’s internal control over financial
reporting will prevent or detect all errors 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.


43





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, 2009 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
            
            
            53
            
            Board
      Chairman and CEOHong
      Song
            
            
            47
            
            Director
      and Vice PresidentKeith
      Hor
            
            
            45
            
            Chief
      Financial OfficerJerry
      Yu
            
            
            54
            
            Chief
      Operating Officer (appointed as of December 9, 2008)Fong
      Heung Sang
            
            
            51
            
            Independent
      DirectorHoi
      S. Kwok
            
            
            59
            
            Independent
      DirectorTuen-Ping
      Yang
            
            
            64
            
            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.




Hong Song, Vice
President and former 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. Mr. Song ceased to be Chief
Operating Officer after Mr. Jerry Yu was appointed to said post.





Keith Hor,
Chief
Financial Officer, was the Company’s 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 resignation of former chief financial officer on the
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.


44


Jerry Yu, Chief
Operating Officer and Vice President, graduated with Bachelor of Science
degree majoring in Accounting from California State University, Chico and Master
of Business Taxation degree from University of Southern California. He
is a Certified Public Accountant and a member of AICPA. Since 2001, he has
served as CEO & Director of Shenzhen Baotian Investment Development Co.
Ltd., a holding company with investments in real estate development, property
management and business acquisitions. From 2001 to 2003 he served as President
& Director of Beijing Hai Hua Aquaculture, Ltd., an aqua-business
specializing in high intensity indoor shrimp farming, and providing turn-key
operation to customers, including feasibility study, company set-up, site
selection, factory design and construction, equipment importation and
engineering service, management and employees training and technology transfer.
From 1992 to 2002, he served as CEO & Director of Fair Fund Industrial
(Group), Ltd., a holding company with operations both in the mainland China and
Hong Kong, including real estate development, construction, property and service
apartment management, food and entertainment service, manufacturing and
import/export trading. From 1989 to 1992 he served as Special Assistant to the
Chairman of Da Shung Engineering Co. Ltd., a Taiwanese company with operations
in construction, real estate development, manufacturing, and golf course
management. From 1979 to 1989, he served as Audit Manager - Johnson & Grover
Accountants, Century City, California, Audit Senior - Laventhal & Horwath,
Los Angeles, California and Audit Staff - Ernst & Ernst, Los Angeles,
California.





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.





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 the Company’s
business:





Huade Zuo,
Manager, R&D , Diguang Electronics, joined Diguang Electronics in
1999 as an engineer, manager, deputy chief engineer and later as Technology
Superintendent. He is responsible for the Company’s 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, Manager, the Indoor Lighting R&D Department, Diguang
Technology, 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.


45




Chen Rongguo,
Controller, Human Resources Administration, 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,
Manager, the fifth Marketing Department for Terminal Product, Diguang
Technology , 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. Kwok and Tuen-Ping Yang. Mr. Fong Heung Sang is 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(d)(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. Kwok and Tuen-Ping
Yang serve on the Compensation Committee. Mr. Hoi S. Kwok is 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.





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.


46


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 the Company’s 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 the Company’s relative performance and its own strategic
goals.




The
Company has not retained a compensation consultant to review its policies and
procedures with respect to executive compensation. The Company conducts an
annual review of the aggregate level of its executive compensation, as well as
the mix of elements used to compensate its executive officers. Based on the
compensations committee general industry knowledge of various companies in the
electronics industry, the Company believes the salaries and bonuses of the key
officers and employees of Diguang are fair and reasonable.





Elements of
Compensation




Executive
compensation consists of following elements:




Base
Salary. Base salaries for the Company’s executives are established based
on the scope of their responsibilities, taking into account competitive market
compensation paid by other companies for similar positions. Generally, the
Company believes 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 the Company’s
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 October 15, 2009.





Discretionary
Annual Bonus. The Compensation Committee has the authority to award
discretionary annual bonuses to the Company’s 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 the Company’s common
stock.




The
Company’s 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 the Company’s 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. The Company believes that long-term performance is
achieved through an ownership culture that encourages such performance by its
key employees through the use of stock options. The Company’s stock compensation
plan has been established to provide certain of the Company’s 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 the Company’s compensation goals. The
Company has not adopted stock ownership guidelines, and its stock compensation
plan has provided the principal method for its key employees to acquire equity
interests in the Company. The Company believes that the annual aggregate value
of these awards should be set near competitive median levels for comparable
companies.


47


Options. The Company’s 2006 Stock
Incentive Plan authorizes the Company to grant options to purchase shares of
common stock to the Company’s employees, directors and consultants. The
Company’s Compensation Committee was the administrator of the stock option plan
until the authority was delegated by the Board to the Company’s former Chief
Operating Officer, Song Hong in 2007 and then to the Company’s Chief Executive
Officer, Song Yi in 2008. 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 the Company’s key employees, including the Company’s Chief
Financial Officer, and the Company’s 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 key officers and key employees, its assessment of individual
performance, a review of each executive’s existing long-term incentives, and
retention considerations. In 2006, the Company’s former Chief Financial Officer,
the only named executive officer at that time, 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 the Company’s
employees. The Chief Executive Officer has not been granted any stock options.
In 2007, the Company’s two of three current independent directors were awarded
stock options. The Company’s current Chief Financial Officer was granted with
20,000 shares of option on March 1, 2007, with an exercise price of $5 per
share, which vest over four years in equal installments on the following four
succeeding anniversaries of the grant date; the Chief Operating Officer was
granted with 300,000 shares of option on December 17, 2008, with an exercise
price of $0.10 per share, which vest quarterly at the beginning of each quarter
over three years starting from January 1, 2009. Please refer to “Grants of Plan
Based Awards”.





In order
to motivate the Company’s employees to achieve the fixed operation targets in
2009, on December 9, 2008 the board approved the granting of the Incentive
Option Shares in 2009 to the employees of the Company, totaling up to 548,000
shares. The actual number of stock options to be granted to the employees is
connected with his or her annual target achievements and responsible
projections, and the person who can achieve all the annual achievements will be
entitled to all the granted stock options, and the person who partially achieves
the annual achievements will be entitled to the partial granted stock options.
If the employee fails to achieve the target completely, no stock options would
be granted. Based on the employee’s annual target achievements, the respective
stock options shall be granted as to 25% of the individual’s total entitled
stock options (shares) on each of the first four anniversaries of the vesting
commencement date.





On July
15, 2007, the Company entered into a two year Consultancy Agreement with Mr.
Chen Min. On July 10, 2009, just before termination of the Consultancy
Agreement, the Board of Directors of the Company granted 50,000 shares of stock
option to Mr. Chen Min for the past consulting service rendered. The 50,000
shares of stock option vested on the grant date and the option may be exercised
for sixty months after termination of the above mentioned Consultancy
Agreement.





2006 Stock
Incentive Plan. The Company’s 2006 Stock Incentive Plan authorizes the
Company to grant incentive stock option, nonstatutory stock option, stock
options, cash awards and stock awards to the Company’s employees, directors and
consultants. Mr. Song Yi, the Company’s chief executive officer is the
administrator of the plan. If and when stock option awards are granted, they
will be made as per the approval of the board of directors, for which the
vesting commencement date will be the first day of the month in the
year and, occasionally, to meet other special retention or performance
objectives. Mr. Song Yi will provide the stock option award plans to the
Compensation Committee for review 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 Yi for the approval of the board of directors.




Stock
Appreciation Rights. The Company currently does not have any Stock
Appreciation Rights Plan that authorizes it to grant stock appreciation
rights.




Other
Compensation. The Company’s 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 the Company’s previous chief financial
officer. Other than the annual salary stipulated in the employment agreements of
the Company’s 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 the Company’s
chief financial officer, chief operating officer and key employees, the Company
does not have any other benefits and perquisites for its executive officers;
however, the Compensation Committee in its discretion may provide benefits and
perquisites to these executive officers if it deems it advisable. The Company
currently has no plans to change the employment agreements (except as required
by law or as required to clarify the benefits to which its executive officers
are entitled as set forth herein) or to extend benefits and
perquisites.


48





SUMMARY
COMPENSATION TABLE




Name and
                            principal
                            position
                            (a)
                          
                          Year
                            (b)
                          
                          
                          Salary
                            ($)
                            (c)
                          
                          
                          Bonus
                            ($)
                            (d)
                          
                          
                          Stock
                            awards
                            ($)
                            (e)
                          
                          
                          Option
      (1)
                            awards
                            ($)
                            (f)
                          
                          
                          Non-equity
                            incentive
                            plan
                            compensation
                            ($)
                            (g)
                          
                          
                          Change in pension
                            value and
                            non-qualified
                            deferred
                            compensation
                            earnings
                            ($)
                            (h)
                          
                          
                          All other
                            compensation
                            ($)
                            (i)
                          
                          
                          Total
                            ($)
                            (j)Yi
      Song
                            Chief
      Executive Officer and Chairman of the Board
                          
                          
                          2009
                            2008
                          
                          
                          
                          164,535
                            214,882
                          
                          
                          
                          —
                            —
                          
                          
                          
                          —
                            —
                          
                          
                          
                          —
                            —
                          
                          
                          
                          ——
                          
                          
                          
                          —
                            —
                          
                          
                          
                          —
                            —
                          
                          
                          
                          164,535
                            214,882Keith
      Hor
                            Chief
      Financial Officer
                            (appointed
      on March 8, 2007)
                          
                          
                          2009
                            2008
                          
                          
                          
                          115,661
                            118,956
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          5,121
                              9,923
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          120,782
                            128,879Hong
      Song
                            Chief
      Operating Officer (resigned as COO on December 9 2008)
                          
                          
                          2009
                            2008
                          
                          
                          
                          111,900
                            171,415
                          
                          
                          
                          —
                            —
                          
                          
                          
                          —
                            —
                          
                          
                          
                          —
                            —
                          
                          
                          
                          —
                            —
                          
                          
                          
                          —
                            —
                          
                          
                          
                          —
                            —
                          
                          
                          
                          111,900
                            171,415Jerry
      Yu
                            Chief
      Operating Officer ( Appointed on December 9 2008 )
                          
                          
                          2009
                            2008
                          
                          
                          
                          117,158
                            33,166
                          
                          
                          
                          —
                            —
                          
                          
                          
                          —
                            —
                          
                          
                          
                          19,860
                            —
                          
                          
                          
                          —
                          
                          
                          
                          —
                            —
                          
                          
                          
                          —
                            —
                          
                          
                          
                          137,018
                            33,166


(1)




On
December 9, 2008, Mr. Hong Song resigned from his position as the Chief
Operating Officer and was appointed as a Vice President of the Company on the
same day.





Mr. Yi
Song entered into an employment letter agreement with the Company as of April
19, 2006, to serve as the Company’s Chief Executive Officer from March 17, 2006
through March 17, 2009, the “Initial Term”, and has continued 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) the
Company without cause, as defined in the employment agreement, upon 30 days
notice or (iii) the Company 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 the Company according to the Company’s policies
at the time of termination. Yi Song shall receive a monthly base salary of
$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.





Mr. Hong
Song entered into an employment letter agreement with the Company as of April
19, 2006, to serve as the Company’s Chief Operating Officer from March 17, 2006
through March 17, 2009, the “Initial Term”, and has continued 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) the Company without cause, as defined in the employment
agreement, upon 30 days written notice, or (iii) the Company 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 the
Company according to the Company’s policies at the time of termination. Hong
Song shall receive a monthly base salary of $16,666.67, which is the RMB
equivalent of $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 the Company’s Chief Financial Officer with effect from
March 8, 2007. Pursuant to the Employment Agreement, Mr. Hor shall receive a
salary of $10,000 per month, payable pursuant to the Company’s normal payroll
practices. In addition, Mr. Hor was granted options to purchase the equivalent
of 20,000 of the Company’s shares under the Company’s 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.




Mr. Jerry
Yu was appointed as the Company’s Chief Operating Officer with effect from
December 9, 2008. Prior to Mr. Yu’s appointment, Mr. Yu was an executive of the
Company. On July 31, 2008, the Company entered into an employment agreement, the
“Employment Agreement” , with Mr. Jerry Yu to serve as the Company’s executive
with effect from September 1, 2008.





On
December 17 2008, the board approved that in accordance with Jerry Yu’s
Employment Agreement signed with the Company on July 31, 2008 and his subsequent
appointment approved as the Chief Operation Officer of the Company on December
9, 2008, under the Company’s 2006 Stock Incentive Plan Jerry Yu was granted
Three Hundred Thousand, 300,000, shares of Company common stock option, the
"Stock Option Grant", by the Company for the first three years, 36 months, of
service with the Company, this Stock Option Grant will vest over three (3) years
in twelve (12) quarterly installments. After the initial first three (3) years
of service with the Company, he shall be granted One Hundred Thousand, 100,000,
shares of Company common stock option for each additional year of service with
the Company, each annual Stock Option Grant will vest over one (1) year in four
(4) quarterly installments, provided that he has continuously provided active
services to the Company throughout each relevant quarter. The Stock Option Grant
is evidenced by the Company's form of respective Notice of Stock Option Grant
and the Stock Option Agreement under the 2006 Stock Incentive Plan. He will be
eligible for future additional stock grants and stock option grants at the
discretion of the Board of Directors.


49




The
Company shall also pay Messrs. Yi Song, Hong Song, Keith Hor and Jerry
Yu such bonuses as may be determined from time to time by its 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
                        
                        
                        
                        2.18Jackie
      You Kazmerzak
                          Chief
      Financial Officer
                        
                        —
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Song
      Hong
                          Chief
      Operating Officer
                        
                        —
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Jerry
      Yu
                          Chief
      Operating Officer
                        
                        December 17, 2008
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        300,000
                        
                        
                        
                        —
                        
                        
                        
                        0.1
                        
                        
                        
                        0.12Fong
      Heung Sang
                          director
                        
                        February 27, 2008
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        20,000
                        
                        
                        
                        —
                        
                        
                        
                        1.91
                        
                        
                        
                        1.36Hoi
      S. Kwok
                          director
                        
                        February 27, 2008
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        20,000
                        
                        
                        
                        —
                        
                        
                        
                        1.91
                        
                        
                        
                        1.36




50


Outstanding
Equity Awards at Fiscal Year-End of 2009




Option awards
                    
                    Stock awardsName2
                    
                    Number of
                      securities
                      underlying
                      unexercised
                      options
                      exercisable
                      (#)
                    
                    
                    Number of
                      securities
                      underlying
                      unexercised
                      options
                      unexercisable
                      (#)
                    
                    
                    Equity
                      incentive plan
                      awards:
                      numberof
                      securities
                      underlying
                      unexercised
                      unearned
                      options
                      (#)
                    
                    
                    Option
                      exercise
                      price
                      ($)
                    
                    Option expiration
                      Date
                    
                    Number
                      of
                      shares
                      or units
                      of stock
                      that
                      havenot
                      vested
                      (#)
                    
                    
                    Market
                      value of
                      shares
                      orunits
                      ofstock
                      that
                      havenot
                      vested
                      ($)
                    
                    
                    Equity
                      incentive plan
                      awards:
                      number of
                      unearned
                      shares units
                      orother
                      rights that
                      have not
                      vested (#)
                    
                    
                    Equity
                      incentive
                      plan awards:
                      market or
                      payout
                      valueof
                      unearned
                      shares, units
                      or other
                      rights
                      that have
                      notvested
                      ($)(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
                    
                    
                    15,000
                    
                    
                    
                    —
                    
                    
                    
                    5,000
                    
                    
                    
                    5
                    
                    February 28, 2017
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    —
                    
                    
                    
                    —Jackie
      You Kazmerzak
                      Former
      Chief Financial Officer
                    
                    
                    20,000
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    5
                    
                    February 25, 2016
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Song
      Hong
                      Former
      Chief Operating Officer
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    —
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Jerry
      Yu
                      Chief
      Operating Officer
                    
                    
                    100,000
                    
                    
                    
                    —
                    
                    
                    
                    200,000
                    
                    
                    
                    0.10
                    
                    December 16, 2018
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Fong
      Heung Sang
                      director
                    
                    
                    12,222
                    
                    
                    
                    —
                    
                    
                    
                    7,778
                    
                    
                    
                    1.19
                    
                    February 26, 2018
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Hoi
      S. Kwok
                      director
                    
                    
                    12,222
                    
                    
                    
                    —
                    
                    
                    
                    7,778
                    
                    
                    
                    1.19
                    
                    February 26, 2018
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —





Pursuant
to the terms of the Amended and Restated Share Exchange Agreement, the Company
assumed Diguang’s outstanding 2006 stock incentive plan covering options
totaling the equivalent of 1,500,000 shares of its common stock. Options
equivalent to approximately 566,000 shares of the Company’s 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 her options have
been vested and are exercisable but none of them has been exercised as March 1,
2008. On December 17, 2008, the Board of Directors approved to grant 300,000
shares of stock options to the Company’s current Chief Operation Officer. The
vesting commencement date of the option is January 1, 2009. The Chief Executive
Officer is not granted any options.


51


Director
Compensation




Name 3
                
                Fees
                  earnedor
                  paid in
                  cash
                  ($)
                
                
                Stock
                  awards
                  ($)
                
                Option
                  awards (1)
                  ($)
                
                Non-equity
                  incentive plan
                  compensation
                  ($)
                
                
                Change in pension
                  value and
                  nonqualified
                  deferred
                  compensation
                  earnings
                
                
                All other
                  compensation
                  ($)
                
                
                Total
                  ($)(a)
                
                (b)
                
                
                (c)
                
                (d)
                
                (e)
                
                
                (f)
                
                
                (g)
                
                
                (h)Tuen-Ping
      Yang
                
                
                24,000
                
                
                
                —
                
                20,403
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                44,403Fong
      Heung Sang
                
                
                36,000
                
                
                
                
                
                6,494
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                42,494Hoi
      S. Kwok
                
                
                24,000
                
                
                
                
                
                6,494
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                30,494


(1)




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, the Company had a total of 22,593,000 shares of common stock
outstanding, which are its only issued and outstanding voting equity securities.
As of December 2009, the Company had repurchased a total of 521,000 shares and
had 22,072,000 shares of common stock outstanding.




The
following table sets forth, as of February 28, 2010: (a) the names and addresses
of each beneficial owner of more than five percent (5%) of the Company’s common
stock known to us, the number of shares of common stock beneficially owned by
each such person, and the percent of the Company’s common stock so owned; and
(b) the names and addresses of each director and executive officer, the number
of shares the Company’s common stock beneficially owned, and the percentage of
the Company’s common stock so owned, by each such person, and by all of the
Company’s directors and executive officers as a group. Each person has sole
voting and investment power with respect to the shares of the Company’s 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)Jerry
      Yu (appointed on December 9, 2008)All
      Officers & Directors as a Group
                
                
                15,590,000
                
                
                
                69
                %


52


(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.




*
Individual owns less than 1% of the Company’s securities.




Pursuant
to the terms of the Share Exchange, and as described above, the Company 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





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




On April
21, 2006, the Company entered into an option agreement with two of its 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.





Sino
Olympics committed to contribute $3.25 million, accounting for 65% interest, to
North Diamond and the other investors committed to contribute $1.75 million,
accounting for a 35% interest, to North Diamond. As of June 30, 2006, Sino
Olympics has contributed capital of $1 million, increasing its capital
contribution up to $1.4875 million, accounting for a 59.5% interest. The other
investors contributed $1.0125 million, accounting for a 40.5% interest in North
Diamond. On September 19, 2006, Sino Olympics contributed 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 had the right to acquire the 32.5%
interest 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
contributed 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 contributed
their capital into North Diamond to the date the Company exercises the
acquisition option. If the Company exercises, solely based on the Company’s
discretion, the aforementioned option, the Company would 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, the Company 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 interest paid at an interest rate at
6%.





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





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:


53


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 roll
forward details of amount due to related parties were summarized as
follows:





Amount due to
                  
                  Diguang Engine
                  
                  
                  Stockholders
                  
                  
                  TotalBalance
      at January 1 , 2008
                  
                  $
                  1,465,790
                  
                  
                  $
                  2,200,000
                  
                  
                  $
                  3,665.790Accrued
      interest
                  
                  
                  51,30
                  
                  
                  
                  137,875
                  
                  
                  
                  189,205Purchase
      price for acquisition of 65% interest in North diamond
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Purchase
      price for acquisition of 100% interest in Dongguan Diguang
      S&T
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Payments
      made
                  
                  
                  (944,001
                  )
                  
                  
                  (1,332,395
                  )
                  
                  
                  (2,276,396
                  )Translation
      adjustment
                  
                  
                  101,429
                  
                  
                  
                  —
                  
                  
                  
                  101,429Balance
      at December 31, 2008
                  
                  $
                  674,548
                  
                  
                  $
                  1,005,480
                  
                  
                  $
                  1,680,028Accrued
      interest
                  
                  
                  17,061
                  
                  
                  
                  47,568
                  
                  
                  
                  64,629Payments
      made
                  
                  
                  (691,273
                  )
                  
                  
                  (109,670
                  )
                  
                  
                  (800,943
                  )Translation
      adjustment
                  
                  
                  (336
                  )
                  
                  
                  —
                  
                  
                  
                  (336
                  )Balance
      at December 31, 2009
                  
                  $
                  —
                  
                  
                  $
                  943,378
                  
                  
                  $
                  943,378





On
December 29, 2007, Diguang Holdings entered into a sale and purchase 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 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 Dongguan, Administration of Foreign investment in
enterprises in Dongguan and State Administration in Foreign Exchange. On January
1, 2008, Diguang Holdings assigned 70% of interest in Dongguan Diguang S&T
to Diguang Electronics.




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





The
purchase price of Dongguan Diguang S&T was $4.2 million, of which $2 million
was paid in 2007. The remaining $2.2 million should be repaid through four
installment payments on June 30, 2008, December 31, 2008, March 31, 2009 and
June 30, 2009, respectively. The Company paid $ 1,332,395 to Sino Olympics
during the year ended December 31, 2008. Among the payment of $ 1,332,395, $1.1
million was purchase price paid as agreed in the purchase agreement; $137,875
was accrued interest and paid in accordance with the purchase agreement; the
remaining $94,520 was paid by Diguang Electronics on behalf of Sino Olympics for
withholding capital gain tax during the sale and purchase transaction of
Dongguan Diguang S&T. The outstanding balance as at December 31, 2009 due to
Stockholders was the last installments of payment of the purchase price
originally to be paid on June 30, 2009.





ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.




The
following table sets forth the aggregate fees for professional audit services
rendered by BDO China Li Xin Da Hua CPA Co., Ltd., which was previously
named as BDO Guangdong Dahua Delu. BDO Guangdong Dahua Delu changed the name to
BDO China Li Xin Da Hua CPA Co., Ltd. on January 1, 2010 after a merger took
place in 2009. BDO China Li Xin Da Hua CPA Co., Ltd. audited the Company’s
annual consolidated financial statements for the fiscal years 2009 and 2008
respectively. The Audit Committee has approved all of the following
fees.


54





Fiscal Year Ended2009
                
                
                2008Audit
      Fees
                
                $
                159,312
                
                
                $
                265,362Audit
      related Fees
                
                
                —
                
                
                
                —Total
      Fees
                
                $
                159,312
                
                
                $
                265,362




Audit
Committee’s Pre-Approval Policy




During
fiscal year ended December 31, 2009, 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.
                  
                  Description3.1(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).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).
  55
  10.4
                
                Employment
      Agreement of Keith Hor dated March 7 2007 (incorporated by reference from
      Form 8-K filed on March 13, 2007).10.5
                
                Lease
      Agreement between Dihao Electronics ( Yangzhou ) Co. Ltd and Transcend
      Optronics ( Yangzhou ) Co., Ltd dated October 1, 2007 (incorporated by
      reference from Form 10-K filed on April 14, 2008).10.6
                
                Lease
      Agreement between Wuhan Diguang Electronics Co. Ltd and Wuhan Hannstar
      Technology Co. Ltd dated October 29, 2007 (incorporated by reference from
      Form 10-K filed on April 14, 2008).10.7
                
                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, 2008).10.8
                
                Translation
      of the Comprehensive Credit Line Agreement entered into between Shenzhen
      Diguang Electronics and Ping An Bank dated July 1, 2008 (incorporated by
      reference from Form 8-K filed on July 8, 2008).10.9
                
                Translation
      of the Pledge Contract entered into between Dongguan Diguang S&T and
      Ping An Bank dated July 1, 2008 (incorporated by reference from Form 8-K
      filed on July 8, 2008).10.10
                
                Employment
      Agreement of Jerry Yu dated July 31, 2008 (incorporated by reference from
      Form 8-K filed on December 15, 2008).14.1
                
                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


56




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.





Date:
March 31, 2010




Diguang International Development Co., Ltd.(Registrant)/s/ Yi SongBy: Yi SongTitle: Chairman of the Board and Chief Executive Officer(Principal Executive Officer)/s/ Keith HorBy: Keith HorTitle: Chief Financial Officer(Principal Financial Officer and Principal Accounting 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:
      March 31, 2010
                            /s/ Yi SongYi
      SongChairman
      of the Board and Chief Executive Officer
                              (Director
      and Principal Executive Officer)Dated:
      March 31, 2010
                            /s/ Hong SongHong
      SongDirectorDated:
      March 31, 2010
                            /s/ Fong Heung SangFong
      Heung SangDirectorDated:
      March 31, 2010
                            /s/ Hoi S. KwokHoi
      S. KwokDirectorDated:
      March 31, 2010
                            /s/ Tuen-Ping YangTuen-Ping
      YangDirector




57




FINANCIAL
STATEMENTS


DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.


CONTENTS





Report
      of Independent Registered Public Accounting Firm
              F-2Consolidated
      Financial StatementsConsolidatedBalance
      Sheets
              F-3ConsolidatedStatements of
      Income and Comprehensive Income
              F-4ConsolidatedStatements of
      Stockholders’ Equity
              F-5ConsolidatedStatements of Cash
      Flows
              F-6Notes
      to Consolidated Financial Statements
              F-7




F-1





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, 2008 and 2009, and the
related statements of income and comprehensive income, stockholders’ equity and
cash flows for each of the years in a two-year period ended December 31, 2009.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based
on our audits.





We
conducted our 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, 2008 and 2009, the results of its operations and
its cash flows for each of the years in a two-year period ended December 31,
2009, in conformity with accounting principles generally accepted in the United
States of America.





/s/BDOChina Li Xin Da Hua CPA Co.,
      Ltd.





BDO China
Li Xin Da Hua CPA Co., Ltd.





Beijing,
PRC


March 23,
2010


F-2


DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.


CONSOLIDATED
BALANCE SHEETS


(In
US Dollars)





December 31,2008
                            
                            
                            2009ASSETSCurrent
      assets:Cash
      and cash equivalents
                            
                            $
                            15,024,363
                            
                            
                            $
                            6,190,513Restricted
      cash
                            
                            
                            —
                            
                            
                            
                            4,341,112Accounts
      receivable, net of allowance for doubtful accounts $ 655,893 and
      $1,529,505
                            
                            
                            9,944,208
                            
                            
                            
                            13,972,086Inventories,
      net of provision $2,081,334 and $3,519,124
                            
                            
                            7,285,860
                            
                            
                            
                            7,439,287Other
      receivables, net of provision $ 101,020 and $ 69,032
                            
                            
                            535,493
                            
                            
                            
                            465,013VAT
      recoverable
                            
                            
                            112,842
                            
                            
                            
                            82,497Advance
      to suppliers
                            
                            
                            602,017
                            
                            
                            
                            900,328Deferred
      tax asset
                            
                            
                            28,485
                            
                            
                            
                            —Total
      current assets
                            
                            
                            33,533,268
                            
                            
                            
                            33,390,836Investment,
      net of impairment $779,302 and $ 1,500,000
                            
                            
                            720,698
                            
                            
                            
                            —Plant,
      property and equipment, net
                            
                            
                            19,369,200
                            
                            
                            
                            17,868,845Long-term
      prepayments
                            
                            
                            —
                            
                            
                            
                            439,502Total
      assets
                            
                            $
                            53,623,166
                            
                            
                            $
                            51,699,183LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Bank
      loans
                            
                            $
                            4,397,215
                            
                            
                            $
                            10,213,683Accounts
      payable
                            
                            
                            15,643,476
                            
                            
                            
                            15,446,721Advance
      from customers
                            
                            
                            561,282
                            
                            
                            
                            325,165Accruals
      and other payables
                            
                            
                            2,337,800
                            
                            
                            
                            2,510,206Accrued
      payroll and related expense
                            
                            
                            626,277
                            
                            
                            
                            712,206Income
      tax payable
                            
                            
                            401,260
                            
                            
                            
                            394,989Amount
      due to related parties
                            
                            
                            674,548
                            
                            
                            
                            —Amount
      due to stockholders – current
                            
                            
                            1,005,480
                            
                            
                            
                            943,378Total
      current liabilities
                            
                            
                            25,647,338
                            
                            
                            
                            30,546,348Research
      funding advanced
                            
                            
                            644,925
                            
                            
                            
                            952,255Total
      non-current liabilities
                            
                            
                            644,925
                            
                            
                            
                            952,255Total
      liabilities
                            
                            
                            26,292,263
                            
                            
                            
                            31,498,603Equity:Common
      stock, par value $0.001 per share, 50 million shares authorized,
      22,593,000 and 22,593,000 shares issued, 22,072,000 and 22,072,000 shares
      outstanding
                            
                            
                            22,593
                            
                            
                            
                            22,593Additional
      paid-in capital
                            
                            
                            20,600,460
                            
                            
                            
                            20,881,635Treasury
      stock at cost
                            
                            
                            (674,455
                            )
                            
                            
                            (674,455
                            )Appropriated
      earnings
                            
                            
                            802,408
                            
                            
                            
                            802,408Accumulated
      deficit
                            
                            
                            (443,829
                            )
                            
                            
                            (7,644,254
                            )Translation
      adjustment
                            
                            
                            4,503,022
                            
                            
                            
                            4,338,891Total
      stockholders’ equity
                            
                            
                            24,810,199
                            
                            
                            
                            17,726,818Non-controlling
      interest
                            
                            
                            2,520,704
                            
                            
                            
                            2,473,762Total
      equity
                            
                            
                            27,330,903
                            
                            
                            
                            20,200,580Total
      liabilities and stockholders’ equity
                            
                            $
                            53,623,166
                            
                            
                            $
                            51,699,183


See
accompanying notes to financial statements


F-3


DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.


CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2009


(In
US Dollars)





Years Ended December 31,2008
                                            
                                            
                                            2009Revenues:Revenues,
      net
                                            
                                            $
                                            55,430,680
                                            
                                            
                                            $
                                            44,075,249Cost
      of sales
                                            
                                            
                                            50,690,610
                                            
                                            
                                            
                                            40,523,868Gross
      profit
                                            
                                            
                                            4,740,070
                                            
                                            
                                            
                                            3,551,381Selling
      expense
                                            
                                            
                                            1,854,369
                                            
                                            
                                            
                                            2,336,476Research
      and development
                                            
                                            
                                            1,163,830
                                            
                                            
                                            
                                            3,049,703General
      and administrative
                                            
                                            
                                            5,509,517
                                            
                                            
                                            
                                            4,411,902Loss
      on disposing assets
                                            
                                            
                                            3,726
                                            
                                            
                                            
                                            30,489Impairment
      loss
                                            
                                            
                                            157,108
                                            
                                            
                                            
                                            720,698Loss
      from operations
                                            
                                            
                                            (3,948,480
                                            )
                                            
                                            
                                            (6,997,887
                                            )Interest
      income (expense), net
                                            
                                            
                                            (259,666
                                            )
                                            
                                            
                                            (367,128
                                            )Investment
      income (expense)
                                            
                                            
                                            67,523
                                            
                                            
                                            
                                            800Other
      income (expense)
                                            
                                            
                                            (190,513
                                            )
                                            
                                            
                                            160,459Loss
      before income taxes
                                            
                                            
                                            (4,331,136
                                            )
                                            
                                            
                                            (7,203,756
                                            )Income
      tax provision
                                            
                                            
                                            191,309
                                            
                                            
                                            
                                            42,351Net
      loss
                                            
                                            
                                            (4,522,445
                                            )
                                            
                                            
                                            (7,246,107
                                            )Net
      income (loss) attributable to non-controlling interest
                                            
                                            
                                            195,925
                                            
                                            
                                            
                                            (45,682
                                            )Net
      income (loss) attributable to common shares
                                            
                                            $
                                            (4,718,370
                                            )
                                            
                                            $
                                            (7,200,425
                                            )Weighted
      average common shares outstanding – basic
                                            
                                            
                                            22,155,882
                                            
                                            
                                            
                                            22,072,000Losses
      per share – basic
                                            
                                            
                                            (0.21
                                            )
                                            
                                            
                                            (0.33
                                            )Weighted
      average common shares outstanding – diluted
                                            
                                            
                                            22,155,882
                                            
                                            
                                            
                                            22,072,000Losses
      per shares – diluted
                                            
                                            
                                            (0.21
                                            )
                                            
                                            
                                            (0.33
                                            )Other
      comprehensive income:Translation
      adjustment
                                            
                                            
                                            2,023,034
                                            
                                            
                                            
                                            (165,391
                                            )Comprehensive
      loss
                                            
                                            
                                            (2,499,411
                                            )
                                            
                                            
                                            (7,411,498
                                            )Comprehensive
      income (loss) attributable to non-controlling interest
                                            
                                            
                                            307,843
                                            
                                            
                                            
                                            (46,942
                                            )Comprehensive
      income attributable to common shares
                                            
                                            $
                                            (2,807,254
                                            )
                                            
                                            $
                                            (7,364,556
                                            )


See
accompanying notes to financial statements.




F-4




DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2009


(In
US Dollars)





Retained Earnings
                        
                        
                        AccumulatedCommon Stock
                        
                        
                        Additional
                        
                        
                        Appropriated
                        
                        
                        Treasury
                        
                        
                        (Accumulated
                        
                        
                        ComprehensiveShares
                        
                        
                        Amount
                        
                        
                        Paid-inCapital
                        
                        
                        Earnings
                        
                        
                        Stock
                        
                        
                        Deficit)
                        
                        
                        Income (Loss)
                        
                        
                        TotalBalance
      at January 1, 2008
                        
                        
                        22,593,000
                        
                        
                        $
                        22,593
                        
                        
                        
                        20,028,955
                        
                        
                        
                        637,799
                        
                        
                        
                        (429,295
                        )
                        
                        
                        4,439,150
                        
                        
                        
                        2,591,906
                        
                        
                        
                        27,291,108Stock
      - based compensation for the year
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        571,505
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        571,505Net
      income (loss) for the year
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (4,718,370
                        )
                        
                        
                        —
                        
                        
                        
                        (4,718,370
                        )Appropriation
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        164,609
                        
                        
                        
                        —
                        
                        
                        
                        (164,609
                        )
                        
                        
                        —
                        
                        
                        
                        —Treasury
      stock
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (245,160
                        )
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (245,160
                        )Translation
      adjustments
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        1,911,116
                        
                        
                        
                        1,911,116Balance
      at December 31, 2008
                        
                        
                        22,593,000
                        
                        
                        $
                        22,593
                        
                        
                        $
                        20,600,460
                        
                        
                        $
                        802,408
                        
                        
                        $
                        (674,455
                        )
                        
                        $
                        (443,829
                        )
                        
                        $
                        4,503,022
                        
                        
                        $
                        24,810,199Stock
      - based compensation for the year
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        281,175
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        281,175Net
      income (loss) for the year
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (7,200,425
                        )
                        
                        
                        —
                        
                        
                        
                        (7,200,425
                        )Translation
      adjustments
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (164,131
                        )
                        
                        
                        (164,131
                        )Balance
      at December 31, 2009
                        
                        
                        22,593,000
                        
                        
                        $
                        22,593
                        
                        
                        
                        20,881,635
                        
                        
                        $
                        802,408
                        
                        
                        
                        (674,455
                        )
                        
                        $
                        (7,644,254
                        )
                        
                        
                        4,338,891
                        
                        
                        
                        17,726,818


See
accompanying notes to financial statements





F-5




DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


Increase
(Decrease) in Cash and Cash Equivalents


(In
US Dollars)




Years Ended December 31,2008
                                
                                
                                2009Cash
      flows from operating activities:Net
      income
                                
                                $
                                (4,522,445
                                )
                                
                                $
                                (7,246,107
                                )Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Depreciation
                                
                                
                                1,833,219
                                
                                
                                
                                1,601,616Bad
      debts allowance
                                
                                
                                220,720
                                
                                
                                
                                869,079Inventory
      provision
                                
                                
                                1,239,816
                                
                                
                                
                                1,749,523Impairment
      of long-term investment
                                
                                
                                157,108
                                
                                
                                
                                720,698Loss
      on disposing assets
                                
                                
                                3,726
                                
                                
                                
                                30,489Share-based
      compensation
                                
                                
                                571,505
                                
                                
                                
                                281,175Deferred
      tax asset
                                
                                
                                53,522
                                
                                
                                
                                28,485Changes
      in operating assets and liabilities:Accounts
      receivable
                                
                                
                                3,079,557
                                
                                
                                
                                (4,898,836
                                )Inventory
                                
                                
                                (1,073,437
                                )
                                
                                
                                (1,903,493
                                )Other
      receivables
                                
                                
                                (134,174
                                )
                                
                                
                                70,470VAT
      recoverable
                                
                                
                                291,740
                                
                                
                                
                                30,347Prepayments
      and other assets
                                
                                
                                586,062
                                
                                
                                
                                (298,422
                                )Accounts
      payable
                                
                                
                                (4,012,725
                                )
                                
                                
                                (196,458
                                )Accruals
      and other payable
                                
                                
                                (1,273,957
                                )
                                
                                
                                258,294Advance
      from customers
                                
                                
                                79,739
                                
                                
                                
                                (236,042
                                )Accrued
      interest payable to related parties
                                
                                
                                —
                                
                                
                                
                                64,629Taxes
      payable
                                
                                
                                (23,295
                                )
                                
                                
                                (6,268
                                )Net
      cash used in operating activities
                                
                                
                                (2,923,319
                                )
                                
                                
                                (9,080,821
                                )Cash
      flows from investing activities:Purchase
      of fixed assets
                                
                                
                                (2,607,743
                                )
                                
                                
                                (160,094
                                )Cash
      paid for acquisition of entities
                                
                                
                                (1,194,520
                                )
                                
                                
                                (109,670
                                )Proceeds
      from disposal of fixed assets
                                
                                
                                9,161
                                
                                
                                
                                29,154Net
      cash used in investing activities
                                
                                
                                (3,793,102
                                )
                                
                                
                                (240,610
                                )Cash
      flows from financing activities:Stock
      repurchase
                                
                                
                                (245,160
                                )
                                
                                
                                —Due
      to related parties
                                
                                
                                (727,161
                                )
                                
                                
                                (691,273
                                )Capital
      infused by minority interest in North Diamond
                                
                                
                                737,500
                                
                                
                                
                                —Proceeds
      from short-term bank facilities
                                
                                
                                4,397,215
                                
                                
                                
                                5,813,568Restricted
      cash pledged for import facilities
                                
                                
                                —
                                
                                
                                
                                (4,341,112
                                )Prepaid
      deposit for long-term credit facilities
                                
                                
                                —
                                
                                
                                
                                (439,502
                                )Research
      funding advanced
                                
                                
                                391,882
                                
                                
                                
                                307,731Net
      cash received from financing activities
                                
                                
                                4,554,276
                                
                                
                                
                                649,412Effect
      of changes in foreign exchange rates
                                
                                
                                935,781
                                
                                
                                
                                (161,831
                                )Net
      increase (decrease) in cash and cash equivalents
                                
                                
                                (1,226,364
                                )
                                
                                
                                (8,833,850
                                )Cash
      and cash equivalents, beginning of the year
                                
                                
                                16,250,727
                                
                                
                                
                                15,024,363Cash
      and cash equivalents, end of the year
                                
                                $
                                15,024,363
                                
                                
                                $
                                6,190,513


See
accompanying notes to financial statements





F-6




DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED FINANCIAL STATEMENTS


NOTE
1 ─ ORGANIZATION AND OVERVIEW OF BUSINESS





Diguang
International Development Co., Ltd., formerly known as Online Processing, Inc.,
“Online”, was organized under the laws of the State of Nevada in 2000. On
January 10, 2006, Online entered into a stock exchange agreement with Diguang
International Holdings Limited., “Diguang Holdings”. 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 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. One of the conditions to closing the transaction was
changing the name from Online Processing, Inc. to “Diguang International
Development Co., Ltd.”, and the name was changed on February 28,
2006.





The
Company specializes in the design, production and distribution of Light Emitting
Diode, “LED”, and Cold Cathode Fluorescent Lamp, “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, taking 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. In late 2009, the Company started its
trial run of producing LED TV sets with two sizes.





The
Company’s headquarter is located in Shenzhen, China. The Company owns its
subsidiaries through Diguang Holdings. Diguang Holdings was established under
the law of the British Virgin Islands on July 27, 2004 and holds equity
interests in the following entities:





·
            Well
      Planner Limited, a Hong Kong based
entity;


·
            Diguang
      Science and Technology (HK) Limited, a British Virgin Islands based
      entity;


·
            Shenzhen
      Diguang Electronics Co., Ltd., a China based
  entity;


·
            North
      Diamond;


·
            Wuhan
      Diguang Electronics Co., Ltd.; and,


·
            Dongguan
      Diguang Electronics Science and Technology Co.
  Ltd.


·
            Shenzhen
      Optimum Electronics Co., Ltd.





Well
Planner Limited, “Well Planner”, was established under the laws of Hong Kong
Special Administrative Region on April 20, 2001 and has been doing major
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. Well Planner mainly sells to Diguang Science and Technology (HK) Limited
and has minimal sales to third-party customers.





Diguang
Science and Technology (HK) Limited, “Diguang Technology”, 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.


F-7


DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED FINANCIAL STATEMENTS


NOTE
1 ─ORGANIZATION AND OVERVIEW OF BUSINESS (Continued)





Shenzhen
Diguang Electronics Co. Ltd., “Diguang Electronics”, 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 an operating life of 20 years
starting on that date. As of December 31, 2006, its registered capital was RMB
85 million, equivalent to approximately $10,573,615. 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.





Diguang
Holdings acquired 65% interest of North Diamond since January 3, 2007. North
Diamond is a holding company of Dihao (Yangzhou)
Co., Ltd.,
“Dihao”,
an operating entity, which isregistered in the Yangzhou
City Development Zone, Jiangsu Province, China.Dihao conducts
business activities of developing, manufacturing and marketing backlight
products for large size electronic display devices and provides relevant
technical services in China.





Diguang
Electronics and Diguang Holdings jointly set up Wuhan Diguang Electronics Co.,
Ltd., “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 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 Central
South region of China. Wuhan Diguang started operation on July 1,
2007.





On
December 29, 2007, Diguang Holdings acquired 100% interest in Dongguan Diguang
Electronics Science and Technology Co. Ltd., “Dongguan Diguang S&T”. On
January 1, 2008, Diguang Holdings assigned 70% of interest in Dongguan Diguang
S&T to Diguang Electronics. 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 since its inception. Dongguan
Diguang S&T started its own manufacturing activities since
2008.





On April
30, 2009, Well Planner established a wholly owned entity named Shenzhen
Optimum Electronics Co., Ltd., “Shenzhen Optimum” a China based
entity. Shenzhen Optimum concentrates in sales of large size LED TV
sets manufactured by Diguang Electronics to domestic customers throughout China.
During 2009, Shenzhen Optimum generated total sales of about
$194,863.


F-8


DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED FINANCIAL STATEMENTS


NOTE
2 ─ 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 five subsidiaries, Diguang
Electronics, Dihao, Wuhan Diguang, Dongguan Diguang S&T and Shenzhen
Optimum, are conducted. Hong Kong dollar is the primary currency of the economic
environment in which the operations of Well Planner are conducted. The Company
uses the United States dollars (“U.S. dollars”) for financial reporting
purposes.





The
Company translates the above six 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
collectability is reasonably assured. The Company will sign sales order (or
purchase order prepared by customers) with customers for each sales transaction.
A sales order signed by both parties is deemed to be persuasive evidence for
revenue recognition. Sales terms of products are usually “FOB destination”
and the delivery is deemed to occur when the products have been delivered to the
sites prescribed by customers. Revenue is recognized when the Company
receives customers’ confirmation of transaction statements. Due to the
nature of backlight products, when the products have quality issue, the Company
will replace these products and the products with quality issue are brought
back. Accordingly, no provision has been made for returnable
goods. Revenue presented on the Company’s income statements is net of sales
taxes.





Certain
sales are subject to the ultimate usage of the products by the Company’s
customers. Revenue is not recognized on these transactions until the period in
which the Company is able to determine that the products shipped have been used
by its customers.





Cash
and Cash Equivalents





The
Company considers all highly liquid investments with maturity of three months or
less to be cash equivalents.


F-9




DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED FINANCIAL STATEMENTS


NOTE
2 ─ 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,
2008 and 2009 were adequate, respectively. However, actual write-off might
exceed the recorded allowance.





The
following table presents allowance activities in accounts
receivable.





December
      31,2008
                    
                    
                    2009Beginning
      balance
                    
                    $
                    680,784
                    
                    
                    $
                    655,893Additions
      charged to expense
                    
                    
                    286,931
                    
                    
                    
                    927,704Recovery
                    
                    
                    —
                    
                    
                    
                    —Write-off
                    
                    
                    (311,822
                    )
                    
                    
                    (54,092
                    )Ending
      balance
                    
                    $
                    655,893
                    
                    
                    $
                    1,529,505





As of
December 31, 2009, accounts receivable of RMB2,257,515, equivalent to $330,728,
was pledged to China Merchants Bank Jinzhonghuan Branch in exchange of issuance
of bank acceptance bills of RMB2,144,640, equivalent to $314,192.





Inventories





Inventories
are composed of raw materials and components, work in progress, finished goods
and consignment goods, most of which are related to backlight products. The
consignment goods are owned by the Company as inventory and are stored at a
customer’s place.





Inventories
are valued at the lower of cost (based on weighted average method) and the
market. Full amount provisions were made for obsolete inventories which are
difficult to estimate future utilization. Once the inventory cost is written
down, the written-down costs are treated as a new cost basis for the inventory,
and are not adjusted back up to the previous cost basis in future periods. For
inventories which will be used in the ordinary course of production or sales,
the net realizable value of the inventories is compared with their carrying
value, if the net realizable value is lower than the carrying value, a provision
for the difference between the net realizable value and the carrying value of
the inventories was recognized. Net realizable value is determined based on the
most recent selling price of these inventories less the estimated cost to
sell.


F-10




DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED FINANCIAL STATEMENTS


NOTE
2 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)





Plant,
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 yearsPlant
      and office building
                      
                      20,
      50 yeasMachinery
      and equipment
                      
                      5-10
      yearsFurniture
      and office equipment
                      
                      5
      yearsSoftware
                      
                      2-5
      yearsVehicles
                      
                      5-10
      yearsLeasehold
      improvement
                      
                      5
      years





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).





The
Chinese government owns all of the parcels of land on which the Company’s plants
are built. In the PRC, land usage rights for commercial purposes are granted by
the PRC government typically for a term of 40-50 years. The Company is required
to pay a lump sum of money to the State Land and Resource Ministry of the
applicable locality to acquire such rights. The Company capitalizes the lump sum
of money paid and amortizes these land usage rights by using the straight line
method over the term of the land use license granted by the applicable
governmental authority.





Construction
in progress is stated at cost. The cost accumulation process starts from the
time the construction project is set-up and ends at the time the project has
been put into service and all regulatory permits and approvals have been
received. The interest costs incurred for these construction projects have been
determined to be insignificant by management. No interest has been capitalized
during the reporting period.





Fair
Value of Financial Instruments





The
carrying amount of cash, accounts receivable, other receivables, advances to
vendors, 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 or paid to related parties and stockholders are reasonable
estimates of their fair value since the amounts will be collected and paid off
in a period less than one year.





Impairment
of Long-Lived Assets





The
Company review long-lived assets 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.





Impairment
of Financial Investments





The
Company accounts for its investments in common stocks using the cost method.
Other than temporary impairment loss is recognized when a series of operating
losses of an investee or other factors indicate a decrease in value of
investments.





Research
and Development





Research
and development costs are expensed as incurred. Research and development
expenses are offset against government subsidiaries received for supporting
research and development efforts and other revenue.


F-11


DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED FINANCIAL STATEMENTS


NOTE
2 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)





Value
Added Tax





Diguang
Electronics, Dihao, Wuhan Diguang, Dongguan Diguang S&T and Shenzhen Optimum
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.





Share-Based
Payments





The
Company receives employee and certain non-employee services in exchange for (a)
equity securities of the Company or (b) liabilities that are based on the fair
value of the Company’s equity securities or that may be settled by the issuance
of such equity securities. The Company uses a fair-value-based method to
calculate and account for above mentioned transactions.





Income
Taxes





The
Company recognizes deferred tax liabilities and assets when it accounts for
income taxes. 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 in Shenzhen and was subject to a favorable income tax
rate at 15% compared to a statutory income tax rate of 33%, 30% for the central
government and 3% for the local government. And Diguang Electronics has been
deemed 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 enterprise income tax at the rate of 15% for the years from
January 1, 2004 to December 31, 2006. Diguang Electronics was subject to an
income tax rate of 15% since January 1, 2007 according to the old tax law. A
newly enacted enterprise income tax law (“EIT Law”) was effective 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. For enterprises like
Diguang Electronics which enjoyed a privileged preferential income tax rate of
15% under the old tax law, the applicable income tax rate should transit to 25%
in 5 years, that is, 18% in the year ended December 31, 2008, 20%, 22%, 24% and
25% in the following four years ending December 31, 2009, 2010, 2011 and 2012,
and 25% ever after. So the applicable income tax rate for Diguang Electronics is
20% for the year ended December 31, 2009.





Well
Planner is subject to an 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.





Diguang
Technology is a BVI registered company. There is no income tax for the company
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 in Yangzhou and has been deemed a high-tech company by Yangzhou
Bureau of Science, Technology and Information. Under this category, Dihao was
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. Under the new EIT Law, the income tax rate for
Dihao is 25%; the applicable income tax rate for Dihao is 12.5% for the three
years ending December 31, 2010.





Wuhan
Diguang is registered in Wuhan. As a manufacturing company with foreign
investment set up before March 16, 2007, Wuhan Diguang was entitled to enjoy a
100% exemption of corporate income tax for the first two years of operations
with a profit position and a 50% exemption of corporate income tax for the
following three years. After the five-year exemption period, Wuhan




F-12




DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED FINANCIAL STATEMENTS


NOTE
2 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)




Income
Taxes (Continued)




Dongguan
Diguang S&T is registered in Dongguan of Guangdong Province and is entitled
to enjoy a 100% exemption of corporate income tax for the first two years of
operation and a 50% exemption of corporate income tax for the following is three
years and will be subject to the unified income tax rate of 25% after the
five-year exemption period. Dongguan Diguang S&T has used up its two years’
100% exemption in 2008 and 2007, even though it suffered losses in these two
years. It is the first of year for Dongguan Diguang S&T to enjoy 50%
exemption of income tax in 2009.




Shenzhen
Optimum is registered at Shenzhen of Guangdong Province. No exemption was
granted to Shenzhen Optimum and it is subject to the unified income tax rate of
25%.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, Dongguan Diguang S&T,
Shenzhen Optimum and Diguang International Development Co., Ltd.





Comprehensive
Income (Loss)





The
Company adopted FASB Accounting Standards Codification 220, Comprehensive Income, which
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





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
reflect the potential dilution of securities that could share in the earnings of
an entity, similar to fully diluted earnings (loss) per share.





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 $9,913,310 and $4,954,697 of December 31, 2008 and 2009,
respectively.


F-13




DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED FINANCIAL STATEMENTS


NOTE
2 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)





Appropriations
to Statutory Reserve





Under the
corporate law and relevant regulations in China, each subsidiary of the Company
located in the mainland China (Diguang Electronics, Dihao, Wuhan Diguang,
Dongguan Diguang S&T, Shenzhen Optimum) 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.





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.




Adoption
of FASB ASC 810-10-65


In
December 2007, the FASB issued a new standard codified in ASC 810-10-65,
“Noncontrolling Interests in Consolidated Financial Statements, An Amendment of
ARB No. 51.”  ASC 810-10-65 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.  ASC 810-10-65 requires retroactive adoption of the
presentation and disclosure requirements for existing minority interests. 
ASC 810-10-65 was effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008.  The Company
adopted this standard effective January 1, 2009 and did not expect the adoption
of this statement to have a material impact on its financial
statements.


Recently
Issued Accounting Pronouncements Adopted




FASB
Accounting Standards Codification





The
issuance of FASB Accounting Standards Codification (“FASB ASC”) on July 1, 2009
(effective for interim or annual reporting periods ending after September 15,
2009) establishes the FASB Accounting Standards Codification as the sole
source of authoritative generally accepted accounting principles. Pursuant to
the provisions of FASB ASC, the Company has updated references to U.S. GAAP in
its financial statements issued for the period ended September 30, 2009. The
adoption of FASB ASC did not impact the Company’s financial position or results
of operations.





FASB ASC
805





Effective
January 1, 2009, the Company adopted FASB ASC 805, “Business
Combinations.” FASB ASC 805 changed accounting for acquisitions that
close beginning in 2009. FASB ASC 805 extends 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. FASB ASC 805 expands on required
disclosures to improve the statement users’ abilities to evaluate the nature and
financial effects of business combinations. The adoption of FASB ASC 805
did not have any material impact on the Company’s financial
statements.





FASB ASC
805-20





Effective
January 1, 2009, the Company adopted FASB ASC 805-20, “Noncontrolling Interests in
Consolidated Financial Statements.” FASB ASC 805-20
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. FASB
ASC 805-20 requires retroactive adoption of the presentation and disclosure
requirements for existing minority interests.


F-14




DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED FINANCIAL STATEMENTS


NOTE
2 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)





Recently
Issued Accounting Pronouncements Adopted (Continued)




FASB ASC
815




Effective
January 1, 2009, the Company adopted FASB ASC 815, “Disclosures about
DerivativeInstruments and
Hedging Activities.” FASB ASC 815 requires enhanced disclosures
about (i) how and why the Company uses derivative instruments, (ii) how the
Company accounts for derivative instruments and related hedged items, and (iii)
how derivative instruments and related hedged items affect the Company’s
financial results. The adoption FASB ASC 815 did not have any impact on the
Company’s financial statements.





FASB ASC
350-30




Effective
January 1, 2009, the Company adopted FASB ASC 350-30, “Determination of the Useful Life of
Intangible Assets.” FASB ASC 350-30 amended the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset. The adoption of FASB ASC
350-30 did not have any material impact on the Company’s financial
statements.





FASB ASC
470-20




Effective
January 1, 2009, the Company adopted FASB ASC 470-20, “Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement).” FASB ASC 470-20 requires entities to account
separately for the liability and equity components of a convertible debt
security by measuring the fair value of a similar nonconvertible debt security
when interest cost is recognized in subsequent periods. FASB ASC 470-20
requires entities to retroactively separate the liability and equity
components of such debt on the entities’ balance sheets on a fair value
basis. The adoption of FASB ASC 470-20 did not have any impact on the
Company’s financial statements.




FASB ASC
860




In June
2009, the FASB issued ASC 860, which eliminates the concept of a qualifying
special-purpose entity, creates more stringent conditions for reporting a
transfer of a portion of a financial asset as a sale, clarifies other
sale-accounting criteria, and changes the initial measurement of a transferor’s
interest in transferred financial assets. FASB ASC 860 will be effective for
transfers of financial assets in years beginning after November 15, 2009 and in
interim periods within those years with earlier adoption prohibited. The
adoption of ASC 860 is not expected to have any material impact on the Company’s
consolidated financial position or results of operations.


F-15




DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED FINANCIAL STATEMENTS


NOTE
2 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)





Recently
Issued Accounting Pronouncements Not Adopted Yet




FASB ASU
2009-05




In August
2009, the FASB issued Accounting Standards Update ("ASU") No. 2009-05,
"Measuring Liabilities at Fair Value," which amends the guidance in ASC 820,
Fair Value Measurements and Disclosures, to provide guidance on fair value
measurement of liabilities. If a quoted price in an active market is not
available for an identical liability, ASU 2009-05 requires companies to compute
fair value by using quoted prices for an identical liability when traded as
an asset, quoted prices for similar liabilities when traded as an asset or
another valuation technique that is consistent with the guidance in ASC
820. ASU 2009-05 will be effective for interim and annual periods beginning
after its issuance. The Company will adopt this ASU 2009-05 on January 1, 2010
and expects that the adoption will not have any material impact on the Company’s
consolidated financial position or results of operations.




FASB ASU
2009-13




In
October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition:
Multiple-Deliverable Revenue Arrangements” (ASU 2009-13). This update
removes the criterion that entities must use objective and reliable evidence of
fair value in separately accounting for deliverables and provides entities with
a hierarchy of evidence that must be considered when allocating arrangement
consideration. The new guidance also requires entities to allocate
arrangement consideration to the separate units of accounting based on the
deliverables’ relative selling price. The provisions will be effective for
revenue arrangements entered into or materially modified in 2011 and must be
applied prospectively. The Company is currently evaluating the impact of
the provisions of ASU 2009-13.




FASB ASU
2009-17





In
November 2009, the FASB issued ASU 2009-17, “Consolidations (Topic 810) –
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities,” which codifies FASB Statement No. 167, “Amendments to FASB
Interpretation No. 46(R).” The ASU changes how a reporting entity determines
when an entity that is insufficiently capitalized or is not controlled through
voting (or similar rights) should be consolidated. The determination of whether
a reporting entity is required to consolidate another entity is based on, among
other things, the other entity’s purpose and design and the reporting entity’s
ability to direct the activities of the other entity that most significantly
impact the other entity’s economic performance. These provisions are effective
January 1, 2010, for a calendar year-end entity, with early application not
being permitted. Adoption of these provisions is not expected to have any
material impact on the Company’s consolidated financial
statements.


F-16




DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED FINANCIAL STATEMENTS


NOTE
3 ─ INVENTORIES




The
inventories are as follows:





December
      31,2008
                  
                  
                  2009Raw
      materials
                  
                  $
                  4,629,926
                  
                  
                  $
                  5,661,873Work
      in progress
                  
                  
                  704,877
                  
                  
                  
                  1,504,063Finished
      goods
                  
                  
                  3,111,681
                  
                  
                  
                  3,092,724Consignment
      goods
                  
                  
                  920,710
                  
                  
                  
                  699,751$
                  9,367,194
                  
                  
                  $
                  10,958,411Provision
                  
                  
                  (2,081,334
                  )
                  
                  
                  (3,519,124
                  )Inventories,
      net
                  
                  $
                  7,285,860
                  
                  
                  $
                  7,439,287





NOTE
4 ─ PLANT, PROPERTY AND EQUIPMENT





A summary
of property, plant and equipment at cost is as follows:





December
      31,2008
                    
                    
                    2009Land
      usage rights
                    
                    $
                    3,201,055
                    
                    
                    $
                    3,199,461Plant
      and office buildings
                    
                    
                    11,720,336
                    
                    
                    
                    11,493,931Machinery
                    
                    
                    5,205,448
                    
                    
                    
                    5,282,122Office
      equipment
                    
                    
                    1,348,348
                    
                    
                    
                    1,425,128Vehicles
                    
                    
                    334,742
                    
                    
                    
                    277,171Software
                    
                    
                    140,945
                    
                    
                    
                    153,309Leasehold
      improvement
                    
                    
                    2,147,683
                    
                    
                    
                    2,096,803Construction
      in process
                    
                    
                    —
                    
                    
                    
                    132,07924,098,557
                    
                    
                    
                    24,060,004Accumulated
      depreciation
                    
                    
                    (4,729,357
                    )
                    
                    
                    (6,191,159
                    )$
                    19,369,200
                    
                    
                    $
                    17,868,845





The
Company planned to construct a manufacturing facility for production of large
size LED products in the Guangming District of Shenzhen City. The construction
of the plant will start in early 2010. Total budgeted capital investment for
this facility is estimated to be $10.5 million excluding cost of land usage
right, which had net book value of $2,400,967
as of December 31, 2009.





The
depreciation and amortization for the years ended December 31, 2008 and 2009
were $1,833,219 and $1,601,616, respectively.


F-17


DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED FINANCIAL STATEMENTS


NOTE
5 ─ 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 , 2008
                              
                              $
                              1,465,790
                              
                              
                              $
                              2,200,000
                              
                              
                              $
                              3,665,790Accrued
      interest
                              
                              
                              51,330
                              
                              
                              
                              137,875
                              
                              
                              
                              189,205Payments
      made
                              
                              
                              (944,001
                              )
                              
                              
                              (1,332,395
                              )
                              
                              
                              (2,276,396
                              )Translation
      adjustment
                              
                              
                              101,429
                              
                              
                              
                              —
                              
                              
                              
                              101,429Balance
      at December 31, 2008
                              
                              $
                              674,548
                              
                              
                              $
                              1,005,480
                              
                              
                              $
                              1,680,028Accrued
      interest
                              
                              
                              17,061
                              
                              
                              
                              47,568
                              
                              
                              
                              64,629Payments
      made
                              
                              
                              (691,273
                              )
                              
                              
                              (109,670
                              )
                              
                              
                              (800,943
                              )Translation
      adjustment
                              
                              
                              (336
                              )
                              
                              
                              —
                              
                              
                              
                              (336
                              )Balance
      at December 31, 2009
                              
                              
                              —
                              
                              
                              
                              943,378
                              
                              
                              
                              943,378





Shenzhen
Diguang Engine & Equipment Co., Ltd





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. The loan matured on November 30, 2008.
But on December 31, 2008, there are still $674,548 (equivalent to RMB4,602,104)
outstanding, of which $600,953 (equivalent to RMB4.1 million) is for principal
and $73,595 (equivalent to RMB502,104) is for accumulated interest accrued till
December 31, 2008. The loan, which matured on November 30, 2008, was repaid in
full on April 10, 2009.


F-18




DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED FINANCIAL STATEMENTS


NOTE
5 ─ RELATED PARTY TRANSACTIONS (Continued)





Stockholders





During
the process of acquiring 100% interest of 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.





The $2.2
million should be repaid through four installment payments on June 30, 2008,
December31, 2008,
March 31, 2009 and June 30, 2009, respectively. The Company paid $1,332,395 toSino Olympics
during the year ended December 31, 2008. Among the payment of $1,332,395, $1.1 million was purchase
price paidas agreed in the purchase agreement; $137,875 was interest
accrued and paidin accordance
withthe purchase agreement; the remaining $94,520 was paid by Diguang
Electronics on behalf of Sino Olympics for withholding capital gain tax during
the sale and purchase transaction of Dongguan Diguang S&T. The Company paid
$109,670 to Sino Olympics in 2009. The balance of $943,378 was overdue on
December 31, 2009, among which, $47,568 was accrued
interest and $895,810 was outstanding purchase consideration. $613,440 was
repaid by the Company on January 28, 2010, among which $561,908 was purchase
consideration and $51,532 was accrued interest.





NOTE
6 ─ LONG-TERM INVESTMENT





The
Company contributed investment of $1.5 million in Huaxia (Yangzhou) Integrated
O/E System Inc. “Huaxia (Yangzhou)” and held 8.06% of total paid-in capital in
this company. This investment was accounted for under the cost
method.





The
Company carried out 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. Huaxia (Yangzhou)
continuously suffered net loss ever since inception in 2006 and had negative net
asset as of December 31, 2009. The $1.5 million investment in Huxia (Yangzhou)
was fully impaired as of December 31, 2009 and impairment loss recognized for
the years ended December 31 2008 and 2009 was $157,108 and $720,698
respectively.


F-19


DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED FINANCIAL STATEMENTS


NOTE 7
─ BANK LOANS





Loans
from Shenzhen Ping’an Bank





To renew
bank loans of RMB30 million with Shenzhen Ping’an Bank, Diguang Electronics
repaid RMB30 million on December 1 and December 2, 2009 respectively when the
loans fell due. Diguang Electronics received RMB10 million, equivalent to
$1,465,008 as of December 31, 2009 from the Bank on December 25, 2009 and the
remaining RMB20 million was received on January 6, 2010. The renewed bank loan
will mature in one year. Pursuant to the renewed loan agreements, the plant in
Dongguan Diguang S&T with net book value of $4,409,253 was put as pledge and
the prevailing annual standard rate was 5.46% under the stipulation from the
People's Bank of China.





The
abovementioned RMB30 million loans were borrowed under the RMB30 million bank
loan facilities provided by Shenzhen Ping’an Bank. Diguang Electronics also
received pledged import financing loans from Shenzhen Ping’an Bank. The import
financing loans were guaranteed by equivalent deposit of cash.





The
Company borrowed bank loans of $2,194,175 and $2,159,475 for import financing
purposes from Shenzhen Ping’an Bank on May 15, 2009 and June 12, 2009,
respectively. The loans will mature in one year and have annual rates of 1.68%
and 1.9425%. The proceeds of the above $4,353,650 loans were received in U.S.
Dollars, and Diguang Electronics was required to repay the loans in RMB at a
fixed exchange rate of 6.8354 and 6.8336 between U.S. Dollar and RMB
respectively when the loans mature. The impact of change in the exchange rate on
the loan is immaterial as of December 31, 2009. The loans were guaranteed by an
equivalent cash deposit in local currency of RMB 29,631,994, with an annual
deposit rate of 2.25%.





On
January 12, 2010, Diguang Electronics received import financing loan of
$2,996,989 from Shenzhen Ping’an Bank with annual interest of 2.31%, which will
mature on January 12, 2011. Diguang Electronics was required to repay the loan
in RMB at the fixed exchange rate of 6.7601 between U.S. Dollar and RMB when the
loan falls mature. The cash deposit to guarantee the loan was RMB20,461,641,
equivalent to $2,997,018 as of December 31, 2009 with an annual deposit rate of
2.25%.





Loan
agreements with China Development Bank Co., Ltd.





On May
18, 2009, the Board of Directors of the Company approved the application of
Diguang Electronics for banking facilities of RMB100 million from China
Development Bank Co., Ltd. The banking facilities will be used in connection
with the construction of the new facility located on the land owned by Diguang
Electronics in the Guangming District of Shenzhen City. The application of
RMB100 million bank facilities had been approved by China Development Bank Co.,
Ltd.





On June
25, 2009, before the application procedures were finalized, Diguang Electronics
entered into a loan agreement with China Development Bank Co., Ltd. to borrow
RMB30 million, which will be included in the aforementioned RMB100 million
facilities when the final approval procedures are completed. Diguang Electronics
received RMB30 million from China Development Bank Co., Ltd. on July 3, 2009.
The loan bears an annual rate of 5.31%, the current benchmark interest rate
pronounced by the People's Bank of China, and will mature in one
year.


F-20




DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED FINANCIAL STATEMENTS


NOTE 7
─ BANK LOANS (Continued)





Loan
agreements with China Development Bank Co., Ltd. (Continued)





The
RMB100 million banking facilities are secured by the followings: two joint and
several personal guarantees from Mr. Song Yi and Mr. Song Hong, directors of the
Company; a collateral placed on the office space owned by Diguang Electronics
with a carrying amount of $2,253,525, a collateral placed on the land use rights
on a piece of land located in the Guangming District of Shenzhen with a carrying
amount of $2,400,967.





On
December 30, 2009, Diguang Electronics paid RMB3 million to China Development
Bank as 5 years’ guarantee expense for the RMB100 million bank facilities and
the bank facilities formally became effective then. Diguang Electronics received
RMB30 million from the bank on January 5, 2010 and repaid RMB25 million of
abovementioned RMB30 million bank loans on the same day. On February 1, 2010,
Diguang Electronics received further RMB15 million from the bank and repaid the
remaining RMB5 million of the RMB30 million loan.





NOTE 8
─ INCOME TAXES





The
income before income taxes in 2008 and 2009 respectively, was as
following:





Years
      Ended December 31,2008
                        
                        
                        2009Income
      (Loss) in China entities
                        
                        $
                        (3,216,935
                        )
                        
                        $
                        (5,130,661
                        )Income
      (Loss) in non-China and non-US entities
                        
                        
                        (2,756,626
                        )
                        
                        
                        (579,488
                        )Income
      (Loss) in U.S. entity
                        
                        
                        (1,294,573
                        )
                        
                        
                        (6,158,468
                        )Elimination
      during consolidation process
                        
                        
                        2,936,998
                        
                        
                        
                        4,664,861Income
      (Loss) before income taxes
                        
                        $
                        (4,331,136
                        )
                        
                        $
                        (7,203,756
                        )





The
income tax provision was as follows:





Years
      Ended December 31,2008
                      
                      
                      2009Current:China
                      
                      $
                      132,422
                      
                      
                      $
                      13,866Federal
                      
                      
                      —
                      
                      
                      
                      —State
                      
                      
                      800
                      
                      
                      
                      —133,222
                      
                      
                      
                      13,866Deferred:China
                      
                      
                      58,087
                      
                      
                      
                      28,485The
      U.S.
                      
                      
                      —
                      
                      
                      
                      —$
                      191,309
                      
                      
                      $
                      42,351




F-21




DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED FINANCIAL STATEMENTS


NOTE 8
─ INCOME TAXES (Continued)





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, 2008 and 2009 were as
follows:





December
      31,2008
                          
                          
                          2009Current:Bad
      debt allowance
                          
                          $
                          78,283
                          
                          
                          $
                          281,340Inventory
      provision
                          
                          
                          347,355
                          
                          
                          
                          660,191425,638
                          
                          
                          
                          941,531Non-current:Net
      operating loss carry forwards
                          
                          
                          507,019
                          
                          
                          
                          1,644,182Valuation
      allowance
                          
                          
                          (904,172
                          )
                          
                          
                          (2,585,713
                          )Net
      deferred tax assets:
                          
                          $
                          28,485
                          
                          
                          $
                          —





The
Company and its subsidiaries suffered operating losses for the year ended
December 31, 2009. Management estimates that it is more likely than not that the
potential economic benefits of the net operating loss will not be materialized
in the near future. Accordingly, a full amount of valuation allowance was
provided at December 31, 2009.





The
difference between the effective income tax rate and the expected federal
statutory rate was as follows:





Years Ended December 31,2008
                  
                  
                  2009Statutory
      rate
                  
                  
                  (34.0
                  )%
                  
                  
                  (34.0
                  )%Income
      tax rate reduction
                  
                  
                  (27.3
                  )
                  
                  
                  (8.5
                  )Permanent
      differences
                  
                  
                  38.7
                  
                  
                  
                  26.7Valuation
      allowance
                  
                  
                  18.2
                  
                  
                  
                  15.2Effective
      income tax rate
                  
                  
                  (4.4
                  )%
                  
                  
                  (0.6
                  )%




F-22


DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED FINANCIAL STATEMENTS


NOTE 9
─ EQUITY TRANSACTIONS





Under
China laws and regulations, Diguang Electronics is required to appropriate a
portion of its retained earnings to a general reserve, which cannot be used for
dividend distribution purpose. In the years ended December 31, 2008 and 2009,
the appropriation was $164,609 and 0, respectively, which was deemed a non-cash
transaction for cash flow statement purpose.




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:





2008
                  
                  
                  2009Sino
      Olympics Industries Limited
                  
                  
                  2,000,000
                  
                  
                  
                  2,000,000After-tax
      Profit Target (in millions) (1)
                  
                  $
                  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.





The
Company accounts for the transactions of issuing these incentive shares based on
the fair value on the grant date. 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,
2008 and 2009, 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, 2008, the Company
had repurchased 521,000 shares of stock at an average price of $1.29 per share,
resulting in 22,072,000 shares of common stock outstanding as of December 31,
2008. No share was repurchased during 2009. The total repurchased shares at cost
were presented in line of treasury stock in the stockholders’ equity section on
the balance sheet as of December 31, 2008 and 2009.





NOTE
10 ─ STOCK OPTIONS





The
Company recognized the share-based compensation cost based on the estimated
grant-date fair value. There were no stock options issued before January 1,
2006.





From
February 25, 2006 to December 31, 2009, the Company issued total 1,504,000
shares of stock option with total fair value of $6,218,888. During the year
ended December 31, 2009, the Company issued 50,000 shares of stock option at
$0.51 per share with a fair value of $24,500; and 848,000 shares were issued
during the year ended December 31, 2008 with total fair value of $90,800, among
which, 548,000 shares were at $0.12 per share, and 300,000 shares were at $0.10
per share, respectively.


F-23




DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED FINANCIAL STATEMENTS


NOTE
10 ─ STOCK OPTIONS (Continued)





The
share-based compensation recognized for stock options granted was $571,505 and
$281,175 for the years ended December 31, 2008 and 2009, respectively. No
tax benefit was recognized for the share-based compensation due to the stock
options granted. The total intrinsic value of warrants and options
exercised during the years ended December 31, 28 and 2009, was approximately $0,
and $0, respectively, as no stock options were exercised in each respective year
since they were 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 31,2008
                  
                  
                  2009Expected
      volatility
                  
                  129.64% to 204.74%
                  
                  
                  
                  271.41
                  %Weighted
      average volatility
                  
                  
                  N/A
                  
                  
                  
                  N/AExpected
      life
                  
                  7 years
                  
                  
                  2.5 yearsRisk
      free interest rate
                  
                  0.98% to 3.75%
                  
                  
                  
                  1.315
                  %





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 March 17, 2006 through the grant day for all the
options granted in 2008 and 2009. The expected terms of stock options are based
on the average vesting period and the contractual life of stock options
granted.





The
risk-free rates are consistent with the expected terms of stock option and based
on the U.S. Treasury yield curve in 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
five-day average share price before the Board of Directors’ approval. These
options have up to ten-year contractual life term.


F-24




DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED 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, 2008 and 2009 is presented as follows:





Stock Options
                                        
                                        Shares
                                        
                                        
                                        Weighted-
                                          Average
                                          Exercise
                                          Price($)
                                        
                                        
                                        Weighted - Average
                                          Remaining
                                          Contractual
                                          Term(years)Outstanding
      at January 1, 2008
                                        
                                        
                                        407,417
                                        
                                        
                                        
                                        5.00
                                        
                                        
                                        
                                        8.22Exercisable
      at January 1, 2008
                                        
                                        
                                        145,389
                                        
                                        
                                        
                                        5.00
                                        
                                        
                                        
                                        8.20Granted
                                        
                                        
                                        888,000
                                        
                                        
                                        
                                        0.19
                                        
                                        
                                        
                                        9.92Exercised
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Forfeited
      or expired
                                        
                                        
                                        (6,750
                                        )
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Outstanding
      at December 31, 2008
                                        
                                        
                                        1,288,667
                                        
                                        
                                        
                                        1.69
                                        
                                        
                                        
                                        9.13Exercisable
      at December 31, 2008
                                        
                                        
                                        247,667
                                        
                                        
                                        
                                        4.86
                                        
                                        
                                        
                                        7.53Granted
                                        
                                        
                                        50,000
                                        
                                        
                                        
                                        0.51
                                        
                                        
                                        
                                        —Exercised
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Forfeited
      or expired
                                        
                                        
                                        (136,750
                                        )
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Outstanding
      at December 31, 2009
                                        
                                        
                                        1,201,917
                                        
                                        
                                        
                                        1.77
                                        
                                        
                                        
                                        8.79Exercisable
      at December 31, 2009
                                        
                                        
                                        599,611
                                        
                                        
                                        
                                        2.82
                                        
                                        
                                        
                                        6.53




On July
15, 2007, the Company entered into a two years Consultancy Agreement with Mr.
Chen Min. On July 10, 2009, just before termination of the Consultancy
Agreement, the Board of Directors of the Company granted 50,000 shares of stock
option to Mr. Chen Min for the past consulting service rendered. The 50,000
shares of stock option vested on the grant date and the option may be exercised
for sixty months after termination of the above mentioned Consultancy Agreement.
The share option has a fair value of $24,500 and was recognized as compensation
cost immediately upon the granting.





The
trading price of the Company stock at December 31, 2008 and 2009 was $0.06, and
$0.26 per share, respectively. As of December 31, 2009, the exercise price of
499,917 shares of outstanding stock option was higher than the trading price of
the Company’s common stock and did not have any intrinsic value; the excise
price of the other 724,000 shares granted in December 2008 was lower than
trading price and reported intrinsic value. Intrinsic value for outstanding and
exercisable options as of December 31, 2009 was $107,360 and $30,840,
respectively.





As of
December 31, 2009, the total unrecognized stock-based compensation based on fair
value on the granting date related to non-vested stock options was
$96,409. That cost is expected to be recognized over a period of three
years.


F-25


DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED FINANCIAL STATEMENTS


NOTE
11 ─ COMMITMENTS AND CONTINGENCIES





Capital
Commitment





The
construction of manufacturing base in the Guangming district of Shenzhen city
started in early 2010. Total amount of signed construction contracts were about
$6.3 million, among which, $644,280 were already paid as of December 31, 2009.
Total budget of the plant construction was about $10.5 million excluding land
cost which has a net book value of $2,400,967 as of December 31, 2009. The
Company plans to pay $7.3 million of construction expenses in 2010 and leave the
remaining $2.6 million in 2011.





Operating
Leases





On
September 10, 2008, Wuhan Diguang entered into a lease agreement with
Hannstar-TPV Display (Wuhan) Corp. to rent machinery from Hannstar-TPV Display
(Wuhan) Corp. The lease agreement lasted from October 2008 to December 2010 with
an annual rental of RMB800,000, equivalent $117,259.





Wuhan
Diguang also entered into lease agreement with Wuhan TPV Display Technology Co.,
Ltd. to rent office place at RMB37,431, equivalent to $5,486 per month from
January to December of 2010.





Future
minimum payments required under the lease agreement with Hannstar-TPV Display
(Wuhan) Corp. and Wuhan TPV that has an initial or a remaining lease term in
excess of one year at December 31, 2009 are as follows:





Year Ended December 31,
                    
                    Amount2010
                    
                    
                    183,096





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 31,2008
                    
                    
                    2009Numerator:Net
      income (loss) attributable to common shareholders
                    
                    $
                    (4,718,370
                    )
                    
                    $
                    (7,200,425
                    )Net
      income (loss) used in computing diluted earnings per share
                    
                    $
                    (4,718,370
                    )
                    
                    $
                    (7,200,425
                    )Denominator:Weighted
      average common shares outstanding – basic
                    
                    
                    22,155,882
                    
                    
                    
                    22,072,000Potential
      diluted shares from stock options grantedWeighted
      average common share outstanding – diluted
                    
                    
                    22,155,882
                    
                    
                    
                    22,072,000Basic
      (losses) earnings per share
                    
                    $
                    (0.21
                    )
                    
                    $
                    (0.33
                    )Diluted
      earnings (losses) per share
                    
                    $
                    (0.21
                    )
                    
                    $
                    (0.33
                    )


F-26


DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED FINANCIAL STATEMENTS


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 year ended December 31,
2008 were $304,316, and Diguang Electronics has not received any government
subsidies for the year ended December 31, 2009.





NOTE
14 ─ RESEARCH FUNDING ADVANCED





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 $552,583) 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 of the total amount available in
three installment payments. On May 23, 2007, Diguang Electronics received the
first installment payment of RMB900, 000, equivalent to $131,850 as of December
31, 2009. In accordance with the government grant agreement, 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 field, any
amount of fund received by the Company shall be returned in full. This project
was not completed and no further fund was received in the year ended December
31, 2009.





On August
26, 2008, Diguang Electronics entered a fund sharing agreement with the
Department of Information Industry of Guangdong Province and Jingge Century
Semiconductor (Shenzhen) Co., Ltd. (“Jingge” thereafter). According to the
agreement, Diguang Electronics and Jingge would share aggregate funding of RMB5
million granted by the Department of Information Industry of Guangdong Province
to support research and development of “Ultra Thin, Energy Saving, and
Environmental Friendly intelligent LED backlight for TFT-LCD” project and
industrialization of LED Driver IC production. According to the sharing
agreement, Diguang Electronics will receive RMB3.5 million of the total amount
and Jingge will receive the rest of RMB1.5 million. Diguang Electronics received
its share of RMB3.5 million (equivalent to $512,753 as of December 31, 2009) on
October 27, 2008. As stated in the agreement, if this development project failed
and Diguang Electronics is deemed to be responsible for the failure, Diguang
Electronics should return received fund in full and a penalty of 20% of received
fund should be paid. This project was not completed as of December 31,
2009.





On
December 22, 2009, Dihao received governmental fund of RMB600,000, equivalent to
$87,900, from Science and Technology bureau of Jiangsu Province in support of
the research and development RGB LED backlights, the duration of project is from
April of 2009 to December of 2010. As of December 31, 2009, the project has not
been completed. According to the agreement, if Dihao breaches terms of the
agreement or could not carry out R&D activities as required by the
agreement, the government has authority to terminate the plan and require Dihao
to return received fund.


F-27




DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED FINANCIAL STATEMENTS


NOTE
14 ─ RESEARCH FUNDING ADVANCED (Continued)





As of
December 31, 2009, the three 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 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 account for 10% or more of revenues, accounts receivable,
purchases, and accounts payable are presented as follows:





Accounts
                  
                  
                  
                  
                  
                  AccountsRevenue
                  
                  
                  Receivable
                  
                  
                  Purchases
                  
                  
                  Payable2008Customer
      A
                  
                  
                  11
                  %
                  
                  
                  0
                  %
                  
                  
                  —
                  
                  
                  
                  —Customer
      B
                  
                  
                  11
                  %
                  
                  
                  18
                  %
                  
                  
                  —
                  
                  
                  
                  —Customer
      C
                  
                  
                  11
                  %
                  
                  
                  6
                  %
                  
                  
                  —
                  
                  
                  
                  —Customer
      D
                  
                  
                  20
                  %
                  
                  
                  16
                  %
                  
                  
                  —
                  
                  
                  
                  —Customer
      E
                  
                  
                  2
                  %
                  
                  
                  12
                  %
                  
                  
                  —
                  
                  
                  
                  —Customer
      F
                  
                  
                  3
                  %
                  
                  
                  10
                  %
                  
                  
                  —
                  
                  
                  
                  —2009Customer
      D
                  
                  
                  11
                  %
                  
                  
                  9
                  %
                  
                  
                  —
                  
                  
                  
                  —Customer
      F
                  
                  
                  8
                  %
                  
                  
                  18
                  %
                  
                  
                  —
                  
                  
                  
                  —





No vendor accounts for 10% or more of
purchases or accounts
payable for the year ended December 31, 2008 and 2009.




NOTE
16 ─ SEGMENT REPORTING




The
Company currently operates mainly in backlight production with portions of new
products of LED monitors, LED general lighting, and LED TV
sets assembly. 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 31,2008
                
                
                2009Sales
      to China domestic customers
                
                $
                15,002,027
                
                
                $
                17,785,350Sales
      to international customers
                
                
                40,428,653
                
                
                
                26,289,899$
                55,430,680
                
                
                $
                44,075,249


F-28


DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 NOTES
TO CONSOLICATED FINANCIAL STATEMENTS


NOTE
16 ─ SEGMENT REPORTING (Continued)





Domestic
                
                
                InternationalCustomers
                
                
                Customers
                
                
                Total2008Revenue
                
                $
                15,002,027
                
                
                $
                40,428,653
                
                
                $
                55,430,680Gross
      margin
                
                
                4
                %
                
                
                10
                %
                
                
                9
                %Receivable
                
                
                4,180,927
                
                
                
                5,280,271
                
                
                
                9,944,208Inventory
                
                
                7,285,860
                
                
                
                —
                
                
                
                7,285,860Property
      and equipment
                
                
                19,369,200
                
                
                
                —
                
                
                
                19,369,200Expenditures
      for long-lived assets
                
                
                2,607,743
                
                
                
                —
                
                
                
                2,607,7432009Revenue
                
                $
                17,785,350
                
                
                $
                26,289,899
                
                
                $
                44,075,249Gross
      margin
                
                
                8
                %
                
                
                8
                %
                
                
                8
                %Receivable
                
                
                6,469,337
                
                
                
                7,502,749
                
                
                
                13,972,086Inventory
                
                
                7,439,287
                
                
                
                —
                
                
                
                7,439,287Property
      and equipment
                
                
                17,868,845
                
                
                
                —
                
                
                
                17,868,845Expenditures
      for long-lived assets
                
                
                160,094
                
                
                
                —
                
                
                
                160,094





NOTE
17 ─ SUPPLEMENTARY INFORMATION ABOUT CASH FLOWS





Years Ended December 31,2008
                  
                  
                  2009Cash
      PaidInterest
                  
                  $
                  (254,093
                  )
                  
                  $
                  (404,410
                  )Income
      Tax
                  
                  
                  (76,870
                  )
                  
                  
                  (19,939
                  )Non-Cash
      Transactions
                  
                  Years Ended December 31,2008
                  
                  
                  2009Dividend
      payable
                  
                  $
                  —
                  
                  
                  $
                  —Amount
      due to stockholders
                  
                  
                  —
                  
                  
                  
                  —Common
      stock
                  
                  
                  —
                  
                  
                  
                  —Additional
      paid-in capital
                  
                  
                  —
                  
                  
                  
                  —Appropriation
                  
                  
                  164,609
                  
                  
                  
                  —Retain
      Earnings
                  
                  
                  (164,609
                  )
                  
                  
                  —Deferred
      offering expense
                  
                  
                  —Translation
      adjustments
                  
                  
                  —
                  
                  
                  
                  —





NOTE
18 ─ QUARTERLY FINANCIAL DATA





Summarized
quarterly financial data for 2008 and 2009 is as follows:





Quarterly Financial Data2009
                        
                        First
                        
                        
                        Second
                        
                        
                        Third
                        
                        
                        FourthNet
      sales
                        
                        $
                        5,999,853
                        
                        
                        
                        10,203,137
                        
                        
                        
                        13,456,366
                        
                        
                        
                        14,415,893Gross
      profit
                        
                        
                        621,365
                        
                        
                        
                        399,981
                        
                        
                        
                        938,160
                        
                        
                        
                        1,591,875Net
      income (loss) attributable to common shares
                        
                        
                        (1,210,418
                        )
                        
                        
                        (1,837,175
                        )
                        
                        
                        (1,217,550
                        )
                        
                        
                        (2,935,282
                        )Basic
      earnings per share
                        
                        $
                        (0.05
                        )
                        
                        
                        (0.08
                        )
                        
                        
                        (0.06
                        )
                        
                        
                        (0.07
                        )2008
                        
                        First
                        
                        
                        Second
                        
                        
                        Third
                        
                        
                        FourthNet
      sales
                        
                        $
                        16,199,591
                        
                        
                        $
                        16,897,178
                        
                        
                        $
                        13,599,288
                        
                        
                        $
                        8,734,623Gross
      profit
                        
                        
                        2,639,234
                        
                        
                        
                        2,181,429
                        
                        
                        
                        881,077
                        
                        
                        
                        (961,670
                        )Net
      income (loss) attributable to common shares
                        
                        
                        168,730
                        
                        
                        
                        134,788
                        
                        
                        
                        (1,301,553
                        )
                        
                        
                        (3,720,335
                        )Basic
      earnings per share
                        
                        $
                        0.01
                        
                        
                        $
                        0.01
                        
                        
                        $
                        (0.06
                        )
                        
                        $
                        (0.17
                        )


F-29





Exhibit
Index


Exhibit No.
                
                Description3.1(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).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, 2006 (incorporated by
      reference from Form 10-K filed on April 14, 2008).10.6
                
                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 and Transcend
      Optronics ( Yangzhou ) Co., Ltd dated October 1, 2007 (incorporated by
      reference from Form 10-K filed on April 14, 2008).10.8
                
                Lease
      Agreement between Wuhan Diguang Electronics Co. Ltd and Wuhan Hannstar
      Technology Co. Ltd dated October 29, 2007 (incorporated by reference from
      Form 10-K filed on April 14, 2008).10.9
                
                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,
2008).10.10
                
                Translation
      of the Comprehensive Credit Line Agreement entered into between Shenzhen
      Diguang Electronics and Ping An Bank dated July 1, 2008 (incorporated by
      reference from Form 8-K filed on July 8, 2008).10.11
                
                Translation
      of the Pledge Contract entered into between Dongguan Diguang S&T and
      Ping An Bank dated July 1, 2008 (incorporated by reference from Form 8-K
      filed on July 8, 2008).10.12
                
                Employment
      Agreement of Jerry Yu dated July 31, 2008 (incorporated by reference from
      Form 8-K filed on December 15, 2008).14.1
                
                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