Notes to Consolidated Financial Statements for the six months ended MarchAs of December 31, 2010,

In conjunction with issuing the convertible notes, the Company agreed to issue common stock warrants to the convertible note investors in the debt financing transaction described in note 13. The warrants issued in conjuction with the convertible notes have the following material terms:

The warrants are exercisable at any time during a five-year period commencing on the closing of a “financing,” which means the first sale (or series of related sales) by us of stock (or debt or equity securities convertible into stock), in a capital raising transaction, occurring after the maturity date (or the date the notes become due pursuant to a default, if earlier) with aggregate gross proceeds of at least $2,000,000.$20,000,000.   The warrants cannot be exercised if no financing is consummated within a five-year period after the issue date and become void if the notes automatically convert into common stock.

The Company analyzed the warrants issued in connection of the issuance of the notes and the conversion features embedded in the notes to assess whether they meet the definition of a derivative under the guidance set forth by FASB ASC Topic 815 (SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”) and, thereof, the applicability of the accounting rules in accordance to FASB ASC Topic 815 to treat the conversion option and the warrants as derivative liabilities.

Management also evaluated whether the warrants meet the scope exception set forth by FASB ASC Topic 815-40 (“Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”), which is that contracts issued or held by the reporting entity that are both (1) indexed to its own stock and (2) classified in stockholders’ equity shall not be considered to be derivative instruments for purposes of FASB ASC Topic 815.  The provisions in FASB ASC Topic 815-40 apply to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by FASB ASC Topic 815 and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.

Derivative instruments are initially measured using the Black-Scholes pricing model at the issuance date and recorded as warrants liabilities. Changeat their fair value and marked-to-market at each report date until they are exercised or expire, with any change in the fair value of the warrants is recorded in other incomecharged or loss in the statement of operations in the future reporting periods. Change in warrant value from February 2010credited to March 31, 2010 were not material.income.

As a result of adopting accounting treatment ofaccording to ASC Topic 815-40, $1,052,000 wasinvestor and placement agent warrants are recorded as derivative liabilities and valued at $1,052,000 using a binomial option pricing model on the date of issuance. Because there was no trade market for the Company’s stock, management used substitute volatility in the initial and subsequent measuring of the fair market value of the warrants liabilitiesissued. Management re-measured the fair market value based on 1,218,857 shares entitled underthe adjusted volatility of publicly traded stock of three companies with business and financial size comparable to the Company’s and the remaining term of the warrants.

As of December 31, 2010, these warrants were re-valued at $548,000 based on factors including the probability of the exercisability of the warrants, changes in the estimate of volatility, and the valuationremaining life of these warrants. The revaluation inputs asare provided in the table as follows.follows:

The Company and its subsidiary and branch divisions are subject to income taxes on an entity basis on income arising in, or derived, from the FASB establishedtax jurisdiction in which they operate. As the Accounting Standards Codification (“Codification” or “ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with generally accepted accounting principlesCompany had no income generated in the United States, (“GAAP”). Rules and interpretive releasesthere was no tax expense or tax liability due to the Internal Revenue Service of the SecuritiesUnited States as of December 31, 2010 and Exchange Commission (“SEC”September 30, 2010.

All of the Company’s income before income taxes is from PRC sources. Actual income tax expense reported in the consolidated statements of operations and comprehensive income differ from the amounts computed by applying the PRC statutory income tax rate of 12.5% (50% discount of 25%) issued under authority of federal securities laws are also sources of GAAPto income before income taxes for SEC registrants. Existing GAAP was not intendedthe three months ended December 31, 2010 for the followings reasons:

Our policy for recording interest and penalties associated with audits is to be changedrecord such items as a resultcomponent of income tax expense. There were no interest and penalties recorded for the Codification,three months ended December 31, 2010 and accordingly the change did not impact our financial statements. The ASC does change the way the guidance is organized and presented.2009.