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 1934For the fiscal year ended
      December 31,
2008.




or




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





Commission File Number
000-06217




DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.


(Exact
name of registrant as specified in its charter)




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




Registrant’s
telephone number, including area code 86-755-2655 3152





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





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




Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.oYes Nox





Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d)
of the Act.    YesoNox




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.    YesxNoo










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





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




Large accelerated filero
            Accelerated fileroNon-accelerated filero
            Smaller reporting company x





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





Aggregate
market value of voting and non-voting common equity held by non-affiliates of
the registrant as of June 30, 2008, based upon the closing price of the common
stock as reported by the OTC Bulletin Board under the symbol “DGNG” on such
date, was approximately $ 6.8 million




22,072,000
shares of common stock outstanding as of February 28, 2009.





DOCUMENTS INCORPORATED BY
REFERENCE





None.









DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.


FORM 10-K


FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008





INDEX





Table
of Contents


PagePART
      I
              3Item
      1.
              Description
      of Business
              3Item
      1A.
              Risk
      Factors
              20Item
      1B.
              Unresolved
      Staff Comments
              33Item
      2.
              Property
              34Item
      3.
              Legal
      Proceedings
              34Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              35PART
      II
              35Item
      5.
              Market
      for Common Equity, Related Stockholder Matters and Issuer Purchases of
      Equity Securities
              35Item
      6.
              Selected
      Financial Data
              36Item
      7
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
              37Item
      7A.
              Quantitative
      and Qualitative Disclosures About Market Risk
              55Item
      8.
              Financial
      Statements and Supplementary Data
              55Item
      9.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              56Item
      9A.
              Controls
      and Procedures
              56Item
      9B
              Other
      Information
              59




1




PART
      III
              59Item
      10.
              Directors
      and Executive Officers, Corporate Governance and Board
      Independence
              59Item
      11.
              Executive
      Compensation
              63Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              69Item
      13.
              Certain
      Relationships and Related Transactions
              70Item
      14.
              Principal
      Accountant Fees and Services
              72PART
      IV
              73Item
      15.
              Exhibits,
      Financial Statement Schedules
              73Signatures
              76




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




The
Company specializes in the design, production and distribution of small to
medium-sized Light Emitting Diode, or “LED”, and Cold Cathode Fluorescent Lamp,
or “CCFL”, backlights for various Thin Film Transistor Liquid Crystal Displays,
or “TFT-LCD”, and Super-Twisted Nematic Liquid Crystal Display, or “STN-LCD”,
Twisted Nematic Liquid Crystal Display, or “TN-LCD”, and Mono LCDs as well
as  the LED lighting, LED displays and Notebook, which are widely
developed in production, taking together, these applications are referred to as
“LCD” applications.  Those applications not only include color displays for
cell phones, car televisions and navigation systems, digital cameras,
televisions, computer displays, camcorders, PDAs and DVDs, CD and MP3/MP4
players, appliance display and the like, but also include indoor and outdoor
lighting, home and office use with energy saving and
environmental  protections.





The
Company conducts that business principally through the operations of Shenzhen
Diguang Electronics, based in Shenzhen, thereafter “Diguang Electronics”, along
with its main backlight manufacturing operation in Dongguan, Guangdong Province
of China, Dihao (Yangzhou) Co., Ltd., based in Yangzhou, thereafter “Dihao”, and
Wuhan Diguang Electronics Co., Ltd, based in Wuhan, thereafter “Wuhan
Diguang”.   As of December 31, 2008, Diguang Electronics has
approximately 1,300 full-time employees, which changes from time to time as
needed; Diguang Electronics is headquartered in Shenzhen, China, with its
backlight manufacturing operations in Dongguan, China. As of December 31, 2008,
Dihao has approximately 254 full-time employees, which changes from time to time
as needed. Dihao is a subsidiary of North Diamond, 65% of which was acquired by
the Company on January 3, 2007. Wuhan Diguang was established as in-house
facilities mainly for a Taiwan-based customer with the capacity to provide large
inches TFT-LCD and it has approximately 155 employees as of December 31,
2008.





DongguanDiguang Electronics
Science andTechnologyCo., Ltd.,thereafter“Dongguan
Diguang”,was established
underthe
laws of the People’s Republic ofChinain 2004asthe
production base ofDiguang
Electronics.Dongguan
Diguangcompleted
its construction ofPlant
No.1 and Dormitory Nos. 1 and2
in2005,
whichwere subsequently rented to Diguang Electronics in 2005.The
construction ofPlant
No. 3 and Dormitory No. 3wascompletedin
2007and
the
total acreage of the property is67,176
m2.Dongguan
Diguang hasbecome a
newmanufacturing base for
backlight,
LED lighting R&D andproduction after it was
acquired on December 30, 2007 and theexpendedspace of the plantprovidesa vast opportunity to
enlarge the production capacity for business expansion.As of December 31
2008,Dongguan Diguang has
approximately65full-timeemployees.




3




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




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





In 2008,
the Company generated revenues of $55.4 million, net loss of $4.7 million and
cash flow used by operations of $2.7 million. The Company has been profitable
and cash flow positive each year since 1999 to 2006, and 2007 and 2008 are the
years it has recorded a loss.





The
Company’s Industry





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





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





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





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





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




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




4




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




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





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





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





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





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




5




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




(b)
The Acquisition of Diguang Holdings




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





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




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





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





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





These
three companies, Diguang Electronics, Well Planner and Diguang Technology,
comprise all of Diguang’ subsidiaries, at that time.
  The
address of the Company’s executive and administrative offices is 23rd Floor,
Building A, Galaxy Century, No.3069,
Caitian Road, Futian District, Shenzhen, the PRC. The
Company’s  telephone number is 86-755-2655-3152.





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




6




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





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





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





Diguang
Electronics designs, develops and manufactures LED and CCFL backlight units.
 These backlight units, as more fully described in the Narrative
Description of Business Section, are essential components used in illuminating
display panels such as TFT-LCD and color STN-LCD panels.  These display
panels are used in products such as mobile phones, PDAs, digital cameras,
computers or television displays and other household and industrial electronic
devices.  Diguang Electronics’ customers are located in both China and
overseas.  Diguang Electronics’ address is 23rd Floor, Building A, Galaxy
Century, No.3069, Caitian Road, Futian District, Shenzhen, the PRC.





Well
Planner was established under the laws of Hong Kong, Special Administrative
Region on April 20, 2001.  Originally owned directly by Yi Song and Hong
Song, it is now a wholly-owned subsidiary of Diguang as a result of a
reorganization of the Songs’ ownership interests in Diguang and the Diguang
subsidiaries in June 15, 2005.  Well Planner’s principal business is custom
forwarding of Diguang Electronics’ products, which assists Diguang Electronics
in meeting export and import requirements that apply to the international sale
of its products and the importation into China of raw materials that Diguang
Electronics uses in its manufacturing operations.  Well Planner performs
these services under a service agreement that provides for a service fee of not
less than 2% of the goods Well Planner has handled for Diguang Electronics. Well
Planner mainly sells to Diguang Technology and has smaller sales to third-party
customers since 2008. Well Planner’s address is 10/F, 579 Nathan Road, Mongkok,
Kowloon, Hong Kong SAR.




Diguang
Technology was established under the laws of British Virgin Islands on August
28, 2003. Originally owned directly by Yi Song and Hong Song, it is now a
wholly-owned subsidiary of Diguang 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.




7




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





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





Historically, the
capital expenditures have included the purchase of production equipment, office
equipment and leasehold improvements, all within the PRC. In connection with the
expansion and ramp-up of the Company’s PRC production capability and capacity,
Diguang incurred capital expenditures of $6.52 million, $6.17 million and $2.61
million in 2006, 2007 and 2008, respectively. The Company depreciates its
production equipment and office equipment on a straight-line basis over an
estimated useful life of five to ten years, and land usage right and plant and
buildings over 20 to 50 years.





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 the
Company’s  products justifies doing so.




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




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




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




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




As noted,
the Company’s and Diguang Holdings management believed that it was in the
Company’s interest to remain a Nevada corporation. Therefore, the Company and
Diguang Holdings’ shareholders agreed to amend the Share Exchange Agreement to
eliminate as a closing condition that Online redomicile to the British Virgin
Islands.  Accordingly, the Company’s 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 the Company. The
Company’s Articles of Incorporation, as amended, are attached as an exhibit to a
previous SEC filing.




8




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





In
addition to removing the closing condition that the Company 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 the Company’s
stock to its independent directors and certain members of its management. This
varied from the information regarding an option plan disclosed in the Current
Report on 8-K filed on January 17, 2006, which stated that an option plan would
be adopted by the Company after closing, would reserve 1,500,000 shares for
issuance under the plan and that no options would be issued prior to eighteen
months following closing without the consent of the member of the Board of
Directors not appointed by Diguang Holdings. The limit on options to be issued
of 1,500,000 remains in place, so that under the assumed plan approximately
960,000 shares remain available for future issuance, and the grant of any of
those options prior to 18 months following the closing of the share exchange
remains subject to the consent of the member of the board of directors not
appointed by Diguang Holdings.





The
parties had intended to increase the authorized stock of Online to 50,000,000
shares as part of the process of converting to a British Virgin Islands
corporation. This increase was needed to provide for the issuance of additional
stock compensation to certain of Diguang Holdings’ shareholders if the Company
achieves 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, the Company amended its certificate of incorporation to increase its
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, the Company acquired all of Diguang Holdings’ issued and
outstanding shares of common stock in exchange for 18,250,000 shares of its
common stock. Prior to that, the Company effected a 3 for 5 reverse stock split,
information regarding which was provided in Online’s January 17, 2006 Form 8-K
and its Current Reports on Form 8-K filed on February 15, 2006 and February 24,
2006, and 4,967,940 shares of the Company’s stock standing in the name of Terri
Wonderly were cancelled.  As a result of all of the foregoing and the
issuance of 2,400,000 shares in the Offering, the Company now has 22,593,000
shares of common stock issued.  Of that amount, Diguang Holdings’ former
shareholders own 80.8%, with the balance held by those who held Online’s shares
prior to the Share Exchange and the investors in the Offering. As a result of
the Share Exchange, Diguang Holdings’ former shareholders obtained control of
Diguang, and Diguang Holdings’ officers and directors were appointed as
Diguang’s officers and directors.




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




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





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




9





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




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





(d)
Financial Information about Geographic Areas





Total revenues by category
of activity and geographic market





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





Years
      Ended December 31,2006
                        
                        
                        2007
                        
                        
                        2008Sales
      to China domestic customers
                        
                        $
                        2,714,184
                        
                        
                        $
                        7,297,447
                        
                        
                        $
                        15,002,027Sales
      to overseas customers
                        
                        
                        31,528,433
                        
                        
                        
                        38,611,809
                        
                        
                        
                        40,428,654$
                        34,242,617
                        
                        
                        $
                        45,909,256
                        
                        
                        $
                        55,430,680





Financial Information about
Geographic Areas





During
2006, 2007 and 2008 the Company derived $2,714,184, $7,297,447 and $15,002,027
respectively, of its revenues from customers in China, excludingHong Kong and Taiwan, the
domicile of the Company’s four principal operating subsidiaries, Diguang
Electronics, Dihao, Wuhan Diguang and Dongguan Diguang.





Revenues
from customers outside of China for 2006, 2007 and 2008 totaled $31,528,433,
$38,611,809 and $40,428,654 respectively. The Company attributes sales to
individual foreign countries based on the destination to which it ships the
products.





There are
certain risks associated with the concentration of the Company’s operations in
China. These include currency risks and political risks. See Risk
Factorsbelow.Until recently, the Chinese
government pegged its currency, the renminbi (RMB) to the United States dollar,
adjusting the relative value only slightly and on infrequent occasion. Many
people viewed this practice as leading to a substantial undervaluation of the
RMB relative to the dollar and other major currencies, providing China with a
competitive advantage in international trade. China now allows the RMB to float
to a limited degree against a basket of major international currencies,
including the dollar, the Euro and the Japanese yen. This change in policy
produced a cumulative revaluation of the RMB of about 17.6% so far.




10





This
17.6% increase in the value of the RMB has produced certain effect on the
Company’s business or its financial performance.  If the Chinese government
allows significant further revaluations of the RMB in the near future, it could
have adverse consequences on the Company’s ability to compete internationally.
In particular, such a revaluation would make the Company’s products relatively
more expensive in markets outside of China than before the revaluation,
representing about 73% of the Company’s product revenues, including those from
Hong Kong, which could slow or eliminate the Company’s anticipated
growth.





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





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





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





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





(e)
Narrative Description of Business





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





The
Company specializes in the design, production and distribution of small to
medium-sized Light Emitting Diode and Cold Cathode Fluorescent Lamp backlights
for various Thin Film Transistor Liquid Crystal Displays, or “TFT-LCD”, and
Super-Twisted Nematic Liquid Crystal Display, or “STN-LCD”, Twisted Nematic
Liquid Crystal Display, or “TN-LCD”, and Mono LCDs as well as the LED lighting,
LED displays and Notebook, which are widely developing in the production, taken
together, these applications are referred to as “LCD” applications. Those
applications not only include color displays for cell phones, car televisions
and navigation systems, digital cameras, televisions, computer displays,
camcorders, PDAs and DVDs, CD and MP3/MP4 players, appliance displays and the
like, but also include the indoor and outdoor lighting, the home and office use
with the energy saving and environmental protections. The Company conducts that
business principally through the operations of Diguang Electronics, Dihao, and
Wuhan Diguang.





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




11




The
Company achieved some success in expanding its customer base and its geographic
markets during 2008. Sales to the Company’s largest customer generated 20% of
its revenues for 2008 compared with 16% in 2007. Sales to the Company’s three
largest customers increased to 42% of 2008 revenue compared to 39% in 2007. The
Company’s top three customers in 2008 are Hannstar-TPV Display (Wuhan) Corp.,
Transcend Optronics and LG.Philips Ltd. The Company is continuing its efforts to
diversify and broaden its customer base to become less reliant on these
customers, including the development of new products, such as backlights for
flat panel televisions.





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





Diguang
Electronics caters to the global demand for backlight products on the basis of
quality, cost and order fulfillment time. Diguang Electronics’ focus on product
quality includes the use of quality materials obtained from selected
international suppliers, and thorough quality control inspection of raw
materials prior to use in production and finished products prior to shipment.
Diguang Electronics also strives to offer its products at a lower cost than most
competitors. This is made possible through Diguang Electronics’ skilled labor
force with a relative lower labor cost level after the enactment and
effectiveness of the new labor law in China on April 1, 2008. Existing
economies of scale also contribute to keeping costs low. Diguang Electronics
also has the ability to deliver its initial run of products within 15 to 30 days
from the time an order is placed, while many of its competitors may require more
time. This rapid fulfillment capability is possible because of Diguang
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 ISO9002 certification from Shenzhen Quality
Certification Centre; in 2002 it received QS9000 certification from Moody
International Certification, ISO9001 certification from the TUVCERT
Certification Body in 2005, and the certification of ISO/TS16949 in 2006. These
certifications signify that Diguang Electronics has established and adheres to
high quality standards in the conduct of its product design and manufacturing
operations.





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




The
Company’s sales are obtained either through its internal workforce, its
subsidiaries of Well Planner and Diguang Technology, or through commissioned
sales agents that represent the Company in locations outside of
China.





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




12




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





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





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





(f)
Significant Recent Events





Acquisition
of 65% interest in North Diamond





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





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





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




13




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





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





Setting
up of Wuhan Diguang





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





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




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





Acquisition
of 100% interest in Dongguan Diguang





On
December 29, 2007, Diguang Holdings entered into a sale and purchase agreement,
or the “Agreement”, with Sino Olympics Industrial Limited, or “Sino Olympics”,
and Shenzhen Diguang Engine & Equipment Co., Ltd., to acquire a 100%
interest in Dongguan Diguang. The closing date of the acquisition was December
30, 2007. The administrative approval process by governmental authorities was
completed on October 20, 2008.




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





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





On
January 1, 2008, Diguang Holdings assigned 70% of interest in Dongguan Diguang
to Diguang Electronics.





Credit
facilities provided by bank




14




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


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


As of
December 31, 2008, the Facilities were used in a short-term loan of
RMB30,000,000 and notes payable of RMB10,000,000.





Research and
Development





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





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





The
Company has spent $1,286,527, $1,214,684 and $1,610,329 for the years ended
2006, 2007 and 2008 respectively on research and development efforts to improve
existing products and processes and to develop new products, not including the
expenses to develop particular backlight products utilizing existing technology
to meet customer specifications for products.





The
Company’s major manufacturing processes are “dry,” meaning that they do not
involve significant quantities of solvents, plating solutions or other types of
materials that lead to the generation of large amounts of hazardous wastes,
process wastewater discharges or air pollutant emissions.  The Company has
moved into its state-of-the-art manufacturing facility in Dongguan in 2005, and
as a result the Company does not anticipate any material capital expenditures
for pollution control equipment for 2009.  The Company is contemplating the
construction or acquisition of additional manufacturing facilities if its
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 the Company’s
processes.




Customers





The
Company’s customer base consists of many large and medium sized companies, which
include PVI,  ALCO, HOT TRACKS, Hannstar-TPV Display (Wuhan) Corp., Transcend Optronics, LG Philips,
IZTECHNOLOGY, Gree, Shanghai Tianma, Seiko, Midea, Affitronics, Samsung, CCT,
Ellipse, Secure, Archos and Wintek, etc.  In 2008, the Company’s largest
customer by sales volume accounted for approximately 20% of total revenues.
 The Company’s top two customers accounted for approximately 31% of
revenues and collectively, its top three customers that year generated about 42%
of revenues.  The Company’s top three customers included Transcend
Optronics, Hannstar-TPV Display (Wuhan) Corp. and LG. Philips Ltd. As a result,
the loss of one or more of the Company’s top customers or a significant decrease
in the volume of business that the Company does with those customers would have
a material adverse effect on its business.  To help protect against that
risk, the Company continually seeks to diversify its customer base, in
particular by expanding its international sales efforts.  The Company also
expects to introduce new backlight technologies for a variety of applications
that will help expand and diversify its customer base.




15




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





The
Company does not do any business directly with governments, although many of its
customers may make products for sale to governments around the
world.





Competition





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





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




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





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




The
Company’s quality enhancements include innovations in light guide technology
with a corresponding increase in backlight life.  The improved overall
performance resulting from these enhancements is one of the reasons the Company
has enjoyed a history of rapid growth.  The Company believes, based on its
familiarity with other products in the market, that it has a technological
advantage relative to other producers.  The Company expects that this
existing technological advantage, combined with its anticipated development of
additional patented technology, will continue to give it a competitive
advantage.





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




16





Intellectual
Property





Diguang
Electronics owns 14 current patents. The patent transfer agreement for seven
unexpired Chinese is in the process of being drafted as the Company is
discussing with Mr. Yi Song, the owner of the patents and Diguang’s Chairman and
CEO, whether or not any consideration, either cash or stock or both, would be
paid for the contemplated patents transfer. However, prior to the completed
patent transfer, Yi Song by way of a written license allowed Diguang Electronics
to use his backlight patents free of charge until the relevant patents have been
transferred to Diguang Electronics. Two of these patents expire in March 2008
and October 2009, which are not significant to the Company’s operation,
respectively, and the remaining six have expiration dates ranging from 2010 to
2013.




These
patents include:





Patent
      Name
                      
                      Patent
      Number
                      
                      Holder
                      
                      Effective date
      of Patents
                      
                      Expiry
      date of Patents1
                      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
                      Advanced
      Efficiency Backlight of Side radiation
                      
                      ZL
      01 2 19472.7
                      
                      Yi
      Song
                      
                      13/04/2001
                      
                      12/04/20116
                      Efficiency
      Uniform Backlight of Front Backlight and White Backlight
      radiation
                      
                      ZL
      01 2 71009.1
                      
                      Yi
      Song
                      
                      19/11/2001
                      
                      18/11/20117
                      High
      Efficiency of Light Source for Planar Fluorescent Lamp
                      
                      ZL
      200420006645.8
                      
                      Yi
      Song
                      
                      11/03/2004
                      
                      10/03/20148
                      Improved
      Uniform and Luminous Side Backlight Device with High
      Efficiency
                      
                      ZL
      090220868
                      
                      Yi
      Song
                      
                      30/11/2001
                      
                      29/11/20119
                      Efficiency
      Fluorescent Lamp of New Model
                      
                      ZL
      200320130305.1
                      
                      Diguang
      Electronics
                      
                      23/12/2003
                      
                      22/12/201310
                      Efficiency
      Photosensitive Sensor for Graphic Content
                      
                      Taiwan
      Patent
                      
                      Yi
      Song
                      
                      22/03/2001
                      
                      22/03/201111
                      LED
      Optic Display
                      
                      ZL200410074672.3
                      
                      Yi
      Song
                      
                      13/09/2004
                      
                      13/09/2024
  17
  12
                LED
      Grouping with Parallel Connected Backlight Modules for Big Sized TFT-LCD
      TV
                
                ZL200620120892.X
                
                Diguang
      Electronics
                
                11/07/2006
                
                11/07/201613
                LED
      backlight module with adiabatic euphotic material radiator
      system
                
                ZL200720005429.5
                
                Diguang
      Electronics
                
                23/04/2007
                
                23/04/201714
                Backlight
      Modules with LED Reflect Concave
                
                ZL200620120893.4
                
                Diguang
      Electronics
                
                11/07/2006
                
                11/07/201615
                arrayed
      LED backlight modules with direct type
                
                ZL200620120894.9
                
                Diguang
      Electronics
                
                11/07/2006
                
                11/07/201616
                Lightings
      and Lamps
                
                ZL200720001219.9
                
                Diguang
      Electronics
                
                09/01/2007
                
                09/01/201717
                Inserted
      CCFL Backlight Module
                
                ZL200620139418.1
                
                Diguang
      Electronics
                
                30/12/2006
                
                30/12/201618
                LED
      Light Source System with Heat Conduction and
                  Heat
      Dissipation System
                
                200710305676.1
                
                Diguang
      Electronics
                
                19/12/2007
                
                19/12/202719
                Side
      Lighting Backlight with Integrated Light Guide Plate and Braced
      Frame
                
                ZL200720156070.1
                
                Diguang
      Electronics
                
                26/07/2007
                
                26/07/201720
                LED
      Lightings (Streetlight)
                
                ZL200720126525.5
                
                Diguang
      Electronics
                
                08/08/2007
                
                08/08/201721
                Direct
      Type Backlight
                
                ZL200510090917.6
                
                Diguang
      Electronics
                
                19/08/2005
                
                19/08/202522
                Lightings
      and Lamps
                
                ZL200720177852.3
                
                Diguang
      Electronics
                
                12/10/2007
                
                12/10/201723
                Video
      Controlled LED Backlight and Its Controlling Calculation
                
                200610090989.5
                
                Diguang
      Electronics
                
                06/07/2006
                
                06/07/202624
                Efficiency
      Planar Light Source
                
                ZL200410039145.9
                
                Diguang
      Electronics
                
                12/02/2004
                
                12/02/2024





Almost
all of the Company’s products incorporate technology from one or more of the
above patents.  As these patents expire, the technology that they represent
will become available to other backlight manufacturers. The expiration of two
patents in 2008 and 2009 will not have material adverse impact on the Company’s
operation results.  However, the pace of change in this field will
generally mean that the technology represented by the expired patents is
out-of-date.  The Company’s efforts will remain directed toward the
development of new patents for leading-edge technologies that will help the
Company to maintain its technological advantage.  The Company also intends
to patent its new inventions both in China and internationally, and it continues
to work closely with leading Chinese universities and research institutions in
the development of such technology.





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





DOING
BUSINESS IN CHINA




CHINESE
LEGAL SYSTEM




18




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




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





ECONOMIC
REFORM ISSUES




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




·    The Company will be able to capitalize
on economic reforms;





·    The Chinese Government will continue
its pursuit of economic reform
policies;




·    The economic policies, even if pursued,
will be successful;




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




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




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




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




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




19




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





ITEM
1A.   RISK FACTORS.




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




Risks
Related to the Company’s Business




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




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




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




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




20




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




A
significant portion of the Company’s revenue is generated from a small number of
customers.  42% of the total revenue was generated from top three customers
in the year ended December 31, 2008.  Roughly 20% of the total revenue
comes from one largest customer.  Under present conditions, the loss of any
of these customers, or a significant reduction in the Company’s level of sales
to any or all of them, could have a material adverse effect on the Company’s
business and operating results.





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





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




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




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




21




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




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




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




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




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




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




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




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




The
Company extends credit to its customers based on assessments of their financial
circumstances, generally without requiring collateral.  As of December 31,
2008, the Company’s accounts receivable, after deducting an allowance for bad
debts, was $9.9 million.  The Company’s overseas customers may be subject
to economic cycles and conditions different from those of its domestic
customers. The Company may also be unable to obtain satisfactory credit
information or adequately secure the credit risk for some of these overseas
customers.  The extension of credit presents an exposure to risk of
uncollected receivables.  Additionally, the Company may not realize from
receivables denominated in a foreign currency the anticipated amounts in United
States dollar terms due to fluctuations in currency values. The Company’s
inability to collect on these accounts may reduce on the Company’s immediate and
long term liquidity.





22




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




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




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




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




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




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




23





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




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




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




Diguang
Electronics currently possesses 14 Chinese patents, and the Company utilizes the
additional patented technologies that are material to its business, which are in
the process of being transferred to Diguang Electronics from Yi Song, referred
to in its prior filings as Song Yi to conform to Chinese convention of last name
first, its Chairman, CEO and the current owner of the patents. If the patents
are not successfully transferred, the Company will not be able to use the same
patents, which would hamper the Company’s production and this would have a
material and adverse effect on its business and revenues. If a patent is
infringed upon by a third party, the Company may need to devote significant time
and financial resources to attempt to halt the infringement. The Company may not
be successful in defending the patents involved in such a dispute. Similarly,
while the Company does not knowingly infringe on patents, copyrights or other
intellectual property rights owned by other parties; it may be required to spend
a significant amount of time and financial resources to resolve any infringement
claims against it.  The Company may not be successful in defending its
position or negotiating an alternative remedy.  Any litigation could result
in substantial costs and diversion of the Company’s management resources and
could reduce the Company’s revenues and profits.




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




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




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




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




24




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




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




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




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




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




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




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




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





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




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




·
            
            enhance
      quality, operational, financial and management
  systems;





·
            
            expand
      facilities and equipment; and




25




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




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




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




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




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




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





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




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




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




26




Risks Related to
International Operations




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




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




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




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





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




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





27




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




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




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




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





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




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





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




28




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




The value
of the Renminbi, the main currency used in China, fluctuates and is affected by,
among other things, changes in China’s political and economic conditions. The
conversion of Renminbi into foreign currencies such as the dollar has been
generally based on rates set by the People’s Bank of China, which are set daily
based on the previous day's interbank foreign exchange market rates and current
exchange rates on the world financial markets. The official exchange rate had
remained stable over the past several years. However, Chinese Government
recently adopted a floating rate with respect to the value of Renminbi against
foreign currencies, with a 0.3% fluctuation. As a result, the exchange rate was
decreased to RMB 6.82 against the dollar at December 31, 2008, accounting for a
6.5% decline of Renminbi within one year. This floating exchange rate, and any
appreciation of the Renminbi that may result from such rate, could have various
effects on the Company’s business, which include making its products more
expensive relative to those of its competitors than has been true in the past,
or increasing the Company’s profitability when stated in dollar terms.  It
is not possible to predict if the net effects of the appreciation of the
Renminbi, if it occurred, would be positive or negative for the Company’s
business.





Changes
in foreign exchange regulations in China may affect the Company’s ability to pay
dividends in foreign currency or conduct other business for which the Company
would need access to foreign currency exchange.




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




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




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




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




29




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




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




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





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




The
Company is subject to various tax regimes, which may adversely affect its
profitability and tax liabilities in the future.




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




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




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




Cessation
of the income tax exemption for Diguang Electronics may have an adverse impact
on the Company’s net profits.




Diguang
Electronics is registered in Shenzhen and was subject to a favorable income tax
rate of 15% compared to a statutory income tax rate of 33%, 30% for the central
government and 3% for the local government.  Diguang Electronics has
been deemed a high-tech company by Shenzhen Bureau of Science, Technology &
Information.  Under this category, Diguang Electronics was entitled to
enjoy a 50% exemption from enterprise income tax at the rate of 15% for the
years from January 1, 2004 to December 31, 2006.  Diguang Electronics
was subject to an income tax rate of 15% since January 1, 2007 according to the
old tax law.  A newly enacted enterprise income tax law (“EIT Law”)
was effective January 1, 2008.  The EIT Law imposes a unified EIT of
25% on all domestic-invested enterprises and foreign invested enterprises unless
these foreign investment enterprises qualify under certain grand-father
rules.  For enterprises like Diguang Electronics which were taxed
under the privileged preferential income tax rate of 15% under the old tax law,
the applicable income tax rate should transit to 25% in 5 years, that is, 18% in
the year ended December 31, 2008, 20%, 22%, 24% and 25% in the following four
years ending December 31, 2009, 2010, 2011 and 2012, and 25% thereafter. So the
applicable income tax rate for Diguang Electronics is 18% for the year ended
December 31, 2008.




30




Cessation
of value added tax refund for Diguang Electronics may have an adverse impact on
the Company’s net profits.




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




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




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





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





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




31




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




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




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




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




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




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




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




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




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





32




Risks
Related to the Company’s Securities.




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




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




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




The
Company’s common stock is currently traded on the Over the Counter Bulletin
Board. If the Company does not succeed in securing a listing on the NASDAQ
Market, it could limit the ability to trade the Company’s common stock and
result in a reduction of the price that can be obtained for shares being
sold.




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




The
Company may not pay dividends.




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




The
Company may not raise funds in the equity market for future
expansion
  The stock
price of the Company may plunge to its bottom price during times
of economic recession and may not recover for a long time. This will
affect its ability to raise fund in the stock market as the stock price cannot
rebound from the prospective investors' perspective.
 
 Though a
company's nominal share price by itself may not provide much assistance in
judging its business prospects, however, stocks at low levels can
negatively impact investors' psychology and therefore it will limit such
company’s
ability to raise new equity capital or make acquisitions using stock as
currency, and it limits institutional ownership and brokerage research coverage.
In addition, some brokerages discourage customers from buying lowly priced
stocks.
 
 With a
fundamental recovery in the underlying business, of course, not
all stocks can snap back to their reasonable levels. Moreover, history
shows that certain stocks can languish in low single digits for years once they
fall to that range and it will trade at low price-earnings multiple for
years which will adversely affect its expansion.
  The
Company may face severe operating environment during times of global
economic recession.
  ’ ’ ’ ’ ’ ’


ITEM
1B.   UNRESOLVED STAFF COMMENTS




Not
Applicable.


33


ITEM
2.   PROPERTY




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




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





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





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





Future
minimum payments required under the lease agreement with Hannstar-TPV Display
(Wuhan) Corp. and Wuhan TPV that has an initial or a remaining lease term in
excess of one year at December 31, 2008 are as follows:





Year
      Ended December 31,
                
                Amount2009
                
                $
                183,0962010
                
                
                183,096$
                366,192





In
October 2007, Dihao entered into a lease agreement with Transcend Optronics
(Yangzhou) Co, Ltd. to rent the factory at a rental of RMB 96,747, or
approximately $12,750, per month for the period from October 1, 2007 to
September 30, 2009. The monthly rental increased to RMB 99,713, or approximately
$14,336, from June 1, 2008.  The new lease agreement, which will last
from October 2009 to September 2011, is still under preparation.





Future
minimum payments required under the lease agreement for the manufacturing
facilities of Dihao that has an initial or a remaining lease term in excess of
one year at December 31, 2008 are as follows:








Years
      Ended December 31,
                  
                  Amount2009
                  
                  $
                  131,538




ITEM
3.   LEGAL PROCEEDINGS.




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




34




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




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




None





PART
II




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




(a)
MARKET PRICES OF COMMON STOCK




The
Company’s common stock currently trades in the over-the-counter market on the
OTC Bulletin Board under the symbol “DGNG”.  Since the Company’s fiscal
year 2005 and until the announcement regarding the Company’s 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 the Company’s common
stock was $1.01. Prior to the Share Exchange, Diguang’s stock did not trade in
any public markets. The following table shows for the periods indicated the high
and low bid quotations for Diguang’s common stock, as reported by financial
reporting services. These quotations are believed to represent inter-dealer
quotations without adjustment for retail mark-up, mark-down or commissions, and
may not represent actual transactions.





PERIOD
                
                HIGH
      BID
                
                
                LOW
      BIDFISCAL
      2007First
      Quarter
                
                $
                4.5
                
                
                $
                2.2Second
      Quarter
                
                $
                3
                
                
                $
                1.3Third
      Quarter
                
                $
                1.9
                
                
                $
                1.2Fourth
      Quarter
                
                $
                2.8
                
                
                $
                1.15FISCAL
      2008First
      Quarter
                
                $
                2.5
                
                
                $
                0.95Second
      Quarter
                
                $
                1.30
                
                
                $
                0.75Third
      Quarter
                
                $
                1.0
                
                
                $
                0.46Fourth
      Quarter
                
                $
                0.95
                
                
                $
                0.06





(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, 2008, there were
22,593,000 shares of the Company’s common stock issued and 22,072,000 shares
outstanding and the Company had approximately 121 stockholders of record as
of December 31, 2008.




35




(c)
DIVIDENDS




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




(d)
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN


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




Plan Category
                    
                    Number of
                      securities
                      to be
                      issued upon
                      exercise of
                      outstanding
                      options,
                      warrants
                      and rights
                    
                    
                    Weighted
                      average
                      exercise
                      price of
                      outstanding
                      options,
                      warrants
                      and
                      rights($/sh)
                    
                    
                    Number
                      of
                      securities
                      remaining
                      available
                      for
                      future
                      issuanceEquity
      Compensation Plan approved by security holders
                    
                    
                    1,288,667
                    
                    
                    
                    1.69
                    
                    
                    
                    46,000
 
 As of
December 31, 2008, 1,288,667 of the Company’s common stock are subject to
outstanding options. This is because approximately 540,000 shares of option of
the Company’s common stock were granted in 2006, 26,000 shares of option were
granted in 2007 and 888,000 shares of option were granted in 2008, under the
Diguang 2006 Option Plan. None of these options has been exercised. But 165,333
shares subject to the option were forfeited due to staff resignation. Pursuant
to the terms of the Amended and Restated Share Exchange Agreement, the Company
assumed Diguang’s outstanding 2006 stock incentive plan covering options
totaling the equivalent of 1,500,000 shares of the Company’s common stock. The
exercise price for each of these options is $5 per share for 566,000 shares,
$1.19 per share for 40,000 shares, $0.12 per share for 548,000 shares and $0.10
per share for 300,000 shares. Awards generally vest over four years in equal
installments on the next four succeeding anniversaries of the grant date, but
options granted to independent directors vest monthly at the end of each month,
options granted to chief operating officer vest quarterly at the beginning of
each quarter over three years. The options that have been issued expire ten
years from their grant date.




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 the Company’s future
performance.





Years
      Ended December 31,2004
                    
                    
                    2005
                    
                    
                    2006
                    
                    
                    2007
                    
                    
                    2008Statement
      of Income data:Total
      revenues
                    
                    $
                    24,483.222
                    
                    
                    $
                    35,648,118
                    
                    
                    $
                    34,242,617
                    
                    
                    $
                    45,909,256
                    
                    
                    $
                    55,430,680Income
      (Loss) from operation
                    
                    
                    6,895,560
                    
                    
                    
                    8,708,622
                    
                    
                    
                    2,079,852
                    
                    
                    
                    (2,913,922
                    
                    
                    
                    (3,948,480
                    )Net
      income (Loss)
                    
                    
                    6,619.557
                    
                    
                    
                    8,513,883
                    
                    
                    
                    1,664,816
                    
                    
                    
                    (2,905,337
                    
                    
                    
                    (4,718,370
                    )Weighted
      average shares outstanding
                    
                    
                    18,250,000
                    
                    
                    
                    18,250,000
                    
                    
                    
                    21,383,960
                    
                    
                    
                    22,531,384
                    
                    
                    
                    22,155,882




36




At
      December 31,2004
                  
                  
                  2005
                  
                  
                  2006
                  
                  
                  2007
                  
                  
                  2008Balance
      Sheet data:Cash
      and cash equivalents
                  
                  $
                  5,352,758
                  
                  
                  $
                  10,561,516
                  
                  
                  $
                  20,550,032
                  
                  
                  $
                  16,250,727
                  
                  
                  $
                  15,024,363Working
      capital
                  
                  
                  7,966,958
                  
                  
                  
                  10,546,457
                  
                  
                  
                  21,095,836
                  
                  
                  
                  11,784,522
                  
                  
                  
                  7,885,930Total
      assets
                  
                  
                  14,158,413
                  
                  
                  
                  30,098,458
                  
                  
                  
                  46,966,828
                  
                  
                  
                  56,579,792
                  
                  
                  
                  53,623,166Long-term
      debt
                  
                  
                  483,296
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,345,730
                  
                  
                  
                  644,925Minority
      interests
                  
                  
                  -
                  
                  
                  
                  452,895
                  
                  
                  
                  1,043,035
                  
                  
                  
                  1,475,361
                  
                  
                  
                  2,520,704Stockholders’
      equity
                  
                  
                  7,974,764
                  
                  
                  
                  17,912,951
                  
                  
                  
                  33,739,804
                  
                  
                  
                  27,291,108
                  
                  
                  
                  24,810,199




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.





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





The
Company specializes 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.





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





Diguang
Electronics was established as an equity joint venture in Shenzhen under the
laws of the People’s Republic of China, the “PRC”, on January 9,
1996.  As of December 31, 2008, Diguang Electronics had approximately
1,300 full-time employees.




37




Dihao is
a 100% wholly-owned subsidiary of North Diamond.  The Company gained
controlling interest of Dihao by acquiring 65% of North Diamond on January 3,
2007.  As of December 31, 2008, Dihao has approximately 254 full-time
employees.





Wuhan
Diguang was established on March 13, 2007 and commenced its operation on July 1,
2007.  Wuhan Diguang was established with the capacity to provide
large inches of TFT-LCD which are mainly sold to its customers from Taiwan.
Wuhan Diguang had approximately 155 employees as of December 31,
2008.





Dongguan
Diguang Electronics Science and Technology Co. Ltd., “Dongguan Diguang S&T”,
was established to be the production base of Diguang
Electronics.   It became a wholly-owned subsidiary of Diguang
Holdings since December 30, 2007 upon acquisition.  As of December 31,
2008, Dongguan Diguang S&T has approximately 65 full-time
employees.





Well
Planner is involved in the import of raw materials into China and export of
finished products from China.





Diguang
Science and Technology Limited, based in Hong Kong, thereafter “Diguang
S&T”, is directly involved with the international buying of raw materials
and selling of backlight products for Diguang Electronics.  Diguang S&T
purchases raw materials from international suppliers and acts as an
international sales group for both Diguang Electronics and Well
Planner.





Critical
Accounting Policies and Estimates





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





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





Revenue
Recognition





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





Certain
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 and Concentration of Credit Risk





During
the normal course of business, the Company extends unsecured credit to its
customers.  Typically credit terms require payment to be made within
90 days of the invoice date. The Company does not require collateral from its
customers.  The Company maintains its cash accounts at credit worthy
financial institutions and closely monitors the movements of its cash
positions.




38





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, 2006, 2007 and 2008 were 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, most of which are related to backlight products.  Inventories
are valued at the lower of cost (based on weighted average method) and the
market. Full
amount provisions were made for obsolete inventories which are difficult to
estimate their future utilization. For inventories which will be used in the
ordinary course of production or sales, the net realizable value of the
inventories is compared with their carrying value.  If the net
realizable value is lower than the carrying value, a provision for the
difference between the net realizable value and the carrying value of the
inventories was recognized. Net realizable value is determined based on the
most recent selling price of these inventories less the estimated cost
to sell.




Income
Taxes





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





Diguang
Electronics is registered in Shenzhen and was subject to a favorable income tax
rate of 15% compared to a statutory income tax rate of 33%, 30% for the central
government and 3% for the local government.  Diguang Electronics has
been deemed a high-tech company by Shenzhen Bureau of Science, Technology &
Information.  Under this category, Diguang Electronics was entitled to
enjoy a 50% exemption from enterprise income tax at the rate of 15% for the
years from January 1, 2004 to December 31, 2006.  Diguang Electronics
was subject to an income tax rate of 15% since January 1, 2007 according to the
old tax law.  A newly enacted enterprise income tax law (“EIT Law”)
was effective January 1, 2008.  The EIT Law imposes a unified EIT of
25% on all domestic-invested enterprises and foreign invested enterprises unless
these foreign investment enterprises qualify under certain grand-father
rules.  For enterprises like Diguang Electronics which were taxed at a
privileged preferential income tax rate of 15% under the old tax law, the
applicable income tax rate should transit to 25% in 5 years, that is, 18% in the
year ended December 31, 2008, 20%, 22%, 24% and 25% in the following four years
ended December 31, 2009, 2010, 2011 and 2012, and 25% thereafter.  So
the applicable income tax rate for Diguang Electronics is 18% for the year ended
December 31, 2008.





Well
Planner is subject to an income tax rate at 17.5% under Hong Kong Inland Revenue
jurisdiction.  However, Well Planner does not have any Hong Kong
sourced income.  In accordance with Hong Kong tax regulation, Well
Planner has not been taxed since its inception.





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





Dihao is
registered at Yangzhou and has been deemed as a high-tech company by Yangzhou
Bureau of Science, Technology and Information. Under this category, Dihao
entitled to enjoy a 100% exemption of corporate income tax for the two years
from January 1, 2006 to December 31, 2007 and a 50% exemption of corporate
income tax for the following three years from January 1, 2008 to December 31,
2010 in accordance with the preferential rules established by Yangzhou local tax
authority on August 2, 1999.  Under new EIT Law, the income tax
rate for Dihao is 25%; the applicable income tax rate for Dihao is 12.5% for the
three years ending 31 December 31, 2010.




39




Wuhan
Diguang is registered in Wuhan. As a manufacturing company with foreign
investment set up before March 16, 2007, Wuhan Diguang entitled to enjoy a 100%
exemption of corporate income tax for the first two years of operation with a
profit position and a 50% exemption of corporate income tax for the following
three years.  After the five year exemption period, Wuhan Diguang will
subject to the unified income tax rate of 25% in accordance with new EIT Law. It
is the first year for Wuhan Diguang to enjoy 100% exemption of income tax in
2008





Dongguan
Diguang S&T is registered at Dongguan of Guangdong Province and, the same as
Wuhan Diguang, Dongguan Diguang S&T entitled to enjoy a 100% exemption of
corporate income tax for the first two years of operation with a profit position
and a 50% exemption of corporate income tax for the following three years and
will subject to the unified income tax rate of 25% after the five year exemption
period. It is the
first year for Dongguan Diguang S&T to enjoy 100% exemption of income tax in
2008.  But Dongguan Diguang S&T suffered a loss in the
year.




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




Because
the consolidated financial statements were based on the respective entities’
historical financial statements, the respective effective income tax rate for
the periods reported represents the effect of actual income tax provisions
incurred to Diguang Electronics, Dihao, Wuhan Diguang, Dongguan Diguang S&T
and Diguang International Development Co., Ltd.




Impairment
of Long-Lived Assets





The
Company adopts the provisions of Statement of Financial Accounting Standard No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
No.144”).  SFAS No.144 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable through the estimated
undiscounted cash flows expected to result from the use and eventual disposition
of the assets.  Whenever any such impairment exists, an impairment
loss will be recognized for the amount by which the carrying value exceeds the
fair value. The impairment loss for the years ended December 31, 2006, 2007 and
2008 was $0, $622,194, and $157,108, respectively. The
Company carried out an impairment review of its long-term investment in
Huaxia (Yangzhou) based on the estimation that the carrying value of the net
assets of Huaxia (Yangzhou) is deemed to be the net realizable value of the
investment.




The
investment in Yangzhou Huaxia Integration was the Company’s long term strategy
for upstream integration for LED development.




Share-Based
Payments





The
Company adopted Statement of Financial Accounting Standards No 123(R):
“Share-Based Payments” (SFAS 123R) effective January 1, 2006.  SFAS
123R amends existing accounting pronouncements for share-based payment
transactions in which an enterprise receives employee and certain non-employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise’s equity
instruments or that may be settled by the issuance of such equity
instruments.  SFAS 123R generally requires such transactions be
accounted for using a fair-value-based method.  As the Company did not
grant any stock options and warrants before January 1, 2006 and granted stock
options to purchase 540,000, 26,000 and 40,000 shares of its common stock on
March 1, 2006, February 6, 2007 and February 27, 2008 the Company accounted for
the stock option granted using a fair-value-based method in accordance with SFAS
No. 123R.





Recently
Issued Accounting Pronouncements





In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141(R)”).  SFAS 141(R)
changes accounting for acquisitions that close beginning in
2009.  SFAS No. 141R broadens the guidance of SFAS No. 141, extending
its applicability to all transactions and other events in which one entity
obtains control over one or more other businesses.  It broadens the
fair value measurement and recognition of assets acquired, liabilities assumed,
and interests transferred as a result of business combinations.  SFAS
No. 141R expands on required disclosures to improve the statement users’
abilities to evaluate the nature and financial effects of business
combinations.  SFAS No. 141R is effective for fiscal years
beginning on or after December 15, 2008 (fiscal year beginning January
1, 2009 for the Company).  The Company is currently assessing the
impact that the adoption of SFAS No. 141R may have on its financial
position, results of operations, and cash flows.




40




In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, “Noncontrolling
Interests in Consolidated Financial Statements, An Amendment of ARB
No. 51” (“SFAS No. 160”).  SFAS No. 160 requires that
a noncontrolling interest in a subsidiary be reported as equity and the amount
of consolidated net income specifically attributable to the noncontrolling
interest be identified in the consolidated financial statements.  It
also calls for consistency in the manner of reporting changes in the parent’s
ownership interest and requires fair value measurement of any noncontrolling
equity investment retained in a deconsolidation.  SFAS No. 160
requires retroactive adoption of the presentation and disclosure requirements
for existing minority interests.  The Company is currently assessing
the impact that the adoption of SFAS No. 160 may have on its financial
position, results of operations, and cash flows.





In March
2008, the FASB issued Statement of Financial Accounting No.161, “Disclosures about
Derivative Instruments and Hedging Activities” (“SFAS No.
161”).  The provisions of SFAS No. 161 are effective for the Company
as of January 1, 2009.  SFAS No. 161 requires enhanced disclosures
about (i) how and why the Company uses derivative instruments, (ii) how the
Company accounts for derivative instruments and related hedged items under SFAS
No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and (iii) how derivative
instruments and related hedged items affect the Company’s financial
results.  The Company does not expect the adoption of this statement
to have a material impact on its financial statements.





In April
2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of
Intangible Assets. FSP No. 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible Assets. FSP No. 142-3 is effective for
financial statements issued for fiscal years beginning after December 15,
2008. Early adoption is prohibited. The Company is currently evaluating the
impact of the pending adoption of FSP No. 142-3 on the consolidated
financial statements.




Results
of Operations





Comparison
of Years Ended December 31, 2008 and 2007





Revenue




41





Net
revenue was approximately $55.4 million for the year ended December 31, 2008, an
increase of $9.5 million, or 21%, comparing with $45.9 million for prior
year.  Of the $9.5 million increase, $6.7 million came from the sales
of CCFL products at Wuhan facility which started operation on July 1, 2007, $2.4
million came from sales of new products from Diguang Electronics, which were
manufactured in facilities in Dongguan, Southern China, the rest of the increase
of $1.2 million came from sales of LED products manufactured at Yangzhou
facility after mitigating decrease of $0.8 million sales of CCFL
products.  Wuhan facility manufactured higher-priced 19” CCFL products
and delivered them to a top TFT-LCD panel maker in 2008, the increase of sales
revenue in Wuhan Diguang is due to commencement of its mass production in 2008
since its establishment in 2007. The increase of sales of new products in
Diguang Electronics was mainly due to new production lines of mini-computer, LED
general lighting and sales of the LCD module, “LCM”, assembly including the LCD
panel that displays images and a backlight unit that supplies light to the LCD
panel makers.  The backlight products manufactured at Yangzhou
facility were delivered mainly to Taiwanese customers located in Eastern China
region, particularly in Shanghai where certain famous international and domestic
LCD module manufacturers reside.  To meet the trend of market demands
in backlight sector of the display industry, management has changed the product
mix in favor of higher-priced products in the categories such as large size CCFL
for TFT-LCD, especially shifting from mid-sized CCFL to mid-sized LED products
despite the fact that the backlight products were under pressure to cut down the
unit price due to price erosion in LCD monitor-end market.





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





Years
      Ended December 31,2007
                                  
                                  
                                  2008International
      sales
                                  
                                  $
                                  38,612,000
                                  
                                  
                                  $
                                  40,429,000Domestic
      sales
                                  
                                  
                                  7,297,000
                                  
                                  
                                  
                                  15,002,000Total
                                  
                                  $
                                  45,909,000
                                  
                                  
                                  $
                                  55,431,000





Sales to
international customers totaled $40.4 million for the year ended December 31,
2008, an increase of $1.8 million, or 5%, comparing with $38.6 million for the
prior year.  The increase of international sales was relatively low
comparing to increase of total revenue. The reason was primarily due to the slow
down in the global demand for the digital display products such as automobile
TV, portable DVD, MP3 and MP4 and LCD product series particularly resulting from
the global economic recession from the second half of the year 2008. Sales to
Taiwanese customers generated from Wuhan, Yangzhou and Shenzhen facilities had
contributed to sales of $20.5 million in 2008, an increase of $5.1 million
compared with the sales of $15.4 million in 2007.  Sales to major
Korean customers are $7 million in 2008; an increase of $2.3 million, or 49%,
compared with $4.7 million in 2007, despite a sharp decrease in delivery to a
TFT-LCD customer of Korean in the second half year.  The increase in
sales to Taiwanese and Korean customers was mitigated by a decrease of $6.2
million in sales to Hong Kong customers in Diguang Electronics.  The
sales revenue to Hong Kong customers was $8.7 million in 2008 and $14.9 million
in 2007.  The significant decline in delivery to Hong Kong customers
was due to weak LCD market demand in the U.S. market, particularly in the second
half year.  The rest revenue increase of $0.6 million was attributable
to sales to other overseas customers.





Sales to
domestic customers were $15 million for 2008, an increase of $7.7 million, or
105%, compared with $7.3 million for 2007.  The increase of domestic
sales revenue was the result of management’s strategy to develop domestic
markets. The increase in revenue was primarily generated from the sales of
mid-size LED products for portable DVD, automobile TV etc. and small size LED
used as mobile phone backlight developed in 2007.  Of the increase of
$7.7 million in sales to domestic customers, $6.9 million came from Diguang
Electronics as a result of a $8.6 million increase in deliveries to new
customers, offset by a $1.7 million decrease in sales to existing customers. For
Diguang Electronics, of the $8.6 million increase in sales to new customers,
$5.9 million came from one new customer since the first delivery in March
2008.  The rest increase of $0.8 million in domestic sales came from
Dongguan Diguang S&T and Dihao.





Looking
at the increase of $9.5 million in revenue in 2008 compared with the revenue in
2007, the Company noted that the net increase of $9.5 million incurred in the
first three quarters of 2008 was based on the quarterly financial
information.  For the fourth quarter, the Company had revenue of $8.7
million in 2008, comparing with $14.5 million in the same period in 2007, a
decrease of $5.8 million, or 40%.  The worldwide financial crises had
a material impact on the Company’s operating results.  Certain major
international customers ceased to place orders during the fourth quarter of
2008.  The Company’s strategy of developing domestic market, to some
extent, mitigated the impact of worldwide financial crises.  Even
though the market shows signs of coming back in the first quarter of 2009, but
the Company is still not sure whether it could maintain the same sales volume of
its products in the year of 2009.




42





Due to
the fact that the Company has thousands categories of products and the products
mixture kept changing to match with market demands during the years of 2008 and
2007, the sale prices are quite different for different categories of products,
it is almost impossible for the Company to discuss the  impact of
changes in volume and changes in product price.





The
Company has three manufacturing facilities located in East China region
(Yangzhou), Central China region (Wuhan), and Southern China region (Dongguan).
There are various capacities in the principal manufacturing facility of Dongguan
to serve the customers which are LCD TV and monitor manufacturers and LCD
assembly enterprises. The Company commenced to produce LED light products in
Dongguan facility since June 2008.  Yangzhou factory focuses on
producing small and mid size of CCFL and LED backlight
products.  Wuhan facility solely manufactures the large size of CCFL
backlight products.  Based on three manufacturing facilities, the
Company believes that it has strategically deployed its production capacity in
China for its long term growth.





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





Years
      Ended December 31,2007
                                        
                                        
                                        2008CCFL
      backlight
                                        
                                        $
                                        26,188,000
                                        
                                        
                                        $
                                        27,319,000LED
      backlight and LED general light
                                        
                                        
                                        19,721,000
                                        
                                        
                                        
                                        26,243,000LCM
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,456,000Mini-notebook
      assembly
                                        
                                        
                                        -
                                        
                                        
                                        
                                        413,000Total
                                        
                                        $
                                        45,909,000
                                        
                                        
                                        $
                                        55,431,000





During
the year ended December 31, 2008, CCFL products accounted for 49% of the
Company’s total sales revenue, compared with 57% for 2007.  Sales of
CCFL backlights totaled $27.3 million for the year ended December 31, 2008, an
increase of $1.1 million, or 4.2%, compared with $26.2 million for
2007.  During 2008, there is a significant increase in delivery of
large size CCFL backlight, which amounted to $14.8 million for 2008, compared
with $9.3 million for 2007, an increase of $5.5 million.  Wuhan
facilities contributed $6.7 million of increase, which was offset by the
decrease of $1.2 million in Diguang Electronics.  The delivery of
mid-size CCFL products amounted to $12.5 million in 2008, a decrease of $4.3
million, or 26%, compared with $16.8 million for 2007.  The reason of
decrease in sales of mid-size CCFL products was that the Company’s customers
have recognized the LED solution and changed their needs from mid-size CCFL to
mid-size LED backlight products.





Sales of
LED backlight products and LED general lights accounted for the 47% of the total
sales revenues for the year ended December 31, 2008.  Sales of LED
backlight products totaled $25.8 million for 2008, an increase of $6.1 million,
or 31%, compared with $19.7 million for 2007.  The maiden delivery of
LED general lights amounted to $486,000 for 2008.  The increase of LED
products is due mainly to the rise of demands for LED products from new and
existing customers in global market whose demands were focused on more small to
mid size LED products.





Of the
total increase in sales of LED products, the sales of mid size LED backlights
amounted to $4.6 million, of which, $3.3 million was generated from Diguang
Electronics and the other $1.3 million from Dihao.  The sales of small
size mobile phone backlight products increased by $2.8 million from $1.1 million
in 2007 to $3.9 million in 2008 from Diguang Electronics.  The
increase in sales of small and mid size LED backlights was offset by decease of
$0.9 million of other LED products.





The
Company expects its LED product shipments will continue to grow and be more
sustainable as the transition from CCFL to LED backlights become more compelling
due to its superior performance in contrast ratio, color gamut, localized
dimming and low power consumption.




43





The
Company has successfully penetrated into the LCM assembly following its
integration strategy.  The TFT-LCD glass substitute is supplied by the
Company’s customers on an OEM basis and the Company has recorded $1.5 million
revenue for both CCFL and LED LCM to the LCD panel makers for
2008.  Manufacturing of LCM provides the Company the vast opportunity
for downstream integration.





From the
third quarter of 2008, the Company began to deliver mini-notebooks to its
customers.  Total sales of mini-notebook amounted to $413,000 for
2008, which are the partial delivery on OEM basis.  It is the
Company’s strategic decision to enter into the fast-growing mini-notebook market
and the Company has attended many local and oversea exhibitions to promote its
products.





Cost
of Sales





Since the
basic materials for all backlight products are similar, the Company discusses
cost of sales in the aggregate for all products.  Cost of sales was
$50.7 million for 2008, an increase of $12.6 million, or 33%, compared with
$38.1 million for 2007.  Of the total cost of sales, $1.2 million was
attributable to inventory provision incurred in 2008.  Comparing with
the provision of only $296,000 incurred in 2007, the $1.2 million provision in
2008 was much higher, which amounted to 2.4% of total cost of sales of
2008.  Due to effect of the worldwide depressed economic conditions,
some of the Company’s costumers stopped placing orders with the Company during
the fourth quarter of 2008.  The Company’s production volume dropped
eminently, but most of the production overheads were fixed, which resulted in
relatively higher unit cost of the Company’s products.  Under such
circumstances, the cost of certain products exceeded the net realizable value
based on the price subsequent to the year end of 2008.  Consequently,
a relatively higher amount of provision was recorded.  The Company
also made provision for obsolete inventories at the end of 2008.





Excluding
the effect of inventory provision, cost of sales was $49.5 million for 2008, an
increase of $11.7 million, or 31%, compared with $37.8 million for
2007.  The increase of 31% in cost of sales was higher than the
increase of 21% in total revenue for the year due mainly to the continuous
decrease in sales price of the Company’s products and relatively lower decrease
in purchase price of raw material.





Raw
material cost was $39.6 million for 2008, which represented an increase of $9.2
million, or 30%, compared with $30.4 million for 2007.  The increase
in raw materials cost for 2008 was attributable mainly to the increase of sales
volume.  Furthermore, the Company was unable to reduce the procurement
cost in the same percentage as the reduction in the unit price pressured by
market force as a general trend because the supplies of certain components were
limited.  Regarding to raw material cost, management noted that the
increase of large size CCFL product sales volume accounted for mainly the
increase of raw material cost, as the material used for CCFL products had a much
higher cost tag attached than the other products.  The increase of raw
material cost for large size CCFL products in Wuhan facility was $5.7 million,
from $3.8 million in 2007 to $9.5 million in 2008.  The percentage of
raw material cost to total revenue was 71% for 2008, comparing with 66% for
2007.  The increase of proportion of raw material cost was due mainly
to increased sales of large size CCFL products in Wuhan Diguang, for which the
raw material cost accounted for 87% of its total revenue.





Labor
cost was $6.5 million for 2008, represented an increase of $1.8 million, or 38%,
comparing with $4.7 million for 2007.  The percentage of labor cost to
total revenue was 12% for 2008, comparing with 10% for
2007.  Effective April 1, 2008, the newly enacted Labor Law of the People’s Republic ofChinarequires higher level of minimum wages,
which resulted in the increase in labor costs for manufacturing companies like Diguang Electronics,
Dihao,Wuhan Diguang and
Dongguan Diguang S&T.  That is the reason whythe Company’slabor cost accounted for a higher
percentage of total revenue in 2008.





Production
overhead was $3.4 million for 2008, an increase of $0.7 million, or 26%,
comparing with $2.7 million for 2007.  The overhead expense include
depreciation charges for fixed assets and amortization for building improvement,
water and electricity expenses,  repaired expenses, and lease rental
etc.  The depreciation charges for 2008 increased $0.4 million due to
the fact that more fixed assets were put into services during 2008 than during
2007.  The cost of water and electricity increased $0.2 million as a
result of the increase in production volume.  The production overhead
accounted for 6% of total revenue for both years of 2008 and 2007.




44




Gross
Margin





The
overall gross margin for 2008 was 9%, an 8% decrease, comparing with 17% gross
margin for 2007.  Taking out the impact of inventory provision
included in cost of sales, the gross margin was 11% for 2008, still represented
a sharp drop comparing with 17% for 2007.





During
2008, the Company suffered the global financial crisis and more aggressive
competitions, which forced it to reduce its selling price to keep existing
customers and spent more resources to obtain new customers in order for it to
maintain its market share in this industry.  Meantime, the Company was
unable to pass the entire burden of decrease in selling prices to its vendors
because the supplies of certain components were limited.   In
addition, in order to move into manufacturing of the high-end products, the
costs of certain components contained in the customers’ specification were
higher than the costs of the same type of components used in low-end products,
which reduced the Company’s gross margin further.  Although the newly
developed products of mini-notebook and LED general lightings have higher gross
margins, however, the sales revenue from of these new products was not
significant enough to account for major portion of the Company’s total revenue,
which accounted for only 2% of total revenue.  Combining all of the
factors, the overall gross margin remained at a relatively low
level.





Gross
margin of LED backlights dropped dramatically from 21% in 2007 to 8% in 2008
resulting in a decrease of 13%.  The sales of mid size LED backlights
and small size LED backlights used in mobile phone contributed greatly to the
overall drop of gross margin.  Sales of mid size LED backlights was
approximately $13 million, accounting for 23% of total revenue. The gross margin
of mid size LED backlights dropped to 11% 2008 from 18% in 2007, due mainly to
the increase in suppliers who are selling the same type of
products.  Meantime, gross margin of small size LED backlights used
for mobile phone remained negative, a negative 14% in 2008 compared with
negative 11% in 2007 with a visible growth in sales volume.  Sales of
LED backlights for mobile phone accounted for 7% of total revenue in 2008,
compared with 2% in 2007.  The Company kept selling small size LED
backlights for mobile phones at negative gross margin in order to compete for a
share of this market segment. In order to sell these mobile phone backlights at
a positive margin, the Company is focusing on enhancing its manufacturing
process and procurement cost to improve the gorss margin in 2009 and at the same
time the Company is focusing on developing new customers and expanding the sales
to existing customers. Through the process of expanding sales volumes, the
Company expects to achieve a positive gross margin in the first half year of
2009.




Gross
margin of CCFL products was relatively stable compared with LED
backlights.  The gross margin of CCFL products dropped only 2% from
14% in 2007 to 12% in 2008.  The primary reason was that sales of
large size CCFL products in Wuhan Diguang brought a much higher gross margin of
6% in 2008, comparing with 0.1% in 2007, since its mass production commenced in
2008.





Management
believes that the market pressure to reduce the price of the Company’s products
will continue in 2009.  Accordingly, management intends to improve
gross margin through focusing on the following aspects: enhancing the Company’s
research and development to provide customers with alternative solutions;
expending customer base; lowering raw material cost through redesigning the
products; and increasing the categories of existing products and launching new
products.  The Company is working on new products of LED general
lighting and ultra-slim LED monitors.





Regarding
international sales, the Company’s gross margin was approximately 12% for 2008,
a 4% decrease, compared with 16% for 2007 due to the price reduction pressure
from end users who are LCD panel makers.  Regarding domestic sales,
the Company’s gross margin was approximately 7%, a 17% decrease, comparing with
24% for 2007.  The decrease of gross margin from domestic customers
was due mainly to the increase in sales volume of small size LED backlights for
mobile phone, which had a negative gross margin of 14%.




Selling
Expenses





Selling
expenses were $1.9 million for 2008, a decrease of approximate $728,000, or 28%,
compared with $2.6 million for 2007.  The changes were generated from
the following expenses. Commission expense decreased $1.1 million in 2008. As a
result of deeply narrowed gross margin, the Company did not have to pay as much
commissions in 2008 as in previous years.  The decrease of commission
expense was offset by the increase in other components of selling
expenses.  Payroll expense increased $95,000 due to an increase in
headcounts; sample charges and exhibition expenses increased by $115,000 and
61,000, respectively, due to extensive promotion activities for new products and
new customers;




45




The
percentage of selling expenses to total revenue was 3.4% for 2008 and 5.6% for
the prior year.





Research
and Development Expenses





Net
research and development expenses were $1.2 million for 2008, an increase of
$109,000, or 10%, compared with $1.1 million for 2007. The changes were
primarily from the following expenses. Cost of moulds and payroll expenses
increased $201,000 and $129,000, respectively, due to increased researching and
developing activities on new products during the year.  On the other
hand, income from government grants increased $144,000 in 2008, which mitigated
the increase of research and development expenses.





The
percentage of research and development expenses to total sales revenue was
approximately 2.1% and 2.3% for 2008 and 2007, respectively.





General
and Administrative Expenses





General
and administrative expenses were $5.5 million for 2008, a decrease of $1
million, or 15%, compared with $6.5 million for 2007.  The share-based
compensation recorded in 2008 decreased by $635,000, which was in line with the
trend of adopting of grading vesting method of recognizing stock
compensation.  Bad debt allowance expenses decreased $308,000 in 2008.
Since the sales volume dropped during the fourth quarter of 2008 and the Company
took the chance to strengthen its collection of overdue accounting
receivables.  The Company’s efforts in collecting accounting
receivable reduced the allowance required at the balance sheet
date.  The start-up expense $293,000 of Wuhan Diguang was included in
prior year’s expense and it did not recur in 2008. The aforementioned decrease
in general and administrative expenses was offset by an increase of $102,000 in
depreciation expense and $84,000 in miscellaneous categories of general and
administrative expenses.





The
percentage of general and administrative expenses to total sales revenue was
approximately 10% and 14% for 2008 and 2007, respectively.





Interest
expense





Net
interest expenses were $260,000 for 2008, representing an increase of $382,000,
compared with an interest income of $122,000 for 2007.  During 2007
and 2008, more and more cash was occupied for working capital purposes or used
to acquire long-term assets, the balance of cash left in banks reduced and
relating interest income was also reduced accordingly.  Moreover, the
Company accrued interest expense of $155,000 and $138,000, respectively, for
short-term loan from bank and for outstanding amount due to stockholders in
acquiring Dongguan Diguang S&T during 2007.





Investment
Income





Investment
income was $68,000 for 2008, represented a decrease of $415,000, or 86%,
compared with $483,000 for 2007.  More cash was occupied for working
capital purpose and/or used to acquire long-term assets during 2008. The Company
did not have as much cash in 2008 as in the prior year to invest in short-term
financial assets.  Consequently, investment income was
reduced.





Other
expenses





Other
expenses were $191,000 for 2008, representing an increase of $23,000, compared
with expense of $168,000 for 2007.  The increase was mainly
attributable to the decrease of income for scrap sales in Diguang
Electronics.





Income
Tax Provision





Income
tax provision for 2008 was approximately $191,000, an increase of $97,000,
compared with $94,000 for 2007.  Yangzhou Dihao has passed its
two-year period with 100% exemption of income tax and it was the first year for
Dihao to provide income tax at a rate of 12.5% during 2008.  The
income tax expense provided in Dihao was approximately $100,000 for
2008.  Diguang Electronics suffered a big loss in 2008, no income tax
was provided and the previously recognized deferred tax assets of approximately
$87,000 were fully reversed during 2008.  In addition, the Company did
not provide any US federal income tax provision during 2008 as there was no
taxable income in the U.S. whereas the Company recorded US federal income tax
provision of approximately $33,000 for 2007 as a result of subpart F income
generated by Diguang S&T (HK) during 2007 in accordance with relevant US IRS
codes.




46




Net
Loss





Net loss
was $4,718,000 for 2008, compared with net loss of $2,905,000 for 2007,
representing an increase of $1,813,000, or 62%, in net loss.  Minority
interest portion of net income generated at North Diamond was $196,000 for 2008
and $335,000 for 2007, which represent 4.3% of net loss for 2008 and 13% of net
loss for 2007.  The increase in net loss was due mainly to the
decrease in gross margin.  As a percentage of total revenue, net loss
for 2008 accounted for 8.5% whereas net loss for 2007 accounted for 6.3%,
representing an increase in loss of 2.2%.





Earnings
(losses) per Share





The basic
loss per share was $0.21 for 2008, compared with basic loss per share of $0.13
for 2007.  Basic earning per share for 2008 was negatively impacted by
$0.08 per share due to the significant decrease in gross margin. The number of
weighted average common shares outstanding was increased to 22,156,000 shares
for 2008 from 21,531,000 shares for 2007.





Comparison
of Years Ended December 31, 2007 and 2006





Revenue





Net
revenue was approximately $45.9 million for the year ended December 31, 2007, an
increase of $11.7 million, or 34%, compared with $34.2 million for the prior
year.  Of the $11.7 million increase, $4.4 million came from the sales
of both mid-size of LED and CCFL products manufactured at Yangzhou facility and
$4.2 million came from the sales of CCFL products at Wuhan facilities which
started operation on July 1, 2007.  The backlight products
manufactured at Yangzhou facility were delivered mainly to Taiwanese customers
located in Eastern China region, particularly in Shanghai where certain famous
international and domestic LCD module manufacturers reside.  The
backlight products manufactured at Wuhan facilities were delivered mainly to
certain top TFT-LCD panel makers for the higher-priced 19” CCFL
products.  The remaining increase of $3.1 million in revenue was
attributed to Diguang Electronics.  The increase in revenue generated
by Diguang Electronics was due mainly to the maiden sales to new
customers.  To meet new market demands in backlight industry,
management has changed the product mix in favor of higher-priced products in the
categories such as CCFL for automobile TV and large size CCFL for TFT-LCD,
especially shifting from CCFL mid-size to LED mid-size products despite the fact
that the backlight products were under pressure to cut down the unit price due
to price erosion in LCD monitor-end market.  As a general trend, many
multinational companies have shifted their procurement chain to China seeking
for low cost solution so that the Company is facing a great opportunity and
challenge in terms of cost competition.





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





Years
      Ended December 31,2006
                                  
                                  
                                  2007International
      sales
                                  
                                  $
                                  31,528,000
                                  
                                  
                                  $
                                  38,612,000Domestic
      sales
                                  
                                  
                                  2,714,000
                                  
                                  
                                  
                                  7,297,000Total
                                  
                                  $
                                  34,243,000
                                  
                                  
                                  $
                                  45,909,000





Sales to
international customers totaled $38.6 million for the year ended December 31,
2007, an increase of $7.1 million, or 23%, compared with $31.5 million for the
prior year.  The increase in revenue was due primarily to the global
demand for the digital display products such as automobile TV, portable DVD, MP3
and MP4 and LCD product series in particularly resulting in the surge in demand
for the LED backlight.  Of the $7.1 million increase, approximately
$3.2 million was attributable to sales of Taiwanese customers generated at Wuhan
and Yangzhou facilities netting the $2.8 million decrease in sales to Hong Kong
customers by Diguang Electronics.  The sales to major Korean customers
increased to $4.7 million for 2007, an increase of $3.9 million, or 493%,
compared with $793,000 for 2006.  Of the sales of $4.7 million to
Korea customers, Diguang Electronics delivered its maiden sales to a
Korean-based customer in Southern China amounting to $3.9 million during
2007.  The newly obtained Korean customers have demonstrated to
management that China is becoming a major country of manufacturing TFT-LCD
products as a result of the fact that the most of the top and secondary tier LCD
panel makers have shifted their sources of supply to China from their existing
upstream and midstream vendor chain due to China’s low labor cost and other
competitive advantages.  Accordingly, the Company believes that this
shift would provide a vast opportunity for it to venture into the larger size of
CCFL backlight, which is the Company’s core competency, and probably the related
industries such as LED TV backlight and LCD assembly.  The sales to
Hong Kong customers were $14.2 million for 2007, a decrease of $2.8 million or
16%, compared with $17 million for 2006.




47




Sales to
domestic customers were $7.3 million for 2007, an increase of $4.6 million, or
170%, compared with $2.7 million for 2006.  The increase in domestic
sales was attributable to the newly obtained customers and the increase of
orders from the existed customers even though the Company faced the pressure to
reduce its product unit price due to market competition. The increase of
domestic sales arise from Diguang Electronics, in which increase of $4 million
generated from sales to exiting customers and the remaining increase of $0.6
from new customers.





The
Company has three manufacturing facilities located East China region (Yangzhou),
Central China region (Wuhan), and Southern China region
(Dongguan).  Especially, there are various capacities in the principal
manufacturing facility located in Dongguan to serve the customers which are LCD
TV and monitor manufacturers and LCD assembly firms. Based on three
manufacturing facilities, the Company believes that it has strategically
deployed its production capacity in China for its long term growth.





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





Years
      Ended December 31,2006
                                  
                                  
                                  2007CCFL
                                  
                                  $
                                  24,212,000
                                  
                                  
                                  $
                                  26,188,000LED
                                  
                                  
                                  10,031,000
                                  
                                  
                                  
                                  19,721,000Total
                                  
                                  $
                                  34,243,000
                                  
                                  
                                  $
                                  45,909,000





During
the year ended December 31, 2007, CCFL products accounted for 57% of the
Company’s total sales revenue, compared with 71% for 2006.  Sales of
CCFL backlights totaled $26.2 million for the year ended December 31, 2007, an
increase of $2 million, or 8%, compared with $24.2 million for
2006.  The change of the product mix was a result of adapting
ourselves to the market pressure to reduce the Company’s product price and the
shortage of TFT-LCD raw materials supply experienced in the first six months of
2007.  The Company lost approximately $2.8 million sales to Hong Kong
customers and approximately $1.2 million sales to other customers whereas it
obtained $6 million increase in sales generated at Wuhan and Yangzhou facilities
by selling higher-priced products within the CCFL category in
2007.  Moreover, the demand for CCFL products from a Korean customer
started in 2007.





LED
backlight products accounted for the remainder of the total sales
revenues.  Sales of LED backlight products totaled $19.7 million for
2007, an increase of $9.7 million, or 97%, compared with $10 million for
2006.  The proportion of LED products, primarily small to medium sizes
of backlight, accounted for 43% for 2007, which is 14% higher than 29% in
2006.  The increase is due mainly to the rise of LED products demanded
by new and existing customers in global market for more small inches of LCD
products.  Mobile phones and electrical products require LED
backlight; therefore, there is a significant increase in LED products ranging
from 4” to 10.5” delivered to the Company’s customers.  Yangzhou Dihao
commenced to deliver LED products to the Company’s customers from the second
quarter ended June 30, 2007 onwards and the revenue contributed to $2.7 million
or 14% of the total LED revenue for 2007.





The
Company expects its LED shipments will continue to grow and be more sustainable
as the transition from CCFL to LED backlights is becoming more compelling due to
its superior performance in contrast ratio, color gamut, localized dimming and
low power consumption.




48




Cost
of Sales





Since the
basic materials for all backlight products are similar, the Company discusses
cost of sales in the aggregate for all products.  Cost of sales was
$38.1 million for 2007, an increase of $15 million, or 65%, compared with $23.1
million for 2006.  The increase in cost of sales for 2007 was higher
than the increase of 34% in total revenue for the year due mainly to the
decrease in sales price whereas the increase in cost of raw
materials.





Raw
material cost was $30.6 million for 2007, an increase by $13.2 million, or 76%,
compared with $17.4 million for 2006.  The increase in raw materials
cost for 2007 was mainly attributable to the increase of sales
volume.  Furthermore, the Company was unable to decrease the
procurement cost in the same percentage as the reduction in the unit price
pressured by market force as a general trend because the supplies of certain
components were limited.  Regarding the increase of raw material cost,
management noted that the increase of large size CCFL product volume accounted
for the increase of raw material cost as the material used for CCFL products had
a much higher cost tag attached than the cost of raw materials used on other
products. As a result, a percentage of material cost to total revenue, raw
material cost accounted for 67% for 2007, compared with 51% for
2006.  Facing this kind of situation, the Company tried very hard to
develop new customers through tough negotiation in order for it to become one of
their vendors.  In addition, to decrease the working capital
requirement in relation to purchasing raw materials used for large size of CCFL
backlight, the Company processed the products for one of its key Taiwanese
customers in Wuhan on OEM basis.





Labor
cost was $4.7 million for 2007, representing an increase of $1.3 million, or
38%, compared with $3.4 million for 2006.  Compared with 65% increase
in cost of sales, the increase of 38% in labor cost was lower.  As a
percentage of labor cost to revenue, the labor cost accounted for 10% of total
net revenue for 2007, compared with 10% of total net revenue for
2006.  The same percentage of labor cost to total revenue demonstrated
the Company’s efforts to control labor cost through improving the Company’s
productivity.  In addition, the increase in the production of large
inches of CCEL products did not require as much labor cost as producing the
small and medium size of CCFL products.





Production
overhead was $2.8 million for 2007, an increase of $0.6 million, or 27%,
compared with $2.2 million for 2006.  As the result of an increase in
production volume, there was an increase for indirect overhead such as water and
electricity expense, depreciation charges for new addition of machineries,
repairs and maintenance expenses for new manufacturing facilities in Wuhan and
Yangzhou.  Compared with the increase of 65% in cost of sales, the
increase proportion in production overhead was lower as the production overhead
was semi-variable in nature.  As a percentage of production overhead
to total revenue, it accounted 6% of total revenue in 2007, compared with 7% of
total revenue in 2006.





Gross
Margin





The
overall gross margin for 2007 was 17%, a 15% decrease, compared with 32% gross
margin for 2006.  During 2007, the Company suffered a significant
price reduction pressure on similar products compared with the unit price it got
in 2006.  The Company was unable to transfer the price reduction
pressure to its suppliers, which meant that it still paid the market price to
procure its raw materials.  The sales volume for 19” CCFL LCD
increased dramatically in 2007, amounting to 9.3 million, which had an average
gross margin at only 5.28%.  Furthermore, in order to move into the
high-end products, the price of certain components contained in the customers’
specification was higher than the price of the same type of components used in
the low-end products, which reduced the Company’s gross
margin.  Similarly, the Company was unable to pass the entire burden
to its customers in order to maintain its market share in this
industry.  On the other hand, as the products made in Wuhan were on
OEM basis to lessen the Company’s working capital requirement whereas the low
gross margin of the products manufactured in Wuhan has pushed the Company’s
gross margin downwards.  To the extent the Company was able to
purchase its raw materials at lower prices consistent with the general trend of
that product market it did everything possible to take the advantage of the
lower prices, which mitigated the price pressure from its
customers.  At the same time, the Company’s strategy to shift to LED
products with a gross margin of 20% in 2007, also contributed a positive impact
to the Company’s gross margin during 2007.




49




Management
believes that the pressure to reduce the product unit price from market will
continue in 2008.  Accordingly, management intends to improve gross
margin through focusing on following aspects: enhancing the Company’s research
and development to provide customers with alternative solutions, lowering
purchasing cost and expending customer base, forming internal strategic business
units.  Accordingly, management plans to design and implement standard
operating procedures together with definite and full documentation in 2008
within the entire organization for the ultimate goal to enhance the Company’s
productivity and profitability.





Regarding
international sales, the Company’s gross margin was approximately 16% for 2007,
a 15% decrease, compared with 31% for 2006 due to the price reduction pressure
from end users who are LCD panel makers.  Regarding domestic sales,
the Company’s gross margin was approximately 24%, a 21% decrease, compared with
45% for 2006.





Selling
Expenses





Selling
expenses were $2.6 million for 2007, an increase of approximate $1 million, or
64%, compared with $1.6 million for 2006.  Of the approximate $1
million of increase, commission expense accounted for $480,000 due to the fact
that more sales in 2007 were commission based sales; transportation expense
accounted for $218,000 due to the increase in sale volume; payroll expense
accounted for $223,000 due to the increase in headcounts; meal and entertainment
and other accounted for approximately $70,000 related to the extended sale
effort exercised by us; travel, show and exhibition expenses accounted for
$49,000 due to the extended effort exercised by us;  telecommunication
expense decreased by $29,000 in conjunction with the decrease in other minor
items.  As a percentage of total revenue, selling expenses were
approximately 5.6% for 2007 and 4.6% for the prior year,
respectively.





Research
and Development Expenses





The net
research and development expenses were $1,054,000 for 2007, an increase of
$268,000, or 34%, compared with $786,000 for 2006.  The increase was
mainly attributed to the increase in payroll expense of $471,000 related to the
Company’s engineers performing research and development
functions.  The increase was offset by the decrease in $180,000 mainly
comprising of net mould charges and raw materials for design and development
usage netting against the reimbursement of mould charges from customers, which
demonstrated that the Company was able to deliver its new products in 2007 for
the development made in 2006.  Other fluctuation include: the decrease
in patent expense and training expense of $80,000 and increase in government
fund and others of $57,000.  As a percentage of total sales revenue,
research and development expenses were approximately 2.3% and 2.3% for 2007 and
2006 respectively.





General
and Administrative Expenses





General
and administrative expenses were $6.5 million for 2007, a decrease of $180,000,
or 3%, compared with $6.7 million for 2006.  In terms of the
components of general and administrative expenses, share-based compensation
decreased by $928,000, or 43%, compared to $$2,134,000 for 2006.  The
decrease was attributable to the resignation of former CFO and two independent
directors in 2007.  Professional service fees were decreased by almost
$389,000 or 46%, compared to the amount of $1,236,000 for 2006.  The
decrease should be attributable to the less financing and reorganization
activities took place in 2007 compared to the level of activities incurred in
2006.  Payroll expense was increased by $440,000 in connection with
the increase in headcounts and pay scale increase.  The start-up
expenses for Wuhan entity accounted for $293,000 whereas there was no such
expense for 2006.  In addition, bad debt allowance increased by
$386,000 as a result of the increase of receivables with aging older than one
year, compared to $271,000 for 2006.  The last $17,000 increase was
related to office expense, compared to $1.59 million for 2006.  As a
percentage of total sales revenue, general and administrative expenses
represented 14% and 19% for 2007 and 2006, respectively.  Excluding
the stock compensation expense, the remaining general and administrative expense
for 2007 and 2006 represented 11% and 13% of total revenue
respectively.





Interest
Income





The net
interest income was $122,000 for 2007, representing a decrease of $37,000, or
23%, compared to $159,000 for 2006.  The decrease in net interest
income was due to the fact that more cash was occupied by financing the business
expansion and the new manufacturing facility in Wuhan in 2007 whereas more net
interest income was earned during 2006 on cash generated from operations and
unused proceeds from the private placement that took place on March 17,
2006.  Interest income for 2007 and 2006 represented 0.27% and 0.46%
of total revenue, respectively.




50




Investment
Income





The
investment income was $483,000 for 2007, represented an increase of $429,000, or
794%, compared with $54,000 for 2006.  The increase was attributable
to the high yield from the investment fund placed with the Bank in China which
was redeemed in December 2007.   Compared with investment income
of $54,000 for 2006, which was attributable to the yield from the cash proceeds
from the private placement placed as short-term deposit in Hong Kong during
2006, the Company did much better in 2007.  Investment income for the
years ended December 31, 2007 and 2006 represented 1.05% and 0.16% of the total
revenue, respectively.





Other
expenses





Other
expense was $168,000 for 2007, representing an increase of $68,000, or 68%,
compared with $100,000 for 2006.  The increase was due primarily to
the increase in exchange losses incurred in working capital.  Other
expenses for 2007 and 2006 represented 0.37% and 0.29% of total revenue,
respectively.





Income
Tax Provision





Income
tax provision for 2007 was approximately $94,000, a decrease of $359,000,
compared with $453,000 for 2006.  The decrease in income tax provision
was attributable mainly to decrease of the taxable income at Diguang
Electronics.  The taxable income at Diguang Electronics was $619,000
for 2007, compared with the taxable income of $4.5 million for 2006, considering
the fact that the applicable tax rate for Diguang Electronics was 15% for 2007
and 10% for 2006, respectively.  In addition, the Company did not
provide any US federal income tax provision for 2006 as there was no taxable
income in the U.S. whereas the Company recorded US federal income tax provision
of approximately $33,000 for 2007 as a result of subpart F income generated by
Diguang S&T (HK) during 2007 in accordance with relevant US IRS
codes.  As a percentage of net revenue, income tax provision was 0.21%
and 1.32% for the years ended December 31, 2007 and 2006,
respectively.




51




Net
Loss





Net loss
was $2,905,000 for 2007, compared with net income of $1,665,000 for 2006,
representing a decrease of approximately $4.6 million in net income or
275%.  Minority interest portion of net income generated at North
Diamond was $335,000 for 2007 and $75,000 for 2006, which represent 11% of net
loss for 2007 and 4.5% of net income for 2006.  The decrease in net
income was due mainly to the decrease in gross margin, the increase in operating
expenses, which was attributable mainly to the increase in selling expenses, the
increase in research and development expense, the increase in impairment loss
related to a long-term investment, and the increase in non-operating loss as a
result of the weak dollar value as the Company’s international sales were mainly
denominated by US dollars.  As a percentage of total revenue, net loss
for 2007 accounted for 6.3% whereas net income for 2006 accounted for 4.9%,
representing a decrease of 11.2%.





Earnings
per Share





The basic
loss per share was $0.13 for 2007, compared with basic earnings per share of
$0.08 for 2006.  Basic earning per share for 2007 were negatively
impacted by $0.21 per share due to the significant decrease in gross margin, the
increase in operating expenses, the incurrence of impairment loss in a long term
investment, and the increase in non-operating loss.  In addition, the
weighted average common shares outstanding were increased to 22,531,000 shares
for 2007, as compared with 21,384,000 shares for 2006.





Liquidity
and Capital Resources




Comparison
of Years Ended December 31, 2008 and 2007





As of
December 31, 2008, the Company had total assets of $ 53.6 million, of which cash
amounted to $15 million, accounts receivable amounted to $9.9 million and
inventories amounted to $7.3 million.  The working capital was $7.9
million and the equity was $24.8 million on December 31, 2008, compared with
$11.8 million and $27.3 million, respectively, on December 31,
2007.  The quick ratios were approximately 1.02 and 1.16 on December
31, 2008 and 2007, respectively.





The Companybelievesthat the current liquidity and capital
resources are sufficient to
sustain operations through at least the next 12 months.The Company’sability to generate adequate amount of
cash to meet the future capital requirements will depend primarily on operating
cash flow.  If sales or cash collectionsare reduced from current expectations,
or if expenses and cash requirements are increased,the Companymay require additional
financing.The Company isexpecting to obtain additional
lines of credit from the commercial banks inChina.





Working capital decreased by$3.9 million to $7.9 million as of
December 31, 2008 from $11.8 million of December 31, 2007.  The
current ratio as of December 31, 2008 and 2007 was 1.31 and 1.45,
respectively.  The decrease in working capital is primarily due to
$2.7 million net cashused in operating activities and $3.8
million net cash used in investing activities.





Cash
position decreased $1.3 million, or 8%, from $16.3 million as of December 31,
2007 to $15 million as of December 31, 2008.





Net cash
used in operating activities was $2.9 million for 2008, comparing with $3.9
million net cash provided by operating activities for 2007.  During
the year 2008, cash used in making payments to vendors and occupied in
inventories were $2 million more than cash received from customers, which is the
main reason that the operating activities used cash $2.9 million in the
year.





Non-cash
items added approximately $4,277,000 back to cash flow in operating activities
for 2008, compared with total non-cash items of $4,261,000 for
2007.  Of the non-cash items for 2008, approximately $572,000 was from
share-based compensation, $634,000 lower than $1,206,000 for
2007.  Depreciation was $1,833,000 for 2008, an increase of $635,000,
comparing with $1,198,000 for 2007, due primarily to putting more equipment and
machinery into services during 2007 and 2008 for the Company’s new product
lines, such as backlights for computer monitors and cell
phones.  Inventory provision was $1.24 million for 2008, $944,000
higher than $296,000 for 2007.   Minority interest was $196,000
for 2008, a decrease of $139,000 comparing with $335,000 for 2007 due to the
decrease of net income in North Diamond.  Bad debt allowance was
$221,000 for 2008, $383,000 lower than $604,000 for 2007.  Impairment
loss from long term investment in Yangzhou Huaxia was $157,000 and $622,000 for
2008 and 2007, respectively.




52




The
impact of the changes in operating assets and liabilities on cash flow between
two years ended December 31, 2008 and 2007 was presented as
follows.





·
            $9,588,000
      from Accounts receivable (positive
impact)


·
            $2,097,000
      from inventory (positive impact)


·
            $241,000
      from other receivable, prepayments and other assets (positive
      impact)


·
            $477,000
      from VAT recoverable (positive
impact)


·
            $14,088,000
      from accounts payable (negative
impact)


·
            $3,006,000
      from accruals and other payable (negative
  impact)


·
            $216,000
      from advance from customers (negative
impact)


·
            $111,000
      from taxes payable (negative
impact)





Total
negative impact from above non-cash items and changes in operating assets and
liabilities was approximately $5.0 million.





Net cash
used in investing activities amounted to $3.8 million for 2008, a decrease of
$6.4 million, or 63%, compared with $10.2 million cash used for
2007.  During 2008, the Company invested $2.6 million in plant,
property and equipment, a decrease of $3.6 million, or 58%, compared with $6.2
million during 2007.  In the
year 2007, $2.4 million was paid to acquire the land usage right in Guangming,
Shenzhen and $1 million was paid for the construction of plant in Dongguan
Diguang S&T.  There was no significant investment in plant and property
in 2008.  For the transaction of acquisition of 65% interest in
North Diamond and 100% interest in Dongguang Diguang S&T, the Company paid
cash of $3.98 million and $1.19 million during 2007 and 2008,
respectively.





Net cash
provided by financing activities was $4.6 million for 2008, compared with
$34,000 used in financing activities for 2007.  During 2008, the
Company repurchased 268,700 shares of common stock with a total cost of
$245,160, compared with 252,000 shares repurchased with a total cost of $429,000
in 2007.  The Company paid out $727,000 to related parties in 2008,
comparing with receipts of $159,000 from related parties in
2007.  Payments to related parties mainly related to repayment of a
loan from Diguang Engine and Equipment when it was due on November 30, 2008. The
Company had an outstanding bank loan of $4.4 million in 2008 whereas it did not
have any outstanding in 2007.  The Company also received capital
contribution of $738,000 from minority shareholders of North Diamond in 2008,
which minority owners of North Diamond infused their capital only in 2006, not
in 2007.  The research funding the Company received from Chinese
government and shared with other companies was $392,000 in 2008, comparing with
$236,000 received in 2007.  If the Company’s research activities
failed, the Company would have paid back to Chinese government for the amount it
received.  However, if the Company’s research activities are
successful, the fund received will be deemed as government
subsidies.





Net cash
generated from financing activities complemented cash used in operating and
investing activities, resulting in a net cash decreased of only $1.2 million
during 2008.





Comparison
of Years Ended December 31, 2007 and 2006





As of
December 31, 2007, the Company had total assets of $56.6 million, of which cash
amounted to $16.3 million, accounts receivable amounted to $12.7 million and
inventories amounted to $7.5 million.  The Company’s working capital
was approximately $11.8 million and the Company’s equity was $28.8 million
compared with working capital of $21.01 million and equity of $33.74 million on
December 31, 2006. The Company’s quick ratios were approximately 1.16 and 2.37
at December 31, 2007 and 2006, respectively.





The
Company believesthat the current liquidity and capital
resources are sufficient to sustain operations through at least the
next 12 months, primarily due to cash expected to be generated from continuing
operations.The
Company’sability to generate
adequate amount of cash to meetitsfuture capital requirements will depend
primarily on operating cash
flow.  If sales or cash collections are reduced from current
expectations, or if expenses and cash requirements are increased,the
Company may require additional
financing.The Company expectsto obtain a line of credit from the
commercial banksinChina.




53




Working capital decreased by $9.3
million to $11.8 millionat
December 31, 2007 from$21.1 millionat December 31, 2006.  The
ratio of current assets to current liabilities at December 31, 2007 and 2006 was
1.45 and 2.73, respectively.  The decrease in working capital is primarily
due to an increase of accounts payable, amount due to a related party and
amount due to stockholders, and offsetting by the increase of accounts
receivable and inventories.  Accounts payable increased $10.8 million,
which was attributable to the rise of inventory level in Dihao and Wuhan at the
end of 2007 and extended credit terms by vendors.  Amount due to a
related party and amount due to stockholders increased $167,000 and $1,100,000,
respectively, as a result of acquiring 100% interest of Dongguan Diguang
S&T.  Accounts receivable and inventories increased $6,3 million
and $3.1 million, respectively.  The increase in accounts receivable
was a result of the increase in sales generated by Yangzhou and Wuhan facilities
and the longer credit terms granted to new customers in 2007.  The
increase in inventories was primarily related to the expectation of the increase
in sales in 2008 generated in Yangzhou and Wuhan facilities.





Cash
position decreased $4.3 million, or 21%, from $20.6 million at December 31, 2006
to $16.3 million at December 31, 2007





Net cash
provided by operating activities was $3.9 million for 2007, compared with the
net cash provided by the operating activities of $3.6 million for
2006.





Non-cash
items added approximately $4,261,000 back to cash outflow from operating
activities for 2007, compared with total non-cash items of $3,773,000 for
2006.  Of the non-cash items for 2007, approximately $1,206,000 was
from share-based compensation, $928,000 lower than $2,134,000 for 2006 due
mainly to the resignation of former CFO and two independent directors and other
management team members.  Depreciation was $1,198,000 for 2007, with
an increase of $432,000, compared with $766,000 for 2006, due primarily to the
addition of equipment and machinery for the Company’s new product lines, such as
backlights for computer monitors and cell phones, and new office building in
Shenzhen that was purchased during 2006 and put into use in March of
2007.  Inventory provision was $296,000 for 2007, $250,000 lower than
$546,000 for 2006.  Minority interest was $335,000 for 2007, compared
with $75,000 for 2006 due to the increase net income generated by North Diamond
for 2007.  Before the Company wrote off its allowance for doubtful
accounts against accounts receivables, bad debt allowance was $604,000 for 2007,
$345,000 higher than $259,000 for 2006.  There was no imputed interest
and deferred tax assets impact for 2007, compared with a positive $80,000 of
imputed interest and a negative $87,000 of deferred tax assets for
2006.  In addition, there was impairment loss of $622,000 related to a
long term investment accounting for under cost method in 2007.





The
impact of the changes in operating assets and liabilities on cash flow was
explained as follows.  The accounts receivable during 2007, was
increased by approximately $6,508,000, compared with a $542,000 decrease in
2006.  Inventory level increased by $3,170,000 during 2007, compared
with a $1.222,000 increase during 2006. Other receivables increased by $249,000
during 2007, compared with a $152,000 increase for 2006.  Deposits,
prepayment and other assets decreased by $460,000 during 2007, compared with a
$638,000 increase in deposits, prepayment and other assets for
2006.  VAT recoverable increased by $185,000 during 2007, compared
with a $220,000 increase for 2006.





Advances
from customers increased by $296,000 during 2007, compared with a $158,000
decrease in 2006.  In addition, tax payable increased by $88,000 for
2007, compared with a decrease of $228,000 for 2006.  Accounts payable
increased by approximately $10 million during 2007, compared with a $735,000
increase during for 2006.  Accruals and other payables increased by
$1,732,000, compared with the increase of $611,000 for 2006.  The
following summarized the impact of changes in operating assets and liabilities
on cash flow between year ended December 31, 2007 and 2006:





·
            $5,966,000
      from Accounts receivable (negative
impact)


·
            $1,949,000
      from inventory (negative impact)


·
            $1,001,000
      from other receivable, prepayments and other assets (positive
      impact)


·
            $35,000
      from VAT recoverable (positive
impact)


·
            $9,341,000
      from accounts payable (positive
impact)




54




·
            $1,121,000
      from accruals and other payable (positive
  impact)


·
            $453,000
      from advance from customers (positive
impact)


·
            $316,000
      from taxes payable (positive
impact)





The total
positive impact from above non-cash items and changes in operating assets and
liabilities was approximately $4.4 million.





Net cash
used in investing activities amounted to $10.2 million for 2007, an increase of
$4.8 million, or 89%, compared with the $5.4 million cash used in investing
activities for 2006.  During 2007, the Company invested $6.2 million
in plant, property and equipment, an increase of $3.0 million, or 94%, compared
with $3.2 million during 2006.  The long-term investment during 2006
was $1.5 million whereas there was no cash disbursement for long term investment
during 2007.  During 2006, the Company redeemed $1.1 million
marketable securities and paid deposit of $1.8 million for the new office
building where the Company moved in 2007.  During 2007, the Company
acquired 65% interest of North Diamond and 100% interest of Dongguang Diguang
S&T by paying cash of $1.98 million and $2.0 million,
respectively.





Net cash
used in the financing activities for 2007 was $34,000, compared with $11 million
net cash provided by financing activities for 2006.  There was no
private placement in 2007 which generates cash proceeds of $12 million during
2006 accounting for the total decrease.  During 2006, the owners of
North Diamond infused a total of $1.4 million of capital into Yangzhou facility
whereas there was no such capital infusion in 2007.  Compared with the
cash proceeds from private placement incurred in 2006 and capital infusion of
$1.4 million in 2006, the cash disbursement for related parties was immaterial
whereas there was a positive cash flow from amount due to related parties during
2007.  Also during 2007, the Company repurchased 252,000 shares of
common stock with a total cost of $429,000.  Meanwhile, the Company
had obtained the research funding of $236,000, which was granted by Chinese
government and shared with other companies.  If the Company’s research
activities failed, the Company would have paid back to Chinese
government.  However, if the Company’s research activities are
successful, the fund received will be deemed as government
subsidies.







ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
required for smaller reporting companies.




ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




(a)
Financial Statements




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




1.     Report
of Independent Registered Public Accounting Firm




2.     Consolidated
Balance Sheets as of December 31, 2008 and 2007




3.     Consolidated
Statements of  Income and Comprehensive Income (Loss) for the years ended
December 31, 2008, 2007 and 2006




4.     Consolidated
Statements of  Stockholders’ Equity for the years ended December 31, 2008,
2007 and 2006




5.     Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007 and
2006




6.     Notes
to Consolidated Financial Statements.




55




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




None .




ITEM
9A. CONTROLS AND PROCEDURES





(a)
            Evaluation of disclosure controls
      and procedures:





The
Company maintains disclosure controls and procedures designed to ensure that
information required to be disclosed in the reports the Company files or submits
under the Securities Exchange Act of 1934, as amended, the “Exchange Act”, is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's, the “SEC”, rules and forms, and
that such information is accumulated and communicated to the Company's
management, including its chief executive officer, the “CEO”, and chief
financial officer, the “CFO”, as appropriate, to allow timely decisions
regarding required financial disclosure.





In
connection with the preparation of this annual report on Form 10-K, the “Form
10-K”, the Company carried out an evaluation as of December 31, 2008, under the
supervision and with the participation of the Company's management, including
the CEO and CFO, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures, as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act. Based upon this evaluation, the
CEO and CFO concluded that as of December 31, 2008 the Company's disclosure
controls and procedures were not effective because of the material weaknesses
described below under “Management's Annual Report on Internal Control over
Financial Reporting.”





To
address these material weaknesses, the Company performed additional analyses and
other procedures, described below under the subheading “Interim Measures”, to
ensure that the Company’s consolidated financial statements were prepared in
accordance with generally accepted accounting principles in the United States,
“GAAP”. Accordingly, Company management believes that the consolidated financial
statements included in this Form 10-K fairly present in all material respects
the Company’s financial condition, results of operations and cash flows for the
periods presented and that this Form 10-K does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the periods covered by this
report.




(b)
            Management’s report on internal control over
      financial reporting.




Management is responsible for
establishing and maintaining adequate internal control over financial reporting
for the Company, as such term is defined in Rules13a-15(f) and 15d-15(f) under the Exchange
Act. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external reporting purposes in
accordance with GAAP.




56





Management has conducted an assessment,
including testing, of the effectiveness of the Company's internal controlover financial reporting as
of December 31, 2008. In making its assessment,
management used the
criteria inInternal
Control—Integrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission
("COSO").




A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company's annual or interim financial
statements will not be prevented or detected on a timely basis. The following
material weaknesses in internal control over financial reporting have been
identified as of December 31, 2008.




1.
            Entity
      level material weaknesses-control
environment




The
Company did not have an appropriate level of control consciousness as it relates
to the establishment and maintenance of policies and procedures with respect to
key internal controls. Effective controls were not designed and in place over
the process related to identifying and accumulating all required information to
ensure the completeness and accuracy of consolidated financial statements and
disclosures as required by Rule 3-10 of Regulation S-X.




2.
            Insufficient
      resources for US GAAP compliance




The
Company currently lacks finance and accounting personnel who possess sufficient
skills and experience to ensure that all transactions are accounted for in
accordance with US GAAP.  In addition, the Company does not have sufficient
internal financial policies and procedures to ensure that the existing personnel
are capable of fulfilling the requirements of US GAAP reporting.
 Amongst those deficiencies, revenue and cost recognition were affected
most as evidenced by their significant adjustments as compared to the Company’s
preliminary consolidated financial statements.




3.
            Ineffective
      information technology general
control





The
Company currently does not have a formal documentation on the information
technology general controls, including program development, program changes,
computer operations, access to programs and data.





Remediation
Measures of Material Weaknesses




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




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





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








3.
            The
      Company continues to retain the services of outside U.S. counselor to
      advise on SEC disclosure requirements and at the same time, the Company
      has the staff training plan on the disclosure requirement either
      internally or enrolment in professional
courses.





4.
            The
      Company is in the progress of implementing an ERP system which the Company
      considered would enable the Company to enhance its management capability
      on monitoring the Company's business operations. Besides, the Company is
      in the process of establishing a comprehensive IT short term development
      plan and long term strategic plan that are appropriately aligned with
      business objectives and include the
following:




57





·
            IT
      short term development plan: Business departments will initialize the
      information technology requests in accordance with their business
      workflow, and senior management will develop implementation plans and
      procedures;·
            IT
      long term strategic plan: IT long term strategic plan development is based
      on corporate strategic requirement, including the IT goal and mission,
      guidance, objectives and the Company’s actions.  The IT mission and
      guidance drive how IT should implement and align with the Company’s
      strategic goals;





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




The
Company also planned to develop an appropriate IT Organization and Relationships
program to regulate IT organizational structure that adequately supports
critical systems and segregation of duties, including the
following:




·
            IT
      managers to have adequate knowledge and experience to fulfill their
      responsibilities to deliver high quality IT services;·
            Significant
      IT processes, controls and activities
  documented;





·
            Job
      roles and responsibilities within the IT organization clearly defined and
      documented;·
            IT
      personnel to understand and accept their responsibilities regarding
      internal controls; and





·
            IT
      management to implement a division of roles and responsibilities,
      segregation of duties, that reasonably prevents a single individual from
      subverting a critical process.




The
Company expects that the overall ERP implementation, together with the above
mentioned policies and procedures, will be completed before September
2009.




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




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




(c)
Changes in internal controls over financial reporting:




For the
fourth quarter ended December 31, 2008, there has been no change in the
Company’s internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, its internal control
over financial reporting.




(d)
Inherent Limitations on Effectiveness of Controls





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




58




ITEM
9B. OTHER INFORMATION




None.




PART
III




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




The
following table and text set forth the names and ages of all directors and
executive officers of the Company as of December 31, 2008  The Board of
Directors is comprised of only one class.  All of the directors will serve
until the next annual meeting of stockholders and until their successors are
elected and qualified, or until their earlier death, retirement, resignation or
removal. Also provided herein are brief descriptions of the business experience
of each director and executive officer during the past five years and an
indication of directorships held by each director in other companies subject to
the reporting requirements under the federal securities laws.




Name
                  
                  
                  Age
                  
                  
                  PositionYi
      Song
                  
                  
                  51
                  
                  Board
      Chairman and CEOHong
      Song
                  
                  
                  45
                  
                  Director
      and Vice PresidentKeith
      Hor
                  
                  
                  44
                  
                  Chief
      Financial OfficerJerry
      Yu
                  
                  
                  52
                  
                  Chief
      Operating Officer (appointed as of December 9 2008)Fong
      Heung Sang
                  
                  
                  49
                  
                  Independent
      DirectorHoi
      S. Kwok
                  
                  
                  57
                  
                  Independent
      DirectorTuen-Ping
      Yang
                  
                  
                  62
                  
                  Independent
      Director




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




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




59




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





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





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




60




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





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





Significant
Employees





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





Gangyi Luo,
Manager, the Division 1 Marketing Department, 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,
Manager, the Division 2 Marketing Department, Diguang
Electronics, joined Diguang Electronics in 1999 as an engineer, manager,
deputy chief engineer and later as Technology Superintendent. He is responsible
for the Company’s technology, especially for the new technology and
products.  From 1981 to 1999, he worked with Hubei Wei Te Engine Factory,
where he was involved in product development. He has extensive experience in the
design and production of moulds.  Mr. Zou Huade graduated from Wuhan
Wireless Industries College in 1981, specializing in the design and production
of moulds.





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




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




61




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




Audit
Committee Financial Expert




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




Compensation
Committee




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




Nominating
Committee




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





Stockholders
Communication




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




Code
of Ethics and Conduct




62




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




Section
16(a) Beneficial Ownership Compliance




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




ITEM
11. EXECUTIVE COMPENSATION




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




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





Elements of
Compensation




Executive
compensation consists of following elements:




Base
Salary.  Base salaries for the Company’s executives are
established based on the scope of their responsibilities, taking into account
competitive market compensation paid by other companies for similar positions.
Generally, the Company believes that executive base salaries should be targeted
near the median of the range of salaries for executives in similar positions
with similar responsibilities at comparable companies, in line with the
Company’s compensation philosophy. Base salaries are reviewed annually, and
adjusted from time to time to realign salaries with market levels after taking
into account individual responsibilities, performance and experience. The last
meeting of the Compensation Committee was held on December 27,
2008.





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




63




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




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




Options.  The Company’s
2006 Stock Incentive Plan authorizes the Company to grant options to purchase
shares of common stock to the Company’s employees, directors and consultants.
The Company’s Compensation Committee was the administrator of the stock option
plan until the authority was delegated by the Board to the Company’s Chief
Operating Officer, Song Hong in 2007 and then to the Company’s Chief Executive
Officer, Song Yi in 2008.  Stock option grants were made on February
25, 2006 or at the commencement of employment. The board of directors reviewed
and approved the stock option to the Company’s key employees, including the
Company’s Chief Financial Officer, and the Company’s independent directors on
February 25, 2006 and the granting of stock options subsequent to that was
administered and approved by the Compensation Committee, based upon a review of
the competitive compensation of key officers and key employees, its assessment
of individual performance, a review of each executive’s existing long-term
incentives, and retention considerations. In 2006, the Company’s former Chief
Financial Officer, the only named executive officer at that time, was awarded
stock options in the amounts indicated in the section entitled “Grants of Plan
Based Awards”. These grants were made to encourage an ownership culture among
the Company’s employees. The Chief Executive Officer has not been granted any
stock options. In 2007, the Company’s two of three current independent directors
were awarded stock options. The Company’s current Chief Financial Officer was
granted with 20,000 shares of option on March 1, 2007, with an exercise price of
$5 per share, which vest over four years in equal installments on the following
four succeeding anniversaries of the grant date; the Chief Operating Officer was
granted with 300,000 shares of option on December 17, 2008, with an exercise
price of $0.10 per share, which vest quarterly at the beginning of each quarter
over three years starting from January 1, 2009. Please refer to “Grants of Plan
Based Awards”.





In order
to motivate the Company’s employees to achieve the fixed operation targets in
2009, on December 9 2008 the board approved the granting of the Incentive Option
Shares in 2009 to the employees of the Company,
total up to 548,000 shares.





The
number of stock options to be granted to the employees in 2009 is connected with
his or her annual target achievements and responsible projections, and the
person who can achieve all the annual achievements will be entitled to all the
granted stock options, and the person who partially achieves the annual
achievements will be entitled to the partial granted stock
options.  If the employee fails to achieve the target completely, no
stock options would be granted.





Based on
the employee’s annual target achievements, the respective stock options shall be
granted as to 25% of the individual’s total entitled stock options (shares) on
each of the first four anniversaries of the vesting commencement
date.





64




2006 Stock
Incentive Plan.  The Company’s 2006 Stock Incentive Plan
authorizes the Company to grant incentive stock option, nonstatutory stock
option, stock options, cash awards and stock awards to the Company’s employees,
directors and consultants. Mr. Song Yi, the Company’s chief executive officer is
the administrator of the plan.  If and when stock option awards are
granted, they will be made as per the approval of the board of directors, for
which the vesting commencement date will be the first day of the month
in the year and, occasionally, to meet other special retention or performance
objectives. Mr. Song Yi will provide the stock option award plans to the
Compensation Committee for review on the executive officers and other key
employees, etc. based upon the competitive compensation of the key officers and
the key employees, its assessment of individual performance, a review of each
executive’s existing long-term incentives, and retention considerations.
Periodic stock option award plan to eligible employees, etc. will be regularly
prepared by Mr. Song Yi for the approval of the board of directors.




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




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





SUMMARY
COMPENSATION TABLE





Name
      and principal position
                          (a)
                        
                        Year
                          (b)
                        
                        
                        Salary
                          ($)
                          (c)
                        
                        
                        Bonus
                          ($)
                          (d)
                        
                        
                        Stock
                          awards
                          ($)
                          (e)
                        
                        
                        Option
                          awards1
                          ($)
                          (f)
                        
                        
                        Non-equity
      incentive
                          plan
      compensation
                          ($)
                          (g)
                        
                        
                        Change
      in pension value and non-qualified deferred compensation
      earnings
                          ($)
                          (h)
                        
                        
                        All
      other compensation
                          ($)
      2
                          (i)
                        
                        
                        Total
                          ($)
                          (j)Yi
      Song
                          Chief
      Executive Officer and Chairman of the Board
                        
                        
                        2008
                          2007
                          2006
                        
                        
                        
                        214,882
                          218,660
                          250,000
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        214,882
                          218,660
                          250,000Keith
      Hor
                          Chief
      Financial Officer
                          (appointed
      on March 8, 2007)
                        
                        
                        2008
                          2007
                          2006
                        
                        
                        
                        118,956
                          117,283
                          -
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        16,795
                          16,795
                          -
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        135,751
                          134,078
                          -Jackie
      You Kazmerzak
                          Chief
      Financial Officer
                          (resigned
      on March 8, 2007)
                        
                        
                        2008
                          2007
                          2006
                        
                        
                        
                        -
                          27,599
                          100,000
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        -
                          36,991
                          84,954
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        -
                          64,590
                          284,954Hong
      Song
                          Chief
      Operating Officer(Resigned on December 9 2008)
                        
                        
                        2008
                          2007
                          2006
                        
                        
                        
                        171,415
                          174,554
                          200,000
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        171,415
                          174,554
                          200,000Jerry
      Yu
                          Chief
      Operating Officer(Appointed
      on December 9 2008)
                        
                        
                        2008
                          2007
                          2006
                        
                        
                        
                        33,166
                          -
                          -
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        -
                          -
                          -
                        
                        
                        
                        33,166




65




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





On December 9, 2008, Mr. Hong Song
resigned from his position as the Chief Operating Officer of Diguang International
Development Co., Ltd., the “Company”.  On the same date, Mr. Song
was appointed as a Vice Presidentof the Company.





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





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




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




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





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




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




66


Grants of
Plan-Based Awards







Estimated
                                  future
      payouts
                                  under
      non-equity
                                  incentive
                                  plan
      awards
                                
                                
                                Estimated
                                  future
      payouts
                                  under
      equity
                                  incentive
                                  plan
      awards
                                
                                
                                All
      other stock awards; number of shares of
                                
                                
                                All
      other option awards; number of securities
                                
                                
                                Exercise
      or base price of
                                
                                
                                Grant
      date fair value of stockName
                                
                                Grant
                                  date
                                
                                
                                Threshold
                                  ($)
                                
                                
                                Target
                                  ($)
                                
                                
                                Maxi-mum
                                  ($)
                                
                                
                                Threshold
                                  (#)
                                
                                
                                Target
                                  (#)
                                
                                
                                Maxi-mum
                                  (#)
                                
                                
                                stock
                                  or
      units
                                  (#)
                                
                                
                                underlying
                                  options
                                  (#)
                                
                                
                                option
      awards
                                  ($/Sh)
                                
                                
                                and
      option awards(a)
                                
                                (b)
                                
                                
                                (c)
                                
                                
                                (d)
                                
                                
                                (e)
                                
                                
                                (f)
                                
                                
                                (g)
                                
                                
                                (h)
                                
                                
                                (i)
                                
                                
                                (j)
                                
                                
                                (k)
                                
                                
                                (l)Song
      Yi
                                  Chief
      Executive Officer and Chairman of the Board
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Keith
      Hor
                                  Chief
      Financial Officer
                                
                                March 1,2007
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                20,000
                                
                                
                                
                                
                                
                                
                                
                                5
                                
                                
                                
                                2.18Jackie
      You Kazmerzak
                                  Chief
      Financial Officer
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Song
      Hong
                                  Chief
      Operating Officer
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Jerry
      Yu
                                  Chief
      Operating  Officer
                                
                                December 17,2008
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                300,000
                                
                                
                                
                                -
                                
                                
                                
                                0.1
                                
                                
                                
                                0.12Fong
      Heung Sang
                                  director
                                
                                February 27,2008
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                20,000
                                
                                
                                
                                -
                                
                                
                                
                                1.91
                                
                                
                                
                                1.36Hoi S. Kwok
                                  director
                                
                                February 27,2008
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                20,000
                                
                                
                                
                                -
                                
                                
                                
                                1.91
                                
                                
                                
                                1.36




Outstanding Equity Awards at Fiscal
Year-End of 2008




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 Board
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Keith
      Hor
                                  Chief
      Financial Officer
                                
                                
                                10,000
                                
                                
                                
                                -
                                
                                
                                
                                10,000
                                
                                
                                
                                5
                                
                                
                                February 28, 2017
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                10,000
                                
                                
                                
                                21,800Jackie
      You Kazmerzak
                                  Former
      Chief Financial Officer
                                
                                
                                20,000
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                5
                                
                                
                                February 25, 2016
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Song
      Hong
                                  Former
      Chief Operating Officer
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Jerry
      Yu
                                  Chief
      Operating Officer
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                December 16, 2018
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                300,000
                                
                                
                                
                                36,000Fong
      Heung Sang
                                  director
                                
                                
                                5,556
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                February 26, 2018
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                14,444
                                
                                
                                
                                19,644Hoi
      S. Kwok
                                  director
                                
                                
                                5,556
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                February 26, 2018
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                14,444
                                
                                
                                
                                19,644
  67




Outstanding Equity Awards at Fiscal
Year-End of 2007


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 Board
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Keith
      Hor
                          Chief
      Financial Officer
                        
                        
                        5,000
                        
                        
                        
                        -
                        
                        
                        
                        15,000
                        
                        
                        
                        5
                        
                        
                        February 28, 2017
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        15,000
                        
                        
                        
                        32,700Jackie
      You Kazmerzak
                          Chief
      Financial Officer
                        
                        
                        20,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        5
                        
                        
                        February 25, 2016
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Song
      Hong
                          Chief
      Operating Officer
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Jerry
      Yu
                          Chief
      Operating Officer
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -





Pursuant to the terms of the Amended
and Restated Share Exchange Agreement, the Company assumed Diguang’s outstanding
2006 stock incentive plan covering options totaling the equivalent of 1,500,000
shares of its common stock.  Options equivalent to approximately
566,000 shares of the Company’s common stock were issued under the Diguang 2006
Option Plan before the Share Exchange closed as follows: the equivalent of
20,000 and 80,000 shares were granted to Diguang’s current and former chief
financial officer in 2007 Agreement, as of March 7, 2007, the date the former
chief financial officer resigned, 20,000 of her options have been vested and are
exercisable but none of them has been exercised as of March 7,
2007.  Under the Stock Option Agreement, the remaining of the 60,000
shares subject to the option that were unvested and hence unexercisable shall
terminate and expire effective immediately on March 7, 2007, the date of her
resignation. Under the Stock Option Agreement, 16,795 of her options have been
vested and are exercisable but none of them has been exercised as March 1,
2008.On December 17, 2008, the Board of Directors approved to
grant 300,000 shares of stock options to the Company’s current Chief Operation
Officer. The vesting commencement date of the option is January 1,
2009.  The Chief Executive
Officer is not granted any options.




68




Director
Compensation




Name3
              
              Fees
      earned or paid in cash
                ($)
              
              
              Stock
      awards
                ($)
              
              Option
      awards1
                ($)
              
              Non-equity
      incentive plan compensation7
                ($)
              
              
              Change
      in pension value and nonqualified deferred compensation earnings8
              
              
              All
      other compensation2
                ($)
              
              
              Total
                ($)(a)
              
              (b)
              
              
              (c)
              
              (d)
              
              (e)
              
              
              (f)
              
              
              (g)
              
              
              (h)Tuen-Ping
      Yang
              
              
              24,000
              
              
              
              50,962
              
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              74,962Fong
      Heung Sang
              
              
              36,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              36,000Hoi
      S. Kwok
              
              
              24,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              24,000





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




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




As of
December 31, 2006, the Company had a total of 22,593,000 shares of common stock
outstanding, which are its only issued and outstanding voting equity securities.
 As of December 2008, the Company had repurchased a total of 521,000 shares
and the Company had a total of 22,072,000 shares of common stock
outstanding.




The
following table sets forth, as of February 28, 2009: (a) the names and addresses
of each beneficial owner of more than five percent (5%) of the Company’s common
stock known to us, the number of shares of common stock beneficially owned by
each such person, and the percent of the Company’s common stock so owned; and
(b) the names and addresses of each director and executive officer, the number
of shares the Company’s common stock beneficially owned, and the percentage of
the Company’s common stock so owned, by each such person, and by all of the
Company’s directors and executive officers as a group. Each person has sole
voting and investment power with respect to the shares of the Company’s common
stock, except as otherwise indicated. Beneficial ownership consists of a direct
interest in the shares of common stock, except as otherwise
indicated.




Name
      of Beneficial Owner
                                                
                                                Amount
      of Beneficial Ownership
                                                
                                                
                                                Percentage
      Ownership(1)Sino
      Olympics Industrial Limited
                                                
                                                
                                                15,590,000
                                                
                                                
                                                
                                                69
                                                %Yi
      Song (2)
                                                
                                                
                                                15,590,000
                                                
                                                
                                                
                                                69
                                                %Hong
      Song
                                                
                                                
                                                *
                                                
                                                
                                                
                                                *Tuen-Ping
      Yang
                                                
                                                
                                                *
                                                
                                                
                                                
                                                *Fong
      Heung Sang (appointed on August 8, 2007)Hoi
      S. Kwok (appointed on August 8, 2007)Remo
      Richli (resigned on June 20, 2007)
                                                
                                                
                                                *
                                                
                                                
                                                
                                                *Gerald
      Beemiller (resigned on June 22, 2007)
                                                
                                                
                                                *
                                                
                                                
                                                
                                                *Jackie
      You Kazmerzak (resigned on March 8, 2007)
                                                
                                                
                                                *
                                                
                                                
                                                
                                                *Keith
      Hor (appointed on March 8, 2007)Jerry
      Yu (appointed on December 9, 2008)All
      Officers & Directors as a Group
                                                
                                                
                                                15,590,000
                                                
                                                
                                                
                                                69
                                                %





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




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




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




69




ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.




Transaction
with management and others





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





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




The
Company is continually looking for opportunities to expand its business through
either internal growth or by merger and acquisition.  During the process of
understanding Diguang Holdings’ business operation, the Company 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 the Company currently produces, but which the
Company would like to produce in the near future. Thus, the Company entered into
a Purchase Option Agreement, the “Option Agreement”, with Sino Olympics, Diguang
Electronics, and Yi Song and Hong Song, the “Songs”, giving it the right to
acquire the interests held in North Diamond from Sino Olympics. Under the Option
Agreement, the Company has the right to purchase from Sino Olympics its entire
equity interest in North Diamond, including the option to acquire the additional
32.5% ownership, for a period of one year from the date of the Option Agreement.
The consideration to be paid for the exercise of the option is the amount that
Sino Olympics paid for its interest, plus interest at the rate of 6% per annum,
plus the assumption of any remaining obligation of Sino Olympics to contribute
registered capital to North Diamond. In consideration for the Sino Olympics'
entry into the Option Agreement, the Company 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 the Company’s board of directors.
In view of the possibility that the Company is going to own a significant
interest in this joint venture, the Company believes that it is in its best
interest to have Yi Song and Hong Song devote a portion of their business time
and efforts to the joint venture.




70




On May
12, 2006, the Company entered into an Amended and Restated Purchase Option
Agreement, the “Amended Agreement”, which superceded the Option Agreement. The
parties to, and the terms and conditions of, the Amended Agreement are wholly
identical to the Option Agreement except in the following respects. First, Sino
Olympics’s current ownership of a 32.5% equity interest, “the Equity Interest”,
in North Diamond is in exchange for a total contribution of $487,500 in
registered capital, and not as was stated in the Option Agreement, in exchange
for a total contribution of $20,000,000 in authorized capital. Second, Sino
Olympics granted the Company 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, 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 the Company exercises the option. Finally, the Amended
Agreement shall terminate if the Company fails 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 contributed only $487,500 into North Diamond,
accounting for 32.5% interest whereas the other investor contributed $1.0125
million, accounting for 67.5% interest based on the actually contributed
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 contributed 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, the Company’s board of directors, which included all the independent
directors, passed resolutions to approve the Company’s acquisition of the Equity
Interest and Sino Olympics’s additional 32.5% ownership in North
Diamond.





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.





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





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





Related
Party Relationships





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





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




71




Amount
      due to
                                        
                                        Diguang
      Engine
                                        
                                        
                                        Stockholders
                                        
                                        
                                        TotalBalance
      at January 1 , 2007
                                        
                                        $
                                        1,298,475
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        1,298,475Accrued
      interest
                                        
                                        
                                        77,113
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        77,113Purchase
      price for acquisition of 65% interest
                                          in
      North diamond
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,977,864
                                        
                                        
                                        
                                        1,977,864Purchase
      price for acquisition of 100% interest in
                                          Dongguan
      Diguang S&T
                                        
                                        
                                        -
                                        
                                        
                                        
                                        4,200,000
                                        
                                        
                                        
                                        4,200,000Payments
      made
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (3,977,864
                                        )
                                        
                                        
                                        (3,977,864
                                        )Translation
      adjustment
                                        
                                        
                                        90,202
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        90,202Balance
      at December 31, 2007
                                        
                                        $
                                        1,465,790
                                        
                                        
                                        $
                                        2,200,000
                                        
                                        
                                        $
                                        3,665,790Accrued
      interest
                                        
                                        
                                        51,330
                                        
                                        
                                        
                                        137,875
                                        
                                        
                                        
                                        189,205Payments
      made
                                        
                                        
                                        (944,001
                                        )
                                        
                                        
                                        (1,332,395
                                        )
                                        
                                        
                                        (2,276,396
                                        )Translation
      adjustment
                                        
                                        
                                        101,429
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        101,429Balance
      at December 31, 2008
                                        
                                        $
                                        674,548
                                        
                                        
                                        $
                                        1,005,480
                                        
                                        
                                        $
                                        1,680,028





On
December 29, 2007, Diguang Holdings entered into a sale and purchase agreement
with Sino Olympics Industrial Limited, or “Sino Olympics”, and Shenzhen Diguang
Engine & Equipment Co., Ltd., or “Shenzhen Diguang”, to acquire a 100%
interest in Dongguan Diguang S&T. The closing date of the acquisition was
December 30, 2007, which was deemed to be the date for the purpose of financial
consolidation. Pursuant to local law, the acquisition is not effective until the
registration of change of shareholders is approved by the Industrial and
Commercial Bureau in Dongguan, Administration of Foreign investment in
enterprises in Dongguan and State Administration in Foreign Exchange. On January
1, 2008, Diguang Holdings assigned 70% of interest in Dongguan Diguang S&T
to Diguang Electronics.




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





The purchase price of Dongguan Diguang
S&T was $4.2 million, of which $2 million was paid in 2007.  The
remaining $2.2 million should be repaid through four installment payments on
June 30, 2008, December31, 2008, March 31, 2009 and June 30,
2009, respectively.  The Company paid $1,332,395 to Sino Olympics during the year ended
December 31, 2008. Among the payment of $1,332,395, $1.1 million was
purchase price paid as agreed in
the purchase agreement; $137,875 was accrued interest and paid in
accordance with the purchase
agreement; the remaining $94,520 was paid by Diguang Electronics on behalf of
Sino Olympics for withholding capital gain tax during the sale and purchase
transaction of Dongguan Diguang S&T.  The outstanding balance due
to Stockholders was the last two installments of payment of the purchase price
to be paid on March 31, 2009 and June 30, 2009,
respectively.





ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.




The
following table sets forth the aggregate fees for professional audit services
rendered by BDO Guangdong Dahua Delu, which was previously named as BDO
Shenzhen Dahua Tiancheng.  BDO Shenzhen Dahua Tiancheng changed its
name to BDO Guangdong Dahua Delu on May 20, 2008 after a merger took place in
2008.  BDO Guangdong Dahua audited the Company’s annual consolidated
financial statements for the fiscal years 2008 and 2007 respectively.  The
Audit Committee has approved all of the following fees.





Fiscal
      Year Ended2008
                                                                                                  
                                                                                                  
                                                                                                  2007Audit
      Fees
                                                                                                  
                                                                                                  $
                                                                                                  265,362
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  275,090Audit
      related Fees
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  40,000Total
      Fees
                                                                                                  
                                                                                                  $
                                                                                                  265,362
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  315,090




72




Audit
Committee’s Pre-Approval Policy




During
fiscal year ended December 31, 2008, the Audit Committee of the Board of
Directors adopted policies and procedures for the pre-approval of all audit and
non-audit services to be provided by the Company’s independent auditor and for
the prohibition of certain services from being provided by the independent
auditor.  The Company may not engage the Company’s independent auditor to
render any audit or non-audit service unless the service is approved in advance
by the Audit Committee or the engagement to render the service is entered into
pursuant to the Audit Committee’s pre-approval policies and procedures.  On
an annual basis, the Audit Committee may pre-approve services that are expected
to be provided to the Company by the independent auditor during the fiscal
year.  At the time such pre-approval is granted, the Audit Committee
specifies the pre-approved services and establishes a monetary limit with
respect to each particular pre-approved service, which limit may not be exceeded
without obtaining further pre-approval under the policy.  For any
pre-approval, the Audit Committee considers whether such services are consistent
with the rules of the Securities and Exchange Commission on auditor
independence. There was no audit committee for the fiscal year ended
2005.




PART
IV




ITEM
15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.




(a) List of Financial
Statements/Schedules




Consolidated
Financial Statements




ConsolidatedBalance Sheets





ConsolidatedStatements of Income and Comprehensive
Income





ConsolidatedStatements of Stockholders’ Equity





ConsolidatedStatements of Cash Flows





Notes to Consolidated Financial
Statements




(b) Exhibits




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




73




Exhibit
      No.
            
            Description2.1
            
            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
            
            Production
      Building Lease Contract with Dongguan Diguang Electronics Science &
      Technology Co., Ltd. and Shenzhen Diguang Electronics Co. dated March 30,
      2005 (incorporated by reference from Form S-1 filed on June 16,
      2006).10.2
            
            Employment
      Agreement of Yi Song (incorporated by reference from Form 8-K filed on
      April 21, 2006).10.3
            
            Employment
      Agreement of Hong Song (incorporated by reference from Form 8-K filed on
      April 21, 2006).10.4
            
            Amended
      and Restated Purchase Option Agreement dated May 12, 2006 (incorporated by
      reference from Form 10-QSB filed on May 15, 2006).10.5
            
            Lease Agreement
      between Wuhan Diguang Electronics Co. Ltd. andTPV Technology
      (Wuhan) Co. Ltd
      dated November 18, 2006 (incorporated by reference from
      Form 10-K filed on April 14, 2008).10.6
            
            Employment
      Agreement of Keith Hor dated March 7 2007 (incorporated by reference from
      Form 8-K filed on March 13, 2007).10.7
            
            Lease Agreement between Dihao
      Electronics (Yangzhou) Co. Ltd and Transcend Optronics
      (Yangzhou) Co., Ltd dated October 1,
      2007(incorporated by
      reference from Form 10-K filed on April 14,
      2008).10.8
            
            Lease Agreement between Wuhan Diguang Electronics
      Co. Ltd and Wuhan Hannstar Technology Co. Ltd dated October 29,
      2007(incorporated by
      reference from Form 10-K filed on April 14,
      2008).10.9
            
            Sale
      and Purchase Agreement relating to 100% interest in Dongguan Diguang
      Science & Technology Limited dated December 29, 2007 (incorporated by
      reference from Form 8-K filed on January 4, 2008).                                74
   10.10
            
            Translation
      of the Comprehensive Credit Line Agreement entered into between Shenzhen
      Diguang Electronics and Ping An Bank dated July 1, 2008 (incorporated by
      reference from Form 8-K filed on July 8, 2008).10.11
            
            Translation
      of the Pledge Contract entered into between Dongguan Diguang S&T and
      Ping An Bank dated July 1, 2008 (incorporated by reference from Form 8-K
      filed on July 8, 2008).10.12
            
            Employment
      Agreement of Jerry Yu dated July 31, 2008 (incorporated by reference from
      Form 8-K filed on December 15, 2008).14.1
            
            Code
      of Ethics (incorporated by reference from Form S-1/A filed on October 30,
      2006).21.1
            
            Subsidiaries
      of the registrant (incorporated by reference from Form S-1 filed on June
      16, 2006).31.1
            
            Rule
      13a-14(a) Certification*31.2
            
            Rule
      13a-14(a) Certification*32.1
            
            Section
      1350 Certification*32.2
            
            Section
      1350 Certification*





































*
      Filed herewith








75


SIGNATURES




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





Date:
March 31, 2009




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




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




Dated:
      March 31, 2009
            
            /s/
      Yi SongYi
      SongChairman
      of the Board and Chief Executive Officer
              (Director
      and Principal Executive Officer)Dated:
      March 31, 2009
            
            /s/
      Hong SongHong
      SongDirectorDated:
      March 31, 2009
            
            /s/
      Fong Heung SangFong
      Heung SangDirectorDated:
      March 31, 2009
            
            /s/
      Hoi S. KwokHoi
      S. KwokDirectorDated:
      March 31, 2009
            
            /s/
      Tuen-Ping YangTuen-Ping
      YangDirector




76








FINANCIAL STATEMENTS


DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.


CONTENTS


Reports
      of Independent Registered Public Accounting Firm
                        
                        F-2Consolidated
      Financial StatementsConsolidatedBalance
      Sheets
                        
                        F-5ConsolidatedStatements of
      Income and Comprehensive Income
                        
                        F-6ConsolidatedStatements of
      Stockholders’ Equity
                        
                        F-7ConsolidatedStatements of Cash
      Flows
                        
                        F-8Notes
      to Consolidated Financial Statements
                        
                        F-9


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, 2007 and 2008, and the
related statements of income and comprehensive income, stockholders’ equity and
cash flows for each of the years in a two-year period ended December 31,
2008.  These financial statements are the responsibility of the
Company’s management.  Our responsibility is to express an opinion on
these financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements and schedule are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.  Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.  An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements.  We believe that our
audits provide a reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Diguang International Development
Co., Ltd, as of December 31, 2007 and 2008, the results of its operations and
its cash flows for each of the years in a two-year period ended December 31,
2008, in conformity with accounting principles generally accepted in the United
States of America.











BDO
Guangdong Dahua Delu CPAs





Shenzhen,
PRC


March 23,
2009





F-2





Report
of Independent Registered Public Accounting Firm





The Board
of Directors


Diguang
International Development Co., Ltd





We have
audited the accompanying consolidated balance sheets of Diguang International
Development Co., Ltd (the “Company”) as of December 31, 2006, and the related
statements of income and comprehensive income, stockholders’ equity and cash
flows for the year ended December 31, 2006.  These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.  We did not audit the financial statements of Dongguan
Diguang Electronic Science and Technology Co., Ltd., a wholly-owned subsidiary,
those statements include assets which represent 16% of the consolidated assets
as of December 31, 2006, and revenues which represent 0% and 0% of the
consolidated revenues for the year ended December 31, 2006.  Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Dongguan
Diguang Electronic Science and Technology Co., Ltd., is based solely on the
report of the other auditors.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements and schedule are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements.  We believe that our
audits and the report of the other auditors provide a reasonable basis for our
opinion.





In our
opinion, based on our audits and the report of other auditors, the financial
statements referred to above present fairly, in all material respects, the
financial position of Diguang International Development Co., Ltd, as of December
31, 2006, the results of its operations and its cash flows for the year 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-3




Report
of Independent Registered Public Accounting Firm








The Board
of Directors


Diguang
International Development Co., Ltd








We have
audited the accompanying balance sheets of Dongguan Diguang Electronic Science
and Technology Co., Ltd (“Dongguan Diguang S&T”) as of December 31, 2006,
and the related statements of operations and comprehensive income (loss),
stockholders’ equity and cash flows for the year ended December 31,
2006.  These financial statements are the responsibility of Dongguan
Diguang S&T’s management.  Our responsibility is to express an
opinion on these financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  Dongguan
Diguang S&T is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting.  Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of Dongguan
Diguang S&T’s internal control over financial reporting. Accordingly, we
express no such opinion.  An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements.  We believe that our audits provide a reasonable
basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Dongguan Diguang Electronics
Science and Technology Co., Ltd, as of December 31, 2006, the results of its
operations and its cash flows for the year ended December 31, 2006, in
conformity with accounting principles generally accepted in the United States of
America.











BDO
Guangdong Dahua Delu CPAs


(Formerly
known as BDO Shenzhen Dahua Tiancheng CPAs)





Shenzhen,
PRC


December
28, 2007




F-4




DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 CONSOLIDATED
BALANCE SHEETS
 (In
US Dollars)


December
      31,2007
                          
                          
                          2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                          
                          $
                          16,250,727
                          
                          
                          $
                          15,024,363Accounts
      receivable, net of allowance for doubtful account $680,784 and $
      655,893
                          
                          
                          12,713,705
                          
                          
                          
                          9,944,208Inventories,
      net of provision $841,518 and $2,081,334
                          
                          
                          7,499,768
                          
                          
                          
                          7,285,860Other
      receivables, net of provision $102,574 and $ 101,020
                          
                          
                          389,764
                          
                          
                          
                          535,493VAT
      recoverable
                          
                          
                          407,376
                          
                          
                          
                          112,842Advance
      to suppliers
                          
                          
                          904,203
                          
                          
                          
                          602,017Deferred
      tax asset
                          
                          
                          86,572
                          
                          
                          
                          28,485Total
      current assets
                          
                          
                          38,252,115
                          
                          
                          
                          33,533,268Investment,
      net of impairment $622,194 and $ 779,302
                          
                          
                          877,806
                          
                          
                          
                          720,698Plant,
      property and equipment, net
                          
                          
                          17,449,871
                          
                          
                          
                          19,369,200Total
      assets
                          
                          $
                          56,579,792
                          
                          
                          $
                          53,623,166LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Bank
      loans
                          
                          $
                          -
                          
                          
                          $
                          4,397,215Accounts
      payable
                          
                          
                          18,855,416
                          
                          
                          
                          15,643,476Advance
      from customers
                          
                          
                          464,281
                          
                          
                          
                          561,282Accruals
      and other payables
                          
                          
                          3,358,199
                          
                          
                          
                          2,337,800Accrued
      payroll and related expense
                          
                          
                          795,690
                          
                          
                          
                          626,277Income
      tax payable
                          
                          
                          428,217
                          
                          
                          
                          401,260Amount
      due to related parties
                          
                          
                          1,465,790
                          
                          
                          
                          674,548Amount
      due to stockholders – current
                          
                          
                          1,100,000
                          
                          
                          
                          1,005,480Total
      current liabilities
                          
                          
                          26,467,593
                          
                          
                          
                          25,647,338Research
      funding advanced
                          
                          
                          245,730
                          
                          
                          
                          644,925Amount
      due to stockholders
                          
                          
                          1,100,000
                          
                          
                          
                          -Total
      non-current liabilities
                          
                          
                          1,345,730
                          
                          
                          
                          644,925Total
      liabilities
                          
                          
                          27,813,323
                          
                          
                          
                          26,292,263Minority
      interest
                          
                          
                          1,475,361
                          
                          
                          
                          2,520,704Stockholders’
      equity:Common
      stock, par value $0.001 per share, 50 million shares authorized,
      22,593,000 and 22,593,000 shares issued, 22,340,700 and 22,072,000 shares
      outstanding
                          
                          
                          22,593
                          
                          
                          
                          22,593Additional
      paid-in capital
                          
                          
                          20,028,955
                          
                          
                          
                          20,600,460Treasury
      stock at cost
                          
                          
                          (429,295
                          )
                          
                          
                          (674,455
                          )Appropriated
      earnings
                          
                          
                          1,949,839
                          
                          
                          
                          2,114,448Retained
      earnings (Accumulated deficit)
                          
                          
                          3,127,110
                          
                          
                          
                          (1,755,869
                          )Translation
      adjustment
                          
                          
                          2,591,906
                          
                          
                          
                          4,503,022Total
      stockholders’ equity
                          
                          
                          27,291,108
                          
                          
                          
                          24,810,199Total
      liabilities and stockholders' equity
                          
                          $
                          56,579,792
                          
                          
                          $
                          53,623,166


See
accompanying notes to financial statements




F-5


DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
 (In
US Dollars)




Years
      Ended December 31,2006
                    
                    
                    2007
                    
                    
                    2008Revenues:Revenues,
      net
                    
                    $
                    34,242,617
                    
                    
                    $
                    45,909,256
                    
                    
                    $
                    55,430,680Cost
      of sales
                    
                    
                    23,145,450
                    
                    
                    
                    38,087,919
                    
                    
                    
                    50,690,610Gross
      profit
                    
                    
                    11,097,167
                    
                    
                    
                    7,821,337
                    
                    
                    
                    4,740,070Selling
      expense
                    
                    
                    1,574,524
                    
                    
                    
                    2,582,456
                    
                    
                    
                    1,854,369Research
      and development
                    
                    
                    786,322
                    
                    
                    
                    1,054,367
                    
                    
                    
                    1,163,830General
      and administrative
                    
                    
                    6,656,469
                    
                    
                    
                    6,476,242
                    
                    
                    
                    5,509,517Loss
      on disposing assets
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,726Impairment
      loss
                    
                    
                    -
                    
                    
                    
                    622,194
                    
                    
                    
                    157,108Income
      (loss) from operations
                    
                    
                    2,079,852
                    
                    
                    
                    (2,913,922
                    )
                    
                    
                    (3,948,480
                    )Interest
      income (expense), net
                    
                    
                    158,699
                    
                    
                    
                    122,251
                    
                    
                    
                    (259,666
                    )Investment
      income (loss)
                    
                    
                    53,676
                    
                    
                    
                    483,311
                    
                    
                    
                    67,523Other
      income (loss)
                    
                    
                    (99,908
                    )
                    
                    
                    (168,017
                    )
                    
                    
                    (190,513
                    )Income
      (loss) before income taxes
                    
                    
                    2,192,319
                    
                    
                    
                    (2,476,377
                    )
                    
                    
                    (4,331,136
                    )Income
      tax provision
                    
                    
                    452,562
                    
                    
                    
                    94,343
                    
                    
                    
                    191,309Net
      income (loss) before minority interests
                    
                    
                    1,739,757
                    
                    
                    
                    (2,570,720
                    )
                    
                    
                    (4,522,445
                    )Minority
      interests
                    
                    
                    74,941
                    
                    
                    
                    334,617
                    
                    
                    
                    195,925Net
      income (loss)
                    
                    $
                    1,664,816
                    
                    
                    $
                    (2,905,337
                    )
                    
                    $
                    (4,718,370
                    )Weighted
      average common shares  outstanding – basic
                    
                    
                    21,383,960
                    
                    
                    
                    22,531,384
                    
                    
                    
                    22,155,882Earnings
      (loss) per share – basic
                    
                    
                    0.08
                    
                    
                    
                    (0.13
                    )
                    
                    
                    (0.21
                    )Weighted
      average common shares outstanding – diluted
                    
                    
                    21,383,960
                    
                    
                    
                    22,531,384
                    
                    
                    
                    22,155,882Earning
      (loss) per shares – diluted
                    
                    
                    0.08
                    
                    
                    
                    (0.13
                    )
                    
                    
                    (0.21
                    )Other
      comprehensive income :Net
      income
                    
                    $
                    1,664,816
                    
                    
                    $
                    (2,905,337
                    )
                    
                    $
                    (4,718,370
                    )Translation
      adjustments
                    
                    
                    851,488
                    
                    
                    
                    1,857,709
                    
                    
                    
                    1,911,116Comprehensive
      income (loss)
                    
                    $
                    2,516,304
                    
                    
                    $
                    (1,047,628
                    )
                    
                    $
                    (2,807,254
                    )





See
accompanying notes to financial statements.




F-6




DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’
EQUITY


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
US Dollars)




Additional
                                
                                
                                
                                
                                
                                
                                
                                
                                RetainedEarnings
                                
                                
                                AccumulatedCommon
      Stock
                                
                                
                                Paid-in
                                
                                
                                Appropriated
                                
                                
                                Treasury
                                
                                
                                (Accumulated
                                
                                
                                ComprehensiveShares
                                
                                
                                Amount
                                
                                
                                Capital
                                
                                
                                Earnings
                                
                                
                                Stock
                                
                                
                                Deficit)
                                
                                
                                Income
      (Loss)
                                
                                
                                TotalBalance
      at January 1, 2006
                                
                                
                                18,250,000
                                
                                
                                $
                                18,250
                                
                                
                                $
                                5,162,272
                                
                                
                                $
                                501,833
                                
                                
                                $
                                -
                                
                                
                                $
                                11,993,501
                                
                                
                                $
                                237,095
                                
                                
                                $
                                17,912,951Reorganization
      and recapitalization
                                
                                
                                1,943,000
                                
                                
                                
                                1,943
                                
                                
                                
                                (44,425
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (42,482
                                )Common
      shares issued
                                
                                
                                2,400,000
                                
                                
                                
                                2,400
                                
                                
                                
                                10,256,976
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                10,259,376Offsetting
      offering expenses
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (25,718
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (25,718
                                )Fair
      value of stock option vested
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                2,134,342
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                2,134,342Capital
      infused in two previously separate entities
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                905,357
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                905,357Imputed
      interest on stockholder loans
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                79,674
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                79,674Net
      income for the year
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,664,816
                                
                                
                                
                                -
                                
                                
                                
                                1,664,816Appropriation
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                792,745
                                
                                
                                
                                -
                                
                                
                                
                                (792,745
                                )
                                
                                
                                -
                                
                                
                                
                                -Translation
      adjustment
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                851,488
                                
                                
                                
                                851,488Balance
      at December 31, 2006
                                
                                
                                22,593,000
                                
                                
                                
                                22,593
                                
                                
                                
                                18,468,478
                                
                                
                                
                                1,294,578
                                
                                
                                
                                -
                                
                                
                                
                                12,865,572
                                
                                
                                
                                1,088,583
                                
                                
                                
                                33,739,804Fair
      value of stock option vested
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,206,091
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,206,091Net
      income for the year
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (2,905,337
                                )
                                
                                
                                -
                                
                                
                                
                                (2,905,337
                                )Appropriation
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                655,261
                                
                                
                                
                                -
                                
                                
                                
                                (655,261
                                )
                                
                                
                                -
                                
                                
                                
                                -Treasury
      stock
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (429,295
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (429,295
                                )Translation
      adjustment converted into capital
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                354,386
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (354,386
                                )
                                
                                
                                -Deemed
      dividend distribution
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (6,177,864
                                )
                                
                                
                                -
                                
                                
                                
                                (6,177,864
                                )Translation
      adjustments
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,857,709
                                
                                
                                
                                1,857,709Balance
      at December 31, 2007
                                
                                
                                22,593,000
                                
                                
                                
                                22,593
                                
                                
                                
                                20,028,955
                                
                                
                                
                                1,949,839
                                
                                
                                
                                (429,295
                                )
                                
                                
                                3,127,110
                                
                                
                                
                                2,591,906
                                
                                
                                
                                27,291,108Fair
      value of stock option vested
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                571,505
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                571,505Net
      income for the year
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (4,718,370
                                )
                                
                                
                                -
                                
                                
                                
                                (4,718,370
                                )Appropriation
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                164,609
                                
                                
                                
                                -
                                
                                
                                
                                (164,609
                                )
                                
                                
                                -
                                
                                
                                
                                -Treasury
      stock
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (245,160
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (245,160
                                )Translation
      adjustments
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,911,116
                                
                                
                                
                                1,911,116Balance
      at December 31, 2008
                                
                                
                                22,593,000
                                
                                
                                $
                                22,593
                                
                                
                                $
                                20,600,460
                                
                                
                                $
                                2,114,448
                                
                                
                                $
                                (674,455
                                )
                                
                                $
                                (1,755,869
                                )
                                
                                $
                                4,503,022
                                
                                
                                $
                                24,810,199





See
accompanying notes to financial statements




F-7




DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
 (In
US Dollars)




Years
      Ended December 31,2006
                      
                      
                      2007
                      
                      
                      2008Cash
      flows from operating activities:Net
      income(loss)
                      
                      $
                      1,664,816
                      
                      
                      $
                      (2,905,337
                      )
                      
                      $
                      (4,718,370
                      )Adjustments
      to reconcile net income to net cash provided by operating
      activities:Minority
      interests
                      
                      
                      74,941
                      
                      
                      
                      334,617
                      
                      
                      
                      195,925Depreciation
                      
                      
                      766,141
                      
                      
                      
                      1,197,819
                      
                      
                      
                      1,833,219Imputed
      interest
                      
                      
                      79,674
                      
                      
                      
                      -
                      
                      
                      
                      -Bad
      debts allowance
                      
                      
                      259,237
                      
                      
                      
                      604,258
                      
                      
                      
                      220,720Inventory
      provision
                      
                      
                      545,446
                      
                      
                      
                      296,072
                      
                      
                      
                      1,239,816Impairment
      of long-term investment
                      
                      
                      -
                      
                      
                      
                      622,194
                      
                      
                      
                      157,108Loss
      on disposing assets
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,726Stock
      compensation
                      
                      
                      2,134,342
                      
                      
                      
                      1,206,091
                      
                      
                      
                      571,505Deferred
      tax asset
                      
                      
                      (86,572
                      )
                      
                      
                      -
                      
                      
                      
                      53,522Changes
      in operating assets and liabilities:Accounts
      receivable
                      
                      
                      (541,888
                      )
                      
                      
                      (6,507,856
                      )
                      
                      
                      3,079,557Inventory
                      
                      
                      (1,221,802
                      )
                      
                      
                      (3,170,378
                      )
                      
                      
                      (1,073,437
                      )Other
      receivables
                      
                      
                      (152,056
                      )
                      
                      
                      (248,711
                      )
                      
                      
                      (134,174
                      )VAT
      recoverable
                      
                      
                      (219,860
                      )
                      
                      
                      (184,913
                      )
                      
                      
                      291,740Prepayments
      and other assets
                      
                      
                      (638,015
                      )
                      
                      
                      459,832
                      
                      
                      
                      586,062Accounts
      payable
                      
                      
                      734,551
                      
                      
                      
                      10,075,059
                      
                      
                      
                      (4,012,725
                      )Accruals
      and other payable
                      
                      
                      610,856
                      
                      
                      
                      1,732,009
                      
                      
                      
                      (1,273,957
                      )Advance
      from customers
                      
                      
                      (157,525
                      )
                      
                      
                      295,936
                      
                      
                      
                      79,739Taxes
      payable
                      
                      
                      (228,046
                      )
                      
                      
                      88,034
                      
                      
                      
                      (23,295
                      )Net
      cash provided by (used in) operating activities
                      
                      
                      3,624,240
                      
                      
                      
                      3,894,726
                      
                      
                      
                      (2,923,319
                      )Cash
      flows from investing activities:Purchase
      of fixed assets
                      
                      
                      (3,214,600
                      )
                      
                      
                      (6,172,666
                      )
                      
                      
                      (2,607,743
                      )Cash
      paid for acquisition of entities
                      
                      
                      -
                      
                      
                      
                      (3,977,864
                      )
                      
                      
                      (1,194,520
                      )Long
      term investment
                      
                      
                      (1,500,000
                      )
                      
                      
                      -
                      
                      
                      
                      -Disposal
      of marketable securities
                      
                      
                      1,056,122
                      
                      
                      
                      -
                      
                      
                      
                      -Deposit
      for office building
                      
                      
                      (1,808,773
                      )
                      
                      
                      -
                      
                      
                      
                      -Disposal
      of fixed assets
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      9,161Due
      from related parties
                      
                      
                      21,538
                      
                      
                      
                      -
                      
                      
                      
                      -Net
      cash used in investing activities
                      
                      
                      (5,445,713
                      )
                      
                      
                      (10,150,530
                      )
                      
                      
                      (3,793,102
                      )Cash
      flows from financing activities:Common
      share issued
                      
                      
                      12,000,000
                      
                      
                      
                      -
                      
                      
                      
                      -Stock
      repurchase
                      
                      
                      -
                      
                      
                      
                      (429,295
                      )
                      
                      
                      (245,160
                      )Offering
      expenses
                      
                      
                      (1,740,624
                      )
                      
                      
                      -
                      
                      
                      
                      -Due
      to related parties
                      
                      
                      (469,590
                      )
                      
                      
                      158,876
                      
                      
                      
                      (727,161
                      )Proceeds
      from short-term bank loan
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4,397,215Capital
      infused by owners of North Diamond
                      
                      
                      1,392,857
                      
                      
                      
                      -
                      
                      
                      
                      737,500Research
      funding advanced
                      
                      
                      -
                      
                      
                      
                      236,225
                      
                      
                      
                      391,882Dividend
      paid
                      
                      
                      (111,140
                      )
                      
                      
                      -
                      
                      
                      
                      -Net
      cash provided by (used in) financing activities
                      
                      
                      11,071,503
                      
                      
                      
                      (34,194
                      )
                      
                      
                      4,554,276Effect
      of changes in foreign exchange rates
                      
                      
                      738,486
                      
                      
                      
                      1,990,693
                      
                      
                      
                      935,781Net
      increase (decrease) in cash and cash equivalents
                      
                      
                      9,988,516
                      
                      
                      
                      (4,299,305
                      )
                      
                      
                      (1,226,364
                      )Cash
      and cash equivalents, beginning of the year
                      
                      
                      10,561,516
                      
                      
                      
                      20,550,032
                      
                      
                      
                      16,250,727Cash
      and cash equivalents, end of the year
                      
                      $
                      20,550,032
                      
                      
                      $
                      16,250,727
                      
                      
                      $
                      15,024,363




See
accompanying notes to financial statements




F-8




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




NOTE
1 ─ REORGANIZATION AND RECAPITALIZATION





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





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





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





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





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





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


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


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





Well
Planner Limited (“Well Planner” thereafter), was established under the laws of
Hong Kong Special Administrative Region on April 20, 2001 and has been doing
major business in custom forwarding related to export and import activities
conducted by Diguang Electronics for a service fee based on a service agreement,
pursuant to which service fees should not be less than 2% of the goods Well
Planner has sold.  Well Planner mainly sales to Diguang Science and
Technology (HK) Limited and has small sales to third-party
customers.




F-9




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




NOTE
1 ─ REORGANIZATION AND RECAPITALIZATION (Continued)





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





Both Well
Planner and Diguang Technology do not have any office space leased in Hong Kong
and British Virgin Islands.





Shenzhen
Diguang Electronics Co. Ltd. (“Diguang Electronics” thereafter) was established
as an equity joint venture in Shenzhen under the laws of the People’s Republic
of China (the “PRC”) on January 9,1996 with the registered capital of RMB85
million (equivalent $10,573,615) as of December 31, 2006 and an operating life
of 20 years starting on that date.  Diguang Electronics designs,
develops and manufactures LED and CCFL backlight units.  These
backlight units are essential components used in illuminating display panels
such as TFT-LCD and color STN-LCD panels.  These display panels are
used in products such as mobile phones, PDAs, digital cameras, liquid crystal
computer or television displays and other household and industrial electronic
devices.  Diguang Electronics’ customers are located in both China and
overseas.





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





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





On
November 18, 2006, Diguang Electronics and Diguang Holdings entered into a
Sino-Foreign Equity Joint Venture Agreement, for the establishment of Wuhan
Diguang Electronics Co., Ltd., (“Wuhan Diguang” thereafter).  Pursuant
to the Joint Venture Agreement, Diguang Electronics and Diguang Holdings set up
Wuhan Diguang in Wuhan, Hubei Province, China, with a registered capital of $1
million, of which 70% was infused by Diguang Electronics and the remaining 30%
by Diguang Holdings.  Wuhan Diguang was then established on March 13,
2007 and its business license issued by Wuhan Municipal Administrative Bureau
for Industry and Commerce is valid for 20 years expiring on March 12,
2027.  Wuhan Diguang manufactures and sells LED and CCFL backlight
units in Middle of China region.  Wuhan Diguang started operation on
July 1, 2007, and its operating results have been included in the consolidation
financial statements of the Company for the year ended December 31,
2007.




F-10




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




NOTE
2 ─ BASE OF PRESENTATION





Acquiring
65% Interest of North Diamond Limited





On
January 3, 2007, the Company acquired 65% interest of North Diamond by
exercising a purchase option, which was entered between the Company and Song’s
brothers who are the holders of these 65% interest in North Diamond because
North Diamond is conducting the same business as the Company.  The
purchase price determined in accordance with the Amended and Restated Purchase
Option Agreement was $1,977,864.  North Diamond is a holding company
of Dihao (Yangzhou) Co., Ltd.(“Dihao”thereafter), an operating
entity, which isregistered in the YangzhouCity Development Zone,
Jiangsu Province,China.Dihao
conducts business activities developing, manufacturing and marketing backlight
products for large size electronic display devices and provides relevant
technical services in China.  Of the $1,977,864the purchase price was
$1,880,357 and the balance $97,507 was the interest paid at a rate of 6% per
annum in line with the amount of capital infused and the time length in which
the capital was infused.  This transaction was accounted for as assets
exchanged between the entities under common control in accordance with Appendix
D of SFAS No. 141, as the owners of the 65% interest of North Diamond also own
greater than 50% interest of the Company.





Acquiring
100% Interest of Dongguan Diguang Electronic Science and Technology Co.,
Ltd.





On
December 29, 2007, Diguang Holdings entered into a sale and purchase agreement
with SinoOlympics Industrial
Limited (“Sino
Olympics”thereafter) andShenzhen Diguang Engine
& Equipment Co., Ltd(“Diguang
Engine”thereafter) to acquire a
100% interest in Dongguan Diguang Electronics Science and Technology Co. Ltd.
(“Dongguan Diguang
S&T”thereafter).  The
closing date of the acquisition is December 30, 2007.The consideration for the purchase
transaction was $4.2 million and the initial payment was $2 million,which was paid bytheend of 2007,followed by four
equal installments of $550,000 payable on June 30, 2008, December31, 2008, March 31, 2009
and June 30, 2009, respectively.  The outstanding interest shall be
paid together with each principal installment in aggregate sum, whereas the
interest shall be calculated on the outstanding balance at the prevailing market
rate quoted by the People’s Bank of China.Dongguan Diguang S&T was
established under the laws of the People’s Republic of China onFebruary 16,2004andhas been used by Diguang
Electronicsas the production baseever since.This transaction
was accounted for as assets exchanged between the entities under common control
in accordance with Appendix D of SFAS No. 141, as the owners of Dongguan Diguang
S&T also own greater than 50% interest of the Company. On January 1, 2008,
Diguang Holdings assigned 70% of interest in Dongguan Diguang S&T to Diguang
Electronics.





Retrospective
Restatement of Historical Consolidated Financial Statements





In
accordance with Paragraph D16 and D17 in Appendix D of SFAS No. 141, the above
two transactions changed the basis of presentation regarding the Company’s
historical consolidated financial statements; therefore, all of the Company’s
historical consolidated financial statements for the years ended December 31,
2005 and 2006 have been retrospectively restated to include the financial data
of two previously separate entities, which are under the common control, since
January 1, 2005 for the purpose of furnishing comparative information and the
cash disbursements for the purchase prices paid and the obligations committed to
pay were deemed as dividends distributed and declared in
2007.  Accordingly, previously reported related party transactions
associated with these two entities were eliminated during the retrospective
restatement process.




F-11




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




NOTE
3 ─ SUMMARY OF ACCOUNTING POLICIES





Principles
of Consolidation





The
financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant inter-company accounts and transactions have been
eliminated.  All of the consolidated financial statements have been
prepared based on generally accepted accounting principles in the United
States.





Foreign
Currency Translations and Transactions





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





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





Revenue
Recognition





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





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





Cash
and Cash Equivalents





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





Short
Term Deposits





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




F-12




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




NOTE
3 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)





Accounts
Receivable and Concentration of Credit Risk





During
the normal course of business, the Company extends unsecured credit to its
customers.  Typically credit terms require payment to be made within
90 days of the invoice date. The Company does not require collateral from its
customers.  The Company maintains its cash accounts at credit worthy
financial institutions and closely monitors the movements of its cash
positions.





The
Company regularly evaluates and monitors the creditworthiness of each customer
on a case-by-case basis.  The Company includes any accounts balances
that are determined to be uncollectible in the allowance for doubtful
accounts.  After all attempts to collect a receivable have failed, the
receivable is written off against the allowance.  Based on the
information available to management, the Company believes that its allowance for
doubtful accounts as of December 31, 2006, 2007 and 2008 were adequate,
respectively.  However, actual write-off might exceed the recorded
allowance.





The
following table presents allowance activities in accounts
receivable.





December
      31,2006
                  
                  
                  2007
                  
                  
                  2008Beginning
      balance
                  
                  $
                  491,908
                  
                  
                  $
                  751,145
                  
                  
                  $
                  680,784Additions
      charged to expense
                  
                  
                  259,237
                  
                  
                  
                  501,684
                  
                  
                  
                  286,931Recovery
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Write-off
                  
                  
                  -
                  
                  
                  
                  (572,045
                  )
                  
                  
                  (311,822
                  )Ending
      balance
                  
                  $
                  751,145
                  
                  
                  $
                  680,784
                  
                  
                  $
                  655,893





Inventories





Inventories
are composed of raw materials and components, work in progress, finished goods
and consignment goods, most of which are related to backlight
products.  Inventories are valued at the lower of cost (based on
weighted average method) and the market. Full mount provisions were made for
obsolete inventories which are difficult to estimate their future utilization.
For inventories which will be used in the ordinary course of production or
sales, the net realizable value of the inventories is compared with their
carrying value, if the net realizable value is lower than the carrying value, a
provision for the difference between the net realizable value and the carrying
value of the inventories was recognized. Net realizable value is determined
based on the most recent selling price of these inventories less the estimated
cost to sell.





Plant,
Property and Equipment





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





Land
      usage right
                  48.5-50
      yearsPlant
      and office building
                  20,
      50 yeasMachinery
      and equipment
                  5-10
      yearsFurniture
      and office equipment
                  5
      yearsSoftware
                  2-5
      yearsVehicles
                  5-10
      yearsLeasehold
      improvement
                  5
      years




F-13




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


NOTE
3 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)





Plant,
Property and Equipment (Continued)





Maintenance
and repairs are charged directly to expense as incurred, whereas betterment and
renewals are generally capitalized in their respective property
accounts.  When an item is retired or otherwise disposed of, the cost
and applicable accumulated depreciation are removed and the resulting gain or
loss is recognized and reflected as an item before operating income
(loss).





Impairment
of Long-Lived Assets





The
Company adopts the provisions of Statement of Financial Accounting Standard No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
No.144”).  SFAS No.144 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable through the estimated
undiscounted cash flows expected to result from the use and eventual disposition
of the assets.  Whenever any such impairment exists, an impairment
loss will be recognized for the amount by which the carrying value exceeds the
fair value. The impairment loss for the years ended December 31, 2006, 2007 and
2008 was $0, $622,194, and $157,108, respectively.





Income
Taxes





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





Diguang
Electronics is registered at Shenzhen and was 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.  And 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 enterprise income tax at the rate of 15%
for the years from January 1, 2004 to December 31, 2006.  Diguang
Electronics was subject to an income tax rate of 15% since January 1, 2007
according to the old tax law.  A newly enacted enterprise income tax
law (“EIT Law”) was effective January 1, 2008.  The EIT Law imposes a
unified EIT of 25% on all domestic-invested enterprises and foreign invested
enterprises unless these foreign investment enterprises qualify under certain
grand-father rules.  For enterprises like Diguang Electronics which
were privileged preferential income tax rate of 15% under the old tax law, the
applicable income tax rate should transit to 25% in 5 years, that is, 18% in the
year ended December 31, 2008, 20%, 22%, 24% and 25% in the following four years
ended December 31, 2009, 2010, 2011 and 2012, and 25% ever after.  So
the applicable income tax rate for Diguang Electronics is 18% for the year ended
December 31, 2008.




F-14




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




NOTE
3 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)





Income
Taxes (Continued)





Well
Planner is subject to an income tax rate at 17.5% under Hong Kong Inland Revenue
jurisdiction.  However, Well Planner does not have Hong Kong sourced
income.  In accordance with Hong Kong tax regulation, Well Planner has
not been taxed since its inception.





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





Dihao is
registered at Yangzhou and has been deemed as a high-tech company by Yangzhou
Bureau of Science, Technology and Information. Under this category, Dihao
entitled to enjoy a 100% exemption of corporate income tax for the two years
from January 1, 2006 to December 31, 2007 and a 50% exemption of corporate
income tax for the following three years from January 1, 2008 to December 31,
2010 in accordance with the preferential rules established by Yangzhou local tax
authority on August 2, 1999.  Under new EIT Law, the income tax
rate for Dihao is 25%; the applicable income tax rate for Dihao is 12.5% for the
three years ending December 31, 2010.





Wuhan
Diguang is registered in Wuhan. As a manufacturing company with foreign
investment set up before March 16, 2007, Wuhan Diguang entitled to enjoy a 100%
exemption of corporate income tax for the first two years of operations with a
profit position and a 50% exemption of corporate income tax for the following
three years.  After the five-year exemption period, Wuhan Diguang will
subject to the unified income tax rate of 25% in accordance with new EIT Law.
It
is the first year for Wuhan Diguang to enjoy 100% exemption of income tax in
2008.




Dongguan
Diguang S&T is registered at Dongguan of Guangdong Province and, the same as
Wuhan Diguang, Dongguan Diguang S&T entitled to enjoy a 100% exemption of
corporate income tax for the first two years of operation with a profit position
and a 50% exemption of corporate income tax for the following three years and
will subject to the unified income tax rate of 25% after the five-year exemption
period. It is the
first year for Dongguan Diguang S&T to enjoy 100% exemption of income tax in
2008 even though it suffered a loss in the year.




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





Because
the consolidated financial statements were based on the respective entities’
historical financial statements, the respective effective income tax rate for
the periods reported represents the effect of actual income tax provisions
incurred to Diguang Electronics, Dihao, Wuhan Diguang, Dongguan Diguang S&T
and Diguang International Development Co., Ltd.




F-15




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




NOTE
3 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)





Adoption
of FIN 48





Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement
No. 109," (thereafter FIN 48).  FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken in a tax return.  A company must
determine whether it is "more-likely-than-not" that a tax position will be
sustained upon examination, including resolution of any related appeals or
litigation processes, based on the technical merits of the
position.  Once it is determined that a position meets the
more-likely-than-not recognition threshold, the position is measured to
determine the amount of benefit to recognize in the financial
statements.  The Company did not report any impact of adopting FIN 48
for the years ended December 31, 2007 and 2008, respectively.





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
$13,501,716 and $9,913,310 as of December 31, 2007 and 2008,
respectively.





Fair
Value of Financial Instruments





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





Value
Added Tax





Diguang
Electronics, Dihao Wuhan Diguang and Dongguan Diguang S&T are subject to
value added tax (VAT) imposed by the PRC government on its domestic product
sales.  VAT rate for the Company is 17%.  The input VAT can
be offset against the output VAT.  VAT payable or receivable balance
presented on the Company’s balance sheets represents either the input VAT less
than or larger than the output VAT. The debit balance represents a credit
against future collection of output VAT instead of a receivable.





Research
and Development





Research
and development costs are expensed as incurred. The actual research and
development expense incurred for the years ended December 31, 2006, 2007 and
2008 was $1,286,527, $1,214,684 and $1,610,329, respectively.  After
offsetting against the government subsidies and other revenue, which were
specified as supporting research and development efforts via the proceeds
collected from value added tax, the net research and development expenses for
the years ended December 31, 2006 ,2007, and 2008 was $786,322, $1,054,367 and
$1,306,013, respectively.




F-16




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




NOTE
3 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)





Use
of Estimates





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





Comprehensive
Income (Loss)





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





Earnings
(Loss) Per Share





The
Company presents earnings per share in accordance with the Statement of
Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No.
128”).  Basic earnings (loss) per share includes no dilution and is
computed by dividing income (loss) available to common shareholders by the
weighted average number of common shares outstanding during the
period.  Diluted earnings (loss) per share reflect the potential
dilution of securities that could share in the earnings of an entity, similar to
fully diluted earnings (loss) per share.  For thethreeyears ended December 31, 2008,the Company issued stock options to
purchase606,000 shares of its common
stock.  The outstanding shares subject to the options at December 31,
2006, 2007 and 2008 were 506,000, 407,417 and 440,667 shares
respectively.  The stock options granted did not have impact on
determination of the diluted EPS for the three year ended December 31, 2006,
2007 and 2008 as they were anti-diluted.  As of December 31, 2007 and
2008, the Company had repurchased 242,300 shares of stock at average price of
$1.77 per share and 268,700 shares of stock at average price of $0.91 per share,
resulting in 22,340,700 and 22,072,000 shares of common stock outstanding,
respectively, which was used as the basis of computation of earnings per
share.





Share-Based
Payments





The
Company adopted Statement of Financial Accounting Standards No 123(R):
“Share-Based Payments” (SFAS 123R) effective January 1, 2006.  SFAS
123R amends existing accounting pronouncements for share-based payment
transactions in which an enterprise receives employee and certain non-employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise’s equity
instruments or that may be settled by the issuance of such equity
instruments.  SFAS 123R generally requires such transactions be
accounted for using a fair-value-based method.  As the Company did not
grant any stock options and warrants before January 1, 2006 and granted stock
options to purchase 540,000, 26,000 and 40,000 shares of its common stock on
March 1, 2006, February 6, 2007 and February 27, 2008 the Company accounted for
the stock option granted using a fair-value-based method in accordance with SFAS
No. 123R.




F-17


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




NOTE
3 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)





Appropriations
to Statutory Reserve





Under the
corporate law and relevant regulations in China, each subsidiary of the Company
located in the mainland China (Diguang Electronics, Dihao, Wuhan Diguang,
Dongguan Diguang S&T) is required to appropriate a portion of its retained
earnings to statutory reserve.  It is required to appropriate 10%(the
proportion is 15% before 2006) of its annual after-tax income each year to
statutory reserve until the statutory reserve balance reaches 50% of the
registered capital.  In general, the statutory reserve shall not be
used for dividend distribution purpose.





SFAS
No. 157





In
September 2006, the FASB issued Statement No. 157, “Fair Value
Measurements” (“SFAS 157”).  SFAS No. 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements.  SFAS No. 157 establishes a fair value
hierarchy about the assumptions used to measure fair value and clarifies
assumptions about risk and the effect of a restriction on the sale or use of an
asset.  SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007.  In February 2008, the FASB issued Staff Position
(FSP) 157-2, “Effective Date of FASB Statement No. 157.”  This FSP
delays the effective date of FAS No. 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value on a recurring basis (at least annually) to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years.  The
partial adoption of FAS No. 157, as allowed by FSP FAS 157-2, did not have a
material impact on the financial statements.





On
October 10, 2008, the FASB issued FSP FAS 157-3, “Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not
Active.”  The FSP clarifies the application of FASB Statement
No. 157, “Fair Value Measurements,” in a market that is not active and provides
an example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not
active.  The FSP is effective immediately, and includes prior period
financial statements that have not yet been issued.





SFAS No. 159





In February 2007, the FASB issued SFAS
No. 159,“The
Fair Value Option for Financial Assets and Financial Liabilities, including an
amendment of FASB Statement No.115”(SFAS No.159).  SFAS No. 159
permitscompanies to choose
to measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value and establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different
measurement attributes for similar types of assets and
liabilities.  The provisions of SFAS No. 159 become effective as
of the beginning of 2008.The adoption is not expected to have a
significant effect on the financialposition, results of operations or cash
flows.




F-18


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




NOTE
3 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)




Recently
Issued Accounting Pronouncements




In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141(R)”).  SFAS 141(R)
changes accounting for acquisitions that close beginning in
2009.  SFAS No. 141R broadens the guidance of SFAS No. 141, extending
its applicability to all transactions and other events in which one entity
obtains control over one or more other businesses.  It broadens the
fair value measurement and recognition of assets acquired, liabilities assumed,
and interests transferred as a result of business combinations.  SFAS
No. 141R expands on required disclosures to improve the statement users’
abilities to evaluate the nature and financial effects of business
combinations.  SFAS No. 141R is effective for fiscal years
beginning on or after December 15, 2008 (fiscal year beginning January 1,
2009 for the Company).  The Company is currently assessing the impact
that the adoption of SFAS No. 141R may have on its financial position,
results of operations, and cash flows.





In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, “Noncontrolling
Interests in Consolidated Financial Statements, An Amendment of ARB
No. 51” (“SFAS No. 160”).  SFAS No. 160 requires that
a noncontrolling interest in a subsidiary be reported as equity and the amount
of consolidated net income specifically attributable to the noncontrolling
interest be identified in the consolidated financial statements.  It
also calls for consistency in the manner of reporting changes in the parent’s
ownership interest and requires fair value measurement of any noncontrolling
equity investment retained in a deconsolidation.  SFAS No. 160
requires retroactive adoption of the presentation and disclosure requirements
for existing minority interests.  SFAS No. 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
The Company does not expect the adoption of this statement to have a
material impact on its financial statements, except that minority interest will
be reclassified as part of equity.





In March
2008, the FASB issued Statement of Financial Accounting No.161, “Disclosures about
Derivative Instruments and Hedging Activities” (“SFAS No.
161”).  The provisions of SFAS No. 161 are effective for the Company
as of January 1, 2009.  SFAS No. 161 requires enhanced disclosures
about (i) how and why the Company uses derivative instruments, (ii) how the
Company accounts for derivative instruments and related hedged items under SFAS
No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and (iii) how derivative
instruments and related hedged items affect the Company’s financial
results.  The Company does not expect the adoption of this statement
to have a material impact on its financial statements.





In April 2008, the FASB issued FSP
No.142-3,
“Determination
of the Useful Life of Intangible Assets.”FSP No. 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible Assets. FSP No. 142-3 is
effective for financial statements issued for fiscal years beginning after
December15, 2008.
Early adoption is prohibited.The Company iscurrently evaluating the impact of the
pending adoption of FSP No. 142-3 ontheconsolidated financial
statements.




F-19


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




NOTE
4 ─ INVENTORIES





The
inventories are as follows:





December
      31,2007
                  
                  
                  2008Raw
      materials
                  
                  $
                  3,631,197
                  
                  
                  $
                  4,629,926Work
      in progress
                  
                  
                  1,603,662
                  
                  
                  
                  704,877Finished
      goods
                  
                  
                  1,802,523
                  
                  
                  
                  3,111,681Consignment
      goods
                  
                  
                  1,303,904
                  
                  
                  
                  920,710$
                  8,341,286
                  
                  
                  $
                  9,367,194Provision
                  
                  
                  (841,518
                  )
                  
                  
                  (2,081,334
                  )Inventories,
      net
                  
                  $
                  7,499,768
                  
                  
                  $
                  7,285,860





NOTE
5 ─ PLANT, PROPERTY AND EQUIPMENT





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





December
      31,2007
                    
                    
                    2008Land
      usage rights
                    
                    $
                    2,993,885
                    
                    
                    $
                    3,201,055Plant
      and office buildings
                    
                    
                    10,505,835
                    
                    
                    
                    11,720,336Machinery
                    
                    
                    4,090,772
                    
                    
                    
                    5,205,448Office
      equipment
                    
                    
                    937,505
                    
                    
                    
                    1,348,348Vehicles
                    
                    
                    277,925
                    
                    
                    
                    334,742Software
                    
                    
                    111,260
                    
                    
                    
                    140,945Leasehold
      improvement
                    
                    
                    1,322,537
                    
                    
                    
                    2,147,68320,239,719
                    
                    
                    
                    24,098,557Accumulated
      depreciation
                    
                    
                    (2,789,848
                    )
                    
                    
                    (4,729,357
                    )$
                    17,449,871
                    
                    
                    $
                    19,369,200





The
depreciation and amortization for the years ended December 31, 2006, 2007 and
2008, were $766,141, $1,197,819 and $ 1,833,219, respectively.





NOTE
6 ─ RELATED PARTY TRANSACTIONS





Related
Party Relationships




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







F-20





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




NOTE
6 ─ RELATED PARTY TRANSACTIONS (Continued)





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





Amount
      due to
                    
                    Diguang
      Engine
                    
                    
                    Stockholders
                    
                    
                    TotalBalance
      at January 1 , 2007
                    
                    $
                    1,298,475
                    
                    
                    $
                    -
                    
                    
                    $
                    1,298,475Accrued
      interest
                    
                    
                    77,113
                    
                    
                    
                    -
                    
                    
                    
                    77,113Purchase
      price for acquisition of 65% interest
                      in
      North diamond
                    
                    
                    -
                    
                    
                    
                    1,977,864
                    
                    
                    
                    1,977,864Purchase
      price for acquisition of 100% interest in Dongguan Diguang
      S&T
                    
                    
                    -
                    
                    
                    
                    4,200,000
                    
                    
                    
                    4,200,000Payments
      made
                    
                    
                    -
                    
                    
                    
                    (3,977,864
                    )
                    
                    
                    (3,977,864
                    )Translation
      adjustment
                    
                    
                    90,202
                    
                    
                    
                    -
                    
                    
                    
                    90,202Balance
      at December 31, 2007
                    
                    $
                    1,465,790
                    
                    
                    $
                    2,200,000
                    
                    
                    $
                    3,665,790Accrued
      interest
                    
                    
                    51,330
                    
                    
                    
                    137,875
                    
                    
                    
                    189,205Payments
      made
                    
                    
                    (944,001
                    )
                    
                    
                    (1,332,395
                    )
                    
                    
                    (2,276,396
                    )Translation
      adjustment
                    
                    
                    101,429
                    
                    
                    
                    -
                    
                    
                    
                    101,429Balance
      at December 31, 2008
                    
                    $
                    674,548
                    
                    
                    $
                    1,005,480
                    
                    
                    $
                    1,680,028





Shenzhen
Diguang Engine & Equipment Co., Ltd





Dongguan
Diguang S&T entered into a loan agreement with Shenzhen Diguang Engine and
Equipment on October 20, 2006.  Pursuant to the loan agreement,
Shenzhen Diguang Engine and Equipment committed to make a loan of RMB10 million
to Dongguan Diguang S&T through a bank at the current market rate for this
type of loan.  On October 20, 2006, Diguang Engine and Equipment
advanced RMB10 million being the principal with a 5.5% interest rate to Dongguan
S&T through China Merchants Bank, Shenzhen Nanyou Branch.  The
loan was matured on November 30, 2008. But on December 31, 2008, there are still
$674,548 (equivalent to RMB4,602,104) outstanding, of which $600,953
(equivalent to RMB4.1 million) is for principal and $73,595
(equivalent to RMB502,104) is for accumulated interest accrued till
December 31, 2008. The Company did not plan to renew the loan contract and would
repay the outstanding amounts recently. On February 17, 2009, Dongguan Diguang
S&T received increased investment of $1.7 million from Diguang Holdings, and
planned to repay full amount of outstanding balance due to Diguang Engine and
Equipment after fulfilling procedures of settlement of exchange.





Stockholders





During
the process of acquiring 100% interest of Dongguan Diguang Science and
Technology (Dongguan Diguang S&T), Sino Olympics Industrial Limited (Sino
Olympics) owns 92% of interest and Shenzhen Diguang Engine & Equipment owns
the remaining 8% of interest at Dongguan Diguang
S&T.  Accordingly, the entire consideration of $4.2 million was
allocated $3,864,000 to Sino Olympics and $336,000 to Shenzhen Diguang Engine
& Equipment.  Based on the fact that Mr. Song brothers are the
owners of both Sino Olympics and Shenzhen Diguang Engine & Equipment, the
entire consideration of the $4.2 million was treated as amount due to Mr. Song
Brothers.  Of the $4.2 million acquisition price, $2 million was paid
in cash before the end of 2007 and the remaining balance of $2.2 million was
recorded as a portion of liabilities of the Company, 50% of $2.2 million was
classified as a portion of current liabilities and the remaining 50% of $2.2
million was classified as a portion of long term liabilities on the Company’s
balance sheet as of December 31, 2007.





F-21




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




NOTE
6 ─ RELATED PARTY TRANSACTIONS (Continued)





The
purchase price of Dongguan Diguang S&T was $4.2 million, of which $2 million
was paid in 2007.  The remaining $2.2 million should be repaid through
four installment payments on June 30, 2008, December31, 2008, March 31, 2009
and June 30, 2009, respectively.  The Company paid $1,332,395 toSino Olympics
during the year ended December 31, 2008. Among the payment of $1,332,395, $1.1 million was purchase
price paidas agreed in the purchase agreement; $137,875 was interest
accrued and paidin accordance ofthe purchase agreement; the remaining $94,520 was paid by Diguang
Electronics on behalf of Sino Olympics for withholding capital gain tax during
the sale and purchase transaction of Dongguan Diguang S&T.  The
outstanding balance of due to Stockholders was the last two installments of
payment of the purchase price to be paid on March 31, 2009 and June 30, 2009,
respectively.





The
purchase price $1,977,864for
acquiring 65% interest in North Diamond was paid out before December 31,
2007.





NOTE
7 ─ LONG-TERM INVESTMENT





The
investment in the following limited liability companies was accounted for under
the cost method.  Regarding investment in Huaxia (Yangzhou) Integrated
O/E System Inc. (“Huaxia (Yangzhou)” thereafter), whose main product is the
chips used to make backlight units, the Company committed to invest up to 15%
interest by contributing cash of $3 million.  At July 6, 2006, the
Company contributed investment of $1.5 million to Huaxia (Yangzhou), and planed
to inject additional capital of $1.5 million in two years after Huaxia
(Yangzhou) changes the Business Registration Certificate.  The Company
transferred out $540,000 and $703,000 of its capital commitment of $3 million to
other investors on June 6, 2007 and May 8, 2008, respectively.  After
the transference, the Company’s total remaining capital commitment to Huaxia
(Yangzhou) is $1,757,000, accounting for 8.79% of the total registered capital
of the company.  On November 30, 2007 and on September 18, 2008,
Huaxia (Yangzhou) increased its paid-in capital by two times to $18.6 million by
investment from the other investors.  The Company did not increase its
investment accordingly; consequently, the Company held only 8.06% of total
paid-in capital in Huaxia (Yangzhou).





Since
Huaxia (Yangzhou) suffered net loss for three consecutive years ended December
31, 2006, 2007 and 2008, the Company carried out an impairment review of the
long-term investment based on the estimation that the carrying value of the net
assets of Huaxia (Yangzhou) is deemed to be the net realizable value of the
investment.  The carrying amount of $1.5 million of the long-term
investment is higher than the Company’s share of the estimated net realizable
value; consequently, an impairment loss of $ 622,196 and $157,108 was recognized
for the years ended December 31, 2007 and 2008, respectively, in accordance with
APB 18.





NOTE
8 ─ BANK LOANS





On July
1, 2008, the Board of Directors of the Company approved for Diguang Electronics
to apply the banking facilities of RMB40 million from Shenzhen Ping’an Bank Co.
Ltd.  The banking facilities will be used for the purpose of expanding
manufacture activities in the newly built plant in Dongguan Diguang S&T, as
well as the second phase capital contribution of Yangzhou Dihao.  On
July 1, 2008, Shenzhen Diguang received a loan of RMB30 million (equivalent of
$4,397,215 as of December 31, 2008) with an interest rate of prevailing
standard rate stipulated by the People's Bank of China (7.4% per annum at the
grant date) from Shenzhen Ping’an Bank. The plant in Dongguan Diguang
S&T with and net book value of $4,792,296 (equivalent RMB32,695,441) was put
as pledge against the RMB 30 million loan from Shenzhen Ping’an
Bank.




F-22




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


NOTE
9 ─ INCOME TAXES





The
income before income taxes in 2006, 2007 and 2008, respectively, was as
following:





Years
      Ended December 31,2006
                    
                    
                    2007
                    
                    
                    2008Income
      (Loss) in China entities
                    
                    $
                    4,592,817
                    
                    
                    $
                    249,932
                    
                    
                    $
                    (3,216,935
                    )Income
      (Loss) in non-China and non-US entities
                    
                    
                    329,004
                    
                    
                    
                    (714,511
                    )
                    
                    
                    (2,756,626
                    )Income
      (Loss) in U.S entity
                    
                    
                    (2,632,239
                    )
                    
                    
                    (2,246,205
                    )
                    
                    
                    (1,294,573
                    )Elimination
      during consolidation process
                    
                    
                    (97,263
                    )
                    
                    
                    (234,407
                    )
                    
                    
                    2,936,998Income
      (Loss) before income taxes
                    
                    $
                    2,192,319
                    
                    
                    $
                    (2,476,377
                    )
                    
                    $
                    (4,331,136
                    )





The
income tax provision was as follows:





Years
      Ended December 31,Current:
                  
                  2006
                  
                  
                  2007
                  
                  
                  2008China
                  
                  $
                  538,334
                  
                  
                  $
                  60,829
                  
                  
                  $
                  132,422Federal
                  
                  
                  -
                  
                  
                  
                  32,714
                  
                  
                  
                  -State
                  
                  
                  800
                  
                  
                  
                  800
                  
                  
                  
                  800539,134
                  
                  
                  
                  94,343
                  
                  
                  
                  133,222Deferred:China
                  
                  
                  (86,572
                  )
                  
                  
                  -
                  
                  
                  
                  58,087The
      U.S.
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -$
                  452,562
                  
                  
                  $
                  94,343
                  
                  
                  $
                  191,309





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, 2007 and
2008 were as follows:





December
      31,Current:
                    
                    2007
                    
                    
                    2008Bad
      debt allowance
                    
                    $
                    66,782
                    
                    
                    $
                    78,283Inventory
      provision
                    
                    
                    126,228
                    
                    
                    
                    347,355Accrued
      salary
                    
                    
                    30,643
                    
                    
                    
                    -223,653
                    
                    
                    
                    425,638Non-current:Net
      operating loss carry forwards
                    
                    
                    -
                    
                    
                    
                    507,019Valuation
      allowance
                    
                    
                    (137,081
                    )
                    
                    
                    (904,172
                    )Net
      deferred tax assets:
                    
                    $
                    86,572
                    
                    
                    $
                    28,485





F-23




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




NOTE
9 ─ INCOME TAXES (Continued)





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




Years
      Ended December 31,2006
              
              
              2007
              
              
              2008Statutory
      rate
              
              
              34.0
              %
              
              
              (34.0
              )
      %
              
              
              (34.0
              )%Income
      tax rate reduction
              
              
              (58.0
              )
              
              
              (33.0
              )
              
              
              (18.5
              )Permanent
      differences
              
              
              47.1
              
              
              
              66.0
              
              
              
              38.7Valuation
      allowance
              
              
              0.2
              
              
              
              5.4
              
              
              
              18.2Other
              
              
              (2.7
              )
              
              
              (0.6
              )
              
              
              -Effective
      income tax rate
              
              
              20.6
              %
              
              
              3.8
              %
              
              
              4.4
              %





As of
December 31, 2008, the U.S, entity has a new operating loss of approximately
$120,000 for federal and state income tax purposes, which can be carried forward
for 20 years and back for two years.  Management estimates that it is
more likely than not that the potential economic benefits of the net operating
loss will not be materialized in the near future.  Accordingly, a full
amount of valuation allowance was provided at December 31,
2008.  Diguang Electronics also suffered an operating loss for the
year ended December 31, 2008.  Accordingly, a full amount of valuation
allowance against the deferred tax asset resulting from that operating loss
incurred was provided based on the same consideration
aforementioned.  Dihao kept earning profit for recent two years; a
deferred tax asset of $28,485 for inventory provision was recognized in Dihao as
of December 31, 2008.





NOTE
10 ─ EQUITY TRANSACTIONS





Under
China laws and regulations, Diguang Electronics is required to appropriate a
portion of its retained earning to a general reserve, which cannot be used for
dividend distribution purpose.  In the years ended December 31, 2006,
2007 and 2008, the appropriation was $792,745, $655,261 and $164,609,
respectively, which was deemed a non-cash transaction for cash flow statement
purpose.





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





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




F-24




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




NOTE
10 ─ 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 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.  By way of example, if the Incentive Shares for 2006 are earned
and issued in 2007 with an aggregate value of $7 million, and as a result the
income from operations for 2007 is reduced by $7 million, the determination of
whether the after-tax profit targets are hit for 2007 will be made without
deducting the $7 million from income from operations.  That is, if
income from operations was $20 million after the charge for issuance of the
Incentive Shares, for purposes of issuance of Incentive Shares for 2007, income
from operations will be deemed to be $27 million, and whether the target is hit
will be determined by deducting from $27 million the amount of taxes that would
have been paid or payable had income from operations actually been $27
million.





The
Company accounts for the transactions of issuing these incentive shares based on
the fair value on the grant date.  Under SFAS 123R, the Company
assesses whether it is probable at the grant date the awards would be earned and
if it is probably the expense would be recorded over the period (which in this
case is specified as the shareholders of Diguang International Development Co.,
Ltd. can earn any of the amounts each year).  The after-tax profit
target for the year ended December 31, 2006, 2007 and 2008, respectively, had
not been met and the Company did not record any share-based compensation for
Song Brothers during this reporting period.




F-25




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


NOTE
10 ─ EQUITY TRANSACTIONS (Continued)





In
accordance with the board resolution of the Company dated February 21, 2007, the
Company appointed Chardan Capital Markets, LLC, (“Chardan”), as the agent to
purchase back up to $5 million of the Company’s common shares on behalf of the
Company pursuant to Rule 10b-18 and 10b-5.  As of December 31, 2008,
the Company had repurchased 521,000 shares of stock at average price of $1.29
per share, resulting in 22,072,000 shares of common stock outstanding as of
December 31, 2008.  The repurchased shares at cost were presented in
line of treasury stock in the stockholders’ equity section on the balance sheet
as of December 31, 2007 and 2008 respectively.





Due to
the acquisition of two previously separate entities, at the respective effective
date, the Company reclassified $74,258, which was 65% accumulated translation
adjustment in North Diamond at December 31, 2006 and $280,128, which was 100%
translation adjustment at Dongguan Diguang S&T at December 30, 2007 as
additional paid-in capital as result of the fact that the Company paid cash to
acquire 65% interest in North Diamond and 100% interest of Dongguan Diguang
S&T so that the accumulated translation adjustment in the respective entity
became part of the Company’s operating assets, which will be included in the
process of determining net income in accordance with SFAS No. 52.





NOTE
11 ─ STOCK OPTIONS





The
Company adopted the fair value recognition provisions of Statement of Financial
Accounting Standards (SFAS) No. 123 (R), “Share-Based
Payments.” The
Company recognized the share-based compensation cost based on the grant-date
fair value estimated in accordance with the new provisions of SFAS No. 123
(R).  There were no stock options issued before January 1,
2006.





For theyears ended December 31,
2006,2007and 2008, the Company issued stock options to
purchase 540,000 shares at $5per share,26,000 shares at $5per share,40,000 shares at $1.91 per
share,  548,000 shares at $0.12 per share, and 300,000 shares at
$0.10,respectively, totaling1,454,000 shares.The Company applied the
Black-Scholes option pricing model to determine the fair value of stock options
on each of the grant dates.  The fair value was $5,992,509 for 540,000
stock options granted in 2006 at $11.10 per share, $56,680 at $2.18 per share
for 26,000 stock options granted in 2007, $54,400 at $1.36 per share for 40,000
stock options granted in February 2008, $54,800 at $0.10 per share for
548,000 shares and $36,000 at $0.12 per share for 300,000 shares granted in
December of 2008.  Total fair value for 1,454,000 shares granted in
2006, 2007 and 2008 were $6,194,389.  The share-based compensationrecognized for stock options granted was $2,134,342, $1,206,091 and
$571,505 for the years endedDecember 31,2006,2007and 2008,respectively.With respect to the newly granted
options of548,000 and
300,000 shares in December 2008,the stock compensation would start on
January 1, 2009.No tax
benefitwas recognized for
the share-based compensation due to the stock options granted.The total intrinsic value
of warrants and options exercised during the years ended December 31, 2006, 2007
and 2008, was approximately $0, $0, and $0, respectively, as no stock options were exercised in each
respective year since they were granted.




F-26




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




NOTE
11 ─ STOCK OPTIONS (Continued)





Assumptions





The
disclosure of the above fair value for these awards was estimated using the
Black-Scholes option pricing model with the assumptions listed
below:





Years
      Ended December 31,2006
                        
                        
                        2007
                        
                        
                        2008Expected
      volatility
                        
                        
                        48.04
                        %
                        
                        
                        105.04
                        %
                        
                        129.64%
      to 204.74%Weighted
      average volatility
                        
                        
                        N/A
                        
                        
                        
                        N/A
                        
                        
                        
                        N/AExpected
      life
                        
                        7
      years
                        
                        
                        7
      years
                        
                        
                        7
      yearsRisk
      free interest rate
                        
                        
                        4.60
                        %
                        
                        
                        4.51
                        %
                        
                        0.98%
      to 3.75%





The
expected volatilities are essentially based on the historical volatility of the
Company’s stock.  Observation was made on a daily
basis.  The periods of observation covered were from January 1, 2005
through March 1, 2006 for options granted on March 1, 2006, and from March 17,
2006 though the grant day for all the other options granted in 2007 and
2008.  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 in 2006 would be vested on
each of the first four anniversaries of the granting date.  The 60,000
shares of stock options granted to directors in 2006 would be vested at the end
of each month starting from the grant date for 36 months in order to match the
term of directorship.  The 80,000 shares of stock options granted to
the former Chief Financial Officer in 2006 vest at the end of each month
starting from the grant date for 48 months.  The 26,000 shares of
stock options granted in 2007 vest on each of the first four anniversaries of
the granting date.  The 40,000 shares of stock options granted to
non-executive directors in February 2008 are to be vested at the end of each
month starting the grant date over a period of 36 months.  The 548,000
shares of sock options granted on December 9, 2008 to employees would be vested
on each of the first four anniversaries starting from January 1,
2009.  The 300,000 shares of stock option granted on December 17, 2008
to the Company’s current Chief Operation Officer will vest on each of the first
days of 12 quarters starting from January 1, 2009.





For those
548,000 shares of sock options granted on December 9, 2008, the total number of
stock options to be vested depends on the accomplishment of certain designated
operating targets for 2009 assigned to each recipient. There is a relationship
between accomplishment of operating targets for 2009 and the total vested number
of options.  If an employee reaches his or her operating target
partially, the total vested number of options will be determined in proportion
to the accomplished target(s).  Therefore, the vesting will be
associated with the accomplishment of operating targets and the length of
employment with the Company by the end of 2009.  The fair
value of the above options, which was determined on December 9, 2008 and
December 17, 2008, is $54,800 and $36,000, to be recognized during the next
four and three years, respectively.  The aggregate compensation costs
based on the fair value on the grant date to be recognized in 2008 for the above
options should be $3,700, which was not material at all.  According to
the Company’s Boards’ meeting minutes, the effective date of the options
granted was January 1, 2009.  Consequently, no stock compensation
was recognized during 2008 and the recognition of stock
compensation started on January 1, 2009.




The
risk-free rates are consistent with the expected terms of stock option and based
on the U.S. Treasury yield curve in effect at the time of grant.  The
Company estimated the forfeiture rate of its stock options was
6.13%.





F-27





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





NOTE
11 ─ STOCK OPTIONS (Continued)





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 5-day average share price before the
Board of Director’s
approval.  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 vesting method over the four years or over the three years
regarding the options granted to directors in order to match their directorship
terms.  A summary of option activities under the 2006 Plan during the
years ended December 31, 2006, 2007 and 2008 is presented as
follows:





Stock
      Options
                  
                  Shares
                  
                  
                  Weighted-
                    Average
                    Exercise
                    Price($)
                  
                  
                  Weighted
      -
                    Average
                    Remaining
                    Contractual Term (Years)Outstanding
      at Janaury1, 2006
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Granted
                  
                  
                  540,000
                  
                  
                  
                  5.00
                  
                  
                  
                  9.17Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Forfeited
      or expired
                  
                  
                  (34,000
                  )
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at December 31, 2006
                  
                  
                  506,000
                  
                  
                  
                  5.00
                  
                  
                  
                  9.17Exercisable
      at December 31, 2006
                  
                  
                  33,333
                  
                  
                  
                  5.00
                  
                  
                  
                  9.17Granted
                  
                  
                  26,000
                  
                  
                  
                  5.00
                  
                  
                  
                  9.17Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Forfeited
      or expired
                  
                  
                  (124,583
                  )
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at December 31, 2007
                  
                  
                  407,417
                  
                  
                  
                  5.00
                  
                  
                  
                  8.22Exercisable
      at December 31, 2007
                  
                  
                  145,389
                  
                  
                  
                  5.00
                  
                  
                  
                  8.20Granted
                  
                  
                  888,000
                  
                  
                  
                  0.19
                  
                  
                  
                  9.92Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Forfeited
      or expired
                  
                  
                  (6,750
                  )
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at December 31, 2008
                  
                  
                  1,288,667
                  
                  
                  
                  1.69
                  
                  
                  
                  9.13Exercisable
      at December 31, 2008
                  
                  
                  247,667
                  
                  
                  
                  4.86
                  
                  
                  
                  7.53





The
trading price of the Company stock at December 31, 2006, 2007 and 2008 was
$4.50, $2.50 and $0.06 per share, respectively.  Consequently, no
intrinsic value was reported.  A summary of the Company’s non-vested
stock options during the years ended December 31, 2006, 2007 and 2008 is
presented below:





F-28




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





NOTE
11 ─ STOCK OPTIONS (Continued)




As of
December 31, 2008, the total unrecognized stock-based compensationbased on fair value on the granting
date related to non-vested stock optionswas $506,591.  That cost is expected to be
recognized over a period offouryears.





NOTE
12 ─ COMMITMENTS AND CONTINGENCIES





Operating
Leases





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





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





Future
minimum payments required under the lease agreement with Hannstar-TPV Display
(Wuhan) Corp.  and Wuhan TPV that has an initial or a remaining lease
term in excess of one year at December 31, 2008 are as follows:





Year
      Ended December 31,
                      
                      Amount2009
                      
                      $
                      183,0962010
                      
                      
                      183,096$
                      366,192







F-29




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


NOTE
12 ─ COMMITMENTS AND CONTINGENCIES (Continued)





Operating
Leases (Continued)





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





Future
minimum payments required under the lease agreement for the manufacturing
facilities of Dihao that has an initial or a remaining lease term in excess of
one year at December 31, 2008 are as follows:





Year
      Ended December 31,
                      
                      Amount2009
                      
                      $
                      131,538





Long-term
Investment Commitment





The
Company has committed to invest additional $257,000 of cash to Huaxia
(Yangzhou).  Please refer to Note 7 for details.





NOTE
13 ─ 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 31,2006
                    
                    
                    2007
                    
                    
                    2008Numerator:Net
      income (loss) attributable to common shareholders
                    
                    $
                    1,664,816
                    
                    
                    $
                    (2,905,337
                    )
                    
                    $
                    (4,718,370
                    )Net
      income (loss) used in computing diluted earnings per share
                    
                    $
                    1,664,816
                    
                    
                    $
                    (2,905,337
                    )
                    
                    $
                    (4,718,370
                    )Denominator:Weighted
      average common shares outstanding – basic
                    
                    
                    21,383,960
                    
                    
                    
                    22,531,384
                    
                    
                    
                    22,155,882Potential
      diluted shares from stock options granted
                    
                    
                    -Weighted
      average common share outstanding – diluted
                    
                    
                    21,383,960
                    
                    
                    
                    22,531,384
                    
                    
                    
                    22,155,882Basic
      earnings (loss) per share
                    
                    $
                    0.08
                    
                    
                    $
                    (0.13
                    )
                    
                    $
                    (0.21
                    )Diluted
      earnings (loss) per share
                    
                    $
                    0.08
                    
                    
                    $
                    (0.13
                    )
                    
                    $
                    (0.21
                    )








F-30




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




NOTE
14 ─ 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, 2006, 2007, and 2008 were
$163,121, $160,317 and $304,316, respectively.





NOTE
15 ─ RESEARCH FUNDING ADVANCED





On April
23, 2007, Diguang Electronics entered a fund sharing agreement with Skyworth LCD
Technology Co., Ltd. (“Skyworth LCD” thereafter) to share aggregate funding of
RMB3 million  (approximately $439,722) granted by the Department of
Science and Technology of Guangdong Province to support the research of large
size TFT back light technology.  According to the sharing agreement,
Diguang Electronics will receive 42.5% or RMB1,275,000 (approximately $186,882)
of the total fund available in two installment payments.  Diguang
Electronics received two installments of RMB892,500 (approximately $130,817) and
RMB382,500 (approximately $56,065) on May 23, 2007 and September 24, 2008,
respectively.  In accordance with the government grant agreement, if
the final product resulting from the research and development project conducted
by Diguang Electronics failed to meet the standards established by the
designated government authorities at the appropriate level in this particular
filed, the amount of fund received by the Company shall be returned in
full.  In August 2008, the product resulting from this development
project was tested and accepted by the Economy & Trade Commission of
Guangdong Province, and the fund received was recognized as income and offset
against research and development expense for the year ended December 31,
2008.





On June
22, 2007 Diguang Electronics entered a fund sharing agreement with Hisense
Electric Co., Ltd. (“Hisense” thereafter) to share aggregate funding of RMB3.77
million (approximately $552,583) granted by the Ministry of Science and
Technology of the People’s Republic of China for supporting technology research
of LED back light products.  According to the sharing agreement,
Diguang Electronics will receive 40% or RMB1,508,000 (approximately $221,033) of
the total amount available in three installment payments.  On May 23,
2007, Diguang Electronics received the first installment payment of RMB900, 000
(approximately $131,916).  In accordance with the government grant
agreement, if the final product resulting from the research and development
project conducted by Diguang Electronics failed to meet the standards
established by the designated government authorities at the appropriate level in
this particular filed, any amount of fund received by the Company shall be
returned in full.  This project was not completed and no further fund
was received in the year ended December 31, 2008.





On August
26, 2008, Diguang Electronics entered a fund sharing agreement with the
Department of Information Industry of Guangdong Province and Jingge Century
Semiconductor (Shenzhen) Co., Ltd. (“Jingge” thereafter). According to the
agreement, Diguang Electronics and Jingge would share aggregate funding of RMB5
million (approximately $732,869) granted by the Department of Information
Industry of Guangdong Province to support research and development of “Ultra
Thin, Energy Saving, and Environmental Friendly intelligent LED backlight for
TFT-LCD” project and industrialization of LED Driver IC production. According to
the sharing agreement, Diguang Electronics will receive RMB3.5 million
(approximately $513,008) of the total amount and Jingge will receive the rest of
RMB1.5 million (approximately $213,861). Diguang Electronics received its share
of RMB3.5 million (approximately




F-31




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


NOTE
15 ─ RESEARCH FUNDING ADVANCED (Continued)





$513,008)
on October 27, 2008.  As stated in the agreement, if this development
project failed and Diguang Electronics is deemed to be responsible for the
failure, Diguang Electronics should return received fund in full and a penalty
of 20% of received fund should be paid.





As of
December 31, 2008, the latter two research projects were still in progress and
no revenue had been generated and cost incurred was expensed.  In
accordance with EITF 07-01, “Accounting for Collaborative Arrangements,” the
Company believes that it does not have any significant business and financial
risk associated with the participation in the above two collaborative
arrangements other than  the fact that it may have the obligation to
pay back the entire amount of fund received if the result of research projects
conducted by the Company would not satisfy the standards established by the
designated government authority at the appropriated level in this particular
field.  Therefore, the amount of fund received was presented as part
of liabilities until the ultimate results would pass the test
successfully.





NOTE
16 ─ CONCENTRATION OF CUSTOMERS AND VENDORS





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





Accounts
                  
                  
                  
                  
                  
                  AccountsRevenue
                  
                  
                  Receivable
                  
                  
                  Purchases
                  
                  
                  Payable2006Customer
      F
                  
                  
                  4
                  %
                  
                  
                  14
                  %
                  
                  
                  -
                  
                  
                  
                  -Customer
      C
                  
                  
                  10
                  %
                  
                  
                  0
                  %
                  
                  
                  -
                  
                  
                  
                  -Customer
      A
                  
                  
                  28
                  %
                  
                  
                  3
                  %
                  
                  
                  -
                  
                  
                  
                  -Customer
      H
                  
                  
                  10
                  %
                  
                  
                  19
                  %
                  
                  
                  -
                  
                  
                  
                  --
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Vendor
      G
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10
                  %
                  
                  
                  0
                  %Vendor
      E
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8
                  %
                  
                  
                  16
                  %2007Customer
      C
                  
                  
                  11
                  %
                  
                  
                  7
                  %
                  
                  
                  -
                  
                  
                  
                  -Customer
      A
                  
                  
                  12
                  %
                  
                  
                  3
                  %
                  
                  
                  -
                  
                  
                  
                  -Customer
      H
                  
                  
                  16
                  %
                  
                  
                  11
                  %
                  
                  
                  -
                  
                  
                  
                  -Customer
      I
                  
                  
                  9
                  %
                  
                  
                  18
                  %
                  
                  
                  -
                  
                  
                  
                  -Customer
      J
                  
                  
                  8
                  %
                  
                  
                  13
                  %
                  
                  
                  -
                  
                  
                  
                  -Vendor
      E
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  11
                  %
                  
                  
                  11
                  %2008Customer
      J
                  
                  
                  11
                  %
                  
                  
                  0
                  %
                  
                  
                  -
                  
                  
                  
                  -Customer
      K
                  
                  
                  11
                  %
                  
                  
                  18
                  %
                  
                  
                  -
                  
                  
                  
                  -Customer
      H
                  
                  
                  11
                  %
                  
                  
                  6
                  %
                  
                  
                  -
                  
                  
                  
                  -Customer
      I
                  
                  
                  20
                  %
                  
                  
                  16
                  %
                  
                  
                  -
                  
                  
                  
                  -Customer
      M
                  
                  
                  2
                  %
                  
                  
                  12
                  %
                  
                  
                  -
                  
                  
                  
                  -Customer
      N
                  
                  
                  3
                  %
                  
                  
                  10
                  %
                  
                  
                  -
                  
                  
                  
                  -


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




F-32




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




NOTE
17 ─ FULFILLMENT OF CAPITAL INFUSION OBLIGATION TO NORTH DIAMOND





The
minority interest party infused capital of $737,500 on May 7, 2008 to North
Diamond.  After the capital infusion, the minority interest
stockholder has fulfilled its capital infusion obligation to North
Diamond.  The Company fulfilled its part of capital $1,369,643 to
North Diamond on July 25, 2008.   After the capital infusion by
both parties, the registered capital requirement of Yangzhou Dihao under China
laws and regulations is satisfied and the proportion of the ownership does not
change.





NOTE
18 ─ SEGMENT REPORTING





The
Company currently operates mainly backlight production with small portion of new
products of LED general lighting and mini-computer assembly.  As the
Company’s major production base is in China while export revenue and net income
in overseas entities is accounted for a significant portion of total
consolidated revenue and net income, management believes that the following
tables present useful information to chief operation decision makers for
measuring business performance, financing needs, and preparing corporate budget,
etc.





Years
      Ended December 31,2006
                    
                    
                    2007
                    
                    
                    2008Sales
      to China domestic customers
                    
                    $
                    2,714,184
                    
                    
                    $
                    7,297,447
                    
                    
                    $
                    15,002,027Sales
      to international customers
                    
                    
                    31,528,433
                    
                    
                    
                    38,611,809
                    
                    
                    
                    40,428,654$
                    34,242,617
                    
                    
                    $
                    45,909,256
                    
                    
                    $
                    55,430,680





Domestic
                  
                  
                  InternationalCustomers
                  
                  
                  Customers
                  
                  
                  Total2006Revenue
                  
                  $
                  2,714,184
                  
                  
                  $
                  31,528,433
                  
                  
                  $
                  34,242,617Gross
      margin
                  
                  
                  45
                  %
                  
                  
                  31
                  %
                  
                  
                  32
                  %Receivable
                  
                  
                  1,039,279
                  
                  
                  
                  5,074,974
                  
                  
                  
                  6,384,253Inventory
                  
                  
                  4,396,247
                  
                  
                  
                  -
                  
                  
                  
                  4,396,247Property
      and equipment
                  
                  
                  8,321,004
                  
                  
                  
                  -
                  
                  
                  
                  8,321,004Expenditures
      for long-lived assets
                  
                  
                  6,523,373
                  
                  
                  
                  -
                  
                  
                  
                  6,523,3732007Revenue
                  
                  $
                  7,297,447
                  
                  
                  $
                  38,611,809
                  
                  
                  $
                  45,909,256Gross
      margin
                  
                  
                  21
                  %
                  
                  
                  16
                  %
                  
                  
                  17
                  %Receivable
                  
                  
                  1,948,355
                  
                  
                  
                  10,765,350
                  
                  
                  
                  12,713,705Inventory
                  
                  
                  7,499,768
                  
                  
                  
                  -
                  
                  
                  
                  7,499,768Property
      and equipment
                  
                  
                  17,449,871
                  
                  
                  
                  -
                  
                  
                  
                  17,449,871Expenditures
      for long-lived assets
                  
                  
                  6,172,666
                  
                  
                  
                  -
                  
                  
                  
                  6,172,6662008Revenue
                  
                  $
                  15,002,027
                  
                  
                  $
                  40,428,654
                  
                  
                  $
                  55,430,680Gross
      margin
                  
                  
                  4
                  %
                  
                  
                  10
                  %
                  
                  
                  9
                  %Receivable
                  
                  
                  4,180,927
                  
                  
                  
                  5,280,271
                  
                  
                  
                  9,461,198Inventory
                  
                  
                  7,285,860
                  
                  
                  
                  -
                  
                  
                  
                  7,285,860Property
      and equipment
                  
                  
                  19,369,200
                  
                  
                  
                  -
                  
                  
                  
                  19,369,200Expenditures
      for long-lived assets
                  
                  
                  2,607,743
                  
                  
                  
                  -
                  
                  
                  
                  2,607,743




F-33


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




NOTE
19 ─ SUPPLEMENTARY INFORMATION ABOUT CASH FLOWS





Years
      Ended December 31,2006
                  
                  
                  2007
                  
                  
                  2008Cash
      PaidInterest
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  (254,093
                  )Income
      Tax
                  
                  
                  689,049
                  
                  
                  
                  (5,598
                  )
                  
                  
                  (76,870
                  )
  Non-Cash
      Transactions
                                
                                Years
      Ended December 31,2006
                                
                                
                                2007
                                
                                
                                2008Amount
      due to stockholders
                                
                                $
                                -
                                
                                
                                $
                                2,200,000
                                
                                
                                $
                                -Common
      stock
                                
                                
                                1,943
                                
                                
                                
                                -
                                
                                
                                
                                -Additional
      paid-in capital
                                
                                
                                (27,661
                                )
                                
                                
                                354,386
                                
                                
                                
                                -Appropriation
                                
                                
                                792,745
                                
                                
                                
                                655,261
                                
                                
                                
                                164,609Retain
      Earnings
                                
                                
                                (792,745
                                )
                                
                                
                                (2,855,261
                                )
                                
                                
                                (164,609
                                )Deferred
      offering expense
                                
                                
                                25,718
                                
                                
                                
                                -
                                
                                
                                
                                -Translation
      adjustments
                                
                                
                                -
                                
                                
                                
                                (354,386
                                )
                                
                                
                                -





NOTE
20 ─ QUARTERLY FINANCIAL DATA (Unaudited)





Summarized
quarterly financial data for 2007 and 2008 is as follows:





Quarterly
      Financial Data2008
                
                First
                
                
                Second
                
                
                Third
                
                
                FourthNet
      sales
                
                $
                16,199,591
                
                
                $
                16,897,178
                
                
                $
                13,599,288
                
                
                $
                8,734,623Gross
      profit
                
                
                2,639,234
                
                
                
                2,181,429
                
                
                
                881,077
                
                
                
                (961,670
                )Net
      income (loss)
                
                
                168,730
                
                
                
                134,788
                
                
                
                (1,301,553
                )
                
                
                (3,720,335
                )Basic
      earnings per share
                
                $
                0.01
                
                
                $
                0.01
                
                
                $
                (0.06
                )
                
                $
                (0.17
                )2007
                
                First
                
                
                Second
                
                
                Third
                
                
                FourthNet
      sales
                
                $
                6,762,087
                
                
                $
                8,896,421
                
                
                $
                15,719,648
                
                
                $
                14,531,100Gross
      profit
                
                
                1,386,499
                
                
                
                1,269,707
                
                
                
                3,035,411
                
                
                
                2,129,720Net
      income (loss)
                
                
                (1,049,328
                )
                
                
                (660,591
                )
                
                
                789,035
                
                
                
                (1,984,453
                )Basic
      earnings per share
                
                $
                (0.05
                )
                
                $
                (0.03
                )
                
                $
                0.03
                
                
                $
                (0.08
                )




F-34





Exhibit
Index


Exhibit
      No.
            
            Description2.1
            
            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
            
            Production
      Building Lease Contract with Dongguan Diguang Electronics Science &
      Technology Co., Ltd. and Shenzhen Diguang Electronics Co. dated March 30,
      2005 (incorporated by reference from Form S-1 filed on June 16,
      2006).10.2
            
            Employment
      Agreement of Yi Song (incorporated by reference from Form 8-K filed on
      April 21, 2006).10.3
            
            Employment
      Agreement of Hong Song (incorporated by reference from Form 8-K filed on
      April 21, 2006).10.4
            
            Amended
      and Restated Purchase Option Agreement dated May 12, 2006 (incorporated by
      reference from Form 10-QSB filed on May 15, 2006).10.5
            
            Lease Agreement
      between Wuhan Diguang Electronics Co. Ltd. and TPV Technology
      (Wuhan) Co. Ltd
      dated November 18, 2006 (incorporated by reference from
      Form 10-K filed on April 14, 2008).10.6
            
            Employment
      Agreement of Keith Hor dated March 7 2007 (incorporated by reference from
      Form 8-K filed on March 13, 2007).10.7
            
            Lease Agreement
      between Dihao Electronics (Yangzhou) Co. Ltd and
      Transcend Optronics (Yangzhou) Co., Ltd dated
      October 1, 2007 (incorporated by reference from
      Form 10-K filed on April 14, 2008).10.8
            
            Lease Agreement
      between Wuhan Diguang Electronics Co. Ltd and Wuhan Hannstar Technology
      Co. Ltd dated October 29, 2007 (incorporated by reference from
      Form 10-K filed on April 14, 2008).                           78
  10.9
            
            Sale
      and Purchase Agreement relating to 100% interest in Dongguan Diguang
      Science & Technology Limited dated December 29, 2007 (incorporated by
      reference from Form 8-K filed on January 4, 2008).10.10
            
            Translation
      of the Comprehensive Credit Line Agreement entered into between Shenzhen
      Diguang Electronics and Ping An Bank dated July 1, 2008 (incorporated by
      reference from Form 8-K filed on July 8, 2008).10.11
            
            Translation
      of the Pledge Contract entered into between Dongguan Diguang S&T and
      Ping An Bank dated July 1, 2008 (incorporated by reference from Form 8-K
      filed on July 8, 2008).10.12
            
            Employment
      Agreement of Jerry Yu dated July 31, 2008 (incorporated by reference from
      Form 8-K filed on December 15, 2008).14.1
            
            Code
      of Ethics (incorporated by reference from Form S-1/A filed on October 30,
      2006).21.1
            
            Subsidiaries
      of the registrant (incorporated by reference from Form S-1 filed on June
      16, 2006).31.1
            
            Rule
      13a-14(a) Certification*31.2
            
            Rule
      13a-14(a) Certification*32.1
            
            Section
      1350 Certification*32.2
            
            Section
      1350 Certification*





















































*
      Filed herewith




79