UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-K


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




For
the fiscal year ended December 31, 2008




OR


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




For the transition period from

to




Commission
file number: 001-15643




INFOSMART
GROUP, INC.


(Exact
name of registrant as specified in its charter)


California
                  
                  95-4597370(State
      or other jurisdiction of incorporation or organization)
                  
                  (I.R.S.
      Employer Identification No.)5th
      Floor, QPL Industrial Building, 126-140 Texaco Road,
                    Tsuen Wan, Hong Kong
                  
                  N/A(Address
      of principal executive offices)
                  
                  (Zip
      Code)




Registrant’s
telephone number: (852) 2944-9905




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


Securities
registered pursuant to Section 12(g) of the Act: Common Stock, no par
value




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





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





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




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




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 the definitions of “large accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated
      filer ̈
              Accelerated
      filer   ̈Non-accelerated
      filer   ̈
              Smaller
      reporting company  þ





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





State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed fiscal year:
$5,654,618 computed by reference to $0.035 as of December 31, 2008.





Number of
shares of common stock outstanding as of April 30, 2009:
161,560,520








TABLE OF CONTENTS


TO
ANNUAL REPORT ON FORM 10-K


FOR
YEAR ENDED DECEMBER 31, 2008





PagePART
      IItem
      1.
                Business
                1Item
      1A.
                Risk
      Factors
                10Item
      1B.
                Unresolved
      Staff Comments
                20Item
      2.
                Properties
                20Item
      3.
                Legal
      Proceedings
                21Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                21PART
      IIItem
      5.
                Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                21Item
      6.
                Selected
      Financial Data
                22Item
      7.
                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operation
                22Item
      7A.
                Quantitative
      and Qualitative Disclosures About Market Risk
                31Item
      8.
                Financial
      Statements and Supplementary Data
                31Item
      9.
                Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                32Item
      9A.
                Controls
      and Procedures
                32Item
      9B.
                Other
      Information
                32PART
      IIIItem
      10.
                Directors,
      Executive Officers and Corporate Governance
                33Item
      11.
                Executive
      Compensation
                35Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                37Item
      13.
                Certain
      Relationships and Related Transactions, and Director
      Independence
                38Item
      14.
                Principal
      Accounting Fees and Services
                38PART
      IVItem
      15.
                Exhibits,
      Financial Statement Schedules
                39Signatures
                
                40





SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS





This
Report contains forward-looking statements. All forward-looking statements are
inherently uncertain as they are based on current expectations and assumptions
concerning future events or future performance of the Company. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
are only predictions and speak only as of the date hereof. Forward-looking
statements usually contain the words “estimate,” “anticipate,” “believe,”
“expect,” or similar expressions, and are subject to numerous known and unknown
risks and uncertainties. In evaluating such statements, prospective investors
should carefully review various risks and uncertainties identified in this
Report, including the matters set forth under the captions “Risk Factors” and in
the Company’s other SEC filings. These risks and uncertainties could cause the
Company’s actual results to differ materially from those indicated in the
forward-looking statements. The Company undertakes no obligation to update or
publicly announce revisions to any forward-looking statements to reflect future
events or developments.




Although
forward-looking statements in this Annual Report on Form 10-K reflect the good
faith judgment of our management, such statements can only be based on facts and
factors currently known by us. Consequently, forward-looking statements are
inherently subject to risks and uncertainties, and actual results and outcomes
may differ materially from the results and outcomes discussed in or anticipated
by the forward-looking statements. Factors that could cause or contribute to
such differences in results and outcomes include, without limitation, those
specifically addressed under the heading “Risks Relating to Our Business” below,
as well as those discussed elsewhere in this Annual Report on Form 10-K. Readers
are urged not to place undue reliance on these forward-looking statements, which
speak only as of the date of this Annual Report on Form 10-K. We file reports
with the Securities and Exchange Commission (“SEC”). You can read and copy any
materials we file with the SEC at the SEC’s Public Reference Room, 100 F.
Street, NE, Washington, D.C. 20549 on official business days during the hours of
10 a.m. to 3 p.m. You can obtain additional information about the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the
SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC, including the Company.




We
undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of this
Annual Report on Form 10-K. Readers are urged to carefully review and consider
the various disclosures made throughout the entirety of this annual report,
which attempt to advise interested parties of the risks and factors that may
affect our business, financial condition, results of operations and
prospects.





PART
I




ITEM
1.  BUSINESS





Overview





We are in
the business of developing, manufacturing, marketing and sales of recordable
digital versatile disc (“DVDR”) media and recordable compact discs (“CDR”).
We currently manufacture DVDRs with 8x and 16x writable speeds as well as CDRs
with 52x writable speeds, and have been developing our DVD-R manufacturing basis
in both Hong Kong and Brazil to capture the worldwide market.  As the
“war” between high density format DVDR (“HD-DVD”) and Blu-ray DVD formats has
ended with the Blu-ray DVD format surviving in the marketplace to become the
latest format of DVD recordable media, we have a new perspective in business
development in the world market for the next 5 years.  We have
acquired the first set of Blu-ray DVD replication systems in the China/Hong Kong
region and will devote more resources to developing the market for Blu-ray DVD
replication systems.  We have customers in Western Europe, Australia,
China and South America.





We
produce our products through our two main operational business subsidiaries,
Infoscience Media Limited (“IS Media”) at our state-of-the-art DVDR
manufacturing facilities in Hong Kong and Discobras Industria E Comercio de
Electro Eletronica Limiteda (“Discobras”) at our state-of-the-art DVDR & CDR
manufacturing facilities in Brazil.





History
and Development of the Company





History





We were
incorporated on July 16, 1996 in the State of California under the name Cyber
Merchants Exchange, Inc. (“Cyber”). In July 1999, we raised approximately $3.2
million through an initial public offering. On June 30, 2000, we raised an
additional $6.3 million in a private placement offering subscribed by 30 high
net-worth Chinese investors. Prior to our reorganization, as described below, we
were an intermediary to global suppliers and buyers in the manufacturing,
wholesaling and retailing apparel business. Effective October 12, 2006, we
changed our name from Cyber Merchants Exchange, Inc. to Infosmart Group, Inc.
(the “Company”).


1


In
December 2006, IS Media acquired 100% of the issued and outstanding common stock
of Infoscience Holdings Limited (“IS Holdings”). IS Media has a cooperation
agreement with IS Holdings wherein it manufactures its DVDRs using certain
patent licenses owned by IS Holdings. IS Media acquired IS Holdings to guarantee
the continuation of this cooperation agreement. We also have a Brazilian
subsidiary, Discobras Industria E Comercio de Electro Eletronica Limiteda
(“Discobras”), which was formed in March 2006 by IS Media and a local partner,
with registered capital of US$8 million for our new Brazilian DVDR production
facility. IS Media currently holds a 99.42% ownership interest in Discobras, and
the local partner holds the remaining 0.58% ownership interest in
Discobras.  In addition, we incorporated a new subsidiary, Portabello
Global Limited (“Portabello”), for distributing and reselling our recordable
digital versatile discs and media to customers in South America.





Company
Reorganization





On May
16, 2004, our shareholders of record on March 25, 2005 approved a reorganization
of the Company (the "Company Reorganization"). The Company Reorganization is
summarized as follows:




·
            We transferred of all of our
      assets and liabilities (the "Transfer") to ASAP Show Inc., a then wholly
      owned subsidiary ("ASAP"), effective May 31, 2005 pursuant to a Transfer
      and Assumption Agreement (“Transfer Agreement”), with ASAP continuing to
      operate the trade show business previously carried on by
      us;




·
            We issued a stock bonus to
      certain directors and key employees of 120,862 shares of our common stock,
      on a post-reverse split basis, effective May 31, 2005 (the “Stock
      Bonus”);




·
            We effected a one for eight and
      one-half (1-for-8.5) reverse stock split of our common stock (the "Reverse
      Split") with special treatment to preserve round lot stockholders,
      effective July 18, 2005;




·
            On or about August 25, 2005, we
      distributed 8,626,480 shares of common stock of ASAP, representing all of
      the outstanding shares of ASAP, to our shareholders of record on August
      18, 2005 on a pro rata basis (the "Distribution"), with such distributed
      shares being held by our transfer agent as depository agent until such
      time as the Form 10-SB filed by ASAP became effective with all comments
      from the SEC cleared (certificates representing such shares were issued by
      the transfer agent to the shareholders on or about March 27,
      2006);




·
            We entered into an amended and
      restated Securities Purchase Agreement (“SPA”) with KI Equity effective as
      of August 25, 2005; and




·
            On September 30, 2005, we
      completed the sale of 7,104,160 shares of our common stock to KI Equity
      for $415,000 (the "Investment"), with the net proceeds of the Investment
      being paid to ASAP pursuant to the terms of the Transfer
      Agreement.




In
connection with the closing of the Investment, our then current directors and
officers resigned, and Kevin Keating was appointed the sole director and officer
of the Company. We accounted for the Company Reorganization as a reverse spinoff
in accordance with the Emerging Issues Task Force Issue No. (“EITF”) 02-11,
“Accounting for Reverse
Spinoffs.” In a reverse spinoff, the legal spinnee (ASAP) is treated as
though it were the spinnor for accounting purposes. Reverse spinoff accounting
is appropriate as the treatment of the legal spinnee as the accounting spinnor
results in the most accurate depiction of the substance of the transaction for
shareholders and other users of the consolidated financials statements. Under
this treatment, the historical financial statements of the Company became the
historical financial statements of ASAP. In making its determination, the
Company considered the following indicators, among others: (i) the accounting
spinnor (legal spinnee, ASAP) is larger than the accounting spinnee (legal
spinnor, the Company); (ii) the fair value of the accounting spinnor (legal
spinnee) is greater than that of the accounting spinnee (legal spinnor); (iii)
the accounting spinnor (legal spinnee) retains the senior management of the
formerly combined entity; and (iv) the accounting spinnor (legal spinnee)
retains senior management. As a result of the Company Reorganization, the
Company became a shell company with nominal assets and operations, with a
business purpose being to identify, evaluate and complete a business combination
with an operating company.




Change in Control
Transaction




On
July 7, 2006, the Company entered into an Exchange Agreement with KI Equity
Partners LLC, Prime Fortune Enterprises Ltd. (“Prime”), the equity owners of
Prime, namely, Mr. Chung Kwok, Ms. Po Nei Sze and Prime Corporate Developments
Limited (the “Prime Shareholders”), and Hamptons Investment Group Ltd.
(“Hamptons”) (collectively the “Infosmart BVI Shareholders”) to acquire all of
the equity ownership of Infosmart Group Limited, a British Virgin Islands
company (“Infosmart BVI”) through the acquisition of Prime, the former 100%
direct equity owner and holding company of Infosmart BVI. Under the terms of the
Exchange Agreement, immediately prior to the closing of the share exchange
transaction, Hamptons was to receive 58.82352 shares of Prime’s capital stock as
payment for its services as a finder in connection with the exchange
transaction.




However,
on August 11, 2006 and prior to the closing of the share exchange transaction,
Prime’s and Infosmart BVI’s board of directors and their respective shareholders
agreed to restructure the ownership of Infosmart BVI’s issued capital stock,
resulting in the transfer of the entire equity ownership of Infosmart BVI
directly to Mr. Chung Kwok, Ms. Po Nei Sze and Prime Corporate Developments
Limited. On August 14, 2006, the Company entered into a First Amendment to the
Exchange Agreement with KI Equity, Prime, the equity owners of Prime, Infosmart
BVI, the equity owners of Infosmart BVI (which also consisted of Mr. Chung Kwok,
Ms. Lui Sau Wan and Prime Corporate Developments Limited), and Hamptons, whereby
Infosmart BVI and the Infosmart BVI Shareholders replaced Prime and the Prime
Shareholders as a parties to the Exchange Agreement, and they assumed all of
Prime’s and the Prime Shareholders’ obligations, representations, warranties,
liabilities and responsibilities under the Exchange Agreement, including Prime’s
obligation to issue the shares of stock to compensate Hamptons for its services
immediately prior to the closing of the share exchange transaction. Pursuant to
the Exchange Agreement, as amended by the First Amendment, the Company acquired
all of the outstanding shares of Infosmart BVI’s capital stock from the equity
owners of Infosmart BVI and Hamptons, and the Infosmart BVI Shareholders
transferred and contributed all of their Infosmart BVI shares to the Company. In
exchange, the Company issued to the Infosmart BVI Shareholders 1,000,000 shares
of the Company’s Series A Preferred Stock, which were convertible into
116,721,360 shares of the Company’s common stock.


2





The
closing of the Exchange Agreement was contingent on a minimum of $7,000,000
being subscribed for, and funded into escrow, by certain accredited and
institutional investors (“Investors”) for the purchase of shares of the
Company’s Series B Preferred Stock promptly after the closing of the Exchange
Agreement under terms and conditions approved by the Company’s board of
directors immediately following the Exchange Agreement (the “Financing”). The
closing of the Financing was contingent on the closing of the Exchange
Agreement, and the Exchange Agreement was contingent on the closing of the
Financing.




Recent
Financing




Immediately
following the closing of the Exchange Agreement, we received gross proceeds of
approximately $7.65 million in connection with the Financing from the Investors.
Pursuant to Subscription Agreements entered into with these Investors, we sold
1,092,857.143 shares of our Series B Preferred Stock at a price per share of
$7.00. Each share of Series B Preferred Stock is convertible into shares of our
common stock. The Company registered the common stock underlying the Series B
Preferred Stock issued in the Financing with the Securities and Exchange
Commission for resale by the Investors. After commissions and expenses, we
received net proceeds of approximately $6.89 million in the
Financing.





In
connection with the issuance of the Series B Preferred Stock to the Investors,
the Company issued warrants to the Investors to purchase an aggregate of
29,310,345 shares of common stock, on as-converted basis, of the Company. The
warrants have an exercise price of $0.326 per share, subject to
adjustments.





Keating
Securities, LLC and Axiom Capital Management, Inc. (“Placement Agents”) acted as
placement agent in connection with the Financing. For their services, the
Placement Agents received a commission equal to 8% of the gross proceeds from
the Financing and a non-accountable expense allowance equal to 2% of the gross
proceeds. In addition, the Placement Agents received, for nominal consideration,
five-year warrants to purchase 10% of the number of shares of common stock into
which the Series B Preferred Stock issued in the Financing may be converted
(“Placement Agent Warrants”).  The Placement Agent Warrants are exercisable
at any time at a price equal 125% of the conversion price, on a net-issuance or
cashless basis. The Placement Agent Warrants have registration rights similar to
the registration rights afforded to the holders of Series B Preferred Stock and
Warrants. The Company also paid for the out-of-pocket expenses incurred by the
Placement Agent and all purchasers in the amount of $25,000.





Upon
completion of the exchange transaction, and after giving effect to the
Financing, the Infosmart BVI Shareholders owned 1,000,000 shares of the
Company’s Series A Preferred Stock, and the Investors in the aggregate received
1,092,857.143 shares of our Series B Preferred Stock. The Series A Preferred
Stock automatically converted into 116,721,360 shares of common stock upon the
filing and approval of a Certificate of Amendment to the Company’s Articles of
Incorporation with the Secretary of State of the State of California on October
12, 2006. Immediately after the exchange transaction, the Infosmart BVI
Shareholders and the Investors owned, in the aggregate, 91.84% of our issued and
outstanding shares of common stock after giving effect to the conversion of the
Series A and Series B Preferred Stock into common stock, and the Company’s
stockholders immediately prior to the exchange transaction owned 8.16% of the
outstanding common stock (or, 12,969,040 shares of our common stock) after
giving effect to the conversion of the Series A and Series B Preferred Stock
into common stock.





The
issuance of the Series A Preferred Shares to the Infosmart BVI Shareholders and,
upon conversion, the shares of the Company’s common stock underlying the Series
A Preferred Shares, was intended to be exempt from registration under the
Securities Act of 1933, as amended (the “Securities Act”), pursuant to
Regulation S promulgated thereunder. The issuance of the Series B Preferred
Shares to Investors was intended to be exempt from registration under the
Securities Act pursuant to Section 4(2) thereof and such other available
exemptions. As such, the Series A Preferred Shares and the Series B Preferred
Shares, and upon conversion thereof, the Company’s common stock, may not be
offered or sold in the United States unless they are registered under the
Securities Act, or an exemption from the registration requirements of the
Securities Act is available.




Name Change and Increase in
Authorized Shares of Common Stock




On
October 12, 2006, the Company effected an increase in the number of authorized
shares of the Company’s common stock from 40,000,000 shares to 300,000,000
shares and also effected a change of the Company’s corporate name (the “Name
Change”) to “Infosmart Group, Inc.” (the “Amendments”) through the filing of a
Certificate of Amendment to the Company’s Articles of Incorporation with the
State of California’s Secretary of State. Per the conversion rights set forth in
the Certificate of Determination for the Series A Preferred Stock, upon filing
and acceptance of the Amendments to the Company’s Articles of Incorporation, all
of the Series A Preferred Stock were automatically converted into approximately
116,721,360 shares of the Company’s Common Stock. The Company’s Name Change and
its trading symbol (OTCBB: IFSG) became effective on the OTC Bulletin Board on
October 18, 2006.


3





Infosmart
BVI





History




Infosmart
Group Limited (“Infosmart BVI”) was incorporated in the British Virgin Islands
on August 23, 2005 under the International Business Companies Act of the British
Virgin Islands. Prior to the Restructuring (as described above), Prime Fortune
Enterprises Limited, a British Virgin Islands company (“Prime”), was the sole
equity owner and shareholder of 100% of Infosmart BVI’s issued capital shares.
In August 2006, the board of directors of both Prime and Infosmart BVI decided
to restructure certain shareholdings in Infosmart BVI so that after the
Restructuring, Prime would no longer own 100% of Infosmart BVI’s issued capital
shares and so that Prime Corporate Developments Ltd. (“Prime Corporate”), Mr.
Chung Kwok and Ms. Sau Wan Lui would replace Prime as the direct owners of 100%
of the issued capital shares and equity ownership of Infosmart BVI.





Prior to
the Restructuring, Prime owned 100% of the issued capital shares of Infosmart
BVI, which consisted of one (1) issued capital share, and Prime’s issued capital
shares were owned as follows: 713 shares held by Prime Corporate, 212 shares
held by Mr. Chung Kwok, and 75 shares held by Lui Sau Wan. On August 11, 2006,
in connection with the Restructuring, Prime’s board of directors approved
resolutions for Prime to transfer the one (1) issued capital share of Infosmart
BVI owned by Prime to Prime shareholder Chung Kwok in exchange for a cash
payment of $1.00 (the “Prime Transfer”), and that pursuant to such resolutions,
Prime transferred the one Infosmart BVI share to Chung Kwok on August 11, 2006
in exchange for the $1.00 cash payment.





Further,
on August 11, 2006 and concurrent with the Prime Transfer, Infosmart BVI’s Board
approved resolutions for the issuance of 999 new shares in Infosmart BVI to
Prime Corporate Developments Limited (“Prime Corporate”), Chung Kwok and Lui Sau
Wan, as follows: 713 shares to Prime Corporate, 211 shares to Chung Kwok, and 75
shares to Lui Sau Wan, in exchange for a cash payment by Prime Corporate, Chung
Kwok and Lui Sau Wan of $1.00 per Infosmart BVI share that each receives (the
“Infosmart BVI Share Issuance”) or an aggregate total payment of $999 for such
shares. On August 11, 2006, Infosmart BVI issued the 999 Infosmart BVI shares,
in amounts as described above, to Prime Corporate, Chung Kwok and Lui Sau Wan
and, in exchange, received the $999 cash payment, pursuant to such
resolutions.





As a
result of and immediately after the Prime Transfer and the Infosmart BVI Share
Issuance, Prime Corporate, Mr. Chung Kwok and Ms. Sau Wan Lui became the owners
of 100% of the issued capital shares of Infosmart BVI, with each of them owning
the same number of Infosmart BVI shares as the number of Prime shares that each
currently owns. Pursuant to a group reorganization completed in October 2005
(the “Infosmart BVI Reorganization”), Infosmart BVI is the holding company
(directly and indirectly) of IS Technology, IS International, IS Media, and
Discobras.





Infosmart
BVI started in the DVDR manufacturing business with the establishment of IS
Technology. Founded in Hong Kong in August of 2002, IS Technology was the first
company in Hong Kong to manufacture recordable digital versatile discs. With the
continual growth in DVDR demand, the initial shareholders of IS Technology took
in other shareholders to form two other companies, IS International and IS Media
Limited, to produce DVDRs. , In December 2006, IS Media acquired 100% of the
issued and outstanding common stock of Infoscience Holdings Limited (“IS
Holdings”). IS Media has a Cooperation Agreement with IS Holdings wherein it
manufactures its DVDRs using certain patent licenses owned by IS Holdings. IS
Media acquired IS Holdings to guarantee the continuation of this agreement.
These four companies and Discobras now form the Company’s main operational
business in Hong Kong and Brazil respectively.




Current Organizational
Structure





As a
result of the share exchange transaction, the Company Reorganization, the
Infosmart BVI Reorganization, the Restructuring, and subsequent acquisitions of
new subsidiaries, the Company’s current organizational structure is as follows
(the percentages depict the current equity interests):


4








5





Our
Business





We
develop, manufacture, market and sell 8x and 16x writable speed DVDRs and 52x
writable speed CDRs, and we are preparing for manufacturing of Blu-Ray format
DVDR discs. In order to act as a one-stop-shop for the optical storage media
needs for our customers, we also outsource orders for products we do not produce
ourselves, such as DVD±RW discs and DVD-RAM discs and other low margin DVDR
items. We have customers in Western Europe, China, South America and Australia.
To capture the South American market, we have established a sales and
distribution network in Brazil and set up a DVDR production facility in Brazil,
and we have a subsidiary, Portabello, that distributes and resells our
recordable digital versatile discs and media to customers in South
America.





Current
Products





We
currently develop, manufacture, market and sell recordable digital versatile
discs (“DVDRs”). A DVDR is an optical disc storage media format that can be used
for data storage, including movies with high video and sound quality. DVDRs are
manufactured with different writable speed ratings. The writable speed ratings
of blank DVDRs match the speed at which the recording lasers in digital
versatile disc (“DVD”) drives (such as those found in DVD players or the DVD
disc drives in computers) can write or “burn” data onto the DVDRs. Currently,
most DVD drives are able to write or “burn” data onto DVDRs at 8 times (“8x”) or
16 times (“16x”) the industry set standard speed for writing or “burning” data
onto a DVDR disc. We manufacture discs with 8x and 16x writable speed ratings.
We estimate that our sales of our 8x writable speed DVDRs account for
approximately 60% of our output, while 16x writable speed DVDRs make up
approximately 40% of our output.





In
December 2007, we stopped producing CDRs in Hong Kong and began producing DVDRs
due to higher margins from DVDRs as compared to CDRs.  However, in
order to ensure “one-stop” shopping to our customers in our distribution
channels, we outsource the production of our CDRs and devote more resources to
the manufacture of DVDRs. According to Techno Systems Research Co., Ltd.
(Japan), total global production volume of CD media in 2007 was 14,024,200,000
discs. We currently outsource CDRs with a standard capacity of 700MB for data
and 80MIN for music.





We have
also distributed flash drives and memory cards through the channels of
distributions in both Asia and South American that we have
established.  Therefore, we have started procuring flash drives and
memory cards from outside manufacturers for distribution within our current
channels.





The following is a segment analysis of
our products:





Flash drive
                                        and memory card
                                      
                                      
                                      DVDR and
                                        Related Products
                                      
                                      
                                      CDR
                                      
                                      
                                      Blu-rayTwelve months ended
                                        December 31,
                                      
                                      
                                      Twelve months ended
                                        December 31,
                                      
                                      
                                      Twelve months ended
                                        December 31,
                                      
                                      
                                      Twelve months ended
                                        December 31,2008
                                      
                                      
                                      2007
                                      
                                      
                                      2008
                                      
                                      
                                      2007
                                      
                                      
                                      2008
                                      
                                      
                                      2007
                                      
                                      
                                      2008
                                      
                                      
                                      2007Revenue
      from external customers
                                      
                                      $
                                      650,962
                                      
                                      
                                      
                                      38,073,558
                                      
                                      
                                      $
                                      32,179,157
                                      
                                      
                                      
                                      63,811,547
                                      
                                      
                                      $
                                      2,275,466
                                      
                                      
                                      
                                      3,084,795
                                      
                                      
                                      $
                                      1,810,000
                                      
                                      
                                      
                                      -Segment
      profit/(loss)
                                      
                                      
                                      (1,020,022
                                      )
                                      
                                      
                                      (7,661,647
                                      )
                                      
                                      
                                      (5,400,670
                                      )
                                      
                                      
                                      17,919,622
                                      
                                      
                                      
                                      392,082
                                      
                                      
                                      
                                      (16,988
                                      )
                                      
                                      
                                      915,000
                                      
                                      
                                      
                                      -TotalTwelve
      months endedDecember 31,2008
                                      
                                      
                                      2007Revenue
      from external customers
                                      
                                      $
                                      36,915,585
                                      
                                      
                                      
                                      104,969,899Segment
      profit/(loss)
                                      
                                      
                                      (5,113,610
                                      )
                                      
                                      
                                      10,240,987





Research
and Development





We plan
to invest at least $10 million in the upcoming year for Blu-ray replication
production lines in the upcoming year, with the first Blu-ray replication
systems being purchased at about $1.4 million. This move is in line with our
strategy of keeping ourselves as the leader and forerunner of recordable media
manufacturers in the world.  We foresee inputting additional resources
in purchasing and installing more production lines in 2008 and in Brazil by 2009
as the market for Blu-ray DVD players and writers become more
mature.


6


Manufacturing





We
currently operate two factories in both Hong Kong and Brazil, with a combined
production capacity of approximately 15 million 8x, 16x writable speed, single
layer DVDRs and CDRs per month.  Currently, our product mix is
approximately 60% of 8x DVDRs, approximately 40% of 16x DVDRs, and approximately
60% of CDRs. We have the flexibility to switch production easily between the two
product types. After manufacturing the DVDRs and CDRs, we put our products
through a rigorous quality assurance process.  Our Quality Management
System complies with ISO9001:2000 requirements, and we are ISO 9000
certified.  As a result of the Blu-ray format DVD prevailing over the
HD-DVD in the battle of dominating the future format of DVDR, we purchased the
first set of Blu-ray DVD production replication systems in the China/Hong Kong
region in order to meet the demands in the high definition media storage
market




Intellectual
Properties and Licenses





Our
subsidiary Infoscience Media Limited (“IS Media”) entered into a cooperation
agreement (“Cooperation Agreement”) with Infoscience Holdings Limited, a then
independent third party and currently a subsidiary of IS Media (“IS Holdings”),
on December 1, 2005. Under the Cooperation Agreement, the parties agreed to
operationally combine their production facilities so that both IS Media and IS
Holdings could both produce DVDRs at their combined facilities using certain
intellectual properties for the production of DVDRs for which IS Holdings holds
patent licenses (the “Patent License”) for use from the DVDR developer (the
“License Agreement”) and also a right to manufacture DVDRs under a government
manufacturing license (the ”Manufacturing License”) held by IS Holdings. IS
Holdings also agreed that IS Media shall have full legal and beneficial
ownership of the first 5,000,000 DVDR discs (the “Second Minimum Quantity”)
produced in both IS Media’s and IS Holding’s production facilities (the
“Combined Facilities”) for each whole month during the one year term of the
Cooperation Agreement.





In
exchange, IS Media agreed: (1) IS Holdings shall receive full legal and
beneficial ownership of all DVDRs produced in the Combined Facilities that are
in excess of the Second Minimum Quantity; and (2) to provide IS Holdings with
stand-by credit of not more than HK$30,000,000 from IS Media’s own sources or
indirectly from any third party including any licensed Hong Kong bank. Under the
Cooperation Agreement, IS Holdings is responsible for paying all the relevant
licensee fees, and IS Media is responsible for all the recurrent costs and
expenses (except for rent and public utilities, for which each party is
responsible for the costs they incur in their own production facility) incurred
for the production of all DVDR products manufactured in the Combined Facilities
during the one year term of the Cooperation Agreement.





IS Media
purchased 100% of the outstanding stock of IS Holdings on December 1, 2006 by
entering into a Sale and Purchase Agreement with New Passion Investments
Limited.  Thus, the Company now indirectly owns the Manufacturing
License and Patent License.  The Cooperation Agreement was extended
for a further 2 years until December 31, 2008.




The
patent license held by IS Holdings was obtained through a joint patent licensing
program (the “DVDR Patent License Program”) that is administered by Koninklijke
Philips Electronics, N.V. (“Philips”). Parties acquiring the patent licenses
through this DVDR Patent License Program are allowed to use patents owned (or
for which these companies have patent applications pending) by participating
companies including Philips, Sony, Hewlett Packard and/or Pioneer that are
essential in the DVDR manufacturing process. The patent license offered through
Philips’ DVDR Patent Licensing Program is offered under non-discriminatory terms
and conditions and, in principle, is available to all
manufacturers.





In
connection with the completion of the Discobras DVDR production facility in
Brazil, we started the process of obtaining the required patent license for use
of intellectual property.  Discobras has satisfied the relevant
governmental requirements in Brazil to produce DVDRs in its production facility.
The patent license, however, is currently being negotiated with the relevant
owners of the patent which are overseas companies located outside of Brazil, and
the Brazilian government must approve the patent license.





Sources
and Availability of Raw Materials and Principal Suppliers





Raw
material costs constitute approximately 60% of the production costs for DVDR and
CDR discs. Key materials used in DVDR production are polycarbonate, silver
target, organic dye, printing oil and bonding glue. The most important cost item
is polycarbonate, which accounts for about half of cost of goods
sold.





The
supply market for polycarbonate is competitive. Major polycarbonate suppliers
include Teijin Chemicals, Dow Chemical, General Electric, Bayer, and Mitsubishi.
We order polycarbonate from a variety of sources depending on price and
availability. Since polycarbonate is a petroleum byproduct, its price is
affected by crude oil prices and can be volatile. We place three (3) month
supply contracts with polycarbonate vendors. These supply contracts guarantee
quantity but leave pricing to be determined by the market.





Polycarbonate prices increased from
$1.90 - 2.50/kg in 2004 to around $2.80/kg - $3.50/kg in 2005 because of surging
oil prices and supply constraints, thereby seriously cutting the profit margins
of disc manufacturers worldwide. Capacity was hit in 2004 by the explosion of
GE’s PCB factory in Spain. At the end of 2005, worldwide polycarbonate capacity
expanded as a major new factory came online in Shanghai, and two other large
factories in Japan and the U.S. expanded output in response to higher market
prices. Polycarbonate prices were approximately $3.00/kg - $3.10/kg at the
beginning of 2006 and dropped into the $2.80-$3.10 range at the end of 2006. We
have worked closely with polycarbonate suppliers as we are a bulk volume
purchaser for production in Hong Kong and Brazil, and we were able to negotiate
prices to about $2.618/kg at the end of 2007 and about $2.6/kg for early
2008.


7





Marketing
and Distribution





More than 90% of our sales are to
wholesalers and distributors who resell to retailers. We have increased our
exposure in Europe, USA, South America, the Middle East, Asia and China
through our marketing
efforts and attendance at trade shows such as:




·
              CeBIT (Hannover, Germany) 2003,
      2004, 2005
 
 ·
              Comdex (Las Vegas, USA)
      2003
  ·
              Computex (Taipei, Taiwan)
      2004
 
 ·
              Gitex (Dubai, UAE) 2004 and
      2005
 
 ·
              China Sourcing Fairs
      2004
 
 ·
              IT Brazil 2005,
      2006
 
 ·
              Hong Kong Electronics Show 2004,
      2005, 2006





During
2007, and as a result of our operations in Brazil, we established our brands
“LASERLINE” and “HONGTEK” in the Brazilian and South American
markets.  We will continue direct sales efforts into these markets in
2008 as such efforts have proven effective even though we outsource products
from other suppliers.





We also
anticipate the increased use of Portabello and Infoscience Media Global Limited
in marketing to small-scale distributors in South America and the China/Hong
Kong region, respectively.





Current
Customers





We have
established a wide client base and distribution network covering Europe/United
Kingdom, the Middle East, Australia, South America and Asia.





Our top
three customers by value, who accounted for 39.67% of our revenue in 2008, are
as follows:




·
              Cheong
      King Industrial Limited markets our DVDR blank media in China. Sales to
      Cheong King Industrial Limited account for approximately 18.75% of our
      revenue.
  ·
              Mega
      Lyra Limited markets our DVDR blank media in Brazil. Sales to Mega Lyra
      Limited account for approximately 14.98% of our
  revenue.
 
 ·
              Raio
      de Sol Comercio de Armarinho markets our DVDR blank media in Brazil. Sales
      to Raio de Sol Comercio de Armarinho account for approximately 5.94% of
      our revenue.


Management
expects that the proportion of revenue accounted for by these customers will
decrease as its markets develop in South America. We will be careful to maintain
relationships with existing customers in developed countries because they are
expected to be volume buyers of our Blu-ray discs in the
future.  During 2008, we considered the products competing with DVDRs
such as flash cards and took a pro-active approach in marketing our own brand of
flash cards with core technology patented by a Taiwan company.





Our
pricing and payment terms are flexible. Our objective is to build a strong base
of loyal customers, and management will offer competitive prices to capture
market share in specific markets that have strong growth prospects. Our payment
terms are more stringent for new customers and more flexible for long-term
customers and established businesses.





In the
Brazilian market, our DVDR facilities have already been running at full capacity
but are not, yet, able to satisfy customer demands.  We have been
transporting some of our DVDR output to Brazil from Hong Kong, which takes about
60-75 days for shipment and customs clearance. We have granted about 6o-90 days
credit with a certain amount of deposits from wholesaling customers and
distributors.   We have exercised tight credit control in the
South American market and, due to the strong market demand, we have recently
reduced our credit period.


8


Competition





Products





We
currently produce Single Layer (“SL”) DVDR discs of two writable speeds (8x and
16x) and CDR discs of 52x writable speed, but we are preparing to launch
production of DVDR discs in either High Density or Blu-Ray formats. The table
and discussion below describe some competitor products:





Computer
storage media comparison




Product
                              
                              Media Type
                              
                              Storage Capacity
                              
                              
                              Unit Price ($)
                              
                              Approximate Price
                                per MB (¢/MB)Floppy
      Disc
                              
                              Non-
      optical
                              
                              
                              1.44
      MB
                              
                              
                              0.22
                              
                              
                              23.75USB
      Drive
                              
                              Non-
      optical
                              
                              
                              2
      GB
                              
                              
                              70
      - 140
                              
                              
                              7-12Flash
      Memory
                              
                              Non-
      optical
                              
                              
                              1
      GB
                              
                              
                              76
      - 120
                              
                              
                              7.4-11.7Hard
      Disc
                              
                              Non-
      optical
                              
                              
                              200
      GB
                              
                              
                              130
                              
                              
                              0.06CD-R
                              
                              Optical
                              
                              
                              700
      MB
                              
                              
                              0.18-0.30
                              
                              
                              0.026-0.043DVD±R*
                              
                              Optical
                              
                              
                              4.7
      GB
                              
                              
                              0.6-0.8
                              
                              
                              0.012-0.017HD
      DVD**
                              
                              Optical
                              
                              
                              15-30
      GB
                              
                              
                              10-15
                              
                              
                              0.05-0.07Blu-Ray
                              
                              Optical
                              
                              
                              25-50
      GB
                              
                              
                              25-30
                              
                              
                              0.06-0.10




Note: 1GB
= 1024 MB





Optical
storage media, hard discs, USB drives and flash memory are the most commonly
used computer storage media. Hard discs have up to 500GB of capacity, cost
around $0.75/GB and are the most economical choice for large storage needs. The
hard disc, however, is less versatile, more fragile and harder to install than
optical storage media; it is also bulky and has poor portability.





Both USB
drives and flash memory are compact in size, provide great portability and
reusability, but are relatively expensive and have limited storage capacity
(maximum only 1-2 GB). These devices are mainly used to store computer and
music/home video files where portability is required. Floppy disc capacity is
too small for multimedia or today’s software files.





For full
movies or computer file backups recordable compact discs and DVDRs offer large
(from 750MB to 9.4GB) and economical (from $0.18 to $0.80 per disc) storage
solutions. Rewritable DVDR discs (“DVD±RW”) are reusable but are more expensive,
and therefore less popular, than write-once DVDR discs that we
produce.





The
victory of the Blu-ray DVD over the HD-DVD means that the market is looking for
highly-compact data storage media and higher resolutions for entertainment
content.  This means that consumers are willing to pay higher prices
for a better entertainment experience.  We are exploring this
opportunity in order to establish a product with higher margins for the
Company.  We do, however, foresee that the DVDR market will continue
to contribute significantly to our revenue and profits, particularly in the
South American markets.  The strategy of having a whole array of
storage media products distributed in our channels enables our own distribution
network to have a “one-stop” product source with the Company as a way to
mitigate competition in the same channels.





Competitor
Companies





Our
competitors are numerous and include companies such as CMC Magnetics, Ritek, NBI
and UME Disc Group. Some of our competitors have significantly larger
manufacturing market share, but that is not necessarily indicative of greater
profitability. We believe that we have achieved optimal capacity and can match
the lowest single layer DVDR production costs anywhere in the
industry.





Government
Regulation and Probability of Affecting Business





The
development of our products is generally not subject to government regulation.
However, because we market and sell our products in other countries, importation
and exportation regulations may impact our activities. A breach of these laws or
regulations may result in the imposition of penalties or fines, suspension or
revocation of licenses. We are not currently involved in any such judicial or
administrative proceedings and believe that we are in compliance with all
applicable regulations.





Although
it is impossible to predict with certainty the effect that additional
importation and exportation requirements and other regulations may have on
future earnings and operations, we are presently unaware of any future
regulations that may have a material effect on our financial position, but
cannot rule out the possibility.





Employees




As of
March 31, 2009, we had 150 full-time employees, including management. None of
these employees are represented by any collective bargaining agreements. Neither
we nor any of the subsidiaries have experienced a work stoppage. Management
believes that our relations with our employees are good.


9


Bankruptcy,
Receivership, or Similar Proceedings





On March
7, 2006, a complaint was filed against the Company in a Chapter 7 bankruptcy
proceeding in U.S. Bankruptcy Court in the District of Delaware in the matter
captioned In Re: Factory 2-U Stores, Inc. The complaint sought to recover from
the Company $91,572 in alleged preferential transfers made to the Company by the
debtor during the ninety-day period prior to the filing of the debtor's
bankruptcy petition. The Company defended against the preference claim
by asserting that such transfers were made in the ordinary course of business.
On May 22, 2007, all parties entered into a settlement agreement, subject to the
bankruptcy court’s approval. The bankruptcy court approved the settlement and
dismissed the complaint with prejudice on June 21, 2007.





ITEM
1A.  RISK FACTORS





You
should carefully consider the risks described below together with all of the
other information included in this report before making an investment decision
with regard to our securities. The statements contained in or incorporated into
this offering that are not historic facts are forward-looking statements that
are subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements. If
any of the following risks actually occurs, our business, financial condition or
results of operations could be harmed. In that case, the trading price of our
common stock could decline, and you may lose all or part of your
investment.





Risks
Relating to Our Business





Our
limited operating history makes evaluation of our business
difficult.





We have a
limited operating history. Infosmart BVI was incorporated in the British Virgin
Islands on August 23, 2005, and IS Technology was founded in August of 2002.
These limited operating histories and the unpredictability of our industry make
it difficult for investors to evaluate our business and future operating
results. An investor in our securities must consider the risks, uncertainties
and difficulties frequently encountered by companies in new and rapidly evolving
markets. The risks and difficulties we face include challenges in accurate
financial planning as a result of limited historical data and the uncertainties
resulting from having had a relatively limited time period in which to implement
and evaluate our business strategies as compared to older companies with longer
operating histories.





We
continually seek to develop new products and standards, which may not be widely
adopted by consumers or, if adopted, may reduce demand by consumers for our
older products.





We
continually seek to develop new products and standards and enhance existing
products and standards with higher memory capacities and other enhanced
features. We cannot assure you that our new products and standards will gain
market acceptance or that we will be successful in penetrating the new markets
that we target. As we introduce new products and standards, it will take time
for these new products and standards to be adopted, for consumers to accept and
transition to these new products and standards and for significant sales to be
generated from them, if this happens at all. Moreover, broad acceptance of new
products and standards by consumers may reduce demand for our older products and
standards. If this decreased demand is not offset by increased demand for our
new products and standards, our results of operations could be harmed. We cannot
assure you that any new products or standards we develop will be commercially
successful.





Our
future operating results may fluctuate and cause the price of our common stock
to decline.





We expect
that our revenues and operating results will continue to fluctuate significantly
from quarter to quarter due to various factors, many of which are beyond our
control. The factors that could cause our operating results to fluctuate
include, but are not limited to:





●       price competition;





●  general price increases by suppliers
and manufacturers;





●       our ability to maintain and expand our
customer relationships;





●       the introduction of new or enhanced
products and strategic alliances by us and our competitors;





●       the success of our brand-building and
marketing campaigns;





●      consumer acceptance of our products and
general shifts in consumer behavior with respect to our industry;





●      our ability to maintain, upgrade and
develop our production facilities and infrastructure;





●      technical difficulties and system
downtime;


10


●
            the amount and timing of
      operating costs and capital expenditures relating to expansion of our
      business, operations and
infrastructure;





●
            general economic conditions as
      well as economic conditions specific to our industry;
      and





●
            our ability to attract and retain
      qualified management and employees.




If our
revenues or operating results fall below the expectations of investors or
securities analysts, the price of our common stock could significantly
decline.





Our
ability to manage our future growth is uncertain.





We are
currently anticipating a period of growth as a result of our corporate growth
strategy, which aims to, among other things, further develop our manufacturing
capabilities, expand our product offerings, and reach new customers. In pursuing
these objectives, the resulting strain on our managerial, operational, financial
and other resources could be significant. Success in managing such expansion and
growth will depend, in part, upon the ability of senior management to manage
effectively. Any failure to manage the anticipated growth and expansion could
have a material adverse effect on our business.





Increased
product returns will decrease our revenues and impact
profitability.





We do not
make allowances for product returns in our financial statements based on the
fact that we have not had a material historical return rate. In order to keep
product returns low, we continuously monitor product purchases and returns and
may change our product offerings based on the rates of returns. If our actual
product returns significantly increase, especially as we expand into new product
categories, our revenues and profitability could decrease. Any changes in our
policies related to product returns may result in customer dissatisfaction and
fewer repeat customers.





Our
growth and operating results could be impaired if we are unable to meet our
future capital needs.





We may
need to raise additional capital in the future to:





●      fund more rapid
expansion;





●      acquire or expand into new
facilities;





●      maintain, enhance and further develop
our manufacturing systems;





●      develop new product categories or
enhanced services;





●      fund acquisitions;
or





●      respond to competitive
pressures.





If we
raise additional funds by issuing equity or convertible debt securities, the
percentage ownership of our stockholders will be diluted. Furthermore, any new
securities could have rights, preferences and privileges senior to those of our
preferred shares and the common stock into which our preferred shares are
convertible. We cannot be certain that additional financing will be available
when and to the extent required or that, if available, it will be on acceptable
terms. If adequate funds are not available on acceptable terms, we may not be
able to fund our expansion, develop or enhance our products or services or
respond to competitive pressures.





The
loss of key senior management personnel could negatively affect our
business.




We depend
on the continued services and performance of our senior management and other key
personnel, particularly Parker Seto, our Chief Executive Officer and President,
and Sebastian Tseng, our Regional Director for South America and V.P. of
Production and R&D. The loss of any of our executive officers or other key
employees could harm our business. Infosmart BVI currently has employment
agreements with its key personnel. Further, we expect to assume
the employment agreements our executive officers currently have
with Infosmart BVI that are described in more detail in the section titled
“Executive Compensation - Employment Agreements” in this annual
report.





Rapid
changes in technology could adversely affect our business and hurt our
competitive position.




We
believe that our ability to increase sales by developing appealing, innovative
products has an important role to play in our growth. However, it is extremely
difficult to predict future demand in the rapidly changing storage media
industry and develop new technologies to meet that demand. We may fail to
develop and supply in a timely manner attractive, new products with innovative
technologies for this industry and its markets. In the event that our management
misreads the industry and market and/or is slow in developing innovative
technologies on a cost competitive basis, actual earnings could differ
significantly from our forecasts. At the same time, we may cease to be able to
compete in markets, resulting in a significant adverse effect on our business
results and growth prospects.


11





The
patents required for manufacturing our DVDR products are owned by multiple
companies. Our failure to obtain all of the required patents to manufacture our
products may interfere with our current or future product development and
sales.





We have
never conducted a comprehensive patent search relating to the technology we use
in our products. The Patent Licenses held by IS Holdings with whom we have a
Cooperation Agreement were obtained through a joint patent licensing program
(the “DVDR Patent License Program”) that is administered by Koninklijke Philips
Electronics, N.V. (“Philips”). Parties acquiring the patent licenses through
this DVDR Patent License Program are allowed to use patents owned by companies
including Philips, Sony, Pioneer and/or Hewlett Packard (or for which such
companies have patent applications pending) that are essential for manufacturing
DVDR products. However, there may be other issued or pending patents owned by
third parties that are required for manufacturing our products for which IS
Holdings does not have a patent license. If so, we could incur substantial costs
defending against patent infringement claims, or we could even be blocked from
selling our products. We cannot determine with certainty whether any other
existing third party patents or the issuance of any new third party patents
would require us or IS Holdings to alter, or obtain licenses relating to, our
processes or products, or implement alternative non-infringing approaches, all
at a significant additional cost to the Company. There is no assurance that we
or IS Holdings will be able to obtain any such licenses on terms favorable to
us, if at all, and obtaining and paying royalties on new licenses might
materially increase our costs. Additionally, the fees in respect of existing
licenses could increase materially in the future when these licenses are
renewed, and such increase may have a significantly and adversely impact our
business.





We
may be unable to retain our Hong Kong business customs license for our
manufacturing facilities in Hong Kong





The Hong
Kong government requires companies manufacturing DVDRs to obtain a business
license for the manufacture of optical Disc/Stampers (the “Hong Kong Business
License”) from the Customs and Excise Department of Hong Kong. We currently
manufacture our products under the Hong Kong Business License held by IS
Holdings under the Cooperation Agreement. If IS Holdings loses its Hong Kong
Business License or we lose our rights under the Cooperation Agreement, there is
no guarantee that we will be able to otherwise obtain the Hong Kong Business
Licenses necessary to operate our manufacturing facilities in Hong
Kong.





Our
business may suffer if we are sued for infringing upon the intellectual property
rights of third parties.





There may
be cases where it is alleged that our products infringe on the intellectual
property rights of third parties. As a result, we may suffer damages or may be
sued for damages. In either case, settlement negotiations and legal procedures
would be inevitable and could be expected to be lengthy and expensive. If our
assertions are not accepted in such disputes, we may have to pay damages and
royalties and suffer losses such as the loss of our market share. The failure to
prevent infringement on the rights of others could have a materially adverse
effect on our business development, business results and financial
condition.





We
are dependent on certain raw materials and other products, and our business will
suffer if we are unable to procure such materials and products.





Our
manufacturing systems are premised on deliveries of raw materials and other
supplies in adequate quality and quantity in a timely manner from many external
suppliers. In new product development, we may rely on certain irreplaceable
suppliers for materials. Because of this, there may be cases where supplies of
raw materials and other products to us are interrupted by an accident or some
other event at a supplier, supply being suspended due to quality or other
issues, or a shortage of or instability in supply due to a rapid increase in
demand for finished products that use certain materials and products. If any of
these situations becomes protracted, we may have difficulty finding substitutes
in a timely manner from other suppliers, which could have a significant, adverse
effect on our production and prevent us from fulfilling our responsibilities to
supply products to our customers. Furthermore, if an imbalance arises in the
supply-demand equation, there could be a spike in the price of raw materials. In
the event of these or other similar occurrences, there could be a material
adverse effect on our business results and financial condition.





We
compete in a highly competitive industry where some of our competitors are
larger and have more resources than we do.





We
operate in a highly competitive environment. We have competitors that are both
larger and smaller than we are in terms of resources and market share. The
marketplaces in which we operate are generally characterized by rapid
technological change, frequent new product introductions and declining prices.
In these highly competitive markets, our success will depend to a significant
extent on our ability to continue to develop and introduce differentiated and
innovative products and customer solutions successfully and on a timely basis.
The success of our product offerings is dependent on several factors including
understanding customer needs, strong digital technology, differentiation from
competitive offerings, market acceptance and lower costs. Although we believe
that we can take the necessary steps to meet the competitive challenges of these
marketplaces, no assurance can be given with regard to our ability to take these
steps, the actions of competitors, some of which will have greater resources
than us, or the pace of technological changes.


12





Technology
in our industry evolves rapidly, potentially causing our products to become
obsolete, and we must continue to enhance existing systems and develop new
systems, or we will lose sales.




Rapid
technological advances, rapidly changing customer requirements and fluctuations
in demand characterize the current market for our products. Further, there are
alternative data storage media, and additional media is under development,
including high capacity hard drives, new CD-R/DVDR technologies, file servers
accessible through computer networks and the Internet. Our existing and
development-stage products may become obsolete if our competitors introduce
newer or more appealing technologies. If these technologies are patented by or
are proprietary to our competitors, then we may not be able to access these
technologies. We believe that we must continue to innovate and anticipate
advances in the storage media industry in order to remain competitive. If we
fail to anticipate or respond to technological developments or customer
requirements, or if we are significantly delayed in developing and introducing
products, our business will suffer in sales.





Our
market is becoming more competitive. Competition may result in price reductions,
lower gross profits and loss of market share.




The
storage media industry is becoming more competitive, and we face the potential
for increased competition in developing and selling our products. Our
competitors may have or could develop or acquire significant marketing,
financial, development and personnel resources. We cannot assure you that we
will be able to compete successfully against our current or future competitors.
The storage media industry has increased visibility, which may lead to large,
well-known, well-financed companies entering into this market. Increased
competition from manufacturers of systems or consumable supplies may result in
price reductions, lower gross profit margins, increased discounts to
distribution and loss of market share and could require increased spending by us
on research and development, sales and marketing and customer
support.





If
we are unable to compete effectively with existing or new competitors, the loss
of our competitive position could result in price reductions, fewer customer
orders, reduced revenues, reduced margins, reduced levels of profitability and
loss of market share.




We have
several competitors, which include the largest DVDR manufacturers in the world.
Certain of these competitors compete aggressively on price and seek to maintain
very low cost structures. Some of these competitors are seeking to increase
their market share, which creates increased pressure, including pricing
pressure, within the market. In addition, certain of the competitors have
financial and human resources that are substantially greater than ours, which
increases the competitive pressures we face. Customers make buying decisions
based on many factors, including among other things, new product and service
offerings and features; product performance and quality; ease of doing business;
a vendor’s ability to adapt to customers’ changing requirements; responsiveness
to shifts in the marketplace; business model; contractual terms and conditions;
vendor reputation and vendor viability. As competition increases, each factor on
which we compete becomes more important and the lack of competitive advantage
with respect to one or more of these factors could lead to a loss of competitive
position, resulting in fewer customer orders, reduced revenues, reduced margins,
reduced levels of profitability and loss of market share. We expect competitive
pressure to remain intense.





The
products we make have a life cycle. If we are unable to successfully time market
entry and exit and manage our inventory, we may fail to enter profitable markets
or exit unprofitable markets.




We
operate in a highly competitive, quickly changing environment. The victory of
the Blu-Ray format DVD over the HD-DVD may accelerate the phase-out and
technological obsolescence of our current DVDR production machine which produces
our current production lines, which would result in impairment in
value.  Also, as the market has turned to the Blu-ray DVD, we must
purchase new equipment to product Blu-ray DVDR discs, and thus our business and
operating results could be adversely affected. Further, if strong competitors
challenge us in Brazil and other key markets, we will need to quickly develop an
adequate competitive response. If we fail to accurately anticipate market and
technological trends, then our business and operating results could be
materially and adversely affected.




We must
also be able to manufacture the products at acceptable costs. This requires us
to be able to accurately forecast customer demand so that it can procure the
appropriate inputs at optimal costs. We must also try to reduce the levels of
older product inventories to minimize inventory write-offs. If we have excess
inventory, it may be necessary to reduce its prices and write down inventory,
which could result in lower gross margins. Additionally, our customers may delay
orders for existing 8x or 16x writable speed DVDR products in anticipation of
Blu-Ray product introductions. As a result, we may decide to adjust prices of
existing products during this process to try to increase customer demand for
these products. Our future operating results would be materially and adversely
affected if such pricing adjustments were to occur and we are unable to mitigate
the resulting margin pressure by maintaining a favorable mix of products, or if
we are unsuccessful in achieving input cost reductions, operating efficiencies
and increasing sales volumes.




If we are
unable to timely develop, manufacture, and introduce new products in sufficient
quantity to meet customer demand at acceptable costs, or if we are unable to
correctly anticipate customer demand for our new and existing products, then our
business and operating results could be materially adversely
affected.


13


If
our products fail to compete successfully with other existing or newly-developed
products for the storage media industry, our business will suffer.





The
success of our products depends upon end users choosing our DVDR technology for
their storage media needs. However, alternative data storage media exist, such
as high capacity hard drives, new CD-R/DVDR technologies, file servers
accessible through computer networks and the Internet, and additional media is
under development. If end users perceive any technology that competes with ours
as more reliable, higher performing, less expensive or having other advantages
over our technology, the demand for our DVDR products could decrease. Further,
some of our competitors may make strategic acquisitions or establish cooperative
relationships with suppliers or companies that produce complementary products
such as cameras, computer equipment, software or biometric applications.
Competition from other storage media is likely to increase. If our products do
not compete successfully with existing or new competitive products, our business
will suffer.





Our
products may have manufacturing or design defects that we discover after
shipment, which could negatively affect our revenues, increase our costs and
harm our reputation.




Our
products may contain undetected and unexpected defects, errors or failures. If
these product defects are substantial, the result could be product recalls, an
increased amount of product returns, loss of market acceptance and damage to our
reputation, all of which could increase our costs and cause us to lose sales. We
do not carry general commercial liability insurance covering our products. In
addition, we are preparing to launch production of Blu-Ray format DVDRs in 2008.
HD and Blu-Ray format DVDR production will require us to master new production
techniques and modify existing or purchase new machinery and equipment. It is
possible that we may fail to achieve mastery of these new techniques and
production yields could suffer as a result.





The
development of digital distribution alternatives, including the copying and
distribution of music and video and other electronic data files, could decrease
the demand for our products.





We are
dependent on the continued viability and growth of the physical distribution of
music, video and other electronic data through recordable media. Alternative
distribution channels and methods, both authorized and unauthorized, for
delivering music, video and other electronic data may erode our volume of sales
and the pricing of our products. The growth of these alternatives is driven by
advances in technology that allow for the transfer and downloading of music,
video and other electronic data files from the Internet. The proliferation of
this copying, use and distribution of such files is supported by the increasing
availability and decreasing price of new technologies, such as personal video
recorders, DVD burners, portable MP3 music and video players, widespread access
to the Internet, and the increasing number of peer-to-peer digital distribution
services that facilitate file transfers and downloading. We expect that file
sharing and downloading, both legal and illegal, will continue to exert downward
pressure on the demand for traditional DVDRs. As current technologies and
delivery systems improve, the digital transfer and downloading of music, video
and other electronic data files will likely become more widespread. As the speed
and quality with which music, video and other electronic data files can be
transferred and downloaded improves, file sharing and downloading may in the
future exert significant downward pressure on the demand for DVDRs. In addition,
our business faces pressure from emerging distribution alternatives such as
video on demand (“VOD”) and personal digital video recorders. As substantially
all of our revenues are derived from the sale of DVDRs, increased file sharing,
downloading and piracy or the growth of other alternative distribution channels
and methods could materially adversely affect our business, financial condition
and results of operations.





Our
revenues, cash flows and operating results may fluctuate for a number of
reasons.




Future
operating results and cash flows will continue to be subject to quarterly
fluctuations based on a wide variety of factors, including seasonality. Although
our sales and other operating results can be influenced by a number of factors
and historical results are not necessarily indicative of future results, our
sequential quarterly operating results generally fluctuate downward in the
fourth quarter of each fiscal year when compared with the immediately preceding
quarter. For example, our first calendar quarter is modestly affected by the
Chinese New Year.





A
significant portion of our revenue will depend on the success of our new venture
in Brazil.





A
significant portion of the Company’s revenues will depend on the success of our
new Brazilian venture. We have no prior manufacturing and distribution
experience in Brazil, and will rely on the local knowledge of its Brazilian
joint venture partner and the general knowledge of the South American
marketplace of its regional director Sebastian Tseng. Our results could suffer
should its relationships with either of these two parties deteriorate in the
early months of the Brazilian venture.





We
are at risk of losing our significant investment in Brazil if we are unable to
obtain the intellectual property licenses required for our Discobras
manufacturing facility.





The
owners of the technologies and intellectual property necessary for the
production of our products require that we obtain separate patent licenses for
the use of intellectual property in our DVDR manufacturing facility in Brazil.
We have completed the required procedures in applying for the patent licenses
for use at the Discobras manufacturing facility and are now waiting for the
patent owners to complete their own procedures, including the submission of the
patent licenses to the Patent Office in Brazil for final approval. However, if
there is a substantial delay in obtaining approval for our use of the patent
licenses, then we may be unable to manufacture a sufficient amount of our
products to fill our sales orders, and this could cause us to lose substantial
revenues. Further, in the event we are unable to obtain the patent licenses,
then we may not be able to manufacture our products in Brazil, thus placing us
at risk of losing its significant investment in the Brazilian
venture.


14


Past
activities of the Company and its affiliates may lead to future liability for
the combined companies.





Prior to
the closing of the share exchange transaction in August 2006, the Company
engaged in businesses unrelated to that of our current business operations. Any
liabilities relating to such prior business against which we are not completely
indemnified may have a material adverse effect on the Company.




Risks
Relating To Doing Business in Hong Kong and Brazil





Adverse
changes in economic and political policies of the People’s Republic of China
government could have a material adverse effect on the overall economic growth
of Hong Kong, which could adversely affect our business.




A
substantial portion of our business operations is conducted in Hong Kong, a
special administrative region in the People’s Republic of China (“PRC”).
Accordingly, our results of operations, financial condition and prospects are
subject to a significant degree to economic, political and legal developments in
Hong Kong and the PRC. The PRC’s economy differs from the economies of most
developed countries in many respects, including with respect to the amount of
government involvement, level of development, growth rate, control of foreign
exchange and allocation of resources. While the PRC economy has experienced
significant growth in the past 20 years, growth has been uneven across different
regions and among various economic sectors of China. The PRC government has
implemented various measures to encourage economic development and guide the
allocation of resources. Some of these measures benefit the overall PRC economy,
but may also have a negative effect on us.





You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in Hong Kong or China based on
United States or other foreign laws against us, our management or the experts
named in the prospectus.




We
currently conduct a substantial portion of our operations in Hong Kong, and a
substantial amount of our assets are located in Hong Kong. In addition, all of
our senior executive officers reside within Hong Kong. As a result, it may not
be possible to effect service of process within the United States or elsewhere
outside Hong Kong upon our senior executive officers, including with respect to
matters arising under U.S. federal securities laws or applicable state
securities laws. Moreover, neither the PRC nor Hong Kong have treaties with the
United States or many other countries providing for the reciprocal recognition
and enforcement of judgment of courts.





Fluctuation
in the value of the Hong Kong Dollar may have a material adverse effect on your
investment.




The value
of the Hong Kong dollar against the U.S. dollar and other currencies may
fluctuate and is affected by, among other things, changes in political and
economic conditions. Although the exchange rate between the Hong Kong dollar and
the U.S. dollar has been effectively pegged, there can be no assurance that the
Hong Kong dollar will remain pegged to the U.S. dollar, especially in light of
the significant international pressure on the Chinese government to permit the
free floatation of the RMB and the Hong Kong dollar, which could result in an
appreciation of RMB or the Hong Kong dollar against the U.S. dollar. Our
revenues and costs are mostly denominated in Hong Kong dollars, while a
significant portion of our financial assets are also denominated in Hong Kong
dollars. Any significant revaluation of the Hong Kong dollar may materially and
adversely affect our cash flows, revenues, earnings and financial position, and
the value of, and any dividends payable on, our stock in U.S.
dollars.





We
face risks related to health epidemics and other outbreaks.




Our
business could be adversely affected by the effects of SARS, Avian flu or
another epidemic or outbreak. Any prolonged recurrence of SARS or other adverse
public health developments in China or in Hong Kong may have a material adverse
effect on our business operations. For instance, health or other government
regulations adopted in response may require temporary closure of our production
facilities or of our offices in Hong Kong. Such closures would severely disrupt
our business operations and adversely affect our results of operations. We have
not adopted any written preventive measures or contingency plans to combat any
future outbreak of SARS, Avian flu or any other epidemic.





Changes
in Hong Kong or Brazil’s political or economic situation could harm our
operational results.





In
addition to our operations in Hong Kong, we also have our production facility
and a sales base in Brazil. Economic reforms adopted by the Chinese or Brazilian
governments have had positive effects on the economic development of these
countries, but the governments could change these economic reforms or any of the
legal systems at any time. This could either benefit or damage the Company’s
operations and profitability. Some of the things that could have this effect
are:





·      Level of government involvement in the
economy;





·      Control of foreign
exchange;





·      Methods of allocating
resources;





·      Balance of payments
position;


15





·      International trade restrictions;
and





·      International
conflict.




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





The
Brazilian government has historically exercised, and continues to exercise,
significant influence over the Brazilian economy. Brazilian political and
economic conditions will have a direct impact on our business and the market
price of our securities.




The
Brazilian government frequently intervenes in the Brazilian economy and
occasionally makes substantial changes in policy, as often occurs in other
emerging economies. The Brazilian government’s actions to control inflation and
carry out other policies have in the past involved wage and price controls,
currency devaluations, capital controls and limits on imports, among other
things. Our business, financial condition and results of operations may be
adversely affected by factors in Brazil including:





●      Currency
volatility;





●      Inflation
acceleration;





●      Monetary policy and interest rate
increases;





●      Fiscal policy and tax
changes;





●      International trade policy including
tariff and non-tariff trade barriers;





●      Foreign exchange
controls;





●      Energy shortages;
and





●      Other political, social and economic
developments in or affecting Brazil.





In 2005
and 2006, government figures, legislators and political party officials,
especially those of the President’s party, have been the subject of a variety of
allegations of unethical or illegal conduct. These accusations, which are being
investigated by the Brazilian Congress, involve campaign financing and election
law violations, and influencing of government officials and Congressmen in
exchange for political support. Several members of the President’s party and of
the federal government, including the President’s chief of staff, have resigned.
We cannot predict what effect these accusations and investigations may have on
the Brazilian economy.





Inflation
and government measures to curb inflation may contribute significantly to
economic uncertainty in Brazil and to heightened volatility in the Brazilian
securities markets and, consequently, may adversely affect our business in
Brazil.




Brazil
has in the past experienced extremely high rates of inflation, with annual rates
of inflation reaching as high as 2,567% in 1993 (as measured by the Índice Geral de Preços do
Mercado published by Fundação Getúlio Vargas, or
IGP-M Index). More recently, Brazil’s rates of inflation were 10.4% in 2001,
25.3% in 2002, 8.7% in 2003, 12.4% in 2004, 1.2% in 2005, 3.8% in 2006, and3.5% in 2007 (as
measured by the IGP-M Index). Inflation, governmental measures to combat
inflation and public speculation about possible future actions have in the past
had significant negative effects on the Brazilian economy and have contributed
to economic uncertainty in Brazil. If Brazil experiences substantial inflation
in the future, our costs may increase and our operating and net margins may
decrease. Inflationary pressures may also lead to further government
intervention in the economy, which could involve the introduction of government
policies that may adversely affect the overall performance of the Brazilian
economy.





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





Since we
have established our business operations in Brazil, some of our revenues will be
settled in the Brazilian Real. Any future restrictions on currency exchanges may
limit our ability to use revenue generated in Reals to fund any future business
activities outside Brazil or to make dividend or other payments in U.S.
dollars.





The
value of our securities will be affected by the foreign exchange rate between
the U.S. dollar, the Hong Kong dollar and the Real.





The value
of our common stock will be affected by the foreign exchange rate between U.S.
and Hong Kong dollars and Real, and between those currencies and other
currencies in which our sales may be denominated. For example, to the extent
that we need to convert U.S. or Hong Kong dollars into Real for our operational
needs and should the Real appreciate against the U.S. dollar at that time, our
financial position, our business, and the price of our common stock may be
harmed. Conversely, if we decide to convert our Reals into U.S. or Hong Kong
dollars for the purpose of declaring dividends on our common stock or for other
business purposes and the U.S. Dollar appreciates against the Real, the U.S. or
Hong Kong dollar equivalent of our earnings from our subsidiaries in Hong Kong
and Brazil would be reduced. We will engage in hedging activities to manage our
financial exposure related to currency exchange fluctuation. In these hedging
activities, we might use fixed-price, forward, futures, financial swaps and
option contracts traded in the over-the-counter markets or on exchanges, as well
as long-term structured transactions when feasible.


16





We
will depend on Brazil’s foreign investment incentive programs, which provide
reductions in taxation or exemptions from taxation for our operations in Brazil.
The loss of the tax benefits from these incentive programs may substantially
affect our earnings.





Under the
State of Bahia’s investment incentive program, our Brazilian subsidiary,
Discobras, has been granted a reduction in the Value Added Tax (“VAT”) it is
required to pay for products. Discobras pays only 2.28%, as compared to VAT of
12% in Salvador, or 18% in São Paulo. This VAT reduction will be available to us
until June 2016. We will also avail ourselves of an incentive program for
foreign investment which exempts Discobras from paying Brazil’s ICMS taxes on
raw materials it imports for production in Brazil and create substantial tax
savings for Infosmart BVI. This tax exemption will last throughJune2016.
In the event that the VAT reduction program is no longer available to us or we
are unable to extend the ICMS tax-exemption, our after-tax earnings would
decline by the amount of the tax benefits, which may be
substantial.





Risks
Relating to this Offering and Ownership of Our Securities





Your
rights with respect to ownership of the Company's Series B Preferred
Shares are set forth in the Certificate of Determination of Rights,
Preferences, Privileges and Restrictions for the Series B Preferred Stock and
form of Warrants and such documents should be reviewed carefully with your legal
counsel.





Your
rights with respect to ownership of our Series B Preferred Shares and the
Warrants are set forth in the Certificate of Determination of Rights,
Preferences, Privileges and Restrictions for the Series B Preferred Stock
that was attached as Exhibit 3.4 and in the form of Warrant attached as
Exhibit 10.17 to our Current Report on Form 8-K filed with SEC on August 24,
2006. These documents contain important provisions that provide you with rights,
limitations and obligations and should be reviewed carefully with your legal
counsel. We will also provide copies of these documents upon
request.





We
are a public company subject to evolving corporate governance and public
disclosure regulations that may result in additional expenses and continuing
uncertainty regarding the application of such regulations.




Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 and related rules and
regulations, are creating uncertainty for public companies. We are presently
evaluating and monitoring developments with respect to new and proposed rules
and cannot predict or estimate the amount of the additional compliance costs we
may incur or the timing of such costs. These new or changed laws, regulations
and standards are subject to varying interpretations, in many cases due to their
lack of specificity, and as a result, their application in practice may evolve
over time as new guidance is provided by courts and regulatory and governing
bodies. This could result in continuing uncertainty regarding compliance matters
and higher costs necessitated by ongoing revisions to disclosure and governance
practices. Maintaining appropriate standards of corporate governance and public
disclosure may result in increased general and administrative expenses and a
diversion of management’s time and attention from revenue-generating activities
to compliance activities. In addition, if we fail to comply with new or changed
laws, regulations and standards, regulatory authorities may initiate legal
proceedings against us and our business and our reputation may be
harmed.




Our
shares may have limited liquidity.




A
substantial portion of our shares of common stock are closely held by certain
institutional and insider investors. Consequently, the public float for our
shares may be highly limited. As a result, you may encounter difficulty selling
large blocks of your shares or obtaining a suitable price at which to sell your
shares.




Our
stock price may be volatile, which may result in losses to our
shareholders.




The stock
markets have experienced significant price and trading volume fluctuations, and
the market prices of companies quoted on the Over-The-Counter Bulletin Board,
the stock market on which shares of our common stock are quoted, generally have
been very volatile and have experienced sharp share price and trading volume
changes. The trading price of our common stock is likely to be volatile and
could fluctuate widely in response to many of the following factors, some of
which are beyond our control:




●
            variations in our operating
      results;




●
            announcements of technological
      innovations, new services or product lines by us or our competitors;





●
            changes in expectations of our
      future financial performance, including financial estimates by securities
      analysts and investors;




●
            changes in operating and stock
      price performance of other companies in our industry;


17




●
            additions or departures of key
      personnel; and





●
            future sales of our common
      stock.




Domestic
and international stock markets often experience significant price and volume
fluctuations. These fluctuations, as well as general economic and political
conditions unrelated to our performance, may adversely affect the price of our
common stock. In particular, following initial public offerings, the market
prices for stocks of companies often reach levels that bear no established
relationship to the operating performance of these companies. These market
prices are generally not sustainable and could vary widely. In the past,
following periods of volatility in the market price of a public company’s
securities, securities class action litigation has often been initiated.




We
have broad discretion as to the use of proceeds from the Financing and may
not use the proceeds effectively.





Our
management team will retain broad discretion as to the allocation and timing of
the use of proceeds from the Financing and may spend these proceeds in ways
with which our shareholders may not agree. The failure of our management to
apply these funds effectively could result in unfavorable returns and
uncertainty about our prospects, each of which could cause the price of our
common stock to decline.





Our
officers and directors own a substantial portion of our outstanding common
stock, which will enable them to influence many significant corporate actions
and in certain circumstances may prevent a change in control that would
otherwise be beneficial to our shareholders.





Our
directors and executive officers, specifically Chung Kwok, Po Nei Sze, and
Andrew Chang, control approximately 59.7% of our outstanding shares of stock
that are entitled to vote on all corporate actions. These stockholders, acting
together, could have a substantial impact on matters requiring the vote of the
shareholders, including the election of our directors and most of our corporate
actions. This control could delay, defer or prevent others from initiating a
potential merger, takeover or other change in our control, even if these actions
would benefit our shareholders and us. This control could adversely affect the
voting and other rights of our other shareholders and could depress the market
price of our common stock.





A
large number of additional shares may be sold into the public market in the near
future, which may cause the market price of our common stock to decline
significantly even if our business is doing well.





Sales of
a substantial amount of common stock in the public market, or the perception
that these sales may occur, could adversely affect the market price of our
common stock. Assuming the full conversion of our Series B Preferred Stock, we
will have approximately 161,379,426 shares of common stock outstanding as of
March 14, 2008. As restrictions on resale of such additional shares end, the
market price could drop significantly if the holders of these restricted shares
sell them or are perceived by the market as intending to sell them.




A
large number of common shares are issuable upon exercise of outstanding common
share warrants and upon conversion of our Series B Preferred Stock. The exercise
or conversion of these securities could result in the substantial dilution of
your investment in terms of your percentage ownership in the Company as well as
the book value of your common shares. The sale of a large amount of common
shares received upon exercise of these warrants on the public market to finance
the exercise price or to pay associated income taxes, or the perception that
such sales could occur, could substantially depress the prevailing market prices
for our shares.





As of
March 14, 2008, there are outstanding warrants entitling the holders to purchase
up to 28,510,347 common shares at an exercise price of $0.326 per share. The
exercise price for all of the aforesaid warrants may be less than your cost to
acquire our common shares. In the event of the exercise of these securities, you
could suffer substantial dilution of your investment in terms of your percentage
ownership in the company as well as the book value of your common shares. In
addition, the holders of the common share purchase warrants may sell common
shares in tandem with their exercise of those options or warrants to finance
that exercise, or may resell the shares purchased in order to cover any income
tax liabilities that may arise from their exercise of the warrants.




We
incur increased costs and compliance risks as a result of being a public company
with substantial business operations.





As a
public company, we incur significant legal, accounting and other expenses that
we did not incur prior to the closing of the share exchange transaction as a
shell company with no business operations and nominal assets. We incur costs
associated with our public company reporting requirements and costs associated
with recently adopted corporate governance requirements, including certain
requirements under the Sarbanes-Oxley Act of 2002, as well as new rules
implemented by the SEC. These rules and regulations, in particular Section 404
of the Sarbanes-Oxley Act of 2002, significantly increased our legal and
financial compliance costs and make some activities more time-consuming and
costly. Like many smaller public companies, we face a significant impact from
required compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Section
404 requires management of public companies to evaluate the effectiveness of
internal control over financial reporting and the independent auditors to attest
to the effectiveness of such internal controls and the evaluation performed by
management. The SEC has adopted rules implementing Section 404 for public
companies as well as disclosure requirements. The Public Company Accounting
Oversight Board, or PCAOB, has adopted documentation and attestation standards
that the independent auditors must follow in conducting its attestation under
Section 404.


18




These new
rules and regulations also make it more difficult and more expensive for us to
obtain director and officer liability insurance, and we may be required to
accept reduced policy limits and coverage or incur substantially higher costs to
obtain the same or similar coverage. As a result, it may be more difficult for
us to attract and retain qualified individuals to serve on our Board of
Directors or as executive officers. We are currently evaluating and monitoring
developments with respect to these new rules, and we cannot predict or estimate
the amount of additional costs we may incur or the timing of such
costs.





If
we fail to maintain the adequacy of our internal controls, our ability to
provide accurate financial statements and comply with the requirements of the
Sarbanes-Oxley Act of 2002 could be impaired, which could cause our stock price
to decrease substantially.





We take
measures to address and improve our financial reporting and compliance
capabilities, and we plan to obtain additional financial and accounting
resources to support and enhance our ability to meet the requirements of being a
public company. We will need to continue to improve our financial and managerial
controls, reporting systems and procedures, and documentation thereof. If our
financial and managerial controls, reporting systems or procedures fail, we may
not be able to provide accurate financial statements on a timely basis or comply
with the Sarbanes-Oxley Act of 2002 as it applies to us. Any failure of our
internal controls or our ability to provide accurate financial statements could
cause the trading price of our common stock to decrease
substantially.





Our
common shares are thinly traded and, you may be unable to sell at or near ask
prices or at all if you need to convert your Series B Preferred Stock and sell
your shares to raise money or otherwise desire to liquidate such
shares.





We cannot
predict the extent to which an active public market for our common stock will
develop or be sustained. Our common shares have historically been sporadically
or “thinly-traded” on the “Over-The-Counter Bulletin Board,” meaning that the
number of persons interested in purchasing our common shares at or near bid
prices at any given time may be relatively small or non-existent. This situation
is attributable to a number of factors, including the fact that the Company is a
small company that is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a consequence,
there may be periods of several days or more when trading activity in our shares
is minimal or non-existent, as compared to a seasoned issuer which has a large
and steady volume of trading activity that will generally support continuous
sales without an adverse effect on share price. We cannot give you any assurance
that a broader or more active public trading market for our common stock will
develop or be sustained, or that current trading levels will be
sustained.





The
market price for our common stock is particularly volatile given our status as a
relatively small company with a small and thinly traded “float” and lack of
current revenues that could lead to wide fluctuations in our share price. The
price at which you convert your Series B Preferred Stock into our common stock
many be indicative of the price that will prevail in the trading market. You may
be unable to sell your common stock at or above your purchase price if at all,
which may result in substantial losses to you.





The
market for our common shares is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
The volatility in our share price is attributable to a number of factors. First,
as noted above, our common shares are sporadically and/or thinly traded. As a
consequence of this lack of liquidity, the trading of relatively small
quantities of shares by our shareholders may disproportionately influence the
price of those shares in either direction. The price for our shares could, for
example, decline precipitously in the event that a large number of our common
shares are sold on the market without commensurate demand, as compared to a
seasoned issuer which could better absorb those sales without adverse impact on
its share price. Secondly, an investment in us is a speculative or “risky”
investment due to our lack of revenues or profits to date and uncertainty of
future market acceptance for current and potential products. As a consequence of
this enhanced risk, more risk-adverse investors may, under the fear of losing
all or most of their investment in the event of negative news or lack of
progress, be more inclined to sell their shares on the market more quickly and
at greater discounts than would be the case with the stock of a seasoned
issuer.





Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include (1) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (2)
manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups by
selling broker-dealers; and (5) the wholesale dumping of the same securities by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market. Although we do not expect to be
in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price.





Other
than the dividend payments that are due for the Series B Preferred Stock, we do
not anticipate paying any cash dividends.





Other
than the dividend payments that are due for the Series B Preferred Stock, we
presently do not anticipate that we will pay any dividends on any of our capital
stock in the foreseeable future. The payment of dividends, if any, would be
contingent upon our revenues and earnings, if any, capital requirements, and
general financial condition. The payment of any dividends will be within the
discretion of our Board of Directors. We presently intend to retain all
earnings, if any, to implement our business plan; accordingly, we do not
anticipate the declaration of any dividends in the foreseeable
future.


19


ITEM
1B. Unresolved Staff Comments





Not
Applicable





ITEM
2. PROPERTIES





Hong
Kong offices and facilities





Our main
offices and manufacturing facilities are located in Hong Kong. We currently
store and deliver products from our manufacturing facilities located in Tsuen
Wan, New Territories, Hong Kong. We have placed a high priority on operating a
safe, clean, and well-maintained distribution facility, which is a key selling
point for many of our customers. Our prime location provides excellent proximity
for shipping products to a diverse customer base located in all regions of the
world.





A summary
description of our facilities, including the total approximate square footage of
our facilities, is provided in the table below:




Location
                            
                            Principal
      Activities
                            
                            Area
      (sq. feet)
                            
                            Lease
      Expiration DateWorkshops
      9 & 10 on 3 rd
      Floor
                              Texaco
      Centre, 126-140 Texaco Road,
                              Tsuen
      Wan, New Territories, Hong Kong
                            
                            Warehouse
                            
                            5,400
      sq. ft.
                            
                            Expired
      on January 31, 20094 -
      5/F., Texaco Centre,
                              126-140
      Texaco Road,
                              Tsuen
      Wan, New Territories, Hong Kong
                            
                            Administrative
      offices, Manufacturing facility
                              &
      Warehouse
                            
                            42,000
      sq. ft.
                            
                            Originally
      expired on January 31, 2009 for 4th
      and 5th
      floors, respectively, and subsequently renewed for 3 years to January 31,
      2012 for both
floors





We lease
office and factory premises under various non-cancelable operating lease
agreements that expire at 31 January 2012. All leases are on a fixed repayment
basis. None of the leases includes contingent rentals. Minimum future
commitments under these agreements payable as of December 31, 2008 are as
follows:





Year
      ending December 312009
                                        
                                        $
                                        340,6202010
                                        
                                        
                                        349,2162011
                                        
                                        $
                                        349,2162012
                                        
                                        
                                        29,101





Rental
expense was $246,073, $214,899, and $169,221 during 2008, 2007, and 2006,
respectively. We believe that our existing facilities are well maintained and in
good operating condition. The tenancy agreement for our office and factory
premises in Hong Kong will expire in 2012.





Brazil
production facility





In the
first quarter of 2006, we started the construction of the production facility in
Brazil, which was completed in February 2007. In February 2007, we relocated
twelve of our existing production lines from Factory 1 to our production
facility in Brazil, and we also installed eight new production lines in that
facility. Our Brazilian production facility is located in Camaçari, State of
Bahia, close to Salvador. The factory is approximately 1,800 sq. meters and can
accommodate 26 production lines. All licenses required for the facility have
been obtained, an incentive program from the State of Bahia had been approved,
and the factory and the warehouse have been leased.





A summary
description of our facilities in Brazil, including the total approximate square
footage of our facilities, is provided in the table below:




Location
                      
                      Principal
      Activities
                      
                      Area
      (sq. feet)
                      
                      Lease
      Expiration DateLoteamento
      Poloplast Quadra D lote 5, galpoes C, D, and E, Camacari, State of Bahia,
      Brazil - BA, CEP 41230-090
                      
                      Manufacturing
      facility
                      
                      20,000
      sq. ft.
                      
                      April
      14, 2010, with options for
renewal.





Our
Brazilian operations are fully operating since March 2007 and have been
producing to full capacity since December 2007.


20


ITEM
3. LEGAL PROCEEDINGS





(a)           From
time to time, the Company is subject to legal claims and legal proceedings that
arise in the ordinary course of our business. In the opinion of management, the
ultimate outcome of claims and litigation of which management is aware will not
have a material adverse effect on our consolidated financial position or results
of operation. Management is not currently aware of any pending legal proceedings
against Infosmart BVI except for the following:





Stanley Rosner v. World Wide
Magic Net, Inc. (n/k/a Cyber) and Burlington Coat Factory, New York State
Supreme Court, Nassau County, Index No. 98-006524. This is a breach of contract,
fraud and tortuous interference action seeking $5,000,000 in compensatory
damages, unspecified punitive damages and declaratory relief. By stipulation
dated May 7, 1998, Mr. Rosner agreed to transfer the action to the Supreme Court
in New York County after conceding Nassau County was not the proper venue for
the action. Since that date, Mr. Rosner has neither transferred the case nor
pursued it further.





(b)           In Re: Factory 2-U Stores,
Inc., U.S. Bankruptcy Court, District of Delaware - Adv. Proc. No.
005-30480. On March 7, 2006, a complaint was filed against the Company in a
Chapter 7 bankruptcy proceeding in U.S. Bankruptcy Court in the District of
Delaware in the matter captioned In Re: Factory 2-U Stores, Inc. The complaint
sought to recover from the Company $91,572 in alleged preferential transfers
made to the Company by the debtor during the ninety-day period prior to the
filing of the debtor's bankruptcy petition. The Company defended
against the preference claim by asserting that such transfers were made in
the ordinary course of business. On May 22, 2007, all parties entered into a
settlement agreement, subject to the bankruptcy court’s approval. The bankruptcy
court approved the settlement and dismissed the complaint with prejudice on June
21, 2007.





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





The
Company did not submit any matters to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.





PART II





ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES of EQUITY SECURITIES





Market
Information





The
Company’s common stock, having no par value per share, is traded on the
Over-The-Counter Bulletin Board ("OTCBB") under the symbol "IFSG." The following
table sets forth, for each quarter within the last two fiscal years, the
reported high and low bid quotations for the Company’s common stock as reported
on the OTCBB. The bid prices reflect inter-dealer quotations, do not include
retail markups, markdowns or commissions and do not necessarily reflect actual
transactions.





Common
Stock





Quarter
      Ended
                    
                    High
      Bid
                    
                    
                    Low
      BidDecember
      31, 2008
                    
                    $
                    0.04
                    
                    
                    $
                    0.03September
      30, 2008
                    
                    
                    0.08
                    
                    
                    
                    0.08June
      30, 2008
                    
                    
                    0.16
                    
                    
                    
                    0.16March
      31, 2008
                    
                    
                    0.27
                    
                    
                    
                    0.26December
      31, 2007
                    
                    $
                    0.455
                    
                    
                    $
                    0.33September
      30, 2007
                    
                    
                    0.41
                    
                    
                    
                    0.21June
      30, 2007
                    
                    
                    0.42
                    
                    
                    
                    0.25March
      31, 2007
                    
                    
                    0.33
                    
                    
                    
                    0.25





As of
March 31, 2009, we have approximately 161,560,520 shares of common stock issued
and outstanding, no shares of Series A preferred stock issued and outstanding,
and no shares of Series B preferred stock issued and outstanding.  We
also have outstanding warrants that were issued in conjunction the private
placement of our Series B Preferred Stock on August 16, 2006. These warrants, if
exercised, would permit stockholders to purchase approximately 28,510,347 shares
of our common stock.  Assuming exercise of all warrants as of March
31, 2009, we have approximately 190,070,867 shares of common stock
outstanding.





Holders





As of
March 14, 2009, we have 94 record holders of our common stock.


21


Dividends





We have
never paid any dividends on the common stock. We anticipate that any future
earnings will be retained for the development of our business and do not
anticipate paying any dividends on the common stock or the preferred stock,
other than for our Series B Preferred Stock, in the foreseeable
future.





Sales
of Unregistered Securities





None.





Securities
Authorized for Issuance under Equity Compensation Plans





We do not
currently have any equity compensation plans or arrangements.





ITEM
6. SELECTED FINANCIAL DATA





Not applicable.





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





Management’s
Discussion and Analysis or Plan of Operation.





FORWARD
LOOKING STATEMENTS





The
following discussion and analysis of our results of operations and financial
condition for the years ended December 31, 2007 and 2006 should be read in
conjunction with our financial statements and the notes to those financial
statements that are included elsewhere in this Annual Report on Form 10-K. Our
discussion includes forward-looking statements based upon current expectations
that involve risks and uncertainties, such as our plans, objectives,
expectations and intentions. Actual results and the timing of events could
differ materially from those anticipated in these forward-looking statements as
a result of a number of factors, including those set forth under the “Risk
Factors” and elsewhere in this report. We use words such as “anticipate,”
“estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,”
“intend,” “may,” “will,” “should,” “could,” and similar expressions to identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. Except
as required by law, we do not undertake any obligation to update or keep current
either (i) any forward-looking statement to reflect events or circumstances
arising after the date of such statement, or (ii) the important factors that
could cause our future results to differ materially from historical results or
trends, results anticipated or planned by us, or which are reflected from time
to time in any forward-looking statement.





OVERVIEW





Infosmart
Group, Inc. (the “Company”), through our wholly owned subsidiary Infosmart Group
Limited (“Infosmart BVI”), is in the business of developing, manufacturing,
marketing and sales of recordable digital versatile disc (“DVDR”) optical
media, and manufacturing recordable compact discs (“CDR”). We currently
manufacture DVDRs with 8x and 16x writable speeds as well as CDRs with 52x
writable speed. We are also preparing for the manufacturing of Blu-Ray format
DVDR discs. We have customers in Western Europe, Australia, China and South
America. We currently manufacture and ship our products from Hong Kong where we
operate state-of-the-art DVDR and CDR manufacturing facilities.





The
Company owns all of the capital stock of Infosmart BVI, a holding company
incorporated in the British Virgin Islands. Infosmart BVI beneficially owns 100%
of the issued and outstanding capital stock of: (i) Info Smart Technology
Limited (“IS Technology”), a company incorporated under the laws of Hong Kong;
(ii) Info Smart International Enterprises Limited (“IS International”), a
company incorporated under the laws of Hong Kong; and (iii) Portabello Global
Limited (“Portabello”), a company incorporated under the laws of the British
Virgin Islands. IS Technology owns all of the issued and outstanding capital
stock of Infoscience Media Limited (“IS Media”), a company incorporated under
the laws of Hong Kong. IS Media owns 99.42% of the issued and outstanding
capital stock of Discobras Industria E Comercio de Eletro Eletronica Ltda., a
company incorporated under the laws of Brazil (“Discobras”), the remaining 0.58%
ownership interest in Discobras is held by our local Brazilian partner. During
the year 2006, the Company acquired all the issued and outstanding capital stock
of Infoscience Holdings Limited (“IS Holdings”), a company incorporated under
the laws of Hong Kong, through IS Media. IS Media has a Cooperation Agreement
with IS Holdings wherein it manufactures its DVDRs using certain patent licenses
and manufacturing licenses owned by IS Holdings. IS Media acquired IS Holdings
to guarantee the continuation of this agreement and obtained the right to use
the relevant patent licenses and manufacturing licenses.





In
March 2006, IS Media formed Discobras, a Brazilian company, with a local
partner, with registered capital of US$8 million for our new Brazilian DVDR
production facility. We relocated some of our DVDR manufacturing equipment to
Brazil in November 2006 and installed them in January 2007. Trial
production in Brazil began in March 2007, and is currently producing at full
capacity. In addition, the owners of the technologies and intellectual property
necessary for the production of our products require that we obtain separate
Patent Licenses for the use of intellectual property in our new DVDR
manufacturing facility in Brazil. We are currently in the process of obtaining
these Patent Licenses.


22


Share
Exchange Transaction





The
Company became engaged in the DVDR manufacturing business in August 2006 in
connection with a share exchange. Prior to the share exchange transaction, we
were a shell company with nominal assets and operations, whose sole business was
to identify, evaluate and investigate various companies with the intent that, if
such investigation warrants, a business combination be negotiated and completed
pursuant to which the Company would acquire a target company with an operating
business with the intent of continuing the acquired company’s business as a
publicly held entity. We entered in an Exchange Agreement (the “Exchange
Agreement”) dated July 7, 2006 and amended on August 14, 2006 with KI Equity
Partners II, LLC (“KI Equity”), Infosmart BVI, the owners of 100% of the capital
shares of Infosmart BVI, namely Chung Kwok, Po Nei Sze, Prime Corporate
Developments Limited (“Prime Corporate”) and Hamptons Investment Group Limited
(“Hamptons”) (collectively the “Infosmart BVI Shareholders”), and Worldwide
Gateway Co., Ltd. The closing of the Exchange Agreement occurred on August 16,
2006. At closing, the Company acquired all of Infosmart BVI’s capital shares
(the “Infosmart BVI Shares”) from the Infosmart BVI Shareholders, and the
Infosmart BVI Shareholders transferred and contributed all of their Infosmart
BVI Shares to the Company. In exchange, the Company issued 1,000,000 shares of
its Series A Convertible Preferred Stock to the Infosmart BVI Shareholders. Each
share of the Company’s Series A Convertible Preferred Stock (“Series A Preferred
Stock”) was convertible into 116.721360 shares of the Company's common stock,
subject to adjustments. The Series A Preferred Stock were to be immediately and
automatically converted into shares of the Company's common stock upon the
approval by a majority of the Company's stockholders (voting together on an
as-converted-to-common-stock basis) and the filing of a Certificate of Amendment
to the Company’s Articles of Incorporation, following the closing of the
Exchange Agreement, to increase the number of authorized shares of the Company's
common stock from 40,000,000 shares to 300,000,000 shares and to change the
Company's corporate name to “Infosmart Group, Inc.”





As
a result of the closing of the Exchange Agreement, Infosmart BVI became the
wholly owned subsidiary of the Company and the Company’s main operational
business. The share exchange transaction, for accounting and financial reporting
purposes, is deemed to be a reverse acquisition, where the Company (the legal
acquirer) is considered the accounting acquiree and Infosmart BVI (the legal
acquiree) is considered the accounting acquirer, and thus the historical
financial statements of the Company are the financial statements of Infosmart
BVI. On August 16, 2006, pursuant to the authority granted by the Company’s
bylaws, the Board of Directors of the Company changed the fiscal year end from
May 31 to December 31.





Name
Change and Increase in Authorized Shares of Common Stock





On
October 12, 2006, the Company effected an increase in the number of authorized
shares of the Company's common stock from 40,000,000 shares to 300,000,000
shares and effected a change of the Company's corporate name (the “Name Change”)
to “Infosmart Group, Inc.” (the “Amendments”) through the filing of a
Certificate of Amendment to the Company’s Articles of Incorporation with the
State of California’s Secretary of State. Per the conversion rights set forth in
the Certificate of Determination for the Series A Preferred Stock, upon filing
and acceptance of the Amendments to the Company’s Articles of Incorporation, all
of the Series A Preferred Stock were automatically converted into approximately
116,721,360 shares of the Company’s Common Stock. The Company’s Name Change and
its trading symbol (OTCBB: IFSG) became effective on the OTC Bulletin Board on
October 18, 2006.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





Basis
of presentation and consolidation





The
accompanying consolidated financial statements of the Company have been prepared
in accordance with generally accepted accounting principles in the United States
of America.





The
consolidated financial statements include the accounts of the Company and its
subsidiaries. Significant intercompany transactions have been eliminated in
consolidation.





The
results of subsidiaries acquired or disposed of during the years are included in
the consolidated income statement from the effective date of acquisition or up
to the effective date of disposal.





Minority
Interests





For the
development of the market in Brazil, the Company entered into an agreement on
March 20, 2006 with two independent third parties for setting up a subsidiary,
Discobrás Indústria E Comércio De Eletro Eletrônica Ltda (“Discobrás”), in
Brazil. Discobrás has a social capital of $8,046,281 (equivalent to
R$17,385,600) and 99.42% or $8,000,000 (equivalent to R$17,285,600) (“Investment
Cost”) of which has been subscribed by the Company. The minority interests have
been recognized in the accompanying financial statements.





For the
development of the market in Blu-ray, the Company entered into an agreement on
April 11, 2008 with independent third parties for setting up a subsidiary,
Manwin International Limited (“Manwin”) in Hong Kong. Manwin has
a  capital of $0.24 (equivalent to HK$2) and 50% or US$0.12
(equivalent to HK$1) (“Investment Cost”) of which has been subscribed by the
Company. The minority interests have been recognized in the accompanying
financial statements.


23


Use
of estimates





In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting periods. These accounts and estimates include, but are not limited to,
the valuation of accounts receivable, inventories, deferred income taxes and the
estimation of useful lives of property, plant and equipment. Actual results
could differ from those estimates.





License
usage rights





License
usage rights are stated at cost less accumulated amortization. Amortization is
provided using the straight-line method over the remaining term of the license
obtained by Infosmart Holdings.





Concentrations
of credit risk





Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of trade receivables. The Company extends
credit based on an evaluation of the customer’s financial condition, generally
without requiring collateral or other security. The Company conducts periodic
reviews of the client’s financial conditions and payment practices. Further, the
Company will maintain an allowance for doubtful accounts based on the
management’s expectations on actual losses possibly incurred.





Revenue
recognition





Revenue
from sales of the Company’s products is recognized when the significant risks
and rewards of ownership have been transferred to the buyer at the time of
delivery and the sales price is fixed or determinable and collection is
reasonably assured.





Advertising
and transportation expenses





Advertising,
transportation and other product-related costs are charged to expenses as
incurred.





Advertising
expenses amounted to $230,769, $10,737 and $45,463 during 2008, 2007 and 2006
respectively and are included in selling and distributing costs.





Transportation
expenses amounted to $214,574, $64,163 and $352,203 during 2008, 2007 and 2006
respectively and are included in selling and distributing costs.





Income
taxes





The
Company uses the asset and liability method of accounting for income taxes
pursuant to SFAS No. 109 “Accounting for Income Taxes”. Under the asset and
liability method of SFAS 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to temporary differences between
the financial statements carrying amounts of existing assets and liabilities and
loss carryforwards and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.





Dividends





Dividends
are recorded in the Company’s financial statements in the period in which they
are declared.





The
Series B Convertible Preferred Stock carries dividends at 8% per annum payable
quarter in cash in US Dollars.





Comprehensive
income





The
Company has adopted SFAS 130, “Reporting Comprehensive Income”, which
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances.





Accumulated
other comprehensive income represents the accumulated balance of foreign
currency translation adjustments of the Company.


24


Foreign
currency translation





The
functional currency of the Company are Hong Kong dollars (“HK$”) and Brazil
dollars (Real$). The Company maintains its financial statements in the
functional currency. Monetary assets and liabilities denominated in currencies
other than the functional currency are translated into the functional currency
at rates of exchange prevailing at the balance sheet dates. Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchanges rates prevailing at the dates of the
transaction. Exchange gains or losses arising from foreign currency transactions
are included in the determination of net income for the respective
periods.





For
financial reporting purposes, the financial statements of the Company which are
prepared using the functional currency have been translated into United States
dollars. Assets and liabilities are translated at the exchange rates at the
balance sheet dates and revenue and expenses are translated at the average
exchange rates and stockholders’ equity is translated at historical exchange
rates. Any translation adjustments resulting are not included in determining net
income but are included in foreign exchange adjustment to other comprehensive
income, a component of stockholders’ equity.





The
exchange rates in effect at December 31, 2008 and 2007 were HK$1 for $0.1290 and
$0.1282 US dollars and Real$1 for $0.4323 and $0.5618 US dollars respectively.
The average exchange rates for 2008,2007 and 2006 were HK$1 for $0.1284,$0.1282
and $0.1287 US dollars and Real$1 for $0.5589,$0.5163 and $0.46 US dollars
respectively. There is no significant fluctuation in exchange rate for the
conversion between Real dollars, HK dollars and US dollars after the balance
sheet date.





Fair
value of financial instruments





The
carrying values of the Company’s financial instruments, including cash and cash
equivalents, restricted cash, trade and other receivables, deposits, trade and
other payables approximate their fair values due to the short-term maturity of
such instruments. The carrying amounts of borrowings approximate their fair
values because the applicable interest rates approximate current market
rates.





It is
management’s opinion that the Company is not exposed to significant interest,
price or credit risks arising from these financial instruments.





The
Company is exposed to certain foreign currency risk from export sales
transactions and recognized trade receivables as they will affect the future
operating results of the Company. The Company did not have any hedging
activities during the reporting period. As the functional currencies of the
Company are HK$ and Real$, the exchange difference on translation to US dollars
for reporting purpose is taken to other comprehensive income.





Stock-based
payment





The
Company adopted the SFAS No. 123R, "Share-Based Payment" ("SFAS 123R") using the
modified prospective method. Under SFAS 123R, equity instruments issued to
service providers for their services are measured at the grant-date fair value
and recognized in the statement of operations over the vesting
period.





Basic
and diluted earnings (loss) per share





The
Company reports basic earnings (loss) per share in accordance with SFAS No. 128,
“Earnings Per Share”. Basic earnings (loss) per share is computed using the
weighted average number of shares outstanding during the periods presented. The
weighted average number of shares of the Company represents the common stock
outstanding during the year.





Diluted
earning (loss) per share is based on the assumption that all dilutive
convertible shares and stock options were converted or exercised. Dilution is
computed by applying the treasury stock method. Under this method, options and
warrants are assumed to be exercised at the beginning of the year (or at the
time of issuance, if later), and as if funds obtained thereby were used to
purchase common stock at the average market price during the year.





The
Company’s common stock equivalents at December 31, 2008 include the
following:





Detachable
      common stock warrants
                    
                    
                    28,510,347Placement
      agent warrants
                    
                    
                    3,740,57732,250,924





Cash
and cash equivalents





Cash and
cash equivalents include all cash, deposits in banks and other highly liquid
investments with initial maturities of three months or less.


25


Restricted
cash





Deposits
in an escrot accounts and deposits in banks for securities of bank overdrafts
facilities that are restricted in use are classified as restricted cash under
current assets.





Trade
receivables





Trade
receivables are stated at original amount less allowance made for doubtful
receivables, if any, based on a review of all outstanding amounts at the year
end. The Company extends unsecured credit to customers in the normal course of
business and believes all trade receivables in excess of the allowances for
doubtful receivables to be fully collectible. Full allowances for doubtful
receivables are made when the receivables are overdue for 1 year and an
allowance is also made when there is objective evidence that the Company will
not be able to collect all amounts due according to the original terms of
receivables. Bad debts are written off when identified. The Company does not
accrue interest on trade accounts receivable.





Inventories





Inventories
are valued at the lower of cost or market value with cost determined on a
first-in, first-out basis. In assessing the ultimate realization of inventories,
the management makes judgments as to future demand requirements compared to
current or committed inventory levels. The Company’s reserve requirements
generally increase/decrease due to managements projected demand requirements,
market conditions and product life cycle changes. During the reporting years,
the Company did not make any allowance for slow-moving or defective
inventories.





Plant
and equipment





Plant and
equipment are stated at cost less accumulated depreciation. Cost represents the
purchase price of the asset and other costs incurred to bring the asset into its
existing use. Maintenance, repairs and betterments, including replacement of
minor items, are charged to expense; major additions to physical properties are
capitalized.





Depreciation
of plant and equipment is provided using the straight-line method over their
estimated useful lives. The principal annual rates are as follows:





Production
      lines and equipment
                              
                              10% with 30% residual valueLeasehold
      improvements and others
                              
                              20%





Upon sale
or disposition, the applicable amounts of asset cost and accumulated
depreciation are removed from the accounts and the net amount less proceeds from
disposal is charged or credited to income.





Impairment
of long-live assets





Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. The
Company recognizes impairment of long-lived assets in the event that the net
book values of such assets exceed the future undiscounted cashflows attributable
to such assets. No impairment of long-lived assets was recognized for any of the
periods presented.





Off-balance
sheet arrangements





Other
than the bank guarantee given by a bank to a utility company which exempted the
Company’s obligation to pay the required utility deposit, the Company does not
have any off-balance sheet arrangements.





Recently
Issued Accounting Pronouncements





In March
2008, the FASB issued SFAS No. 161, DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES (an amendment to SFAS No. 133). This statement is effective
for financial statements issued for fiscal year and interim periods beginning
after November 15, 2008 and requires enhanced disclosures with respect to
derivative and hedging activities. The Company will comply with the disclosure
requirements of this statement if it utilizes derivative instruments or engages
in hedging activities upon its effectiveness.





In April
2008, the FASB issued FASB Staff Position No. 142-3, DETERMINATION OF THE USEFUL
LIFE OF INTANGIBLE ASSETS (“FSP No. 142-3”) to improve the consistency between
the useful life of a recognized intangible asset (under SFAS No. 142) and the
period of expected cash flows used to measure the fair value of the intangible
asset (under SFAS No. 141(R)). FSP No. 142-3 amends the factors to be considered
when developing renewal or extension assumptions that are used to estimate an
intangible asset’s useful life under SFAS No. 142. The guidance in the new staff
position is to be applied prospectively to intangible assets acquired after
December 31, 2008. In addition, FSP No.142-3 increases the disclosure
requirements related to renewal or extension assumptions. The Company does not
believe implementation of FSP No. 142-3 have a material impact on its financial
statements.


26


In May
2008, the FASB issued statement No. 162, THE HIERARCHY OF GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES. This statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This statement is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, “the Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles”.





In May
2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1 "Accounting
for Convertible Debt instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 requires the
issuer of certain convertible debt instruments that may be settled in cash (or
other assets) on conversion to separately account for the liability (debt) and
equity (conversion option) components of the instrument in a manner that
reflects the issuer's non-convertible debt borrowing rate. FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008 on a retroactive
basis. As we do not have convertible debt at this time, we currently believe the
adoption of FSP APB 14-1 will have no effect on our combined results of
operations and financial condition.





In May
2008, the FASB issued Statement No. 163, ACCOUNTING FOR FINANCE GUARANTEE
INSURANCE CONTRACTS - AN INTERPRETATION OF FASB STATEMENT NO. 60. The premium
revenue recognition approach for a financial guarantee insurance contract links
premium revenue recognition to the amount of insurance protection and the period
in which it is provided. For purposes of this statement, the amount of insurance
protection provided is assumed to be a function of the insured principal amount
outstanding, since the premium received requires the insurance enterprise to
stand ready to protect holders of an insured financial obligation from loss due
to default over the period of the insured financial obligation. This Statement
is effective for financial statements issued for fiscal years beginning after
December 15, 2008.





In June
2008, the FASB issued FASB Staff Position Emerging Issues Task Force (EITF) No.
03-6-1, DETERMINING WHETHER INSTRUMENTS GRANTED IN SHARE-BASED PAYMENT
TRANSACTIONS ARE PARTICIPATING SECURITIES (“FSP EITF No. 03-6-1”). Under FSP
EITF No. 03-6-1, unvested share-based payment awards that contain rights to
receive nonforfeitable dividends (whether paid or unpaid) are participating
securities, and should be included in the two-class method of computing EPS. FSP
EITF No. 03-6-1 is effective for fiscal years beginning after December 15, 2008,
and interim periods within those years, and is not expected to have a
significant impact on the Company’s financial statements.





None of
the above new pronouncements has current application to the Company, but may be
applicable to the Company’s future financial reporting.





RESULTS
OF OPERATIONS





The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:





Year
      ended December 312008
                                    
                                    
                                    %
      of
                                    
                                    
                                    2007
                                      Audited
                                    
                                    
                                    %
      of
                                    
                                    
                                    2006
                                      Audited
                                    
                                    
                                    %
      ofAudited
                                    
                                    
                                    Revenue
                                    
                                    
                                    Revenue
                                    
                                    
                                    
                                    
                                    
                                    RevenueNET
      SALES
                                    
                                    $
                                    36,915,585
                                    
                                    
                                    
                                    100.00
                                    %
                                    
                                    $
                                    104,969,899
                                    
                                    
                                    
                                    100.00
                                    %
                                    
                                    $
                                    27,102,441
                                    
                                    
                                    
                                    100.00
                                    %COST
      OF SALES
                                    
                                    
                                    (32,211,974
                                    )
                                    
                                    
                                    87.26
                                    %
                                    
                                    
                                    (90,186,253
                                    )
                                    
                                    
                                    85.92
                                    %
                                    
                                    
                                    (19,570,525
                                    )
                                    
                                    
                                    72.21
                                    %GROSS
      PROFIT
                                    
                                    
                                    4,703,611
                                    
                                    
                                    
                                    12.74
                                    %
                                    
                                    
                                    14,783,646
                                    
                                    
                                    
                                    14.08
                                    %
                                    
                                    
                                    7,531,916
                                    
                                    
                                    
                                    27.79
                                    %ADMINISTRATIVE
      EXPENSES
                                    
                                    
                                    (9,439,172
                                    )
                                    
                                    
                                    25.57
                                    %
                                    
                                    
                                    (4,416,087
                                    )
                                    
                                    
                                    4.21
                                    %
                                    
                                    
                                    (1,997,379
                                    )
                                    
                                    
                                    7.37
                                    %DEPRECIATION
                                    
                                    
                                    (740,749
                                    )
                                    
                                    
                                    2.00
                                    %
                                    
                                    
                                    (743,743
                                    )
                                    
                                    
                                    0.71
                                    %
                                    
                                    
                                    (223,893
                                    )
                                    
                                    
                                    0.83
                                    %SELLING
      AND DISTRIBUTING COSTS
                                    
                                    
                                    (742,524
                                    )
                                    
                                    
                                    2.01
                                    %
                                    
                                    
                                    (499,716
                                    )
                                    
                                    
                                    0.47
                                    %
                                    
                                    
                                    (475,781
                                    )
                                    
                                    
                                    1.76
                                    %INCOME
      / (LOSS) FROM OPERATIONS
                                    
                                    
                                    (6,218,834
                                    )
                                    
                                    
                                    (16.84
                                    )
      %
                                    
                                    
                                    9,124,100
                                    
                                    
                                    
                                    8.69
                                    %
                                    
                                    
                                    4,834,863
                                    
                                    
                                    
                                    17.84
                                    %PROFESSIONAL
      EXPENSES RELATEDTO
      RESTRUCTURING AND SHARE EXCHANGE
                                    
                                    
                                    0
                                    
                                    
                                    
                                    0
                                    %
                                    
                                    
                                    0
                                    
                                    
                                    
                                    0
                                    %
                                    
                                    
                                    (2,753,390
                                    )
                                    
                                    
                                    10.16
                                    %REVERSAL
      OF COMMISSION PAYABLE
                                    
                                    
                                    0
                                    
                                    
                                    
                                    0
                                    %
                                    
                                    
                                    0
                                    
                                    
                                    
                                    0
                                    %
                                    
                                    
                                    0
                                    
                                    
                                    
                                    0
                                    %OTHER
      INCOME
                                    
                                    
                                    2,276,769
                                    
                                    
                                    
                                    6.17
                                    %
                                    
                                    
                                    1,710,408
                                    
                                    
                                    
                                    1.63
                                    %
                                    
                                    
                                    449,985
                                    
                                    
                                    
                                    1.66
                                    %INTEREST
      EXPENSES
                                    
                                    
                                    (1,191,545
                                    )
                                    
                                    
                                    (3.23
                                    )
      %
                                    
                                    
                                    (662,059
                                    )
                                    
                                    
                                    0.63
                                    %
                                    
                                    
                                    (511,322
                                    )
                                    
                                    
                                    1.89
                                    %INCOME
      BEFORE INCOME TAXES
                                    
                                    
                                    (5,133,610
                                    )
                                    
                                    
                                    (13.90
                                    )
      %
                                    
                                    
                                    10,172,449
                                    
                                    
                                    
                                    9.69
                                    %
                                    
                                    
                                    2,020,136
                                    
                                    
                                    
                                    7.45
                                    %INCOME
      TAXES
                                    
                                    
                                    (89,482
                                    )
                                    
                                    
                                    (0.24
                                    )
      %
                                    
                                    
                                    52,506
                                    
                                    
                                    
                                    0.05
                                    %
                                    
                                    
                                    (955,592
                                    )
                                    
                                    
                                    (3.53
                                    )
      %NET
      INCOME
                                    
                                    
                                    (5,223,092
                                    )
                                    
                                    
                                    (14.14
                                    )
      %
                                    
                                    
                                    10,224,955
                                    
                                    
                                    
                                    9.74
                                    %
                                    
                                    
                                    1,064,544
                                    
                                    
                                    
                                    3.93
                                    %MINORITY
      INTEREST
                                    
                                    
                                    (22,637
                                    )
                                    
                                    
                                    (0.06
                                    )
      %
                                    
                                    
                                    12,250
                                    
                                    
                                    
                                    0.02
                                    %
                                    
                                    
                                    0
                                    
                                    
                                    
                                    0
                                    %SERIES
      B PREFERRED DIVIDENDS
                                    
                                    
                                    (189,312
                                    )
                                    
                                    
                                    (0.52
                                    )
      %
                                    
                                    
                                    (453,764
                                    )
                                    
                                    
                                    (0.43
                                    )
      %
                                    
                                    
                                    (202,069
                                    )
                                    
                                    
                                    (0.75
                                    )
      %SERIES
      B PREFERRED DEEMED DIVIDEND
                                    
                                    
                                    0
                                    
                                    
                                    
                                    0
                                    %
                                    
                                    
                                    0
                                    
                                    
                                    
                                    0
                                    %
                                    
                                    
                                    (2,297,157
                                    )
                                    
                                    
                                    (8.48
                                    )
      %NET
      (LOSS)/INCOME APPLICABLE TO COMMON SHAREHOLDERS
                                    
                                    $
                                    (5,435,041
                                    )
                                    
                                    
                                    (14.72
                                    )
      %
                                    
                                    $
                                    9,783,441
                                    
                                    
                                    
                                    9.33
                                    %
                                    
                                    $
                                    (1,434,682
                                    )
                                    
                                    
                                    (5.29
                                    )
      %




27




Comparison
of Two Years Ended December 31, 2008 and 2007





Net
Sales. For the
year ended December 31, 2008, net sales decreased approximately 65% from
$104,969,899 to $36,915,585 relative to the year ended December 31, 2007. The
decrease in net sales is a decrease specifically in the sale of of DVDRs in Hong
Kong, which resulted from our policy of geographical diversification and our
shift of focus from the lower margin Hong Kong markets to higher margin markets
such as Asia and Brazil.  Market trends show a high expectation for the new
Blu-ray discs and a lower demand for DVDR discs.





Cost of
Sales. Cost of
sales decreased from $90,186,253, or approximately 85.92% of net sales for the
year ended December 31, 2007, to $32,211,974, or approximately 87.93% of net
sales for the year ended December 31, 2008. The approximately 64% decrease was
primarily attributable to the decrease in our volume of sales. The decrease in
the cost of sales was in line with the decrease in our net sales.





Gross
Profit. Gross profit decreased approximately 68% from $14,783,646 for the
year ended December 31, 2007 to $4,703,611 for the year ended December 31, 2008.
This decrease in gross profit was primarily due to the decrease in our volume of
net sales.





Selling and
Distribution Costs. For the year ended December
31, 2008, selling and distribution costs increased approximately 47% from
$499,716 to $742,524 relative to the year ended December 31, 2007. This increase
in selling and distribution costs was promotion of our Blu-ray business for the
year ended December 31, 2008.





Administrative
Expenses. Administrative expenses increased approximately 213% from
$4,416,087 for the year ended December 31, 2007 to $9,439,172 for the year ended
December 31, 2008. This substantial increase in administrative expenses during
the year ended December 31, 2008 was mainly because the full provision for
doubtful debts.





Professional
Expenses Related To Restructuring and Share Exchange. Such professional
expenses increased substantially from $320,892 for the year ended December 31,
2005 to $2,753,390 for the year ended December 31, 2006 but none of these
expenses incurred in 2007. The increase was mainly due to the completion of the
restructuring and share exchange transaction in August 2006. These one-off
payments were made to different professional parties who provided services in
connection with the restructuring and share exchange transaction during the
period. The professional expenses comprised the following items:





Financial
      Advisory Fees
                                  
                                  $
                                  1,431,993Reverse
      Merger Fees
                                  
                                  
                                  450,000Other
      Professional Parties’ Fees
                                  
                                  
                                  747,000Others
                                  
                                  
                                  124,397Total
                                  
                                  $
                                  2,753,390





Net
Income. Net
income decreased approximately 155% from $9,783,441 for the year ended December
31, 2007 to $(5,435,041) for the year ended December 31, 2008. This is due to
the decrease in net sales and increased administrative expenses.





Comparison
of Two Years Ended December 31, 2007 and 2006





Net
Sales. For the
year ended December 31, 2007, net sales increased approximately 287% from
$27,102,441 to $104,969,899 relative to the year ended December 31, 2006. The
increase in revenue was mainly due to the effect of new market sales generated
in Brazil and a substantial increase in sales in Australia, Asia and North
America.  Also the trading of Compact Flash and SD-RAM penetrated
through our distribution channel in Asia.


28


Cost of
Sales. Cost of
sales increased from $19,570,525, or approximately 72.2% of net sales for the
year ended December 31, 2006, to $90,186,253, or approximately 85.9% of net
sales for the year ended December 31, 2007. The approximately 360% increase was
primarily attributable to the increase in our volume of sales. The increase in
the cost of sales was in line with the increase in our net sales.





Gross
Profit. Gross profit increased approximately 96% from $7,531,916 for the
year ended December 31, 2006 to $14,783,646 for the year ended December 31,
2007. This increase in gross profit was primarily due to the increase in our
volume of sales as well as the substantial increase in sales in the higher
margin markets, like Brazil and Asia.  Also the rapid development of
Compact Flash and SD-RAM market in Asia contributed to this increase in gross
profit. In addition, the increase of our gross profit percentage from
approximately 27.8% for the year ended December 31, 2006 to approximately 14.1%
for the year ended December 31, 2007 was due to the increase in sales in higher
margin markets, which was offset by a slight decrease of our sales prices in
other markets in 2007.





Selling and
Distribution Costs. For the year ended December
31, 2007, selling and distribution costs slightly increased approximately 5%
from $475,781 to $499,716 relative to the year ended December 31, 2006. This
slightly increase in selling and distribution costs was not in line with the
steep increase in our net sales mainly due to the change to a more competitive
freight forwarder which led to a reduction of our freight expenses for the year
ended December 31, 2007.





Administrative
Expenses. Administrative expenses increased approximately 121% from
$1,997,379 for the year ended December 31, 2006 to $4,416,087 for the year ended
December 31, 2007. This substantial increase in administrative expenses during
the year ended December 31, 2007 was mainly because the charges of top
management’s remunerations as well as the employment of new administrative
personnel, and also the operation of administrative function in Brazil
factory.





Professional
Expenses Related To Restructuring and Share Exchange. Such professional
expenses increased substantially from $320,892 for the year ended December 31,
2005 to $2,753,390 for the year ended December 31, 2006 but none of these
expenses incurred in 2007. The increase was mainly due to the completion of the
restructuring and share exchange transaction in August 2006. These one-off
payments were made to different professional parties who provided services in
connection with the restructuring and share exchange transaction during the
period. The professional expenses comprised the following items:





Financial
      Advisory Fees
                            
                            $
                            1,431,993Reverse
      Merger Fees
                            
                            
                            450,000Other
      Professional Parties’ Fees
                            
                            
                            747,000Others
                            
                            
                            124,397Total
                            
                            $
                            2,753,390





Net
Income. Net
income increased approximately 582% from $(1,434,682) for the year ended
December 31, 2006 to $9,783,441 for the year ended December 31, 2007. Further,
the net income (loss) margin was 9.7% and (5.29)% in the same comparable periods
in 2007 and 2006, respectively. The increase in net income was in line with the
increase in gross profit, which was offset by a slightly increase of our selling
and distribution cost and corresponding increase in administrative
cost.





GROWTH
STRATEGIES





Our
growth strategy is to diversity our product range and geographical markets with
a well-balanced approach as below:





·
            We
      will mitigate the risk of being overconcentrated in the DVDR product
      market by starting the trading of different kinds of storage media
      products which we are pro-active in providing choices of competitive
      products and even substitutes to our current customers to ensure the
      distribution channels have a great coverage of products from
      Infosmart.





·
            Given
      the mature operation of Brazilian plant, we would explore to further
      leverage the tax advantages on exemption and rate reduction on import duty
      and value-added tax on raw material and semi-finished goods in three
      different categorizes of products such as other recordable media (e.g.:
      Flash card and SD Ram), consumer electronic products and telecommunication
      products.  The Company intends to make use of the current
      distribution channels for products fall within these three categorizes by
      sub-assembling them in our Brazilian plant which can serve as a platform
      for channeling these goods to South American
  market.





·
            The
      emergence of ‘Blu-ray’ products with a higher margin than the current DVDR
      provides us with opportunity for the entertainment-context replication
      business, which we have already purchased the first set of Blu-ray
      production facilities in China/Hong Kong in parallel with the thorough
      marketing work with various films and records distributors in Asia and
      also training our technical staff in operating the machine.  We
      foresee the Blu-ray facilities would come into production in
      June.


29


New
Markets





South
America and Brazil





As
expected, sales in South America grew significantly in the year 2007 and we
anticipate that sales will continue to grow in this region in the near
future.





Our
Company’s latest developments in connection with Brazil are discussed in the
section above entitled “Overview.” For other South American countries, we will
select strong distribution partners, conduct more marketing activities and
exhibitions, and pre-position inventory in bonded warehouses in the region to
ensure prompt delivery of our products.





Brazil
will remain our main focus in 2007. In addition to attending certain IT
exhibition in Brazil for the year 2006, we will attend local computer games
exhibitions and the main tradeshow for supermarket and chain store buyers in
2007. Our sales team will continue to locate distributors and strategic channel
partners for specific territorial submarkets in Brazil.





We have
launched our own brand “Hontek”, “Laser Line” as well as “TOP COMP” recordable
optical media products in the Brazilian retail market in 2007, with sales to
supermarkets and chain stores such as Bompreco (a Wal-Mart subsidiary).
Management expects that sales directly to retailers will generate higher profit
margins than sales to local wholesalers, the result is very encouraging which we
have achieved a very widespread distribution network in South America with less
than a year that would be beneficial for our distribution of different products
in future





Other
Developing Markets - The Middle East, Africa, Eastern European
Region/Russia





Some of
our Western European distributors sell our products to retailers in the Middle
East and Eastern Europe. We plan to exploit opportunities in major developing
markets in the Middle East, Africa, Russia and Eastern European countries
directly by attending tradeshows and advertising in trade websites.





Online
Marketing Exposure





The
Internet is increasingly being used for product sourcing. We currently invest
approximately $20,000 per year on online exposure   in industry portals
such as globalsources.com, alibaba.com and the Hong Kong Trade Development
Council website. We plan to increase our online promotional activities in
2008.





LIQUIDITY
AND CAPITAL RESOURCES





Year
Ended December 31, 2008





Net cash
flow provided by operating activities was $2,725,586 for the year ended December
31, 2008 and net cash flow used in operating activities was $5,427,346 for the
year ended December 31, 2007. The substantial increase in our net cash outflow
provided by operating activities for the year ended December 31, 2008 was mainly
due to the receipt from our trade receivable more than the repayment of our
trade payable provided more cash flow.





Net cash
flow used in investing activities was $113,875 and $478,493 for the years ended
December 31, 2008 and 2007, respectively. Uses of cash flow for investing
activities mainly related to the capital expenditures for the acquisition of
plant and equipment.





Net cash
flow provided by financing activities was $473,117 for the year ended December
31, 2008. Compared with net cash flow provided by financing activities of
$5,048,240 for the year ended December 31, 2007, the decrease in our net cash
flow was mainly due to the repayment of non-recurring bank loans.





Year
Ended December 31, 2007





Net cash
flow used in operating activities was $5,427,346 for the year ended December 31,
2007 and net cash flow provided  by operating activities was
$4,679,397 for the year ended December 31, 2006. The substantial increase in our
net cash outflow used in operating activities for the year ended December 31,
2007 was mainly due to the increase of our trade payables with corresponding
increase in sales volume  with days sales outstanding of 78.1days in
2007 and days payable outstanding of 58.2 days in 2007 used more cash
flow.





Net cash
flow used in investing activities was $478,493 and $8,654,722 for the years
ended December 31, 2007 and 2006, respectively. Uses of cash flow for investing
activities mainly related to the capital expenditures for the acquisition of
plant and equipment.





Net cash
flow provided by financing activities was $5,048,240 for the year ended December
31, 2007. Compared with net cash flow provided by financing activities of
$4,027,732 for the year ended December 31, 2006, the increase in our net cash
flow was mainly due to the inflow of proceeds from other loans.


30


Contractual
Obligations and Off-Balance Sheet Arrangements





Contractual
Obligations





We have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments. We have presented below a summary of the most
significant assumptions used in our determination of amounts presented in the
tables, in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash
flows.





The
following tables summarize our contractual obligations as of December 31, 2008,
and the effect these obligations are expected to have on our liquidity and cash
flows in future periods.




Payments Due
      by PeriodTotal
                          
                          Less than 1 year
                          
                          1-3
      Years
                          
                          3-5
      Years
                          
                          5
      Years +In
      ThousandsContractual Obligations:Bank
      Indebtedness
                          
                          $
                          5,465
                          
                          
                          $
                          5,465
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          —Other
      Indebtedness
                          
                          
                          10,694
                          
                          
                          
                          3,503
                          
                          
                          
                          7,191
                          
                          
                          
                          —
                          
                          
                          
                          —Operating
      Leases
                          
                          
                          1,067
                          
                          
                          
                          340
                          
                          
                          
                          727
                          
                          
                          
                          —
                          
                          
                          
                          —Total
      Contractual Obligations:
                          
                          $
                          17,226
                          
                          
                          $
                          9,308
                          
                          
                          $
                          7,918
                          
                          
                          $
                          —
                          
                          
                          $
                          —





Bank
indebtedness consists of secured and unsecured borrowings from our banking
facilities arrangements including letters of credit, bank overdrafts, and
non-recurring bank loans.





Other
indebtedness consists of loans and debt financing from independent third parties
for working capital and the acquisition of DVDR production lines and
equipment.





Operating
leases amounts include a lease for factory premises under non-cancelable
operating lease agreement that expires in year 2010, with an option to renew the
lease. The lease is on a fixed repayment basis. The lease does not include
contingent rentals.





Purchase
obligations consist of a contract with an engineer in Hong Kong to set up the
foundation for the factory in Brazil.





Off-balance
Sheet Arrangements





A bank
guarantee was given by a bank to an electric utility company on Infoscience
Media Limited behalf. This guarantee exempted Infoscience Media Limited from the
obligation of paying a deposit required by the electric utility company. This
off-balance sheet arrangement has no effect on liquidity, capital resources,
market risk support or credit risk support, other than allowing Infoscience
Media Limited to retain approximately $153,846 deposit that would have been
required by the utility company. Infoscience Media Limited is not aware of any
events, demands, commitments, trends or uncertainties that will result in of
reasonably likely result in the termination of this arrangement.





Other
than the arrangement described above, we have not entered into any other
financial guarantees or other commitments to guarantee the payment obligations
of any third parties. We have not entered into any derivative contracts that are
indexed to our shares and classified as shareholder’s equity or that are not
reflected in our consolidated financial statements. Furthermore, we do not have
any retained or contingent interest in assets transferred to an unconsolidated
entity that serves as credit, liquidity or market risk support to such entity.
We do not have any variable interest in any unconsolidated entity that provides
financing, liquidity, market risk or credit support to us or engages in leasing,
hedging or research and development services with us.





ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
applicable.





ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


31


Infosmart
Group Inc.





Consolidated
Financial Statements


For the
years ended December 31, 2008, 2007 and 2006


(Stated
in US Dollars)





INDEX
TO CONSOLIDATED FINANCIAL INFORMATION





Report of Independent Registered
      Public Accounting Firm, dated March 31,
      2009
                
                
                F-2Consolidated Statement
      of Income and Comprehensive Income for the Years Ended
      December 31, 2008, 2007, and 2006
                
                
                F-3Consolidated Balance Sheets as of
      December 31, 2008 and 2007
                
                
                F-4Consolidated Statements of Cash
      Flows for the Years Ended December 31, 2008 and
      2007
                
                
                F-6Consolidated Statements of
      Stockholders’ Equity for the Years Ended December 31, 2008,
      2007, and
      2006
                
                
                F-8Notes to Consolidated Financial
      Statements
                
                
                F-9




F-1




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of


Infosmart
Group Inc.





We have
audited the accompanying consolidated balance sheet of Infosmart Group Inc. (the
“Company”) and its subsidiaries as of December 31, 2008 and 2007 and the related
consolidated statement of income, stockholders’ equity and cash flows for years
ended December 31, 2008 and 2007. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. 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 assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statements presentation. 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 consolidated financial position of the Company and its
subsidiaries as of December 31, 2008 and 2007, and the consolidated results of
their operations and their cash flows for the years ended December 31, 2008 and
2007 in conformity with accounting principles generally accepted in the United
States of America.





The
accompanying consolidated financial statements for the year ended December 31,
2008, have been prepared assuming that the Company and its subsidiaries will
continue as a going concern. As discussed in Note 3 to the consolidated
financial statements, the Company has suffered significant reduction in revenue
and gross profit in the reported period, which would raise sufficient doubt
about its ability as a going concern considering the amount of commitment to be
satisfied by the Company as disclose in Note 17. Management is confident and has
taken measures to obtain financial support aiming at satisfying such commitment.
Management has also contemplated a plan of debt restructuring and spin off
exercise that is targeted to alleviate the repayment budget of the Company
regarding those commitments.





Parker
Randall CF (H.K.) CPA Limited


Certified
Public Accountants


Hong
Kong


April
30, 2009


F-2





INFOSMART
GROUP INC.


CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


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


(Stated
in US Dollars)





Year ended December 312008
                              
                              
                              2007
                              
                              
                              2006Net
      sales
                              
                              
                              36,915,585
                              
                              
                              
                              104,969,899
                              
                              
                              
                              27,102,441Cost
      of sales
                              
                              
                              (32,211,974
                              )
                              
                              
                              (90,186,253
                              )
                              
                              
                              (19,570,525
                              )Gross
      profit
                              
                              
                              4,703,611
                              
                              
                              
                              14,783,646
                              
                              
                              
                              7,531,916Administrative
      expenses
                              
                              
                              (9,439,172
                              )
                              
                              
                              (4,416,087
                              )
                              
                              
                              (1,997,379
                              )Depreciation
      – note 11
                              
                              
                              (740,749
                              )
                              
                              
                              (743,743
                              )
                              
                              
                              (223,893
                              )Selling
      and distributing costs
                              
                              
                              (742,524
                              )
                              
                              
                              (499,716
                              )
                              
                              
                              (475,781
                              )(Loss)
      / income from operations
                              
                              
                              (6,218,834
                              )
                              
                              
                              9,124,100
                              
                              
                              
                              4,834,863Professional
      expenses related to Restructuringand
      Share Exchange – note 5
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (2,753,390
                              )Other
      income – note 6
                              
                              
                              2,276,769
                              
                              
                              
                              1,710,408
                              
                              
                              
                              449,985Interest
      expenses
                              
                              
                              (1,191,545
                              )
                              
                              
                              (662,059
                              )
                              
                              
                              (511,322
                              )(Loss)
      / income before income taxes
                              
                              
                              (5,133,610
                              )
                              
                              
                              10,172,449
                              
                              
                              
                              2,020,136Income
      taxes – note 7
                              
                              
                              (89,482
                              )
                              
                              
                              52,506
                              
                              
                              
                              (955,592
                              )Non-controlling
      interests - PL
                              
                              
                              (22,637
                              )
                              
                              
                              12,250
                              
                              
                              
                              -Net
      (loss) / income
                              
                              
                              (5,245,729
                              )
                              
                              
                              10,237,205
                              
                              
                              
                              1,064,544Series
      B preferred dividends
                              
                              
                              (189,312
                              )
                              
                              
                              (453,764
                              )
                              
                              
                              (202,069
                              )Series
      B preferred deemed dividend – note 17
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (2,297,157
                              )Net
      (loss) / income applicable to commonshareholders
                              
                              
                              (5,435,041
                              )
                              
                              
                              9,783,441
                              
                              
                              
                              (1,434,682
                              )Other
      comprehensive incomeForeign
      currency translation adjustments
                              
                              
                              (5,839,679
                              )
                              
                              
                              1,497,766
                              
                              
                              
                              (12,421
                              )Total
      comprehensive (loss) / income
                              
                              
                              (11,274,720
                              )
                              
                              
                              11,281,207
                              
                              
                              
                              (1,447,103
                              )(Loss)
      / earning per share-
      basic and dilutive – note 8
                              
                              
                              (0.07
                              )
                              
                              
                              0.07
                              
                              
                              
                              0.04Weighted
      average shares outstanding-
      basic – note 8
                              
                              
                              161,560,520
                              
                              
                              
                              140,025,108
                              
                              
                              
                              119,188,957-
      dilutive – note 8
                              
                              
                              161,560,520
                              
                              
                              
                              140,622,119
                              
                              
                              
                              119,188,957


See the
accompanying notes to consolidated financial statements




F-3




INFOSMART
GROUP INC.


CONSOLIDATED
BALANCE SHEETS


AS OF
DECEMBER 31, 2008 AND 2007


(Stated
in US Dollars)





As of December 312008
                  
                  
                  2007ASSETSCurrent
      assetsCash
      and cash equivalents
                  
                  
                  449,089
                  
                  
                  $
                  1,023,440Trade
      receivables (net of allowance for doubtful accountsof
      $Nil for 2008 and 2007)
                  
                  
                  7,628,529
                  
                  
                  
                  38,725,882Prepaid
      expenses and other receivables – note 9
                  
                  
                  4,653,565
                  
                  
                  
                  544,345Provision
      for tax
                  
                  
                  880,008
                  
                  
                  
                  13,847Inventories
      – note 10
                  
                  
                  1,906,445
                  
                  
                  
                  3,396,194Total
      current assets
                  
                  
                  15,517,636
                  
                  
                  
                  43,703,708Deferred
      tax assets – note 7
                  
                  
                  
                  
                  
                  
                  -Plant
      and equipment, net – note 11
                  
                  
                  28,210,693
                  
                  
                  
                  31,093,668Intangible
      assets – note 16
                  
                  
                  1,528,475
                  
                  
                  
                  1,810,655TOTAL
      ASSETS
                  
                  
                  45,256,804
                  
                  
                  
                  76,608,031LIABILITIES
      AND STOCKHOLDERS’ EQUITYLIABILITIESCurrent
      liabilitiesTrade
      payables
                  
                  
                  4,613,815
                  
                  
                  $
                  25,809,022Other
      payables and accrued liabilities – note 12
                  
                  
                  1,177,485
                  
                  
                  
                  1,672,468Income
      tax payable
                  
                  
                  242,862
                  
                  
                  
                  696,946Current
      portion of bank borrowings – note 13
                  
                  
                  5,465,309
                  
                  
                  
                  6,762,553Finance
      lease payable
                  
                  
                  11,373
                  
                  
                  
                  34,570Current
      portion of other loans – note 14
                  
                  
                  3,503,542
                  
                  
                  
                  5,065,639Total
      current liabilities
                  
                  
                  15,014,386
                  
                  
                  
                  40,041,198Non-current
      portion of bank borrowings – note 13
                  
                  
                  -
                  
                  
                  
                  2,092,949Non-current
      portion of other loans – note 14
                  
                  
                  7,191,948
                  
                  
                  
                  717,423Advance
      from a related party – note 15
                  
                  
                  929,751
                  
                  
                  
                  929,634Deferred
      tax liabilities – note 7
                  
                  
                  2,396,706
                  
                  
                  
                  2,305,729TOTAL
      LIABILITIES
                  
                  
                  25,532,791
                  
                  
                  
                  46,086,933COMMITMENTS AND
      CONTINGENCIES—note 17




F-4





INFOSMART
GROUP INC.


CONSOLIDATED
BALANCE SHEETS (CONT’D)


AS OF
DECEMBER 31, 2008 AND 2007


(Stated
in US Dollars)





As of December 312008
                                  
                                  
                                  2007Series
      B Redeemable Convertible Preferred Stock: No par value -note
      18Authorized
      1,800,000 shares; Issued and outstanding2008
      – NIL shares and 2007–597,011
      shares
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,690,222STOCKHOLDERS’
      EQUITYCommon
      stock: No par valueAuthorized:
      300,000,000 shares; Issued and outstanding:2008
      – 161,560,520 shares and 2007 –144,248,709
      shares – note 18
                                  
                                  
                                  4,557,827
                                  
                                  
                                  
                                  2,412,605Additional
      paid-in-capital – note 18
                                  
                                  
                                  8,118,664
                                  
                                  
                                  
                                  8,118,664Accumulated
      other comprehensive income
                                  
                                  
                                  (4,322,676
                                  )
                                  
                                  
                                  1,517,003Retained
      earnings
                                  
                                  
                                  11,303,600
                                  
                                  
                                  
                                  16,738,643TOTAL
      STOCKHOLDERS’ EQUITY
                                  
                                  
                                  19,657,415
                                  
                                  
                                  
                                  28,786,915Non-controlling
      interest
                                  
                                  
                                  66,598
                                  
                                  
                                  
                                  43,96119,724,013
                                  
                                  
                                  
                                  28,830,876TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                                  
                                  
                                  45,256,804
                                  
                                  
                                  $
                                  76,608,031




See the
accompanying notes to consolidated financial statements


F-5





INFOSMART
GROUP INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


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


(Stated
in US Dollars)




Year
      ended December 312008
                                        
                                        
                                        2007
                                        
                                        
                                        2006Cash
      flows from operating activitiesNet
      (loss) / income
                                        
                                        
                                        (5,435,041
                                        )
                                        
                                        $
                                        9,783,441
                                        
                                        
                                        $
                                        1,064,544Adjustments
      to reconcile net (loss) / income to net cash flowsprovided
      by operating activities:Depreciation
                                        
                                        
                                        2,384,286
                                        
                                        
                                        
                                        2,960,677
                                        
                                        
                                        
                                        1,820,529Amortization
      of license usage right
                                        
                                        
                                        282,180
                                        
                                        
                                        
                                        289,552
                                        
                                        
                                        
                                        -Deferred
      income taxes
                                        
                                        
                                        89,481
                                        
                                        
                                        
                                        350,568
                                        
                                        
                                        
                                        577,767Loss
      / (Profit) on disposal of property, plant and equipment
                                        
                                        
                                        (63,000
                                        )
                                        
                                        
                                        245,934
                                        
                                        
                                        
                                        381,498Professional
      expenses related to Restructuring and ShareExchange
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,628,993Changes
      in operating assets and liabilities:Trade
      receivables
                                        
                                        
                                        31,097,353
                                        
                                        
                                        
                                        (32,536,829
                                        )
                                        
                                        
                                        (2,882,093
                                        )Prepaid
      expenses and other receivables
                                        
                                        
                                        (4,109,221
                                        )
                                        
                                        
                                        (274,132
                                        )
                                        
                                        
                                        167,669Inventories
                                        
                                        
                                        1,489,749
                                        
                                        
                                        
                                        (2,335,122
                                        )
                                        
                                        
                                        365,608Tax
      prepaid
                                        
                                        
                                        (866,161
                                        )
                                        
                                        
                                        (13,847
                                        )
                                        
                                        
                                        -Trade
      payables
                                        
                                        
                                        (21,195,207
                                        )
                                        
                                        
                                        22,874,578
                                        
                                        
                                        
                                        1,071,828Income
      tax payable
                                        
                                        
                                        (453,967
                                        )
                                        
                                        
                                        332,258
                                        
                                        
                                        
                                        363,928Advance
      from a related party
                                        
                                        
                                        117
                                        
                                        
                                        
                                        3,285
                                        
                                        
                                        
                                        (1,287,409
                                        )Other
      payables and accrued liabilities
                                        
                                        
                                        (494,983
                                        )
                                        
                                        
                                        (7,107,709
                                        )
                                        
                                        
                                        406,535Net
      cash flows provided by / (used in) operating activities
                                        
                                        
                                        2,725,586
                                        
                                        
                                        
                                        (5,427,346
                                        )
                                        
                                        
                                        4,679,397Cash
      flows from investing activitiesAcquisition
      of plant and equipment
                                        
                                        
                                        (281,892
                                        )
                                        
                                        
                                        (531,331
                                        )
                                        
                                        
                                        (8,686,331
                                        )Proceeds
      from disposal of plant and machinery
                                        
                                        
                                        168,017
                                        
                                        
                                        
                                        52,838
                                        
                                        
                                        
                                        -Cash
      acquired on the acquisition of subsidiaries
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        31,609Net
      cash flows used in investing activities
                                        
                                        
                                        (113,875
                                        )
                                        
                                        
                                        (478,493
                                        )
                                        
                                        
                                        (8,654,722
                                        )Cash
      flows from financing activitiesDividend
      paid
                                        
                                        
                                        (189,312
                                        )
                                        
                                        
                                        (453,764
                                        )
                                        
                                        
                                        (202,069
                                        )Proceeds
      from new bank loans
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        618,240Proceeds
      from other loans
                                        
                                        
                                        3,564,062
                                        
                                        
                                        
                                        4,764,761
                                        
                                        
                                        
                                        128,600Repayment
      of non-recurring bank loans
                                        
                                        
                                        (2,759,328
                                        )
                                        
                                        
                                        (8,294
                                        )
                                        
                                        
                                        (3,705,482
                                        )Net
      advancement / (repayment) of other bank borrowings
                                        
                                        
                                        (550,915
                                        )
                                        
                                        
                                        221,126
                                        
                                        
                                        
                                        1,766,999New
      obligations under capital leases
                                        
                                        
                                        -
                                        
                                        
                                        
                                        112,810
                                        
                                        
                                        
                                        -Repayment
      of other loans
                                        
                                        
                                        (87,571
                                        )
                                        
                                        
                                        (298,109
                                        )
                                        
                                        
                                        (674,436
                                        )Decrease/(increase)
      in restricted cash
                                        
                                        
                                        -
                                        
                                        
                                        
                                        552,973
                                        
                                        
                                        
                                        (289,930
                                        )Increase/(decrease)
      in bank overdrafts
                                        
                                        
                                        64,000
                                        
                                        
                                        
                                        194,423
                                        
                                        
                                        
                                        (258,420
                                        )Proceeds
      from issuance of common stock
                                        
                                        
                                        455,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        999Proceeds
      from the exercise of detachable common stock warrants
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        260,800Proceeds
      from the issuance of Series B preferred stockand
      detachable common stock warrants
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        7,650,000Preferred
      stock issuance costs and recapitalization costs
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (1,215,000
                                        )Repayment
      of obligations under capital leases
                                        
                                        
                                        (22,819
                                        )
                                        
                                        
                                        (37,686
                                        )
                                        
                                        
                                        (52,569
                                        )Net
      cash flows provided by/(used in) financing activities
                                        
                                        
                                        473,117
                                        
                                        
                                        
                                        5,048,240
                                        
                                        
                                        
                                        4,027,732Effect
      of foreign currency translation on cash and cash
    equivalents
                                        
                                        
                                        (3,659,179
                                        )
                                        
                                        
                                        1,674,781
                                        
                                        
                                        
                                        (517
                                        )Net
      increase in cash and cash equivalents
                                        
                                        
                                        (574,351
                                        )
                                        
                                        
                                        817,182
                                        
                                        
                                        
                                        51,890Cash
      and cash equivalents, beginning of year
                                        
                                        
                                        1,023,440
                                        
                                        
                                        
                                        206,258
                                        
                                        
                                        
                                        154,368Cash
      and cash equivalents, end of year
                                        
                                        
                                        449,089
                                        
                                        
                                        $
                                        1,023,440
                                        
                                        
                                        $
                                        206,258


See the
accompanying notes to consolidated financial statements


F-6





INFOSMART
GROUP INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONT’D)


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


(Stated
in US Dollars)





Year ended December
      312008
                        
                        
                        2007
                        
                        
                        2006Supplemental
      disclosures for cash flow information:Cash
      paid for:Interest
                        
                        $
                        1,191,545
                        
                        
                        $
                        457,662
                        
                        
                        $
                        511,309Income
      taxes
                        
                        
                        1,084,052
                        
                        
                        
                        509,108
                        
                        
                        
                        13,897Noncash
      investing and financing activities:Current
      account with IHL offsetting for the acquisition of
    property,plant
      and equipment
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        5,611,063Other
      payables for the acquisition of property, plant and
    equipment
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,871,667Conversion
      of Series B shares to common stock
                        
                        
                        1,690,222
                        
                        
                        
                        891,704
                        
                        
                        
                        512,101Issuance
      of Placement Agent warrants
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        644,800Series
      B Preferred deemed dividend
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,297,157Value
      of exchange transaction and financing services rendered inexchange
      for shares of common stock
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        747,000Value
      of exchange transaction and financing services rendered inexchange
      of Series A shares
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,431,993





See the
accompanying notes to consolidated financial statements


F-7





INFOSMART
GROUP INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


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


(Stated
in US Dollars)





AccumulatedSeries A Preferred
                          
                          
                          Additional
                          
                          
                          otherCommon stock
                          
                          
                          stock
                          
                          
                          Paid-in
                          
                          
                          comprehensive
                          
                          
                          RetainedShares
                          
                          
                          Amount
                          
                          
                          Shares
                          
                          
                          Amount
                          
                          
                          capital
                          
                          
                          Income/(loss)
                          
                          
                          earnings
                          
                          
                          TotalBalance,
      December 31, 2005
                          
                          
                          10,119,040
                          
                          
                          $
                          1
                          
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          619,877
                          
                          
                          $
                          31,658
                          
                          
                          $
                          8,389,883
                          
                          
                          $
                          9,041,419Issuance
      of common stock - note 18
                          
                          
                          -
                          
                          
                          
                          999
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          999Issuance
      of Series A shares - note 18
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          944,445
                          
                          
                          
                          -
                          
                          
                          
                          (21,336
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (21,336
                          )Issuance
      of common stock - note 18
                          
                          
                          3,309,770
                          
                          
                          
                          747,000
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          747,000Issuance
      of Series A shares - notes 8 and 18
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          55,555
                          
                          
                          
                          -
                          
                          
                          
                          1,431,993
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,431,993Conversion
      of Series A shares - note 18
                          
                          
                          116,721,360
                          
                          
                          
                          -
                          
                          
                          
                          (1,000,000
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Issuance
      of Series B shares with detachable warrants - note 18
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5,443,330
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5,443,330Series
      B preferred deemed-
      dividend - note 18
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (2,297,157
                          )
                          
                          
                          (2,297,157
                          )Conversion
      of Series B shares - note 18
                          
                          
                          4,851,256
                          
                          
                          
                          512,101
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          512,101Exercise
      of warrants - note 18
                          
                          
                          800,000
                          
                          
                          
                          260,800
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          260,800Issuance
      of Placement Agent Warrants - note 18
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          644,800
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          644,800Comprehensive
      incomeNet
      income
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,064,544
                          
                          
                          
                          1,064,544Foreign
      currency translation adjustments
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (12,421
                          )
                          
                          
                          -
                          
                          
                          
                          (12,421
                          )Total
      comprehensive income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,052,123Series
      B preferred dividend
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (202,069
                          )
                          
                          
                          (202,069
                          )Balance,
      December 31, 2006
                          
                          
                          135,801,426
                          
                          
                          $
                          1,520,901
                          
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          8,118,664
                          
                          
                          $
                          19,237
                          
                          
                          $
                          6,955,201
                          
                          
                          $
                          16,614,003Series
      B preferred dividend
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (453,763
                          )
                          
                          
                          (453,763
                          )Conversion
      of Series B shares - note 18
                          
                          
                          8,447,282
                          
                          
                          
                          891,704
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          891,704Net
      income
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          10,237,205
                          
                          
                          
                          10,237,205Foreign
      currency translation adjustments
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,497,766
                          
                          
                          
                          -
                          
                          
                          
                          1,497,766Balance,
      December 31, 2007
                          
                          
                          144,248,708
                          
                          
                          $
                          2,412,605
                          
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          8,118,664
                          
                          
                          $
                          1,517,003
                          
                          
                          $
                          16,738,643
                          
                          
                          $
                          28,786,915Series
      B preferred dividend
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (189,313
                          )
                          
                          
                          (189,313
                          )Issuance
      of Common Stock
                          
                          
                          1,300,000
                          
                          
                          $
                          455,000
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          455,000Conversion
      of Series B shares - note 18
                          
                          
                          16,011,812
                          
                          
                          $
                          1,690,222
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,690,222Net
      income
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (5,245,730
                          )
                          
                          
                          (5,245,730
                          )Foreign
      currency translation adjustments
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          (5,839,679
                          )
                          
                          
                          -
                          
                          
                          
                          (5,839,679
                          )Balance,
      December 31, 2008
                          
                          
                          161,560,520
                          
                          
                          $
                          4,557,827
                          
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          8,118,664
                          
                          
                          $
                          (4,322,676
                          )
                          
                          $
                          11,303,600
                          
                          
                          $
                          19,657,415





See notes
to consolidated financial statements


F-8





INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)





1. Corporation
information





The
Company was incorporated in the State of California and the Company’s shares are
quoted for trading on the Over-The-Counter Bulletin Board in the United States
of America.





2. Description
of business





The
Company, through its wholly owned subsidiary, Infosmart Group Limited
(“Infosmart”), is engaged in the business of developing, manufacturing,
marketing and sales of recordable digital versatile disc (“DVDR”) and recordable
compact discs (“CDR”), optical digital discs used for storing data and
interactive sequences as well as audio and video files, under a cooperation
agreement signed with a wholly owned subsidiary.  With the cooperation
agreement, the Company is able to manufacture DVDR and CDR under license
agreement granted from the intellectual property owner and the manufacturing
license issued by the Customs and Excise Department of Hong Kong.





The key
raw materials for the production of the Company’s products are PC resin and
silver granule. PC resin is mainly used in the molding of DVDR and
CDR.  Silver granule is mainly used in coating the DVDR and
CDR.





The
Company’s main suppliers are located in Hong Kong while the Company’s customers
are located in both Hong Kong and overseas including Australia, Europe, North
America and South America. The Company’s major customers include distributors
and retail traders.  The Company currently manufactures and ships the
products from Hong Kong and Brazil where the Company operates a state of the art
DVDR and CDR manufacturing facilities.





For the
development of the market in Brazil, the Company entered into an agreement on
March 20, 2006 with two independent third parties for setting up a subsidiary,
Discobrás Indústria E Comércio De Eletro Eletrônica Ltda (“Discobrás”), in
Brazil for the new DVDR production facility.  Recently, Discobras has
completed construction of the DVDR production facility. The subsidiary had
obtained all required government licenses and all other documents and approvals
necessary to operate a DVDR production facility in Brazil. Discobras installed
DVDR manufacturing equipment in February 2007 and began trial production in
March 2007. Regular production was commenced gradually from April
2007.





3. Continuance
of operations





These
financial statements have been prepared on a going concern basis. The Company
has working capital surplus of $503,250 at December 31, 2008 as compared with a
surplus of $3,662,510 in 2007.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern, which contemplates the realization
of assets and the liquidation of liabilities in the normal course of business.
The Company has incurred significant loss for the year ended December 31, 2008
and has a capital commitment of $5,000,000 to be repayable by monthly
installment of $366,666 for the period from June 2009 till Aug 2010. The Company
is therefore suffered by a heavily liquidity pressure.





For
minimizing the cash flow shortage pressure, the Company had managed its
liquidity during this time through a serious of cost reduction initiatives,
capital markets transactions and seeking for new finance. At the same time, the
directors and shareholders of the Company agree to give full financial support
to the Company by realizing their personal assets to make all the operating
expenses and all the outstanding liabilities repayable when necessary for the
next twelve months.





The
management of the Company is also currently engaged in negotiations with
financial institutions for new loans arrangements. By the date of this report,
the management of the Company has not yet reached an agreement with any
financial institutions. These negotiations are ongoing, and the management is
confident that a final loan agreement will be concluded in the near
future.


F-9




INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)





4.
            Summary
      of significant accounting policies
(Cont’d)




Basis
of presentation and consolidation





The
accompanying consolidated financial statements of the Company have been prepared
in accordance with generally accepted accounting principles in the United States
of America.





The
consolidated financial statements include the accounts of Infosmart Group Inc.
(the Company) and its subsidiaries (the Group). Significant intercompany
transactions have been eliminated in consolidation.





The
results of subsidiaries acquired or disposed of during the years are included in
the consolidated income statement from the effective date of acquisition or up
to the effective date of disposal.





As of
December 31, 2007, the particulars of the subsidiaries are as
follows:





Name of company
                          
                          Place of
                            Incorpor
                            ation
                          
                          Date of
                            Incorpor
                            Ation
                          
                          Attributable
                            equity
                            interest %
                          
                          Issued capitalInfosmart
      Group Limited
                          
                          British
      Virgin Islands
                          
                          March
      23 2005
                          
                          100
                          
                          US$1,427,794Infoscience
      Media Global Limited
                          
                          British
      Virgin Islands
                          
                          May
      17 2007
                          
                          100
                          
                          US$1Portabello
      Global Limited
                          
                          British
      Virgin Islands
                          
                          March
      21 2007
                          
                          100
                          
                          US$1Info
      Smart International Enterprises Limited
                          
                          Hong Kong
                          
                          September
      26 2003
                          
                          100
                          
                          US$25.65 (HK$200)Info
      Smart Technology Limited
                          
                          Hong Kong
                          
                          December
      14 2001
                          
                          100
                          
                          US$618,075
                            (HK$4,820,000)Infoscience
      Media Limited
                          
                          Hong Kong
                          
                          September
      10 2004
                          
                          100
                          
                          US$1,282 (HK$10,000)Infoscience
      Holdings Limited
                          
                          Hong Kong
                          
                          February
      23 2004
                          
                          100
                          
                          US$13 (HK$100)Manwin
      International Limited
                          
                          Hong Kong
                          
                          April
      112008
                          
                          50
                          
                          US$0.24 (HK$2)Discobras
      Industria E Comercio De Electro Electronica Ltda
                          
                          Brazil
                          
                          March
      2006
                          
                          99.42
                          
                          US$7,977,072





Non-controlling
Interests





For the
development of the market in Brazil, the Company entered into an agreement on
March 20, 2006 with two independent third parties for setting up a subsidiary,
Discobrás Indústria E Comércio De Eletro Eletrônica Ltda (“Discobrás”), in
Brazil. Discobrás has a social capital of $8,046,281 (equivalent to
R$17,385,600) and 99.42% or $8,000,000 (equivalent to R$17,285,600) (“Investment
Cost”) of which has been subscribed by the Company. The minority interests have
been recognized in the accompanying financial statements.





For the
development of the market in Blu-ray, the Company entered into an agreement on
April 11, 2008 with independent third parties for setting up a subsidiary,
Manwin International Limited (“Manwin”) in Hong Kong. Manwin has
a  capital of $0.24 (equivalent to HK$2) and 50% or US$0.12
(equivalent to HK$1) (“Investment Cost”) of which has been subscribed by the
Company. The minority interests have been recognized in the accompanying
financial statements.


F-10


INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)





4.
            Summary
      of significant accounting policies
(Cont’d)





Use
of estimates





In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting periods. These accounts and estimates include, but are not limited to,
the valuation of accounts receivable, inventories, deferred income taxes and the
estimation of useful lives of property, plant and equipment. Actual results
could differ from those estimates.





License
usage rights





License
usage rights are stated at cost less accumulated amortization. Amortization is
provided using the straight-line method over the remaining term of the license
obtained by IHL.





Concentrations
of credit risk





Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of trade receivables. The Company extends
credit based on an evaluation of the customer’s financial condition, generally
without requiring collateral or other security. The Company conducts periodic
reviews of the client’s financial conditions and payment practices. Further, the
Company will maintain an allowance for doubtful accounts based on the
management’s expectations on actual losses possibly incurred. Other than set
forth below, no customers represented 10% or more of the Company’s net
sales.





At
December 31, 2008, 2007 and 2006, customers representing 10% or more of the
Company’s net sales and their related trade receivables are:





Net
      sales
                    
                    Year ended December 312008
                    
                    
                    2007
                    
                    
                    2006Cheong
      King Industrial Limited
                    
                    $
                    6,868,890
                    
                    
                    $
                    -
                    
                    
                    $
                    -Mega
      Lyra Limited
                    
                    
                    5,490,000
                    
                    
                    
                    -
                    
                    
                    
                    -Optimost
      Investments Limited
                    
                    
                    -
                    
                    
                    
                    26,507,301
                    
                    
                    
                    -Laser
      Corporation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,539,155AgroDigital
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,443,350ENet
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,763,194$
                    12,358,890
                    
                    
                    $
                    26,507,301
                    
                    
                    $
                    12,745,699


Trade
      receivables
                    
                    As of December 312008
                    
                    
                    2007
                    
                    
                    2006Cheong
      King Industrial Limited
                    
                    $
                    2,974,155
                    
                    
                    $
                    -
                    
                    
                    $
                    -Mega
      Lyra Limited
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    -Optimost
      Investments Limited
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Laser
      Corporation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,450,249AgroDigital
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,312,563ENet
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -$
                    2,974,155
                    
                    
                    $
                    -
                    
                    
                    $
                    4,762,812
  Revenue
recognition





Revenue
from sales of the Company’s products is recognized when the significant risks
and rewards of ownership have been transferred to the buyer at the time of
delivery and the sales price is fixed or determinable and collection is
reasonably assured.


F-11


INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)





4.
            Summary
      of significant accounting policies
(Cont’d)





Advertising
and transportation expenses





Advertising,
transportation and other product-related costs are charged to expenses as
incurred.





Advertising
expenses amounted to $230,769, $10,737 and $45,463 during 2008, 2007 and 2006
respectively and are included in selling and distributing costs.





Transportation
expenses amounted to $214,574, $64,163 and $352,203 during 2008, 2007 and 2006
respectively and are included in selling and distributing costs.





Income
taxes





The
Company uses the asset and liability method of accounting for income taxes
pursuant to SFAS No. 109 “Accounting for Income Taxes”. Under the asset and
liability method of SFAS 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to temporary differences between
the financial statements carrying amounts of existing assets and liabilities and
loss carryforwards and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.





Dividends





Dividends
are recorded in the Company’s financial statements in the period in which they
are declared.





The
Series B Convertible Preferred Stock carries dividends at 8% per annum payable
quarter in cash in US Dollars.





Comprehensive
income





The
Company has adopted SFAS 130, “Reporting Comprehensive Income”, which
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances.





Accumulated
other comprehensive income represents the accumulated balance of foreign
currency translation adjustments of the Company.





Foreign
currency translation





The
functional currency of the Company are Hong Kong dollars (“HK$”) and Brazil
dollars (Real$). The Company maintains its financial statements in the
functional currency. Monetary assets and liabilities denominated in currencies
other than the functional currency are translated into the functional currency
at rates of exchange prevailing at the balance sheet dates. Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchanges rates prevailing at the dates of the
transaction. Exchange gains or losses arising from foreign currency transactions
are included in the determination of net income for the respective
periods.





For
financial reporting purposes, the financial statements of the Company which are
prepared using the functional currency have been translated into United States
dollars. Assets and liabilities are translated at the exchange rates at the
balance sheet dates and revenue and expenses are translated at the average
exchange rates and stockholders’ equity is translated at historical exchange
rates. Any translation adjustments resulting are not included in determining net
income but are included in foreign exchange adjustment to other comprehensive
income, a component of stockholders’ equity.





The
exchange rates in effect at December 31, 2008 and 2007 were HK$1 for $0.1290 and
$0.1282 US dollars and Real$1 for $0.4323 and $0.5618 US dollars respectively.
The average exchange rates for 2008,2007 and 2006 were HK$1 for $0.1284,$0.1282
and $0.1287 US dollars and Real$1 for $0.5589,$0.5163 and $0.46 US dollars
respectively. There is no significant fluctuation in exchange rate for the
conversion between Real dollars, HK dollars and US dollars after the balance
sheet date.


F-12


INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)





4.
            Summary
      of significant accounting policies
(Cont’d)





Fair
value of financial instruments





The
carrying values of the Company’s financial instruments, including cash and cash
equivalents, restricted cash, trade and other receivables, deposits, trade and
other payables approximate their fair values due to the short-term maturity of
such instruments. The carrying amounts of borrowings approximate their fair
values because the applicable interest rates approximate current market
rates.





It is
management’s opinion that the Company is not exposed to significant interest,
price or credit risks arising from these financial instruments.





The
Company is exposed to certain foreign currency risk from export sales
transactions and recognized trade receivables as they will affect the future
operating results of the Company. The Company did not have any hedging
activities during the reporting period. As the functional currencies of the
Company are HK$ and Real$, the exchange difference on translation to US dollars
for reporting purpose is taken to other comprehensive income.





Stock-based
payment





The
Company adopted the SFAS No. 123R, "Share-Based Payment" ("SFAS 123R") using the
modified prospective method. Under SFAS 123R, equity instruments issued to
service providers for their services are measured at the grant-date fair value
and recognized in the statement of operations over the vesting
period.





Basic
and diluted earnings (loss) per share





The
Company reports basic earnings (loss) per share in accordance with SFAS No. 128,
“Earnings Per Share”. Basic earnings (loss) per share is computed using the
weighted average number of shares outstanding during the periods presented. The
weighted average number of shares of the Company represents the common stock
outstanding during the year.





Diluted
earning (loss) per share is based on the assumption that all dilutive
convertible shares and stock options were converted or exercised. Dilution is
computed by applying the treasury stock method. Under this method, options and
warrants are assumed to be exercised at the beginning of the year (or at the
time of issuance, if later), and as if funds obtained thereby were used to
purchase common stock at the average market price during the year.





The
Company’s common stock equivalents at December 31, 2008 include the
following:





Detachable
      common stock warrants
                    
                    
                    28,510,347Placement
      agent warrants
                    
                    
                    3,740,57732,250,924





Cash
and cash equivalents





Cash and
cash equivalents include all cash, deposits in banks and other highly liquid
investments with initial maturities of three months or less.


F-13


INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)





4.
            Summary
      of significant accounting policies
(Cont’d)





Trade
receivables





Trade
receivables are stated at original amount less allowance made for doubtful
receivables, if any, based on a review of all outstanding amounts at the year
end. The Company extends unsecured credit to customers in the normal course of
business and believes all trade receivables in excess of the allowances for
doubtful receivables to be fully collectible. Full allowances for doubtful
receivables are made when the receivables are overdue for 1 year and an
allowance is also made when there is objective evidence that the Company will
not be able to collect all amounts due according to the original terms of
receivables. Bad debts are written off when identified. The Company does not
accrue interest on trade accounts receivable.





Inventories





Inventories
are valued at the lower of cost or market value with cost determined on a
first-in, first-out basis. In assessing the ultimate realization of inventories,
the management makes judgments as to future demand requirements compared to
current or committed inventory levels. The Company’s reserve requirements
generally increase/decrease due to managements projected demand requirements,
market conditions and product life cycle changes. During the reporting years,
the Company did not make any allowance for slow-moving or defective
inventories.





Plant
and equipment





Plant and
equipment are stated at cost less accumulated depreciation. Cost represents the
purchase price of the asset and other costs incurred to bring the asset into its
existing use. Maintenance, repairs and betterments, including replacement of
minor items, are charged to expense; major additions to physical properties are
capitalized.





Depreciation
of plant and equipment is provided using the straight-line method over their
estimated useful lives. The principal annual rates are as follows:





Production
      lines and equipment
              10%
      with 30% residual valueLeasehold
      improvements and others
              20%





Upon sale
or disposition, the applicable amounts of asset cost and accumulated
depreciation are removed from the accounts and the net amount less proceeds from
disposal is charged or credited to income.





Impairment
of long-live assets





Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. The
Company recognizes impairment of long-lived assets in the event that the net
book values of such assets exceed the future undiscounted cashflows attributable
to such assets. No impairment of long-lived assets was recognized for any of the
periods presented.





Off-balance
sheet arrangements





Other
than the bank guarantee given by a bank to a utility company which exempted the
Company’s obligation to pay the required utility deposit (note 13), the Company
does not have any off-balance sheet arrangements.


F-14


INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)





4.
            Summary
      of significant accounting policies
(Cont’d)





Recently
Issued Accounting Pronouncements





In March
2008, the FASB issued SFAS No. 161, DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES (an amendment to SFAS No. 133). This statement is effective
for financial statements issued for fiscal year and interim periods beginning
after November 15, 2008 and requires enhanced disclosures with respect to
derivative and hedging activities. The Company will comply with the disclosure
requirements of this statement if it utilizes derivative instruments or engages
in hedging activities upon its effectiveness.




In April
2008, the FASB issued FASB Staff Position No. 142-3, DETERMINATION OF THE USEFUL
LIFE OF INTANGIBLE ASSETS (“FSP No. 142-3”) to improve the consistency between
the useful life of a recognized intangible asset (under SFAS No. 142) and the
period of expected cash flows used to measure the fair value of the intangible
asset (under SFAS No. 141(R)). FSP No. 142-3 amends the factors to be considered
when developing renewal or extension assumptions that are used to estimate an
intangible asset’s useful life under SFAS No. 142. The guidance in the new staff
position is to be applied prospectively to intangible assets acquired after
December 31, 2008. In addition, FSP No.142-3 increases the disclosure
requirements related to renewal or extension assumptions. The Company does not
believe implementation of FSP No. 142-3 have a material impact on its financial
statements.




In May
2008, the FASB issued statement No. 162, THE HIERARCHY OF GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES. This statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This statement is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, “the Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles”.





In May
2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1 "Accounting
for Convertible Debt instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 requires the
issuer of certain convertible debt instruments that may be settled in cash (or
other assets) on conversion to separately account for the liability (debt) and
equity (conversion option) components of the instrument in a manner that
reflects the issuer's non-convertible debt borrowing rate. FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008 on a retroactive
basis. As we do not have convertible debt at this time, we currently believe the
adoption of FSP APB 14-1 will have no effect on our combined results of
operations and financial condition.




In May
2008, the FASB issued Statement No. 163, ACCOUNTING FOR FINANCE GUARANTEE
INSURANCE CONTRACTS - AN INTERPRETATION OF FASB STATEMENT NO. 60. The premium
revenue recognition approach for a financial guarantee insurance contract links
premium revenue recognition to the amount of insurance protection and the period
in which it is provided. For purposes of this statement, the amount of insurance
protection provided is assumed to be a function of the insured principal amount
outstanding, since the premium received requires the insurance enterprise to
stand ready to protect holders of an insured financial obligation from loss due
to default over the period of the insured financial obligation. This Statement
is effective for financial statements issued for fiscal years beginning after
December 15, 2008.


F-15


INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)





4.
            Summary
      of significant accounting policies
(Cont’d)





Recently
Issued Accounting Pronouncements





In June
2008, the FASB issued FASB Staff Position Emerging Issues Task Force (EITF) No.
03-6-1, DETERMINING WHETHER INSTRUMENTS GRANTED IN SHARE-BASED PAYMENT
TRANSACTIONS ARE PARTICIPATING SECURITIES (“FSP EITF No. 03-6-1”). Under FSP
EITF No. 03-6-1, unvested share-based payment awards that contain rights to
receive nonforfeitable dividends (whether paid or unpaid) are participating
securities, and should be included in the two-class method of computing EPS. FSP
EITF No. 03-6-1 is effective for fiscal years beginning after December 15, 2008,
and interim periods within those years, and is not expected to have a
significant impact on the Company’s financial statements.




None of
the above new pronouncements has current application to the Company, but may be
applicable to the Company’s future financial reporting.





5.
            Professional
      expenses related to Restructuring and Share
  Exchange





Year ended December 312008
                  
                  
                  2007
                  
                  
                  2006Issuance
      of shares of Infosmart’s common stock to HIG Note 5(a)
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  1,431,993Reverse
      Merger fees Note 5(b)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  450,000Issuance
      of the Company’s common stock to professional parties Note
    5c
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  747,000Others
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  124,397$
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  2,753,390





Notes:





5(a).
            Under
      the terms of the Exchange Agreement, immediately prior to the closing of
      the Exchange Agreement, HIG received 58.82352 shares (exchanged for
      55,555.55 shares of the Company’s Series A Convertible Preferred Stock) of
      Infosmart’s common stock as payment for its services as a finder in
      connection with the exchange
transaction.


5(b).
            Keating
      Securities, LLC. was paid an advisory fee of
  $450,000.


5(c).
            Fees
      for services rendered by Worldwide Gateway Company Ltd. and Richardson and
      Patel were settled by issuance of 2,850,000 shares and 459,770 shares of
      the Company’s common stock.


5(d).
            The
      above professional expenses relate to the Restructuring and Share Exchange
      which occurred during the year and are
  non-recurring.





6.
            Other
      Income





Year ended December 312008
                  
                  
                  2007
                  
                  
                  2006Insurance
      compensation
                  
                  $
                  670,941
                  
                  
                  $
                  641,157
                  
                  
                  $
                  -Interest
      income
                  
                  
                  1,468
                  
                  
                  
                  5,473
                  
                  
                  
                  23,821Scrap
      sales
                  
                  
                  265,449
                  
                  
                  
                  160,455
                  
                  
                  
                  322,006Other
      income
                  
                  
                  416,380
                  
                  
                  
                  903,323
                  
                  
                  
                  104,158$
                  1,354,238
                  
                  
                  $
                  1,710,408
                  
                  
                  $
                  499,985





F-16




INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)





7.
            Income
      taxes





The
components of income before income taxes are:-





Year
      ended December 312008
                      
                      
                      2007
                      
                      
                      2006Brazil
                      
                      $
                      3,903,035
                      
                      
                      $
                      (2,360,083
                      )
                      
                      $
                      -Hong
      Kong
                      
                      
                      (3,104,057
                      )
                      
                      
                      (1,148,746
                      )
                      
                      
                      5,247,207The
      British Virgin Islands
                      
                      
                      (3,583,171
                      )
                      
                      
                      14,336,412
                      
                      
                      
                      (1,720,880
                      )The
      United States
                      
                      
                      (2,067,236
                      )
                      
                      
                      (482,683
                      )
                      
                      
                      (1,506,191
                      )Elimination
      of the inter-group transaction
                      
                      
                      (282,181
                      )
                      
                      
                      (172,451
                      )
                      
                      
                      -$
                      (5,133,610
                      )
                      
                      $
                      10,172,449
                      
                      
                      $
                      2,020,136





The
components of the provision for income taxes are:-





Year
      ended December 312008
                      
                      
                      2007
                      
                      
                      2006Current
      taxesHong
      Kong
                      
                      $
                      51,309
                      
                      
                      $
                      155,011
                      
                      
                      $
                      377,825Deferred
      taxesHong
      Kong
                      
                      
                      38,173
                      
                      
                      
                      (207,517
                      )
                      
                      
                      577,76789,482
                      
                      
                      $
                      (52,506
                      )
                      
                      $
                      955,592





The
Company is subject to income tax in the United States. No provision for income
tax in the United States has been made as the Company had no taxable income for
the years ended December 31, 2008, 2007 and 2006. The statutory tax rate is
34%.





The
Company’s subsidiary incorporated in the BVI is not subject to income taxes
under the current laws of BVI.





The
Company’s subsidiaries operating in Hong Kong are subject to profit tax rate of
16.5% (2007: 17.5%)on the estimated assessable profits during the
years.





The
Company’s subsidiaries operating in Brazil is subject to profit tax rate of 34%.
No provision for income tax in Brazil has been made as the Company had tax
relief for the year ended December 31, 2008.





The
effective income tax expenses differ from the statutory rate of 34% in the
United States as follows:


Year
      ended December 312008
                      
                      
                      2007
                      
                      
                      2006Provision
      for income tax at 34%
                      
                      $
                      1,327,031
                      
                      
                      $
                      3,458,632
                      
                      
                      $
                      686,846Foreign
      tax rate differential
                      
                      
                      89,482
                      
                      
                      
                      304,207
                      
                      
                      
                      (280,690
                      )Increase
      in valuation allowance
                      
                      
                      -
                      
                      
                      
                      966,540
                      
                      
                      
                      512,105Exemption
      in taxation
                      
                      
                      (1,327,031
                      )
                      
                      
                      (4,874,381
                      )
                      
                      
                      -Others
                      
                      
                      -
                      
                      
                      
                      92,496
                      
                      
                      
                      37,331Effective
      income tax expenses
                      
                      $
                      89,482
                      
                      
                      $
                      (52,506
                      )
                      
                      $
                      955,592




F-17




INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)





7.
            Income
      taxes (cont’d)





Deferred
tax (assets) liabilities as of December 31, 2008 and 2007 are composed of the
following:





As
      of December 312008
                          
                          
                          2007Hong KongOperating
      losses available for future periods
                          
                          $
                          -
                          
                          
                          $
                          -Temporary
      difference on accelerated tax depreciation on plant and
      equipment
                          
                          
                          2,396,706
                          
                          
                          
                          2,305,728The United SatesOperating
      losses available for future periods
                          
                          
                          (2,740,553
                          )
                          
                          
                          (482,683
                          )Valuation
      allowance
                          
                          
                          2,740,553
                          
                          
                          
                          482,683Deferred
      tax liabilities, net
                          
                          $
                          2,396,706
                          
                          
                          $
                          2,305,728Recognized
      in the balance sheet:Net
      deferred tax assets
                          
                          $
                          -
                          
                          
                          $
                          -Net
      deferred tax liabilities
                          
                          
                          2,396,706
                          
                          
                          
                          2,305,728$
                          2,396,706
                          
                          
                          $
                          2,305,728





The
Company has a federal net operating loss carry forward of $2,740,553 (2007: $482,683) available to
offset taxable income through to the year 2008. The Company recorded a deferred
income tax asset for the tax effect of net operating loss carry forwards
aggregating $2,740,553 (2007:
$482,683), against which the Company has recorded a full valuation
allowance in recognition of the uncertainty regarding the ultimate amount of
income tax benefits to be derived. Under the Tax Reform Act of 1986, the amounts
of and benefits from net operating losses carried forward may be impaired or
limited in certain circumstances. Events which may cause limitations in the
amount of net operating losses that the Company may utilize in any one year
include, but are not limited to, a cumulative ownership change of more than 50
percent over a three-year period. At December 31, 2008, the effect of such
limitation, if imposed, has not been determined.





At
December 31, 2008, the Company also had a net operating loss carried forward of
$38,224,904 (2007:
$3,088,795) in Hong Kong that is available for offset against future
profits for an unlimited period of time.




F-18




INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)





8.
            Earning
      per share





The
Company’s common stock equivalents at December 31, 2008 include the
following:





Detachable
      common stock warrants
                    
                    
                    28,510,347Placement
      agent warrants
                    
                    
                    3,740,57732,250,924





The
Company stock equivalents on issue during the period were
anti-dilutive.





9.
            Prepaid
      expenses and other receivables





As
      of December 312008
                      
                      
                      2007Prepaid
      professional expenses
                      
                      $
                      714,285
                      
                      
                      $
                      28,724Other
      prepaid operating expenses
                      
                      
                      1,857,868
                      
                      
                      
                      427,372Rental
      and utility deposits
                      
                      
                      84,127
                      
                      
                      
                      80,312Other
      receivables for advancement
                      
                      
                      -
                      
                      
                      
                      7,937Blu-ray
      production facility deposit
                      
                      
                      1,997,285
                      
                      
                      
                      -$
                      4,653,565
                      
                      
                      $
                      544,345





10.
            Inventories





As
      of December 312008
                      
                      
                      2007Raw
      materials
                      
                      $
                      1,270,204
                      
                      
                      $
                      1,190,330Work
      in progress
                      
                      
                      141,350
                      
                      
                      
                      15,974Finished
      goods
                      
                      
                      494,891
                      
                      
                      
                      2,189,890$
                      1,906,445
                      
                      
                      $
                      3,396,194




F-19




INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)




11.
            Plant
      and equipment





As
      of December2008
                  
                  
                  2007CostsProduction
      lines and equipment
                  
                  $
                  38,285,587
                  
                  
                  $
                  38,034,178Leasehold
      improvements
                  
                  
                  2,091,402
                  
                  
                  
                  2,132,378Furniture,
      fixtures and office equipment
                  
                  
                  212,399
                  
                  
                  
                  221,393Motor
      vehicles
                  
                  
                  255,615
                  
                  
                  
                  260,55040,845,003
                  
                  
                  
                  40,648,499Accumulated
      depreciationProduction
      lines and equipment
                  
                  
                  11,286,382
                  
                  
                  
                  8,666,845Leasehold
      improvements
                  
                  
                  1,220,333
                  
                  
                  
                  811,850Furniture,
      fixtures and office equipment
                  
                  
                  74,776
                  
                  
                  
                  50,662Motor
      vehicles
                  
                  
                  52,819
                  
                  
                  
                  25,47412,634,310
                  
                  
                  
                  9,554,831NetProduction
      lines and equipment
                  
                  
                  26,999,205
                  
                  
                  
                  29,367,333Leasehold
      improvements
                  
                  
                  871,069
                  
                  
                  
                  1,320,528Furniture,
      fixtures and office equipment
                  
                  
                  137,623
                  
                  
                  
                  170,731Motor
      vehicles
                  
                  
                  202,796
                  
                  
                  
                  235,076Plant
      and equipment, net
                  
                  $
                  28,210,693
                  
                  
                  $
                  31,093,668





An
analysis of production lines and equipment pledged to banks for banking
facilities (note 13) granted to the Company is as follows:





Pledge
      for
                    banking
      facilitiesAs
      of December 312008
                  
                  
                  2007Costs
                  
                  $
                  14,724,398
                  
                  
                  $
                  14,724,398Accumulated
      depreciation
                  
                  
                  (4,677,815
                  )
                  
                  
                  (4,115,101
                  )Net
                  
                  $
                  10,046,583
                  
                  
                  $
                  10,609,297





Pledge
      for
                    banking
      facilitiesAs
      of December 312008
                  
                  
                  2007Depreciation
      for the year
                  
                  $
                  562,714
                  
                  
                  $
                  1,569,309




F-20


INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)





11.
            Plant
      and equipment (cont’d)





The components of depreciation charged
are:





Year
      ended December 312008
                    
                    
                    2007
                    
                    
                    2006Included
      in factory overheads
                    
                    $
                    1,925,717
                    
                    
                    $
                    2,500,452
                    
                    
                    $
                    1,596,636Production
      lines and equipmentIncluded
      in operating expensesLeasehold
      improvements
                    
                    
                    373,174
                    
                    
                    
                    395,835
                    
                    
                    
                    191,634Furniture,
      fixtures and office equipment
                    
                    
                    30,799
                    
                    
                    
                    29,900
                    
                    
                    
                    21,300Motor
      vehicles
                    
                    
                    54,596
                    
                    
                    
                    34,490
                    
                    
                    
                    10,959458,569
                    
                    
                    
                    460,225
                    
                    
                    
                    223,893$
                    2,384,286
                    
                    
                    $
                    2,960,677
                    
                    
                    $
                    1,820,529





12.
            Other
      payables and accrued liabilities





As
      of December 312008
                  
                  
                  2007Customers
      deposits
                  
                  $
                  -
                  
                  
                  $
                  -Accrued
      professional fee
                  
                  
                  59,272
                  
                  
                  
                  233,231Staff
      costs payable
                  
                  
                  113,503
                  
                  
                  
                  193,083Other
      loan interest payable
                  
                  
                  258,465
                  
                  
                  
                  165,057Other
      accrued expenses for operations
                  
                  
                  746,245
                  
                  
                  
                  1,081,097$
                  1,177,485
                  
                  
                  $
                  1,672,468




F-21




INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)





13.
            Bank
      borrowings





As
      of December 312008
                  
                  
                  2007Secured:Bank
      overdrafts repayable on demand
                  
                  $
                  258,423
                  
                  
                  $
                  194,423Repayable
      within one yearNon-recurring
      bank loans
                  
                  
                  2,092,520
                  
                  
                  
                  2,310,090Other
      bank borrowings
                  
                  
                  3,114,366
                  
                  
                  
                  3,665,2805,465,309
                  
                  
                  
                  6,169,793Repayable
      after one yearNon-recurring
      bank loans
                  
                  
                  -
                  
                  
                  
                  2,092,9495,465,309
                  
                  
                  
                  8,262,742Unsecured:Bank
      overdrafts repayable on demandRepayable
      within one yearOther
      bank borrowings
                  
                  
                  -
                  
                  
                  
                  592,760-
                  
                  
                  
                  592,760$
                  5,465,309
                  
                  
                  $
                  8,855,502





As of
December 31, 2008, the Company’s banking facilities are composed of the
following:




AmountFacilities
      granted
                          
                          Granted
                          
                          
                          Utilized
                          
                          
                          UnusedLetter
      of credit including:-
      Outstanding letter of credit
                          
                          
                          
                          
                          $
                          195,000-
      Letter of credit under trust receipt
                          
                          
                          
                          
                          
                          2,919,3665,128,205
                          
                          
                          
                          3,114,366
                          
                          
                          
                          2,013,839Bank
      overdrafts
                          
                          
                          256,410
                          
                          
                          
                          244,315
                          
                          
                          
                          12,095Non-recurring
      bank loans
                          
                          
                          2,092,520
                          
                          
                          
                          2,092,520
                          
                          
                          
                          -Bank
      guarantee for utility deposit
                          
                          
                          153,846
                          
                          
                          
                          153,846
                          
                          
                          
                          -7,630,981
                          
                          
                          
                          5,605,047
                          
                          
                          
                          2,025,934




As of
December 31, 2008, the above banking borrowings were secured by the
following:




(a)
              first
      fixed legal charge over 17 DVDR discs production lines with carrying
      amounts of $10,046,583 (note 11);
 
 (b)
              joint
      and several guarantees executed by two beneficial shareholders of the
      Company, a spouse of one of the beneficial shareholders and a director of
      the Company’s subsidiary.




The
interest rates of bank loans in ISTL and IML were at 1.75% and 1.5% over one
month Hong Kong Interbank Offered Rate per annum respectively




F-22




INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)





14.
            Other
      loans





The
outstanding principal of the other loans are repayable as follows:





As
      of December 312008
                        
                        
                        2007Year
      ending December 312008
                        
                        $
                        -
                        
                        
                        $
                        5,065,6392009
                        
                        
                        3,503,542
                        
                        
                        
                        572,0992010
                        
                        
                        7,191,948
                        
                        
                        
                        145,324Total
                        
                        
                        10,695,490
                        
                        
                        
                        5,783,062Current
      portion
                        
                        
                        (3,503,542
                        )
                        
                        
                        (5,065,639
                        )Non-current
      portion
                        
                        
                        7,191,948
                        
                        
                        
                        717,423





All the
other loans are unsecured and have fixed repayment terms. The interest rate is
Hong Kong Prime interest rate (the average effective rate is approximately 5.44%
(2008) and 7.59% (2007) .





15.
            Advance
      from a related party





Advance
from a related party for working capital are as follows:





As
      of December 312008
                    
                    
                    2007Prime
      Corporate Developments Ltd.
                    
                    $
                    929,751
                    
                    
                    $
                    929,634





The above
advance is interest-free, unsecured and the related party has undertaken not to
demand repayment in the next twelve months.





F-23





INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)





16.
            License
      usage rights





2008
                      
                      
                      2007Cost
      of license usage rights
                      
                      $
                      2,092,809
                      
                      
                      $
                      2,092,809Less:
      Accumulated amortization
                      
                      
                      (564,334
                      )
                      
                      
                      (282,154
                      )Land
      use rights, net
                      
                      $
                      1,528,475
                      
                      
                      $
                      1,810,655





The
Company obtained the Infoscience Holdings Limited during 2006.  In the
process of acquisition, 2 license were obtained for the production of DVDR discs
(“the Products”)





1.
            License
      agreement granted from DVDR developer (intellectual property owner) to
      produce the Products


2.
            The
      license for the manufacture of optical discs issued by the Customs and
      Excise Department of Hong Kong





Estimate
usage right totally is 89 months.  At December 2008, the license will
be expired in 65 months





Amortization
expense for the years ended 2008 was $282,180 (2007:$282,154 & 2006:
Nil).





The
estimated aggregate amortization expenses for license usage right for the five
succeeding years is as follows :-





Year2009
                      
                      $
                      282,1802010
                      
                      
                      282,1802011
                      
                      
                      282,1802012
                      
                      
                      282,1802013
                      
                      
                      282,180$
                      1,410,900





17.
            Commitments
      and contingencies





Operating leases
commitments





The
Company leases office and factory premises under various non-cancelable
operating lease agreements that expire at 31 January 2012, with an option
to renew the lease. All leases are on a fixed repayment basis. None of the
leases include contingent rentals. Minimum future commitments under these
agreements payable as of December 31, 2008 are as follows:-





Year
      ending December 312009
                                  
                                  $
                                  340,6202010
                                  
                                  
                                  349,2162011
                                  
                                  
                                  349,2162012
                                  
                                  
                                  29,101





Rental
expense was $246,073, $214,899, and $169,221 during 2008, 2007 and 2006
respectively.




F-24




INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)








17.
            Commitments
      and contingencies





Capital
commitments





At the
balance sheet date, the Company Group has a contractual commitment in respect of
the repayment of other loan of $5,000,000 (2007: Nil).





Contingencies





From time
to time, the Company is subject to legal claims and legal proceedings that arise
in the ordinary course of our business. In the opinion of management, the
ultimate outcome of claims and litigation of which management is aware will not
have a material adverse effect on our consolidated financial position or results
of operation. Management is not currently aware of any pending legal proceedings
against Infosmart BVI except for the following:




Stanley Rosner v. World Wide
Magic Net, Inc. (n/k/a Cyber) and Burlington Coat Factory, New York State
Supreme Court, Nassau County, Index No. 98-006524. This is a breach of contract,
fraud and tortuous interference action seeking $5,000,000 in compensatory
damages, unspecified punitive damages and declaratory relief. By stipulation
dated May 7, 1998, Mr. Rosner agreed to transfer the action to the Supreme Court
in New York County after conceding Nassau County was not the proper venue for
the action. Since that date, Mr. Rosner has neither transferred the case nor
pursued it further.





In Re: Factory 2-U Stores,
Inc., U.S. Bankruptcy Court, District of Delaware - Adv. Proc. No.
005-30480. On March 7, 2006, a complaint was filed against the Company in a
Chapter 7 bankruptcy proceeding in U.S. Bankruptcy Court in the District of
Delaware in the matter captioned In Re: Factory 2-U Stores, Inc. The complaint
sought to recover from the Company $91,572 in alleged preferential transfers
made to the Company by the debtor during the ninety-day period prior to the
filing of the debtor's bankruptcy petition. The Company defended
against the preference claim by asserting that such transfers were made in
the ordinary course of business. On May 22, 2007, all parties entered into a
settlement agreement, subject to the bankruptcy court’s approval. The settlement
term is that Infosmart is required to pay to the complaint the sum of $15,000 on
or before May 25, 2007. The bankruptcy court approved the settlement and
dismissed the complaint with prejudice on June 21, 2007.





F-25




INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)





18.
            Common
      Stock and Convertible Preferred
Stock


Common
      stock
                                            
                                            
                                            Series
      A
                                            
                                            
                                            Series
      B
                                            
                                            
                                            Additional
                                              paid-in
                                              capitalNo.
      of
                                            
                                            
                                            
                                            
                                            
                                            No.
      of
                                            
                                            
                                            
                                            
                                            
                                            No.
      of
                                            
                                            
                                            AmountShares
                                            
                                            
                                            Amount
                                            
                                            
                                            Shares
                                            
                                            
                                            Amount
                                            
                                            
                                            SharesBalance,
      January 1, 2006
                                            
                                            
                                            10,119,040
                                            
                                            
                                            $
                                            1
                                            
                                            
                                            
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            619,877Issuance
      of Infosmart’s common stock prior to exchange transaction on August 11,
      2006
                                            
                                            
                                            -
                                            
                                            
                                            
                                            999
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Issuance
      of Series A shares on August 16, 2006 for the exchange of:-
      1,000 shares of Infosmart’s common stock held by Original Infosmart
      Shareholders
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            944,445
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (21,336
                                            )-
      58.82352 shares of Infosmart’s common stock held by HIG
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            55,555
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,431,993Issuance
      of common stock for the completion of the Restructuring and Share
      Exchange:on
      August 16, 2006-
      finders fee
                                            
                                            
                                            2,850,000
                                            
                                            
                                            
                                            627,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            --
      legal advise fee
                                            
                                            
                                            459,770
                                            
                                            
                                            
                                            120,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Issuance
      of Series B shares with detachable warrants on August 16,
    2006
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,092,857
                                            
                                            
                                            
                                            3,738,827
                                            
                                            
                                            
                                            5,443,330Issuance
      of Placement Agent warrants on various dates
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (644,800
                                            )
                                            
                                            
                                            644,800Conversion
      of Series A to common stock on October 12, 2006
                                            
                                            
                                            116,721,360
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (1,000,000
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Conversion
      of Series B to common stock on various date
                                            
                                            
                                            4,851,256
                                            
                                            
                                            
                                            512,101
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (180,883
                                            )
                                            
                                            
                                            (512,101
                                            )
                                            
                                            
                                            -Issuance
      of common stock for the exercise of warrants
                                            
                                            
                                            800,000
                                            
                                            
                                            
                                            260,800
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Balance,
      December 31, 2006
                                            
                                            
                                            135,801,426
                                            
                                            
                                            $
                                            1,520,901
                                            
                                            
                                            
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            
                                            911,974
                                            
                                            
                                            $
                                            2,581,926
                                            
                                            
                                            $
                                            8,118,664Conversion
      of Series B to common stock on various date
                                            
                                            
                                            8,447,282
                                            
                                            
                                            $
                                            891,704
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (314,963
                                            )
                                            
                                            
                                            (891,704
                                            )
                                            
                                            
                                            -Balance,
      December 31, 2007
                                            
                                            
                                            144,248,708
                                            
                                            
                                            $
                                            2,412,605
                                            
                                            
                                            
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            
                                            597,011
                                            
                                            
                                            $
                                            1,690,222
                                            
                                            
                                            $
                                            8,118,664Issuance
      of common stock
                                            
                                            
                                            1,300,000
                                            
                                            
                                            $
                                            455,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Conversion
      of Series B to common stock on various date
                                            
                                            
                                            16,011,812
                                            
                                            
                                            $
                                            1,690,222
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (597,011
                                            )
                                            
                                            
                                            (1,690,222
                                            )
                                            
                                            
                                            -Balance,
      December 31, 2008
                                            
                                            
                                            161,560,520
                                            
                                            
                                            $
                                            4,557,827
                                            
                                            
                                            
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            8,118,664
  F-26
  INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)





18.
            Common
      Stock and Convertible Preferred Stock
(cont’d)





Common
Stock





The
number of authorized shares of the Company's common stock is 300,000,000 shares.
The shares have no par value.





Preferred
Stock





The
Company is authorized under its Articles of Incorporation to issue 10,000,000
shares of preferred stock, no par value per share. Of the 10,000,000 shares of
preferred stock authorized, 1,200,000 shares were designated as Series A
Convertible Preferred Stock and 1,800,000 shares were designated as Series B
Redeemable Convertible Preferred Stock pursuant to Certificates of Determination
that were approved by the Company's Board of Directors, and filed with and
accepted by, the Secretary of State of the State of California prior to the
closing of the exchange transaction.





Series A Preferred
Stock





Under the
terms of the Exchange Agreement, the Infosmart Shares held by the Infosmart
Shareholders were exchanged for 1,000,000 shares of the Company’s Series A
Preferred Stock (the “Exchange”).





Series B Preferred Stock and
Warrants





The
consummation of the Exchange was contingent on a minimum of $7 million (or such
lesser amount as mutually agreed by Infosmart and the placement agent) being
subscribed for, and funded into escrow, by certain accredited and institutional
investors (“Investors”) for the purchase of shares of Series B Redeemable
Convertible Preferred Stock of the Company promptly after the closing the
Exchange under terms and conditions approved by the Company’s board of directors
immediately following the Exchange (the “Financing”). The closing of the
Financing was contingent on the closing of the Exchange, and the Exchange was
contingent on the closing of the Financing.





Immediately
following the closing of the Exchange, the Company received gross proceeds of
approximately $7.65 million in connection with the Financing from the Investors.
Pursuant to Subscription Agreements entered into with these Investors, the
Company sold 1,092,857.143 shares of the Company’s Series B Preferred Stock with
detachable warrants at a price per share of $7.00. Each share of Series B
Preferred Stock will be convertible into shares of the Company’s common stock.
It will be convertible into shares of the Company’s common stock at the election
of the holder at a conversion price equal to $0.261 per share (“Conversion
Price”). The Company was required to register the common stock underlying the
Series B Preferred Stock and warrants issued in the Financing with the
Securities and Exchange Commission for resale by the Investors. After deducting
placement agents’ commissions and expenses as detailed below, the Company
received net proceeds of approximately $6.89 million in the
Financing.





In
connection with the issuance of the Series B Preferred Stock to the Investors,
the Company issued warrants to the Investors to purchase an aggregate of
29,310,345 shares of common stock, on as-converted basis, of the Company. The
warrants have an exercise price of $0.326 per share, subject to
adjustments.





Keating
Securities, LLC and Axiom Capital Management, Inc. (“Placement Agents”) acted as
Placement Agents in connection with the Financing. For their services, the
Placement Agents received a commission equal to 8% of the gross proceeds or
approximately $587,000 from the offering and a non-accountable expense allowance
equal to 2% of the gross proceeds or approximately $153,000.





F-27




INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)





18.
            Common
      Stock and Convertible Preferred Stock
(cont’d)





Series B Preferred Stock and
Warrants (cont’d)





In
addition, the Placement Agents received, for nominal consideration, five-year
warrants to purchase 10% of the number of shares of common stock into which the
Series B Preferred Stock issued in the Financing are converted to (“Placement
Agent Warrants”). The Placement Agent Warrants will be exercisable at any time
at a price equal 125% of the conversion price, on a net-issuance or cashless
basis. The Placement Agent Warrants have registration rights similar to the
registration rights afforded to the holders of Series B Preferred Stock and
warrants. The Company also paid for the out-of-pocket expenses incurred by the
Placement Agents and all purchasers in the amount of $25,000. Further, the
Company issued to the Placement Agent, warrants to purchase an aggregate of
2,931,035 shares of our common stock on an as-converted basis at an exercise
price of $0.326 per share.





The
warrants are fully vested at the time of grant and have a term of five years.
The material terms of the Company’s Series B Preferred Stock are summarized
below.





Voting:
The holders of Preferred Stock (including the Investors acquiring such shares as
part of the Financing after the closing of the Exchange) are entitled to vote
together with the holders of the common stock, as a single class, upon all
matters submitted to holders of common stock for a vote. Each share of Preferred
Stock will carry a number of votes equal to the number of shares of common stock
issue as if converted at the record date.





Dividends:
The Series B Convertible Preferred Stock is cumulative, non-participating and
carries dividends at 8% per annum payable quarterly in cash in US
Dollars.





Conversion:
The outstanding and unconverted Series B Convertible Preferred Stock shall be
converted into shares of the Company’s common stock at the Conversion Price then
in effect by delivering to the holders an Automatic Conversion Notice upon the
happening of all of the following events: (i) for each of the twenty (20)
consecutive Trading Days immediately preceding the date of delivery of the
Automatic Conversion Notice, the daily Closing Price of the Common Stock shall
be equal to at least two hundred fifty percent (250%) of the Conversion Price in
effect as of the date immediately preceding the date of the Automatic Conversion
Notice; and (ii) the daily trading volume of the Common Stock for each of the
Trading Days during such twenty (20) Trading day period shall be at least
500,000 shares; provided, however, no such conversion is permitted unless at the
time of the delivery of the Automatic Conversion Notice and on the Automatic
Conversion Date, (A) The Company is in compliance with all of its obligations
under this Certificate of Determination and the Transaction Documents, (B)
during each of the Trading Days in such twenty (20) day period, the Registration
Statement has been effective and has not been suspended by the SEC, (C) as of
the Conversion Date, the Registration Statement is effective and has not been
suspended by the SEC and no event has occurred which will likely result in the
Registration Statement being declared ineffective or suspended by the SEC, and
(D) no Triggering Event (as described under “Redemption Rights” in this Form
8-K) has occurred and is continuing.





All
shares of Series B Convertible Preferred Stock outstanding on  August
16, 2008 were automatically converted at the then Conversion Price.




F-28




INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)





18.
            Common
      Stock and Convertible Preferred Stock
(cont’d)





Additional paid-in
capital





The
Company allocated the net proceeds ($6,885,000) between the Series B Preferred
Stock ($3,738,827) and the warrants ($3,146,173) based upon their relative fair
values as of the closing date. The Company determined the fair value of the
warrants (including Placement Agent Warrants which were valued at $644,800)
using the Black-Scholes option pricing model with the following assumptions: no
dividend yield; weighted average risk free rate of 5.05%; volatility of 368% and
a contractual life of 5 years. The Company recorded the portion of the proceeds
attributable to the stock as mezzanine equity pursuant to EITF Topic D-98,
Classification and Measurement of Redeemable Securities after determining the
guidance in FAS 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity did not apply. The Company
determined that the warrants meet the definition of a derivative instrument as
defined in SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, but do not require derivative treatment pursuant to the scope
exception in paragraph 11(a) of SFAS 133.





The
Company evaluated whether the embedded conversion feature in the stock required
bifurcation and determined that the economic characteristics and risks of the
embedded conversion feature in the stock were clearly and closely related to the
stock and concluded that bifurcation was not required under SFAS 133. The
Company calculated the intrinsic value of the beneficial conversion feature
embedded in the stock ($2,297,157) pursuant to the guidance in EITF 00-27,
Application of Issue No. 98-5 to Certain Convertible Instruments.





19.
            Pension
      plans





The
Company participates in a defined contribution pension scheme under the
Mandatory Provident Fund Schemes Ordinance (“MPF Scheme”) for all its eligible
employees in Hong Kong.





The MPF
Scheme is available to all employees aged 18 to 64 with at least 60 days of
service in employment in Hong Kong.  Contributions are made by the
Company operating in Hong Kong at 5% of the participants’ relevant income with a
ceiling of $128.20 (equivalent of HK$1,000).  The participants are
entitled to 100% of the Company’s contributions together with accrued returns
irrespective of their length of service with the Company, but the benefits are
required by law to be preserved until the retirement age of 65.  The
only obligation of the Company with respect to MPF Scheme is to make the
required contributions under the plan.





The
assets of the schemes are controlled by trustees and held separately from those
of the Company. The Company fully complied the contribution requirement and
total pension cost was $42,552, $65,959 and $77,885 for the years ended December
31, 2008, 2007 and 2006 respectively.





F-29




INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)





20.
            Segment
      Information





The
Company is engaged in the manufacture and distribution of DVDR discs and CDR.
The nature of the products, their production processes, the type of their
customers and their distribution methods are substantially similar. Information
for the products of DVDR and CDR is disclosed under FAS 131, “Disclosures about
Segments of an Enterprise and Related Information” as below:





Flash
      drive and memory card
                          
                          
                          DVDR
      and Related Products
                          
                          
                          CDR
                          
                          
                          Blu-rayYear
      ended December 31
                          
                          
                          Year
      ended December 31
                          
                          
                          Year
      ended December 31
                          
                          
                          Year
      ended December 312008
                          
                          
                          2007
                          
                          
                          2006
                          
                          
                          2008
                          
                          
                          2007
                          
                          
                          2006
                          
                          
                          2008
                          
                          
                          2007
                          
                          
                          2006
                          
                          
                          2008
                          
                          
                          2007
                          
                          
                          2006Revenue
      from external customers
                          
                          $
                          650,962
                          
                          
                          $
                          38,073,558
                          
                          
                          $
                          -
                          
                          
                          $
                          32,179,157
                          
                          
                          $
                          63,811,547
                          
                          
                          $
                          25,622,351
                          
                          
                          $
                          2,275,466
                          
                          
                          $
                          3,084,795
                          
                          
                          $
                          1,480,090
                          
                          
                          $
                          1,810,000
                          
                          
                          $
                          -
                          
                          
                          $
                          -Segment
      profit/(loss)
                          
                          
                          (1,020,022
                          )
                          
                          
                          (7,661,647
                          )
                          
                          
                          -
                          
                          
                          
                          (5,400,670
                          )
                          
                          
                          17,919,622
                          
                          
                          
                          4,512,839
                          
                          
                          
                          392,082
                          
                          
                          
                          (16,988
                          )
                          
                          
                          260,687
                          
                          
                          
                          915,000
                          
                          
                          
                          -
                          
                          
                          
                          -Segment
      assets
                          
                          
                          282,331
                          
                          
                          
                          28,179,194
                          
                          
                          
                          -
                          
                          
                          
                          42,768,465
                          
                          
                          
                          46,145,703
                          
                          
                          
                          42,584,004
                          
                          
                          
                          396,008
                          
                          
                          
                          2,283,134
                          
                          
                          
                          2,137,501
                          
                          
                          
                          1,810,000
                          
                          
                          
                          -
                          
                          
                          
                          -





TotalYear ended December 312008
                      
                      
                      2007
                      
                      
                      2006Revenue
      from external customers
                      
                      $
                      36,915,585
                      
                      
                      $
                      104,969,900
                      
                      
                      $
                      27,102,441Segment
      profit/(loss)
                      
                      
                      (5,113,610
                      )
                      
                      
                      10,240,987
                      
                      
                      
                      4,773,526Segment
      assets
                      
                      
                      45,256,804
                      
                      
                      
                      76,608,031
                      
                      
                      
                      44,721,505





A
reconciliation is provided for unallocated amounts relating to corporate
operations which is not included in the segment information.


Year ended December 312008
                            
                            
                            2007
                            
                            
                            2006Total
      consolidated revenue
                            
                            $
                            36,915,585
                            
                            
                            $
                            104,969,900
                            
                            
                            $
                            27,102,441Total
      profit / (loss) for reportable segments
                            
                            $
                            (5,133,610
                            )
                            
                            $
                            10,240,986
                            
                            
                            $
                            4,773,526Unallocated
      amounts relating to operations:Professional
      expenses related to Restructuring andShare
      Exchange
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (2,753,390
                            )Income
      / (loss) before taxes
                            
                            $
                            (5,133,610
                            )
                            
                            $
                            10,240,986
                            
                            
                            $
                            2,020,136





As of December 312008
                    
                    2007AssetsTotal
      assets for reportable segments
                    
                    $
                    45,256,804
                    
                    
                    $
                    76,608,031





Other
than the production lines and equipment with carrying amount of $13,473,826
(2007: $11,947,265) and the construction in progress located in Brazil, all of
the Company’s long-lived assets are located in Hong Kong. Geographic information
about the revenues, which are classified based on location of the customers, is
set out as follows:




F-30




INFOSMART
GROUP INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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


(Stated
in US Dollars)





20.
            Segment
      Information (cont’d)





Year ended December 312008
                  
                  
                  2007
                  
                  
                  2006Argentina
                  
                  $
                  631,795
                  
                  
                  $
                  204,637
                  
                  
                  $
                  74,039Australia
                  
                  
                  659,065
                  
                  
                  
                  15,848,368
                  
                  
                  
                  5,841,997Beliez
                  
                  
                  717,173
                  
                  
                  
                  0
                  
                  
                  
                  0Brazil
                  
                  
                  16,367,070
                  
                  
                  
                  33,090,824
                  
                  
                  
                  6,870,908Chile
                  
                  
                  10,000
                  
                  
                  
                  2,145
                  
                  
                  
                  521,747Czech
      Republic
                  
                  
                  -
                  
                  
                  
                  20,573
                  
                  
                  
                  413,237China
                  
                  
                  16,320,728
                  
                  
                  
                  51,399,473
                  
                  
                  
                  4,264,994Philippines
                  
                  
                  580,981
                  
                  
                  
                  -
                  
                  
                  
                  -Romania
                  
                  
                  166,844
                  
                  
                  
                  -
                  
                  
                  
                  -South
      Africa
                  
                  
                  60,092
                  
                  
                  
                  156,060
                  
                  
                  
                  -Taiwan
                  
                  
                  654,848
                  
                  
                  
                  177,786
                  
                  
                  
                  19,954Thailand
                  
                  
                  42,763
                  
                  
                  
                  491,417
                  
                  
                  
                  398,691Turkey
                  
                  
                  -
                  
                  
                  
                  216,380
                  
                  
                  
                  -United
      Kingdom
                  
                  
                  -
                  
                  
                  
                  165,210
                  
                  
                  
                  4,770,317United
      States
                  
                  
                  704,226
                  
                  
                  
                  2,000,064
                  
                  
                  
                  1,583,684Singapore
                  
                  
                  -
                  
                  
                  
                  17,814
                  
                  
                  
                  1,213,742Other
      countries
                  
                  
                  0
                  
                  
                  
                  1,179,149
                  
                  
                  
                  1,129,131Total
                  
                  $
                  36,915,585
                  
                  
                  $
                  104,969,900
                  
                  
                  $
                  27,102,441





21.
            Comparative
      amounts





Certain
amounts included in prior years’ consolidated statement of operations have been
reclassified to conform to the current year’s presentation. These
reclassifications had no effect on reported total assets, liabilities,
shareholders’ equity, or net income.




F-31




ITEM
9. CHANGES in and DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES





None.





ITEM
9A. CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





Based on
their evaluation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of
December 31, 2008, our chief executive officer and chief financial officer have
concluded that our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms and are operating
in an effective manner.





Management’s
Annual Report on Internal Control over Financial Reporting





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





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





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





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





Because
of its inherent limitations, the Company’s internal control over financial
reporting may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.





Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control—Integrated
Framework.





Based on
our assessment, management believes that, as of December 31, 2008, our
internal control over financial reporting is effective based on those
criteria.





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.





Changes
in Internal Controls





There
were no changes in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended) during the quarter ended December 31, 2008 that have materially
affected, or are reasonably likely to materially affect, our international
control over financial reporting.





ITEM
9B. OTHER INFORMATION





There
were no items required to be disclosed in a report on Form 8-K during the fourth
quarter of the year ended December 31, 2008 that were not reported.


32
  PART
III
  ITEM
10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE




Our
directors and executive officers, their ages, their respective offices and
positions, and their respective dates of election or appointment are as
follows:





Name
                      
                      Age
                      
                      Position
      Held
                      
                      Officer/Director
      sinceParker
      Seto
                      
                      41
                      
                      Chief
      Executive Officer and President
                      
                      
                      8/21/07Po
      Nei Sze
                      
                      36
                      
                      Chief
      Financial Officer, Treasurer, Secretary and Director
                      
                      
                      8/16/06Andrew
      Chung Yuen Chang
                      
                      39
                      
                      Chairman
      of the Board of Directors
                      
                      
                      8/16/06Simon
      Lee
                      
                      40
                      
                      Director
                      
                      
                      3/16/07Wai
      Chuen Leung
                      
                      43
                      
                      Director
                      
                      
                      7/4/07Joseph
      Chang
                      
                      45
                      
                      Director
                      
                      
                      6/4/07Chi-Man
      Lam
                      
                      43
                      
                      Director
                      
                      
                      8/9/07Chen
      Chiu Ju
                      
                      42
                      
                      Director
                      
                      
                      10/10/08





Business
Experience Descriptions – 5 years bus exp and other directorships of
directors




Parker Seto – Chief
Executive Officer and President. Mr. Seto has served as our Chief
Executive Officer and President since August 21, 2007. Mr. Seto served as a
director of the Company from March 16, 2007 until his resignation on August 9,
2007. He has extensive experience in initial public offerings and auditing
public companies and provides financial advisory services. Concurrent to his
position with the Company and since 2002, Mr. Seto is an advisor to several
mid-sized businesses in Hong Kong and mainland China for general business
management consultation. From 2005 to June 2007, Mr. Seto was Managing Director
of WestPark Capital, Inc. Mr. Seto currently serves as a director of New Fiber
Technology Cloth Inc. since March 2008.  He graduated from the Chinese
University of Hong Kong in Professional Accountancy stream with a Bachelor of
Business Administration (Honour) in 1990. Mr. Seto is a Member of the American
Institute of Certified Public Accountants, Fellow Member of the Association of
Chartered Certified Accountants in United Kingdom, and member of the Hong Kong
Institute of Certified Public Accountants.





Po Nei Sze - Chief Financial
Officer, Treasurer, Secretary and Director. Ms. Sze has served as our
director, Chief Financial Officer, Treasurer, and Secretary since August 16,
2006. Ms. Sze co-founded Infosmart Group Limited, a company incorporated in the
British Virgin Islands (“Infosmart BVI”), in 2002 and oversaw its finance, human
resources, accounting, purchasing, and shipping departments. The Company
effected a reverse merger with Infosmart BVI on August 16, 2006. Ms. Sze
received her degree in Business Administration from the British Columbian
Institute of Technology in Canada. Ms. Sze is also a director of Eternal Scene
International Limited since December 2002 and Prime Corporate Developments
Limited since January 2004.





Andrew Chung Yuen Chang -
Chairman of the Board.  Mr. Chang has served as our
Chairman of the Board since August 16, 2006. In 1995, he founded Hung Tat
International (HK) Ltd. (“Hung Tat”), a telecommunications devices manufacturing
business, which today employs 1,400 workers and has revenues of $15 million.
Hung Tat exports most of its output to the U.S., and its major customers include
Family Dollar, Best Buy, Circuit City, Southern Telecom, and jWIN Electronics.
Mr. Chang holds a Master of Economics degree from the University of Macquaire,
Australia and a Bachelor of Commerce degree from the University of New South
Wales, Australia where he majored in accounting.  Mr. Chang is also a
director of Honor Lustre Ltd. since September 2005, Hung Tat Far East since
April 2002, Hung Tat since January 1998, and Health Genius International Ltd.
since May 1996.





Simon Lee - Director.
Mr. Lee has served as our director since March 16, 2007. Mr. Lee graduated from
the Chinese University of Hong Kong in 1990 majoring in physics. He obtained his
Masters in Business Administration from the Chinese University of Hong Kong
where he specialized in accounting and finance stream. He is a Fellow Member of
the Association of Chartered Association Accountants of the United Kingdom and a
member of the Hong Kong Institute of Certified Public Accountants. Mr. Lee has
been an instructor in the School of Accountancy at the Chinese University of
Hong Kong and is currently a Lecturer in the School of Accountancy and Law at
the Faculty of Business of the Hong Kong Baptist University. He is also a
Research Fellow of the Corporate Governance and Financial Policy Centre of Hong
Kong Baptist University. Mr. Lee is regularly invited by multinational companies
to provide training to professionals in the banking and personal financial
management sector.





Wai Chuen Leung -
Director.  Mr. Leung has served as our director since July 4,
2007. Mr. Leung has extensive experience in auditing and accounting. Concurrent
to his directorship with the Company, he is the Chief Financial Officer of
Sinobest Technology Holdings Ltd., a position he has held since May 2005. From
August 2004 to September 2005, Mr. Leung was the Independent Non-Executive
Director for Maxx Bioscience Holdings Ltd. From December 2004 to March 2005, he
was the Financial Controller for Pro-Health International Group Ltd. From
December 2001 to December 2004, he was the Financial Controller for WLS Holdings
Ltd. Mr. Leung graduated from the University of Hong Kong with a Bachelor’s
degree in Social Sciences. He also received a Master’s degree in Business
Administration from the University of Manchester and the University of Wales. In
addition, Mr. Leung will soon receive his Master’s degree in Business with a
concentration in Logistics Management from the RMIT University.




33


Joseph Chang -
Director.  Mr. Chang has served as our director since June 4,
2007. Mr. Chang has extensive experience in corporate finance, investment
consulting, and business management. Concurrent to his directorship with the
Company, he is the Chief Executive Officer of Active Asia Investments (HK)
Limited, a position he has held since January 2007. From 2003 to 2006, Mr. Chang
was the Chief Executive Officer of Global Trend Investment Consulting Limited.
From March 2000 to April 2003, Mr. Chang was the Chief Financial Officer and
Chief Operating Officer for HWACOM Systems, a systems integration company in the
telecommunications/networking industry. Mr. Chang graduated from the National
Taiwan Institution of Technology with a major in Industrial Management and a
sub-major in MIS. He also graduated from the Banking and Insurance Department
from the National Business College of Taipei.





Chi-Man Lam -
Director.  Mr. Lam has served as our director since August 9,
2007. Mr. Lam has extensive experience in business management. Concurrent to his
directorship with the Company, he runs and is a director of Vision Products
Limited, a trader in toys and gift products, which he founded in 1997. Mr. Lam
is a graduate of the Chinese University of Hong Kong with both a Bachelor’s
degree and a Master’s degree in Business Administration.





Chen Chia Ju –
Director.  Mr. Chen is served as Vice President for Chian-Lan
Assets Management Ltd in Taiwan since July 2006.  He is also the head
of HK branch in Chian-Lan. He has profound IPO/SPO knowledge and experience in
Taiwan, HK and China equity/ investments market with numerous successful
projects .  He is also the expert in corporate finance, internal
control and auditing procedure. He was head of auditing team for Kan Wei Chong
Sing CPA firm from July 1994 to July 1997. He was also in charge of underwriting
business for Shen-He security firm from August 1997 to February 2000. He has
helped five companies to go for IPO/SPO in Taiwan from March 2000 to June 2006.
Mr. Chen graduated from Chung-Hwa University with a Bachelor's degree in Finance
Management.




Family
Relationships





There are no family
relationships among our directors and executive officers.





Involvement
in Certain Legal Proceedings




None of
our directors or executive officers has, during the past five
years:




(a)
            Has
      had a petition under the federal bankruptcy laws or any state insolvency
      law filed by or against, or a receiver, fiscal agent or similar officer
      was appointed by a court for the business or property of such person, or
      any partnership in which he was a general partner at or within two years
      before the time of such filing, or any corporation or business association
      of which he was an executive officer at or within two years before the
      time of such filing;


(b)
            Been
      convicted in a criminal proceeding or is a named subject of a pending
      criminal proceeding (excluding traffic violations and other minor
      offenses);


(c)
            Been
      the subject of any order, judgment, or decree, not subsequently reversed,
      suspended or vacated, of any court of competent jurisdiction, permanently
      or temporarily enjoining him from, or otherwise limiting, the following
      activities:





(i)
            Acting
      as a futures commission merchant, introducing broker, commodity trading
      advisor, commodity pool operator, floor broker, leverage transaction
      merchant, any other person regulated by the Commodity Futures Trading
      Commission, or an associated person of any of the foregoing, or as an
      investment adviser, underwriter, broker or dealer in securities, or as an
      affiliated person, director or employee of any investment company, bank,
      savings and loan association or insurance company, or engaging in or
      continuing any conduct or practice in connection with such
      activity;





(ii)
            Engaging
      in any type of business practice;
or





(iii)
            Engaging
      in any activity in connection with the purchase or sale of any security or
      commodity or in connection with any violation of federal or state
      securities laws or federal commodities
laws;





(d)
            Been
      the subject of any order, judgment or decree, not subsequently reversed,
      suspended or vacated, of any federal or state authority barring,
      suspending or otherwise limiting for more than 60 days the right of such
      person to engage in any activity described in paragraph (c)(i) above, or
      to be associated with persons engaged in any such
  activity;





(e)
            Been
      found by a court of competent jurisdiction in a civil action or by the
      Commission to have violated any federal or state securities law, and the
      judgment in such civil action or finding by the Commission has not been
      subsequently reversed, suspended, or vacated;
  and





(f)
            Been
      found by a court of competent jurisdiction in a civil action or by the
      Commodity Futures Trading Commission to have violated any federal
      commodities law, and the judgment in such civil action or finding by the
      Commodity Futures Trading Commission has not been subsequently reversed,
      suspended or vacated.




34




Compliance with
Section 16(a) of the Exchange Act




Based
solely upon a review of the copies of such forms furnished to the Company, or
written representations that no reports were required, we believe that for the
fiscal year ended December 31, 2008, beneficial owners complied with
Section 16(a) filing requirements applicable to them.




Code
of Ethics





We have
adopted a code of ethics that applies to all directors, officers, and employees,
including our Chief Executive Officer and Chief Financial Officer, and members
of the board of directors. We will provide to any person, without charge and
upon request, a copy of the code of ethics. Any such request must be made in
writing to the Company, c/o Investor Relations, 5th Floor,
QPL Industrial Building, 126-140 Texaco Road, Tsuen Wan, Hong Kong.




Material
Changes to the Procedures by which Security Holders May Recommend Nominees to
the Board of Directors




There
have been no material changes to the procedures by which security holders may
recommend nominees to the Board of Directors.




Audit Committee





We are
not a “listed company” under SEC rules and are therefore not required to have an
audit committee comprised of independent directors.  We established an
Audit Committee, however, in November 2007.  Our Audit Committee was
established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934. The Audit Committee assists Board oversight of (i) the integrity of
our financial statements, (ii) our compliance with legal and regulatory
requirements, (iii) the independent auditor’s qualifications and independence,
and (iv) the performance of our internal audit function and independent auditor,
and prepares the report that the Securities and Exchange Commission requires to
be included in our annual proxy statement. The current members of the Audit
Committee are Simon Lee (Chairman), Joseph Chang, and Chi-Man Lam. The Board has
determined that Mr. Lee is an “audit committee financial expert” within the
meaning of Item 407(d)(5)(ii) of SEC Regulation S-B, and is “independent” within
the meaning of AMEX Company Guide Section 121A.





ITEM
11. EXECUTIVE COMPENSATION





Summary
of Compensation





The
following executive compensation disclosure reflects all compensation awarded
to, earned by or paid to the executive officers below for the fiscal years ended
December 31, 2008 and December 31, 2007. The following table summarizes all
compensation for fiscal year 2008 received by our Chief Executive Officer, Chief
Financial Officer, our two most highly compensated executive officers who earned
more than $100,000 in fiscal year 2008, and up to two additional individuals for
whom disclosure would have been provided but for the fact that the individual
was not serving as an executive officer at the end of fiscal year
2008.





SUMMARY
COMPENSATION TABLE





Name and principal
                                      position
                                    
                                    Year
                                    
                                    Salary
                                      ($)
                                    
                                    
                                    Bonus
                                      ($)
                                    
                                    
                                    Stock
                                      Awards
                                      ($)
                                    
                                    
                                    Option
                                      Awards
                                      ($)
                                    
                                    
                                    Non-Equity
                                      Incentive Plan
                                      Compensation
                                      ($)
                                    
                                    
                                    Nonqualified
                                      Deferred
                                      Compensation
                                      Earnings
                                      ($)
                                    
                                    
                                    All Other
                                      Comp-ensa
                                      tion ($)
                                    
                                    
                                    Total
                                      ($)Parker
      Seto,
                                      CEO
      and President
                                    
                                    2008
                                    
                                    $
                                    127,692
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    127,6922007
                                    
                                    
                                    66,200
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    66,200Po
      Nei Sze,
                                      CFO, Treasurer,
                                      Secretary, and Director
                                    
                                    2008
                                    
                                    
                                    155,212
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    155,2122007
                                    
                                    
                                    137,987
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    2,000
                                    
                                    
                                    
                                    139,987





Outstanding
Equity Awards at Fiscal Year-End




There
are no outstanding equity awards for any of our named executive officers
outstanding as of December 31, 2008.


35
  Grants
of Plan-Based Awards to Executive Officers in 2008
 
 No
plan-based awards were granted to our named executive officers in fiscal year
2008.





Option
Exercises and Stock Vesting





There
were no exercises of stock options, SARS, or similar instruments, or vesting of
stock during fiscal year 2008 for each of our named executive
officers.





Pension
Benefits





None of
our named executive officers participates in any pension benefit plan adopted by
the Company.





Nonqualified
Deferred Compensation Plans





None of
our named executive officers participates in any nonqualified deferred
compensation plan adopted by the Company.





Compensation
of Directors





The
following director compensation disclosure reflects all compensation awarded to,
earned by or paid to the directors below for the fiscal year ended December 31,
2008.





DIRECTOR
COMPENSATION





Name
                    
                    Fees Earned
                      or Paid in
                      Cash
                      ($)
                    
                    
                    Stock
                      Awards
                      ($)
                    
                    
                    Option
                      Awards
                      ($)
                    
                    
                    Non-Equity
                      Incentive Plan
                      Compensation
                      ($)
                    
                    
                    Change in Pension
                      Value and
                      Nonqualified
                      Deferred
                      Compensation
                      Earnings
                      ($)
                    
                    
                    All Other
                      Compen-sation
                      ($)
                    
                    
                    Total ($)Andrew
      Chang
                    
                    $
                    59,615
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    59,615Po
      Nei Sze (1)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Simon
      Lee
                    
                    
                    12,819
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    12,819Wai
      Chuen Leung
                    
                    
                    12,307
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    12,307Joseph
      Chang
                    
                    
                    26,923
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    26,923Chi-Man
      Lam
                    
                    
                    12,307
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    12,307Chen
      Chia Ju
                    
                    
                    3,639
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,639





(1)           Ms.
Sze’s director compensation is fully reflected in the disclosures provided in
the Summary Compensation Table above.





Employment
and Director Agreements





In August
2007, our predecessor entity, Infosmart Group, Limited, a company incorporated
in the British Virgin Islands (“Infosmart BVI”), entered into an employment
agreement with Parker Seto that provided for a starting monthly salary of
HK$83,000. Such salary is subject to an annual review by Infosmart BVI’s Board
of Directors (“Infosmart BVI Board”) at a time determined by the Infosmart BVI
Board. Under the terms of the agreement, Mr. Seto is also entitled to receive
reimbursements for all reasonable business, office personnel, company-related
entertainment, and travel expenses that he incurs or he pays for on behalf of
Infosmart BVI.




In June
2006, Infosmart BVI entered into an employment agreement with Po Nei Sze that
provided a starting monthly salary of HK$50,000 or approximately US$6,435. Such
salary is subject to an annual review by the Infosmart BVI Board at a time
determined by the Infosmart BVI Board. Under the terms of the agreement, Ms. Sze
is also entitled to receive reimbursements for all reasonable business, office
personnel, company-related entertainment, and travel expenses that she incurs or
she pays for on behalf of Infosmart BVI.




36




In June
2006, Infosmart BVI entered into an employment agreement with Chung Kwok for his
services as Chief Executive Officer and a director that provided for a base
monthly salary is HK$60,000. Such salary is subject to an annual review by the
Infosmart BVI Board at a time determined by the Infosmart BVI Board. Under the
terms of the agreement, Mr. Kwok is also entitled to receive reimbursements for
all reasonable business, office personnel, company-related entertainment and
travel expenses that he incurs or he pays for on behalf of Infosmart
BVI.




In July
2006, Infosmart BVI entered into an employment agreement with Andrew Chang that
provided a starting monthly salary of HK$50,000 or approximately US$6,435. Such
salary is subject to an annual review by the Infosmart BVI Board at a time
determined by the Infosmart BVI Board. Under the terms of the agreement, Mr.
Chang is also entitled to receive reimbursements for all reasonable business,
office personnel, company-related entertainment, and travel expenses that he
incurs or he pays for on behalf of Infosmart BVI.





Each of
the above-described employments agreements state the officer and/or directors
employment may be terminated immediately, without Infosmart BVI’s prior notice
or payment in lieu of notice if at any time the officer and or director (1)
becomes physically or mentally disabled whether totally or partially so that he
is substantially unable to perform his duties for a period of or for 30 days in
the aggregate in any period of six consecutive months, (2) is convicted of a
criminal offense, except one which in the reasonable of Infosmart BVI’s Board
does not affect his position with Infosmart BVI at the time of such conviction,
(3) commits repeated or continued (after warning) any persistent or material
breach of the employment agreement; (4) is guilty of willful neglect in
discharging his duties or commits any grave misconduct which in the absolute
opinion of the Infosmart BVI Board tends to bring himself or Infosmart BVI into
disrepute; or (5) commits an act of bankruptcy or compounded with his creditors
generally or is guilty of conduct which would make his continued appointment
prejudicial to the interests of Infosmart BVI. Further, the agreements provide
for employee insurance, mandatory provident fund benefits, and, after completion
of the three-month probation period, medical insurance. These agreements also
contain restrictive covenants preventing competition with Infosmart BVI during
their employment and for a period of 12 months after termination, and also
covenants preventing the use of confidential business information, except in
connection with the performance of their duties for Infosmart BVI, during or at
any time after termination of their employment.




We expect
to assume the above-described employment agreements our officers and directors
currently have with Infosmart BVI.




There are
no other employment agreements or arrangements with any of our directors or
named executive officers. We do not have a long term incentive plan or
arrangement of compensation with any individual in the group of officers and
directors.




Compensation
Committee Interlocks and Insider Participation





During
the fiscal year ended December 31, 2008, the members of our Compensation
Committee were Simon Lee, Joseph Chang, and Chi-Man Lam
(Chairman).  None of the members of our Compensation Committee are
executive officers of the Company.





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




Securities
Authorized for Issuance under Equity Compensation Plans




We do not
currently have any equity compensation plans or arrangements.




Security
Ownership of Certain Beneficial Owners and Management




The
following table sets forth certain information regarding beneficial ownership of
our common stock as of April 30, 2009 by (i) each person who is known by us
to own beneficially more than five percent (5%) of the outstanding shares of our
voting securities, (ii) each of our directors and executive officers, and
(iii) all of our directors and executive officers as a group. Unless
otherwise indicated below, to our knowledge, all persons listed below have sole
voting and investing power with respect to their shares of common stock, except
to the extent authority is shared by spouses under applicable community property
laws.





Name and Address of Beneficial Owner (1)
              
              Amount and
                Nature
                of Beneficial
                Ownership (2)
              
              
              Percent
                of Class (2)Parker
      Seto
              
              
              0
              
              
              
              *Po
      Nei Sze (3)
              
              
              51,451,826
              
              
              
              31.85
              %Andrew
      Chung Yuen Chang
              
              
              9,483,727
              
              
              
              5.87
              %Chung
      Kwok
              
              
              16,189,400
              
              
              
              10.02
              %Simon
      Lee
              
              
              0
              
              
              
              *Wai
      Chuen Leung
              
              
              0
              
              
              
              *Joseph
      Chang
              
              
              0
              
              
              
              *Chi-Man
      Lam
              
              
              0
              
              
              
              *Chen
      Chia Ju
              
              
              0
              
              
              
              *Prime
      Corporate Developments Limited (3)
              
              
              51,451,826
              
              
              
              31.85
              %Cede
      & Co (4)
              
              
              35,736,195
              
              
              
              22.12
              %Lui
      Sau Wan (5)
              
              
              20,757,376
              
              
              
              12.85
              %All
      Officers and Directors as a group (8 persons)
              
              
              88,043,419
              
              
              
              59.7
              %




* Less
than 1%.




37




(1)
            
            Unless
      otherwise indicated, the address of the beneficial owner will be c/o
      Infosmart Group Limited, 5th
      Floor, QPL Industrial Building, 126-140 Texaco Road, Tsuen Wan, Hong
      Kong.





(2)
                          
                          Applicable
      percentages are based on 161,560,520 shares of common stock
      outstanding on March 31, 2009, adjusted as required by rules promulgated
      by the SEC. Under Rule 13d-3, a beneficial owner of a security includes
      any person who, directly or indirectly, through any contract, arrangement,
      understanding, relationship, or otherwise has or shares: (i) voting power,
      which includes the power to vote, or to direct the voting of shares; and
      (ii) investment power, which includes the power to dispose or direct the
      disposition of shares. Certain shares may be deemed to be beneficially
      owned by more than one person (if, for example, persons share the power to
      vote or the power to dispose of the shares). In addition, shares are
      deemed to be beneficially owned by a person if the person has the right to
      acquire the shares (for example, upon exercise of an option) within 60
      days of the date as of which the information is provided. In computing the
      percentage ownership of any person, the amount of shares outstanding is
      deemed to include the amount of shares beneficially owned by such person
      (and only such person) by reason of these acquisition rights. As a result,
      the percentage of outstanding shares of any person as shown in this table
      does not necessarily reflect the person's actual ownership or voting power
      with respect to the number of shares of common stock actually
      outstanding.(3)
                          
                          Ms.
      Po Nei Sze is the sole owner of Prime Corporate and exercises sole voting
      and investment control over such shares.(4)
                          
                          The
      address for this shareholder is PO Box 20 Bowling Green Stn New York NY
      10274.(5)
                          
                          The
      address for this shareholder is No. 188, Victoria Road, Hong
      Kong.




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





Certain
Relationships and Related Transactions





There
were no transactions since the beginning of our last fiscal year, or any
proposed transaction, in which we were a participant and the amount involved
exceeds $120,000, and in which any related person had or will have a direct or
direct material interest.




Director
Independence





Five of
our directors – Simon Lee, Wai Chuen Leung, Joseph Chang, Chi-Man Lam, Chen
Chiu Ju — are independent directors as that term is defined under AMEX
Rules and Regulations.





ITEM 14.   PRINCIPAL ACCOUNTING FEES AND
SERVICES





Fees for
professional services provided by our current independent auditors, Parker
Randall CF (H.K.) CPA Limited*, and our former independent auditors, PKF Hong
Kong, in each of the last two fiscal years, in each of the following categories
are:




2008
                                          
                                          
                                          
                                          2007
                                          *Audit
      fees
                                          
                                          $
                                          63,680
                                          
                                          
                                          $
                                          73,630Audit-
      related fees
                                          
                                          
                                          32,564
                                          
                                          
                                          
                                          10,000Tax
      fees
                                          
                                          
                                          —
                                          
                                          
                                          
                                          17,085All
      other fees
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —*
      We retained Parker Randall CF (H.K.) CPA Limited on August 10,
      2007.




Fees for
audit services include fees associated with the annual audit and the review of
documents filed with the Securities and Exchange Commission. Audit-related fees
principally include fees reasonably related to the performance of the audit or
review of our financial statements and that are not reported as Audit Fees. Tax
fees included tax compliance, tax advice and tax planning work.




38




All Other
Fees




The
Company did not incur any other fees related to services rendered by our
principal accountant for the fiscal years ended December 31, 2008 and
2007.





Effective
May 6, 2003, the Securities and Exchange Commission adopted rules that require
that before our auditor is engaged by us to render any auditing or permitted
non-audit related service, the engagement be:




-approved
by our audit committee; or





-entered
into pursuant to pre-approval policies and procedures established by the audit
committee, provided the policies and procedures are detailed as to the
particular  service,  the  audit committee is
informed of each service, and such policies and procedures do not include
delegation of the audit committee's responsibilities to management.




ITEM 15.   EXHIBITS, FINANCIAL STATEMENT
SCHEDULES





Financial
Statements





A list of
the financial statements of the Company filed as part of this Report can be
found above in Part II, Item 8.




Exhibit Number
                    
                    Description23.1
                    
                    Consent
      of Parker Randall CF (H.K.) CPA Limited *23.2
                    
                    Consent
      of Parker Randall CF (H.K.) CPA Limited *31.1
                    
                    Section 302
      Certification by the Corporation’s Chief Executive Officer
    *31.2
                    
                    Section 302
      Certification by the Corporation’s Chief Financial Officer
    *32.1
                    
                    Section 906
      Certification by the Corporation’s Chief Executive Officer
    *32.2
                    
                    Section 906
      Certification by the Corporation’s Chief Financial Officer
    *




* Filed
herewith.




39


SIGNATURES




Pursuant
to the requirements of section 13 or 15 (d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.





INFOSMART
      GROUP, INC.Dated:
      April 30, 2009
                    By:
                    /s/
      Parker SetoParker
      Seto, Chief Executive Officer and
President




Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.





Name
            
            Position
            
            Date/s/
      Parker Seto
              
              Parker
      Seto
            
            Chief
      Executive Officer, President
            
            April
      30, 2009/s/
      Po Nei Sze
              
              Po
      Nei Sze
            
            Chief
      Financial Officer, Treasurer,
              Secretary,
      Director
            
            April
      30, 2009/s/
      Andrew Chung Yuen Chang
              
              Andrew
      Chung Yuen Chang
            
            Chairman
      of the Board of Directors
            
            April
      30, 2009/s/
      Simon Lee
              
              Simon
      Lee
            
            Director
            
            April
      30, 2009/s/
      Wai Chuen Leung
              
              Wai
      Chuen Leung
            
            Director
            
            April
      30, 2009/s/
      Joseph Chang
              
              Joseph
      Chang
            
            Director
            
            April
      30, 2009/s/
      Chi-Man Lam
              
              Chi-Man
      Lam
            
            Director
            
            April
      30, 2009/s/
      Chen Chia Ju
              
              Chen
      Chia Ju
            
            Director
            
            April
      30, 2009




40