UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 (Mark
One)
 FORM
10-K
 
 x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended December 31,
2008
 
  or
 
 o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from _____________to
  ______________
 
 
 Commission
file number  000-52639
 
 ORIENT
PAPER, INC.
 (Exact
name of registrant as specified in its charter)
 
 Nevada
              20-4158835State or other jurisdiction of
                Incorporation or organization
              (I.R.S. Employer
                Identification No.)
 
 
 Science
Park, Xushui County, Baoding City
 Hebei
Province, The People’s Republic of China 072550
 (Address
of principal executive offices) (Zip Code)
 
 Registrant’s
telephone number, including area code: 011- (86) 312-8605508
 Securities
registered pursuant to Section 12(b) of the Act:
 
 Title
      of each class
              
              Name
      of each exchange on which
registered
 
 Securities
registered pursuant to section 12(g) of the Act:
 
 Common
Stock
 (Title of
class)
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
 oYes                       þ No
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. oYes þ No
 
 Note– Checking the box above
will not relieve any registrant required to file reports pursuant to Section 13
or 15(d) of the Exchange Act from their obligations under those
Sections.
 
 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.
 þ
Yes     oNo
 
 Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. 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,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
  Large
      accelerated filer o
              
              Accelerated
      filer oNon-accelerated
      filer o
      (Do not check if a smaller reporting company)
              
              Smaller
      reporting company þ
 
 Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Act). o YesþNo
 
 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 second fiscal
quarter.
 
 Note. – If a determination as
to whether a particular person or entity is an affiliate cannot be made without
involving unreasonable effort and expense, the aggregate market value of the
common stock held by non-affiliates may be calculated on the basis of
assumptions reasonable under the circumstances, provided that the assumptions
are set forth in this Form.
 
 The
aggregate market value of the voting and non-voting common stock of the issuer
held by non-affiliates as of  March  24, 2009 was
approximately $3,494,073 (20,553,371 shares of common stock held by
non-affiliates)  based upon a closing price of the common stock of
$0.17 as quoted by Nasdaq OTC Bulletin Board on June 30, 2008.
   APPLICABLE
ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
 PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
 
 Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. o Yeso No
 
 (APPLICABLE
ONLY TO CORPORATE REGISTRANTS)
 
 Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.
 
 As of
March 24, 2009, there are presently 45,101,987 shares of common stock, par value
$0.001 issued and outstanding.
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 
 List hereunder the following documents
if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part
II, etc.) into which the document is incorporated: (1) Any annual report to
security holders; (2) Any proxy or information statement; and (3) Any prospectus
filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The
listed documents should be clearly described for identification purposes (e.g.,
annual report to security holders for fiscal year ended December 24,
1980).
  1
  TABLE OF
CONTENTS
  PagePART
      IItem
      1.
                BUSINESS
                
                3Item
      1A.
                RISK
      FACTORS
                
                12Item
      1B.
                UNRESOLVED
      STAFF COMMENTS
                
                23Item
      2.
                PROPERTIES
                
                23Item
      3.
                LEGAL
      PROCEEDINGS
                
                23Item
      4.
                SUBMISSION OF
      MATTERS TO A VOTE OF SECURITY HOLDERS
                
                23PART
      IIItem
      5.
                MARKET FOR
      REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
                
                23Item
      6.
                SELECT
      FINANCIAL DATA
                
                25Item
      7.
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                
                25Item
      7A.
                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                
                30Item
      8.
                FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                
                30Item
      9.
                CHANGES IN AND
      DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                
                51Item
      9A.
                CONTROLS AND
      PROCEDURES
                
                51Item
      9A(T).
                CONTROLS AND
      PROCEDURES
                
                51Item
      9B.
                OTHER
      INFORMATION
                
                52PART
      IIIItem
      10.
                DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                
                53Item
      11.
                EXECUTIVE
      COMPENSATION
                
                54Item
      12.
                SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
                
                55Item
      13.
                CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                
                56Item
      14.
                PRINCIPAL
      ACCOUNTING FEES AND SERVICES
                
                57PART
      IVItem
      15.
                EXHIBITS AND
      FINANCIAL STATEMENT SCHEDULES
                
                58SIGNATURES
                
                59
  2
  FORWARD
LOOKING STATEMENTS
  In this
annual report, references to “Orient Paper,” “OPAI,” “the Company,” “we,”
“our,” “us,” and the Company’s wholly owned subsidiary, “HBOP,” refer
to Orient Paper, Inc.
 
 This
Annual Report on Form 10-K contains forward-looking statements regarding our
business, financial condition, results of operations and prospects. Words such
as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,”
“estimates” and similar expressions or variations of such words are intended to
identify forward-looking statements, but are not deemed to represent an
all-inclusive means of identifying forward-looking statements as denoted in this
Annual Report on Form 10-K. Additionally, statements concerning future matters
are forward-looking statements.
  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 headings “Risks Factors” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.” You
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 SEC. The SEC maintains a website (www.sec.gov) that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC, including us. You can also read and copy any
materials we file with the SEC at the SEC’s Public Reference Room at 100 F
Street, NE, Washington, DC 20549. You can obtain additional information about
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
  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, except as required by law. Readers are urged to
carefully review and consider the various disclosures made throughout the
entirety of this Annual Report, which are designed to advise interested parties
of the risks and factors that may affect our business, financial condition,
results of operations and prospects.
 
 
 PARTI
  Item
1.                  Business.
  Corporate
History
 
 Orient
Paper, Inc. was incorporated in the State of Nevada on December 9, 2005 under
the name “Carlateral, Inc.”  Through the steps described immediately
below, we became the holding company for Hebei Baoding Orient Paper Milling
Company Limited ("HBOP"), a producer and distributor of paper products in the
People’s Republic of China (“PRC" or “China”), on October 29, 2007, and
effective December 21, 2007, we changed our name to “Orient Paper, Inc.” to more
accurately describe our business.
  On
October 29, 2007, Orient Paper entered into an agreement and plan of merger (the
"Merger Agreement") with (i) its own wholly owned subsidiary, CARZ Merger Sub,
Inc., (ii) Dongfang Zhiye Holding Limited ("Dongfang Holding") and (iii) each of
Dongfang Holding shareholders (Zhenyong Liu, Xiaodong Liu, Chen Li, Ning Liu,
Jie Liu, Shenzhen Huayin Guaranty & Investment Company Limited, Top Good
International Limited, Total Giant Group Limited, Total Shine Group Limited,
Victory High Investment Limited, Think Big Trading Limited, Huge Step
Enterprises Limited, and Sure Believe Enterprise Limited) (the "Dongfang Holding
Shareholders").
  Dongfang
Holding is a holding corporation with no operations and was formed on November
13, 2006, under the laws of the British Virgin Islands (“BVI”). Dongfang Holding
owns all of the issued and outstanding stock and ownership of HBOP.
  3
  Pursuant
to the Merger Agreement, Dongfang Holding merged with CARZ Merger Sub, Inc. via
a share exchange, with Dongfang Holding as the surviving entity (the “Merger
Transaction”).  In exchange for their shares in Dongfang Holding, the
Dongfang Holding Shareholders received an aggregate of 29,801,987 newly-issued
shares of our common stock, $.001 par value, which shares were distributed pro
ratably among the Dongfang Holding Shareholders in accordance with their
respective ownership interests in Dongfang Holding.
  As a
result of the Merger Transaction, Dongfang Holding became a wholly-owned
subsidiary of Orient Paper, which, in turn, made Orient Paper the indirect owner
of Dongfang Holding's operating company subsidiary, HBOP.  HBOP, the
entity through which we operate our business currently has no subsidiaries,
either wholly- or partially-owned.
 
 The
following diagram sets forth the current corporate structure of Orient
Paper:
 
  Orient
      Paper, Inc.(Nevada
      company)100%
      ownershipDongfang
      Zhiye Holding Limited(BVI
      company)100%
      ownershipHebei
      Baoding Orient Paper Milling Company Limited(PRC
      company)
   Neither
Orient Paper nor Dongfang Holding has any operations or plans to have any
operations in the future other than acting as a holding company and management
company for HBOP and raising capital for its operations. However, we reserve the
right to change our operating plans regarding Orient Paper and Dongfang
Holding.
  Our
Business
  HBOP,
founded in 1996, engages mainly in production and distribution of products such
as printing paper, uncoated and coated paper, corrugated paper, plastic paper,
graphic design paper, and other paper and packaging related products. HBOP uses
recycled paper as its primary raw material and has its corporate offices in
Baoding, PRC.
  HBOP's
main products include various specifications of: (i) corrugated paper, (ii)
middle-grade offset paper, (iii) high-grade offset paper and (iv) writing paper.
Products currently in development include (a) security paper, (b) digital
photographic paper. With respect to each of these products, HBOP has already
established process orders, installed production equipment and completed small
pilot production.
  In  2003,
HBOP obtained ISO9000-2000 certification from the International Organization for
Standardization.  It was also designated a specially protected
enterprise in Baoding City, a recognition that is awarded to companies in
Baoding of larger-scale and in good credit and tax standing.
  Manufacturing
Process
 
 Our
products generally undergo two stages of manufacturing: (1) creating pulp from
recycled paper products, and (2) treating the pulp and molding it into the
desired type of paper product.  A brief overview of the pulp and
papermaking process is described below.
  4
  Pulping
 
 The
recycled waste paper is first sorted by hand and machine, and then broken down
and beaten or smashed into small pieces using water and mechanical energy. It is
then put through a course screening drum, followed by a fine screening drum in
order to produce different grades of pulp. In order to purify the pulp further,
an approach flow system is used to filter out any impurities or inconsistencies,
such as sand, in the pulp. Bleaching agents are added to lighten the color of
the pulp.
 
 Paper
Making
 
 The pulp
is then sieved removing the excess water and molded into size. The moisture
content is further reduced by applying hydraulic pressure to the
pulp.  The pulp then enters the drying section where it is run over
heated cylinders. The dried paper is then coated with a mixture of clay, white
pigment, and binder to produce a surface on which ink can sit without being
fully absorbed, enabling crisper, more consistent print quality.
  The paper
goes through a process called calendering, which flattens and smooths the paper
into long sheets. The paper is then wound onto a reel that is mounted in a
roll-slitting machine for rewinding, during which cutters are used to cut the
paper into the desired widths. Upon completion, the rolls are fitted with
sleeves, labeled, and then moved to quality control before shipment or
storage.
   
 
  Products
 
 Corrugated
paper
 
 Corrugated
paper is used in the manufacturing of paperboard and comprises approximately 60%
of our total paper production.  Since the third quarter of 2008, we
have also begun manufacturing and selling high-strength corrugated paper, used
in the production of high quality paperboard.  Raw materials used in
the production of corrugated paper include old paperboard and certain
supplementary agents.
  5
  Middle-
and high-grade offset paper
 
 Offset
paper is used for offset printing.  Our middle-grade and high-grade
offset paper comprises approximately 12% and 10% of our total paper production,
respectively.   The offset paper we manufacture is typically
coated and brightened.  Raw materials used in the production of offset
paper include recycled white edge paper, wood pulp, fluorescent whitening
agent, sizing agent and pulvis talc.
 
 Writing
paper
 
 Writing
paper is uncoated paper that is suitable for printing and writing with ink on
both sides, without the ink bleeding or striking through.   Raw
materials used in the production of writing paper include recycled loose-leaf
paper and fluorescent whitening agent.
 
 Market
for our Products
 
 The PRC Paper Making
Industry
  According to a general survey by the
China Paper Association, in 2007, there were approximately 3,500 paper and board
manufacturers in the People’s Republic of China, with a total output of 73.5
million tons, up 13.08% from 65 million tons in 2006.  Total domestic
consumption was 72.9 million tons in 2007, up 10.45% from 66 million tons a year
before.
 
 Compared
with year 2000, output in 2007 had increased by approximately 140.98% and
consumption grew by approximately 103.92%.  The output of paper and
board maintained an average growth rate of approximately 13.4% during the
2000-2007 time frame, while consumption increased at an annual rate of 10.72%,
both higher than the GDP growth rate of the same period.  The growth
rate is expected to continue.  According to the China Paper
Association, the People’s Republic of China is currently ranked second in terms
of output and consumption of paper and board products.  It is expected
to become the world’s largest paper making and consumption market by
2015.
 
 
 
 Data
source: 2007 Annual Report of the Paper Making Industry and 2008 Market
Analysis, China Paper Association
 
 We
believe that the burgeoning market provides many interesting opportunities for
us. Greater affluence and urbanization of China has led to wider access to
higher education, increased shopping facilities and advertising, all of which
have in turn increased demand for and increased the variety of paper and
packaging products available for consumption in China (PriceWaterhouseCoopers,
“Paper and Packing Market in China: China Risks and Rewards,” September
2005).  We are pursuing opportunities in several higher-grade paper
products, such as security paper and digital photographic paper, that we believe
will experience high growth and that we can address with our manufacturing
expertise.
  6
  Industry
Consolidation
 
 Prior to
1988, the paper and pulp industry in China was comprised of numerous small-scale
production enterprises, many of which used low-tech production processes that
were highly pollutive.  In 1988, in an effort to reduce pollution, the
National Environmental Protection Administration issued Interim Measures on the
Administration of Water Pollutants Discharge Permits, requiring all companies
discharging pollution into the water as a direct or indirect byproduct of
production to adhere to certain caps on pollution discharge.   In
1996, China’s State Council issued “Decisions on Environmental Protection
Issues”, setting forth strict rules and regulations intended to reduce
pollution, including a directive for the closure of all paper plants with an
annual output of less than 50,000 tons.  Since 1997, the PRC
government has closed at least 7,000 pulp and paper mills
(PriceWaterhouseCoopers, “Paper and Packing Market in China: China Risks and
Rewards,” September 2005); however, the industry still remains largely
fragmented.  Recognizing that China constitutes one of the largest
markets for paper consumption in the world with potential for continued
expansion, the PRC government continues its efforts to consolidate, modernize,
and promote the environmental sustainability of the industry. In its 11th Five
Year Plan, the PRC government projected that by 2010, production capacity would
reach 90 million tons ( “China’s government to control pulp, papermaking
growth,” PaperAge, November 5, 2007).
  Customers
 
 We generally sell our products to
paperboard making companies (in the case of packaging products like corrugated
paper) and to printing companies (in the case of cultural paper products such as
printing and writing paper). Of the more than 140 clients we serve, HBOP's
largest customers are Beijing People’s Fine Arts Publishing House, Beijing
Qiuhao Printing Company Limited, Baoding Binghe Printing Company Limited,
Beijing Yutian Planet Books Company Limited and Baoding Dadi Colour Printing
Company Limited.  None of these customers individually comprised more
than 10% of our revenue.
 
 For the year ended December 31, 2008, HBOP’s top
10 customers were as follows:
 
 Major
customers and revenue generated for the year ended December 31,
2008
  Name
              
              Amount (US$)Beijing
      People’s Fine Arts Publishing House
              
              
              3,336,983.62Beijing
      Qiuhao Printing Company Limited
              
              
              2,957,782.27Baoding
      Binghe Printing Company Limited
              
              
              2,876,174.43Beijng
      Yutian Planet Books Company Limited
              
              
              2,760,200.44Baoding
      Dadi Colour Printing Company Limited
              
              
              2,743,549.66Baoding
      Xida Printing Company Limited
              
              
              2,705,404.93Beijing
      Yuewei Cultural Development Company Limited
              
              
              2,644,575.27Baoding
      Xinmin Printing Company Limited
              
              
              2,298,146.86China
      Lucky Offset Group Integrated  Services Company
              
              
              2,244,296.50Baoding
      Huatai Printing Company Limited
              
              
              2,199,225.98
 
 For the
year ended December 31, 2007, HBOP’s top 10 customers were as
follows:
 
 Major
customers and revenue generated for the year ended December 31,
2007
  Name
              
              Amount (US$)Baoding
      Binghe Printing Company Limited
              
              
              1,870,220.28Baoding
      Hengyi Printing Company Limited
              
              
              1,869,758.87Hebei
      Mancheng Printing Company Limited
              
              
              1,770,911.31Baoding
      Xida Printing Company Limited
              
              
              1,614,411.16China
      Lucky Offset Group Integrated  Services Company
              
              
              1,582,341.82Beijing
      People’s Fine Arts Publishing House
              
              
              1,424,035.91Beijing
      Qiuhao Printing Company Limited
              
              
              1,413,499.53Laishui
      Xingwang Packaging Products Company Limited
              
              
              1,246,187.98Beijng
      Yutian Planet Books Company Limited
              
              
              1,237,328.96Baoding
      Dadi Colour Printing Company Limited
              
              
              1,236,743.11
  7
  For the
year ended December 31, 2006, HBOP’s top 10 customers were as
follows:
 
 Major
customers and revenue generated for the year ended December 31,
2006
  Name
              
              Amount (US$)Beijing
      Chinabase Star Paper Company Limited
              
              
              1,304,222.42Shanghai
      Hengshi Paper Company Limited
              
              
              910,563.40Hebei
      Mancheng Printing Company Limited
              
              
              876,071.72Beijing
      Kexing Paper Company Limited
              
              
              781,092.51Baoding
      Hengyi Printing Company Limited
              
              
              721,961.30Beijing
      Beishangle Welfare Paper Products Company Limited
              
              
              702,653.46Laishui
      Liming Paperboard Company Limited
              
              
              662,555.31Beijing
      Tongzhou Ciqu Printing Company Limited
              
              
              646,192.53Linhai
      Tianlun Paper Company Limited
              
              
              645,746.84Tianjin
      Jiteng Paper Products Company Limited
              
              
              619,840.32
 
 Marketing
Strategy
 
 We have
targeted corporate clients in the mid- to high-end paper market, where products
such as corrugated paper and mid- to high-grade offset paper have potential for
high volume growth.  Our primary market for our products has been in
the northern Chinese region.  This has been our focus not only because
the region provides for growing demand for our products in the urban centers of
Beijing and Tianjin, but because we enjoy a price advantage in the region over
competitors from other locales in China.  However, as our production
capacity expands and our product list diversifies, we may expand our market to
eastern and southern China.  We may also consider growing an export
market through business and technology partnerships with foreign
collaborators.
 
 Expand
Production Capacity
 
 In the
fiscal year ended December 31, 2008, we had a production capacity of
approximately 170,000 tons.  In order to meet domestic demand for
paper, which is currently exceeding domestic supply, we plan to increase our
production capacity as well as the diversity of our products in the coming
year.
 
 Continue
to Develop and Market New Products
 
 We are
currently developing the following products:
 
 Digital
Photographic Paper
 
 Digital
photographic paper is composed of dimensionally stable, chemically neutral pulp
paper.  It is typically coated on both sides with a thin polyethylene
film and is “cooked” to prevent chemicals and water entering the paper. This
product is currently under development and will need additional financing to be
able to be marketed for full-scale manufacture.
 
 Security
Paper
 
 Security
paper, or anti-counterfeit paper, contains certain identification features that
assist in detecting fraud.  Security paper is manufactured by
utilizing advanced technology to insert security lines made of metal or plastic
into white pulp to produce patterned, shaded paper.  Security paper is
used in the printing of various forms of securities or negotiable
instruments.  This product is currently under development and will
need additional financing to be able to be marketed for full-scale
manufacture.
  8
  Raw
Materials and Principal Suppliers
  The
supplies used in our production processes are comprised mainly of old paperboard
and white edge paper, both of which are readily available items for which there
are multiple sources. We also purchase coal and chemical agents from nearby
suppliers.  Although we do not anticipate difficulties in obtaining
necessary supplies, ongoing inflationary pressures could lead to an increase in
our costs of raw materials and production, which we may pass on to our
customers.
 
 Our main
suppliers are Xushui County Dongfang Trading Company Limited, Beijing Chinabase
Star Paper Company Limited, Hebei Dingxing Material Recycling Station, Beijing
Heerwang Industrial Material Company Limited, and Beijing Jianshun Fanya
Resource Renewable Company Limited.   We typically sign one-year
contracts with these suppliers.  For the year ended December 31, 2008,
we had three major suppliers which primarily accounted for 50%, 12%, and 11% of
total purchases.  For the year ended December 31, 2007, we had two
major suppliers, which primarily accounted for 52% and 40% of total
purchases.
 
 For the
year ended December 31, 2008, HBOP’s top 10 suppliers were as
follows:
 
 Suppliers
and purchase amount for the year ended December 31, 2008
 
 Name
              
              Amount (US$)Xushui
      County Dongfang Trading Company Limited
              
              
              28,471,056.42Beijing
      Chinabase Star Paper Company Limited
              
              
              6,920,078.33Hebei
      Dingxing Material Recycling Station
              
              
              6,038,397.73Baoding
      Tianhe Coal Industries Company
              
              
              4,604,558.56Beijing
      Heerwang Industrial Material Company Limited
              
              
              2,591,927.85Beijing
      Jianshun Fanya Resource Renewable Company Limited
              
              
              1,274,557.15Baoding
      Ranhua Company Limited
              
              
              988,816.51Beijing
      Huaxin Chemical Research Institute
              
              
              375,990.08Baoding
      Haiming Company Limited Nanshi District
              
              
              209,283.89Beijing
      Minzheng Daily Chemial Industrial Company
              
              
              62,332.48
 
 For the
year ended December 31, 2007, HBOP’s top 5 suppliers were as
follows:
 
 Suppliers
and purchase amount for the year ended December 31, 2007
 
 Name
              
              Amount (US$)Xushui
      County Dongfang Trading Company Limited
              
              
              15,855,343.73Beijing
      Heerwang Industrial Material Company Limited
              
              
              12,489,425.63Baoding
      Tianhe Coal Industries Company
              
              
              1,685,322.58Chile
      Silver Star Pulp Company Limited
              
              
              503,658.57Baoding
      Ranhua Company Limited
              
              
              180,015.27
 
 For the
year ended December 31, 2006, HBOP’s top 5 suppliers were as
follows:
 
 Suppliers
and purchase amount for the year ended December 31, 2006
 
 Name
              
              Amount (US$)Xushui
      County Dongfang Trading Company Limited
              
              
              14,602,089.43Beijing
      Heerwang Industrial Material Company Limited
              
              
              5,165,298.92Baoding
      Tianhe Coal Industries Company
              
              
              2,377,524.30AP
      Procurement Business Company Limited – Macao Branch
              
              
              868,187.86Baoding
      Ranhua Company Limited
              
              
              562,362.93
  9
  Competition
 
 HBOP's
main competitors are: Chenming Paper Group Limited; Huatai Group Limited; Nine
Dragons Paper (Holdings) Limited; Sun Paper Group Limited; and Zhonghua Paper
Co., Ltd. In addition to these competitors there are numerous smaller family
operations in the paper production industry. A number of our competitors are
larger entities with broader customer bases and greater financial resources than
those available to us.The business of our
primary competitors is briefly described below:
 
 Chenming
Paper Group, Ltd. (“Chenming”), based in Shandong Province (located in northeast
China), produces primarily newsprint paper and art paper (high quality, heavy,
two-side coated printing paper).  Chenming is believed to be the first
company to have all three types of public listings available in China: renminbi
A-shares and foreign currency B-shares in Shenzhen, the smaller of the
mainland’s two stock exchanges, and H-shares in Hong Kong. Chenming has a
production capacity of 4 million tons/yr for its coated woodfree paper product
and is believed to rank among the top 500 enterprises in China.
 
 Huatai
Group, Ltd. (“Huatai”), based in Shandong Province (located in northeast China),
primarily produces newsprint, fine paper, special printing papers, coated board,
and tissue paper.  Huatai is the first Shandong papermaker to publicly
list its stock and has become a famous brand in China. Its annual paper
production volume is estimated to reach 1.6 million tons.
 
 Nine
Dragons Paper (Holdings) Limited (“ND Paper”), based in Guangdong Province
(located in southeast China), primarily produces kraft paper and high-strength
corrugated paper. ND Paper has reported that in December 2005, the company’s
corrugating medium production lines PM9 and PM10 came into operation, boosting
ND Paper's annual total production capacity to 3.3 million tons and making the
company the largest high-strength corrugated paper  manufacturer in
China.
 
 Sun Paper
Group, Ltd., based in Shandong Province (located in northeast China), primarily
produces card paper, whiteboard paper, and art paper.  It also
produces alkaline peroxide mechanical pulp, sourced in part from woodchips
harvested by the company’s poplar plantations.  The company has
reported that it has an annual production capacity of approximately 1.5 million
tons and in 2006 successfully listed on the Shenzhen Stock
Exchange.
 
 Zhonghua
Paper Co., Ltd., based in Zhejiang Province (located in eastern China),
primarily produces card paper and whiteboard paper.  With an annual
production capacity of 500,000 tons, it is purported to be the largest and most
progressive coated whiteboard paper manufacturer in China.
 
 We
believe that we face indirect competition from the above-listed companies,
either because we produce different types of paper products, or for those
products that do overlap, because we market our products in different geographic
regions of China.
  Our
Competitive Edge
 
 Regional advantage (northern
China).  We believe that HBOP is the largest papermaking enterprise in
Hebei Province.  Our proximity to large urban centers in northern
China, Beijing and Tianjin, gives us a large market in which to sell our
products.
 
 Other
paper manufacturers are also located in Hebei Province and in nearby Beijing and
Tianjin, however due to production capacity and product differences, we do not
consider them to be major competitors. Our proximity to Beijing and Tianjin also
grants us easy access to a variety of long-term suppliers who enjoy a robust
market in northern China for their products.
  10
  Price
advantage.  Because we are approximately 75 miles (120
kilometers) from Beijing, the cultural center of China and our largest target
market, there is no need to arrange for interim warehouses or employees.
Tianjin, another large urban center, is also approximately 75 miles from our
facilities.  Baoding city itself is also home to numerous printing and
packaging companies. We therefore have lower freight costs and other associated
costs of sales, enabling us to charge lower prices for our products to our
customers.  Additionally, Beijing and Tianjin’s high consumption of
paper products generates a large amount of wastepaper, which in turn provides us
with a steady and geographically advantageous source of recycled paperboard and
recycled paper to serve as raw materials for our products.
 
 Research
and Development
  Currently,
we have 37 professionals engaged in research and development (“R&D”),
including one senior engineer with professorial experience, 6 senior engineers
and 4 senior technicians.  Our R&D efforts have resulted in the
design of a low-cost, high quality digital photo paper, which we plan to launch
to customers when we obtain financing to support production.
 
 We have
cooperative relationships with a number of research institutes, including the
State Association of Light Industry, Shanghai Paper Processing Association,
Research Institute of Beijing, Zhongtian Paper Group, and the Department of
Technical Physics at Beijing University.
  Intellectual
Property
 
 HBOP has registered 1 trademark with
the Trademark Bureau under the State of
Administration for Industry & Commerce, which remains effective through
April 6, 2014:
 
 Trademark
              
              Certificate
                No.
              
              Category
              
              Registrant
              
              Valid TermShuangxing
                (“双星”)
              
              3298963
              
              Fax
      paper, thermal paper, blueprint paper, sensitized paper, spectrum
      sensitized paper, blueprint cloth, photographic paper, cyanotyping
      solution, diazo paper
              
              HBOP
              
              April
      4, 2004 through April 6, 2014
  Domain
names
 
 Orient
Paper owns the rights to the internet domain name,
www.orientalpapercorporation.com.
  Government
Regulation
 
 The
testing, approval, manufacturing, labeling, advertising and marketing,
post-approval safety reporting, and export of our products are extensively
regulated by governmental authorities in the PRC. We are also subject to various
other regulations and permit systems by the Chinese government. These
regulations and their impact on our business are set forth in more detail
below.
 
 Environmental Regulation
 
 Our
operations and facilities are subject to environmental laws and regulations
stipulated by the national and the local environment protection bureaus in the
PRC.
 
 Since the
implementation of the State Council’s “Decisions on Environmental Protection
Issues” in 1996, the PRC paper industry has subject to rigorous environmental
standards.  We believe that we are one of the few major paper
manufacturers in Hebei Province to obtain a Pollution Discharge Permit, which
enables us to operate in compliance with PRC environmental regulations. We were
first issued the permit in September 1996 and since we have remained in line
with the PRC’s restrictions on carbon dioxide and sulfur oxide byproducts, have
successfully renewed the permit each year.
  11
  Waste Water
Treatment
 
 HBOP uses
a multi-level water recycling process. Waste water from the pulping process is
fed into collection pools, where it is divided into two parts, namely water and
recovered pulp fiber.  The latter is returned into the pulping
process.
 
 Chemical agents are added to the waste
water, and the waste water is fed into a biogas reactor and filtering pools,
producing purified water and depositing sludge.  The purified water is
released and the sludge is pumped into a sludge pool, condensed and dehydrated.
We then use the sludge as an ingredient in the manufacture of corrugated
paper.
  We
maintain controls at our production facilities to facilitate compliance with
environmental rules and regulations. We are not aware of any investigations,
prosecutions, disputes, claims or other proceedings in respect of environmental
protection, nor have we been subject to any action by any environmental
administration authorities of the PRC. To our knowledge, our operations meet or
exceed the existing requirements of the PRC.
  Employees
 
 As of
March 24, 2009, we have approximately 600 full time employees who receive labor
insurance. These employees are organized into a union under the labor laws of
the PRC and can bargain collectively with us. In addition, we employ over 15
sales representatives, who are paid no commission but receive performance-based
bonuses at the end of the year. These representatives are not part of the
union.  We maintain good relations with our
employees.
  We are
required to contribute a portion of our employees' total salaries to the Chinese
government's social insurance funds, including medical insurance and
unemployment insurance and to purchase job injury insurance for employees, in
accordance with relevant regulations. The government's social insurance funds
account for 5-10% of employees' total salaries. The job injury insurance premium
is about RMB 50 (approximately US$7) per person. We expect the amount of our
contributions to the government's social insurance funds and the cost related to
job injury insurance to increase in the future as we expand our workforce
and operations.
 
 Executive
Offices
 
 Our
executive offices in the PRC are located at Science Park, Xushui County, Baoding
City, Hebei Province, PRC 072550.  Our telephone and facsimile number
is 00-86-312-8605508/8605530.
 
 
 Item
1A.               RiskFactors.
 
 Risks Related To Our Business
  Our operating
history may not serve as an adequate basis to judge our future prospects and
results of operations.
  HBOP
commenced its current line of business operations in 1996 and received its
Pollution Discharge Permit in September 1996, which must be renewed every year
for HBOP to stay in business. Our operating history may not provide a meaningful
basis on which to evaluate its business. We cannot assure you that HBOP will
maintain its profitability or that we will not incur net losses in the future.
We expect that HBOP’s operating expenses will increase as it expands. Any
significant failure to realize anticipated revenue growth could result in
significant operating losses. We will continue to encounter risks and
difficulties frequently experienced by companies at a similar stage of
development, including our potential failure to:
  ·
                  raise
      adequate capital for expansion and
operations;
 ·
                  implement
      our business model and strategy and adapt and modify them as
      needed;
 ·
                  increase
      awareness of our brand name, protect our reputation and develop
      customer loyalty;
 ·
                  manage
      our expanding operations and service offerings, including the integration
      of any future acquisitions;
  12
  ·
                  maintain
      adequate control of our expenses;
or
 ·
                  anticipate
      and adapt to changing conditions in paper markets in which we operate
      as well as the impact of any changes in government regulations, mergers
      and acquisitions involving our competitors, technological
      developments and other significant competitive and market
      dynamics
 If we are
not successful in addressing any or all of these risks, our business may be
materially and adversely affected.
 
 HBOP’s
failure to compete effectively may adversely affect our ability to generate
revenue.
  Through
HBOP, we compete in a highly developed market with companies that have
significantly greater experience and history in our industry. If we do not
compete effectively, we could lose market share and experience falling prices,
adversely affecting our financial results. Our competitors will expand in the
key markets and implement new technologies making them more competitive. There
is also the possibility that competitors will be able to offer additional
products, services, lower prices, or other incentives that we cannot or will not
offer or that will make our products less profitable. We cannot assure you that
we will be able to compete effectively with current or future competitors or
that the competitive pressures we face will not harm our
business.
 
 We
may not be able to effectively control and manage the growth of
HBOP.
 
 If HBOP’s
business and markets grow and develop, it will be necessary for us to finance
and manage expansion in an orderly fashion. An expansion would increase demands
on existing management, workforce and facilities. Failure to satisfy such
increased demands could interrupt or adversely affect our  operations
and cause delay in production and delivery of our paper products, as well as
administrative inefficiencies.
  We
may require additional financing in the future and a failure to obtain such
required financing will inhibit our ability to grow.
 
 The
continued growth of our business may require additional funding from time to
time, which we expect to raise in private placements of our equity or debt
securities with accredited investors or by offering our securities for sale
pursuant to an effective registration statement on a market where our common
stock is traded. The proceeds of this funding would be used for general
corporate purposes of HBOP, which could include acquisitions, investments,
repayment of debt and capital expenditures among other things. We may also
use the proceeds to repurchase our capital stock or for our corporate overhead
expenses. If we borrow funds we expect to be the primary obligor on any debt.
Obtaining additional funding would be subject to a number of factors including
market conditions, operating performance and investor sentiment, many of which
are outside of our control. These factors could make the timing, amount, terms
and conditions of additional funding unattractive or unavailable to us. Our
management believes that we currently have sufficient funds from working capital
to meet our current operating costs over the next 12 months.
 
 The
terms of any future financing may adversely affect your interest as
stockholders.
 
 If we
require additional financing in the future, we may be required to incur
indebtedness or issue equity securities, the terms of which may adversely affect
your interests in us. For example, the issuance of additional indebtedness may
be senior in right of payment to your shares upon our liquidation. In addition,
indebtedness may be under terms that make the operation
of our business more difficult because the lender's consent could be
required before we take certain actions. Similarly the terms of any equity
securities we issue may be senior in right of payment of dividends to your
common stock and may contain superior rights and other rights as compared to
your common stock. Further, any such issuance of equity securities may dilute
your interest in us.
 
 We,
through our subsidiaries Dongfang Holding or HBOP, may engage in future
acquisitions that could dilute the ownership interests of our stockholders,
cause us to incur debt and assume contingent liabilities.
 
 We,
through our subsidiaries Dongfang Holding or HBOP, may review acquisition and
strategic investment prospects that we believe would complement the current
product offerings of HBOP, augment its market coverage or enhance its
technical capabilities, or otherwise offer growth opportunities. From time to
time we review investments in new businesses and we, through our
subsidiary, Dongfang Holding or HBOP, expect to make investments in, and to
acquire, businesses, products, or technologies in the future. We expect that
when we raise funds from investors for any of these purposes we will be either
the issuer or the primary obligor while the proceeds will be forwarded to HBOP.
In the event of any future acquisitions, we could:
  13
  ·
              issue
      equity securities which would dilute current stockholders’ percentage
      ownership;
 ·
              incur
      substantial debt;
 ·
              assume
      contingent liabilities; or
 ·
              expend
      significant cash.
 
 These
actions could have a material adverse effect on our operating results or the
price of our common stock. Moreover, even if through our subsidiaries
Dongfang Holding or HBOP, we do obtain benefits in the form of increased
sales and earnings, there may be a lag between the time when the expenses
associated with an acquisition are incurred and the time when we recognize such
benefits. Acquisitions and investment activities also entail numerous risks,
including:
 
 ·
              difficulties
      in the assimilation of acquired operations, technologies and/or
      products;
 ·
              unanticipated
      costs associated with the acquisition or investment
      transaction;
 ·
              the
      diversion of management’s attention from other business
      concerns;
 ·
              adverse
      effects on existing business relationships with suppliers and
      customers;
 ·
                risks
      associated with entering markets in which HBOP has no or limited
      prior experience;
 ·
                the
      potential loss of key employees of acquired organizations;
    and
 ·
                substantial
      charges for the amortization of certain purchased intangible assets,
      deferred stock compensation or similar
items.
 
 We cannot
ensure that we will be able to successfully integrate any businesses, products,
technology, or personnel that we might acquire in the future and our failure to
do so could have a material adverse effect on our and/or HBOP’s business,
operating results and financial condition.
 
 We
are responsible for the indemnification of our officers and
directors.
 
 Our
Articles of Incorporation provides for the indemnification and/or exculpation of
our directors, officers, employees, agents and other entities which deal with it
to the maximum extent provided, and under the terms provided, by the laws and
decisions of the courts of the state of Nevada. Since we do not hold any
indemnification insurance, these indemnification provisions could result in
substantial expenditures, which we may be unable to recoup, which could
adversely affect our business and financial conditions. Zhenyong Liu, our
Chairman of Board  and Chief Executive Officer, Jing Hao, our Chief
Financial Officer, Dahong Zhou, our Secretary, and Xiaodong Liu, Fuzeng Liu, and
Chen Li, our directors, are key personnel with rights to indemnification under
our Articles of Incorporation.
 
 We
may not have adequate internal accounting controls. While we have certain
internal procedures in our budgeting, forecasting and in the management and
allocation of funds, our internal controls may not be adequate.
 
 We are
constantly striving to improve our internal control over financial reporting. We
expect to continue to improve our internal accounting control for budgeting,
forecasting, managing and allocating our funds and to better account for them as
we grow. There is no guarantee that such improvements will be adequate or
successful or that such improvements will be carried out on a timely basis. If
we do not have adequate internal accounting controls, we may not be able to
appropriately budget, forecast and manage our funds, we may also be unable to
prepare accurate accounts on a timely basis to meet our continuing financial
reporting obligations and we may not be able to satisfy our obligations under US
securities laws.
  14
  We
are dependent on certain key personnel and loss of these key personnel could
have a material adverse effect on our business, financial condition and results
of operations.
  Our
success is, to a certain extent, attributable to the management, sales and
marketing, and paper factory operational expertise of key personnel. Zhenyong
Liu, our Chief Executive Officer and Chairman of the Board, Jing Hao, our Chief
Financial Officer, Dahong Zhou, our Secretary, and Li Han, HBOP’s General
Engineer, Gengqi Yang, HBOP’s General Sales Manager, and Li Wang, HBOP’s Quality
Control Manager perform key functions in the operation of our business.
There can be no assurance that Orient Paper or HBOP will be able to retain
these officers after the term of their employment contracts expire. The loss of
these officers could have a material adverse effect upon our business, financial
condition, and results of operations. We must attract, recruit and retain a
sizeable workforce of technically competent employees. We do not carry key man
life insurance for any of our key personnel or personnel nor do we foresee
purchasing such insurance to protect against a loss of key personnel and
the key personnel.
  We are
dependent upon the services of Mr. Liu for the continued growth and operation of
our company because of his experience in the industry and his personal and
business contacts in the PRC. Neither we nor HBOP have an employment agreement
with Mr. Liu and do not anticipate entering into an employment agreement in the
foreseeable future. Although we have no reason to believe that Mr. Liu will
discontinue his services with us or HBOP, the interruption or loss of his
services would adversely affect our ability to effectively run our business and
pursue our business strategy as well as our results of
operations.
  We  may
not be able to hire and retain qualified personnel to support our growth and if
we are unable to retain or hire these personnel in the future, our ability to
improve our products and implement our business objectives could be
adversely affected.
  Competition
for senior management and senior personnel in the PRC is intense, the pool of
qualified candidates in the PRC is very limited, and we may not be able to
retain the services of our senior executives or senior personnel, or attract and
retain high-quality senior executives or senior personnel in the future. This
failure could materially and adversely affect our future growth and financial
condition.  We expect to hire additional sales and plant personnel
throughout fiscal year 2009 in order to accommodate our growth.
  If
we fail to increase our brand recognition, we may face difficulty in obtaining
new customers and business partners.
 
 We
believe that establishing, maintaining and enhancing our brand in a
cost-effective manner is critical to achieving widespread acceptance of our
current and future products and services and is an important element in our
effort to increase our customer base and obtain new business partners. We
believe that the importance of brand recognition will increase as competition in
our market develops. Some of our potential competitors already have
well-established brands in paper industry. Successful promotion of our brand
will depend largely on our ability to maintain a sizeable and active customer
base, our marketing efforts and ability to provide reliable and useful products
and services at competitive prices. Brand promotion activities may not yield
increased revenue, and even if they do, any increased revenue may not offset the
expenses we will incur in building our brand. If we fail to successfully promote
and maintain our brand, or if we incur substantial expenses in an unsuccessful
attempt to promote and maintain our brand, we may fail to attract enough new
customers or retain our existing customers to the extent necessary to realize a
sufficient return on our brand-building efforts, in which case our business,
operating results and financial condition, would be materially adversely
affected.
 
 Our operating
results may fluctuate as a result of factors beyond our
control.
 
 Our
operating results may fluctuate significantly in the future as a result of a
variety of factors, many of which are beyond our control. These factors
include:
 
 ·
              the
      costs of paper products and
development;
 ·
              the
      relative speed and success with which we can obtain and maintain
      customers, merchants and vendors for our
  products;
 ·
              capital
      expenditure for equipment;
 ·
              marketing
      and promotional activities and other
costs;
 ·
              changes
      in our pricing policies, suppliers and
  competitors;
 ·
              the
      ability of our suppliers to provide products in a timely manner
      to their customers;
 ·
              changes
      in operating expenses;
 ·
              increased
      competition in the paper markets;
and
 ·
              other
      general economic and seasonal
factors.
  15
  We
face risks related to product liability claims.
  We
presently do not maintain product liability insurance. We face the risk of
loss because of adverse publicity associated with product liability
lawsuits, whether or not such claims are valid. We may not be able to avoid such
claims. Although product liability lawsuits in the PRC are rare, and we have
not, to date, experienced significant failure of our products, there is no
guarantee that we will not face such liability in the future. This
liability could be substantial and the occurrence of such loss or liability may
have a material adverse effect on our business, financial condition and
prospects.
  We
face risks relating to difficulty in defending intellectual property rights from
infringement.
 
 Our
success depends on protection of our current and future technology and products
and our ability to defend our intellectual property rights. We have filed
for trademark protection for the various names and brands of our products sold
in the PRC.   However, it is possible for our competitors to
develop similar competitive products even thought we have taken steps to protect
our intellectual property. If we fail to protect our intellectual property
adequately, competitors may manufacture and market products similar to ours. We
expect to file patent applications seeking to protect newly developed technology
and products in various countries, including China. Some patent applications in
the PRC are maintained in secrecy until the patent is issued. Because the
publication of discoveries tends to follow their actual discovery by many
months, we may not be the first to invent, or file patent applications on any
of our discoveries. Patents may not be issued with respect to any of our
patent applications and existing or future patents issued to or licensed by us
may not provide competitive advantages for our products. Patents that are issued
may be challenged, invalidated or circumvented by our competitors. Furthermore,
our patent rights may not prevent our competitors from developing, using or
commercializing products that are similar or functionally equivalent to our
products.
 
 We also
rely on trade secrets, non-patented proprietary expertise and continuing
technological innovation that we shall seek to protect, in part, by entering
into confidentiality agreements with licensees, suppliers, employees and
consultants. These agreements may be breached and there may not be adequate
remedies in the event of a breach. Disputes may arise concerning the ownership
of intellectual property or the applicability of confidentiality agreements.
Moreover, our trade secrets and proprietary technology may otherwise become
known or be independently developed by our competitors. If patents are not
issued with respect to products arising from research, we may not be able to
maintain the confidentiality of information relating to these
products.
 
 Our
operating results also depend on the availability and pricing of energy and raw
materials.
 
 In
addition to our dependence upon wood pulp, recycled white edge paper and
cardboard costs, our operating results depend on the availability and pricing of
energy and other raw materials, including chemical agents and coal.  An
interruption in the supply of supplemental chemical agents could cause a
material disruption at our mill in Hebei.  In addition, an interruption in
the supply of coal could cause a material disruption at our facilities in
Baoding.  At present, our raw materials are purchased from a number of
suppliers, typically pursuant to a long-term contract, of which the three
largest suppliers account for over 70% of all purchases.  If any of these
contracts were to be terminated for any reason, or not renewed upon expiration,
or if market conditions were to substantially change creating a significant
increase in the price of coal, we may not be able to find alternative,
comparable suppliers or suppliers capable of providing coal to us on terms or in
amounts satisfactory to us.  As a result of any of these events, our
business, financial condition and operating results could suffer.
 
 A material
disruption at one of our manufacturing facilities could prevent us from meeting
customer demand, reduce our sales, and/or negatively affect our net
income.
 
 Any of
our manufacturing facilities, or any of our machines within an otherwise
operational facility, could cease operations unexpectedly due to a number of
events, including:
 
 •
              Maintenance
      outages;
 •
              Prolonged
      power failures;
 •
              An
      equipment failure;
 •
              Disruption
      in the supply of raw materials, such as wood fiber, energy, or
      chemicals;
 •
              A
      chemical spill or release;
 •
              Closure
      because of environmental-related
concerns;
  16
  •
              Explosion
      of a boiler;
 •
              The
      effect of a drought or reduced rainfall on our water
    supply;
 •
              Disruptions
      in the transportation infrastructure, including roads, bridges, railroad
      tracks, and tunnels;
 •
              Fires,
      floods, earthquakes, hurricanes, or other
  catastrophes;
 •
              Terrorism
      or threats of terrorism;
 •
              Labor
      difficulties; or
 •
              Other
      operational problems.
 
 Our
certificates, permits, and licenses related to our papermaking operations are
subject to governmental control and renewal and failure to obtain renewal will
cause all or part of our operations to be terminated.
 
 Due to
the nature of the business, we are subject to environmental, health, and safety
laws and regulations, including those related to the disposal of hazardous waste
from our manufacturing processes. Compliance with existing and future
environmental, health and safety laws could subject us to future costs or
liabilities; impact our production capabilities; constrict our ability to sell,
expand or acquire facilities; and generally impact our financial performance. We
have accrued liabilities for environmental clean-up sites, including sites for
which governmental agencies have designated us as a potentially responsible
party, where it is probable that a loss will be incurred and the cost or amount
of loss can be reasonably estimated. However, because of the uncertainties
associated with environmental assessment and remediation activities, future
expense to remediate currently identified sites and other sites, which could be
identified in the future for cleanup, could be higher than the liability
currently accrued.
  In 1988,
the National Environmental Protection Bureau issued Interim Measures on the
Administration of Water Pollutants Discharge Permits, requiring all companies
discharging pollution into the water as a direct or indirect byproduct of
production to adhere to certain caps on pollution
discharge.  Additionally, such companies were required to obtain and
annually renew a Pollution Discharge Permit in order to conduct their
operations.   The PRC government has the authority to shut down a
company’s operations for failure to maintain a valid permit.
 
 
 Risks
Related To Doing Business In The PRC
 
 Changes in the
policies of the PRC government could have a significant impact upon the business
we may be able to conduct in the PRC and the profitability of such
business.
  Our
business operations may be adversely affected by the current and future
political environment in the PRC. The PRC has operated as a socialist state
since the mid-1900s and is controlled by the Communist Party of China. The
Chinese government exerts substantial influence and control over the manner in
which we and it must conduct our business activities. The PRC has only
permitted provincial and local economic autonomy and private economic activities
since 1988. The government of the PRC has exercised and continues to exercise
substantial control over virtually every sector of the Chinese economy,
particularly the paper industry, through regulation and state ownership. Our
ability to operate in the PRC may be adversely affected by changes in Chinese
laws and regulations, including those relating to taxation, import and export
tariffs, raw materials, environmental regulations, land use rights, property and
other matters. Under current leadership, the government of the PRC has been
pursuing economic reform policies that encourage private economic activity and
greater economic decentralization. There is no assurance, however, that the
government of the PRC will continue to pursue these policies, or that it will
not significantly alter these policies from time to time without
notice.
 
 The PRC's
economy is in a transition from a planned economy to a market oriented economy
subject to five-year and annual plans adopted by the government that set
national economic development goals. Policies of the PRC government can have
significant effects on the economic conditions of the PRC. The PRC government
has confirmed that economic development will follow the model of a market
economy. Under this direction, we believe that the PRC will continue to
strengthen its economic and trading relationships with foreign countries and
business development in the PRC will follow market forces. While we believe that
this trend will continue, there can be no assurance that this will be the
case.
  17
  A change
in policies by the PRC government could adversely affect our interests by, among
other factors: changes in laws, regulations or the interpretation thereof,
confiscatory taxation, restrictions on currency conversion, imports or sources
of supplies, or the expropriation or nationalization of private enterprises.
Although the PRC government has been pursuing economic reform policies for more
than two decades, there is no assurance that the government will continue to
pursue such policies or that such policies may not be significantly altered,
especially in the event of a change in leadership, social or political
disruption, or other circumstances affecting the PRC's political, economic and
social life.
 
 The
PRC laws and regulations governing our current business operations are sometimes
vague and uncertain. Any changes in such PRC laws and regulations may
harm our business.
  The PRC
laws and regulations governing our current business operations are sometimes
vague and uncertain. The PRC’s legal system is a civil law system based on
written statutes, in which system decided legal cases have little value as
precedents unlike the common law system prevalent in the United States. There
are substantial uncertainties regarding the interpretation and application of
PRC laws and regulations, including but not limited to the laws and regulations
governing our business, or the enforcement and performance of our
arrangements with customers in the event of the imposition of statutory liens,
death, bankruptcy and criminal proceedings. The Chinese government has been
developing a comprehensive system of commercial laws, and considerable progress
has been made in introducing laws and regulations dealing with economic matters
such as foreign investment, corporate organization and governance, commerce,
taxation and trade. However, because these laws and regulations are relatively
new, and because of the limited volume of published cases and judicial
interpretation and their lack of force as precedents, interpretation and
enforcement of these laws and regulations involve significant uncertainties. New
laws and regulations that affect existing and proposed future businesses may
also be applied retroactively. We are considered a foreign persons or foreign
funded enterprises under PRC laws, and as a result, we are required to comply
with PRC laws and regulations. We cannot predict what effect the interpretation
of existing or new PRC laws or regulations may have on our business. If the
relevant authorities find that we are in violation of PRC laws or regulations,
they would have broad discretion in dealing with such a violation, including,
without limitation:
 
 ·
              levying
      fines;
 ·
              revoking HBOP’s
      business and other licenses;
 ·
              requiring
      that we restructure our ownership or operations;
  and
 ·
              requiring
      that we discontinue any portion or all of our
  business.
  Among the
material laws that we are subject to are the Price Law of The People’s Republic
of China, Measurement Law of The People’s Republic of China, Tax Law,
Environmental Protection Law, Contract Law, Patent Law, Accounting Laws and
Labor Law.
 
 A
slowdown, inflation or other adverse developments in the PRC economy may harm
our customers and the demand for our services and products.
 
 All of
our operations are conducted in the PRC and all of our revenue is generated from
sales in the PRC. Although the PRC economy has grown significantly in recent
years, we cannot assure you that this growth will continue. A slowdown in
overall economic growth, an economic downturn, a recession or other adverse
economic developments in the PRC could significantly reduce the demand
for our products and harm our business.
 
 While the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth could lead to growth in the money supply and
rising inflation. If prices for our products rise at a rate that is insufficient
to compensate for the rise in the costs of supplies, it may harm our
profitability. In order to control inflation in the past, the PRC government has
imposed controls on bank credit, limits on loans for fixed assets and
restrictions on state bank lending. Such an austere policy can lead to a slowing
of economic growth. In October 2004, the People's Bank of China, the PRC's
central bank, raised interest rates for the first time in nearly a decade and
indicated in a statement that the measure was prompted by inflationary concerns
in the Chinese economy. Repeated rises in interest rates by the central bank
would likely slow economic activity in the PRC which could, in turn, materially
increase our costs and also reduce demand for our
products.
  18
  Governmental
control of currency conversion may affect the value of your
investment.
 
 The PRC
government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of the PRC. We
receive substantially all of our revenue in Renminbi, which is currently not a
freely convertible currency. Shortages in the availability of foreign currency
may restrict our ability to remit sufficient foreign currency to pay dividends,
or otherwise satisfy foreign currency dominated obligations. Under existing PRC
foreign exchange regulations, payments of current account items, including
profit distributions, interest payments and expenditures from the transaction,
can be made in foreign currencies without prior approval from the PRC State
Administration of Foreign Exchange by complying with certain procedural
requirements. However, approval from appropriate governmental authorities is
required where Renminbi is to be converted into foreign currency and remitted
out of the PRC to pay capital expenses such as the repayment of bank loans
denominated in foreign currencies.
 
 The PRC
government may also in the future restrict access to foreign currencies for
current account transactions. If the foreign exchange control system prevents us
from obtaining sufficient foreign currency to satisfy our currency demands, we
may not be able to pay certain of our expenses as they come due.
 
 The
fluctuation of the Renminbi may harm your investment.
 
 The value
of the Renminbi against the U.S. dollar and other currencies may fluctuate and
is affected by, among other things, changes in the PRC's political and economic
conditions. According to the currency website xe.com, as of March 4,
2009, $1 = 6.84420 Yuan (RMB). As we rely entirely on revenues earned in
the PRC, any significant revaluation of the Renminbi may materially and
adversely affect our cash flows, revenues and financial condition. For example,
to the extent that we need to convert U.S. dollars we receive from an offering
of our securities into Renminbi for HBOP’s operations, appreciation of the
Renminbi against the U.S. dollar would diminish the value of the proceeds of the
offering and this could harm our business, financial condition and results of
operations because it would reduce the proceeds available to us for capital
investment in proportion to the appreciation of the Renminbi. Thus if we raise
1,000,000 dollars and the Renminbi appreciates against the U.S. dollar by 15%,
then the proceeds will be worth only RMB5,817,570 as opposed to RMB 6,844,200
prior to the appreciation. Conversely, if we decide to convert our Renminbi into
U.S. dollars for the purpose of making payments for dividends on our common
shares or for other business purposes and the U.S. dollar appreciates against
the Renminbi; the U.S. dollar equivalent of the Renminbi we convert would be
reduced in proportion to the amount the U.S. dollar appreciates. In addition,
the depreciation of significant RMB denominated assets could result in a charge
to our income statement and a reduction in the dollar value of these
assets. Thus if HBOP has RMB1,000,000 in assets and Renminbi is depreciated
against the U.S. dollar by 15%, then the assets will be valued at
$127,051as opposed to $146,109 prior to the depreciation.
  On July
21, 2005, the PRC government changed its decade-old policy of pegging the value
of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is
permitted to fluctuate within a narrow and managed band against a basket of
certain foreign currencies. This change in policy has resulted in an
approximately 14.5% appreciation of the Renminbi against the U.S. dollar as of
June 2, 2008. While the international reaction to the Renminbi revaluation has
generally been positive, there remains significant international pressure on the
PRC government to adopt an even more flexible currency policy, which could
result in a further and more significant appreciation of the Renminbi against
the U.S. dollar.
 
 PRC
State Administration of Foreign Exchange ("SAFE") regulations regarding offshore
financing activities by PRC residents which may increase the administrative
burden we face. The failure by our shareholders who are PRC residents to make
any required applications and filings pursuant to such regulations may prevent
us from being able to distribute profits and could expose us and our PRC
resident shareholders to liability under PRC law.
 
 SAFE,
issued a public notice ("SAFE #75") effective from November 1, 2005, which
requires registration with SAFE by the PRC resident shareholders of any foreign
holding company of a PRC entity. Without registration, the PRC entity cannot
remit any of its profits out of the PRC as dividends or otherwise.
  19
  In
October 2005, SAFE issued a public notice, the Notice on Relevant Issues in the
Foreign Exchange Control over Financing and Return Investment Through Special
Purpose Companies by Residents Inside China, or the SAFE notice, which requires
PRC residents, including both legal persons and natural persons, to register
with the competent local SAFE branch before establishing or controlling any
company outside of China, referred to as an "offshore special purpose company,"
for the purpose of overseas equity financing involving onshore assets or equity
interests held by them. In addition, any PRC resident that is the shareholder of
an offshore special purpose company is required to amend its SAFE registration
with the local SAFE branch with respect to that offshore special purpose company
in connection with any increase or decrease of capital, transfer of shares,
merger, division, equity investment or creation of any security interest over
any assets located in China. Moreover, if the offshore special purpose company
was established and owned the onshore assets or equity interests before the
implementation date of the SAFE notice, a retroactive SAFE registration is
required to have been completed before March 31, 2006. If any PRC shareholder of
any offshore special purpose company fails to make the required SAFE
registration and amendment, the PRC subsidiaries of that offshore special
purpose company may be prohibited from distributing their profits and the
proceeds from any reduction in capital, share transfer or liquidation to the
offshore special purpose company. Moreover, failure to comply with the SAFE
registration and amendment requirements described above could result in
liability under PRC laws for evasion of applicable foreign exchange
restrictions.
 
 It is
unclear whether our other PRC resident shareholders must make disclosure to
SAFE. While our PRC counsel has advised us that only PRC resident shareholders
who receive ownership of the foreign holding company in exchange for ownership
in the PRC operating company are subject to SAFE #75, there can be no assurance
that SAFE will not require our other PRC resident shareholders to register and
make the applicable disclosure. In addition, SAFE #75 requires that any monies
remitted to PRC residents outside of the PRC be returned within 180 days;
however, there is no indication of what the penalty will be for failure to
comply or if shareholder non-compliance will be considered to be a violation of
SAFE #75 by us or otherwise affect us.
 
 In the
event that the proper procedures are not followed under SAFE
#75, HBOP could lose the ability to remit monies outside of the PRC
and would therefore be unable to pay dividends or make other distributions. Our
PRC resident shareholders could be subject to fines, other sanctions and even
criminal liabilities under the PRC Foreign Exchange Administrative Regulations
promulgated January 29, 1996, as amended.
  The
PRC's legal and judicial system may not adequately protect our business and
operations and the rights of foreign investors.
 
 The PRC
legal and judicial system may negatively impact foreign investors. In 1982, the
National People's Congress amended the Constitution of China to authorize
foreign investment and guarantee the "lawful rights and interests" of foreign
investors in the PRC. However, the PRC's system of laws is not yet
comprehensive. The legal and judicial systems in the PRC are still rudimentary,
and enforcement of existing laws is inconsistent. Many judges in the PRC lack
the depth of legal training and experience that would be expected of a judge in
a more developed country. Because the PRC judiciary is relatively inexperienced
in enforcing the laws that do exist, anticipation of judicial decision-making is
more uncertain than would be expected in a more developed country. It may be
impossible to obtain swift and equitable enforcement of laws that do exist, or
to obtain enforcement of the judgment of one court by a court of another
jurisdiction. The PRC's legal system is based on the civil law regime, that is,
it is based on written statutes; a decision by one judge does not set a legal
precedent that is required to be followed by judges in other cases. In addition,
the interpretation of Chinese laws may be varied to reflect domestic political
changes.
 
 The
promulgation of new laws, changes to existing laws and the pre-emption of local
regulations by national laws may adversely affect foreign investors. However,
the trend of legislation over the last 20 years has significantly enhanced the
protection of foreign investment and allowed for more control by foreign parties
of their investments in Chinese enterprises. There can be no assurance that a
change in leadership, social or political disruption, or unforeseen
circumstances affecting the PRC's political, economic or social life, will not
affect the PRC government's ability to continue to support and pursue these
reforms. Such a shift could have a material adverse effect on our business
and prospects.
 
 The
practical effect of the PRC legal system on our business operations in the PRC
can be viewed from two separate but intertwined considerations. First, as a
matter of substantive law, the foreign invested enterprise laws provide
significant protection from government interference. In addition, these laws
guarantee the full enjoyment of the benefits of corporate articles and contracts
to foreign invested enterprise participants. These laws, however, do impose
standards concerning corporate formation and governance, which are qualitatively
different from the general corporation laws of the United States. Similarly, the
PRC accounting laws mandate accounting practices, which are not consistent with
U.S. generally accepted accounting principles. PRC's accounting laws require
that an annual "statutory audit" be performed in accordance with PRC accounting
standards and that the books of account of foreign invested enterprises are
maintained in accordance with Chinese accounting laws. Article 14 of the
People's Republic of China Wholly Foreign-Owned Enterprise Law requires a wholly
foreign-owned enterprise to submit certain periodic fiscal reports and
statements to designated financial and tax authorities, at the risk of business
license revocation. While the enforcement of substantive rights may appear less
clear than United States procedures, foreign invested enterprises and wholly
foreign-owned enterprises are Chinese registered companies, which enjoy the same
status as other Chinese registered companies in business-to-business dispute
resolution. Any award rendered by an arbitration tribunal is enforceable in
accordance with the United Nations Convention on the Recognition and Enforcement
of Foreign Arbitral Awards (1958). Therefore, as a practical matter, although no
assurances can be given, the Chinese legal infrastructure, while different in
operation from its United States counterpart, should not present any significant
impediment to the operation of foreign invested enterprises
  20
  Any
recurrence of Severe Acute Respiratory Syndrome, or SARS, or another widespread
public health problem, could harm our operations.
  A renewed
outbreak of SARS or another widespread public health problem (such as bird flu)
in the PRC, where all of our revenues are derived, could significantly harm our
operations. Our operations may be impacted by a number of health-related
factors, including quarantines or closures of some of our offices that would
adversely disrupt our operations. Any of the foregoing events or other
unforeseen consequences of public health problems could significantly harm our
operations.
  Because
our principal assets are located outside of the United States and most of our
directors and all of our officers reside outside of the United States, it may be
difficult for you to enforce your rights based on U.S. federal securities laws
against us and our officers or to enforce U.S. court judgment against us or them
in the PRC.
  Most of
our directors and all of our officers reside outside of the United States. In
addition, our operating company is located in the PRC and substantially all of
our assets are located outside of the United States. It may therefore be
difficult for investors in the United States to enforce their legal rights based
on the civil liability provisions of the U.S. Federal securities laws against us
in the courts of either the U.S. or the PRC and, even if civil judgments are
obtained in U.S. courts, to enforce such judgments in PRC courts. Further, it is
unclear if extradition treaties now in effect between the United States and the
PRC would permit effective enforcement against us or our officers and directors
of criminal penalties, under the U.S. Federal securities laws or
otherwise.
 
 The
relative lack of public company experience of our management team may put us at
a competitive disadvantage.
 
 Our
management team lacks public company experience, which could impair our ability
to comply with legal and regulatory requirements such as those imposed by
Sarbanes-Oxley Act of 2002. The individuals who now constitute our senior
management have never had responsibility for managing a publicly traded company.
Such responsibilities include complying with federal securities laws and making
required disclosures on a timely basis. Our senior management may not be able to
implement programs and policies in an effective and timely manner that
adequately responds to such increased legal, regulatory compliance and reporting
requirements. Our failure to comply with all applicable requirements could lead
to the imposition of fines and penalties and distract our management from
attending to the growth of our business.
 
 RISKS
RELATED TO OUR COMMON STOCK
  Our
officers and directors control us through their positions and stock ownership
and their interests may differ from other stockholders.
 
 As of
March 24, 2009, there were 45,101,987 shares of our common stock issued and
outstanding. Our officers and directors beneficially own approximately 38.92% of
our common stock. Mr. Zhenyong Liu, our Chief Executive Officer, beneficially
owns approximately 34.69% of our common stock. As a result, he is able to
influence the outcome of stockholder votes on various matters, including the
election of directors and extraordinary corporate transactions including
business combinations. Yet Mr. Liu’s interests may differ from those of other
stockholders. Furthermore, ownership of 38.92% of our common stock by our
officers and directors reduces the public float and liquidity, and may affect
the market price, of our common stock as traded on the OTCBB.
  21
  We
are not likely to pay cash dividends in the foreseeable future.
 
 We intend
to retain any future earnings for use in the operation and expansion of our
business. We do not expect to pay any cash dividends in the foreseeable future
but will review this policy as circumstances dictate. Should we decide in the
future to do so, as a holding company, our ability to pay dividends and meet
other obligations depends upon the receipt of dividends or other payments from
our operating subsidiaries. In addition, our operating subsidiaries, from time
to time, may be subject to restrictions on their ability to make distributions
to us, including restrictions on the conversion of local currency into U.S.
dollars or other hard currency and other regulatory restrictions.
 
 Investors
may have difficulty liquidating their investment because our common stock is
subject to the "penny stock" rules, which require delivery of a schedule
explaining the penny stock market and the associated risks before any
sale.
 
 Our
common stock may be subject to regulations prescribed by the SEC relating to
"penny stocks." The SEC has adopted regulations that generally define a penny
stock to be any equity security that has a market price (as defined in such
regulations) of less than $5 per share, subject to certain exceptions. These
regulations impose additional sales practice requirements on broker-dealers who
sell penny stocks to persons other than established customers and accredited
investors (generally institutions with assets in excess of $5,000,000 and
individuals with a net worth in excess of $1,000,000 or annual income exceeding
$200,000 (individually) or $300,000 (jointly with their spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of these securities and have received
the purchaser's prior written consent to the transaction. Additionally, for any
transaction, other than exempt transactions, involving a penny stock, the rules
require the delivery, prior to the transaction, of a risk disclosure document
mandated by the SEC relating to the penny stock market. The broker-dealer also
must disclose the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny
stocks.
 
 Legal
remedies, which may be available to the investor, are as follows:
  ·
              If
      penny stocks are sold in violation of the investor's rights listed above,
      or other federal or state securities laws, the investor may be able to
      cancel his purchase and get his money
back.
 ·
              If
      the stocks are sold in a fraudulent manner, the investor may be able to
      sue the persons and firms that caused the fraud for
    damages.
 ·
              If
      the investor has signed an arbitration agreement, however, s/he may have
      to pursue a claim through
arbitration.
 
 If the
person purchasing the securities is someone other than an accredited investor or
an established customer of the broker-dealer, the broker-dealer must also
approve the potential customer's account by obtaining information concerning the
customer's financial situation, investment experience and investment objectives.
The broker-dealer must also make a determination whether the transaction is
suitable for the customer and whether the customer has sufficient knowledge and
experience in financial matters to be reasonably expected to be capable of
evaluating the risk of transactions in such securities. Accordingly, the SEC's
rules may limit the number of potential purchasers of the shares of our common
stock and stockholders may have difficulty selling their
securities.
 
 A
large number of shares will be eligible for future sale and may depress our
stock price.
 
 We may be
required, under terms of future financing arrangements, to offer a large number
of common shares to the public, or to register for sale by future private
investors a large number of shares sold in private sales to them.
 
 Sales of
substantial amounts of common stock, or a perception that such sales could
occur, and the existence of options or warrants to purchase shares of common
stock at prices that may be below the then-current market price of our common
stock, could adversely affect the market price of our common stock and could
impair our ability to raise capital through the sale of our equity securities,
either of which would decrease the value of any earlier investment in our common
stock.
  Standards
for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 are uncertain,
and if we fail to comply in a timely manner, our business could be harmed and
our stock price could decline.
  Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require annual assessment of our internal control over financial reporting, and
attestation of this assessment by our company's independent registered public
accountants. The SEC extended the compliance dates for non-accelerated filers,
as defined by the SEC. Accordingly, we believe that the annual assessment of our
internal controls requirement applies to our annual report for the 2008 fiscal
year and the attestation requirement of management's assessment by our
independent registered public accountants will first apply to our annual report
for the 2009 fiscal year. The standards that must be met for management to
assess the internal control over financial reporting as effective are new and
complex, and require significant documentation, testing and possible remediation
to meet the detailed standards. We may encounter problems or delays in
completing activities necessary to make an assessment of our internal control
over financial reporting. In addition, the attestation process by our
independent registered public accountants is new and we may encounter problems
or delays in completing the implementation of any requested improvements and
receiving an attestation of our assessment by our independent registered public
accountants. If we cannot assess our internal control over financial reporting
as effective, or our independent registered public accountants are unable to
provide an unqualified attestation report on such assessment, investor
confidence and share value may be negatively impacted.
  22
  Item
1B.              UnresolvedStaff Comments.
 
 Not
applicable.
 
 Item
2.                 Properties.
  Our
headquarters are located at Hebei Baoding Orient Paper Milling Company Limited,
Science Park, Xushui County, Baoding City, Hebei Province, PRC. The
headquarters, divided into two districts approximately 4 kilometers apart, has a
total area of 258.06 mu or approximately 42.50 acres.
 
 All land
in the PRC is owned by the government and cannot be sold to any individual or
entity. Instead, the government grants landholders a "land use right" after a
purchase price for such "land use right" is paid to the government. The "land
use right" allows the holder the right to use the land for a specified long-term
period of time and enjoys all the incidents of ownership of the land. The
following are the details regarding HBOP’s land use rights with regard to
the land that it uses in its business.
 
 The first
district on which our headquarters is located, comprising 200 mu of land, is
leased from the local government pursuant to a 30 year lease that expires
December 31, 2031. The lease requires an annual payment of approximately $17,604
(RMB 120,000) due by June 30 every year. In addition, HBOP is obligated to
return the land in its condition at the commencement of the lease. We have not
obtained an estimate for any costs of restoration, but believe the costs to be
accrued for 2007 and 2008 is immaterial.
 
 The
remaining 58.06 mu of land constituting our company grounds was obtained
pursuant to a land use right granted by the local government on March 10, 2003,
pursuant to which HBOP obtained the right to use 58.06 mu of land located in
Baoding City for commercial purposes.  The land use right is valid for
50 years through March 10, 2053, and was acquired for approximately $2,189,328
(RMB14,984,200), which was fully paid on March 8, 2005.
  Our facilities include a total of 8
plants, 5 warehouses, 2 office buildings, 2 cafeterias, and 1
dormitory.  Major equipment includes 8 papermaking machines that are
all owned by HBOP and been paid in full.
 
 Item
3.                 LegalProceedings.
 
 We know
of no material, active, pending or threatened proceeding against us or our
subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or
defendant in any material proceeding or pending litigation.
 
 Item
4.                 Submissionof Matters to a Vote of Security Holders.
 
 None.
 
 PARTII
 
 Item
5.                 Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.
 
 Market
Information
 
 Orient
Paper’s common stock is quoted on the OTC Bulletin Board under the symbol
“OPAI.OB.”
  Until
January 29, 2008, there was no active trading in our common stock.
 
 The range
of high and low bid quotations by quarter from January 29, 2008 through December
31, 2008 is listed below. The information for the first quarter of 2008
commences on January 29, 2008.  The quotations are taken from the OTC
Bulletin Board. They reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual
transactions.
  Calendar
      Quarter
                
                High
      Bid
                
                Low Bid2008
      First Quarter
                
                
                0.51
                
                0.102008
      Second Quarter
                
                
                1.30
                
                0.142008
      Third Quarter
                
                
                0.17
                
                0.102008
      Fourth Quarter
                
                
                0.29
                
                0.05
  23
  As of
March 24, 2009, we had approximately 17 shareholders of record of our common
stock, including the shares held in street name by brokerage firms.
  Penny
Stock Regulations
 
 The SEC
has adopted regulations which generally define "penny stock" to be an equity
security that has a market price of less than $5.00 per share. Our common stock,
falls within the definition of penny stock and subject to rules that impose
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000, or annual incomes
exceeding $200,000 or $300,000, together with their spouse).
 
 For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser's prior written consent to the transaction. Additionally, for any
transaction, other than exempt transactions, involving a penny stock, the rules
require the delivery, prior to the transaction, of a risk disclosure document
mandated by the SEC relating to the penny stock market. The broker-dealer also
must disclose the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the "penny stock" rules may restrict the ability of broker-dealers
to sell our common stock and may affect the ability of investors to sell their
common stock in the secondary market.
 
 Dividends
 
 Our Board
of Directors has not declared a dividend on our common stock during the last two
fiscal years and we do not anticipate the payments of dividends in the near
future as we intend to reinvest our profits to grow operations.
  Recent
Sales of Unregistered Securities
 
 We did
not sell any unregistered securities during the fiscal year ended December 31,
2008.
 
 Equity
Compensation Plan Information
 
 On
April 2, 2008, we established a 2008 Equity Incentive Plan ("Equity Incentive
Plan") for the issuance of up to 5,000,000 shares of common stock to employees,
officers, directors, consultants, independent contractors and advisors of Orient
Paper or any parent or subsidiary of Orient Paper, provided such consultants,
contractors and advisors rendered bona fide services not in connection with the
offer and sale of securities in a capital-raising transaction.  As
part of this Equity Incentive Plan, under a Registration Statement on Form S-8
as filed with the SEC on April 23, 2008, we registered 5,000,000 shares of our
common stock, proposing a maximum offering price of $0.75.
  Pursuant
to the Equity Incentive Plan, effective April 1, 2008, we issued as
consideration for consulting services the following:
 
 Gangrong
Xu – 1,800,000 shares of common stock, valued at the market price on March 28,
2008, or $.10 per share.
 Xingan
Xiong – 1,600,000 shares of common stock, valued at the market price on March
28, 2008, or $.10 per share.
 Zhu Zhu –
1,600,000 shares of common stock, valued at the market price on March 28, 2008,
or $.10 per share.
 
 Purchases
of Equity Securities by the Small Business Issuer and Affiliated
Purchasers
 
 None.
  24
  Item
6.                 SelectedFinancial Data.
 
 The
following selected statements of operations data contains statement of
operations data and balance sheets data of Hebei Baoding Orient Paper Milling
Co., Ltd., the entity through which we operate our business, for the years ended
December 31, 2008 and 2007. The statements of operation data and balance sheets
data were derived from the audited financial statements. Such financial data
should be read in conjunction with the financial statements and the notes to the
financial statements starting on page F-1 and with the section entitled
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” below.
 
  Statements of Operation Data
 
 Year
      ended December 31,2008
              
              
              2007Net
      revenue
              
              $
              65,203,992
              
              
              $
              39,707,431Cost
      of sales
              
              
              (52,643,791
              )
              
              
              (33,098,875
              )Gross
      profit
              
              $
              12,560,201
              
              
              $
              6,608,556Selling,
      general and administrative expenses
              
              
              (327,825
              )
              
              
              (143,112
              )Operating
      income
              
              $
              12,232,376
              
              
              $
              6,465,444Interest
      income
              
              
              65,316
              
              
              
              3,349Interest
      expenses
              
              
              (598,471
              )
              
              
              (406,382
              )Income
      before income taxes
              
              $
              11,699,221
              
              
              $
              6,062,411Income
      taxes
              
              
              (2,924,806
              )
              
              
              (2,000,596
              )Net
      income
              
              $
              8,774,415
              
              
              $
              4,061,815Foreign
      currency translation adjustment
              
              
              1,301,652
              
              
              
              1,419,335Total
      comprehensive income
              
              $
              10,076,067
              
              
              $
              5,481,150
  
 Balance Sheet Data
 
 As of December
      31,2008
              
              
              2007Cash
      and cash equivalents
              
              $
              3,234,419
              
              
              $
              622,661Working
      capital
              
              
              (1,165,795
              )
              
              
              (7,856,626
              )Total
      assets
              
              
              52,822,062
              
              
              
              36,730,288Total
      debt
              
              
              18,732,906
              
              
              
              13,217,199Total
      shareholders’ equity
              
              
              34,089,156
              
              
              
              23,513,089
 
 
 Item
7.                 Management’sDiscussion and Analysis of Financial Condition and
Results of Operations
 
 The
following discussion of the financial condition and results of operation of the
Company for the years ended December 31, 2008, and 2007, should be read in
conjunction with the selected financial data, the financial statements, and the
notes to those statements that are included elsewhere in this Annual
Report.
 
 Some of
the information contained in this discussion and analysis or set forth elsewhere
in this Report, including information with respect to our plans and strategy for
our business and related financing, includes forward-looking statements that
involve risks and uncertainties.  You should review the “Risk Factors”
section of this Report for a discussion of important factors that could cause
actual results to differ materially from the results described in or implied by
the forward-looking statements contained in the following discussion and
analysis.
  25
  Cautionary Note Regarding
Forward-Looking Statements
 
 This
Annual Report on Form 10-K (“Report”) contains forward-looking statements. For
this purpose, any statements contained in this Report that are not statements of
historical fact may be deemed to be forward-looking statements, including any
statements relating to future actions and outcomes including but not limited to
prospective products, future performance or results of current or anticipated
products, sales and marketing efforts, costs and expense trends, future interest
rates, outcome of contingencies and their future impact on financial condition,
results of operations, liquidity, business strategies, cost savings, objectives
of management, and other matters. You can identify forward-looking statements by
those that are not historical in nature, particularly those that use terminology
such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,”
“plans,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,”
“contemplates,” “predicts,” “potential,” or “continue” or variations and/or the
negative of these similar terms. Forward-looking statements are based on current
expectations, estimates, forecasts and projections about the Company, us, our
future performance, our beliefs and our Management’s assumptions. All
forward-looking statements made in this Report, including any future written or
oral statements made by us or on our behalf are expressly qualified in their
entirety by the cautionary statements contained or referred to in this
section.
 
 These
forward-looking statements are not guarantees of future performance and involve
risks, uncertainties and assumptions that we cannot predict. Any assumptions,
upon which they are based, are made in good faith and reflect our current
judgment regarding the direction of our business, actual results will almost
always vary, sometimes materially, from any estimates, predictions, projections,
assumptions or other future performance suggested in this Report. Therefore,
actual outcomes and results may differ materially from what is expressed or
forecast in such forward-looking statements. In evaluating these forward-looking
statements, you should consider various factors, including the following: (a)
those risks and uncertainties related to general economic conditions, (b)
whether we are able to manage our planned growth efficiently and operate
profitable operations, (c) whether we are able to generate sufficient revenues
or obtain financing to sustain and grow our operations, (d) whether we are able
to successfully fulfill our primary requirements for cash.    Please
refer to Part II, Item 7 under “Liquidity and Capital Resources” and Part I,
Item 1A under “Risk Factors” contained in this Report for additional discussion.
   Please also refer to our other filings with the Securities and
Exchange Commission. We assume no obligation to update forward-looking
statements, except as otherwise required under the applicable federal securities
laws.
 
 Results of
Operations
 
 Comparison of the
Year Ended December 31, 2008 and 2007
 
 Net
revenue
 
 Net
revenue for the year ended December 31, 2008, was $65,203,992, an increase of
64.2% as compared with the net revenue of $39,707,431 in the same period ended
December 31, 2007. The increase resulted primarily from higher production
capacity as a result of strengthened internal control, and advancements in
production technology, the continuation of a strong domestic market demand for
our products, and the success of our targeted marketing of mid-to high-end paper
customers in the Northern China region. Further, the Chinese currency (Renminbi
Yuan) has been appreciating against the U.S. dollar, leading to an increase in
net revenue as reported in U.S. dollars.
  Cost of
sales
 
 Cost of
sales increased to $52,643,791 for the year ended December 31, 2008,
representing a 59.1% increase as compared with $33,098,875 for the same period
of 2007. This increase is due primarily to the increase of
sales,  with the increase in cost of sales roughly in line with the
increase in sales.
 
 Selling, general and
administrative expenses
 
 Selling,
general and administrative expenses were $327,825 for the year ended December
31, 2008, an increase of 129.1% as compared to $143,112 for the same period of
2007. This increase was due primarily to increased business travel and research
expenses required to expand our production capacity and market position as well
as a general salary increment made to employees, offset by realized foreign
currency gains.
  Gross
profit
 
 Gross
profit increased by 90.1% to $12,560,201 for the year ended December 31, 2008,
as compared to $6,608,556 for the year ended December 31, 2007. Our gross profit
margin increased by 2.7% from 16.6% as of the year ended December 31, 2007 to
19.3% as of the same period of 2008, mainly due to our efforts to implement of
stringent cost control and price reductions in raw material costs. Furthermore,
the increase in our net revenue was greater than the increase in related cost of
sales, resulting in an overall increase in gross profit.
 
 Income from
operations
 
 Operating
income increased by 89.2% to $12,232,376 for the year ended December 31,
2008, as compared with $6,465,444 for the year ended December 31, 2007. The
increase was primarily a result of higher net revenue generated and the
relatively lower cost of net revenue and the increase on production capacity and
sales growth.
  26
  Net
income
 
 Net
income was $8,774,415 for the year ended December 31, 2008, an increase of
116.0% from $4,061,815 for the same period of 2007. This increase is primarily
attributable to the cumulative effect of the reasons discussed above. Our net
profit margin increased by 3.3 % from 10.2% as of the year ended December 31,
2007 to 13.5% as of the fiscal year ended December 31, 2008. This increase was
primarily attributable to the increase of gross profit margin.
  Foreign
currency translation adjustment
 
 Foreign currency translation adjustment
related to comprehensive income was $1,301,652 for the year ended December 31,
2008, a decrease of 8.3% as compared to $1,419,335 for the year ended December
31, 2007.  The foreign currency translation adjustment was primarily
attributable to the higher appreciation of the RMB in fiscal year
2008.
 
 Total
comprehensive income
 
 Total
comprehensive income was $10,076,067 for the year ended December 31, 2008, an
increase of $4,594,917 or 83.8% as compared to $5,481,150 for the year ended
December 31, 2007.  The increase resulted primarily from the increase
in net income and foreign currency translation adjustment.
 
 Earnings
per share
 
 Basic and diluted earnings per share
amounted to $0.20 for the year ended December 31, 2008, an increase of 100.0% as
compared to $0.10 for the same period of 2007. This increase in earnings per
share was primarily attributable to the increase of net income.
 
 Weighted
average number of shares outstanding
 
 Weighted
average number of shares outstanding increased 2,977,596 shares from 40,101,987
in 2007 to 43,079,583 for 2008.  The increase in the weighted average
number of shares outstanding was primarily attributable to the issuance of
5,000,000 shares of common stock to three consultants as the compensation for
the consulting services provided in fiscal year 2008 to Orient
Paper.
 Accounts
receivable
 
 Accounts
receivable increased by 28.1% to $1,425,899 as of December 31, 2008, compared
with $1,113,406 as of December 31, 2007. This increase in accounts receivable
was primarily attributable to the increase of net revenue.
 
 Inventory
 
 Inventory
consists of raw materials and finished goods as of December 31, 2008. The
recorded value of our inventory increased 604.1% to $2,821,063 from $400,689 as
of December 31, 2008. This increase is mainly due to the increase in
sales.  In addition, raw material inventory increased from $182,752 as
of December 31, 2007 to $2,378,757 as of December 31, 2008, an increase of
1201.6%, which was due to our ability to take advantage of lower raw material
costs in the second half of 2008, resulting in the purchase in 2008 of more raw
materials at a lower cost as compared to 2007.
 
 Accounts payable and accrued
liabilities
 
 Accounts
payable and accrued liabilities amounted to $740,846 as of December 31, 2008, an
increase of 29.4% from $572,590 as of December 31, 2007. This increase is mainly
due to larger purchases of raw material as a result of business
expansion.
  Liquidity
and Capital Resources
 
 Overview
 
 We had
net working capital deficit of $1,165,795 at December 31, 2008, a decrease of
$6,690,831 over a net working capital deficit of $ 7,856,626 at December 31,
2007.
 
 Cash
and cash equivalent
  Our cash
and cash equivalents were $622,661 at the beginning of the year ended December
31, 2008, and increased to $3,234,419 by the end of such period, an increase of
$2,611,758 or 419.5%.  The net change in cash and cash equivalents
represented an increase of 669.0% or $541,691 from $80,970 for the comparable
period in 2007. The increase was primarily attributable to the increase in
monetary funds as a result of higher net revenue in 2008 and timely
collections.
  27
  Net
cash provided by operating activities
 
 Net cash
provided by operating activities was $10,743,556 for the year ended December 31,
2008, an increase of $3,011,829 or 39.0% from $7,731,727 for the comparable
period in 2007. The increase was primarily attributable to the increase of net
revenue and timely collections.
 
 Net
cash used in investing activities
  Net cash
used in investing activities was $(14,584,502) for the year ended December 31,
2008, an increase of $11,311,930 or 345.7% from $ (3,272,572) for the comparable
period in 2007. The increase was primarily attributable to increased capital
expenditures, mainly for purchase of new product lines.
  Net
cash provided by (used in) financing activities
 
 Net cash
provided by financing activities was $5,151,052 for the year ended December 31,
2008, compared to net cash used in financing activities $5,336,799 for the same
period in 2007. The difference was primarily attributable to increases in
working capital.
  Contractual
Obligations and Off-Balance Sheet Arrangements.
 
 We have
certain fixed contractual obligations and commitments that may 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.
 
 Critical
accounting policies and estimates
  The
financial statements are prepared in accordance with accounting principles
generally accepted in the United States, which require us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Management makes these estimates using the best information
available at the time the estimates are made; however actual results could
differ materially from those estimates (See Note 10 in the Notes to Financial
Statements).
  New
Financial Accounting Pronouncements
  In December 2007, the FASB issued SFAS
No. 141R, “Business
Combinations – Revised 2007” (“SFAS No. 141R”), which replaces FASB
Statement No. 141, “Business
Combinations.”  SFAS No. 141Restablishes principles
and requirements intending to improve the relevance, representational
faithfulness, and comparability of information that a reporting entity provides
in its financial reports about a business combination and its
effects.  This is accomplished through requiring the acquirer to
recognize assets acquired and liabilities assumed arising from contractual
contingencies as of the acquisition date, measured at their acquisition-date
fair values.  This includes contractual contingencies only if it is
more likely than not that they meet the definition of an asset of a liability in
FASB Concepts Statement No. 6, “Elements of Financial
Statements – a
replacement of FASB Concepts Statement No. 3.”This statement also
requires the acquirer to recognize goodwill as of the acquisition date, measured
as a residual.  However, this statement improves the way in which an
acquirer’s obligations to make payments conditioned on the outcome of future
events are recognized and measured, which in turn improves the measure of
goodwill.  This statement also defines a bargain purchase as a
business combination in which the total acquisition-date fair value of the
consideration transferred plus any noncontrolling interest in the acquiree, and
it requires the acquirer to recognize that excess in earnings as a gain
attributable to the acquirer.  This, therefore, improves the
representational faithfulness and completeness of the information provided about
both the acquirer’s earnings during the period in which it makes a bargain
purchase and the measures of the assets acquired in the bargain
purchase.  The management of Orient Paper does not expect the adoption
of this pronouncement to have a material impact on its financial
statements.
  28
  In December 2007, the FASB issued SFAS
No. 160, “Noncontrolling
Interests in Consolidated Financial Statements – amendment of ARB No. 51”
(“SFAS No. 160”).  SFAS No. 160 establishes new accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary.  Specifically, this statement
requires the recognition of a noncontrolling interest (minority interest) as
equity in the consolidated financial statements and separate from the parent’s
equity.  The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income
statement.  SFAS No. 160 clarifies that changes in a parent’s
ownership interest in a subsidiary that do not result in deconsolidation are
equity transactions if the parent retains its controlling financial
interest.  In addition, this statement requires that a parent
recognize a gain or loss in net income when a subsidiary is
deconsolidated.  Such gain or loss will be measured using the fair
value of the noncontrolling equity investment on the deconsolidation
date.  SFAS No. 160 also includes expanded disclosure requirements
regarding the interests of the parent and its noncontrolling
interest.
 
 SFAS No. 160 is effective for fiscal
years and interim periods within those fiscal years, beginning on or after
December 15, 2008.  Earlier adoption is prohibited.  The
management of Orient Paper does not expect the adoption of this pronouncement to
have a material impact on its financial statements.
 
 In March 2008, the FASB issued FASB
Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement 133”
(“SFAS No. 161”).  SFAS No. 161 enhances required disclosures
regarding derivatives and hedging activities, including enhanced disclosures
regarding how:  (a) an entity uses derivative instruments; (b)
derivative instruments and related hedged items are accounted for under FASB No.
133, “Accounting for
Derivative Instruments and Hedging Activities”; and (c) derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows.  Specifically, FASB No. 161
requires:
 
 ·
              Disclosure
      of the objectives for using derivative instruments be disclosed in terms
      of underlying risk and accounting
designation;
 ·
              Disclosure
      of the fair values of derivative instruments and their gains and losses in
      a tabular format;
 ·
              Disclosure
      of information about credit-risk-related contingent features;
      and
 ·
              Cross-reference
      from the derivative footnote to other footnotes in which
      derivative-related information is
disclosed.
 
 FASB No. 161 is effective for fiscal
years and interim periods beginning after November 15, 2008.  Earlier
application is encouraged.  The management of Orient Paper does not
expect the adoption of this pronouncement to have a material impact on its
financial statements.
 
 In May 2008, the FASB issued FASB
Statement No. 162, “The
Hierarchy of Generally Accepted Accounting Principles” (“SFAS No.
162”).  SFAS No. 162 identifies the sources of accounting principles
and the framework for selecting the principles used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles in the United States of
America.  The sources of accounting principles that are generally
accepted are categorized in descending order as follows:
 
 a)
              FASB
      Statements of Financial Accounting Standards and Interpretations, FASB
      Statement 133 Implementation Issues, FASB Staff Positions, and American
      Institute of Certified Public Accountants (AICPA) Accounting Research
      Bulletins and Accounting Principles Board Opinions that are not superseded
      by actions of the FASB.
 
 b)
              FASB
      Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and
      Accounting Guides and Statements of
Position.
 
 c)
              AICPA
      Accounting Standards Executive Committee Practice Bulletins that have been
      cleared by the FASB, consensus positions of the FASB Emerging Issues Task
      Force (EITF), and the Topics discussed in Appendix D of EITF Abstracts
      (EITF D-Topics).
 
 d)
              Implementation
      guides (Q&As) published by the FASB staff, AICPA Accounting
      Interpretations, AICPA Industry Audit and Accounting Guides and Statements
      of Position not cleared by the FASB, and practices that are widely
      recognized and prevalent either generally or in the
    industry.
 
 SFAS No.
162 is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board amendment to its authoritative
literature.  It is only effective for nongovernmental entities;
therefore, the GAAP hierarchy will remain in SAS 69 for state and local
governmental entities and federal governmental entities.  The
management of Orient Paper does not expect the adoption of this pronouncement to
have a material impact on its financial statements.
  29
  On May
26, 2008, the FASB issued FASB Statement No. 163, “Accounting for Financial Guarantee
Insurance Contracts” (“SFAS No. 163”).  SFAS No. 163 clarifies
how FASB Statement No. 60, “Accounting and Reporting by
Insurance Enterprises” (“SFAS No. 60”), applies to financial guarantee
insurance contracts issued by insurance enterprises, including the recognition
and measurement of premium revenue and claim liabilities.  It also
requires expanded disclosures about financial guarantee insurance
contracts.
 
 The
accounting and disclosure requirements of SFAS No. 163 are intended to improve
the comparability and quality of information provided to users of financial
statements by creating consistency.  Diversity exists in practice in
accounting for financial guarantee insurance contracts by insurance enterprises
under SFAS No. 60, “Accounting
and Reporting by Insurance Enterprises.”  That diversity
results in inconsistencies in the recognition and measurement of claim
liabilities because of differing views about when a loss has been incurred under
FASB Statement No. 5, “Accounting for Contingencies”
(“SFAS No. 5”).  SFAS No. 163 requires that an insurance enterprise
recognize a claim liability prior to an event of default when there is evidence
that credit deterioration has occurred in an insured financial
obligation.  It also requires disclosure about (a) the risk-management
activities used by an insurance enterprise to evaluate credit deterioration in
its insured financial obligations and (b) the insurance enterprise’s
surveillance or watch list.
 
 SFAS No.
163 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and all interim periods within those fiscal years,
except for disclosures about the insurance enterprise’s risk-management
activities.  Disclosures about the insurance enterprise’s
risk-management activities are effective the first period beginning after
issuance of SFAS No. 163.  Except for those disclosures, earlier
application is not permitted.  The management of Orient Paper does not
expect the adoption of this pronouncement to have material impact on its
financial statements.
 
 Item
7A.              Quantitativeand Qualitative Disclosures About Market
Risk.
 
 Not
Applicable.
 
 
 Item
8.                 FinancialStatements and Supplementary Data.
 
 Our
audited financial statements for the fiscal years ended December 31, 2008 and
2007, together with the report of the independent certified public accounting
firm thereon and the notes thereto, are presented beginning at page
F-1.
  30
  ORIENT
PAPER, INC.
 INDEX
TO FINANCIAL STATEMENTS
 DECEMBER
31, 2008, AND 2007
  Report
      of Registered Independent Auditors
                F-2Financial
      Statements-Balance
      Sheets as of December 31, 2008, and 2007
                F-3Statements
      of Operations and Comprehensive Income for the Years Ended December 31,
      2008, and 2007
                F-4Statements
      of Stockholders’ Equity for the Years Ended December 31, 2008, and
      2007
                F-5Statements
      of Cash Flows for the Years Ended December 31, 2008, and
    2007
                F-6Notes
      to Financial Statements December 31, 2008, and 2007
                F-8
   F-1
 
 REPORT
OF REGISTERED INDEPENDENT AUDITORS
 
 To the
Board of Directors and Stockholders of
 Orient
Paper, Inc.:
 
 We have
audited the accompanying balance sheets of Orient Paper, Inc. (a Nevada
corporation) as of December 31, 2008, and 2007, and the related statements of
operations and comprehensive income, stockholders’ equity, and cash flows for
each of the two years in the period ended December 31, 2008.  These
financial statements are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America).  Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.  Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
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 financial position of Orient Paper, Inc. as of December
31, 2008, and 2007, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 2008, in conformity with
accounting principles generally accepted in the United States of
America.
 
 Respectfully
submitted,
 
 /s/ Davis
Accounting Group P.C.
 
 Cedar
City, Utah,
 March 19,
2009
  F-2
  ORIENT
      PAPER, INC.BALANCE
      SHEETSAS
      OF DECEMBER 31, 2008, AND 2007ASSETS2008
                  
                  
                  2007Current
      Assets:Cash
      and cash equivalents
                  
                  $
                  3,234,419
                  
                  
                  $
                  622,661Accounts
      receivable - Trade (No allowance for doubtfulaccounts
      in 2008 and 2007, respectively)
                  
                  
                  1,425,899
                  
                  
                  
                  1,113,406Inventories
                  
                  
                  2,821,063
                  
                  
                  
                  400,689Total
      current assets
                  
                  
                  7,481,381
                  
                  
                  
                  2,136,756Property,
      Plant, and Equipment:Building
      and improvements
                  
                  
                  9,876,637
                  
                  
                  
                  9,230,313Machinery
      and equipment
                  
                  
                  47,347,109
                  
                  
                  
                  33,444,574Vehicles
                  
                  
                  544,670
                  
                  
                  
                  509,02757,768,416
                  
                  
                  
                  43,183,914Less
      - Accumulated depreciation and amortization
                  
                  
                  (12,427,735
                  )
                  
                  
                  (8,590,382
                  )Net
      property, plant, and equipment
                  
                  
                  45,340,681
                  
                  
                  
                  34,593,532Total
      Assets
                  
                  $
                  52,822,062
                  
                  
                  $
                  36,730,288LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Short-term
      loans
                  
                  $
                  6,858,652
                  
                  
                  $
                  6,039,145Accounts
      payable - Trade and accrued liabilities
                  
                  
                  740,846
                  
                  
                  
                  572,590Current
      portion of related party note
                  
                  
                  -
                  
                  
                  
                  2,530,368Income
      taxes payable
                  
                  
                  1,047,678
                  
                  
                  
                  851,279Total
      current liabilities
                  
                  
                  8,647,176
                  
                  
                  
                  9,993,382Long-Term
      Debt, less current portion:Loan
      from credit union
                  
                  
                  1,948,176
                  
                  
                  
                  -Related
      party notes
                  
                  
                  8,137,554
                  
                  
                  
                  3,223,817Total
      long-term debt
                  
                  
                  10,085,730
                  
                  
                  
                  3,223,817Total
      liabilities
                  
                  
                  18,732,906
                  
                  
                  
                  13,217,199Commitments
      and ContingenciesStockholders'
      Equity:Common
      stock, 500,000,000 shares authorized, $0.001 parvalue
      per share, 45,101,987 shares and 40,101,987 sharesissued
      and outstanding in 2008 and 2007, respectively
                  
                  
                  45,102
                  
                  
                  
                  40,102Additional
      paid-in capital
                  
                  
                  9,565,117
                  
                  
                  
                  9,070,117Statutory
      earnings reserve
                  
                  
                  3,079,063
                  
                  
                  
                  1,762,900Accumulated
      other comprehensive income
                  
                  
                  3,592,839
                  
                  
                  
                  2,291,187Retained
      earnings
                  
                  
                  17,807,035
                  
                  
                  
                  10,348,783Total
      stockholders' equity
                  
                  
                  34,089,156
                  
                  
                  
                  23,513,089Total
      Liabilities and Stockholders' Equity
                  
                  $
                  52,822,062
                  
                  
                  $
                  36,730,288
 The
accompanying notes to financial statements are
 an
integral part of these balance sheets.
  F-3
  ORIENT
      PAPER, INC.STATEMENTS
      OF OPERATIONS AND COMPREHENSIVE INCOMEFOR
      THE YEARS ENDEDDECEMBER
      31, 2008 AND 2007Year
      EndedDecember
      31,2008
              
              
              2007Revenues:Sales,
      net
              
              $
              65,203,992
              
              
              $
              39,707,431Cost
      of Sales:Cost
      of sales
              
              
              52,381,908
              
              
              
              32,939,286Business
      tax and surcharges
              
              
              261,883
              
              
              
              159,589Total
      cost of sales
              
              
              52,643,791
              
              
              
              33,098,875Gross
      Profit
              
              
              12,560,201
              
              
              
              6,608,556Selling,
      General and Administrative Expenses
              
              
              327,825
              
              
              
              143,112Income
      from Operations
              
              
              12,232,376
              
              
              
              6,465,444Other
      Income (Expense):Interest
      income
              
              
              65,316
              
              
              
              3,349Interest
      (expense)
              
              
              (598,471
              )
              
              
              (406,382
              )Total
      other (expense)
              
              
              (533,155
              )
              
              
              (403,033
              )Income
      before Income Taxes
              
              
              11,699,221
              
              
              
              6,062,411Provision
      for Income Taxes
              
              
              (2,924,806
              )
              
              
              (2,000,596
              )Net
      Income
              
              
              8,774,415
              
              
              
              4,061,815Comprehensive Income:Foreign
      currency translation adjustment
              
              
              1,301,652
              
              
              
              1,419,335Total
      Comprehensive Income
              
              $
              10,076,067
              
              
              $
              5,481,150Earnings
      Per Share:Basic
      and Diluted Earning per
      Share
              
              $
              0.20
              
              
              $
              0.10Weighted
      Average Number of SharesOutstanding
      - Basic and Diluted
              
              
              43,079,583
              
              
              
              40,101,987
 
 The
accompanying notes to financial statements are
 an
integral part of these statements.
  F-4
  ORIENT
      PAPER, INC.

                  STATEMENTS OF
      STOCKHOLDERS' EQUITY

                    FOR
      THE YEARS ENDED DECEMBER 31, 2008, AND 2007Common
      stock
              
              
              AdditionalPaid-in
              
              
              StatutoryEarnings
              
              
              AccumulatedOtherComprehensive
              
              
              RetainedDescription
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Reserve
              
              
              Income
              
              
              Earnings
              
              
              TotalsBalance
      - December 31, 2006
              
              
              40,101,987
              
              
              $
              40,102
              
              
              $
              9,070,117
              
              
              $
              1,153,628
              
              
              $
              871,852
              
              
              $
              6,896,240
              
              
              $
              18,031,939Foreign
      currency translation adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,419,335
              
              
              
              -
              
              
              
              1,419,335Transfer
      to Statutory Earnings Reserve
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              609,272
              
              
              
              -
              
              
              
              (609,272
              )
              
              
              -Net
      income for the period
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4,061,815
              
              
              
              4,061,815Balance
      - December 31, 2007
              
              
              40,101,987
              
              
              $
              40,102
              
              
              $
              9,070,117
              
              
              $
              1,762,900
              
              
              $
              2,291,187
              
              
              $
              10,348,783
              
              
              $
              23,513,089Common
      stock issued for services
              
              
              5,000,000
              
              
              
              5,000
              
              
              
              495,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              500,000Foreign
      currency translation adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,301,652
              
              
              
              -
              
              
              
              1,301,652Transfer
      to Statutory Earnings Reserve
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,316,163
              
              
              
              -
              
              
              
              (1,316,163
              )
              
              
              -Net
      income for the period
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              8,774,415
              
              
              
              8,774,415Balance
      - December 31, 2008
              
              
              45,101,987
              
              
              $
              45,102
              
              
              $
              9,565,117
              
              
              $
              3,079,063
              
              
              $
              3,592,839
              
              
              $
              17,807,035
              
              
              $
              34,089,156
 
 The
accompanying notes to financial statements are
 an
integral part of these statements.
  F-5
  ORIENT
      PAPER, INC.STATEMENTS
      OF CASH FLOWSFOR
      THE YEARS ENDEDDECEMBER
      31, 2008, AND 2007Year
      EndedDecember
      31,2008
              
              
              2007Cash
      Flows from Operating Activities:Net
      income
              
              $
              8,774,415
              
              
              $
              4,061,815Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
      and amortization
              
              
              3,837,353
              
              
              
              2,953,201Issuance
      of common stock for services
              
              
              500,000
              
              
              
              -Changes
      in net assets and liabilities:Accounts
      receivable - Trade
              
              
              (312,493
              )
              
              
              512,456Inventories
              
              
              (2,420,374
              )
              
              
              2,280,991Accounts
      payable - Trade and accrued liabilities
              
              
              168,256
              
              
              
              (1,271,995
              )Other
      payables
              
              
              -
              
              
              
              176,399Income
      taxes payable
              
              
              196,399
              
              
              
              (981,140
              )Net
      Cash Provided by Operating
      Activities
              
              
              10,743,556
              
              
              
              7,731,727Cash
      Flows from Investing Activities:Purchases
      of property, plant, and equipment
              
              
              (14,584,502
              )
              
              
              (3,272,572
              )Net
      Cash (Used in) Investing Activities
              
              
              (14,584,502
              )
              
              
              (3,272,572
              )Cash
      Flows from Financing Activities:Proceeds
      from related party loans
              
              
              4,331,545
              
              
              
              -Payments
      to related party
              
              
              -
              
              
              
              (6,019,005
              )Proceeds
      from borrowings on credit facility
              
              
              819,507
              
              
              
              682,206Net
      Cash Provided (Used in) by Financing Activities
              
              
              5,151,052
              
              
              
              (5,336,799
              )Effect
      of Exchange Rate Changes on Cashand
      Cash Equivalents
              
              
              1,301,652
              
              
              
              1,419,335Net
      Increase in Cashand
      Cash Equivalents
              
              $
              2,611,758
              
              
              $
              541,691Cash
      and Cash Equivalents - Beginning of
      Period
              
              
              622,661
              
              
              
              80,970Cash
      and Cash Equivalents - End of Period
              
              $
              3,234,419
              
              
              $
              622,661Supplemental
      Disclosure of Cash Flow Information:Cash
      paid for interest
              
              $
              598,471
              
              
              $
              386,481Cash
      paid for income taxes
              
              $
              2,728,407
              
              
              $
              2,981,736
  The
accompanying notes to financial statements are
 an
integral part of these statements.
  F-6
  ORIENT
PAPER, INC.STATEMENTS OF CASH FLOWSFOR THE YEARS ENDEDDECEMBER 31,
2008, AND 2007
  Supplemental
Disclosure of Cash Flow Information:
  On
October 29, 2007, the Company entered into an Agreement and Plan of Merger
between Orient Paper; CARZ Merger Sub, Inc., a Nevada corporation, and wholly
owned subsidiary of the Company; DZH Limited; and the stockholders of DZH
Limited. Under the terms of the Agreement and Plan of Merger, the Company issued
to the stockholders of DZH Limited 29,801,987 shares of the Company's common
stock, par value $.001, in exchange for all of the issued and outstanding shares
of stock of DZH Limited (50,000 shares).
  In May
2008, the Company issued 5,000,000 shares of common stock to three consultants
for services rendered during the year ended December 31, 2008, valued at
$500,000.
  
 The
accompanying notes to financial statements are
 an
integral part of these statements.
  F-7
 ORIENT
PAPER, INC.NOTES TO FINANCIAL STATEMENTSDECEMBER
31, 2008, AND 2007
  (1)           Summary
of Significant Accounting Policies
 
 Basis of Presentation and
Organization
 
 Orient
Paper, Inc. (“Orient Paper” or “the Company”) is a Nevada corporation that
initially provided financing services specializing in subprime title loans,
secured primarily using automobiles (and also boats, recreational vehicles,
machinery, and other equipment) as collateral.  Orient Paper was
incorporated under the laws of the State of Nevada on December 9, 2005, under
the name of Carlateral, Inc.  The target market of Orient Paper was
individuals needing short-term capital (30 to 90 days).  Such
individuals generally were those who either did not meet the lending criteria of
established banks and lending institutions, or did not wish to incur the delays
associated with a lengthy loan application and approval process.  The
accompanying financial statements of Orient Paper were prepared from the
accounts of Orient Paper under the accrual basis of accounting in United States
dollars.  In addition, the accompanying financial statements reflect
the completion of a reverse merger between Orient Paper; CARZ Merger Sub, Inc.,
a Nevada corporation and wholly owned subsidiary of Orient Paper; Dongfang Zhiye
Holding Limited, a British Virgin Islands company ("DZH Limited"); and the
stockholders of DZH Limited, which was effected on October 29,
2007.  DZH Limited is a holding company with no operations, and owns
100 percent of the outstanding stock and ownership of Hebei Baoding Orient Paper
Milling Co., Ltd. ("HBOP"), a company organized under the laws of the People's
Republic of China ("PRC").
 
 Prior to
the completion of the reverse merger, Orient Paper had limited operations (since
its incorporation on December 9, 2005).  On December 21, 2007, the
name of Orient Paper was changed from Carlateral, Inc. to Orient Paper, Inc. in
order to better reflect the current business plan subsequent to the reverse
merger.
 
 DZH
Limited was formed on November 13, 2006, under the laws of the British Virgin
Islands, and is a holding company.  As such, DZH Limited does not
generate any financial or operating transactions.  It owns 100 percent
of the issued and outstanding stock and ownership of HBOP.
 
 HBOP was
organized on March 3, 1996, under the laws of the PRC.  HBOP engages
mainly in the production and distribution of products such as copy paper,
uncoated and coated paper, digital-photo paper, corrugated paper, plastic paper,
craft paper, graphic-design paper, antifraud-thermal-security paper, and other
paper and packaging-related products.  HBOP uses recycled paper as its
raw material.
 
 Given
that DZH Limited is considered to have acquired Orient Paper by a reverse merger
through an Agreement and Plan of Merger (see Note 6), and its stockholders
currently have voting control of Orient Paper, the accompanying financial
statements and related disclosures in the notes to financial statements present
the financial position as of December 31, 2008, and 2007, and the operations for
the years ended December 31, 2008, and 2007, of DZH Limited and its subsidiary
HBOP under the name of Orient Paper. The reverse merger has been recorded as a
recapitalization of Orient Paper, with the consolidated net assets of DZH
Limited and its wholly owned operating subsidiary HBOP, and net assets Orient
Paper brought forward at their historical bases.  The costs associated
with the reverse merger have been expensed as incurred.
  F-8
 ORIENT
PAPER, INC.NOTES TO FINANCIAL STATEMENTSDECEMBER
31, 2008, AND 2007
  Foreign
Currency Translation
 
 Orient
Paper accounts for foreign currency translation pursuant to SFAS No. 52, “Foreign Currency
Translation” (“SFAS No. 52”).  Orient Paper's functional
currency is the Chinese Yuan Renminbi (“CNY”).  Under SFAS No. 52, all
assets and liabilities are translated into United States dollars using the
current exchange rate at the end of each fiscal period.  Revenues and
expenses are translated using the average exchange rates prevailing throughout
the respective periods.  Translation adjustments are included in other
comprehensive income (loss) for the period.  Certain transactions of
Orient Paper are denominated in United States dollars.  Translation
gains or losses related to such transactions are recognized for each reporting
period in the related statement of operations and comprehensive income
(loss).
 
 Use
of Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of December 31, 2008, and 2007, and revenues and expenses for the
years ended December 31, 2008, and 2007.  Actual results could differ
from those estimates made by management.
 
 Risks
and Uncertainties
 
 Orient
Paper is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates, and operating in the
PRC under its various laws and restrictions.
 
 Cash
and Cash Equivalents
 
 For
purposes of reporting within the statements of cash flows, Orient Paper
considers all cash on hand, cash accounts not subject to withdrawal restrictions
or penalties, and all highly liquid debt instruments purchased with a maturity
of three months or less to be cash and cash equivalents.
 
 Concentration
of Credit Risk
 
 Financial
instruments which potentially subject Orient Paper to concentrations of credit
risk consist principally of cash.  Orient Paper places its temporary
cash investments in reputable financial institutions which are fully insured by
the PRC government.
  F-9
 ORIENT
PAPER, INC.NOTES TO FINANCIAL STATEMENTSDECEMBER
31, 2008, AND 2007
 
 Accounts
Receivable
 
 Trade
accounts receivable are recorded on shipment of products to customers, and
generally are due under the terms of net 30 days.  The trade
receivables are not collateralized and interest is not accrued on past due
accounts.  Periodically, management reviews the adequacy of its
provision for doubtful accounts based on historical bad debt expense results and
current economic conditions using factors based on the aging of its accounts
receivable.  Additionally, Orient Paper may identify additional
allowance requirements based on indications that a specific customer may be
experiencing financial difficulties.  Actual bad debt results could
differ materially from these estimates.  As of December 31, 2008, and
2007, management determined that a reserve for bad debts was not
needed.  While management uses the best information available upon
which to base estimates, future adjustments to the allowance may be necessary if
economic conditions differ substantially from the assumptions used for the
purposes of analysis.
 
 Inventories
 
 Inventories
consist principally of raw materials (used paper) and finished goods, and are
stated at the lower of cost (first-in, first-out method) or market.
 
 Property,
Plant, and Equipment
 
 Property,
plant, and equipment are stated at cost.  Major renewals, betterments,
and improvements are charged to the asset accounts while replacements,
maintenance, and repairs, which do not improve or extend the lives of the
respective assets, are expensed to operations.  At the time property,
plant, and equipment are retired or otherwise disposed of, the asset and related
accumulated depreciation or amortization accounts are relieved of the applicable
amounts.  Gains or losses from retirements or sales are credited or
charged to income.
 
 Orient
Paper depreciates and amortizes property, plant, and equipment using the
straight-line method as follows:
  Building
      and improvements
              30
      yearsMachinery
      and equipment
              5-15
      yearsVehicles
              15
      years
  Long-Lived
Assets
 
 Orient
Paper evaluates the recoverability of long-lived assets and the related
estimated remaining useful lives when events or circumstances lead management to
believe that the carrying value of an asset may not be recoverable and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount.  In such circumstances, those assets are
written down to estimated fair value.  For the years ended December
31, 2008, and 2007, no events or circumstances occurred for which an evaluation
of the recoverability of long-lived assets was required.
 
 Fair
Value of Financial Instruments
 
 Orient
Paper estimates the fair value of financial instruments using the available
market information and valuation methods.  Considerable judgment is
required in estimating fair value.  Accordingly, the estimates of fair
value may not be indicative of the amounts Orient Paper could realize in a
current market exchange.  As of December 31, 2008, and 2007, Orient
Paper's financial instruments approximated fair value to do the nature and
maturity of such instruments.
  F-10
 ORIENT
PAPER, INC.NOTES TO FINANCIAL STATEMENTSDECEMBER
31, 2008, AND 2007
 
 Statutory
Reserves
 
 The laws
and regulations of the PRC require that before an enterprise distributes profits
to its shareholders, it must first satisfy all tax liabilities, provide for
losses in previous years, and make allocations, in proportions determined at the
discretion of the Board of Directors, after the statutory
reserve.  The statutory reserves include a surplus reserves fund and a
common welfare fund.  These statutory reserves represent restricted
retained earnings.
 
 Surplus
Reserve Fund
 
 Orient
Paper is required to transfer 10 percent of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50 percent of Orient Paper's
registered capital.
 
 The
transfer to this reserve must be made before distribution of any dividend to
shareholders.  For the years ended December 31, 2008, and 2007, Orient
Paper transferred $877,442 and $406,182, respectively, to this
reserve.  The surplus reserve fund is non-distributable other than
during liquidation and can be used to fund previous years' losses, if any, and
may be utilized for business expansion or converted into share capital by
issuing new shares to existing shareholders in proportion to their shareholdings
or by increasing the par value of the shares currently held by them, provided
that the remaining reserve balance after such issue is not less than 25 percent
of the registered capital.
 
 Common
Welfare Fund
 
 Orient
Paper is required to transfer five percent to 10 percent of its net income, as
determined in accordance with the PRC accounting rules and regulations, to the
statutory common welfare fund.  For the years ended December 31, 2008,
and 2007, Orient Paper transferred $438,721 and $203,090, respectively, to this
fund.  This fund can only be utilized on capital items for the
collective benefit of Orient Paper's employees, such as construction of
dormitories, cafeteria facilities, and other staff welfare
facilities.  This fund is non-distributable other than upon
liquidation.  The transfer to this fund must be made before
distribution of any dividend to shareholders.
 
 Revenue
Recognition Policy
 
 Orient
Paper recognizes revenue when goods are shipped, when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no other
significant obligations of Orient Paper exist, and collectability is reasonably
assured.  Orient Paper is required to collect a three percent
value-added-tax ("VAT") on each sale.  Gross revenues do not include
this VAT which is remitted to the government quarterly.
  F-11
 ORIENT
PAPER, INC.NOTES TO FINANCIAL STATEMENTSDECEMBER
31, 2008, AND 2007
  Advertising
 
 Orient
Paper expenses all advertising and promotion costs as incurred.  The
Company incurred $216 and $0 in advertising and promotion costs for the years
ended December 31, 2008, and 2007, respectively.
  Lease
Obligations
 
 All
noncancellable leases with an initial term greater than one year are categorized
as either capital or operating leases.  Assets recorded under capital
leases are amortized according to the same methods employed for property and
equipment or over the term of the related lease, if shorter.
 
 Income
Taxes
 
 Orient
Paper accounts for income taxes pursuant to SFAS No. 109, “Accounting for Income Taxes”
(“SFAS No. 109”).  Under SFAS No. 109, deferred tax assets and
liabilities are determined based on temporary differences between the bases of
certain assets and liabilities for income tax and financial reporting
purposes.  The deferred tax assets and liabilities are classified
according to the financial statement classification of the assets and
liabilities generating the differences.
 
 Orient
Paper maintains a valuation allowance with respect to deferred tax
assets.  Orient Paper establishes a valuation allowance based upon the
potential likelihood of realizing the deferred tax asset and taking into
consideration Orient Paper's financial position and results of operations for
the current period.  Future realization of the deferred tax benefit
depends on the existence of sufficient taxable income within the carryforward
period under the Federal tax laws.
 
 Changes
in circumstances, such as Orient Paper generating taxable income, could cause a
change in judgment about the realizability of the related deferred tax
asset.  Any change in the valuation allowance will be included in
income in the year of the change in estimate.
 
 Foreign
operations of Orient Paper are governed by the Income Tax Laws of the
PRC.  Pursuant to the PRC Income Tax Laws, the Enterprise Income Tax
("EIT") is at a statutory rate of 25 percent.
 
 Comprehensive
Income (Loss)
 
 Orient
Paper presents comprehensive income (loss) in accordance with Statement of
Financial Accounting Standards No. 130, “Reporting Comprehensive
Income” (“SFAS No. 130”).  SFAS No. 130 states that all items
that are required to be recognized under accounting standards as components of
comprehensive income (loss) be reported in the financial
statements.  For the years ended December 31, 2008, and 2007, the only
components of comprehensive income were the net income for the periods, and the
foreign currency translation adjustments.
  F-12
 ORIENT
PAPER, INC.NOTES TO FINANCIAL STATEMENTSDECEMBER
31, 2008, AND 2007
  Earnings
Per Common Share
 
 Basic
earnings per share is computed by dividing the net income attributable to the
common stockholders by the weighted average number of shares of common stock
outstanding during the period.  Diluted earnings per share is computed
similar to basic earnings per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive.
  Reclassification
 
 Certain
2007 amounts have been reclassified to conform with the 2008
presentation.
 
 (2)             Inventories
 
 Inventories
consisted of the following as of December 31, 2008, and 2007:
 
 December
      31,
              
              
              December
      31,2008
              
              
              2007Raw
      materials
              
              $
              2,378,757
              
              
              $
              182,752Finished
      goods
              
              
              442,306
              
              
              
              217,937Total
      inventories
              
              $
              2,821,063
              
              
              $
              400,689
 
 (3)              Loans
Payable
 
 Orient
Paper had the following loans payable as of December 31, 2008, and
2007:
  F-13
 ORIENT
PAPER, INC.NOTES TO FINANCIAL STATEMENTSDECEMBER
31, 2008, AND 2007
 December
      31,
              
              
              December
      31,Description
              
              2008
              
              
              2007Note
      payable to Bank, secured by equipment; payable at
maturity,including
      interest at 7.8% per annum; Renewable annually.
              
              $
              1,907,100
              
              
              $
              1,911,174Credit
      facility payable to Bank, secured by building; payable at
      maturity,including
      interest at 2% plus the Bank's reference interest rate;Renewable
      annually.
              
              
              1,246,950
              
              
              
              1,302,450Note
      payable to Bank, secured by equipment; payable at
maturity,including
      interest at 6.7% per annum; Renewable annually.
              
              
              880,200
              
              
              
              822,600Note
      payable to Bank, secured by equipment; payable at
maturity,including
      floating interest per annum; Renewable annually.
              
              
              2,824,402
              
              
              
              2,002,921Loan
      payable to Credit Union, secured by equipment; payable atmaturity,
      including interest at 9.29% per annum; Matures September 10,
      2011.
              
              
              1,948,176
              
              
              
              -Total
      loans payable
              
              $
              8,806,828
              
              
              $
              6,039,145Less
      - Current portion
              
              
              (6,858,652
              )
              
              
              (6,039,145
              )Total
      loans payable - long-term portion
              
              $
              1,948,176
              
              
              $
              -
 
 As of
December 31, 2008, Orient Paper's credit facility had a maximum borrowing level
of $2,000,000, which left $753,050 in borrowing capacity.  The average
short-term borrowing rates for the years ended December 31, 2008, and 2007, were
approximately 7.33 percent and 6.71 percent, respectively.
 
 Future
maturities of loans payable, excluding lease obligations, were as follows as of
December 31, 2008:
 
 December
      31,
              
              Amount2009
              
              $
              6,858,6522010
              
              
              -2011
              
              
              1,948,176Totals
              
              $
              8,806,828
  (4)
              Major
      Suppliers
 
 For the
year ended December 31, 2008, Orient Paper had three major suppliers which
primarily accounted for 50%, 12%, and 11% of total purchases.  For the
year ended December 31, 2007, Orient Paper had two major suppliers, which
primarily accounted for 52% and 40% of total purchases.
  F-14
 ORIENT
PAPER, INC.NOTES TO FINANCIAL STATEMENTSDECEMBER
31, 2008, AND 2007
  (5)
              Commitments
      and Contingencies
 
 Operating Lease
 
 Orient
Paper leases 32.95 acres of land at its location from a local government through
a real estate lease with a 30-year term and expires on December 31,
2031.  The lease requires an annual rental payment of approximately
$17,604.  This operating lease is renewable at the end of the 30-year
term.
 
 Future
minimum lease payments were as follows as of December 31, 2008:
 
 December
      31,
              
              Amount2009
              
              $
              17,6042010
              
              
              17,6042011
              
              
              17,6042012
              
              
              17,6042013
              
              
              17,604Thereafter
              
              
              316,782Total
      operating lease payments
              
              $
              404,802
 
 Environmental
Remediation
 
 In
accordance with the real estate lease, Orient Paper will be obligated to return
the land to its condition prior to the lease.  As such, Orient Paper
will accrue the cost estimated to return the land to its prior condition over
the 30-year life of the lease.  Orient Paper has not obtained an
estimate for those costs, but management is confident that any such costs that
should be accrued are not material as of December 31, 2008, and
2007.
 
 Consulting
Agreements
 
 On
January 1, 2008, Orient Paper entered into three separate written agreements
with third-party individuals to provide consulting services during the year
2008.  These agreements could be terminated at any time by the parties
with or without cause, effective upon written 30 days
notice.  However, termination by Orient Paper did not waive the
obligation of Orient Paper to pay the consultants.  Consulting
services under the agreements principally commenced January 1, 2008, and
consisted of various accounting, legal, and regulatory matters.  The
three consultants received collectively approximately $500,000 for services
during the year ended December 31, 2008.  The consultants agreed that
compensation could be paid by issuance of restricted shares of common stock
under the terms mutually agreed upon by both parties at a future
date.  For the year ended December 31, 2008, $500,000 was accrued for
services rendered by the three consultants, and paid by the issuance of
5,000,000 shares of common stock.
 
 (6)              Related Party
Transactions
 
 The Chief
Executive Officer of Orient Paper loaned money (over a period of time) to the
Company for working capital purposes, which amounted to $6,157,104 as of
December 31, 2008.  During the year ended December 31, 2008, and 2007,
Orient Paper applied payments of $0 and $6,019,005, respectively, towards this
loan.  On July 24, 2008, the Chief Executive Officer of the Company
agreed to change the term of the loan to a maturity date of three
years.  This loan is non-interest bearing and is matures July 23,
2011.  There are provisions for deferring payment to the Chief
Executive Officer if Orient Paper's cash flow is not sufficient to cover the
obligation.
  F-15
 ORIENT
PAPER, INC.NOTES TO FINANCIAL STATEMENTSDECEMBER
31, 2008, AND 2007
  On August
5, 2008, a member of the Board of Directors loaned money to Orient Paper for
working capital purposes which amounted to $880,200 as of December 31,
2008.  The amount owed bares interest at 7.56% per annum and is due on
August 4, 2011.
 
 On August
5, 2008, a member of the Board of Directors loaned money to Orient Paper for
working capital purposes which amounted to $1,100,250 as of December 31,
2008.  The amount owed bares interest at 7.56% per annum and is due on
August 4, 2011.
 
 (7)              Common
Stock
  On
October 29, 2007, Orient Paper entered into an Agreement and Plan of Merger (the
"Merger Agreement") between Orient Paper; CARZ Merger Sub, Inc., a Nevada
corporation, and wholly owned subsidiary of Orient Paper; DZH Limited; and the
stockholders of DZH Limited.  Under the terms of the Merger Agreement,
Orient Paper issued to the stockholders of DZH Limited 29,801,987 shares of
Orient Paper's common stock, par value $0.001, in exchange for all of the issued
and outstanding shares of stock of DZH Limited (50,000 shares).  The
shares of common stock of Orient Paper were issued without registration under
the Securities Act of 1933, and were distributed pro rata among the stockholders
of DZH Limited in accordance with their respective ownership interests in DZH
Limited immediately before completion of the merger transaction.  As a
result of the Merger Agreement, DZH Limited merged with CARZ Merger Sub, Inc.,
with DZH Limited as the surviving entity.  As such, DZH Limited became
a wholly owned subsidiary of Orient Paper, which in turn, made Orient Paper the
indirect owner of DZH Limited's operating subsidiary, HBOP.
 
 For
financial reporting purposes, DZH Limited is considered to have acquired Orient
Paper by a reverse merger through the Merger Agreement, and its stockholders
currently have voting control of Orient Paper.  As such, the
accompanying financial statements and related disclosures in the notes to
financial statements present the financial position as of March 31, 2008, and
December 31, 2007, and the operations for the three months ended March 31, 2008,
and 2007, of DZH Limited and its subsidiary HBOP under the name of Orient
Paper.  The reverse merger has been recorded as a recapitalization of
Orient Paper, with the consolidated net assets of DZH Limited and its wholly
owned operating subsidiary HBOP, and net assets Orient Paper brought forward at
their historical bases.  The costs associated with the reverse merger
have been expensed as incurred.
  F-16
 ORIENT
PAPER, INC.NOTES TO FINANCIAL STATEMENTSDECEMBER
31, 2008, AND 2007
  On
December 21, 2007, by a majority vote of the stockholders of Orient Paper, the
amount of authorized common stock, par value $0.001 per share, was increased
from 75,000,000 shares to 500,000,000 shares.  In addition, Orient
Paper eliminated preemptive rights to acquire unissued shares of its common
stock.
 
 On April
23, 2008, Orient Paper established a 2008 Equity Incentive Plan (“Equity
Incentive Plan”), granted to individuals who are affiliates of Orient
Paper.  As part of this Equity Incentive Plan, Orient Paper registered
with the SEC 5,000,000 shares of its common stock, at a proposed maximum
offering price of $0.75 per share.
 
 On May
15, 2008, the Company issued to three consultants 5,000,000 shares of common
stock for services rendered and to be rendered during the year 2008 with a value
of $500,000.
 
 (8)              Income
Taxes
 
 On March
16, 2007, the National peoples’ Congress in China passed the New Enterprise
Income Tax Law effective January 1, 2008.  Orient Paper’s Enterprise
Income Tax rate is 25% effective January 1, 2008.  The provision for
income taxes for the year ended December 31, 2008, and 2007, was as follows (33%
effective tax rate in 2007 and 25% effective tax rate in 2008):
 
 2008
              
              
              2007Current
      Tax Provision:National
      and local-
              
              $
              2,924,806
              
              
              $
              2,000,596Total
      current tax provision
              
              $
              2,924,806
              
              
              $
              2,000,596
 
 (9)              Change
in the Board of Directors and Management
 
 Effective
November 16, 2007, each of the following individuals was appointed by the Board
of Directors of Orient Paper to serve until his or her successor is chosen or
upon his or her earlier resignation or removal as an officer of Orient Paper in
accordance with the Bylaws of Orient Paper: Zhenyong Liu, Chief Executive
Officer; Jing Hao, Chief Financial Officer; and, Dahong Zhou,
Secretary.
 
 Effective
November 30, 2007, Hui Ping Cheng resigned in her capacity as the sole member of
the Board of Directors of Orient Paper.  Effective the same date,
Zhenyong Liu, Xiaodong Liu, Fuzeng Liu, and Chen Li were appointed to the Board
of Directors to serve until his or her successor is chosen or upon his or her
earlier death, resignation, or removal as a member of the Board of Directors in
accordance with the Bylaws of Orient Paper.  Zhenyong Liu was also
appointed as Chairman of the Board of Directors of Orient Paper.
  F-17
 ORIENT
PAPER, INC.NOTES TO FINANCIAL STATEMENTSDECEMBER
31, 2008, AND 2007
  (10)            Recent
Accounting Pronouncements
 
 In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations – Revised
2007” (“SFAS No. 141R”), which replaces FASB Statement No. 141, “Business
Combinations.”  SFAS No. 141Restablishes principles
and requirements intending to improve the relevance, representational
faithfulness, and comparability of information that a reporting entity provides
in its financial reports about a business combination and its
effects.  This is accomplished through requiring the acquirer to
recognize assets acquired and liabilities assumed arising from contractual
contingencies as of the acquisition date, measured at their acquisition-date
fair values.  This includes contractual contingencies only if it is
more likely than not that they meet the definition of an asset of a liability in
FASB Concepts Statement No. 6, “Elements of Financial
Statements – a
replacement of FASB Concepts Statement No. 3.”This statement also
requires the acquirer to recognize goodwill as of the acquisition date, measured
as a residual.  However, this statement improves the way in which an
acquirer’s obligations to make payments conditioned on the outcome of future
events are recognized and measured, which in turn improves the measure of
goodwill.  This statement also defines a bargain purchase as a
business combination in which the total acquisition-date fair value of the
consideration transferred plus any noncontrolling interest in the acquiree, and
it requires the acquirer to recognize that excess in earnings as a gain
attributable to the acquirer.  This, therefore, improves the
representational faithfulness and completeness of the information provided about
both the acquirer’s earnings during the period in which it makes a bargain
purchase and the measures of the assets acquired in the bargain
purchase.  The management of Orient Paper does not expect the adoption
of this pronouncement to have a material impact on its financial
statements.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – amendment of ARB No. 51” (“SFAS No.
160”).  SFAS No. 160 establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary.  Specifically, this statement
requires the recognition of a noncontrolling interest (minority interest) as
equity in the consolidated financial statements and separate from the parent’s
equity.  The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income
statement.  SFAS No. 160 clarifies that changes in a parent’s
ownership interest in a subsidiary that do not result in deconsolidation are
equity transactions if the parent retains its controlling financial
interest.  In addition, this statement requires that a parent
recognize a gain or loss in net income when a subsidiary is
deconsolidated.  Such gain or loss will be measured using the fair
value of the noncontrolling equity investment on the deconsolidation
date.  SFAS No. 160 also includes expanded disclosure requirements
regarding the interests of the parent and its noncontrolling
interest.
 
 SFAS No.
160 is effective for fiscal years and interim periods within those fiscal years,
beginning on or after December 15, 2008.  Earlier adoption is
prohibited.  The management of Orient Paper does not expect the
adoption of this pronouncement to have a material impact on its financial
statements.
 
 In March
2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement 133”
(“SFAS No. 161”).  SFAS No. 161 enhances required disclosures
regarding derivatives and hedging activities, including enhanced disclosures
regarding how:  (a) an entity uses derivative instruments; (b)
derivative instruments and related hedged items are accounted for under FASB No.
133, “Accounting for
Derivative Instruments and Hedging Activities”; and (c) derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows.  Specifically, FASB No. 161
requires:
  F-18
 ORIENT
PAPER, INC.NOTES TO FINANCIAL STATEMENTSDECEMBER
31, 2008, AND 2007
  ·
              Disclosure
      of the objectives for using derivative instruments be disclosed in terms
      of underlying risk and accounting
designation;
 ·
              Disclosure
      of the fair values of derivative instruments and their gains and losses in
      a tabular format;
 ·
              Disclosure
      of information about credit-risk-related contingent features;
      and
 ·
              Cross-reference
      from the derivative footnote to other footnotes in which
      derivative-related information is
disclosed.
 
 FASB No.
161 is effective for fiscal years and interim periods beginning after November
15, 2008.  Earlier application is encouraged.  The
management of Orient Paper does not expect the adoption of this pronouncement to
have a material impact on its financial statements.
 
 In May
2008, the FASB issued FASB Statement No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”).  SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States of America.  The
sources of accounting principles that are generally accepted are categorized in
descending order as follows:
 
 e)
              FASB
      Statements of Financial Accounting Standards and Interpretations, FASB
      Statement 133 Implementation Issues, FASB Staff Positions, and American
      Institute of Certified Public Accountants (AICPA) Accounting Research
      Bulletins and Accounting Principles Board Opinions that are not superseded
      by actions of the FASB.
 
 f)
              FASB
      Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and
      Accounting Guides and Statements of
Position.
 
 g)
              AICPA
      Accounting Standards Executive Committee Practice Bulletins that have been
      cleared by the FASB, consensus positions of the FASB Emerging Issues Task
      Force (EITF), and the Topics discussed in Appendix D of EITF Abstracts
      (EITF D-Topics).
 
 h)
              Implementation
      guides (Q&As) published by the FASB staff, AICPA Accounting
      Interpretations, AICPA Industry Audit and Accounting Guides and Statements
      of Position not cleared by the FASB, and practices that are widely
      recognized and prevalent either generally or in the
    industry.
 
 SFAS No.
162 is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board amendment to its authoritative
literature.  It is only effective for nongovernmental entities;
therefore, the GAAP hierarchy will remain in SAS 69 for state and local
governmental entities and federal governmental entities.  The
management of Orient Paper does not expect the adoption of this pronouncement to
have a material impact on its financial statements.
 
 On May
26, 2008, the FASB issued FASB Statement No. 163, “Accounting for Financial Guarantee
Insurance Contracts” (“SFAS No. 163”).  SFAS No. 163 clarifies
how FASB Statement No. 60, “Accounting and Reporting by
Insurance Enterprises” (“SFAS No. 60”), applies to financial guarantee
insurance contracts issued by insurance enterprises, including the recognition
and measurement of premium revenue and claim liabilities.  It also
requires expanded disclosures about financial guarantee insurance
contracts.
  F-19
 ORIENT
PAPER, INC.NOTES TO FINANCIAL STATEMENTSDECEMBER
31, 2008, AND 2007
  The
accounting and disclosure requirements of SFAS No. 163 are intended to improve
the comparability and quality of information provided to users of financial
statements by creating consistency.  Diversity exists in practice in
accounting for financial guarantee insurance contracts by insurance enterprises
under SFAS No. 60, “Accounting
and Reporting by Insurance Enterprises.”  That diversity
results in inconsistencies in the recognition and measurement of claim
liabilities because of differing views about when a loss has been incurred under
FASB Statement No. 5, “Accounting for Contingencies”
(“SFAS No. 5”).  SFAS No. 163 requires that an insurance enterprise
recognize a claim liability prior to an event of default when there is evidence
that credit deterioration has occurred in an insured financial
obligation.  It also requires disclosure about (a) the risk-management
activities used by an insurance enterprise to evaluate credit deterioration in
its insured financial obligations and (b) the insurance enterprise’s
surveillance or watch list.
 
 SFAS No.
163 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and all interim periods within those fiscal years,
except for disclosures about the insurance enterprise’s risk-management
activities.  Disclosures about the insurance enterprise’s
risk-management activities are effective the first period beginning after
issuance of SFAS No. 163.  Except for those disclosures, earlier
application is not permitted.  The management of Orient Paper does not
expect the adoption of this pronouncement to have material impact on its
financial statements.
 
  F-20
  Item
9.                 Changesin and Disagreements with Accountants on Accounting and
Financial Disclosure.
 
 On
November 27, 2007, Orient Paper (i) appointed the accounting firm of Davis
Accounting Group P.C. ("New Auditor") as its independent auditor and (ii)
dismissed the accounting firm of Moore & Associates Chartered ("Former
Auditor"), which firm had previously served as Orient Paper’s independent
auditor.
 
 The
Board of Directors' decision to engage the New Auditor was primarily based upon
Orient Paper’s newly acquired international operations. As reported by Orient
Paper in its Current Report on Form 8-K previously filed with the Securities and
Exchange Commission on November 2, 2007, on October 29, 2007, Orient Paper
acquired by merger a subsidiary having business operations in
China.
 
 The
reports of the Former Auditor on Orient Paper’s financial statements for the
fiscal years ended February 28, 2007 and 2006 did not contain an adverse
opinion, a disclaimer of opinion or any qualifications or modifications related
to uncertainty, limitation of audit scope or application of accounting
principles, except that reports of the Former Auditor on Orient Paper’s
financial statements for the fiscal years ended February 28, 2007 and 2006 were
modified with respect to substantial doubt regarding the ability of Orient Paper
to continue as a going concern.. During the fiscal years ended February 28, 2007
and 2006 and the period from March 1, 2007 to November 27, 2007, Orient Paper
did not have any disagreements (within the meaning of Instruction 4 of Item 304
of Regulation S-K) with the Former Auditor as to any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure and there had been no reportable events (as defined in Item 304 of
Regulation S-K).
 
 Prior
to engaging the New Auditor, Orient Paper had not consulted with the New Auditor
regarding (i) the application of accounting principles to a specified
transaction, either completed or proposed, or any of the matters or events set
forth in Items 304(a)(2) of Regulation S-K, or the type of audit opinion that
might be rendered on Orient Paper’s financial statements during the two most
recent fiscal years through November 27, 2007, ; or (ii) any matter or event
that was the subject of disagreement, as that term is defined in Item
304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of
Regulation S-K.
 
 The
dismissal of the Former Auditor and appointment of the New Auditor as Orient
Paper’s independent auditor was approved by Orient Paper’s Board of Directors on
November 27, 2007.
 
 A letter
of the Former Auditor addressed to the Securities and Exchange Commission was
included as Exhibit 16.1 to this report on Form 8-K filed with the SEC on
December 3, 2007. Such letter stated the Former Auditor agreed with the
statements made by Orient Paper in the Form 8-K as they referred to the Former
Auditor.
  Orient
Paper provided to the New Auditor a copy of the disclosures in the Form 8-K and
provided the New Auditor the opportunity to furnish the SEC with a letter
addressed to the SEC containing any new information, clarification of the SEC’s
expression of its views, or the respects in which it did not agree with Orient
Paper’s statements made in response to its required disclosures. The New Auditor
declined to furnish Orient Paper with such a letter.
 Item
9A.              Controlsand Procedures.
 Item
9A(T).        Controlsand Procedures.
 
 Evaluation
of Disclosure Controls and Procedures
 
 The
Company maintains a set of disclosure controls and procedures designed to ensure
that information required to be disclosed by the Company in the reports filed
under the Securities Exchange Act, is recorded, processed, summarized and
reported within the time periods specified by the SEC's rules and forms.
Disclosure controls are also designed with the objective of ensuring that this
information is accumulated and communicated to the Company's management,
including the Company's chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required
disclosure.
  Based
upon their evaluation as of the end of the period covered by this report, the
Company's chief executive officer and chief financial officer concluded that,
the Company's disclosure controls and procedures are effective to ensure that
information required to be included in the Company's periodic SEC filings is
recorded, processed, summarized, and reported within the time periods specified
in the SEC rules and forms.
  51
  Management’s
Report on Internal Control over Financial Reporting
 
 Our
management is responsible for establishing and maintaining adequate internal
control over our financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act.   Our management is also required to
assess and report on the effectiveness of our internal control over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002
(“Section 404”).    Internal control over financial reporting is a
process to provide reasonable assurance regarding the reliability of our
financial reporting for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting includes
policies and procedures that: (i) pertain to maintaining records that in
reasonable detail accurately and fairly reflect our transactions; (ii) provide
reasonable assurance that transactions are recorded as necessary for preparation
of our financial statements and that receipts and expenditures of company assets
are made in accordance with management authorization; and (iii) provide
reasonable assurance that unauthorized acquisition, use or disposition of
company assets that could have a material effect on our financial statements
would be prevented or detected on a timely basis.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. 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 and procedures may deteriorate.
 
 For the
fiscal year ended December 31, 2008, Orient Paper carried out an evaluation of
the effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15(b). In making this assessment,
we used the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO)   in Internal Control – Integrated
Framework.   This evaluation was conducted by Zhenyong Liu, our Chief
Executive Officer, and Jing Hao, our Chief Financial Officer. Based upon this
evaluation and the material weakness described below, the Chief Executive
Officer and the Chief Financial Officer concluded that Orient Paper’s internal
control over financial reporting is effective based on those
criteria.
  This
annual report does not include an attestation report issued by Orient
Paper’s registered independent accounting firm regarding Orient Paper’s internal
control over financial reporting. The
management’s report was not subject to attestation by Orient Paper’s registered
independent public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission.
  Changes
in Internal Controls over Financial Reporting
  Except as
described above, there were no changes in our internal controls over financial
reporting during the fiscal year ended December 31, 2008 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
 
 Limitations
on Controls
 
 Management
does not expect that our disclosure controls and procedures or our internal
control over financial reporting will prevent or detect all error and fraud. Any
control system, no matter how well designed and operated, is based upon certain
assumptions and can provide only reasonable, not absolute, assurance that its
objectives will be met. Further, no evaluation of controls can provide absolute
assurance that misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, within the Company have been
detected.
  Item
9B.              OtherInformation.
 
 None.
  52
  PART
III
 
 Item
10.               Directors, Executive Officers and Corporate Governance
 
 Set forth
below is certain information regarding our directors and executive
officers.  Our Board of Directors is comprised of two directors. 
There are no family relationships between any of our directors or executive
officers. Each of our directors is elected to serve until the next annual
meeting of our shareholders and until his successor is elected and qualified or
until such director’s earlier death, removal or termination.
 
 The
following table sets forth certain information with respect to our directors and
executive officers:
  Name
              
              Age
              
              Position/TitleZhenyong
      Liu
              
              45
              
              Chief
      Executive Officer and Chairman of the BoardJing
      Hao
              
              25
              
              Chief
      Financial OfficerDahong
      Zhou
              
              29
              
              SecretaryXiaodong
      Liu
              
              34
              
              DirectorFuzeng
      Liu
              
              59
              
              DirectorChen
      Li
              
              51
              
              Director
  Our
directors hold office until the next annual meeting of our shareholders and
until their successors have been qualified after being elected or appointed. Our
officers serve at the discretion of our Board of Directors.
 
 Set forth
below is biographical information about our current directors and executive
officers:
  Zhenyong Liu. On November 30,
2007, Zhenyong Liu became a member of the Board of Directors and was appointed
Chairman of the Board of Directors. Mr. Liu has also served as the Company's
Chief Executive Officer since November 16, 2007. Mr. Liu also serves as Chairman
of Hebei Baoding Orient Paper Milling Company Limited, a position he has held
since 1996. Hebei Baoding Orient Paper Milling Company Limited is the Chinese
operating subsidiary of Dongfang Zhiye Holding Limited, which entity was
acquired by our Company under the merger transaction previously reported by
Orient Paper in its Current Report on Form 8-K filed with the Commission on
November 2, 2007. From 1990 to 1996, he served as Plant Director of Xinxin Paper
Milling Factory. Mr. Liu served as General Manager of Xushui Town Huandong
electronic appliances procurement station from 1986 to 1990 and as Vice Plant
Director of Liuzhuang Casting Factory from 1982 to 1986.
  Jing Hao. Jing Hao was
appointed as our Chief Financial Officer on November 16, 2007. Ms. Hao also
serves as Chief Financial Officer of Hebei Baoding Orient Paper Milling Company
Limited, a position she has held since 2006. Hebei Baoding Orient Paper Milling
Company Limited is the Chinese operating subsidiary of Dongfang Zhiye Holding
Limited. From 2005 to 2006, she served as Manager of Financial Department for
Hebei Baoding Orient Paper Milling Company Limited from 2005 to 2006 and as
Assistant Manager of Financial Department for Shandong Chenming Paper Milling
Group Company Limited from 2004 to 2006.
  Dahong Zhou. Dahong Zhou was
appointed as our Secretary on November 16, 2007.Dahong Zhou also serves as
Executive Manager of Hebei Baoding Orient Paper Milling Company Limited, a
position she has held since 2006. Hebei Baoding Orient Paper Milling Company
Limited is the Chinese operating subsidiary of Dongfang Zhiye Holding Limited,
which entity was acquired by our Company under the Merger Transaction reported
in our Current Report filed November 2, 2007.
  Xiaodong Liu. On November 30,
2007, Xiaodong Liu became a member of the Board of Directors. Mr. Liu also
serves as General Manager of Hebei Baoding Orient Paper Milling Company Limited,
a position he has held since 2002. Hebei Baoding Orient Paper Milling Company
Limited is the Chinese operating subsidiary of Dongfang Zhiye Holding Limited.
He previously was at Hebei Baoding Orient Paper Milling Company Limited from
2000 to 2002 and at Hebei Province Oil Investigation Design Institute from 1998
to 2000.
  Fuzeng Liu. On November 30,
2007, Fuzeng Liu became a member of the Board of Directors. Mr. Liu also serves
as Vice General Manager of Hebei Baoding Orient Paper Milling Company Limited, a
position he has held since 2002. Hebei Baoding Orient Paper Milling Company
Limited is the Chinese operating subsidiary of Dongfang Zhiye Holding Limited.
Previously, he was Deputy Secretary of Xushui Town Traffic Bureau from 1992 to
2002, Party Secretary of Xushui Town Dayin Village from 1988 to 1992, and Head
of the Xushui Town Cuizhuang Village from 1984 to 1984. From 1977 to 1984, Mr.
Liu served in committee office of Xushui Town. From 1970 to 1977, Mr. Liu served
in the Pharmaceutical Company of Xushui Town.
  53
  Chen Li. On November 30,
2007, Chen Li became a member of the Board of Directors. Since 2005, Chen Li has
also served as Deputy Secretary of the Bureau of Justice of Xushui Town.
Previously, he was Deputy Secretary of Bureau of Technical Supervision of Xushui
Town from 1994 to 2005, Head of the Office of Agricultural Commission of Xushui
Town from 1989 to 1994, and Vice Minister of the Armed Forces of Xushui Town
from 1985 to 1989. From 1979 to 1985, Mr. Li served in the army of the People's
Republic of China.
 
 Audit
Committee Financial Expert
 
 Our Board
of Directors currently acts as our audit committee. Our Board of Directors has
not yet determined whether we have a member who qualifies as an "audit committee
financial expert" as defined in Item 407(d)(5)(ii) of Regulation S-K, and is
"independent" as the term is defined in Item 407(a)(1) of Regulation S-K. Our
Board of Directors is in the process of searching for a suitable candidate for
this position.
 
 Audit
Committee
 
 We have
not yet appointed an audit committee, and our Board of Directors currently acts
as our audit committee. At the present time, we believe that the members of
Board of Directors are collectively capable of analyzing and evaluating our
financial statements and understanding internal controls and procedures for
financial reporting. Our company, however, recognizes the importance of good
corporate governance and intends to appoint an audit committee comprised
entirely of independent directors, including at least one financial expert,
during our 2009 fiscal year.
 
 Code
of Ethics
  We have
not adopted a code of ethics to apply to our principal executive officer,
principal financial officer, principal accounting officer and controller, or
persons performing similar functions because, until recently, we have not been
an operating company. We expect to prepare a Code of Ethics in the near
future.
 
 Compliance
with Section 16(a) of the Securities Act of 1934
 
 Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our executive
officers and directors and persons who own more than 10% of a registered class
of our equity securities to file with the Securities and Exchange Commission
initial statements of beneficial ownership, reports of changes in ownership and
annual reports concerning their ownership of the our common stock and other
equity securities, on Form 3, 4 and 5 respectively. Executive officers,
directors and greater than 10% shareholders are required by the Securities and
Exchange Commission regulations to furnish our company with copies of all
Section 16(a) reports they file.
 
 Based
solely on our review of the copies of such reports received by us, and on
written representations by our officers and directors regarding their compliance
with the applicable reporting requirements under Section 16(a) of the Exchange
Act, we believe that, with respect to the fiscal year ended December 31, 2008,
our officers and directors, and all of the persons known to us to own more than
10% of our common stock, filed all required reports on a timely
basis.
  Item
11.               ExecutiveCompensation.
  Our
current and previous executive officers and directors do not receive any
compensation and have not received any restricted shares awards, options, or any
other payouts. As such, we have not included a Summary Compensation Table or
other tables pertaining to compensation or grants of options, stock or other
awards that otherwise would be included.
 
 Employment
Agreements
 
 We do not
have any written employment agreements.
  54
  Compensation
Discussion and Analysis
 
 We strive
to provide our named executive officers (as defined in Item 402 of Regulation
S-K) with a competitive base salary that is in line with their roles and
responsibilities when compared to peer companies of comparable size in similar
locations.
 
 We plan
to implement a more comprehensive compensation program, which takes into account
other elements of compensation, including, without limitation, short and long
term compensation, cash and non-cash, and other equity-based compensation such
as stock options. We expect that this compensation program will be comparable to
the programs of our peer companies and aimed to retain and attract talented
individuals.
 
 We will
also consider forming a compensation committee to oversee the compensation of
our named executive officers. The majority of the members of the compensation
committee would be independent directors.
 
 Compensation
of Directors
 
 As of the
date of this Report, our directors have received no compensation for their
service on the Board of Directors. We plan to implement a compensation program
for our independent directors, as and when they are appointed, which we
anticipate will include such elements as an annual retainer, meeting attendance
fees and stock options. The details of that compensation program will be
negotiated with each independent director.
 
 Outstanding
Equity Awards at Fiscal Year-End
 
 On April 23, 2008, Orient Paper
established a 2008 Equity Incentive Plan ("Equity Incentive Plan"), granted to
individuals who are affiliates of Orient Paper. As part of this Equity
Incentive Plan, Orient Paper registered with the SEC 5,000,000 shares of its
common stock, at a proposed maximum offering price of $0.75 per share. None of
these equity awards were outstanding and no other equity awards were issued as
of the fiscal year ended December 31, 2008.
 
 Pension
and Retirement Plans
  Currently,
we do not offer any annuity, pension or retirement benefits to be paid to any of
our officers, directors or employees. There are also no compensatory plans or
arrangements with respect to any individual named above which results or will
result from the resignation, retirement or any other termination of employment
with our company, or from a change in our control.
  Item
12.               SecurityOwnership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
 
 The
following table sets forth certain information with respect to the beneficial
ownership of our voting securities by (i) any person or group owning more than
5% of any class of voting securities, (ii) each director, (iii) our Chief
Executive Officer and President and (iv) all executive officers and directors as
a group as of March 24, 2009.
 
 55


Amount
and Nature of Beneficial Ownership
 
 Title
      of Class
                
                Name and Address
                  of Beneficial Owner
      (1)
                
                Amount
      and Nature of Beneficial Ownership (2)
                
                Percentage of
                  Common
                  Stock (2)Common
      Stock
                
                Max
      Time Enterprises, Limited (3)
                  10880
      Wilshire Blvd.,
                  Los
      Angeles, CA 90024
                
                
                3,000,000
                
                
                15.52
                %Common
      Stock
                
                Hui
      Ping Cheng (3)
                
                
                3,000,000
                
                
                15.52
                %Directors and Executive
      OfficersCommon
      Stock
                
                Zhenyong
      Liu
                  CEO
      and Director
                
                
                15,646,043
                
                
                34.69
                %Common
      Stock
                
                Jing
      Hao
                  CFO
                
                
                0
                
                
                0
                %Common
      Stock
                
                Dahong
      Zhou
                  Secretary
                
                
                0
                
                
                -0-
                %Common
      Stock
                
                Xiaodong
      Liu
                  Director
                
                
                1,102,674
                
                
                2.44
                %Common
      Stock
                
                Fuzeng
      Liu
                  Director
                
                
                -0-
                
                
                0
                %Common
      Stock
                
                Chen
      Li
                  Director
                
                
                804,654
                
                
                1.78
                %All
      Directors and Executive Officers as a Group (6
      persons)
                
                
                
                
                17,553,371
                
                
                38.92
                %
  
 (1)
              Except
      as otherwise indicated, the address of each beneficial owner is c/o Orient
      Paper Inc., Science Park, Xushui Town Baoding City, Hebei Province, PRC
      072550.(2)
              Information
      with respect to beneficial ownership is based upon information furnished
      by each stockholder or contained in filings made with the Securities and
      Exchange Commission. Beneficial ownership is determined in accordance with
      the rules of the Securities and Exchange Commission and generally includes
      voting or investment power with respect to securities.In
      determining the percent of common stock owned by a person or entity on
      March 24, 2009, (a) the numerator is the number of shares of the class
      beneficially owned by such person and includes shares which the beneficial
      owner may acquire within 60 days upon conversion or exercise of a
      derivative security, and (b) the denominator is the sum of (i) the shares
      of that class outstanding on March 24, 2009 (45,101,987 shares of Common
      Stock) and (ii) the total number of shares that the beneficial owner may
      acquire upon conversion or exercise of a derivative security within such
      60 day period. Unless otherwise stated, each beneficial owner has sole
      power to vote and dispose of the shares.(3)
              Hui
      Ping Cheng, a former director of the Company, is the sole owner, director
      and officer of Max Time Enterprise Limited and, by reason thereof, Ms.
      Cheng may be deemed to be an indirect beneficial owner of 3,000,000 shares
      of the Company's common stock held by Max Time Enterprise
      Limited.
 Item
13.               CertainRelationships and Related Transactions, and Director
Independence.
 
 Zhenyong Liu, the Company’s Chief
Executive Officer, loaned money to Orient Paper for working capital purposes,
which amounted to $6,157,104 as of December 31, 2008.  During the
calendar years ended December 31, 2008, and 2007, Orient Paper applied payments
of $0 and $6,019,005, respectively, towards this loan. On July 24, 2008, Mr. Liu
agreed to change the loan term to three years. As such, the loan, as amended, is
non-interest bearing and is due on July 23, 2011. There are provisions for
deferring payment to the Chief Executive Officer if Orient Paper's cash flow is
not sufficient to cover the obligation.
  56
  On August 5, 2008, a member of our
Board of Directors loaned money to Orient Paper for working capital purposes,
which amounted to $880,200 as of December 31, 2008. The amount owed bears
interest at 7.56% per annum, and is due on August 4, 2011.
 
 On August 5, 2008, a member of our
Board of Directors loaned money to Orient Paper for working capital purposes,
which amounted to $1,100,250 as of December 31, 2008. The amount owed bears
interest at 7.56% per annum, and is due on August 4, 2011.
 
 Procedures
for Approval of Related Party Transactions
  Our Board
of Directors is charged with reviewing and approving all potential related party
transactions.  All such related party transactions must then be
reported under applicable SEC rules. We have not adopted other procedures for
review, or standards for approval, of such transactions, but instead review them
on a case-by-case basis.
 
 Director
Independence
 
 The
Company currently does not have a director that qualifies as an “independent”
director as that term is defined under the National Association of Securities
Dealers Automated Quotation system.  Our company, however, recognizes
the importance of good corporate governance and intends to appoint an audit
committee comprised entirely of independent directors, including at least one
financial expert, in the near future.
 
 
 Item
14.               PrincipalAccounting Fees and Services
 
 Audit
Fee
 
 Orient
Paper incurred, in the aggregate, approximately $49,000 for professional
services rendered by its registered independent public accounting firm for the
audit of Orient Paper’s annual financial statements for the year ended December
31, 2008, and for the reviews of the financial statements included in its
Quarterly Reports on Form 10-Q during this fiscal year.
 
 Audit-Related
Fees
 
 Orient
Paper incurred approximately $1,309 in fees from its registered independent
public accounting firm for audit-related services during the year ended
December 31, 2008.
 
 Tax
Fees
 
 Orient
Paper incurred approximately $850 in fees from its registered independent public
accounting firm for tax compliance or tax consulting services during the year
ended December 31, 2008.
 
 All
Other Fees
 
 Orient
Paper did not incur any fees from its registered independent public accounting
firm for services rendered to Orient Paper, other than the services covered in
"Audit Fees" and “Audit-Related Fees” for the fiscal year ended December 31,
2008.
  57
  PART
IV
 
 Item
15.               Exhibits, Financial Statements Schedules
 
 Exhibit
      No.
                        Description of
      Exhibit3.1
                        Articles
      of Incorporation.*3.2
                        Certificate
      of Amendment to Articles of Incorporation.***3.3
                        Bylaws.*3.4
                        Specimen
      of Common Stock certificate.*10.1
                        Agreement
      and Plan of Merger, dated October 29, 2007, by and among Carlateral, Inc.,
      CARZ Merger Sub, Inc., Dongfang Zhiye Holding Limited, and the
      shareholders of Dongfang Zhiye Holding Limited.**10.2
                        Land
      Lease Agreement, dated January 2, 2002, by and between the Company and
      Xushui County Dayin Township Wuji Village Committee and Party
      Branch.10.3
                        Land
      Use Rights Certificate, dated March 10, 2003.10.4
                        Purchase
      Contract, dated December 30, 2003, by and between the Company and Beijing
      Heerwang Industrial Material Company Limited.10.5
                        Purchase
      Contract, dated December 31, 2003, by and between the Company and Xushui
      County Dongfang Trading Company Limited.10.6
                        Purchase
      Contract, dated January 1, 2008, by and between the Company and Baoding
      Tianhe Coal Industries Company.10.7
                        Purchase
      Contract, effective January 1, 2008, by and between the Company and
      Beijing Heerwang Industrial Material Company Limited.10.8
                        Purchase
      Contract, dated March 20, 2008, by and between the Company and Hebei
      Dingxing Material Recycling Station.10.9
                        Purchase
      Contract, dated January 1, 2008, by and between the Company and Beijing
      Huaxin Chemical Research Institute.10.10
                        Purchase
      Contract, dated January 1, 2008, by and between the Company and Beijing
      Chinabase Star Paper Co., Ltd.16.1
                        Letter
      of Moore & Associates Chartered to the Securities and Exchange
      Commission pursuant to the requirements of Item 304(a)(3) of Regulation
      S-B.*****21.1
                        List
      of Subsidiaries.23.1
                        Report
      of Independent Registered Public Accounting Firm (Farber Hass Hurley
      LLP).****23.2
                        Report
      of Independent Registered Public Accounting Firm (Davis Accounting Group
      P.C.).****31.1
                        Certification
      by Chief Executive Officer pursuant to Sarbanes Oxley Act of 2002 Section
      302.31.2
                        Certification
      by Chief Financial Officer pursuant to Sarbanes Oxley Act of 2002 Section
      302.32.1
                        Certification
      by Chief Executive Officer pursuant to Sarbanes-Oxley Act of 2002 Section
      906.32.2
                        Certification
      by Chief Financial Officer pursuant to Sarbanes-Oxley Act of 2002 Section
      906.
 
 *
Incorporated by reference to the exhibit to our report on form SB-2 filed with
the SEC on August 4, 2006.
 **
Incorporated by reference to the exhibit to our report on form 8-K filed with
the SEC on November 2, 2007.
 ***
Incorporated by reference to the exhibit of the same number to our report on
form 8-K filed with the SEC on December 28, 2007.
 ****
Incorporated by reference to the exhibit to our registration statement on form
S-8 filed with the SEC on April 23, 2008.
 *****
Incorporated by reference to the exhibit of the same number to our report on
form 8-K filed with the SEC on December 3, 2007.
  58
  SIGNATURES
 
 In
accordance with Section 13 or 15(d) of the Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 Date:  March
27, 2009
 ORIENT
      PAPER, INC.By:
              /s/
      Zhenyong LiuZhenyong
      LiuChief
      Executive Officer
 
 In
accordance with the Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
 
 Name
              
              Title
              
              Date/s/
      Zhenyong Liu
              
              Chief
      Executive Officer and Director (principal executive
    officer)
              
              March
      26, 2009Zhenyong
      Liu/s/
      Jing Hao
              
              Chief
      Financial Officer  (principal financial and accounting
      officer)
              
              March
      26, 2009Jing
      Hao/s/
      Dahong Zhou
              
              Secretary
              
              March
      26, 2009Dahong
      Zhou/s/
      Xiaodong Liu
              
              Director
              
              March
      26, 2009Xiaodong
      Liu
 
 /s/
      Fuzeng Liu
              
              Director
              
              March
      26, 2009Fuzeng
      Liu
 
 /s/
      Chen Li
              
              Director
              
              March
      26, 2009Chen
      Li
    59