**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, 2006.**


**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.)8THFloor,
                Building 64, Jinlong Industry District Majialong
              Nanshan
                District, Shenzhen, PRC
            
            518052(Address
                of principal executive offices)
            
            (Zip
                Code)




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


Securities
      registered pursuant to Section 12(b) of the Act:


None


Securities
      registered pursuant to Section 12(g) of the Act:


Common
      stock, $0.001 par value




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




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




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




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (§229.405 of this chapter) is not contained herein, and will
      not be contained, to the best of registrant’s knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this
      Form 10-K or any amendment to this
      Form 10-K. x




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
      (Check one):


Large
      accelerated filer  o Accelerated
      filer  o Non-accelerated
      filer x




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





Aggregate
      market value of voting and non-voting common equity held by non-affiliates
      of
      the registrant as of June 30, 2006, based upon the closing price of the common
      stock as reported by the over-the-counter
      market of the National Association of Securities Dealers “Electronic Bulletin
      Board” under the symbol “DGNG ”
on
      such
      date, was approximately $64,878,800




22,593,000
      shares of common stock outstanding as of January 31, 2007





**DOCUMENTS
      INCORPORATED BY REFERENCE**




None







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


**FORM 10-K**


**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2006**





**INDEX**





**Table
      of Contents**


**Page**PART
                  IItem
                  1.
              Description
                  of Business
              3Item
                  1A.
              Risk
                  Factors
              16Item
                  1B.
              Unresolved
                  Staff Comments
              28Item
                  2.
              Property
              28Item
                  3.
              Legal
                  Proceedings
              29Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              29PART
                  IIItem
                  5.
              Market
                  for Common Equity, Related Stockholder Matters and Issuer Purchases
                  of
                  Equity Securities
              29Item
                  6.
              Selected
                  Financial Data
              32Item
                  7
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              32Item
                  7A.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              44Item
                  8.
              Financial
                  Statements and Supplementary Data
              45Item
                  9.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              45Item
                  9A.
              Controls
                  and Procedures
              45Item
                  9B
              Other
                  Information
              46PART
                  IIIItem
                  10.
              Directors
                  and Executive Officers and Corporate Governance
              46Item
                  11.
              Executive
                  Compensation
              50Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              55Item
                  13.
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              56Item
                  14.
              Principal
                  Accountant Fees and Services
              59PART
                  IVItem
                  15.
              Exhibits,
                  Financial Statement Schedules
              F1Signatures
              
              62




2




Cautionary
      Statement




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




PART
      I




ITEM
      1.   DESCRIPTION OF BUSINESS.




**Overview**




We
      design, manufacture, sell and distribute small to medium-sized Light Emitting
      Diode (“LED”) and Cold Cathode Fluorescent Lamp (“CCFL”) backlights for Liquid
      Crystal Displays (“LCD”) in a variety of applications, such as color displays
      for cell phones, car televisions and navigation systems, digital cameras,
      camcorders, PDAs and DVDs, CD and MP3/MP4 players and appliance
      displays. Our manufacturing subsidiary is headquartered in Shenzhen, China.
      We have also developed large size of LED/CCFL backlight products for LCD Display
      and we have started to enter the backlight markets for computer displays and
      televisions.





In
      2006,
      we generated revenues of $31.9 million, net income of $1.7 million and cash
      flow
      from operations of $3.5 million. We have been profitable and cash flow positive
      each year since 1999.





**Our
      Industry**





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





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





The
      demand for large size LCD backlights fuels the growth for the backlight portion
      of an LCD and counterbalances price reductions in small to medium size
      backlights. Large-size LCD backlights, primarily used for LCD TVs, generated
      global revenues of approximately $7.5 billion in 2005 and $9.2 billion in 2006,
      which Displaybank projects will grow to $11.4 billion in 2007.





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




3





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





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




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





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




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





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





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





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




4





On
      September 5, 2005, Online issued 1,333,333 shares of its common stock, 800,000
      on a post-Reverse Split basis, to Chardan Capital, LLC, pursuant to a consulting
      agreement, in exchange for Chardan’s consulting services provided to Online.
 The fair value of these shares was approximately $532,000 at a price of
      $0.40 per share, which was the market price on that day.  Pursuant to the
      signed consulting agreement, Chardan agreed to pay cash of $1,333.33 for those
      shares. **** All
      of
      the shares were subject to Online’s right to repurchase them for the same amount
      Chardan paid in cash to acquire the stock if Online consummated a business
      combination with an operating company that Chardan did not introduce to Online.
       Online acknowledged that Chardan introduced Diguang Holdings to Online.
 Upon the filing of an earlier registration statement in
      2006 **,** that
      right of repurchase expired, and none of the restricted shares issued to Chardan
      are subject to repurchase.  The issuance of this stock was exempt from
      registration under Section 4(2) of the Securities Act of 1933, as amended,
      as
      being issued in a private transaction involving fewer than 35 persons.





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




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




On
      January 10, 2006, we 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 our common stock.  In connection with the Share
      Exchange, we agreed to change our name to Diguang.  We also effected a
      3-for-5 reverse split of our outstanding stock, which reduced the shares issued
      and outstanding from 11,518,233 to 6,910,940, and Terri Wonderly, our CEO,
      returned to us for cancellation 4,967,940 of our common stock that she owned.
       As a result, the total outstanding shares of common stock immediately
      prior to the Share Exchange were 1,943,000.  Taking into account the shares
      issued in the Share Exchange and the Offering, we now have 22,593,000 shares
      of
      common stock issued and outstanding, 18,250,000 of which are owned by Diguang
      Holdings’ former shareholders, with the balance being held by a combination of
      our shareholders prior to the Share Exchange and the investors in the Offering.




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





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





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




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





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





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





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




5





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





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





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





Well
      Planner was established under the laws of Hong Kong, Special Administrative
      Region on April 20, 2001.  Originally owned directly by Yi Song and Hong
      Song, it is now a wholly-owned subsidiary of Diguang as a result of a
      reorganization of the Songs’ ownership interests in Diguang and the Diguang
      subsidiaries on June 15, 2005.  Well Planner’s principal business is custom
      forwarding of Diguang Electronics’ products, which assists Diguang Electronics
      in meeting export and import requirements that apply to the international sale
      of its products and the importation into China of raw materials that Diguang
      Electronics uses in its manufacturing operations.   Well Planner
      performs these services under a service agreement that provides for a service
      fee of not less than 2% of the goods Well Planner has handled for Diguang
      Electronics.  However, Well Planner’s only customer is Diguang Technology,
      making Well Planner essentially a pass-through entity.  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 as a result of a reorganization of the Songs’
ownership interests in Diguang and the Diguang subsidiaries in June 2005.
 The business predecessor of Diguang Technology was an unlimited liability
      company named Diguang Electronics (Hong Kong) Co., which was established under
      Hong Kong laws on October 12, 1998, also owned directly by Yi Song and Hong
      Song.  Diguang Electronics (HK) was engaged in the business of distributing
      Diguang Electronics’ products and purchasing electronic components and raw
      materials for Diguang Electronics’ operations in international markets.  On
      October 31, 2003, all of the substantial business operations of Diguang
      Electronics (HK) were transferred to Cheer Top Capital Limited, a company
      incorporated in the British Virgin Islands that was acquired by the Songs for
      the purpose of basing those operations in the British Virgin Islands.  In
      June 2004 the name was changed to Diguang Science and Technology (HK) Limited.
       After businesses were transferred, a dividend of approximately $2.65
      million was distributed.  Diguang Technology’s address is Commonwealth
      Trust Limited, Drake Chambers, Tortola, British Virgin Islands.





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




6





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





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




Historically,
      Diguang Electronic’s capital expenditures have included the purchase of
      production equipment, office equipment and leasehold improvements, all within
      the PRC. In connection with the expansion and ramp-up of our PRC production
      capability and capacity, Diguang Electronics incurred capital expenditures
      of
      $0.16 million, $1.99 million and $2.85 million in 2004, 2005 and 2006,
      respectively. We depreciate our production equipment and office equipment on
      a
      straight-line basis over an estimated useful life of five to ten years.
      Currently, Diguang does not have any capital expenditures or divestitures in
      progress.





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





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




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




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




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




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





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





In
      addition to removing the closing condition that we convert to a British Virgin
      Islands company, the parties also modified the Share Exchange Agreement to
      provide for the assumption of an option plan adopted by Diguang Holdings prior
      to the closing of the Share Exchange. Diguang Holdings had issued options under
      that plan equivalent to approximately 540,000 shares of our stock to our
      independent directors and certain members of its management. The limit on
      options to be issued of 1,500,000 remains in place, so that under the assumed
      plan approximately 960,000 shares remain available for future issuance, and
      the
      grant of any of those options prior to 18 months following the closing of the
      share exchange remains subject to the consent of the member of the board of
      directors not appointed by Diguang Holdings.




7





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





In
      the
      Share Exchange, we acquired all of Diguang Holdings’ issued and outstanding
      shares of common stock in exchange for 18,250,000 shares of our common stock.
       Prior to that, we effected a 3 for 5 reverse stock split, and
      4,967,940 shares of our stock standing in the name of Terri Wonderly were
      cancelled.  As a result of all of the foregoing and the issuance of
      2,400,000 shares in the Offering, we now have 22,593,000 shares of common stock
      issued and outstanding.  Of that amount, Diguang Holdings’s former
      shareholders own 75%, with the balance held by those who held Online’s shares
      prior to the Share Exchange and the investors in the Offering. As a result
      of
      the Share Exchange, Diguang Holdings’s former shareholders obtained control of
      Diguang, and Diguang Holdings’s officers and directors were appointed as
      Diguang’s officers and directors.




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


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




(1)
      After-tax profit targets shall be the income from operation, less taxes paid
      or
      payable with regard to such income, excluding the effect on income from
      operations, if any, resulting from issuance of incentive shares in any
      year.





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




We
      did
      not meet the 2006 after-tax profit target. No incentive shares were issued
      to
      date.




8




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





*Total
      revenues by category of activity and geographic market*





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


**Years
                  Ended December 31,****2004**
              
              **2005**
              
              **2006**Sales
                  to China domestic customers
              
              $
              4,667,219
              
              $
              4,921,563
              
              $
              3,969,812Sales
                  to overseas customers
              
              
              19,816,003
              
              
              30,726,555
              
              
              27,888,427$
              24,483,222
              
              $
              35,648,118
              
              $
              31,858,239





*Financial
      Information about Geographic Areas*





During
      2004, 2005 and 2006, we derived $4,667,219, $4,921,563 and $3,969,812
      respectively, of our revenues from external customers in China, excluding Hong
      Kong and Taiwan, the domicile of our principal operating subsidiary, Diguang
      Electronics.





Revenues
      from customers outside of China for 2004, 2005 and 2006 totaled $19,816,003,
      $30,726,555 and $27,888,427, respectively. We attribute sales to individual
      foreign countries based on the destination to which we ship the
      products.





Virtually
      all of our long-lived assets are held by Diguang Electronics in
      China.





There
      are
      certain risks associated with the concentration of our operations in China.
      These include currency risks and political risks. See *Risk
      Factors* above *.* 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
      4.5%
      so far.





This
      4.5%
      increase in the value of the RMB is not expected to produce a material effect
      on
      our business or our financial performance.  However, if the Chinese
      government allows significant further revaluations of the RMB in the near
      future, it could have adverse consequences on our ability to compete
      internationally. In particular, such a revaluation would make our products
      relatively more expensive in markets outside of China than before the
      revaluation, representing about 88% of our product revenues, including those
      from Hong Kong, which could slow or eliminate our anticipated
      growth.





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





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




9





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





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





***(e)
      Narrative Description of Business***





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





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





We
      conduct that business principally through the operations of Diguang Electronics,
      headquartered in Shenzhen, China, with additional offices and its backlight
      manufacturing operations in Dongguan, China. Diguang Electronics has
      approximately 1,730 full-time employees, although the figure changes from time
      to time as production demands require.





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





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





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





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





We
      achieved some success in expanding our customer base and our geographic markets
      during 2006. Sales to our largest customer generated 24% of our revenues for
      2006 compared with 31% in 2005. Sales to our three largest customers increased
      to 52% of 2006 revenue compared to 62% in 2005. This actually represented a
      diversification of the customer base, as both the second and third largest
      customer in 2006 were not among the top three in 2005. We are continuing our
      efforts to diversify and broaden our customer base to become less reliant on
      these customers, including the development of new products, such as backlights
      for flat panel televisions.




10





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





Diguang
      Electronics caters to the global demand for backlight products on the basis
      of
      quality, cost and order fulfillment time. Diguang Electronics’ focus on product
      quality includes the use of quality materials obtained from selected
      international suppliers, and thorough quality control inspection of raw
      materials prior to use in production and finished products prior to shipment.
      Diguang Electronics also strives to offer its products at a lower cost than
      most
      competitors. This is made possible through Diguang Electronics’ skilled labor
      force of 1,730 people that, due to China’s low wage scale, is very low cost.
      Existing economies of scale also contribute to keeping costs low. Diguang
      Electronics also has the ability to deliver its initial run of products within
      15 to 30 days from the time an order is placed, while many of our competitors
      can require more time. This rapid fulfillment capability is possible because
      of
      Diguang Electronic’s large and skilled product development team, and it provides
      an important advantage to Diguang Electronics in this competitive
      market.





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





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





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





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





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





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




11





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





*Research
      and Development*





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





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





We
      have
      spent $803,000, $727,000 and $786,000 for the years ended 2004, 2005 and 2006
      respectively on research and development efforts to improve existing products
      and processes and to develop new products, not including the expenses to develop
      particular backlight products utilizing existing technology to meet customer
      specifications for products.





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





*Customers*





Our
      customer base consists of many large and medium sized companies, which include
      PVI,  ALCO, HOT TRACKS, IZTECHNOLOGY, Gree, Tianma, Seiko, Midea,
      Affitronics, Samsung, CCT, LG, Ellipse, Secure, Archos and Wintek, etc.  In
      2006, our largest customer by sales volume accounted for approximately 24%
      of
      total revenues. Our
      top two customers, ALCO and Din Wai, accounted for approximately
      47% of revenues and collectively, our top three customers that year generated
      about 52% of revenues.  As a result, the loss of one or more of our top
      customers or a significant decrease in the volume of business that we do with
      those customers would have a material adverse effect on our business. To help
      protect against that risk, we continually seek to diversify our customer base,
      in particular by expanding our international sales efforts.  We also expect
      to introduce new backlight technologies for a variety of applications that
      will
      help expand and diversify our customer base.





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





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




12





*Competition*





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





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




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





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





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





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





*Intellectual
      Property*





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




13




These
      patents include:




***Patent
                Name***
            
            ***Patent
                Number***
            
            ***Holder***
            
            ***Effective date
                of Patents***
            
            ***Expiry
                date of Patents***1
            
            Uniformly
                Effective Front Backlight
            
            ZL
                99 2 48884.2
            
            Yi
                Song
            
            28/10/1999
            
            27/10/20092
            
            Efficiency
                Backlight and front Backlight of Side radiation
            
            ZL
                00 2 33726.6.
            
            Yi
                Song
            
            12/05/2000
            
            11/05/20103
            
            Efficiency
                Photosensitive Sensor for Graphic Content
            
            ZL
                01 2 01714.0
            
            Yi
                Song
            
            20/01/2001
            
            19/01/20114
            
            Efficiency
                Uniform Illuminance Equipment
            
            ZL
                02 2 05116.3
            
            Yi
                Song
            
            10/02/2002
            
            9/02/20125
            
            Efficiency
                Uniform Backlight of Side radiation
            
            ZL
                98 2 01487.2
            
            Yi
                Song
            
            02/03/1998
            
            01/03/20086
            
            Advanced
                Efficiency Backlight of Side radiation
            
            ZL
                01 2 19472.7
            
            Yi
                Song
            
            13/04/2001
            
            12/04/20117
            
            Efficiency
                Uniform Backlight of Front Backlight and White Backlight radiation
            
            ZL
                01 2 71009.1
            
            Yi
                Song
            
            19/11/2001
            
            18/11/20118
            
            High
                Efficiency of Light Source for Planar Fluorescent Lamp
            
            ZL
                200420006645.8
            
            Yi
                Song
            
            11/03/2004
            
            10/03/20149
            
            Negative
                LCD Display with Printed Flake
            
            ZL
                97201997.9
            
            Yi
                Song
            
            25/03/1997
            
            24/03/200710
            
            Improved
                Uniform and Luminous Side Backlight Device with High
                Efficiency
            
            ZL
                090220868
            
            Yi
                Song
            
            30/11/2001
            
            29/11/201111
            
            Efficiency
                Fluorescent Lamp of New Model
            
            ZL
                200320130305.1
            
            Diguang
                Electronics
            
            23/12/2003
            
            22/12/2013




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





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




DOING
      BUSINESS IN CHINA




CHINESE
      LEGAL SYSTEM




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




14




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.




ECONOMIC
      REFORM ISSUES




Although
      the Chinese Government owns the majority of productive assets in China, in
      the
      past several years the Chinese 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.




15




ITEM
      1A.   RISK FACTORS.




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




***Risks
      Related to our Business***




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




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




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




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




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




A
      significant portion of our revenue is generated from a small number of
      customers.  The aggregate percentage of the revenue contributed by our top
      three customers in 2006 was 52%, with roughly 47% coming from the two largest
      customers.  Under present conditions, the loss of any of these customers,
      or a significant reduction in our level of sales to any or all of them, could
      have a material adverse effect on our business and operating results. ****





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




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




16




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




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




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




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




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




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




We
      operate in a competitive environment that is characterized by price deflation
      and technological change. We compete with major international and domestic
      companies. Our major competitors include Shian Yih Electronics Ind. Co. Ltd.,
      Wai Chi Electronics Ltd., Radiant Opto-Electronics Corporation, K-Bridge
      Electronics Co. Ltd., etc. and other similar companies primarily located in
      Japan, Taiwan, Korea, Hong Kong and China Mainland. Our competitors may have
      greater market recognition and substantially greater financial, technical,
      marketing, distribution, purchasing, manufacturing, personnel and other
      resources than we do.  Furthermore, some of our competitors have
      manufacturing and sales forces that are geographically diversified, allowing
      them to reduce transportation expenses, tariff costs and currency fluctuations
      for certain customers in markets where their facilities are located.  Many
      competitors have production lines that allow them to produce more sophisticated
      and complex devices than we currently do and to offer a broader range of display
      devices to our target customers. Other emerging companies or companies in
      related industries may also increase their participation in the display and
      display module markets, which would intensify competition in our markets. We
      might lose some of our current or future business to these competitors or be
      forced to reduce our margins to retain or acquire that business, which could
      decrease our revenues or slow our future revenue growth and lead to a decline
      in
      profitability. In 2006, our revenue and net income decreased by $3.8 million
      and
      $7.2 million, respectively, compared with 2005, partly due to the price
      reduction as a result of keen competition in the market.




17




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




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




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




We
      extend
      credit to our customers based on assessments of their financial circumstances,
      generally without requiring collateral.  As of December 31, 2006, our
      accounts receivable, after deducting an allowance for bad debts, was nearly
      $5.0
      million.  Our overseas customers may be subject to economic cycles and
      conditions different from those of our domestic customers. We may also be unable
      to obtain satisfactory credit information or adequately secure the credit risk
      for some of these overseas customers.  The extension of credit presents an
      exposure to risk of uncollected receivables.  Additionally, we may not
      realize from receivables denominated in a foreign currency the anticipated
      amounts in United States dollar terms due to fluctuations in currency values.
      Our inability to collect on these accounts may reduce on our immediate and
      long
      term liquidity.




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




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




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




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




18




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




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




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




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




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




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




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




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




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




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




19




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




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




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




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




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




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




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




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




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




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


·
              enhance
                  quality, operational, financial and management systems;
 
 ·
              expand
                  facilities and equipment; and
  20
  ·
              successfully
                  hire, train and motivate additional employees, including the technical
                  personnel necessary to operate our production facilities.




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




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




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




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




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




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




**Mr.
      Yi Song, our Chief Executive Officer, controls approximately 75% of our
      outstanding common shares and may have conflict of interest with our minority
      shareholders.**




Mr.
      Yi
      Song, our Chief Executive Officer, beneficially owns approximately 75% of the
      outstanding shares of our common stock.  As a result of being the majority
      shareholder, for transactions that require shareholders approval, he has control
      over decisions to enter into any of them, which could result in the approval
      of
      transactions that might not maximize shareholders’ value, and has the ability to
      prevent entry into any of them.  In addition, he can control the election
      of members of the Company’s board, have the ability to appoint new members to
      the Company’s management team and control the outcome of matters submitted to a
      vote of the holders of the Company’s common stock.  The interests of Mr. Yi
      Song may at times conflict with the interests of our other shareholders.




***Risks
      Related to International Operations***




21




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




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




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




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




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




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





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




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




22




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




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




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




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





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




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




The
      value
      of the Renminbi, the main currency used in China, fluctuates and is affected
      by,
      among other things, changes in China’s political and economic conditions. The
      conversion of Renminbi into foreign currencies such as the dollar has been
      generally based on rates set by the People’s Bank of China, which are set daily
      based on the previous day's interbank foreign exchange market rates and current
      exchange rates on the world financial markets. The official exchange rate had
      remained stable over the past several years. However, China recently adopted
      a
      floating rate with respect to the Renminbi, with a 0.3% fluctuation. As a
      result, the exchange rate of the Renminbi recently rose to 7.80 against the
      dollar, amounting to a 3.3% appreciation of the Renminbi. This floating exchange
      rate, and any appreciation of the Renminbi that may result from such rate,
      could
      have various effects on our business, which include making our products more
      expensive relative to those of our competitors than has been true in the past,
      or increasing our profitability when stated in dollar terms.  It is not
      possible to predict if the net effects of the appreciation of the Renminbi,
      if
      it occurred, would be positive or negative for our business.




23




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




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




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




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




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




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




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




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




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




24




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




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




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




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




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




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




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




Although
      local tax authorities in China are responsible for collecting the applicable
      central government income tax as well as provincial government income tax,
      these
      authorities often follow local practices in tax collection matters. Like most
      high-tech enterprises in Shenzhen, Diguang Electronics paid total income tax
      at
      a rate of 7.5% in 2004, 2005 and 2006 whereas, the applicable minimum required
      central government income tax rate was 10% for 2004, 2005 and 2006,
      respectively. The Shenzhen tax authority had accepted without objection Diguang
      Electronics’ tax filings and payments for 2005 and 2006. Diguang Electronics
      also expects that it will continue to pay income tax at a rate of 15% for 2007
      because of local tax practices implemented by local tax authority. Diguang
      Electronics believes the risk of application of a retroactive additional 2.5%
      tax and related penalties, if any, for 2005 and 2006 to be minimal. However,
      there can be no assurance that Diguang Electronics will not be required to
      pay
      the deficient tax and any related penalty in the future.




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




25





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




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




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




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





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




26





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




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




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




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




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




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




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




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




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




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




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




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




27




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




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




Our
      common stock is currently traded on the Over the Counter Bulletin Board, and
      we
      intend to file an application for listing on The NASDAQ Market or as soon as
      practicable thereafter. Although we intend on meeting all of the necessary
      requirements as stated by NASDAQ Marketplace Rule


4420(a),
      there is no guarantee that our application will be accepted.  If we do not
      succeed in securing a listing on the NASDAQ Market, it could limit the ability
      to trade our common stock and result in a reduction of the price that can be
      obtained for shares being sold.




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




**We
      may not pay dividends.**




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




ITEM
      1B.   UNRESOLVED STAFF COMMENTS.




Not
      Applicable.




ITEM
      2.   PROPERTY.




Neither
      we, Diguang, Well Planner nor Diguang Technology own or lease any property.
       Our indirect subsidiary, Diguang Electronics, is headquartered in
      Shenzhen, China where it leases office space, 1,002.6 square meters, with a
      monthly rental of RMB15,039 plus maintenance fee of RMB1,504, approximately
      US$2,786, that houses management, research and development personnel, marketing,
      finance and administrative support staff.  This lease expired in January
      2006, and then management renewed it. The renewed lease was from February 1,
      2006 to January 31, 2007, which was for the office space only, with a monthly
      rental of RMB15,052 plus maintenance fee of RMB 1,504, approximately $2,080.
      Diguang Electronics will move to the new office space in Shenzhen
      in early 2007. The new office space, which is located in Futian District,
      Shenzhen, China has been handed over to the Company from the developer. We
      anticipate that we would relocate to the new office by the second quarter of
      2007.




28





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





Future
      minimum payments required under the lease agreement with Dongguan Diguang
      Electronic Science & Technology Ltd. that has an initial or a remaining
      lease term in excess of one year at December 31, 2006 are as
      follows:





Year
            
            Amount2007
            
            
            584,3082008
            
            
            584,3082009
            
            
            584,3082010
            
            
            48,6922011
            
            
            -Total
            
            $
            1,801,616




ITEM
      3.   LEGAL PROCEEDINGS.




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





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




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




NONE




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




(a)
      MARKET PRICES OF COMMON STOCK




Our
      common stock currently trades in the over-the-counter market on the National
      Association of Securities Dealers “Electronic Bulletin Board” under the symbol
“DGNG”.  Since our fiscal year 2005 and until the announcement regarding
      our entry into a memorandum of understanding with Diguang Holdings and its
      stockholders on September 30, 2005, Online’s stock traded only sporadically or
      not at all.  The day prior to that announcement, the bid price of our
      common stock was $1.01. Prior to the Share Exchange, Diguang’s stock did not
      trade in any public markets. The following table shows for the periods indicated
      the high and low bid quotations for Online’s and 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.




29




PERIOD
            
            
            HIGH
                BID
            
            
            LOW
                BIDFISCAL
                2005First
                Quarter
            
            $
            1.01
            
            $
            0.20Second
                Quarter
            
            $
            1.01
            
            $
            0.20Third
                Quarter
            
            $
            2.50
            
            $
            0.25Fourth
                Quarter
            
            $
            3.25
            
            $
            1.01FISCAL
                2006First
                Quarter
            
            $
            18
            
            $
            5.083Second
                Quarter
            
            $
            14.50
            
            $
            10.25Third
                Quarter
            
            $
            11.60
            
            $
            6.25Fourth
                Quarter
            
            $
            7.00
            
            $
            3.50




As
      of
      December 31, 2006, 540,000 of our common stock are subject to outstanding
      options because these shares were issued under the Diguang 2006 Option Plan
      (the
“Plan”). None of these options has been exercised. Out of these 540,000 shares
      subject to the options, an aggregate of 34,000 stock options shall return to
      the
      award pool as defined under the Plan and are available for re-grant under the
      Plan because the optionees left the employment of the Company. Pursuant to
      the
      terms of the Amended and Restated Share Exchange Agreement, we assumed Diguang’s
      outstanding 2006 stock incentive plan covering options totaling the equivalent
      of 1,500,000 shares of our common stock. The exercise price for each of these
      540,000 options is $5.00 per share. The commencement date for these
      options is March 1, 2006, with monthly vesting at the end of each month after
      March 1, 2006, for the three independent directors as well as for the chief
      financial officer and yearly vesting for the other employees of Diguang; The
      options that have been issued expire ten years from their grant date, which
      date
      is February 25, 2006 or the date the optionee commences his or her service
      relationship with us, whichever is the later date.




We
      filed
      a registration statement on Form S-1 to register 4,693,000 shares of our common
      stock on June 16, 2006 which was declared effective on October 30, 2006.




(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, 2006, there were 22,593,000
      shares of the Company’s common stock outstanding and the Company had
      approximately 124 stockholders of record.




(c)
      DIVIDENDS




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




(d)
      SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN




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




**Plan
                Category**
            
            
            **Number
                of securities to be**
              **issued
                upon exercise of**
              **outstanding
                options,**
              **warrants
                and rights**
            
            
            **Weighted
                average**
              **exercise
                price of**
              **outstanding
                options,**
              **warrants
                and rights**
            
            
            **Number
                of**
              **securities**
              **remaining**
              **available
                for**
              **future
                issuance**Equity
                  Compensation Plan approved by security holders
            
            
            540,000
            
            
            5.00
            
            
            960,000—
            
            —
            
            —




30




(e)
      PERFORMANCE GRAPH









**10/27/06**
            
            
            **10/06**
            
            
            **11/06**
            
            
            **12/06****Diguang
                International Development Co.**
            
            
            **100.00**
            
            
            **81.00**
            
            
            **69.17**
            
            
            **75.00****NASDAQ
                Composite**
            
            
            **100.00**
            
            
            **104.01**
            
            
            **102.55**
            
            
            **104.08****NASDAQ
                Electronic Components**
            
            
            **100.00**
            
            
            **102.21**
            
            
            **105.43**
            
            
            **101.57**




31




ITEM
      6.
      SELECTED FINANCIAL DATA




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




Years
                Ended December 31,2002
            
            
            2003
            
            
            2004
            
            
            2005
            
            
            2006**Statement
                of Income Data:**Total
                revenues
            
            $
            4,023,865
            
            $
            6,156,408
            
            $
            24,483,222
            
            $
            35,648,118
            
            $
            31,858,239Income
                from operations
            
            
            362,715
            
            
            1,080,230
            
            
            6,895,560
            
            
            9,295,427
            
            
            1,998,695Net
                income
            
            
            361,634
            
            
            1,045,640
            
            
            6,619,557
            
            
            8,849,057
            
            
            1,666,699Weighted
                average sharesoutstanding
            
            
            18,250,000
            
            
            18,250,000
            
            
            18,250,000
            
            
            18,250,000
            
            
            21,688,704EPS
            
            
            0.02
            
            
            0.06
            
            
            0.36
            
            
            0.48
            
            
            0.08




At
                December 31,2002
            
            
            2003
            
            
            2004
            
            
            2005
            
            
            2006**Balance
                Sheet Data:**Cash
                and cash equivalents
            
            $
            1,879,730
            
            $
            1,241,033
            
            $
            5,352,758
            
            $
            10,054,568
            
            $
            18,910,808Working
                capital
            
            
            2,523,353
            
            
            1,418,879
            
            
            7,966,958
            
            
            12,636,098
            
            
            23,440,426Total
                assets
            
            
            5,641,847
            
            
            7,940,920
            
            
            14,158,413
            
            
            23,403,591
            
            
            37,699,382Long-term
                debt
            
            
            -
            
            
            483,284
            
            
            483,296
            
            
            -
            
            
            -Stockholders’
                equity
            
            
            2,816,715
            
            
            1,353,763
            
            
            7,974,764
            
            
            14,880,839
            
            
            29,582,226




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




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




32




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




**Business
      Overview**





We
      specialize in the design, production and distribution of small to medium-sized
      Light Emitting Diode (“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.





We
      conduct that business principally through the operations of Diguang Electronics.
       Diguang Electronics has approximately 1,730 full-time employees, the
      number of employees changes from time to time as needed, as of December 31,
      2006, and is headquartered in Shenzhen, China, with additional offices and
      its
      backlight manufacturing operations in Dongguan, China.





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





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





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





**Critical
      Accounting Policies and Estimates**





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




33




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





**Revenue
      Recognition**


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





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





We
      regularly evaluate and monitor the creditworthiness of each customer on a
      case-by-case basis. We include any account balances that are determined to
      be
      uncollectible in the allowance for doubtful accounts. After all attempts to
      collect a receivable have failed, the receivable is written off against the
      allowance. Based on the information available to management, the Company
      believes that its allowance for doubtful accounts as of December 31, 2005
      and 2006 was adequate, respectively. However, actual write-off might exceed
      the
      recorded allowance.





**Inventories**





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




**Income
      Taxes**





We
      account for income taxes in accordance with Statement of Financial Accounting
      Standards No 109, “Accounting for Income Taxes” (“SFAS No. 109”). SFAS No. 109
      requires an entity to recognize deferred tax liabilities and assets. Deferred
      tax assets and liabilities are recognized for the future tax consequence
      attributable to the difference between the tax bases of assets and liabilities
      and their reported amounts in the financial statements. Deferred tax assets
      and
      liabilities are measured using the enacted tax rate expected to apply to taxable
      income in the years in which those temporary differences are expected to be
      recovered or settled. The effect on deferred tax assets and liabilities of
      a
      change in tax rates is recognized in income in the period that included the
      enactment date.





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





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





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




34




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 only represents the effect of actual income tax provisions
      incurred in Diguang Electronics and Diguang International Development Co.,
      Ltd.




**Impairment
      of Long-Lived Assets**





We
      review
      long-lived assets for impairment when certain indicators are present that
      suggest the carrying amount may not be recoverable. This review process
      primarily focuses on other intangible assets from business acquisitions and
      property, plant and equipment. Factors considered include the under-performance
      of a business compared to expectations and shortened useful lives due to planned
      changes in the use of the assets. Recoverability is determined by comparing
      the
      carrying amount of long-lived assets to estimate future undiscounted cash flows.
      If future undiscounted cash flows are less than the carrying amount of the
      long-lived assets, an impairment charge would be recognized for the excess
      of
      the carrying amount over fair value determined by either a quoted market price,
      if any, or a value determined by utilizing a discounted cash flow technique.
      Additionally, in the case of assets that will continue to be used by us in
      future periods, a shortened life may be utilized if appropriate, resulting
      in
      accelerated amortization or depreciation based upon the expected net realizable
      value of the asset at the date the asset will no longer be utilized by us.
      Actual results may vary from estimates due to, among other things, differences
      in operating results, shorter asset useful lives and lower market values for
      excess assets.





**Share-Based
      Payments**




We
        adopted the provisions of, and have accounted for stock-based compensation
        in
        accordance with, Statement of Financial Accounting Standards (“SFAS”)
        No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”) since January 1,
        2006. We elected the modified-prospective method, under which prior
        periods are not revised for comparative purposes. Under the fair value
        recognition provisions of SFAS 123R, stock-based compensation cost is measured
        at the grant date based on the fair value of the award and is recognized
        as an
        expense on a straight-line basis, net of estimated forfeitures, over the
        requisite service period, which is generally the vesting period. We use the
        Black-Scholes option pricing model to determine the fair value of stock options
        and ESPP shares. The determination of the fair value of stock-based compensation
        awards on the date of grant using an option-pricing model is affected by
        our
        stock price as well as assumptions regarding a number of complex and subjective
        variables, including our expected stock price volatility over the term of
        the
        awards, actual and projected employee stock option exercise behaviors, risk-free
        interest rate and expected dividends. Furthermore, we are required to estimate
        forfeitures at the time of grant and record stock-based compensation expense
        only for those awards that are expected to vest. If actual forfeitures differ
        from those estimates, we may need to revise those estimates used in subsequent
        periods.




35




**Results
      of Operations**





**Comparison
      of years ended December 31, 2006 and 2005**





**Revenue**





Net
      revenue was approximately $31.9 million for the year ended December 31, 2006,
      a
      decrease of $3.8 million or 11%, compared to $35.6 million for the prior year.
      The major reason of the revenue decline was the pricing pressure in the
      backlight industry. CCFL products were under more pricing pressure than LED
      products because CCFL backlights were mostly applied to larger (7”-10.4”)
      displays that are newer products and are, therefore, subject to more price
      erosion in the earlier stage of the product life cycle. In such an environment,
      our strategy was to improve our product mix in favor of higher-priced products
      in the CCFL category. This strategy mitigated the impact of the pricing pressure
      on our financial results.





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





Years
                Ended December 31,2005
            
            
            2006International
                sales
            
            
            30,727,000
            
            
            27,888,000Domestic
                sales
            
            
            4,921,000
            
            
            3,970,000Total
            
            
            35,648,000
            
            
            31,858,000





Sales
      to
      international customers totaled $27.9 million for the year ended December 31,
      2006, a decrease of $2.8 million or 9%, compared to $30.7 million for the prior
      year. The decrease in revenue was primarily due to the reduced unit prices
      as a
      result of the change in market demands. However, the impact of such a change
      in
      market demands was mitigated by our successful development of new customers
      who
      purchased our high-end products. The change in revenue by geographical segment
      was primarily due to the decrease in sales to customers located in Taiwan as
      a
      result of the product prices reduction which has been a general trend. Sales
      to
      Taiwanese customers were $5.8 million for the year ended December 31, 2006,
      a
      decrease of $4.0 million or 40%, compared to $9.8 million for the prior year.
      The main reason is that a major customer decreased its purchase from us by
      $3.3
      million, or 45% to $4.0 million for the year ended December 31, 2006, compared
      with $7.3 million for the prior year, as a result of decrease in delivery of
      36%
      and the reduction in the average unit price by 13%. However, sales to Hong
      Kong
      customers were $17 million for the year ended December 31, 2006, an increase
      of
      $1.5 million or 9.5%, compared to $15.5 million for the prior year. This
      is attributable to the sales of CCFL backlights for 19" displays to a new Hong
      Kong based customer with the sales of $1.4 million. We secured a potential
      monitor panel maker and the sales of CCFL backlights to this customer amounted
      to $1.3 million for the year ended December 31, 2006. We were further selected
      as one of the major in-house suppliers for its commencement of mass production
      in early 2007, to supply higher-priced products of 19" CCFL in the
      future.




Sales
      to
      domestic customers were $4 million for the year ended December 31, 2006, a
      decrease of $0.9 million or 18%, compared to $4.9 million for the prior year.
      The decrease in domestic sales was primarily due to the decrease in product
      price in the competitive market. But the decrease was mitigated by the increased
      sales to some of new domestic customers developed in the prior periods. Sales
      to
      one of the new domestic customers, Dihao
      Electronic (Yangzhou) Co., Ltd., a
      related party, amounted to $1.2 million for the year ended December 31, 2006,
      compared to no such sales in the prior year.





From
      the
      product mix aspect, our sales can be divided into two main categories: CCFL
      and
      LED products as follows.





Years
                Ended December 31,2005
            
            
            2006CCFL
            
            
            24,290,000
            
            
            21,827,000LED
            
            
            11,358,000
            
            
            10,037,000Total
            
            
            35,648,000
            
            
            31,864,000




36




During
      the year ended December 31, 2006, CCFL products accounted for 68% of our total
      sales revenue, compared to 68% for the prior year. Sales of CCFL backlights
      totaled $21.8 million for the year ended December 31, 2006, a decrease of $2.5
      million or 10%, compared to $24.3 million for the prior year. The decrease
      in
      revenue from sales of CCFL was primarily due to the unit price decline as a
      result of the change in market demand. Despite the general drop in unit price
      for CCFL products, we successfully boosted the sales of higher-priced products
      within the CCFL category, such as backlights for portable DVDs and automobile
      TV.





LED
      backlight products accounted for the remainder of the total sales revenues.
      Sales of LED backlight products totaled $10 million for the year ended December
      31, 2006, a decrease of $1.4 million or 11.6%, compared to $11.4 million for
      the
      prior year. The decrease is due to LED technology cannot economically produce
      large size monitor notably more than 3". Therefore, the sales volume of LED
      products dropped; however the unit price for certain existing products did
      not
      decline as significant as the price of CCFL products. In addition, the products
      we sold were higher price-to-performance products to our customers.





**Cost
      of Sales**





Since
      the
      basic materials for all backlight products are similar, we hereby discuss cost
      of sales in aggregate of all products. Cost of sales was $21.4 million for
      the
      year ended December 31, 2006, a decrease of $1.6 million, or 7%, compared to
      $23
      million for the prior year. The decrease in cost of sales for the year ended
      December 31, 2006 was lower than the 11% decrease in total revenue for the
      same
      year.





Raw
      material cost was $16.4 million for the year ended December 31, 2006, a decrease
      of $2.5 million, or 13%, compared to $18.9 million for the prior year. The
      13%
      reduction of raw material cost was a key contributor to our accomplishment
      of
      a higher gross margin in a very challenging market environment. The
      decrease in raw material costs was attributed to the re-engineering of product
      designs that aims at maximizing the luminous efficiency of products while
      minimizing the material input, reducing unit cost of raw materials purchased,
      and enhancing the efficiency in the production process.





Labor
      cost was $3.3 million for the year ended December 31, 2006, compared to $2.5
      million for the prior year. The 29% increase in labor cost was attributed to
      the
      significant increase in the headcount of employees as well as increased employee
      benefits. The increase in headcounts resulted from establishing the film cutting
      and LED assembling lines to bring these functions in-house.





Production
      overhead was $1,735,000 for the year ended December 31, 2006, an increase of
      $66,000 or 4%, compared to $1,669,000 for the prior year. The 4% increase in
      production overhead was attributed to the additional depreciation expense from
      the newly established production lines for the 15”-19” CCFL products and the
      increase in rental related to new factory premise we moved to in the middle
      of
      2005. However, the increase in production overhear was exchanged for the
      enhancement of our production efficiency by setting up all production lines
      in
      one location. The effect will be materialized in the long run.





**Gross
      Margin**





The
      overall gross margin for the year ended December 31, 2006 was 32.9%, a 2.4%
      decrease, compared to 35.3% gross margin for the prior year. Despite the
      significant pricing pressure which has resulted in an average decline of 24%
      on
      the unit price of our existing products sold in 2006, we managed to maintain
      our
      gross margins through three main aspects. We improved our product mix in favor
      of higher-margin products while continuing to re-engineer our product designs
      to
      reduce material consumption while maintaining product quality. In addition,
      we
      developed know-how to produce more types of components in-house at lower costs
      than purchasing them from outside suppliers. Facing the unfavorable price
      reduction pressure for our product sales, we also took advantage of purchasing
      components and raw materials at a lower price in terms of the general market
      trend. The aforementioned positive effect significantly offset the negative
      impact of the price reduction effect during the year ended December 31, 2006.
      However, the above positive effect was also offset by the increase in labor
      cost
      and production overhead, and the inventory provision recorded at the year-end
      of
      2006.





Regarding
      international sales, our gross margin was approximately 33%, a 3% decrease,
      compared to 36% for the prior year due to the price reduction pressure from
      end
      users who are LCD panel makers. Regarding domestic sales, our gross margin
      was
      approximately 31%, a 1% decrease, compared to 32% in 2005.





37




**Selling
      Expenses**





Selling
      expenses were $1,545,000 for year ended December 31 2006, an increase of $65,000
      or 4%, compared to $1,480,000 for 2005. The increase was primarily attributable
      to our efforts to expand our market share and promote our new products such
      as
      backlights for computer monitors and television sets. During the year ended
      December 31, 2006, the commission expense paid to our trade agencies amounted
      to
      $690,000, a decrease of $317,000, or 31%, compared to $1,007,000 incurred in
      the
      prior year. In the mean time, we increased the number of our sales
      representatives and raised the sales incentives, resulting in the increased
      expense of $105,000. Higher transportation expenses contributed to the increase
      of $153,000 in selling expenses. Higher advertising costs, promotion expenses,
      for attending trade shows, travel and business entertainment expenses also
      contributed to the increase of $124,000 in selling expenses. As a percentage
      of
      total sales revenue, selling expenses were approximately 4.9% for the year
      ended
      December 31, 2006 and 4.2% for the prior year, respectively.





**Research
      and Development**





For
      the
      year ended December 31, 2006 the net research and development expenses were
      $786,000, an increase of $59,000 or 8%, compared to $727,000 for the prior
      year.
      Before offset by government subsidies for research and development in the form
      of value-added tax rebate, the gross research and development expenses were
      $949,000 and $930,000 for the year ended December 31, 2006 and 2005
      respectively. The government subsidies we received were $163,000 and $203,000
      for the year ended December 31, 2006 and 2005 respectively. This increase of
      merely $19,000 reflected our efforts in researching and developing new products,
      such as the 15”-19” backlights for monitors and LED backlight application for
      televisions. The increase was mainly incurred in the expansion of the research
      and development team as well as the compensation levels of our engineers.
      Moreover, the consumption of mould and the material for experiments and sample
      products also experienced a meaningful increase. As a percentage of total sales
      revenue, research and development expenses were approximately 2.5% and 2.0%
      for
      the year ended December 31, 2006 and 2005 respectively.





**General
      and Administrative Expenses**





General
      and administrative expenses were $6.1 million for the year ended December 31,
      2006, an increase of $5 million or 460%, compared to $1.1 million for the prior
      year. The increase was attributed mainly to the recognition of share-based
      compensation by approximately $2.1 million. The employee stock option program
      started on March 1, 2006 when 540,000 shares of stock options were granted.
      As a
      result, share-based compensation expenses were recognized during 2006 but not
      in
      2005. The Company recognized the share-based compensation cost based on the
      grant-date fair value estimated in accordance with the new provisions of SFAS
      No. 123R. There were no stock options issued before January 1, 2006. The Company
      used Black-Scholes option pricing model to determine the fair value of stock
      options on the grant date. The fair value of stock options for 540,000 shares
      was at approximately $11.10 per share, resulting in total fair value
      of $5,992,509. Of the total fair value of 5,992,509, $2,134,342 was
      recognized as expenses under the graded method and the remaining balance will
      be
      recognized over the vesting period, with the forfeiture rate of its stock
      options being estimated to be 6.13%. The impact of the share-based compensation
      on our net income and earnings per share was significant. In order to provide
      a
      meaningful and consistent comparison of the underlying business fundamentals
      of
      both periods, non-GAAP net income and earnings per share data excluding stock
      option compensation amortization, as well as a reconciliation table of GAAP
      and
      non-GAAP statistics are provided under captions “Net Income” and “Earnings per
      Share.” Moreover, compensation to managerial and administrative employees
      increased by $1.0 million, as we hired new talents to enhance our managerial
      strength and raised the level of compensation for key positions. In addition,
      the increase in professional expenses of $0.9 million as a result of becoming
      a
      public company, additional provision for bad debts by $240,000, increase in
      travel expense by $200,000 and increase in office rental by $246,000 had mainly
      contributed to the increase of management expense. Moreover, higher business
      entertainment and office expenses also contributed to the increase of $389,000
      in general and administrative expenses. As a percentage of total sales revenue,
      general and administrative expenses represented 19% and 3% for the year ended
      December 31, 2006 and 2005, respectively. Excluding the stock compensation
      expense, the current general and administrative expense for the year ended
      December 31, 2006 represented 13% of total sales revenue.





**Interest
      Income (Expense)**





The
      net
      interest income was $244,000 for the year ended December 31, 2006, representing
      an increase of $198,000 or 433%, compared with an interest expense of $46,000
      in
      2005. During the year ended December 31, 2005, we had a term loan of $494,000
      outstanding and corresponding interest during the year. That bank loan was
      paid
      off on October 28, 2005. We had no interest-bearing debt outstanding during
      the
      year ended December 31, 2006. Interest income was earned on cash generated
      from
      operations and unused proceeds from the private placement that took place on
      March 17, 2006. Interest income for the year ended 2006 represented 0.8% of
      total sales revenue.




38




**Income
      Tax Provision**




Income
        tax provision for the year ended December 31, 2006 was approximately $453,000,
        a
        decrease of $80,000 or 2%, compared to $533,000 for the prior year. The decrease
        in income tax provision was attributed mainly to the decrease in taxable
        income
        from Diguang Electronics. The taxable income in Diguang Electronics for the
        year
        ended December 31, 2006 was $4.5 million, compared to $5.3 million for the
        prior
        year. Diguang Electronics has been entitled to enjoy a 50% exemption from
        corporate income tax at the rate of 15% for the three years from January
        1, 2004
        to December 31, 2006, which means that the income tax rate should be 7.5%
        for
        these three years. However, in accordance with the Rules for the Implementation
        of the Income Tax law of the PRC for Enterprises with Foreign Investment
        and
        Foreign Enterprises prescribed by the central government, the minimum corporate
        income tax rate should be 10% for the three years ended December 31, 2004,
        2005,
        and 2006. Therefore, the tax provision was based a rate of 10% for both
        periods, and Diguang Electronics enjoys 5% of tax holiday rate with the
        value of $227,000 and $267,000 in 2006 and 2005, respectively. As a
        percentage of net revenue, income tax provision was 1.4% and 1.5% for the
        years
        ended December 31, 2006 and 2005, respectively.





**Net
      Income**





Net
      income was $1.7 million for the year ended December 31, 2006, a decrease of
      $7.1
      million, or 81% from $8.8 million for the prior year. The
      employee stock option program started on March 1, 2006 when 540,000 shares
      of
      stock options were granted. As a result, net income was impacted by share-based
      compensation of $2.1million, while we did not have any share-based compensation
      in the prior year, which explained a portion of change of $7.1 million.
      The rest of the decrease in net income was due mainly to the decrease in total
      sales revenues; the increase in operating expenses, which was primarily
      attributed to the share-based compensation, the increase in professional
      expense, the increase in key employee compensation, the increase in travel
      and
      other expenses; and the slight increase in research and development expenses
      as
      well as the slight increase in selling expense. As a percentage of revenue,
      net
      income fell to 5% for the year ended December 31, 2006 from 25% for the prior
      year.




**Earnings
      per Share**




The
      basic
      earnings per share were $0.08 for the year ended December 31, 2006, a decrease
      of $0.40 per share or 83%, compared with $0.48 per share for prior year. Earnings
      per share were negatively impacted by $0.10 per share due to stock based
      compensation. The decrease in earnings per share was due to the decrease in
      net
      income attributable to common shareholders. In addition, the
      weighted average common shares outstanding were increased to 21.7 million shares
      for the year ended December 31, 2006, as compared with 18.3 million shares
      for
      the prior year.





**Comparison
      of years ended December 31, 2005 and 2004**





**Revenue**





Net
      revenue was $35.6 million for the year ended December 31, 2005, an increase
      of
      $11.1 million, or 46%, compared to $24.5 million for the prior year. By the
      end
      of year 2003 Diguang Electronics had successfully developed a medium size CCFL,
      less than 10.4 inches, which was broadly applied to automobile systems, laptops,
      and DVDs.  The commercial production of the medium size CCFL backlights
      resulted in a substantial increase in our 2004 sales revenue and the growth
      continued in the 2005 as demand in that market grew.  Virtually all of our
      sales growth in 2005 was the result of an increase in unit sales, both newly
      introduced products and products similar to those produced in 2004. Despite
      there is reduction in unit price of the products due to the market conditions,
      sales volume for both CCFL products and LED products increased due to the launch
      of new products to meet the customers’ needs.




39




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





Years
                Ended December 31,2004
            
            2005International
                sales
            
            
            19,816,000
            
            
            30,727,000Domestic
                sales
            
            
            4,667,000
            
            
            4,921,000Total
            
            
            24,483,000
            
            
            35,648,000





The
      increase in revenue for the year ended December 31, 2005 was attributed mainly
      to increases in sales to international customers, which totaled $30.7 million
      for the year ended December 31, 2005. Compared to the international sales of
      $19.8 million for 2004, there was an increase of $10.9 million, or 55%. Sales
      to
      Hong Kong customers were $15.5 million for the year ended December 31, 2005,
      an
      increase of $1.2 million or 8%, compared to $14.3 million for 2004. Sales to
      Taiwanese customers were $9.8 million for the year ended December 31, 2005,
      an
      increase of $9.3 million or 1794%,
      compared to $0.5 million for 2004.





Sales
      to
      domestic customers were $4.9 million for the year ended December 31, 2005,
      a
      slight increase of $0.2 million over sales to domestic customers of $4.7 million
      for 2004, a 5.5% increase. The increase in domestic sales was primarily due
      to
      the increase in product varieties and customers in the competitive
      market.





**Cost
      of Sales**





Cost
      of
      sales was $23 million for the year ended December 31, 2005, an increase of
      $8.5
      million, or 59%, compared to $14.5 million for the year ended December 31,
      2004.
      This increase was consistent with the increase in the net revenue. As a
      percentage of the net revenue, cost of sales for the year ended
      December 31, 2005 and 2004 was 65% and 59%, respectively. The increase in
      cost of sales as a percentage of the net revenue was attributed to the higher
      rental incurred for the new and larger plant, the increased depreciation and
      amortization of new equipment and the product price reductions sometimes given
      in exchange for larger orders, although those large orders also had offsetting
      economies associated with them, such as longer production runs.  An
      increase in labor costs also constituted a factor to the increase in cost of
      sales.





**Gross
      Margin**





The
      overall gross margin for the year ended December 31, 2005 was 35%, a 6%
      decrease, compared to 41% gross margin for the year ended December 31, 2004.
      Despite the significant pricing pressure we faced resulting in the old products
      sold in 2005 having an average decline more than the reduction in material
      procurement cost, we managed to maintain our gross margins by using a
      multi-pronged approach. We improved our product mix in favor of higher-margin
      products while continuing to re-engineer our product designs to reduce material
      consumption while maintaining product quality. In addition, we developed
      know-how to produce more types of components in-house at lower costs than
      purchasing them from suppliers. The overall effect on gross margin due to the
      decrease in purchase price of materials and the saving resulting from the
      enhancement of production process fully offset the decrease caused by the price
      reduction effect in revenue side during the year ended December 31, 2005.
      However, the above positive effect was offset by the increase in labor cost
      and
      production overhead, resulting in a decrease in gross margin in the year ended
      December 31, 2005.





Regarding
      international sales, our gross margin was approximately 36% for the year ended
      December 31, 2005, a 6% decrease, compared to 42% for the year ended December
      31, 2004 due to the price reduction pressure from end users who are mainly
      LCD
      panel makers. Regarding domestic sales, our gross margin was approximately
      32%,
      a 7% decrease, compared to 39% for the year ended December 31, 2004 due to
      the
      keen competition to secure the customers.





The
      overall gross profit ratio was 35% for the year ended December 31, 2005, and
      due
      to the cost of sales increase, the gross profit decreased by 6% compared to
      41%
      for the year 2004.




40




**Selling
      Expenses**





Selling
      expenses were approximately $1.5 million for the year ended December 31, 2005,
      an increase of $576,000, or 64%, compared to $904,000 for 2004. As a percentage
      of net revenue, selling expenses were 4.2% and 3.7% for the year ended December
      31, 2005 and 2004, respectively. The increase in selling expenses as a
      percentage of the net revenue for year ended December 31, 2005 was attributable
      to the increase in commissions paid to the trade agencies as a result of the
      increase in our sales to international customers from $19.8 million in 2004
      to
      $30.7 million in 2005. We anticipate that as international sales grow and larger
      contracts are obtained, future selling expenses will fall to and remain at
      2% -
      3% of net revenues.





**Research
      and Development**





Approximately
      27% of research and development expenses consisted of payroll expenses, 56%
      of
      which was the consumption of moulds and materials. The remaining balance of
      these expenses was the training and relevant laboratory expenses. For the year
      ended December 31, 2005 the net research and development expenses were $728,000,
      a decrease of $74,000 or 9%, compared to $802,000 for the year 2004. Before
      offset by government subsidies for research and development in the form of
      value-added tax rebate, the gross research and development expenses were
      $930,000 and $807,000 for the year ended December 31, 2005 and 2004
      respectively. The government subsidies we received were $203,000 and $5,547
      for
      the year ended December 31, 2005 and 2004 respectively. This increase in
      research and development expenses was due to an increased effort to develop
      new
      types of backlight products to become a leader in backlight technology
      advancement. Our focus on research and development and the related expenses
      ultimately resulted in a significant increase in our total sales. In the future,
      we expect to continue to increase our research and development efforts and
      develop new patented proprietary technologies that create significant and
      sustainable competitive advantages.





**General
      and Administrative Expenses**





General
      and administrative expenses for the year ended December 31, 2005 were
      approximately $1.1 million, a decrease of $330,000 or a 23% decrease, compared
      to approximately $1.4 million for the prior year. The decrease resulted from
      the
      fact that during 2004, a bad debt provision of $459,000 was provided for aged
      outstanding accounts receivable from an European company and a professional
      fee
      of approximately $450,000 related to the discontinued efforts to list on the
      Singapore Stock Exchange. Additional expenses related to the increase in general
      and administrative expenses for the year ended December 31, 2005 included
      $285,000 incurred for financial auditing of the prior years in preparation
      for
      the reverse merger and private placement, a depreciation and amortization
      increase from $85,000 to $254,000, a $169,000 increase, a business travel &
transportation increase from $21,000 to $103,000, a $82,000 increase, office
      supply expense increase from $27,000 to $61,000, a 34,000 increase, and a
      welfare increase from $45,000 to $61,000, a $16,000 increase. As a percentage
      of
      sales, general and administrative expenses were 3.1% and 5.8% for the year
      ended
      December 31, 2005 and 2004, respectively. This decrease as a percentage of
      total sales was attributed to the fact that the increase in sales was faster
      than the increase in our general and administrative expenses and that the above
      bad debts provision and listing expenses ($900,000) did not accrue in 2005.
      Partially offsetting those decreases was a deferred offering expense of
      approximately $26,000 related to the private placement in connection with the
      Share Exchange transaction with Online Processing, Inc. on the balance sheet
      as
      of December 31, 2005, for auditing and legal expenses in connection with the
      share exchange between the shareholders of Diguang and Online Processing and
      related transactions.





**Interest
      Income (Expense)**





After
      net
      of interest expense, there was interest income of $46,000 for the year ended
      December 31, 2005. Comparing to interest expense of $22,000 in 2004, there
      was a
      swing of $68,000. The decrease in interest expenses for 2005 was due to the
      fact
      that we paid off the outstanding bank loan of $483,000 at the second half of
      2005 in addition to the fact that the increase in interest income was from
      the
      cash of approximately $10 million in bank at December 31, 2005 compared to
      $5
      million at December 31, 2004.





**Income
      Tax Provision**


The
        income tax provision for the year ended December 31, 2005 was approximately
        $533,000, an increase of $274,000, or 106%, compared to $259,000 for 2004.
        The
        increase in income tax provision was attributed mainly to the increase in
        taxable income in Diguang Electronics, as this entity was the only entity
        subject to corporate income tax. The taxable income in Diguang Electronics
        for
        the year ended December 31, 2005 was $5,413,000, compared to $2,610,000 of
        taxable income in Diguang Electronics for the prior year. The increase in
        taxable income was a result of a combination of an increase in sales and
        a
        decrease in operating expenses as a percentage of total sales. Diguang
        Electronics has been entitled to enjoy a 50% exemption from corporate income
        tax
        at the rate of 15% for the three years from January 1, 2004 to December 31,
        2006, which means that the income tax rate was 7.5%. However, in accordance
        with
        the Rules for the Implementation of the Income Tax law of the PRC for
        Enterprises with Foreign Investment and Foreign Enterprises prescribed by
        the
        central government, the minimum corporate income tax rate should be 10% within
        the three years ended December 31, 2004, 2005, and 2006. Therefore, the tax
        provision was 10% for both periods, and Diguang Electronics enjoys 5% of
        tax holiday rate with the value of $267,000 and $130,000 in 2005 and
        2004, respectively. As a percentage of net revenue, income tax provision
        was 1.49% and 1.06% for the years ended December 31, 2005 and 2004,
        respectively.




41


**Net
      Income**





Net
      income grew $2.2 million or 34% to approximately $8.8 million for the year
      ended
      December 31, 2005, from approximately $6.6 million for 2004. An increase in
      overall sales, led by growth in international sales and continued decrease
      of
      operating expenses as a percentage of total sales, from 12.8% for the year
      ended
      December 31, 2004 down to 9.3% for the year ended December 31, 2005, were the
      major contributing factors to the increase in net income.





**Earnings
      per Share**





The
      basic
      earnings per share were $0.48 for the year ended December 31, 2005, as compared
      with $0.36 for 2004. The increase in earnings per share was due to the increase
      in net income attributable to common shareholders, which was $8.8 million for
      the year ended December 31, 2005, an increase of $2.2 million or 34%, from
      $6.6
      million for 2004. In addition, the weighted average common shares outstanding
      were increased to 18.3 million shares for both the year ended December 31,
      2005
      and 2004.




**Liquidity
      and Capital Resources**





As
      of
      December 31, 2006, we had total assets of $37.7 million, of which cash amounted
      to $18.9 million, accounts receivable amounted to $5 million and inventories
      amounted to $4 million. Our working capital was approximately $23.4 million
      and
      our equity was $29.6 million comparing with working capital of $12.6 million
      and
      equity of $14.9 million at December 31, 2005. Our quick ratio was approximately
      3.09:1 compared to the quick ration of 1.82:1 as of December 31,
      2005.





**Comparison
      of years ended December 31, 2006 and 2005**





As
      of
      December 31, 2006, our cash position had a net increase of $8.9 million as
      compared with cash position of $10 million at December 31, 2005.





Net
      cash
      generated by operating activities was $3.5 million for the year ended at
      December 31, 2006, a decrease of $6.1 million, or 64% from the $9.6 million
      for
      the prior year.





Non-cash
      items added approximately $3.2 million back to cash flow from operating
      activities for the year ended December 31, 2006, compared with total non-cash
      items of $287,000 for the prior year. Of the non-cash items for the year ended
      December 31, 2006, approximately $2.1 million was the share-based compensation
      whereas there was no such expense for the prior year. Depreciation was $334,000
      for the year ended December 31, 2006, $80,000 higher than the $254,000 for
      the
      prior year, primarily due to the addition of equipment and machinery for our
      new
      product lines, such as backlights for computer monitors, during the current
      year. $259,000 was the bad debts allowance for the year ended December 31,
      2006,
      $227,000 higher than the $32,000 for the prior year. Inventory provision was
      $545,000 for the year ended December 31, 2006 whereas there was no Inventory
      provision for the prior year. Deferred tax assets were increased by
      approximately $87,000 for the year ended December 31, 2006 whereas there was
      no
      change in deferred tax assets for the prior year. The impact of changes in
      non-cash items on cash flow from operating activities between years ended
      December 31, 2006 and 2005 was approximately $2.86 million
      positive.





The
      impact of the changes in operating assets and liabilities on cash flow was
      explained for as follows. The accounts receivable during the current year was
      decreased by approximately $573,000 comparing with the $1.3 million increase
      in
      accounts receivable for the prior year. Inventory level was increased by $1.1
      million during the current year, a decrease of $666,000 or 37% less than the
      $1.78 million increase in inventory for the prior year. Other receivables
      increased by $134,000 during the current reporting period, $79,000 or 37% less
      than the $214,000 increase in other receivables for the prior year. VAT
      recoverables during the current year was increased by $220,000 whereas there
      was
      no such change for the prior year. Deposits, prepayment and other assets during
      the current year were increased by $334,000 comparing with the $46,000 decrease
      in the same category for the prior year.





Advances
      from customers decreased by $158,000 during the current year comparing with
      the
      $19,000 increase in the same category for the prior year. In addition, tax
      payable decreased by $228,000 for the current year, comparing with an increase
      of $348,000 for the prior year. Accounts payable decreased by $174,000 for
      the
      year ended December 31, 2006, compared with the $3.1 million increase in the
      same category for the prior year. Accruals and other payables increased by
      $385,000, $123,000 or 47% more than the $262,000 increase for the prior year.
      The following summarized the impact of changes in operating assets and
      liabilities on cash flow between years ended December 31, 2006 and
      2005:




·
            $1,900,000
                from accounts receivable (positive impact)




42




·
            $666,000
                from inventory(positive impact)


·
            $79,000
                from other receivable (positive impact)


·
            $220,000
                from VAT recoverables (negative impact)


·
            $381,000
                from deposits, prepayment and other assets (negative
                impact)


·
            $3,200,000
                from of accounts payable (negative
                impact)


·
            $149,000
                from accruals and other payable (positive
                impact)


·
            $177,000
                from advance from customers (negative
                impact)


·
            $576,000
                from taxes payable (negative
                impact)





The
      total
      impact from above non-cash items and the changes in operating assets and
      liabilities was approximately $6.1 million.





Net
      cash
      used in investing activities amounted to $5.2 million for the year ended
      December 31, 2006, an increase of $1.8 million or 53%, compared to the $3.4
      million cash used in investing activities during the prior year. In 2006, we
      invested $870,000 into plant, property and equipment as a result we added new
      production lines in Dongguan facility whereas we relocated our production lines
      to Dongguan facility during the prior year and incurred investment of
      approximately $1.8 million. The majority of the $1.8 million investment in
      fixed
      assets during the prior year was spent on adding equipment and machinery to
      the
      new facility. During the current year, we disposed of marketable securities
      with
      proceeds of approximately $1.1 million, compared with the purchase of marketable
      securities by $765,000 during the prior year. During the year ended December
      31,
      2006, we made cash payment of $1.8 million for a new office space which was
      not
      put into use as of December 31, 2006 compared with the advance of $722,000
      made
      in the prior year. During the year ended December 31, 2006, we made a $1.5
      million investment in Huaxia (Yangzhou) Integrated O/E System Inc. for 15%
      of
      its equity interest whereas we did not have such investment activity in the
      prior year. During the year ended December 31, 2006, due from related parties
      was increased by $2.1 million, $2.0 million more than the change incurred during
      the prior year, primarily due to the fact that Diguang Electronics made a $2.0
      million loan to Dongguan Diguang Electronic Science & Technology Co., Ltd.
      through a bank at the current market rate for this type of loan, which would
      be
      used for the construction of the new production facility and dormitory in
      Dongguan.





Net
      cash
      generated by financing activities for the year ended December 31, 2006 was
      approximately $10 million. The primary source of cash flow for the current
      year
      was from a private placement. In March 2006, we completed a $12 million private
      placement in connection with effecting a reverse merger with Online Processing,
      Inc. Offering expenses paid in 2006 amounted to approximately $1.74 million
      in
      addition to $26,000 paid in 2005. The net funds raised will be used to fund
      our
      next phase of expansion resulting from our new product offerings. The increase
      in cash used in financing activities for the year ended December 31, 2006 was
      due to the repayment to related parties, which was a negative cash flow of
      $133,000, a decrease of $878,000 compared to $1.0 million during the prior
      year.
      We paid dividends of approximately $111,000 in the current year, which was
      the
      remaining balance at December 31, 2005, whereas there were no dividends paid
      for
      the year ended December 31, 2005.





**Comparison
      of years ended December 31, 2005 and 2004**





Our
      principal source of funds for the year ended December 31, 2005 and 2004 was
      from
      operating cash flows. For the year ended December 31, 2005, operating cash
      flow
      was $9.6 million compared to an operating cash flow of $4.9 million for the
      year
      ended December 31, 2004. The reason for the increase in cash flow from operating
      activities was due to the significant increase in our net income from $6.6
      million in 2004 to $8.8 million in 2005, an increase by $2.2 million or 34%.
      As
      a result of the investment in our fixed assets incurred in the year ended
      December 31, 2005 and 2004, our depreciation and amortization expenses in 2005
      increased by approximately $168,000. These newly acquired fixed assets greatly
      support the growth in our total sales. The increase in accounts receivable
      in
      2005 resulted in a negative cash flow of $1.3 million, decreased by almost
      1.0
      million compared to the same item in 2004. In order to maintain our readiness
      for sales, the increase in our inventory resulted in a negative cash flow of
      $1.8 million, which represented an increase of $3 million compared to the
      positive cash flow of $1.2 million in 2004. However, the increase in inventory
      was offset by the increase in accounts payable, which was $3 million in 2005,
      increased by almost $2.7 million. Other receivables increased by $214,000 in
      2005 as compared with an increase of $886,000 in 2004. The increase in income
      tax payable was $348,000 as a result of recognizing income tax provision based
      on 10% of corporate income tax rate based on conservative consideration, an
      increase of $180,000 compared to $167,000 in 2004. The increase in accrued
      liabilities in 2005 was only $262,000, an increase of $1 million compared to
      a
      $752,000 decrease in 2004.




43




Cash
      used
      in investing activities was $3.4 million and $0.5 million for years ended
      December 31, 2005 and 2004, respectively. Approximately $1.8 million was spent
      to purchase new production equipment for the Dongguan factory in 2005, an
      increase of approximately $1.7 million from $160,000 for the year ended December
      31, 2004. Additional purchases of new equipment and machinery in the year ended
      December 31, 2005 allowed us to increase our capacity at the Dongguan facility
      and accommodate larger and more time sensitive orders from customers.
 Amounts due from related parties amounted to $722,000 for the year ended
      December 31, 2005. The cash idle in Diguang Technology was put into our
      short-term deposit for interest earning purpose resulting in the negative cash
      of $765,000, an increase of $474,000 compared to the negative cash flow of
      $291,000 in 2004. The deposit of almost $97,000 for purchasing office space
      was
      incurred only in 2005.





Cash
      used
      in financing activities was $1.5 million and $307,000 for the year ended
      December 31, 2005 and 2004, respectively. The increase in cash used in financing
      activities for the year ended December 31, 2005 was due to the repayment to
      related parties, which was a negative cash flow of $1 million, an increase
      of
      $705,000 compared to $307,000 in 2004. Another major factor in the increase
      of
      negative cash flow in financing activities was the repayment of a bank loan,
      which was approximately $471,000 in 2005 compared to nil in 2004. As we
      discussed in general and administrative expenses, considering the upcoming
      fund
      raising activities, we recognized deferred offering expense of approximately
      $26,000 on the balance sheet to offset the future proceeds from fund raising
      exercise, which did not incur in 2004. 
 **Recently
        Issued Accounting Pronouncements**
 
 In
        July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
        Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109,"
        (thereafter FIN 48). FIN 48 prescribes a recognition threshold and measurement
        attribute for the financial statement recognition and measurement of a tax
        position taken in a tax return. A company must determine whether it is
        "more-likely-than-not" that a tax position will be sustained upon examination,
        including resolution of any related appeals or litigation processes, based
        on
        the technical merits of the position. Once it is determined that a position
        meets the more-likely-than-not recognition threshold, the position is measured
        to determine the amount of benefit to recognize in the financial statements.
        FIN
        48 is effective for fiscal years beginning after December 15, 2006. The company
        will adopt the provisions of FIN 48 beginning in the first quarter of 2007.
        The
        cumulative effect of applying the provisions of FIN 48 will be reported as
        an
        adjustment to the opening balance of retained earnings on January 1, 2007.
        The
        Company is currently assessing the impact of FIN 48 on its consolidated
        financial statements.
 
 In
        September 2006, the FASB issued SFAS No. 157, åFair Value Measurements.æ SFAS
        No. 157 clarifies the definition of fair value, establishes a framework for
        measuring fair value and expands the disclosures on fair value measurements.
        SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.
        The Company will adopt the provisions of SFAS No. 157 beginning in the first
        quarter of 2008 and therefore, the Company has not yet determined the effect,
        if
        any, the adoption of SFAS No. 157 will have on its results of operations
        or
        financial position.
 
 In
        September 2006, the Securities and Exchange Commission (SEC) issued Staff
        Accounting Bulletin No. 108, åConsidering the Effects of Prior Year Misstatement
        when Quantifying Misstatements in Current Year Financial Statements’ (SAB 108),
        which will be effective for the fiscal year ending after November 15, 2006.
        The
        objective of SAB 108 is to eliminate diversity in practice surrounding how
        public companies quantify financial statement misstatements. SAB 108 requires
        quantification of financial statement misstatements based on the effects
        of the
        misstatements on the consolidated statement of income, the consolidated balance
        sheet and related financial statement disclosures.
 
 According
        to SAB 108, both årolloveræ and åiron curtainæ approaches must be considered
        when evaluating a misstatement for materiality. This is referred to as the
ådual
        approach.æ For the companies that have previously evaluated misstatements under
        one, but not both, of these methods, SAB 108 provides companies with a one-time
        option to record the cumulative effect of their prior unadjusted misstatements
        in a manner similar to a change in accounting principle in their annual
        financial statements during the effective time period if (i) the cumulative
        amount of the unadjusted misstatements at the beginning of the adopting year
        would have been material under the dual approach to their annual financial
        statements for the prior year or (ii) the effect of correcting the unadjusted
        misstatements during the adopting year would cause these annual financial
        statements to be materially misstated under the dual approach. In accordance
        with SAB 108, companies are allowed, upon adoption, to record the effects
        as
        cumulative-effect adjustment to the retained earnings. The adoption of SAB
        108
        did not have significant impact on its financial position and results of
        operations.
 
 In
        September 2006, the FASB issued FASB Staff Position: åAccounting for Planned
        Major Maintenance Activities,æ (thereafter FSP AUG AIR-1). FSP AUG AIR-1
        addresses the accounting for planned major maintenance activities. FSP AUG
        AIR-1
        prohibits the use of the accrue-in-advance method of accounting in annual
        and
        interim financial reporting periods for planned major maintenance activities,
        which had previously allowed companies the right to recognize planned major
        maintenance costs by accruing a liability over several reporting periods
        before
        the maintenance was performed. FSP AUG AIR-1 still allows the direct expense,
        built-in-overhaul and deferral methods of accounting as acceptable, however
        it
        does mandate that companies apply the same method of accounting in both interim
        and annual financial reporting periods and that the method be retrospectively
        applied if applicable. FSP AUG AIR-1 is effective for fiscal years beginning
        after December 15, 2006. The Company does not expect that the adoption of
        FSP
        AUG AIR-1 will have a material effect on its consolidated financial
        statements.




ITEM
      7A
      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




*Transaction
      Risk and Currency Risk Management*




Our
      operations do not employ financial instruments or derivatives which are market
      sensitive and therefore we are not subject to the financial market risks
      associated with such instruments and derivatives.





*Exchange
      Rate Sensitivity*




Our
      financial results could be affected by factors such as changes in foreign
      currency exchange rates or weak economic conditions in foreign markets. Since
      a
      majority of our sales in 2006 were made in U.S. dollars and Hong Kong dollars,
      and since the Hong Kong dollar is pegged to the U.S. dollar at an amount in
      the
      range of 7.75 to 7.85, a strengthening of the U.S. dollar could make our
      products less competitive in foreign markets. Our interest expense is sensitive
      to changes in the general level of interest rates in the U.S.





Due
      to
      the nature of our short-term investments, we do not believe that there is any
      material market risk exposure and therefore do not believe that quantitative
      tabular disclosures are required.





Our
      production base is in China, which results in a substantial portion of our
      operating expenses being denominated in Renminbi, although the majority of
      our
      purchases are made in U.S. dollars..





The
      value
      of the Renminbi, the main currency used in the PRC, 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 has
      remained stable over the past several years. However, China recently adopted
      a
      floating rate with respect to the Renminbi, with a 0.3% fluctuation. This
      floating exchange rate, and any appreciation of the Renminbi that may result
      from such rate, could have various adverse effects on our business, as described
      in *Risk
      Factors,* above.




We
      currently do not engage in hedging or other activities to control the risk
      of
      our foreign currency exposure.





We
      have
      approximately $18.9 million, of cash and deposits as of December 31, 2006,
      of
      which approximately $14.2 million is denominated in Renminbi. If the exchange
      rate of US dollars were to increase by 5% against Renminbi, we would potentially
      suffer loss by approximately $0.2 million in the account reflection.





44




*Exchange
      Controls*





Chinese
      law allows enterprises owned by foreign investors to remit their profits,
      dividends and bonuses earned in China to other countries, and the remittance
      does not require prior approval by the SAFE regulations formerly required
      extensive documentation and reporting, some of which was burdensome and slowed
      payments. If there is a return to payment restrictions and reporting, the
      ability of a Chinese company to attract investors will be reduced. Also, current
      investors may not be able to obtain the profits of the business which they
      own
      as a result of other restrictions that the Chinese government may impose.
 Relevant Chinese law and regulation permit payment of dividends only from
      retained earnings, if any, determined in accordance with Chinese accounting
      standards and regulations. It is possible that the Chinese tax authorities
      may
      require changes in our reported income that would limit our ability to pay
      dividends and other distributions. Chinese law requires companies to set aside
      a
      portion of net income to fund certain reserves which amounts are to
      distributable as dividends. These rules and possible changes could restrict
      a
      company in China from repatriating funds to us and our shareholders as
      dividends.




*Interest
      Rate Risk*




We
      are
      equity financed and do not have any debt that is subject to interest rate change
      risk.




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, 2006 and 2005




3.     Consolidated
      Statements of Operations for the years ended December 31, 2006, 2005 and
      2004




4.     Consolidated
      Statements of Comprehensive Income (Loss) for the years ended December 31,
      2006,
      2005 and 2004




5.     Consolidated
      Statements of Changes in Stockholders’ Equity for the years ended December 31,
      2006, 2005 and 2004




6.     Consolidated
      Statements of Cash Flows for the years ended December 31, 2006, 2005 and
      2004




7.     Notes
      to Consolidated Financial Statements.




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




This
      information was previously reported, as that term is defined in Rule 12b-2
      under
      the Exchange Act, in our Current Report on Form 8-K filed on July 20, 2006.




ITEM
      9A.
      CONTROLS AND PROCEDURES




(a)
      Evaluation of disclosure controls and procedures:




As
      of December 31, 2006, the end of the period covered by this report, the
      Company’s chief executive officer and its chief financial officer reviewed and
      evaluated the effectiveness of the Company’s disclosure controls and procedures,
      as defined in Exchange Act Rule 13a-15(e) and 15d-15(e).  As of the end of
      that period, based on that evaluation, the Company’s chief executive officer and
      chief financial officer concluded that the disclosure controls and procedures
      were effective in ensuring that material information the Company must disclose
      in the reports that it files or submits under the Securities Exchange Act of
      1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and
      reported on a timely basis, and that information required to be disclosed by
      the
      Company in reports that it files or submits under the Exchange Act is
      accumulated and communicated to the Company’s chief executive officer and chief
      financial officer as appropriate to allow timely decisions regarding required
      disclosure.




45




(b)
      Changes in internal controls over financial reporting:




For
      the
      fiscal year ended December 31, 2006, 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.




(c)
      Inherent Limitations on Effectiveness of Controls





The
      Company’s management, including its CEO and CFO, does not expect that our
      disclosure controls or our internal control over financial reporting will
      prevent or detect all error and all fraud. A control system, no matter how
      well
      designed and operated, can provide only reasonable, not absolute, assurance
      that
      the control system’s objectives will be met. The design of a control system must
      reflect the fact that there are resource constraints, and the benefits of
      controls must be considered relative to their costs. Further, because of the
      inherent limitations in all control systems, no evaluation of controls can
      provide absolute assurance that misstatements due to error or fraud will not
      occur or that all control issues and instances of fraud, if any, within the
      company have been detected. These inherent limitations include the realities
      that judgments in decision-making can be faulty and that breakdowns can occur
      because of simple error or mistake. Controls can also be circumvented by the
      individual acts of some persons, by collusion of two or more people, or by
      management override of the controls. The design of any system of controls is
      based in part on certain assumptions about the likelihood of future events,
      and
      there can be no assurance that any design will succeed in achieving its stated
      goals under all potential future conditions. Projections of any evaluation
      of
      controls effectiveness to future periods are subject to risks. Over time,
      controls may become inadequate because of changes in conditions or deterioration
      in the degree of compliance with policies or procedures.




ITEM
      9B.
      OTHER INFORMATION




None.




PART
      III




ITEM
      10.
      DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE




The
      following table and text set forth the names and ages of all directors and
      executive officers of the Company as of December 31, 2006.  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.




Jackie
      You Kazmerzak resigned as our chief financial officer on March 7, 2007. Keith
      Hor was appointed as our chief financial officer with effect from March 7,
      2007.
      A current report on Form 8-K to disclose the resignation of Jackie You Kazmerzak
      and the appointment of Keith Hor was filed with the SEC on March 13,
      2007.




Name
            
            Age
            
            PositionYi
                Song
            
            48
            
            Board
                Chairman and CEOHong
                Song
            
            43
            
            Director
                and COOJackie
                You Kazmerzak
            
            32
            
            Chief
                Financial Officer (resigned as of March 7, 2007)Keith
                Hor
            
            42
            
            Chief
                Financial Officer (appointed as of March 7, 2007)Remo
                Richli
            
            43
            
            Independent
                DirectorGerald
                Beemiller
            
            63
            
            Independent
                DirectorTuen-Ping
                Yang
            
            60
            
            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 (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.




46





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





***Jackie
      You Kazmerzak, Chief Financial Officer (resigned as of March 7, 2007)*** is
      experienced in corporate finance and investment management, having been a
      Marketing Officer at Bank of America in Shanghai from 1996 to 1998, a portfolio
      manager at Northern Trust in San Francisco, California from 2000 to 2004, and
      a
      portfolio manager at Sand Hill Advisors in Palo Alto, California from 2004
      to
      January 2006.  She is a Chartered Financial Analyst (CFA) and is fluent in
      Mandarin and English.  She received her MBA from Arizona State University
      with a concentration in finance in 2000 and she holds a degree in economics
      from
      Shanghai International Studies University.





***Keith
      Hor*** , ***Chief
      Financial Officer (appointed as of March 7, 2007),*** was
      our
      financial controller from October 2006 to March 2007, overseeing the corporate
      strategic planning, financial and accounting functions. 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. Prior to that, for three years, he was the group
      financial controller of Tsui Hang Hing Group, an apparel manufacturing company
      with manufacturing facilities in China, Vietnam and Mauritius. 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.





***Remo
      Richli, Independent Director*** ,
      is a
      partner of Bridgelink, a privately-held international Mergers and Acquisitions
      firm headquartered in Switzerland since 2005. His responsibilities include
      the
      acquisition and divestiture of companies as well as raising funds, including
      private equity deals and venture capital funds. Previously, he worked in the
      US
      as a financial expert at RP Associates in San Diego, a venture capital firm
      focusing on corporate finance and financial structures. His work included
      evaluations of investment opportunities, financial modeling of investments,
      and
      fundraising, as well as building teams on operational and strategic levels.
      During his time with RP Associates, Mr. Richli also served as Chief Financial
      Officer of one of its portfolio companies. From 1993 to 1999, Mr. Richli owned
      a
      consulting firm engaged in corporate finance consultancy for mid-sized companies
      and acted as the Chief Executive Officer of client companies on a consulting
      basis. From 1991 to 1993, Mr. Richli was a director at the Department of Finance
      at the city government level in Switzerland. He studied in Switzerland and
      in
      the US and holds several degrees in Business and Economics from the University
      of Basel, Switzerland and the University of Applied Science in Luzern,
      Switzerland.




47




***Gerald
      Beemiller, Independent Director*** ,
      has
      been the Vice President of World Wide Sales for Pericom Semiconductor
      Corporation since December 2000; prior to that he was Vice President of Sales
      and Marketing for Sony Semiconductor Company of America. In those positions
      he
      acquired significant expertise in the field of electronics technology. He
      received a BS in Mathematics, with a minor in Electrical Engineering and
      Computer Science, from Arizona State University in 1966.




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


*Significant
      Employees*





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





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





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





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





***Chen
      Rongguo, Budget & Control Superintendent, 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.




***Zhao
      Guobao, Management Superintendent, Diguang Electronics,*** joined
      Diguang Electronics in March 2005 as Director of Dongguan Factory and later
      as
      Management Superintendent.  He studied for Engineering Facility, Hengyang
      Engineering Institute of Hunan Province from 1998 to 2002.  And he has been
      enrolled a graduate program under Management Science & Engineering at
      Tianjin University.  He was engaged as Production Section Chief, Casino
      Company from September 1996 to March 2000.  He was positioned as Senior
      Production Manager, Shenzhen Electric-Magnetic Field Company from April 2000
      to
      February 2003.  And he was designated from March 2003 to March 2005 as
      vice-president for manufacture, Shenzhen Jinke Science & Technology Company.




*Involvement
      in Certain Legal Proceedings*




To
      the best of the Company’s knowledge, during the past five years, none of the
      following occurred with respect to a present or former director or executive
      officer of the Company: (1) any bankruptcy petition filed by or against any
      business of which such person was a general partner or executive officer either
      at the time of the bankruptcy or within two years prior to that time; (2) any
      conviction in a criminal proceeding or being subject to a pending criminal
      proceeding (excluding traffic violations and other minor offenses); (3) being
      subject to any order, judgment or decree, not subsequently reversed, suspended
      or vacated, of any court of any competent jurisdiction, permanently or
      temporarily enjoining, barring, suspending or otherwise limiting his involvement
      in any type of business, securities or banking activities; and (4) being found
      by a court of competent jurisdiction (in a civil action), the SEC or the
      Commodities Futures Trading Commission to have violated a federal or state
      securities or commodities law, and the judgment has not been reversed, suspended
      or vacated.




48




*Audit
      Committee Financial Expert*




The
      Company has a separately-designated 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: Remo Richli,
      Gerry Beemiller and Tuen-Ping Yang.  Mr. Remo Richli is the Chairman of the
      Audit Committee. The Board has determined that Mr. Remo Richli is the Audit
      Committee financial expert, as defined in Item 401(h)(2)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, Remo Richli, Gerry Beemiller and Tuen-Ping
      Yang serve on the Compensation Committee. Mr Gerry Beemiller 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, Remo Richli, Gerry Beemiller 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 Messrs Keith Hor, the
      Company’s chief financial officer and he 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.




49




*Section
      16(a) Beneficial Ownership Compliance*




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




ITEM
      11.
      EXECUTIVE COMPENSATION




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




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




**Elements
      of Compensation**




Executive
      compensation consists of following elements:




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





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




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




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




50




***Options.*** Our
      2006
      Stock Incentive Plan authorizes us to grant options to purchase shares of common
      stock to our employees, directors and consultants. Our compensation
      committee was the administrator of the stock option in 2006 until the
      authority delegated by the Board to the designated person. Stock option
      grants were made on February 25, 2006 or at the commencement of employment.
      The
      board of directors reviewed and approved the stock option to our key employees,
      including our chief financial officer, and our independent directors on February
      25, 2006 and the granting of stock options subsequent to that was administered
      and approved by the Compensation Committee, based upon a review of the
      competitive compensation of the key officers and the key employees, its
      assessment of individual performance, a review of each executive’s existing
      long-term incentives, and retention considerations. In 2006, our chief financial
      officer, the only named executive officer, was awarded stock options in the
      amounts indicated in the section entitled “Grants of Plan Based Awards”. These
      grants were made to encourage an ownership culture among our employees. Neither
      the chief executive officer nor the chief operating officer has been granted
      any
      stock options. Stock options granted by us have an exercise price of $5.00
      per
      share, expire ten years after the date of grant and with monthly vesting at
      the
      end of each month after March 1, 2006, for the three independent directors
      as
      well as for the chief financial officer and yearly vesting for the other
      employees; the options issued to the independent directors, the chief financial
      officer and our other employees, vest at a rate of 1/36th per month, 1/48th
      per
      month, and 1/4th per year, respectively.




***2006
      Stock Incentive Plan.*** Our
      2006 Stock Incentive Plan authorizes us to grant incentive stock option,
      nonstatutory stock option, stock options, cash awards and stock awards to our
      employees, directors and consultants. Mr. Song Hong, our chief operating
      officer, is the administrator of the plan. If and when stock option awards
      are
      granted, they will be made on March 1 annually and, occasionally, to meet other
      special retention or performance objectives. After authority was delegated
      by
      the Board to Mr. Song Hong, he will review and approve stock option award plans
      to executive officers and other key employees based upon his assessment of
      individual performance, a review of each executive’s existing long-term
      incentives, and retention considerations. Periodic stock option awards will
      continue to be made at the discretion of Mr. Song Hong to eligible employees.




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




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


**S** **UMMARY** **** **C** **OMPENSATION** **** **T** **ABLE**




Name
                  and principal position
              
              Year
              
              Salary
                ($)
              
              Bonus
                ($)
              
              Stock
                  awards ($)
              
              Option
                  awards ($)
              
              Non-equity
                  incentive plan compensation ($)
              
              Change
                  in pension value and non-qualified deferred compensation earnings
                  ($)
              
              All
                  other compensation ($) 2
              
              Total
                ($)(a)
              
              (b)
              
              (c)
              
              (d)
              
              (e)
              
              (f)
              
              (g)
              
              (h)
              
              (i)
              
              (j)Yi
                  Song
              
              
              2006
              
              
              197,151
              
              
              3,008
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              200,159Chief
                  Executive Officer and Chairman of the Board
              
              
              2005
              
              
              16,890
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              16,8902004
              
              
              9,230
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              9,230Jackie
                  You Kazmerzak
              
              
              2006
              
              
              95,000
              
              
              -
              
              
              -
              
              
              184,954
              
              
              -
              
              
              -
              
              
              -
              
              
              279,954Chief
                  Financial Officer
              
              
              2005
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -2004
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Hong
                  Song
              
              
              2006
              
              
              156,943
              
              
              3,008
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              159,951Chief
                  Operating Officer
              
              
              2005
              
              
              13,122
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              13,1222004
              
              
              8,260
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              8,260




51




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





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





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





We
      did
      not enter into any written employment agreement with Ms Kazmerzak who was only
      appointed as of March 17, 2006. 80,000 shares subject to the stock options
      were
      granted to her. The dollar amount recognized for financial statement reporting
      purposes with respect to the fiscal year in accordance with FAS123R is
      calculated in accordance with Black Scholes Model by reference to the
      average staff turnover rate.




**G** **RANTS
        OF** **P** **LAN-** **B** **ASED** **A** **WARDS**


Estimated
                  future payouts under non-equity incentive plan awards
              
              Estimated
                  future payouts under equity incentive plan awardsName
              
              Grant
                  date
              
              Threshold
                  ($)
              
              Target
                  ($)
              
              Maximum
                  ($)
              
              Threshold
                  (#)
              
              Target
                  (#)
              
              Maximum
                  (#)
              
              All
                  other stock awards number of shares of stock or units(#)
              
              All
                  other option awards; number of securities underlying
                  options(#)
              
              Exercise
                  or base price of option awards ($/Sh)
              
              Grant
                  date fair value of stock and option awards(a)
              
              (b)
              
              (c)
              
              (d)
              
              (e)
              
              (f)
              
              (g)
              
              (h)
              
              (i)
              
              (j)
              
              (k)
              
              (l)Song
                  Yi
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Chief
                  Executive Officer and Chairman of the BoardJackie
                  You Kazmerzak
              
              
              February
                  25, 2006
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              80,000
              
              
              -
              
              $
              5
              
              $
              11.10Chief
                  Financial OfficerSong
                  Hong
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Chief
                  Operating Officer




52




**O** **UTSTANDING** **E** **QUITY** **A** **WARDS
        AT** **F** **ISCAL** **Y** **EAR-** **E** **ND**


Option
                  awards
              
              Stock
                  awardsName2
              
              Number
                  of securities underlying unexercised options exercisable (#)
              
              Number
                  of securities underlying unexercised options unexercisable (#)
              
              Equity
                  incentive plan awards: number of securities underlying unexercised
                  unearned options (#)
              
              Option
                  exercise price ($)
              
              Option
                  expiration date
              
              Number
                  of shares or units of stock that have not vested (#)
              
              Market
                  value of shares or units of stock that have not vested ($)
              
              Equity
                  incentive plan awards: number of unearned shares units or other
                  rights
                  that have not vested (#)
              
              Equity
                  incentive plan awards: market or payout value of unearned shares,
                  units or
                  other rights that have not vested ($)(a)
              
              (b)
              
              (c)
              
              (d)
              
              (e)
              
              (f)
              
              (g)
              
              (h)
              
              (i)
              
              (j)Song
                  Yi
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Chief
                  Executive Officer and Chairman of the BoardJackie
                  You Kazmerzak
              
              
              20,376
              
              
              59,624
              
              
              -
              
              
              5
              
              
              February
                  25, 2016
              
              
              -
              
              
              -
              
              
              -
              
              
              -Chief
                  Financial OfficerSong
                  Hong
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Chief
                  Operating Officer




Pursuant
      to the terms of the Amended and Restated Share Exchange Agreement, we assumed
      Diguang’s outstanding 2006 stock incentive plan covering options totaling the
      equivalent of 1,500,000 shares of our common stock. Options equivalent to
      approximately 540,000 shares of our common stock were issued under the Diguang
      2006 Option Plan before the Share Exchange closed as follows: the equivalent
      of
      80,000 shares were granted to Diguang’s chief financial officer. The exercise
      price for the options is $5.00 per share. The commencement date for these
      options is March 1, 2006, with monthly vesting at the end of each month after
      March 1, 2006, for the chief financial officer. The options issued to the chief
      financial officer vest at a rate of 1/48th per month,. The options that have
      been issued expire ten years from their grant date which date is February 25,
      2006. Under the Stock Option Agreement, as of March 7, 2007, the date the chief
      financial officer resigned, 20,376 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 59,624 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. Neither the Chief
      Executive Officer nor the Chief Operating Officer was or is granted any options.




53


**O** **PTION** **E** **XERCISES
        AND** **S** **TOCK** **V** **ESTED**


Options
                  awards
              
              Stock
                  awardsName2
              
              Number
                  of shares acquired on exercise (#)
              
              Value
                  realized on exercise ($)
              
              Number
                  of shares acquired on vesting (#)
              
              Value
                  realized on vesting ($)(a)
              
              (b)
              
              (c)
              
              (d)
              
              (e)Song
                  Yi
              
              
              -
              
              
              -
              
              
              -
              
              
              -Chief
                  Executive Officer and Chairman of the BoardJackie
                  You Kazmerzak
              
              
              -
              
              
              -
              
              
              -
              
              
              -Chief
                  Financial OfficerSong
                  Hong
              
              
              -
              
              
              -
              
              
              -
              
              
              -Chief
                  Operating Officer




None
      of
      the options that has been granted to the Chief Financial Officer has been
      exercised as of March 7, 2007.




**P** **ENSION** **B** **ENEFITS**


Name
              
              Plan
                  name
              
              Number
                  of years credited service (#)
              
              Present
                  value of accumulated benefit ($)
              
              Payments
                  during last fiscal year ($)(a)
              
              (b)
              
              (c)
              
              (d)
              
              (e)Song
                  Yi
              
              
              -
              
              
              -
              
              
              -
              
              
              -Chief
                  Executive Officer and Chairman of the BoardJackie
                  You Kazmerzak
              
              
              -
              
              
              -
              
              
              -
              
              
              -Chief
                  Financial OfficerSong
                  Hong
              
              
              -
              
              
              -
              
              
              -
              
              
              -Chief
                  Operating Officer




We
      did
      not and do not grant any pension benefits to our executive officers.




**N** **ONQUALIFIED** **D** **EFERRED** **C** **OMPENSATION**


Name3
              
              Executive
                  contributions in last FY ($)
              
              Registrant
                  contributions in last FY ($)
              
              Aggregate
                  earnings in last FY ($)
              
              Aggregate
                  withdrawals/ distributions ($)
              
              Aggregate
                  balance at last FYE ($)(a)
              
              (b)
              
              (c)
              
              (d)
              
              (e)
              
              (f)Song
                  Yi
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Chief
                  Executive Officer and Chairman of the BoardJackie
                  You Kazmerzak
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Chief
                  Financial OfficerSong
                  Hong
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Chief
                  Operating Officer




54




**D** **IRECTOR** **C** **OMPENSATION**


Name3
              
              Fees
                  earned or paid in cash ($)
              
              Stock
                  awards ($)
              
              Option
                  awards ($)
              
              Non-equity
                  incentive plan compensation7($)
              
              Change
                  in pension value and nonqualified deferred compensation
                  earnings8
              
              All
                  other compensation($)
              
              Total
                  ($)(a)
              
              (b)
              
              (c)
              
              (d)
              
              (e)
              
              (f)
              
              (g)
              
              (h)Remo
                  Richli
              
              
              28,500
              
              
              -
              
              
              61,651
              
              
              -
              
              
              -
              
              
              -
              
              
              90,151Gerald
                  Beemiller
              
              
              19,000
              
              
              -
              
              
              61,651
              
              
              -
              
              
              -
              
              
              -
              
              
              80,551Tuen-Ping
                  Yang
              
              
              19,000
              
              
              -
              
              
              61,651
              
              
              -
              
              
              -
              
              
              -
              
              
              80,551




20,000
      shares subject to the options have been each granted to the independent
      directors, but as if December 31, 2006 only 5,556 shares were vested, with
      fair
      value of $61,651 listed on the above table. No stock options were granted to
      Yi
      Song or Hong Song. The dollar amount recognized for financial statement
      reporting purposes with respect to the fiscal year in accordance with FAS123R
      is
      calculated in accordance with Black Scholes Model by reference to the average
      staff turnover rate.




**P** **OTENTIAL** **P** **AYMENTS** **U** **PON** **T** **ERMINATION
        OR** **C** **HANGE-IN-** **C** **ONTROL**




There
      were and are no potential payments that are payable to any of the named
      executive officers in connection with any termination termination, including
      without limitation resignation, severance, retirement or a constructive
      termination, or a change in control of the registrant or a change in the
      officer’s responsibilities.




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




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




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




The
      following table sets forth, as of , December 31, 2006: (a) the names and
      addresses of each beneficial owner of more than five percent, 5%, of our common
      stock known to us, the number of shares of common stock beneficially owned
      by
      each such person, and the percent of our common stock so owned; and (b) the
      names and addresses of each director and executive officer, the number of shares
      our common stock beneficially owned, and the percentage of our common stock
      so
      owned, by each such person, and by all of our directors and executive officers
      as a group. Each person has sole voting and investment power with respect to
      the
      shares of our common stock, except as otherwise indicated. Beneficial ownership
      consists of a direct interest in the shares of common stock, except as otherwise
      indicated.


55




**Name
                of Beneficial Owner**
            
            **Amount
                of Beneficial Ownership**
            
            **Percentage
                Ownership****(1)****Sino
                Olympics Industrial Limited**
              8th
                Floor, Building 64,
              Ma
                Jia Long, Nan Shan,
              Shenzhen,
                PRC
            
            
            17,000,000
            
            
            75.25
            %**Yi
                Song (2)**
              8th
                Floor, Building 64,
              Ma
                Jia Long, Nan Shan,
              Shenzhen,
                PRC
            
            
            17,000,000
            
            
            75.25
            %**Hong
                Song**
              8th
                Floor, Building 64
              Ma
                Jia Long, Nan Shan
              Shenzhen,
                PRC
            
            
            *
            
            
            ***Tuen-Ping
                Yang**
            
            
            *
            
            
            ***Remo
                Richli**
            
            
            *
            
            
            ***Gerald
                Beemiller**
            
            
            *
            
            
            ***Jackie
                You Kazmerzak**
            
            
            *
            
            
            *All
                Officers & Directors as a Group (6 individuals)
            
            
            17,000,000
            
            
            75.25
            %





(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 17,000,000 shares owned by Sino Olympics.





*
      Individual owns less than 1% of our securities.




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




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




*Transaction
      with management and others*





On
      December 20, 2004, Diguang Electronics entered into a lease agreement with
      Dongguan Diguang Electronics Science & Technology Co., Ltd., a company 92%
      currently owned by Sino Olympics, and formerly owned by Diguang Electronics
      (Hong Kong), and 8% owned by Shenzhen Diguang Engine & Equipment Co., Ltd.,
      to rent the plant with rent of RMB440,000 plus repair and maintenance fee of
      RMB80,000 per month for the first two years; subsequent rental will be subject
      to change in line with the market price in that time.  The lease terms
      started on January 20, 2005 and expire on January 19, 2010.  On February
      23, 2005, both parties agreed that the rent for three months from February
      to
      April 2005 shall be waived as Diguang Electronics had to finish its interior
      remodeling during this period.  On March 30, 2005, both parties agreed that
      the rent shall be RMB380,000 per month including all maintenance expenses based
      on the prevailing market price for similar facilities leased in the Dongguan
      area and that the lease term is from February 1, 2005 to January 31, 2010.
       Dongguan Diguang Electronics Science & Technology Co., Ltd., is an
      affiliate of Yi Song and Hong Song, who directly or indirectly own it 100%.




56





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





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




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





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





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





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





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




57





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




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




**Related
                Party Relationships**
              **Name
                of Related Parties**
            
            **Relationship
                with the Company**Mr.
                Yi Song
            
            One
                of the shareholders of the CompanyMr.
                Hong Song
            
            One
                of the shareholders of the CompanyShenzhen
                Diguang Engine & Equipment Co., Ltd.
              (a
                China based entity)
            
            80%
                owned by Mr. Yi Song and
              20%
                owned by Mr. Hong SongDonDongguan
                Diguang Electronic Science and Technology Co., Ltd. (a China based
                entity
                from which Diguang Electronics has rented the plant.)
            
            92%
                owned by Sino Olympics Industrial Limited and 8% owned by Shenzhen
                Diguang
                Engine & Equipment Co., Ltd.Sino
                Olympics Industrial Limited
            
            The
                representative of Song’s brothersDihao
                Electronics (Yangzhou) Co., Ltd.
            
            65%
                owned by Sino Olympic Industrial Ltd. (as of September 30,
                2006)





According
      to the lease agreement between Diguang Electronics and Dongguan Diguang
      Electronic Science & Technology Co., Ltd., a company 92% owned by Sino
      Olympics Industrial Limited and 8% owned by Shenzhen Diguang Engine &
Equipment Co., Ltd., dated March 30, 2005, Diguang Electronics agreed to pay
      the
      rental of RMB380,000 per month including all maintenance fees based on the
      prevailing market price for a similar facility to be leased in Dongguan area
      and
      that the lease terms start from February 1, 2005 to January 31, 2010, and both
      parties agreed that the rental for three months from February to April 2005
      shall be waived as Diguang Electronics had to finish its interior remodeling
      during this period. Based on the above agreement, the Company recorded the
      monthly rental of RMB361,000 on a straight-line basis.


58





The
      roll-forward details of amount due from/to related parties were summarized
      as
      follows:


**Amount
                  due from**
              
              Diguang
                  Engine and Equipment
              
              Dongguan
                  Diguang
              
              Dihao
                  Electronics (Yangzhou)
              
              Stockholders
              
              TotalBalance
                  at January 1, 2005
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              642,572
              
              $
              642,572Additions
              
              
              21,538
              
              
              -
              
              
              -
              
              
              644,734
              
              
              644,734Payments
                  received
              
              
              -
              
              
              -
              
              
              -
              
              
              (148,672
              )
              
              (148,672
              )Additions
              
              
              -
              
              
              -
              
              
              -
              
              
              849,062
              
              
              849,062Translation
                  adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              1,164
              
              
              1,164Offset
                  by dividends declared
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,988,860
              )
              
              (1,988,860
              )Balance
                  at December 31, 2005
              
              
              21,538
              
              
              -
              
              
              -
              
              
              -
              
              
              21,538Additions
                  - sales
              
              
              -
              
              
              -
              
              
              1,255,628
              
              
              -
              
              
              1,255,628Additions
                  - rental deposit
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Additions
                  - loan
              
              
              -
              
              
              2,050,204
              
              
              -
              
              
              -
              
              
              2,050,204Additions
                  - prepaid rental
              
              
              -
              
              
              55,997
              
              
              -
              
              
              -
              
              
              55,997Cash
                  received
              
              
              (21,538
              )
              
              -
              
              
              (1,009,291
              )
              
              -
              
              
              (1,030,829
              )Balance
                  at December 31, 2006
              
              $
              -
              
              $
              2,106,201
              
              $
              246,337
              
              $
              -
              
              $
              2,352,538




**Amount
                  due to**
              
              Diguang
                  Engine and Equipment
              
              Dongguan
                  Diguang
              
              Stockholders
              
              TotalBalance
                  at January 1, 2005
              
              $
              843,259
              
              $
              -
              
              $
              170,221
              
              $
              1,013,480Addition
              
              
              359,070
              
              
              -
              
              
              -
              
              
              359,070Rental
              
              
              -
              
              
              467,571
              
              
              -
              
              
              467,571Cash
                  payments made
              
              
              (1,221,546
              )
              
              (332,470
              )
              
              (170,221
              )
              
              (1,724,237
              )Translation
                  adjustment
              
              
              21,556
              
              
              -
              
              
              -
              
              
              21,556Balance
                  at December 31, 2005
              
              
              2,339
              
              $
              135,101
              
              
              -
              
              
              137,440Rental
              
              
              
              
              
              544,365
              
              
              
              
              
              544,365Payments
                  made
              
              
              (2,355
              )
              
              (679,466
              )
              
              -
              
              
              (681,821
              )Translation
                  adjustment
              
              
              16
              
              
              -
              
              
              -
              
              
              16Balance
                  at December 31, 2006
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -





During
      the year ended December 31, 2006, Diguang Electronics paid rental of $679,466,
      and prepaid approximately one-month rental of $55,997 to Dongguan Diguang
      Electronic Science and Technology Co., Ltd.




ITEM
      14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.




The
      following table sets forth the aggregate fees for professional audit services
      rendered by Lopez, Blevins, Bork & Associates, LLP and BDO Reanda for the
      audit of the Company’s annual financial statements for the fiscal years 2006 and
      2005, and fees billed for other services provided by Lopez, Blevins, Bork &
Associates, LLP and BDO Reanda for fiscal years 2006 and 2005.




Fiscal
                    Year Ended**2006**
              
              **2005**Audit
                  Fees
              
              $
              207,700
              
              $
              140,500Audit
                  Related Fees (1)
              
              
              176,000
              
              $
              53,400Tax
                Fees (2)
              
              
              5,000
              
              
              -All
                  Other Fees (3)
              
              
              -
              
              
              -Total
                  Fees Paid
              
              $
              388,700
              
              $
              193,900


(1)
                Includes
                    accounting and reporting consultations related to acquisitions
                    and
                    internal control procedures.
  59
  (2)
              Includes
                  fees for service related to tax compliance services, preparation
                  and
                  filing of tax returns and tax consulting services. Fee for Year
                  2006 was
                  the retainer amount payable up to December 31,
                  2006.
 (3)
                  Includes
                      fees for business
                      trips.




Audit
      Committee’s Pre-Approval Policy




During
      fiscal year ended December 31, 2006, 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.




60




FINANCIAL
      STATEMENTS


DIGUANG
      INTERNATIONAL DEVELOPMENT CO., LTD.





CONTENTS





**Report
                of Independent Registered Public Accounting Firm**
            
            F-2*Consolidated
                Financial Statements*Consolidated****Balance
                Sheets
            
            F-3Consolidated****Statements
                of Income and Comprehensive Income
            
            F-4Consolidated****Statements
                of Stockholders’ Equity
            
            F-5Consolidated****Statements
                of Cash Flows
            
            F-6**Notes
                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, 2005 and 2006, and the
      related statements of income and comprehensive income, stockholders’ equity and
      cash flows for each of the years in the three-year period ended
      December 31, 2006. These financial statements are the responsibility of the
      Company’s management. Our responsibility is to express an opinion on these
      financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. 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, 2005 and 2006, the results of its operations and
      its cash flows for each of the years in the three-year period ended
      December 31, 2006, in conformity with accounting principles generally
      accepted in the United States of America.






BDO
        Reanda
 Beijing,
        PRC
 March 23, 2007




F-2


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


**CONSOLIDATED
      BALANCE SHEETS**


**(In
      US Dollars)**


2005
            
            2006***ASSETS***Current
                assets:Cash
                and cash equivalents
            
            $
            10,054,568
            
            $
            18,910,808Short
                term deposits
            
            
            1,056,122
            
            
            -Accounts
                receivable, net of allowance for doubtful account $491,908 and
                $751,145
            
            
            6,081,427
            
            
            5,006,649Trade
                receivable from a related party
            
            
            -
            
            
            246,337Inventories,
                net of provision $0 and $545,446
            
            
            3,447,096
            
            
            4,008,445Other
                receivables
            
            
            80,318
            
            
            215,569VAT
                recoverables
            
            
            -
            
            
            220,793Advance
                to suppliers
            
            
            417,781
            
            
            756,208Amount
                due from related parties
            
            
            21,538
            
            
            55,997Deferred
                tax asset
            
            
            -
            
            
            86,572Loan
                receivable from a related party
            
            
            -
            
            
            2,050,204Total
                current assets
            
            
            21,158,850
            
            
            31,557,582Investment
            
            
            -
            
            
            1,500,000Property
                and equipment, net
            
            
            2,119,893
            
            
            2,672,338Prepayment
                for purchasing office space
            
            
            99,130
            
            
            1,969,462Deferred
                offering expense
            
            
            25,718
            
            
            -Total
                assets
            
            $
            23,403,591
            
            $
            37,699,382**LIABILITIES
                AND SHAREHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            5,868,614
            
            $
            5,685,836Advance
                from customers
            
            
            334,943
            
            
            177,184Accruals
                and other payables
            
            
            1,277,161
            
            
            1,575,933Accrued
                payroll and related expense
            
            
            221,295
            
            
            342,531Dividend
                payable
            
            
            111,140
            
            
            -Income
                tax payable
            
            
            572,159
            
            
            335,672Amount
                due to related parties
            
            
            137,440
            
            
            -Total
                current liabilities
            
            
            8,522,752
            
            
            8,117,156Total
                liabilities
            
            
            8,522,752
            
            
            8,117,156Shareholders’
                equity:Common
                stock, par value $0.001 per share, 50 million shares authorized,
                18,250,000 shares and 22,593,000 issued and outstanding
            
            
            18,250
            
            
            22,593Additional
                paid-in capital
            
            
            1,872,598
            
            
            14,193,773Appropriated
                earnings
            
            
            501,833
            
            
            1,294,578Retained
                earnings
            
            
            12,328,675
            
            
            13,202,629Translation
                adjustment
            
            
            159,483
            
            
            868,653Total
                stockholders’ equity
            
            
            14,880,839
            
            
            29,582,226Total
                liabilities and stockholders' equity
            
            $
            23,403,591
            
            $
            37,699,382




*See
      accompanying notes to financial statements*




F-3




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


**CONSOLIDATED
      STATEMENTS OF INCOME**


**AND
      COMPREHENSIVE INCOME**


**(In
      US Dollars)**


Years
                Ended December 31,2004
            
            2005
            
            2006Revenues:Revenues,
                net
            
            $
            24,483,222
            
            $
            35,648,118
            
            $
            31,858,239Cost
                of sales
            
            
            14,453,785
            
            
            23,048,087
            
            
            21,391,123Gross
                profit
            
            
            10,029,437
            
            
            12,600,031
            
            
            10,467,116Selling
                expense
            
            
            904,200
            
            
            1,480,229
            
            
            1,545,354Research
                and development
            
            
            802,511
            
            
            727,302
            
            
            786,322General
                and administrative
            
            
            1,425,807
            
            
            1,096,160
            
            
            6,136,745Loss
                on disposing assets
            
            
            1,359
            
            
            913
            
            
            -Income
                from operations
            
            
            6,895,560
            
            
            9,295,427
            
            
            1,998,695Interest
                income (expense), net
            
            
            (22,459
            )
            
            45,710
            
            
            243,699Investment
                income (loss)
            
            
            -
            
            
            (7,405
            )
            
            53,676Other
                income (loss)
            
            
            5,343
            
            
            48,252
            
            
            (176,809
            )Income
                before income taxes
            
            
            6,878,444
            
            
            9,381,984
            
            
            2,119,261Income
                tax provision
            
            
            258,887
            
            
            532,927
            
            
            452,562Net
                income
            
            $
            6,619,557
            
            $
            8,849,057
            
            $
            1,666,699Weighted
                average common shares outstanding - basic
            
            
            18,250,000
            
            
            18,250,000
            
            
            21,688,704Earnings
                per share - basic
            
            
            0.36
            
            
            0.48
            
            
            0.08Weighted
                average common shares outstanding - diluted
            
            
            18,250,000
            
            
            18,250,000
            
            
            21,688,704Earning
                per shares - diluted
            
            
            0.36
            
            
            0.48
            
            
            0.08Other
                comprehensive income :Net
                income
            
            $
            6,619,557
            
            $
            8,849,057
            
            $
            1,666,699Translation
                adjustment
            
            
            1,444
            
            
            157,018
            
            
            709,170Comprehensive
                income
            
            $
            6,621,001
            
            $
            9,006,075
            
            $
            2,375,869





*See
      accompanying notes to financial statements.*





F-4




**DIGUANG
        INTERNATIONAL DEVELOPMENT CO., LTD.**
 **CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS’ EQUITY**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006**


Additional
            
            
            
            
            
            AccumulatedCommon
                Stock
            
            Paid-in
            
            Appropriated
            
            Retained
            
            ComprehensiveShares
            
            Amount
            
            Capital
            
            Earnings
            
            Earnings
            
            Income
                (Loss)
            
            TotalBalance
                at January 1, 2004
            
            
            18,250,000
            
            $
            18,250
            
            $
            636,153
            
            $
            30,186
            
            $
            668,153
            
            $
            1,021
            
            $
            1,353,763Appropriation
            
            
            -
            
            
            -
            
            
            -
            
            
            103,321
            
            
            (103,321
            )
            
            -
            
            
            -Net
                income for the year
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            6,619,557
            
            
            -
            
            
            6,619,557Translation
                adjustments
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,444
            
            
            1,444Balance
                at December 31, 2004
            
            
            18,250,000
            
            
            18,250
            
            
            636,153
            
            
            133,507
            
            
            7,184,389
            
            
            2,465
            
            
            7,974,764Retained
                earnings converted to capital
            
            
            -
            
            
            -
            
            
            1,236,445
            
            
            -
            
            
            (1,236,445
            )
            
            -
            
            
            -Appropriation
            
            
            -
            
            
            -
            
            
            -
            
            
            368,326
            
            
            (368,326
            )
            
            -
            
            
            -Dividends
                declared
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,100,000
            )
            
            -
            
            
            (2,100,000
            )Net
                income for the year
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            8,849,057
            
            
            -
            
            
            8,849,057Translation
                adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            157,018
            
            
            157,018Balance
                at December 31, 2005
            
            
            18,250,000
            
            
            18,250
            
            
            1,872,598
            
            
            501,833
            
            
            12,328,675
            
            
            159,483
            
            
            14,880,839Reorganization
                and recapitalization
            
            
            1,943,000
            
            
            1,943
            
            
            (44,425
            )
            
            -
            
            
            -
            
            
            -
            
            
            (42,482
            )Common
                shares issued
            
            
            2,400,000
            
            
            2,400
            
            
            10,256,976
            
            
            -
            
            
            -
            
            
            -
            
            
            10,259,376Offsetting
                offering expenses
            
            
            -
            
            
            -
            
            
            (25,718
            )
            
            -
            
            
            -
            
            
            -
            
            
            (25,718
            )Fair
                value of stock options granted
            
            
            -
            
            
            -
            
            
            2,134,342
            
            
            -
            
            
            -
            
            
            -
            
            
            2,134,342Net
                income for the year
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,666,699
            
            
            -
            
            
            1,666,699Appropriation
            
            
            -
            
            
            -
            
            
            -
            
            
            792,745
            
            
            (792,745
            )
            
            -
            
            
            -Translation
                adjustments
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            709,170
            
            
            709,170Balance
                at December 31, 2006
            
            
            22,593,000
            
            $
            22,593
            
            $
            14,193,773
            
            $
            1,294,578
            
            $
            13,202,629
            
            $
            868,653
            
            $
            29,582,226





*See
      accompanying notes to financial statements*




F-5


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


**NOTESSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006**


( **The
      Increase or Decrease in Cash and Cash Equivalents** )




Years
                  Ended December 31,2004
              
              2005
              
              2006Cash
                  flows from operating activities:Net
                  income
              
              $
              6,619,557
              
              $
              8,849,057
              
              
              1,666,699Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
              
              
              85,393
              
              
              253,822
              
              
              333,658Bad
                  debts allowance
              
              
              459,847
              
              
              32,061
              
              
              259,237Inventory
                  provision
              
              
              -
              
              
              -
              
              
              545,446Loss
                  on disposing assets
              
              
              1,359
              
              
              913
              
              
              -Stock
                  compensation
              
              
              -
              
              
              -
              
              
              2,134,342Deferred
                  tax asset
              
              
              -
              
              
              -
              
              
              (86,572
              )Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (2,297,522
              )
              
              (1,306,417
              )
              
              572,882Inventory
              
              
              1,229,532
              
              
              (1,777,958
              )
              
              (1,112,402
              )Other
                  receivables
              
              
              (885,952
              )
              
              (213,797
              )
              
              (134,468
              )VAT
                  recoverables
              
              
              -
              
              
              -
              
              
              (219,860
              )Prepayments
                  and other assets
              
              
              (247,987
              )
              
              46,331
              
              
              (334,473
              )Accounts
                  payable
              
              
              385,614
              
              
              3,066,304
              
              
              (173,626
              )Accruals
                  and other payable
              
              
              (752,432
              )
              
              261,875
              
              
              410,745Advance
                  from customers
              
              
              102,474
              
              
              19,196
              
              
              (157,525
              )Taxes
                  payable
              
              
              167,388
              
              
              347,510
              
              
              (228,046
              )Net
                  cash provided by (used in) operating activities
              
              
              4,867,271
              
              
              9,578,897
              
              
              3,476,037Cash
                  flows from investing activities:Purchase
                  of fixed assets
              
              
              (159,686
              )
              
              (1,843,338
              )
              
              (870,270
              )Long
                  term investment
              
              
              -
              
              
              -
              
              
              (1,500,000
              )Disposal
                  (purchase) of marketable securities
              
              
              (290,752
              )
              
              (765,370
              )
              
              1,056,122Deposit
                  for office building
              
              
              -
              
              
              (721,928
              )
              
              (1,808,773
              )Due
                  from related parties
              
              
              -
              
              
              (96,659
              )
              
              (2,104,355
              )Net
                  cash used in investing activities
              
              
              (450,438
              )
              
              (3,427,295
              )
              
              (5,227,276
              )Cash
                  flows from financing activities:Common
                  share issued
              
              
              -
              
              
              -
              
              
              12,000,000Offering
                  expenses
              
              
              -
              
              
              (25,718
              )
              
              (1,740,624
              )Due
                  to related parties
              
              
              (306,565
              )
              
              (1,011,142
              )
              
              (132,754
              )Payments
                  for a long-term bank loan
              
              
              -
              
              
              (470,941
              )
              
              -Dividend
                  paid
              
              
              -
              
              
              -
              
              
              (111,140
              )Net
                  cash provided by (used in) financing activities
              
              
              (306,565
              )
              
              (1,507,801
              )
              
              10,015,482Effect
                  of changes in foreign exchange rates
              
              
              1,457
              
              
              58,009
              
              
              591,997Net
                  increase (decrease) in cash and cash equivalents
              
              
              4,111,725
              
              
              4,701,810
              
              
              8,856,240Cash
                  and cash equivalents, beginning of the year
              
              
              1,241,033
              
              
              5,352,758
              
              
              10,054,568Cash
                  and cash equivalents, end of the year
              
              $
              5,352,758
              
              $
              10,054,568
              
              $
              18,910,808




*See
      accompanying notes to financial statements*





F-6


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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      1 - REORGANIZATION AND RECAPITALIZATION**





On
      January 10, 2006, Online Processing, Inc. (“Online” thereafter) entered into a
      stock exchange agreement with Diguang International Holdings Limited (Diguang
      Holdings thereafter). Pursuant to the stock exchange agreement, without raising
      $12 million, the reverse acquisition will not be effective, vice versa, without
      reverse acquisition being effective, the private placement will be not
      closed.





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





Online
      Processing Inc. was organized under the laws of the State of Nevada in 2000.
       Its initial business was to provide Internet-based mortgage processing for
      mortgage brokers.  It had never been able to achieve profitability in that
      business so it began searching for operating companies to acquire in order
      to
      increase shareholders’ value.





In
      February 2003, through a share exchange, it acquired 100% of the issued and
      outstanding stock of Communication Field Services, Inc. (“CFS”), a Nevada
      corporation engaged in the business of providing installation, maintenance
      and
      servicing of communication technologies.  Online’s plan was to secure
      additional financing to expand the CFS’ business, but it was unable to do so. In
      March 2003, Online decided to cease commercial operations in CFS.  Since
      then, there were no real meaningful operating activities by Online. Thereafter,
      it began the process of reviewing new business opportunities with the intention
      to maximize shareholders’ interest, looking at possible business acquisitions in
      North America and internationally. In accordance with the Stock Exchange
      Agreement, Online implemented a reverse split of 3-for-5 making the total
      outstanding shares from 11,518,233 at December 31, 2005 into 6,910,940 shares.
      Then its CEO, Terri Wonderly, agreed to cancel 4,697,940 shares of common stock
      that she owned. Consequently, Online ended up with having 1,943,000 shares
      issued and outstanding right before the effectiveness of the aforementioned
      stock exchange transaction and fund raising transaction. Of the 1,943,000 shares
      issued and outstanding, 900,000 shares are owned by the existing shareholders
      of
      Online, 800,000 shares are owned by Chardan Capital, the financial consultant,
      and the remaining 243,000 shares are owned by the placement agents.





Diguang
      Holdings was established under the law of the British Virgin Islands on July
      27,
      2004 by Sino Olympics (which is controlled by the song brothers) for the purpose
      of holding 100% of the equity interest in the following entities:





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




·
            Well
                Planner Limited (a Hong Kong based entity);
                and




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




Shenzhen
      Diguang Electronics Co. Ltd. “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 the registered capital of RMB85 million
      (equivalent $10,573,615) as of December 31, 2006 and an operating life of 20
      years starting on that date. Diguang Electronics designs, develops and
      manufactures LED and CCFL backlight units. These backlight units are essential
      components used in illuminating display panels such as TFT-LCD and color STN-LCD
      panels. These display panels are used in products such as mobile phones, PDAs,
      digital cameras, liquid crystal computer or television displays and other
      household and industrial electronic devices. Diguang Electronics’ customers are
      located in both China and overseas.




F-7


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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      1 - REORGANIZATION AND RECAPITALIZATION (Continued)**





Well
      Planner Limited (“Well Planner” thereafter), was established under the laws of
      Hong Kong Special Administrative Region on April 20, 2001 and has been doing
      business in custom forwarding related to export and import activities conducted
      by Diguang Electronics for a service fee based on a service agreement, pursuant
      to which service fees should not be less than 2% of the goods Well Planner
      has
      sold. However, Well Planner makes sales only to Diguang Science and Technology
      (HK) Limited. In essence, Well Planner is a pass-through entity among all three
      entities.





Diguang
      Science and Technology (HK) Limited (“Diguang Technology” thereafter) was
      established under the laws of the British Virgin Islands on August 28, 2003
      and
      has handled all sales to international customers and procurements of electronic
      components and materials for Diguang Electronics.





The
      above
      stock exchange transaction enabled those shareholders of Diguang Holdings to
      obtain a majority voting interest in Online. Generally accepted accounting
      principles in the United States of America require that the company whose
      shareholders retain the majority interest in a combined business be treated
      as
      the acquirer for accounting purposes. Based on the fact that the above two
      transactions were consummated simultaneously, the two transactions have been
      accounted for as a reverse acquisition with a shell company with cash as Diguang
      Holdings has acquired controlling equity interest in Online as of March 17,
      2006. The reverse acquisition process utilizes the capital structure of Online
      and the assets and liabilities of Diguang Holdings are recorded at historical
      cost.





Diguang
      Holdings is the continuing operating entity for financial reporting purposes
      and
      the financial statements prior to March 17, 2006 represent Diguang Holdings’
financial position and results of operations. As of March 17, 2006, Online
      had
      no assets, $42,482 of liabilities, and the corresponding negative shareholders’
equity with 1,943,000 shares of common stock issued and outstanding, all of
      which were included in the consolidated financial statements of Diguang Holdings
      as of December 31, 2006. Please see the stockholders’ equity statement for the
      period from January 1, 2006 to December 31, 2006. And note that this
      reorganization transaction was deemed a non-cash transaction for cash flow
      statement purposes. Although Diguang Holdings is deemed to be the acquiring
      corporation for financial accounting and reporting purposes, the legal status
      of
      Online as the surviving company did not change.





The
      Company previously reported deferred offering expenses of $310,718 as of
      December 31, 2005. After revisiting the components of deferred offering
      expenses, the Company recorded $285,000 of audit fees as part of general and
      administrative expense for the year ended December 31, 2005. After the
      correction, net income for the year ended December 31, 2005 was reduced by
      $285,000 and the corresponding impact on cash flow statement for 2005 has been
      included in a reconciliation, which is contained in Note 5.





**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





F-8


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


**NOTE
      2 - SUMMARY OF ACCOUNTING POLICIES (Continued)**





**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 one of subsidiaries, Diguang
      Electronics, are conducted. Hong Kong dollar is the primary currency of the
      economic environment in which the operations of one of subsidiaries, Well
      Planner, are conducted. U.S dollar is the functional currency in which Diguang
      Technology, one subsidiary established under the laws of the British Virgin
      Islands, recorded all its activities. The Company uses the United States dollars
      (“U.S. dollars”) for financial reporting purposes.





The
      Company translates two subsidiaries’ assets and liabilities into U.S. dollars
      using the rate of exchange prevailing at the balance sheet date, and the
      statement of income is translated at average rate during the reporting period.
      Adjustments resulting from the translation of subsidiaries’ financial statements
      from the functional currency into U.S. dollars are recorded in shareholders'
      equity as part of accumulated comprehensive income (loss) - translation
      adjustments. Gains or losses resulting from transactions in currencies other
      than the functional currency are reflected in the statements of income for
      the
      reporting periods.





**Revenue
      Recognition**


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





**Short
      Term Deposits**





Short
      term deposits consist of certificates of deposit having maturity of three to
      twelve months. These short term deposits are renewable when they mature and
      interest rates are subject to change in line with the market interest rates
      available when they are renewed.





**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 maintains its cash accounts at credit worthy financial institutions
      and
      closely monitors the movements of its cash positions.




The
      Company regularly evaluates and monitors the creditworthiness of each customer
      on a case-by-case basis. The Company includes any accounts balances that are
      determined to be uncollectible in the allowance for doubtful accounts. After
      all
      attempts to collect a receivable have failed, the receivable is written off
      against the allowance. Based on the information available to management, the
      Company believes that its allowance for doubtful accounts as of December 31,
      2005 and 2006 were adequate, respectively. However, actual write-off might
      exceed the recorded allowance.





F-9


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


**NOTE
      2 - SUMMARY OF ACCOUNTING POLICIES (Continued)**





The
      following table presents allowance activities in accounts
      receivable.





December
                31,2004
            
            2005
            
            2006Beginning
                balance
            
            $
            459,847
            
            $
            491,908
            
            $
            491,908Additions
                charged to expense
            
            
            32,061
            
            
            -
            
            
            259,237Recovery
            
            
            -
            
            
            -
            
            
            -Write-off
            
            
            -
            
            
            -
            
            
            -Ending
                balance
            
            $
            491,908
            
            $
            491,908
            
            $
            751,145





**Inventories**





Inventories
      are composed of raw materials and components, work in progress, and finished
      goods, all of which are related to backlight products. Inventories are valued
      at
      the lower of cost (based on weighted average method) and the
      market.





**Property
      and equipment**





Properties
      and equipment are recorded at historical cost, net of accumulated depreciation.
      The Amount of depreciation is determined using the straight-line method over
      the
      shorter of the estimated useful lives and the remaining contractual life related
      to leasehold improvements, as follows:





Machinery
                and equipment
            
            
            5-10
                yearsFurniture
                and office equipment
            
            
            5
                yearsAccounting
                Software
            
            
            2
                yearsVehicles
            
            
            5-10
                yearsSoftware
            
            
            2-5
                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).





**Impairment
      of Long-Lived Assets**





The
      Company adopts the provisions of Statement of Financial Accounting Standard
      No.
      144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
      No.144”). SFAS No.144 requires that long-lived assets be reviewed for impairment
      whenever events or changes in circumstances indicate that the carrying amount
      of
      an asset may not be recoverable through the estimated undiscounted cash flows
      expected to result from the use and eventual disposition of the assets. Whenever
      any such impairment exists, an impairment loss will be recognized for the amount
      by which the carrying value exceeds the fair value.





F-10


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


**NOTE
      2 - SUMMARY OF ACCOUNTING POLICIES (Continued)**





**Income
      Taxes**





The
      Company accounts for income taxes in accordance with Statement of Financial
      Accounting Standards No 109, “Accounting for Income Taxes” (“SFAS No. 109”).
      SFAS No. 109 requires an entity to recognize deferred tax liabilities and
      assets. Deferred tax assets and liabilities are recognized for the future tax
      consequence attributable to the difference between the tax bases of assets
      and
      liabilities and their reported amounts in the financial statements. Deferred
      tax
      assets and liabilities are measured using the enacted tax rate expected to
      apply
      to taxable income in the years in which those temporary differences are expected
      to be recovered or settled. The effect on deferred tax assets and liabilities
      of
      a change in tax rates is recognized in income in the period that included the
      enactment date.





Well
      Planner is subject to a favorable income tax rate at 17.5% under Hong Kong
      Inland Revenue jurisdiction. However, Well Planner does not have Hong Kong
      sourced income. In
      accordance with Hong Kong tax regulation, Well Planner has not been taxed since
      its inception. There is no income tax for the companies domiciled in the BVI.
      Accordingly, the Company’s financial statements do not present any income tax
      provision related to the British Virgin Islands tax
      jurisdiction.




There
      is
      no income tax for the companies domiciled in the BVI. Accordingly, the Company’s
      financial statements do not present any income tax provision related to the
      British Virgin Islands tax jurisdiction.





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





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 and Diguang International Development Co.,
      Ltd.










F-11


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




**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 $12,328,675 and $15,834,868 at December 31, 2005 and 2006,
      respectively.





**Fair
      Value of Financial Instruments**





The
      carrying amount of cash, accounts receivable, other receivables, advance to
      vendor, accounts payable and accrued liabilities are reasonable estimates of
      their fair value because of the short maturity of these items. The fair value
      of
      amounts due from/to related parties and stockholders are reasonable estimate
      of
      their fair value as the amounts will be collected and paid off in a period
      less
      than one year.





**Value
      Added Tax**





Diguang
      Electronics is subject to value added tax (VAT) imposed by the PRC government
      on
      its domestic product sales. VAT rate for the Company is 17%. The input VAT
      can
      be offset against the output VAT. VAT payable or receivable balance presented
      on
      the Company’s balance sheets represents either the input VAT less than or larger
      than the output VAT. The debit balance represents a credit against future
      collection of output VAT instead of a receivable.





**Research
      and Development**





Research
      and development costs are expensed as incurred. The actual research and
      development expense incurred for the years ended December 31, 2004, 2005 and
      2006 was $802,511, $869,792, and $1,286,527, respectively. After offsetting
      against the government subsidies and other revenue, which were specified as
      supporting research and development efforts via the proceeds collected from
      value added tax, the net research and development expenses for the three years
      was $802,511, $727,302 and $786,322, respectively.




F-12


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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      2 - SUMMARY OF ACCOUNTING POLICIES (Continued)**





**Use
      of Estimates**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ materially from those
      estimates.





**Appropriations
      to Statutory Reserve**





Under
      the
      corporate law and relevant regulations in China, the subsidiary of the Company
      located in the mainland China (Diguang Electronics) is required to appropriate
      a
      portion of its retained earnings to statutory reserve. It is required to
      appropriate 15% 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.





**Comprehensive
      Income (Loss)**





The
      Company adopted Statement of Financial Accounting Standard No. 130, “Reporting
      Comprehensive Income” (“SFAS No. 130”), issued by the Financial Accounting
      Standards Board (“FASB”). SFAS No. 130 establishes standards for reporting and presentation
      of comprehensive income (loss) and its components in a full set of
      general-purpose financial statements. The Company has chosen to report
      comprehensive income (loss) in the statements of income and comprehensive
      income. Comprehensive income (loss) is comprised of net income and all changes
      to stockholders’ equity except those due to investments by owners and
      distributions to owners.





**Earnings
      (Loss) Per Share**





The
      Company presents earnings per share in accordance with the Statement of
      Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”).
      SFAS No. 128 replaces the calculation of primary and fully diluted earnings
      (loss) per share with basic and diluted earnings (loss) per share. Basic
      earnings (loss) per share includes no dilution and is computed by dividing
      income (loss) available to common shareholders by the weighted average number
      of
      common shares outstanding during the period. Diluted earnings (loss) per share
      reflects the potential dilution of securities that could share in the earnings
      of an entity, similar to fully diluted earnings (loss) per share. The
      outstanding shares subject to the options at December 31, 2006 were 506,000
      shares. The stock options granted during 2006 did not have impact on
      determination of the diluted EPS for the year ended December 31, 2006 as they
      were anti-diluted.




**Share-Based
      Payment**





The
      Company adopted Statement of Financial Accounting Standards No 123(R):
“Share-Based Payments” (SFAS 123R) effective January 1, 2006. SFAS 123R amends
      existing accounting pronouncements for share-based payment transactions in
      which
      an enterprise receives employee and certain non-employee services in exchange
      for (a) equity instruments of the enterprise or (b) liabilities that are based
      on the fair value of the enterprise’s equity instruments or that may be settled
      by the issuance of such equity instruments. SFAS 123R generally requires such
      transactions be accounted for using a fair-value-based method. As the Company
      did not grant any stock options and warrants before January 1, 2006 and granted
      stock options to purchase 540,000 shares of its common stock on March 1, 2006,
      the Company accounted for the stock option granted using a fair-value-based
      method in accordance with SFAS No. 123R.




F-13


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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      2 - SUMMARY OF ACCOUNTING POLICIES (Continued)**





**Recently
      Issued Accounting Pronouncements**





In
      July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
      Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109,"
      (thereafter FIN 48).  FIN
      48 prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken in a tax return.
      A
      company must determine whether it is "more-likely-than-not" that a tax position
      will be sustained upon examination, including resolution of any related appeals
      or litigation processes, based on the technical merits of the position. Once
      it
      is determined that a position meets the more-likely-than-not recognition
      threshold, the position is measured to determine the amount of benefit
      to **** recognize
      in the financial statements. FIN
      48is
      effective for fiscal years beginning after December 15, 2006. The company
      will adopt the provisions of FIN
      48beginning in the first quarter of 2007. The cumulative effect of applying the
      provisions of FIN
      48will be
      reported as an adjustment to the opening balance of retained earnings on
      January 1, 2007. The Company is currently assessing the impact of FIN
      48on its
      consolidated financial statements.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements.” SFAS No. 157 clarifies the definition of fair value,
      establishes a framework for measuring fair value and expands the disclosures
      on
      fair value measurements. SFAS No. 157 is effective for fiscal years
      beginning after November 15, 2007. The Company will adopt the provisions of
      SFAS No. 157 beginning in the first quarter of 2008 and therefore, the
      Company has not yet determined the effect, if any, the adoption of SFAS
      No. 157 will have on its results of operations or financial
      position.




In
      September 2006, the Securities and Exchange Commission (SEC) issued Staff
      Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatement
      when Quantifying Misstatements in Current Year Financial Statements’ (SAB 108),
      which will be effective for the fiscal year ending after November 15, 2006.
      The
      objective of SAB 108 is to eliminate diversity in practice surrounding how
      public companies quantify financial statement misstatements. SAB 108 requires
      quantification of financial statement misstatements based on the effects of
      the
      misstatements on the consolidated statement of income, the consolidated balance
      sheet and related financial statement disclosures.





F-14


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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      2 - SUMMARY OF ACCOUNTING POLICIES (Continued)**





**Recently
      Issued Accounting Pronouncements (Continued)**





According
      to SAB 108, both “rollover” and “iron curtain” approaches must be considered
      when evaluating a misstatement for materiality. This is referred to as the
“dual
      approach.” For the companies that have previously evaluated misstatements under
      one, but not both, of these methods, SAB 108 provides companies with a one-time
      option to record the cumulative effect of their prior unadjusted misstatements
      in a manner similar to a change in accounting principle in their annual
      financial statements during the effective time period if (i) the cumulative
      amount of the unadjusted misstatements at the beginning of the adopting year
      would have been material under the dual approach to their annual financial
      statements for the prior year or (ii) the effect of correcting the unadjusted
      misstatements during the adopting year would cause these annual financial
      statements to be materially misstated under the dual approach. In accordance
      with SAB 108, companies are allowed, upon adoption, to record the effects as a
      cumulative-effect adjustment to the retained earnings. The
      adoption of SAB 108 did not have significant impact on its financial position
      and results of operations.






In
      September 2006, the FASB issued FASB Staff Position: “Accounting for
      Planned Major Maintenance Activities,” (thereafter FSP AUG AIR-1). FSP AUG AIR-1
      addresses the accounting for planned major maintenance activities. FSP AUG
      AIR-1
      prohibits the use of the accrue-in-advance method of accounting in annual and
      interim financial reporting periods for planned major maintenance activities,
      which had previously allowed companies the right to recognize planned major
      maintenance costs by accruing a liability over several reporting periods before
      the maintenance was performed. FSP AUG AIR-1 still allows the direct expense,
      built-in-overhaul and deferral methods of accounting as acceptable, however
      it
      does mandate that companies apply the same method of accounting in both interim
      and annual financial reporting periods and that the method be retrospectively
      applied if applicable. FSP AUG AIR-1 is effective for fiscal years beginning
      after December 15, 2006. The Company does not expect that the adoption of
      FSP AUG AIR-1 will have a material effect on its consolidated financial
      statements.




**NOTE
      3 - INVENTORIES**





Inventories
      are consisted of the following:





December
                31,2005
            
            2006Raw
                materials
            
            $
            1,823,996
            
            $
            1,893,360Work
                in progress
            
            
            78,752
            
            
            930,190Finished
                goods
            
            
            1,544,348
            
            
            1,207,961Consignment
                goods
            
            
            
            
            
            522,380$
            3,447,096
            
            $
            4,553,891Provision
            
            
            -
            
            
            (545,446
            )Inventories,
                net
            
            $
            3,447,096
            
            $
            4,008,445




F-15


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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      4 - PROPERTY AND EQUIPMENT**





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





December
                31,2005
            
            2006Machinery
            
            $
            1,577,166
            
            $
            2,447,036Office
                equipment
            
            
            470,086
            
            
            464,738Vehicles
            
            
            144,995
            
            
            159,959Software
            
            
            27,124
            
            
            10,238Leasehold
                improvement
            
            
            373,427
            
            
            407,7562,592,798
            
            
            3,489,728Accumulated
                depreciation
            
            
            (472,905
            )
            
            (817,390
            )$
            2,119,893
            
            $
            2,672,338





The
      depreciation and amortization for the years ended December 31, 2004, 2005 and
      2006, were $85,393, $253,822 and $333,658, respectively.





Pursuant
      to the Board resolution of Diguang Electronics dated December 12, 2005, it
      was
      resolved that Diguang Electronics would acquire an office space of 1,220 square
      meters in Shenzhen at a total cost of RMB15,369,877 (equivalent of $1,969,462).
      On January 25, 2006, a pre-sale agreement was reached. Diguang Electronics
      had
      made full payment of RMB15,369,877 and the office space had not been put in
      use
      as of December 31, 2006.





**NOTE
      5 - RELATED PARTY TRANSACTIONS**





Related
      Party Relationships





Name
                of Related Parties
            
            Relationship
                with the CompanyMr.
                Yi Song
            
            One
                of 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 SongDongguan
                Diguang Electronic Science and Technology Co., Ltd. (a China based
                entity
                from which Diguang
              Electronics
                has rented the plant.)
            
            92%
                owned by Sino Olympics Industrial Limited and 8% owned by Shenzhen
                Diguang
                Engine & Equipment Co., Ltd.Sino
                Olympics Industrial Limited
            
            The
                representative of Song’s brothersDihao
                Electronics (Yangzhou) Co., Ltd.
            
            65%
                owned by Sino Olympic Industrial Ltd.





According
      to the lease agreement between Diguang Electronics and Dongguan Diguang
      Electronic Science & Technology Co., Ltd., a company 92% owned by Sino
      Olympics Industrial Limited and 8% owned by Shenzhen Diguang Engine and
      Equipment Co., Ltd., dated March 30, 2005, Diguang Electronics agreed to pay
      the
      rental of RMB380,000 per month including all maintenance fees based on the
      prevailing market price for a similar facility to be leased in Dongguan area
      and
      that the lease terms start from February 1, 2005 to January 31, 2010, and both
      parties agreed that the rental for three months from February to April 2005
      shall be waived as Diguang Electronics had to finish its interior remodeling
      during this period. Based on the above agreement, the Company recorded the
      monthly rental of RMB361,000 on a straight-line basis.




F-16


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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      5 - RELATED PARTY TRANSACTIONS (Continued)**





The
      break-down details of due from/to related parties were summarized as
      follows:





**Amount
                due from**
            
            Diguang
                Engine and Equipment
            
            Dongguan
                Diguang
            
            Dihao
                Electronics (Yangzhou)
            
            Stockholders
            
            TotalBalance
                at January 1, 2005
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            642,572
            
            $
            642,572Additions
            
            
            21,538
            
            
            -
            
            
            -
            
            
            644,734
            
            
            644,734Payments
                received
            
            
            -
            
            
            -
            
            
            -
            
            
            (148,672
            )
            
            (148,672
            )Additions
            
            
            -
            
            
            -
            
            
            -
            
            
            849,062
            
            
            849,062Translation
                adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            1,164
            
            
            1,164Offset
                by dividends declared
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,988,860
            )
            
            (1,988,860
            )Balance
                at December 31, 2005
            
            
            21,538
            
            
            -
            
            
            -
            
            
            -
            
            
            21,538Additions
                - sales
            
            
            -
            
            
            -
            
            
            1,255,628
            
            
            -
            
            
            1,255,628Additions
                - rental deposit
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Additions
                - loan
            
            
            -
            
            
            2,050,204
            
            
            -
            
            
            -
            
            
            2,050,204Additions
                - prepaid rental
            
            
            -
            
            
            55,997
            
            
            -
            
            
            -
            
            
            55,997Cash
                received
            
            
            (21,538
            )
            
            -
            
            
            (1,009,291
            )
            
            -
            
            
            (1,030,829
            )Balance
                at December 31, 2006
            
            $
            -
            
            $
            2,106,201
            
            $
            246,337
            
            $
            -
            
            $
            2,352,538





**Amount
                due to**
            
            Diguang
                Engine and Equipment
            
            Dongguan
                Diguang
            
            Stockholders
            
            TotalBalance
                at January 1, 2005
            
            $
            843,259
            
            $
            -
            
            $
            170,221
            
            $
            1,013,480Addition
            
            
            359,070
            
            
            -
            
            
            -
            
            
            359,070Rental
            
            
            -
            
            
            467,571
            
            
            -
            
            
            467,571Cash
                payments made
            
            
            (1,221,546
            )
            
            (332,470
            )
            
            (170,221
            )
            
            (1,724,237
            )Translation
                adjustment
            
            
            21,556
            
            
            -
            
            
            -
            
            
            21,556Balance
                at December 31, 2005
            
            
            2,339
            
            $
            135,101
            
            
            -
            
            
            137,440Rental
            
            
            
            
            
            544,365
            
            
            
            
            
            544,365Payments
                made
            
            
            (2,355
            )
            
            (679,466
            )
            
            -
            
            
            (681,821
            )Translation
                adjustment
            
            
            16
            
            
            -
            
            
            -
            
            
            16Balance
                at December 31, 2006
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -





**Stockholders**





The
      transactions between Diguang Electronic (HK) and Diguang Science and Technology
      were continued in early 2005. During the year ended December 31, 2005, Diguang
      Electronic (HK) collected $644,734 on behalf of Diguang Science and Technology.
      The stockholders used cash of $849,062 owned by Diguang Science and Technology
      (HK) Ltd. and made a payment of $148,672. The net cash disbursement was
      approximately $700,390.




F-17


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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      5 - RELATED PARTY TRANSACTIONS (Continued)**





**Stockholders**  **(Continued)**





In
      July
      2005, the Chinese government adjusted exchange rate between RMB and US dollar
      resulting in certain translation adjustment. During the year ended December
      31,
      2005, the translation adjustment of $1,164 was allocated to the amount due
      from
      stockholders.




In
      order
      to clear the outstanding balance of amount due from stockholders before becoming
      a public company through recapitalization and reorganization with a shell
      company, the Board of Diguang Science and Technology (HK) Ltd. resolved to
      declare dividends of $2,100,000 to two stockholders on December 12, 2005. Of
      the
      $2,100,000, $1,988,860 was used to offset the outstanding balance of amount
      due
      from stockholders, and the remaining $111,140 was presented as dividends payable
      as of December 31, 2005, which was paid during the first quarter of 2006. After
      a result, there was no outstanding balance of amount due from stockholders
      at
      December 31, 2006.





In
      addition, Diguang Science and Technology made payment of $170,221 to
      stockholders during 2005 to clear the outstanding balance of amount due to
      stockholder as of December 31, 2005.





**Shenzhen
      Diguang Engine & Equipment Co., Ltd**





During
      December 2005, Shenzhen Diguang Electronics purchased certain equipment on
      behalf of Diguang Engine and Equipment totaling $21,538, which was outstanding
      as of December 31, 2005 and collected during the first quarter of
      2006.





On
      the
      other side, Shenzhen Diguang Electronics used the fund of $359,070 from Shenzhen
      Diguang Engine and Equipment during the year ended December 31, 2005. In order
      to clear the outstanding related party accounts before becoming a public company
      through recapitalization and reorganization with a shell company, Shenzhen
      Diguang Electronics made a payment of $1,221,546 during the year ended December
      31, 2005, resulting in a balance of $2,339 at December 31, 2005, which was
      paid
      during the year of 2006. During the year ended December 31, 2005, translation
      adjustment of $21,556 was allocated to amount due to Shenzhen Diguang Engine
      and
      Equipment. For cash flow purpose, the net payments to amount due to Diguang
      Engine and Equipment were approximately $840,920 during the year ended December
      31, 2005.





**Dongguan
      Diguang Electronic Science and Technology Co., Ltd.**





The
      Song
      brothers built a facility in Dongguan City, Guangdong province, in early 2005
      under the name of Dongguan Diguang Electronic Science and Technology Co., Ltd.
      and moved the manufacturing activities of Shenzhen Diguang Electronics to this
      facility.





According
      to the lease agreement between Shenzhen Diguang Electronics and Dongguan Diguang
      Electronic Science & Technology Co., Ltd., dated March 30, 2005, Diguang
      Electronics agreed to pay the rental of RMB380,000 (approximately $49,000)
      per
      month including all maintenance fees based on the prevailing market price for
      a
      similar facility to be leased in Dongguan area and that the lease terms start
      from February 1, 2005 to January 31, 2010, and both parties agreed that the
      rental for three months from February to April 2005 would be waived as Shenzhen
      Diguang Electronics had to finish its interior remodeling during this period.
      Based on the above agreement, the Company recorded the monthly rental of
      RMB361,000 (approximately $46,000) on a straight-line basis and recorded amount
      of $467,571 due to Dongguan Diguang Electronic Science and Technology Co.,
      Ltd.
      It made payments of $332,470 during the year ended December 31, 2005, resulting
      in a balance of $135,101 as of December 31, 2005. For cash flow purposes, the
      net amount of $135,101 was included in operating activities considering
      that





F-18


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


**NOTE
      5 - RELATED PARTY TRANSACTIONS (Continued)**





**Dongguan
      Diguang Electronic Science and Technology Co., Ltd.
      (Continued)**





the
      nature of rental expense was part of operating activities during the year ended
      December 31, 2005. During the year ended December 31, 2006, Diguang Electronics
      paid rental of $679,466, and prepaid approximately one-month rental of $55,997
      to Dongguan Diguang Electronic Science and Technology Co., Ltd.





According
      to the Board resolution on September 26, 2006, Diguang Electronics decided
      to
      make a loan of $2 million to Dongguan Diguang Electronic Science and Technology
      Co., Ltd. through a bank at the current market rate for this type of loan,
      which
      would be used for the construction of the new production facility and dormitory
      in Dongguan. Therefore, on September 30, 2006, Diguang Electronics signed a
      mandate loan contract with Dongguan Diguang Electronic Science and Technology
      Co., Ltd., which limit the borrowing up to RMB16 million and requires interest
      payment at a rate consistent with the market interest rate. On September 30,
      2006, Diguang Electronics advanced RMB3,040,000 ($389,538) being the principal
      with a 5.5% interest rate to Dongguan Diguang Electronic Science and Technology
      Co., Ltd. through China Merchants Bank, Shenzhen Nanyou Branch. On October
      10,
      2006, Diguang Electronics advanced RMB12,960,000 ($1,660,666) being the
      principal with a 5.5% interest rate to Dongguan Diguang Electronic Science
      and
      Technology Co., Ltd. through China Merchants Bank, Shenzhen Nanyou Branch.
      The
      loan will be matured on November 30, 2007.





**Yangzhou
      Dihao Electronics Co., Ltd.**





During
      the year ended December 31, 2006, Diguang Electronics made sales of components
      of CCFL backlights of $1,255,628 to Dihao Electronics (Yangzhou) Co., Ltd.
      There
      was a related party trade receivable balance of $246,337 as of December 31,
      2006.




F-19


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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      6 ─ LONG-TERM INVESTMENT**





The
      investment in the following limited liability companies was accounted for under
      the cost method. Regarding investment in Huaxia (Yangzhou) Integrated O/E System
      Inc., whose main product is the chips used to make backlight units, the Company
      committed to invest up to 15% interest by contributing cash of $3 million.
      At
      July 6, 2006, the Company contributed investment of $1.5 million to Huaxia
      (Yangzhou) Integrated O/E System Inc., and planed to inject additional capital
      of $1.5million in two years after Huaxia (Yangzhou) Integrated O/E System Inc.
      changes the Business Registration Certificate.




**NOTE
      7 ─ INCOME TAXES**





The
      income before income taxes in 2004, 2005 and 2006, respectively, was as
      following:





Years
                Ended December 31,2004
            
            2005
            
            2006Income
                in Diguang Technology
            
            $
            3,824,816
            
            $
            4,089,348
            
            $
            354,934Income
                in Well Planner
            
            
            464,755
            
            
            249,327
            
            
            130,649Income
                in Diguang Electronics
            
            
            2,588,873
            
            
            5,329,266
            
            
            4,519,759Loss
                in the U.Sentity
            
            
            -
            
            
            -
            
            
            (2,681,887
            )Consolidation
                adjusting
            
            
            -
            
            
            (285,957
            )
            
            (204,194
            )$
            6,878,444
            
            $
            9,667,941
            
            $
            2,119,261





The
      income tax provision was as follows:





Years
                Ended December 31,2004
            
            2005
            
            2006Current:China
            
            $
            258,887
            
            $
            532,927
            
            $
            538,334America
            
            
            -
            
            
            -
            
            
            800258,887
            
            
            532,927
            
            
            539,134Deferred
                  income tax benefits:
            
            
            -
            
            
            -
            
            
            (86,572
            )$
            258,887
            
            $
            532,927
            
            $
            452,562





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, 2005 and 2006 were
      as
      follows:





F-20


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


**NOTE
      7 ─ INCOME TAXES (Continued)**





December
                31,2005
            
            2006Current:Bad
                debt allowance
            
            $
            -
            
            $
            32,027Inventory
                provision
            
            
            -
            
            
            54,54586,572Non-current:Net
                operating loss carry-forwards
            
            
            -
            
            
            4,255Others
            
            
            -
            
            
            157-
            
            
            
            
            
            4,411Total
            
            
            -
            
            
            90,983Less:
                Valuation allowance
            
            
            -
            
            
            (4,411
            )Net
                deferred tax assets:
            
            
            -
            
            
            (86,572
            )





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





Years
                Ended December 31,2004
            
            2005
            
            2006Statutory
                rate
            
            
            34.0
            %
            
            34.0
            %
            
            34.0
            %Income
                tax rate reduction
            
            
            (24.0
            )
            
            (24.0
            )
            
            (69.8
            )Permanent
                differences
            
            
            (0.1
            )
            
            (0.0
            )
            
            56.9Valuation
                allowance
            
            
            -
            
            
            -
            
            
            0.2Other
            
            
            (6.3
            )
            
            (4.3
            )
            
            -Effective
                income tax rate
            
            
            3.8
            %
            
            5.7
            %
            
            21.3
            %





**NOTE
      8 - EQUITY TRANSACTIONS**





Under
      China laws and regulation, Diguang Electronics is required to appropriate a
      portion of its retained earning to a general reserve, which cannot be used
      for
      dividend distribution purpose. In the years ended December 31, 2004, 2005 and
      2006, the appropriation was $103,321, $368,326 and $792,745, respectively,
      which
      was deemed a non-cash transaction for cash flow statement purpose.





On
      October 8, 2005, Diguang Electronics converted its retained earnings of RMB10
      million (equivalent $1,236,445) into the registered capital resulting in a
      total
      registered capital amounting RMB15 million (equivalent $1,840,845), which was
      approved by relevant government agency and verified by a CPA firm and was deemed
      as a non-cash transaction for cash flow reporting purpose.





On
      December 12, 2005, the Board of Diguang Technology resolved to declare dividend
      of $2.1 million from its retained earnings to Sino Olympics Industrial Limited.
      According to the board resolution, Sino Olympics Industrial Limited will receive
      the only cash payment of approximately $111,140 at the end of February 2006,
      after netting of amount of $1,988,860 of due from related parties, which was
      deemed as a non-cash transaction for cash flow statement purpose.





F-21


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


**NOTE
      8 - EQUITY TRANSACTIONS (Continued)**





As
      of
      March 17, 2006 right before the reverse merger and private placement took place,
      Online had 11,518,233 shares of common stock outstanding. The board of directors
      and majority shareholders of Online resolved to implement a 3-for-5 reverse
      split. Consequently, the total outstanding share number after the reverse split
      was 6,910,940. Terry Wonderly, the majority shareholder, agreed to cancel
      4,967,940 shares of common stock she owned. After this cancellation, Online
      had
      1,943,000 shares of common stock outstanding right before reverse merger and
      private placement. Of the 1,943,000 shares of common stock issued and
      outstanding, Chardan Capital LLC (the consultant of Online for the reverse
      merger and private placement) accounted for 800,000 shares and Chardan Capital
      Markets and Maxim (two placement agents) accounted for 243,000
      shares.





On
      March
      17, 2006, in connection with the reverse acquisition between Diguang
      International Holdings and Online, the Company issued 2.4 million shares of
      its
      common stock to 91 accredited investors at $5.00 per share to raise cash of
      $12
      million. After deducting the offering expenses of $1,647,124 paid by cash and
      the accrued offering expense of $93,500, the Company recorded the net proceeds
      of $10,259,376. The Company also deducted from additional paid-in capital the
      offering expenses of $25,718 incurred in 2005 and presented as a deferred
      expense on the balance sheet as of December 31, 2005. This deduction was deemed
      as a non-cash transaction for cash flow statement purpose.





In
      accordance with the signed Share Exchange Agreement, the shareholders of Diguang
      International Holdings Limited will be granted certain incentive shares if
      the
      Company (post reverse merger) meets certain financial performance criteria.
      The
      incentive shares and financial performance criteria are as follows:





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





(1)
      After-tax profit targets shall be the income from operations, less taxes paid
      or
      payable with regard to such income, excluding the effect on income from
      operations, if any, resulting from issuance of Incentive Shares in any year.




The
      Company accounts for the transactions of issuing these incentive shares based
      on
      the fair value on the grant date. Under SFAS 123R, the Company assesses whether
      it is probable at the grant date the awards would be earned and if it is
      probably the expense would be recorded over the period (which in this case
      is
      specified as the shareholders of Diguang
      International Development Co., Ltd. can earn
      any of the amounts each year). The
      Company did not meet the 2006 after-tax profit target. Consequently, no
      incentive shares were issued to date.




F-22


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


**NOTE
      9 - STOCK OPTIONS**





Effective
      on January 1, 2006, the Company adopted the fair value recognition provisions
      of
      Statement of Financial Accounting Standards (SFAS) No. 123R, *“Share-Based
      Payments.”* The
      Company recognized the share-based compensation cost based on the grant-date
      fair value estimated in accordance with the new provisions of SFAS No. 123R.
      There were no stock options issued before January 1, 2006. The Company used
      Black-Scholes option pricing model to determine the fair value of stock options
      on the grant date. The fair value of stock options for 540,000 shares was at
      approximately $11.10 per share, resulting in a share-based compensation totaling
      $5,992,509. Of the total fair value of 5,992,509, $2,134,342 was recognized
      as
      expenses under the graded method and the remaining balance will be recognized
      over the vesting period. As of December 31, 2006 only 33,333 shares of stock
      options became exercisable.




**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:





December
                31,2005
            
            2006Expected
                volatility
            
            
            N/A
            
            
            48.04
            %Weighted
                average volatility
            
            
            N/A
            
            
            N/AExpected
                life
            
            
            N/A
            
            
            7
                yearsRisk
                free interest rate
            
            
            N/A
            
            
            4.600
            %





The
      expected volatilities are essentially based on the historical volatility of
      the
      Company’s stock. The observation is made on a daily basis. The period of
      observation covered was from January 1, 2005 to March 1, 2006. The expected
      terms of stock options are based on the average vesting period and the
      contractual life of stock options granted. The 400,000 shares of stock options
      granted to employees vest on each of the first four anniversaries of the
      granting date. The 60,000 shares of stock options granted to directors vest
      at
      the end of each month starting from the grant date for 36 months in order to
      match the term of directorship. The 80,000 shares of stock options granted
      to
      the Chief Financial Officer vest at the end of each month starting from the
      grant date for 48 months. The risk-free rate is 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 6.3%.





**Stock
      Option Plan**





The
      Company’s 2006 Stock Incentive Plan (the “2006 Plan”), which is
      shareholder-approved, permits the grant of stock options to its employees up
      to
      1,500,000 shares of common stock. The Company believes that such awards better
      align the interests of its employees with those of its shareholders. Option
      awards are generally granted with an exercise price per share equal to the
      market price of the grant date. These options have up to ten-year contractual
      life term. 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 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 year ended December 31, 2006 is presented as
      follows:





F-23


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


**NOTE
      9 - STOCK OPTIONS (Continued)**


Stock
                  Options
              
              Shares
              
              Weighted-
                  Average Exercise Price
              
              Weighted
                  - Average Remaining Contractual Term
              
              Aggregate
                  IntrinsicValue
                    atReportingDateOutstanding
                  at Janaury1, 2006
              
              
              -
              
              $
              -
              
              
              -
              
              
              -Granted
              
              
              540,000
              
              
              5.00
              
              
              9.17
              
              
              -Exercised
              
              
              -
              
              
              -
              
              
              -
              
              
              -Forfeited
                  or expired
              
              
              34,000
              
              
              5.00
              
              
              9.17
              
              
              -Outstanding
                  at December 31, 2006
              
              
              506,000
              
              
              5.00
              
              
              9.17
              
              $
              -Exercisable
                  at December 31, 2006
              
              
              33,333
              
              $
              5.00
              
              
              9.17
              
              $
              -


(Note:
          The trading price of the Company at December 31, 2006 was $4.50 per share.
          Therefore, no intrinsic value reported.)





A
      summary
      of the status of the Company’s non-vested stock options during the year ended
      December 31, 2006 is presented below:





Non-vested
                Options
            
            Shares
            
            Weighted-Average
              Grant
                Date Fair ValueNon-vested
                at January 1, 2006
            
            
            -
            
            $
            -Granted
            
            
            540,000
            
            
            11.10Vested
            
            
            33,333
            
            
            11.10Forfeited
            
            
            (34,000
            )
            
            11.10Non-vested
                at December 31, 2006
            
            
            472,667
            
            $
            11.10





**NOTE
      10 ─ COMMITMENTS AND CONTINGENCIES**





**Operating
      Leases**





Diguang
      Electronics leases its plant and office from a local customer - Tianma
      Microelectronic Co., Ltd. (“TMCL”) since May 1, 2000. The lease term was
      from May 1, 2000 to April 30, 2003 with a monthly rental of RMB23,061
      (approximately $2,786) for both office and production facility. After the lease
      is terminated, another lease was signed with Tianma Microelectronic Co., Ltd.
      on
      an annual basis and renewable upon Diguang Electronics’ request. The lease was
      from February 1, 2005 to January 31, 2006 which was for the office space only,
      with a monthly rental of RMB15,039 plus maintenance fee of RMB 1,504
      (approximately $1,999). The lease for production facility was terminated on
      April 30, 2005, with a monthly rental RMB32,388 (approximately $3,913). As
      of
      December 31, 2006, the latest lease contract is dated from February 1, 2006
      to
      January 31, 2007, which was for the office space only, with a monthly rental
      of
      RMB15,052 plus maintenance fee of RMB 1,504 (approximately $2,080).





On
      December 20, 2004, Diguang Electronics entered into a lease agreement with
      Dongguan Diguang Electronic Science & Technology Ltd., 92% of which is owned
      by Diguang Electronics (Hong Kong) and 8% is owned by Shenzhen Diguang Engine
      & Equipment Co., Ltd., to rent the plant with rental of RMB440,000 plus
      maintenance fee of RMB80,000 per month for the first two years. The subsequent
      rental will be subject to change in line with the market price. The lease terms
      starts from January 20, 2005 and expire on January 19, 2010. On February 23,
      2005, both parties agreed that the rental for three months from February to
      April 2005 shall be waived as Diguang Electronic had to finish its interior
      remodeling during this period. On March 30, 2005, both parties agreed that
      the
      rental shall beRMB380,000 per month including all maintenance fee based on
      the
      prevailing market price for the similar facility to be leased in Dongguan area
      and that the lease terms start from February 1, 2005 to January 31, 2010. There
      were no other changes under the lease agreement. Based on the above amendments,
      the Company recorded the monthly rental of RMB361,000 on a straight-line
      basis.




F-24


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


**NOTE
      10 ─ COMMITMENTS AND CONTINGENCIES (Continued)**





**Operating
      Leases (Continued)**





Future
      minimum payments required under the lease agreement with Dongguan
      Diguang Electronic Science & Technology Ltd. that
      has
      an initial or a remaining lease term in excess of one year at December 31,
      2006
      are as follows:





Year
            
            Amount2007
            
            
            584,3082008
            
            
            584,3082009
            
            
            584,3082010
            
            
            48,6922011
            
            
            -Total
            
            $
            1,801,616





Both
      Well
      Planner and Diguang Technology do not have any office space leased in Hong
      Kong
      and British Virgin Islands. The rental expense for the years ended December
      31,
      2004, 2005, and 2006 were $219,499, $521,322 and $544,365,
      respectively.





On
      October 8, 2006, The company entered into a lease agreement with Wuhan Hanyu
      Guanjie Technology Ltd., to rent equipment with rental of RMB235,200
      (approximately $30,138) per month from December 1, 2006 to November 30, 2008.
      The equipment is leased for the newly
      set-up subsidiary in Wuhan, China, which is going to serve as an in-house
      supplier of 15”-19” CCFL backlight to a joint venture established by two
      Taiwan-based companies.





Future
      minimum payments required under the lease agreement with Wuhan
      Hanyu Guanjie Technology Ltd. that has
      an initial or a remaining lease term in excess of one year at December 31,
      2006
      are as follows:





Year
            
            Amount2007
            
            
            361,6562008
            
            
            331,518Total
            
            $
            693,174




F-25


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




**NOTE
      11 - 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 31,2004
            
            2005
            
            2006**Numerator:**Net
                income attributable to common shareholders
            
            $
            6,619,557
            
            $
            8,849,057
            
            $
            1,666,699Net
                income used in computing diluted earnings per share
            
            $
            6,619,557
            
            $
            8,849,057
            
            $
            1,666,699**Denominator:**Weighted
                average common shares outstanding - basic
            
            
            18,250,000
            
            
            18,250,000
            
            
            21,688,704Potential
                diluted shares from stock options granted
            
            
            -
            
            
            -
            
            
            -Weighted
                average common share outstanding - diluted
            
            
            18,250,000
            
            
            18,250,000
            
            
            21,688,704Basic
                earnings per share
            
            $
            0.36
            
            $
            0.48
            
            $
            0.08Diluted
                earnings per share
            
            $
            0.36
            
            $
            0.48
            
            $
            0.08





**NOTE
      12 - GOVERNMENT SUBSIDIES**





The
      local
      government in Shenzhen provided government subsidies sourcing from the proceeds
      of value added tax and corporate income tax collected to encourage Diguang
      Electronics’ research and development efforts. All
      subsidies were accounted for based on the hard evidence that Diguang Electronics
      should be entitled to receive these subsidies or that cash has been received. Government
      subsidies received with specification to support the research and development
      efforts were first offset against Diguang Electronics’ research and development
      expense and the remaining balance, if any, together with proceeds from other
      subsidy programs, were recognized as other income in accordance with
      internationally prevailing practice. The government subsidies for the years
      ended December 31, 2004, 2005, and 2006 were $5,547, $203,012 and $163,121,
      respectively.





F-26


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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**NOTE
      13 ─ CONCENTRATION OF CUSTOMERS AND VENDORS**





Customers
      and vendors who accounts for 10% or more of revenues, accounts receivable,
      purchases, and accounts payable are presented as follows:





Accounts
            
            
            
            AccountsRevenue
            
            Receivable
            
            Purchases
            
            Payable**2004**Customer
                A
            
            
            4
            %
            
            13
            %
            
            -
            
            
            -Customer
                B
            
            
            3
            %
            
            11
            %
            
            -
            
            
            -Customer
                C
            
            
            50
            %
            
            7
            %
            
            -
            
            
            -Vendor
                A
            
            
            -
            
            
            -
            
            
            9
            %
            
            13
            %Vendor
                F
            
            
            -
            
            
            -
            
            
            25
            %
            
            19
            %**2005**Customer
                C
            
            
            31
            %
            
            6
            %
            
            -
            
            
            -Customer
                D
            
            
            6
            %
            
            16
            %
            
            -
            
            
            -Customer
                E
            
            
            25
            %
            
            12
            %
            
            -
            
            
            -Vendor
                A
            
            
            -
            
            
            -
            
            
            14
            %
            
            7
            %Vendor
                F
            
            
            -
            
            
            -
            
            
            20
            %
            
            24
            %**2006**Customer
                F
            
            
            5
            %
            
            18
            %Customer
                E
            
            
            11
            %
            
            0
            %Customer
                C
            
            
            30
            %
            
            3
            %Vendor
                G
            
            
            
            
            
            
            
            
            11
            %
            
            0
            %Vendor
                F
            
            
            
            
            
            
            
            
            8
            %
            
            20
            %





**NOTE
      14 - SEGMENT REPORTING**





The
      Company currently operates only in one business segment. As the Company’s major
      production base is in China while export revenue and net income in overseas
      entities is accounted for a significant portion of total consolidated revenue
      and net income, management believes that the following tables present useful
      information to chief operation decision makers for measuring business
      performance, financing needs, and preparing corporate budget, etc.





Years
                Ended December 31,2004
            
            2005
            
            2006Sales
                to China domestic customers
            
            $
            4,667,219
            
            $
            4,921,563
            
            $
            3,969,812Sales
                to international customers
            
            
            19,816,003
            
            
            30,726,555
            
            
            27,888,427$
            24,483,222
            
            $
            35,648,118
            
            $
            31,858,239





F-27


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


**NOTE
      14 - SEGMENT REPORTING (Continued)**





Domestic
            
            InternationalCustomers
            
            Customers
            
            Total**2004**Revenue
            
            $
            4,667,219
            
            $
            19,816,003
            
            $
            24,483,222Gross
                margin
            
            
            39
            %
            
            42
            %
            
            41
            %Receivable
            
            
            1,511,062
            
            
            3,253,803
            
            
            4,764,865Inventory
            
            
            1,624,749
            
            
            -
            
            
            1,624,749Property
                and equipment
            
            
            491,102
            
            
            -
            
            
            491,102Expenditures
                for long-lived assets
            
            
            159,686
            
            
            -
            
            
            159,686**2005**Revenue
            
            $
            4,921,563
            
            $
            30,726,555
            
            $
            35,648,118Gross
                margin
            
            
            32
            %
            
            36
            %
            
            35
            %Receivable
            
            
            2,006,595
            
            
            4,074,832
            
            
            6,081,427Inventory
            
            
            3,447,096
            
            
            -
            
            
            3,447,096Property
                and equipment
            
            
            2,119,893
            
            
            -
            
            
            2,119,893Expenditures
                for long-lived assets
            
            
            1,722,424
            
            
            -
            
            
            1,722,424**2006**Revenue
            
            $
            3,969,812
            
            $
            27,888,427
            
            $
            31,858,239Gross
                margin
            
            
            31
            %
            
            33
            %
            
            33
            %Receivable
            
            
            1,309,279
            
            
            3,697,370
            
            
            5,006,649Inventory
            
            
            4,008,445
            
            
            -
            
            
            4,008,445Property
                and equipment
            
            
            2,672,338
            
            
            -
            
            
            2,672,338Expenditures
                for long-lived assets
            
            
            1,969,462
            
            
            -
            
            
            1,969,462





**NOTE
      15 - SUPPLEMENTARY INFORMATION ABOUT CASH FLOWS**





Years
                Ended December 31,**Cash
                Paid**
            
            2004
            
            2005
            
            2006Interest
            
            $
            22,552
            
            $
            29,982
            
            $
            -Income
                Tax
            
            
            91,499
            
            
            185,417
            
            
            689,049




Years
                        Ended December 31,**Non-Cash
                        Transactions**
                    
                    2004
                    
                    2005
                    
                    2006Due
                        from a related party
                    
                    $
                    -
                    
                    $
                    749,772
                    
                    $Dividend
                        payable
                    
                    
                    -
                    
                    
                    111,140
                    
                    
                    -Due
                        to a related party
                    
                    
                    -
                    
                    
                    1,239,088
                    
                    
                    -Common
                        stock
                    
                    
                    -
                    
                    
                    -
                    
                    
                    1,943Additional
                        paid-in capital
                    
                    
                    -
                    
                    
                    1,236,445
                    
                    
                    (1,943
                    )Appropriation
                    
                    
                    103,321
                    
                    
                    368,326
                    
                    
                    792,745Retain
                        Earnings
                    
                    
                    (103,321
                    )
                    
                    (3,704,771
                    )
                    
                    (792,745
                    )Deferred
                        offering expense
                    
                    
                    -
                    
                    
                    -
                    
                    
                    25,718Additional
                        paid-in capital
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (25,718
                    )


F-28




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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
        16 ─ Quarterly Financial Data (Unaudited)**
  Summarized
        quarterly financial data for 2004, 2005 and 2006 is as follows:


QUARTERLY2006
              
              
              First
              
              
              Second
              
              
              Third
              
              
              FourthNet
                  sales
              
              $
              8,751,178
              
              $
              8,987,996
              
              $
              8,252,019
              
              $
              5,867,046Gross
                  profit
              
              
              3,075,306
              
              
              3,262,744
              
              
              3,052,875
              
              
              1,076,191Net
                  income (loss)
              
              
              1,949,398
              
              
              833,404
              
              
              669,316
              
              
              (1,785,419
              )Basic
                  earnings per share
              
              $
              0.10
              
              $
              0.04
              
              $
              0.03
              
              $
              (0.08
              )QUARTERLY2005
              
              
              First
              
              
              Second
              
              
              Third
              
              
              FourthNet
                  sales
              
              $
              5,188,964
              
              $
              13,197,505
              
              $
              9,676,969
              
              $
              7,584,680Gross
                  profit
              
              
              1,525,879
              
              
              4,881,375
              
              
              3,876,508
              
              
              2,316,269Net
                  income (loss)
              
              
              1,026,804
              
              
              3,674,334
              
              
              2,738,496
              
              
              1,409,423Basic
                  earnings per share
              
              $
              0.06
              
              $
              0.20
              
              $
              0.15
              
              $
              0.08


**NOTE
      17─ SUBSEQUENT EVENTS**





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 (WOFE) in China
      started operation in early 2006.




F-29




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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      17─ SUBSEQUENT EVENTS** **(Continued)**





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





Pursuant
      to the signed option agreement, the Company has the right to acquire the 32.5%
      interest currently held by the Song Brothers in North Diamond, in exchange
      for
      cash payment of $487,500 plus interest at 6% per annum from the date of capital
      infused to the date of acquisition actually taken place. The Company also
      obtained an option to acquire the entire 65% interest from Sino Olympics with
      the expectation that the total investment could reach $3.25 million plus
      interest at 6% per annum from the date at which the Song brothers infused their
      capital into North Diamond to the date the Company exercises this acquisition
      option. If the Company exercises (solely based on the Company’s discretion) the
      aforementioned option, the Company will assume the obligation to contribute
      $3.25 million of the registered capital ($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,
      assuming 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 the interest paid in terms of a rate at
      6%
      per annum. This transaction will be accounted for assets exchanged between
      the
      entities under common control in accordance with Appendix D of SFAS No. 141.
      The
      amount of cash consideration exceeded the historical cost of the investment
      on
      the parent company’s book will be deemed as dividends.





F-30





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




**Exhibit
                No.**
            
            
            **Description**2.1
            
            
            Amended
                and Restated Share Exchange Agreement with Online, Diguang, Terri
                Wonderly, Sino Olympics, JLF Partners I, LP, JLF Partners II, LP,
                JLF
                Offshore Fund, Ltd., Craig Samuels and Hilltop Holdings Company,
                LP, dated
                March 17, 2006 (incorporated by reference from Form 8-K filed on
                March 21,
                2006)3.1(i)
            
            
            Amended
                and Restated Articles of Incorporation (incorporated by reference
                from
                Form S-1/A filed on October 30, 2006)3.1(ii)
            
            
            Amended
                and Restated By-laws (incorporated by reference from Form S-1/A filed
                on
                October 30, 2006)4.1
            
            
            Amended
                and Restated Share Exchange Agreement with Online, Diguang International
                Holdings Limited, Terri Wonderly, Sino Olympics, JLF Partners I,
                LP, JLF
                Partners II, LP, JLF Offshore Fund, Ltd., Craig Samuels and Hilltop
                Holdings Company, LP dated March 17, 2006 (Exhibit 2.1)4.2
            
            
            Placement
                Agent Agreement with Online, Chardan Capital Markets, LLC and Maxim
                Group,
                LLC dated September 27, 2005 (incorporated by reference from Form
                S-1
                filed on June 16, 2006)4.3
            
            
            Amended
                and Restated Form of Registration Rights Agreement dated January
                16, 2006
                (incorporated by reference from Form S-1 filed on June 16, 2006)10.1
            
            
            Employment
                Agreement of Yi Song (incorporated by reference from Form 8-K filed
                on
                April 21, 2006)10.2
            
            
            Employment
                Agreement of Hong Song (incorporated by reference from Form 8-K filed
                on
                April 21, 2006)10.3
            
            
            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)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




61




SIGNATURES


In
        accordance with Section 13 or 15(d) of the Exchange Act, the Company caused
        this
        report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
  **Diguang
                    International Development Co., Ltd.**
                  (Registrant)/s/ Keith
                HorBy:
                  Keith Hor
                Title:
                    Chief Financial Officer
                  (Principal
                    Financial Officer)
  Pursuant
        to the requirements of the Securities Act of 1933, this registration statement
        has been signed by the following persons in the capacities and on the dates
        indicated.
  Dated:
                  April 2, 2007
              /s/
                  Yi SongYi
                  SongChairman
                  of the Board and Chief Executive Officer
                (Director
                  and Principal Executive Officer)Dated:
                  April 2, 2007
              /s/
                  Hong SongHong
                  SongDirectorDated:
                  April 2, 2007
              /s/
                  Remo RichliRemo
                  RichliDirectorDated:
                  April 2, 2007
              /s/
                  Gerald BeemillerGerald
                  BeemillerDirectorDated:
                  April 2, 2007
              /s/
                  Tuen-Ping YangTuen-Ping
                  YangDirector




62