Dahua (DHUA) 10-Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

o    TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from ____________________ to _________________________

Commission file number: 000-49852

DAHUA INC.

(Exact name of small business issuer as specified in its charter)

Delaware	04-3616479
State or other jurisdiction	(I.R.S. Employer Identification No.)
of incorporation or organization)

19^th Floor, Building C, Tianchuangshiyuan, Huizhongbeili,

Chaoyang District, Beijing, China, 100012

(Address of principal executive offices)

86-10-6480-1527

(Issuer's telephone number)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company as defined in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o  Accelerated Filer o  Non-accelerated Filer o  Smaller Reporting Company x

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 25,015,000 shares of common stock, par value $.0001, as of August 14, 2008

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DAHUA INC.

Table of Contents

Part I. Financial Information

Item1. Financial Statements

Consolidated Balance Sheet as of June 30, 2008 (unaudited) and
December 31, 2007	3
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the Three and Six Months Ended June 30, 2008 and 2007 (Unaudited)	4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2008 and 2007 (Unaudited)	5
Notes to Consolidated Financial Statements	6
Item 2. Management's Discussion and Analysis or Plan of Operation	11
Item 3. Qualitative and Quantitative Disclosures About Market Risk	15
Item 4T. Controls and Procedures	16
Part II. Other Information
Item 1. Legal Information	17
Item 1A. Risk Factors	18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3. Defaults Upon Senior Securities	25
Item 4. Submission of Matters to a Vote of Security Holders	25
Item 5. Other Information	25
Item 6. Exhibits and Reports on Form 8-K	25
Signatures	26

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

DAHUA, INC.

Consolidated Balance Sheets as of June 30, 2008 and

December 31, 2007

ASSETS

	June 30, 2008			December 31, 2007
	(unaudited)
Current assets:
Cash and cash equivalents	$	1,514,540		$	1,893,626
Inventory (note 4)		7,066,614			6,501,143
Prepaid expenses		157,795			148,171
Total Current Assets		8,738,949			8,542,940
Equipment:
Computer equipment		56,247			52,816
Office equipment		101,982			93,983
Telephones		3,266			3,067
Vehicles		557,099			508,748
Total Equipment		718,594			658,614
Less: Accumulated depreciation		(199,190	)		(135,119	)
Net equipment		519,404			523,495
Construction in progress (note 5)		1,436,124			788,896
Prepaid construction in progress		123,735			-
Other receivables (note 12)		316,088			300,054
Prepaid tax (note 9)		433,412			234,608
Restricted cash (note 8)		724,029			679,872
Total Assets	$	12,291,741		$	11,069,865

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable	$	251,712	$	236,360
Customer deposits (note 7)		5,533,571		4,994,842
Short-term loans - related parties (note 6)		845,257		309,975
Accrued interest - short-term loans, related parties (note 6)		172,122		151,446
Other accruals		139,282		179,470
Total Current Liabilities		6,941,944		5,872,093
Minority interest in subsidiary		936,947		972,996
Stockholders’ Equity:
Preferred stock: par value $.0001, 20,000,000 shares authorized;
none issued and outstanding		-		-
Common stock: par value $.0001; 80,000,000 shares authorized;
25,015,000 shares issued and outstanding		2,502		2,500
Additional paid-in capital		3,131,200		3,130,452
Retained earnings		443,939		588,884
Accumulated other comprehensive income		835,209		502,940
Total stockholders’ equity		4,412,850		4,224,776
Total Liabilities and Stockholders’ Equity	$	12,291,741	$	11,069,865

See accompanying notes to unaudited consolidated financial statements

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DAHUA, INC.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

	Three months ended						Six months ended
	June 30,						June 30,
	2008			2007			2008			2007
Revenues
Sales revenues	$	-		$	2,500,012		$	-		$	5,627,934
Cost of goods sold		-			2,086,135			-			4,197,698
Gross Profit		-			413,877			-			1,430,236
Expenses
Advertising		-			141,469			-			360,667
Depreciation		27,494			16,237			53,708			31,392
Payroll expense		13,724			142,662			30,179			229,302
Other general and administrative		95,983			294,139			146,621			757,367
Total expenses		137,201			594,507			230,508			1,378,728
Net income (loss) from operations		(137,201	)		(180,630	)		(230,508	)		51,508
Other Income (expense)
Interest expense		-			(27,963	)		-			(59,051	)
Other revenues		-			2			-			436
Interest income		15,646			4,459			49,514			7,870
Total other income (expense)		15,646			(23,502	)		49,514			(50,745	)
Net income (loss) before taxes and minority interest		(121,555	)		(204,132	)		(180,994	)		763
Provision for income taxes		-			67,363			-			(252	)
Net income (loss) before minority interest		(121,555	)		(136,769	)		(180,394	)		511
Minority interest in subsidiary income (loss)		(24,161	)		(27,354	)		(36,049	)		102
Net income (loss)	$	(97,394	)	$	(109,415	)	$	(144,945	)	$	409
Foreign currency translation adjustment	$	122,006		$	61,408		$	332,269		$	97,444
Comprehensive income (loss)	$	24,612		$	(48,007	)	$	187,324		$	97,853
Basic and diluted income (loss) per share	$	(0.00	)	$	(0.00	)	$	(0.01	)	$	0.00
Weighted average common shares outstanding		25,015,000			25,000,000			25,014,917			25,000,000

See accompanying notes to unaudited consolidated financial statements

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DAHUA, INC.

Consolidated Statements of Cash Flows

(Unaudited)

	Six months ended June 30,
	2008			2007
Cash Flows from Operating Activities:
Net income	$	(144,945	)	$	409
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation		53,708			31,392
Minority interest		(36,049	)		102
Stock issued for services		750			-
Loss from disposition of equipment		-			417
Changes in operating assets and liabilities:
Inventory		(139,107	)		(494,894	)
Tax prepaid		(178,295	)		(481,794	)
Accounts payable		-			(279,278	)
Customer deposits		208,159			2,702,814
Accrued interest		10,528			59,051
Other accruals		(50,356	)		35,878
Net cash provided by operating activities		(275,607	)		1,574,097
Cash Flows from Investing Activities:
Purchase of equipment		(16,709	)		(32,447	)
Proceeds from disposition of equipment		-			4,275
Construction in progress		(578,873	)		(270,476	)
Prepaid construction in progress		(120,182	)		-
Other receivable		3,356			(16,952	)
Net cash used in investing activities		(712,408	)		(315,600	)
Cash Flows from Financing Activities:
Payments made on related party loans		-			(2,190,680	)
Net proceeds from loans
payable-related parties		500,356			-
Net cash used in financing activities		500,356			(2,190,680	)
Effect of rate changes on cash		108,573			45,143
Decrease in cash and cash equivalents		(420,954	)		(887,040	)
Cash and cash equivalents, beginning of period		1,893,626			2,338,835
Cash and cash equivalents, end of period	$	1,514,540		$	1,451,795
Supplemental disclosure of cash flow information:
Income taxes paid in cash	$	-		$	317,498
Sales taxes paid in cash	$	-		$	517,128
Non-cash activities
Stock issued for services	$	750		$	-

See accompanying notes to unaudited consolidated financial statements

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DAHUA INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of operations

Dahua, Inc. (“Dahua”) was incorporated on March 8, 2002 in the State of Delaware as Norton Industries Corp. (“Norton”). The name was changed to Dahua, Inc. on February 7, 2005 as result of a reverse acquisition in which Norton acquired all capital shares of Bauer Invest Inc. ("Bauer"). Incident to the reverse acquisition the Company paid $100,000 to the previous shareholders of Norton for shares of stock that were canceled. The acquisition was accounted for as a reverse merger, as the post acquisition owners and control persons of Dahua are substantially the same as the pre acquisition owners and control persons of Bauer and the $100,000 paid to purchase and cancel the previous shares was treated as an adjustment to paid in capital.

Bauer Invest Inc. was incorporated on December 10, 2003, under the laws of the Territory of the British Virgin Islands (“BVI”). Bauer has had no operations other than the acquisition of 80% of Beijing Dahua Real Estate Development, Ltd. (“Subsidiary”) on May 25, 2004. The Subsidiary is a corporation established on September 24, 2001 in the People’s Republic of China (“PRC”). The acquisition was accounted for as a reverse merger, as the post acquisition owners and control persons of Bauer are substantially the same as the pre- acquisition owners and control persons of the subsidiary. These financial statements are essentially those of the Subsidiary with a recapitalization to show the effects due to the reverse mergers. The consolidated entity is hereafter referred to as ‘the Company’.

The Company engages in the development of real estate and the sale of commodity housing. The Company has completed all of the construction on its current development project and all of the houses are sold or available for sale.

2. Basis of Presentation

The consolidated financial statements include the accounts of Dahua, Inc., Bauer Invest, Inc., Beijing Dahua Real Estate Development Ltd and Zhuolu Dahua Real Estate Development Ltd. All inter-company accounts and transactions have been eliminated in consolidation. The Company records minority interest expense, which reflects the 20% portion of the earnings of Beijing Dahua Real Estate Development, Ltd. allocable to holders of the minority interest.

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). This basis differs from that used in the statutory accounts of the Company, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in the PRC. All necessary adjustments have been made to present the financial statements in accordance with US GAAP.

3. Summary of Significant Accounting Policies

Economic and Political Risks

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The Company faces a number of risks and challenges as a result of having primary operations and markets in the PRC. Changing political climates in the PRC could have a significant effect on the Company’s business.

Cash and Cash Equivalents

For purposes of the statements of cash flows, cash and cash equivalents includes cash on hand and demand deposits held by banks. Deposits held in financial institutions in the PRC are not insured by any government entity or agency.

Trade Accounts Receivable

Trade accounts receivable are recognized and carried at original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful accounts is made when collection of the full amount becomes questionable. The Company had no trade accounts receivable at June 30, 2008.

Inventories

Inventories consist primarily of land acquisition and development costs, engineering, infrastructure, capitalized interest, and construction costs. The inventories are valued at cost based on the level of completion using the weighted-average method.

Property, Plant, and Equipment

Property, plant, and equipment are carried at cost less accumulated depreciation, which is computed using the straight-line method over the useful lives of the assets. Upon disposal of assets, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in income. Property and equipment are depreciated over their estimated useful lives as follows:

Computer equipment	3 years
Office equipment	7 years
Vehicles	7 years

Depreciation expense for the six-month periods ended June 30, 2008 and 2007 was $53,708 and $31,392, respectively.

Long-term assets of the Company are reviewed annually to assess whether the carrying value has become impaired, according to the guidelines established in Statement of Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company also evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. No impairment of assets was recorded in the periods reported.

Revenue Recognition

The Company recognizes revenue on the sale of a house when the consummation of a sale is evidenced by: 1) a contractual arrangement that is binding to both parties; 2) the exchange of all consideration (i.e. the seller has transferred to the buyer the usual risks and rewards of ownership and the buyer has made payment in full to the seller); 3) the arrangement of all permanent financing for which the seller is responsible and; 4) the performance of all conditions precedent to closing. No revenue is recognized when the Company’s receivable is subject to future subordination, as is the case when the Company guarantees a bank loan for the period prior to the certification of title transfer.

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Advertising Expenses

Advertising costs are expensed as incurred. Advertising expense amounted to $0 and $360,667 for the six-month periods ended June 30, 2008 and 2007.

Foreign Currency and Comprehensive Income

The accompanying consolidated financial statements are presented in United States (“US”) dollars. The functional currency is the Yuan Renminbi (“RMB”) of the PRC. The consolidated financial statements are translated into US dollars from RMB at period-end exchange rates for assets and liabilities, and weighted average exchange rates for revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.

During July 2005, China changed its foreign currency exchange policy from a fixed RMB/US dollar exchange rate into a flexible rate under the control of China’s government. We used the Closing Rate Method in translation of the financial statements.

RMB is not freely convertible into the currency of other nations. All such exchange transactions must take place through authorized institutions. There is no guarantee the RMB amounts could have been, or could be, converted into US dollars at rates used in translation.

Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of operations in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. Nearly all differences in tax bases and financial statement carrying values are permanent differences. Therefore, the Company has recorded no deferred tax assets or liabilities.

Estimates

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

Earnings Per Share

Basic earnings per common share ("EPS") are calculated by dividing net income by the weighted average number of common shares outstanding during the year. Diluted EPS is calculated by adjusting the weighted average outstanding shares, assuming conversion of all potentially dilutive securities, such as stock options and warrants. The numerators and denominators used in the computations of basic and diluted EPS are presented in the following table:

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	For the six months ended
	June 30, 2008			June 30, 2007
NUMERATOR FOR BASIC AND DILUTED EPS
Net income to common stockholders	$	(144,945	)	$	409
DENOMINATORS FOR BASIC AND DILUTED EPS
Weighted average shares of common stock outstanding		25,014,917			25,000,000
Add: dilutive equity securities outstanding		-			-
Denominator for diluted EPS		25,014,917			25,000,000
EPS-Basic	$	(0.01	)	$	0.00
EPS-Diluted	$	(0.01	)	$	0.00

The Company had no potentially dilutive securities outstanding at June 30, 2008 and 2007.

4. Inventory

Inventory represents completed houses available for sale at June 30, 2008. During 2005, the Company completed all of its housing construction. As of June 30, 2008, 60 units were sold, 13 units were reserved with clients’ deposits, and 2 units were available for sale.

5. Construction in progress

Construction in progress represents the cost of the new building, which the Company is constructing. The new building will have four stories. The Company plans to use two stories for its office and administration, and give out the other two stories (lease free) to the home owner association. The home owner association will hire a third party to collect usage fee and maintain the facilities at their cost. As of June 30, 2008, the balance of construction in progress was $1,436,124.

6. Related Party Transactions

Short-term loans due to related parties had balances of $1,017,379 and $1,094,518 (including accrued interest) at June 30, 2008 and 2007, respectively. The loans carry an annual interest rate of 6 percent and are due on demand. Interest accrued on the loans was $10,839 and $59,051 for the six months period-ended June 30, 2008 and 2007. The interest amounts, which were accrued for the six months periods ended June 30, 2008, were capitalized as construction in progress.

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7. Customer deposits

Customer deposits consist of down payments received on sales contracts for houses. When all of the conditions set forth in the Company’s revenue recognition policy are met, the Company will recognize the down payments as revenue. The aggregate of the customers’ deposits at June 30, 2008 was $5,533,571. Of the 13 units reserved, 3 unit’s deposits are money received from bank arrangements (see note 8) in the amounts of $998,673. Accordingly, the bank has liens against these 3 units.

8. Off-Balance Sheet Arrangements

The Company entered into an agreement with two banks (the “Banks”) that extended mortgage loans to its home buyers, where the Company agrees to provide a certain limited guarantee, which covers the risk before the conveyance of title upon closing. Upon initiating the loan on behalf of the buyer for the down payment, the Banks have withheld a percentage ranging from 5% to 20% of the loan and deposited such funds into a segregated account in each bank. At June 30, 2008, the balance of this separate account was $724,029. Since the Company does not recognize revenue when its receivables are subject to future subordination, the entire amount that could become payable to the Banks under the limited guarantee is recorded as a liability on the balance sheet and is included in customer deposits, as is explained in note 6.

9. Tax

The Company made no provision for sales tax and income tax for the six months periods ended June 30, 2008 for the reason that no sales revenue was recognized for the six months ended June 30, 2008. The houses that the company reserved didn’t meet the requirement of revenue recognition.

As of June 30, 2008, the Company has a prepaid tax of $433,412.

10. Stock

The Company is authorized to issue up to 80,000,000 shares of common stock, $.0001 par value, and 20,000,000 shares of preferred stock, $.0001 par value per share. For the help that Pacific Services provided in the company’s financial reporting in the United States, the company issued 15,000 shares of the Company’s Common Stock, valued at $0.05 to Pacific Services Inc in January 2008 for a total non-cash consideration of $750. As of June 30, 2008, there were 25,015,000 shares of common stock issued and outstanding, and no shares of preferred stock were issued and outstanding.

11. Contingencies

The Company has not, historically, carried any property or casualty insurance. No amounts have been accrued for any liability that could arise from the lack of insurance. Management feels the chances of such an obligation arising are remote.

Deposits in banks in the PRC are not insured by any government entity or agency, and are consequently exposed to risk of loss. Management believes the probability of a bank failure, causing loss to the Company, is remote.

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12. Other receivables

Other receivables primarily represent loans due from outside parties. As of June 30, 2008, the balance of other receivable (including accrued interest) was $316,088. The loans due from outside parties carry an annual interest rate of 6 percent and are due within two years.

13. Recent Accounting Pronouncements

In March of 2008 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133, “Accounting for Derivatives and Hedging Activities.”  SFAS No. 161 has the same scope as Statement No. 133 but requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.  The statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption.  SFAS No. 161 has no effect on the Company’s financial position, statements of operations, or cash flows at this time.

In December 2007, the Financial Accounting Standards Board ("FASB") issued FASB Statements No.141 (revised 2007), "Business Combinations" ("FAS 141(R)") and No. 160, "Noncontrolling Interests in Consolidated Financial Statements" ("FAS 160"). These standards aim to improve, simplify, and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. The provisions of FAS 141 (R) and FAS 160 are effective for the fiscal year beginning June 1, 2009. We are currently evaluating the provisions of FAS 141(R) and FAS 160.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS No. 141R”).  SFAS No. 141R amends SFAS 141 and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any non-controlling interest in the acquiree.  It also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  It is effective for fiscal years beginning on or after December 15, 2008 and will be applied prospectively.  SFAS No. 141R has no effect on the Company’s financial reporting.

Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The discussion in this quarterly report on Form 10-Q contains forward-looking statements. Such statements are based upon beliefs of management, as well as assumptions made by and information currently available to management of the Company as of the date of this report. These forward-looking statements can be identified by their use of such verbs as "expect", "anticipate", "believe" or similar verbs or conjugations of such verbs. If any of these assumptions prove incorrect or should unanticipated circumstances arise, the actual results of the Company could materially differ from those anticipated by such forward-looking statements. The Company assumes no obligation to update any such forward-looking statements.

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Overview

We, through our subsidiary Beijing Dahua Real Estate Development Ltd., are engaged in the business of development, construction and sale of luxury residential single-family homes in Beijing, China. In July 2003, we began to develop our first real estate project, Dahua Garden (the "First Phase"), which consists of 76 luxury residential units, all of which are single-family houses ranging from approximately 2,000 to 5,000 square feet, each with 3 - 4 bedrooms. The construction site is located at the northern skirt of Beijing, China. The construction began in July 2003 and was completed in December 2005. As of June 30, 2008, out of 76 luxury residential units, 60 units have been sold, 13 units were reserved with clients' deposits, and 2 units were available for sale.

We are currently in the process of applying with Beijing municipal and Changping district government agencies for the requisite licenses, permits, and approvals in order to start the Second Phase of Dahua Garden. But, in August 2006, the Chinese government issued a number of new rules and regulations for real estate developers, like us, in an attempt to push down rising house prices by cutting down luxury single family house constructions and favoring construction of apartment buildings. Under the government’s new policy, (i) no single family houses can be built, if the construction has not started, without special construction permits; (ii) All permits previously issued have to be re-reviewed and re-approved; and (iii) the land previously acquired for luxury housing construction has to be revalued and sold to the people who offer the most money for the land in an auction. Because of those new government policies, we have incurred a long delay for obtaining the consents and approvals to commence our construction for the second phase of Dahua Garden. On May 9, 2007, we contacted a Beijing Municipal Government agency, who is responsible for the issuance of construction permits, for our construction approval time frame guidance. We were told two weeks later that our construction permit is very much likely to be issued for two reasons: (1) We have completed our First Phase of Dahua Garden; and (2) We have acquired for this land for almost ten (10) years. It is expected that we may obtain our construction approvals by the middle of 2008. While this process is now broken off for the Olympic Games which is going to be held in Beijing in August 8, 2008. We are told that the process will be restarted up after the Olympic Games. However, there is no assurance that we will obtain those consents and approvals from the government. If no consents and approvals are obtained, we may have to cease our Second Phase of single luxury family house operations, and change our business plan to build apartment buildings.

We, through our subsidiary Zhuolu Dahua Real Estate Development Ltd., are engage in the business of development, construction and sale of luxury residential single-family homes in Zhuolu county, Hebei province which is about 140 kilometers faraway from Beijing. The first phase will consist of 246 luxury residential units, all of which are single-family houses ranging from approximately 2,000 to 5,000 square feet, each with 3 - 4 bedrooms. We are now in the process of getting the permits needed to begin the construction.

Results of Operations

For the Three Months Ended June 30, 2008 and 2007

Revenues

We began our First Phase of Dahua Garden construction, which consists of 76 luxury residential units, in July 2003. The construction was completed in December 2005. For the three months ended June 30, 2008, no sales revenue was recognized in this quarter. The following table sets forth certain information about our sales of housing units:

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	Cumulative Balance as of
	June 30, 2008		March 31, 2008		December 31, 2007
Units sold		60		60		60
Units reserved with deposits		13		13		13
Units available for sales		2		2		3
Units kept by the company		1		1		-
Total		76		76		76

	Six months		Three months		Three months
	ended		ended		ended
	June 30, 2008		June 30, 2008		June 30, 2007
Houses sold		-		-		6
Houses reserved		-		-		(3	)

For the three months ended June 30, 2008 and 2007, we recognized sales revenues of $0 and $2,500,012 from the sale of our housing units, respectively

Cost of Goods Sold

Cost of goods sold consists primarily of land acquisition and development costs, engineering, infrastructure, capitalized interest, and construction costs. For the three months ended June 30, 2008 and 2007, our cost of goods sold was $0 and $2,086,135, respectively

Operating Expenses

For the three months ended June 30, 2008, our operating expenses were $137,201, a decrease of $457,306, or 76.9%, as compared to $594,507 for the same period of prior year mainly due to the fundamental completion of the construction and the sales.

Net Income

For the three months ended June 30, 2008, we had a net loss of $97,394, or $0.00 per share, as compared with a net loss of $109,415, or $0.00 per share, for the same period of the prior year.

For the Six Months Ended June 30, 2008 and 2007

Revenues

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We began our First Phase of Dahua Garden construction, which consists of 76 luxury residential units, in July 2003. The construction was completed in December 2005. For the six months ended June 30, 2008, no sales revenue was recognized by the company. For the same period in 2007, we recognized sales revenues of $5,627,934.

Cost of Goods Sold

Cost of goods sold consists primarily of land acquisition and development costs, engineering, infrastructure, capitalized interest, and construction costs. For the six months ended June 30, 2008 and 2007, our cost of goods sold were $0 and $4,197,698 respectively. As compared to 2007, because no sales revenue was recognized in 2008, no cost of goods sold was recognized accordingly.

Operating Expenses

During the six months ended June 30, 2008, our operating expenses were $230,508 as compared to $1,378,728 during the six-month period in 2007, a decrease of $1,148,220 or 83.2%, mainly due to the fundamental completion of the construction and the sales.

Net Income

For the six months ended June 30, 2008, we had a net loss of $144,945, or $0.01 per share, as compared with a net income of $409 or $0.00 per share, for the same period of the prior year.

Liquidity and Capital Resources

Since inception, our operations have been primarily funded by equity capital, unsecured short-term loans from Dahua Project Management Group ("Dahua Group"), our affiliate, and customer deposits that we received from our pre-sale of housing units.

After receiving the Residential Housing Pre-sale Permit issued by the government, we are permitted to sell the residential units to be built to the public, which is common practice in China. Upon execution of a binding purchase contract between the developer and a homebuyer, a deposit and installment payments are required to be made to the developer, which we use to construct our residential housing units. As of June 30, 2008, our customer deposit balance was $5,533,571.

We also borrow from time to time based on a verbal line of credit agreement from Dahua Group, our affiliate. The funds borrowed are unsecured and there is no upper limit on the amount of money that we can borrow as long as there are funds available and we need it for our operations. The money we borrow under this arrangement bears interest at an annual rate of 6%, repayable within 30 days upon demand by the lender. As of June 30, 2008, the short-term loans due to related parties had a balance of $845,257, and accrued interest of $172,122.

As of June 30, 2008, we had cash and cash equivalents balance of $1,514,540. For the six months ended June 30, 2008, our operating activities used $275,607 of net cash. During the six months ended June 30, 2008, our investing activities used $712,408 of net cash, mainly for the cost of the new building, which we are constructing and the company long-term investment on the subsidiary company. For the same period, the financing activities provided net cash of $500,356 from net payments on loans payable from related parties.

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Our First Phase of Dahua Garden was completed in December 2005. We are currently applying with Beijing municipal and Changping district governmental agencies for all the requisite licenses, permits, and approvals to start our Second Phase of Dahua Garden. It is estimated that approximately $60.5 million is needed to complete the Second Phase. In addition to customer deposits, and short-term loans (line of credit) from Dahua Group, the proceeds generated from sale of the First Phase will also be used to finance the Second Phase development. There are no material commitments for capital expenditures.

While there can be no assurance that we will have sufficient funds over the next twelve months, we believe that funds generated from the sale of our First Phase of Dahua Garden housing units, purchaser deposits from pre-sale contracts, and the line of credit provided by our affiliate, Dahua Group, will be adequate to meet our anticipated operating expenses, capital expenditure and debt obligations for at least the next twelve months. Nevertheless, our continuing operating and investing activities may require us to obtain additional sources of financing. In that case, we may seek financing from institutional investors, banks, or other sources of financing. There can be no assurance that any necessary additional financing will be available to us on commercially reasonable terms, if at all.

Off-Balance Sheet Arrangements

We entered into an agreement with two banks (the “Banks”) that extended mortgage loans to our home buyers, where we agree to provide a certain limited guarantee, which covers the risk before the conveyance of title upon closing. Upon initiating the loan on behalf of the buyer for the down payment, the Banks have withheld a percentage ranging from 5% to 20% of the loan and deposited such funds into a segregated account in each bank. At June 30, 2008, the balance of this separate account was $724,029. Since the Company does not recognize revenue when its receivables are subject to future subordination, the entire amount that could become payable to the banks under the limited guarantee is recorded as a liability on the balance sheet and is included in customer deposits.

Item 3. QUALITATIVE AND QUANTITIVE DOSCLOSURES ABOUT MARKET RISK

The Company is subject to the following market risks, including but not limit to:

General Real Estate Risk

(i) The real estate development industry in general, and the residential luxury real estate development industry in particular, is a high risk industry, subject to changes in general economic conditions, fluctuating interest rates, and changing demand for the types of developments being considered. Volatility in local and regional land use demands, as well as changing supply and demand for the specific uses for which the real property is being developed, are also factors in assessing the relative risks of the business. The demand for residential real estate development is particularly sensitive to changing interest rates and shifting demographics. Both of these factors affecting the demand for residential housing are highly unpredictable over both the short-and long-term. If market conditions change dramatically and unfavorably to us, we may go out of business.

(ii)We need permits, licenses or approvals from government authorities to begin our construction of the second phase project. If we fail to obtain all required licenses, permits, or approvals, we may have to cease our operations.

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(iii)Recent PRC regulations relating to cutting down luxury single family house constructions may limit our ability to implement our business plan. If no consents and approvals are obtained, we may have to cease our second phase of single luxury family house operations, and change our business plan to build apartment buildings.

Risk Relating to Property Sales

The Company may not be able to sell a property at a particular time for our full value, particularly in a poor market.

Foreign Currency Exchange Rate Risk

The Company is doing all our business in P.R. China. All the revenue and profit is denominated in RMB. When RMB depreciates, it may adversely affect the company's financial performance.

Item 4T. CONTROLS AND PROCEDURES

(i) Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation and under the supervision of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

(ii) Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting, except as follows:

On December 6, 2006, we identified two material weaknesses in our internal control over financial reporting related to construction interest accounting. The amount of $51,220 interest expense was incorrectly shown as capitalized construction interest. These material weaknesses resulted in the restatements of our previously reported financial statements for the year ended December 31, 2005 and for the quarters ended March 31, June 30, and September 30, 2006. The restatement resulted in (i) an increase in net loss of $40,736 for the quarter ended March 31, 2006; (ii) a decrease in total assets of $50,920; and (iii) a decrease in stockholders' equity of $40,736. The restatement has no impact on the statement of cash flows.

In connection with this restatement, management assessed the effectiveness of the Company’s internal control over financial reporting, and identified the following deficiencies:

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(a) We lacked adequate resources with sufficient technical expertise to properly account for construction in accordance with U.S. general accepted according principles; and

(b) We lacked consistent and effective review and supervision to ensure that the review of accounts entries supporting our construction interest provision was conducted in sufficient detail by someone other than the preparer of such entries.

Over the past six months, we have taken steps to strengthen our ability to identify and resolve GAAP construction accounting issues as they arise. Specifically, we have implemented new controls and procedures to substantially mitigate the risks associated with the material weaknesses identified above:

(1) We provided additional training to our accounting staff on the requirements of the U.S. generally accepted accounting principles to increase their familiarity with those standards, and ensure their proper application of the U.S. GAAP to various transactions, including construction accounting, and other financial statements matters;

(2) We designated an experienced individual who is expected to provide additional review over our presentation and disclosure in financial statements and to provide further technical accounting expertise in applying U.S. generally accepted accounting principles; and

(3) We adopted procedures to conduct additional detailed transaction review and control activities to confirm that our financial statements for each period, present fairly, in all material respects, our financial positions, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles.

(4) We adopted procedures to solicit the services of the outside consulting firm to assist in complex and non-routine accounting transactions.

Our CEO and CFO do not expect that our internal controls and procedures will prevent all error and all fraud. Although our internal controls were designed to provide reasonable assurance of achieving their objectives, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any system of controls is also based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

PART II. OTHER INFORMATION

Item 1. Legal Information: None.

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Item 1A. Risk Factors :

Investing in shares of our common stock involves a high degree of risk. You should carefully consider the following risk factors, in addition to the other information set forth in this report, before you purchase these shares. The risks and uncertainties described below are those we have identified as material. If any of the events contemplated by the following discussion of risks should occur, our business, financial condition and results of operations may suffer. As a result, the trading price of our common stock could decline and you could lose part or all of your investment in our common stock.

Risks Related to Our Business

WE LACK AN OPERATING HISTORY UPON WHICH AN EVALUATION OF OUR FUTURE SUCCESS OR FAILURE CAN BE MADE.

We were incorporated in March 2002 as a blank check company for the purpose of seeking to complete a merger or business acquisition. We conducted virtually no business until January 30, 2005, when we acquired Bauer Invest Ltd. Bauer is a holding company, which conducts its business through its 80% owned subsidiary Beijing Dahua Real Estate Development, Ltd., a private company operating in the People's Republic of China (“Dahua Real Estate”). Dahua Real Estate was incorporated on September 24, 2001, to engage in the development and sale of luxury single-family houses in Beijing, China. The acquisition of Bauer was accounted for as a recapitalization, rather than a business combination. Accordingly, the historical operations of Bauer and its subsidiaries were represented as our historical operations. Our limited operating history makes it difficult for you to evaluate our business and future prospects.

WE WILL NEED ADDITIONAL FINANCING TO CARRY OUT OUR SECOND PHASE PROJECT. IF WE ARE UNABLE TO OBTAIN ADDITIONAL FINANCING, WE MAY HAVE TO DELAY THE IMPLEMENTATION OF OUR SECOND PHASE PROJECT, AND OUR ABILITY TO INCREASE REVENUE WILL BE MATERIALLY IMPAIRED.

Since inception, we have been dependent on short-term loans and customer deposits to meet our cash requirements. As of December 31, 2005 we completed the construction of our First Phase of Dahua Garden project consisting of 76 luxury single-family houses. Of 76 units, 60 houses were sold, 13 houses were reserved with clients’ deposits, 2 houses were available for sale and one unit was kept by the company. We are currently applying with Beijing municipal and Changping district governmental agencies for all the requisite licenses, permits, and approvals to start our Second Phase of Dahua Garden. To date we have not received any licenses, permits or approvals from governmental authorities to commence our Second Phase construction. We expect to obtain the licenses, permits and approvals by the end of 2008. It is estimated that we need approximately $60.5 million in order to complete our Second Phase project. We intend to use (i) our proceeds from sales of our First Phase housing units, (ii) customer deposits from our pre-sale of the housing units in the Second Phase, and (iii) short-term borrowings from Dahua Group, our affiliate, to finance our Second Phase of Dahua Garden. At present we do not have any arrangements for additional financing. If we are unable to obtain additional financing on terms acceptable to us, we may have to delay or curtail our Second Phase project, and our ability to increase revenue will be materially impaired.

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IF WE RAISE ADDITIONAL CAPITAL THE VALUE OF YOUR INVESTMENT MAY DECREASE.

If we need to raise additional capital to implement or continue operations, we will likely issue additional equity or convertible debt securities. If we issue equity or convertible debt securities, the net tangible book value per share may decrease, the percentage ownership of our current stockholders may be diluted and such equity securities may have rights, preferences or privileges senior to or more advantageous than our common stockholders.

WE NEED PERMITS, LICENSES OR APPROVALS FROM GOVERNMENT AUTHORITIES TO BEGIN OUR CONSTRUCTION OF THE SECOND PHASE PROJECT. IF WE FAIL TO OBTAIN ALL REQUIRED LICENSES, PERMITS, OR APPROVALS, WE MAY HAVE TO CEASE OUR OPERATIONS.

Before we can develop a property, we must obtain a variety of approvals from local and municipal governments with respect to such matters as zoning, density, subdivision, traffic considerations, site planning and environmental issues. Although there are currently no unfavorable rulings that would have a significant adverse effect on the development of our proposed Second Phase of Dahua Garden, there is no assurance that we will be able to obtain all required licenses, permits, or approvals from government authorities. If we fail to obtain all required licenses, permits, or approvals, we may have to cease our operations.

RECENT PRC REGULATIONS RELATING TO CUTTING DOWN LUXURY SINGLE FAMILY HOUSE CONSTRUCTIONS MAY LIMIT OUR ABILITY TO IMPLEMENT OUR BUSINESS PLAN. IF NO CONSENTS AND APPROVALS ARE OBTAINED, WE MAY HAVE TO CEASE OUR SECOND PHASE OF SINGLE LUXURY FAMILY HOUSE OPERATIONS, AND CHANGE OUR BUSINESS PLAN TO BUILD APARTMENT BUILDINGS.

In August 2006, the Chinese government issued a series of rules and regulations in an attempt to push down rising house prices in China by cutting down luxury single family house constructions and supporting construction of apartment buildings. Under the government’s new policy, (i) no single family houses can be built, if the construction has not started, without special construction permits. All permits issued previously have to be re-reviewed and re-approved; and (2) the land previously acquired for luxury housing construction have to be revalued and sold to the people who offer the most money for the land. Because of those new government policies, we have incurred a long delay for obtaining the consents and approvals to commerce our construction for the second phase of Dahua Garden. In May 2007, we contacted a Beijing Municipal Government agency, who is responsible for the issuance of construction permits, for construction approval time frame guidance. We were told that our construction permit is likely to be issued for the following two reasons: (1) We have completed our first phase of Dahua Garden; and (2) We have acquired for this land for almost ten (10) years. We are expected that we can obtain our construction approvals by the middle of 2008. While this process is now broken off for the Olympic Games which is going to be held in Beijing in August 8, 2008. We are told that the process will be restarted up after the Olympic Games. However, there is no assurance that we will obtain those consents and approvals from the government. If no consents and approvals are obtained, we may have to cease our second phase of single luxury family house operations, and change our business plan to build apartment buildings. As of the date of this report, we don’t have any current plan or arrangements for development of apartment buildings.

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WE HAVE IDENTIFIED MATERIAL WEAKNESSES IN OUR INTERNAL CONTROL OVER FINANCIAL REPORTING, WHICH COULD CONTINUE TO IMPACT NEGATIVELY OUR ABILITY TO REPORT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION ACCURATELY AND IN A TIMELY MANNER.

The Company has identified material weaknesses in our internal control over financial reporting as of December 31, 2006 and March 31, 2007 because of material weaknesses identified in management’s assessment of the effectiveness of such internal control as of that dates related to construction interest accounting. These material weaknesses have resulted in the restatements of our previously reported financial statements for the quarter ended March 31, 2006. The Company has taken the necessary actions to remediate the material weakness identified. These material weaknesses, if not remediated or fail to remediate, could create an increased risk of misstatement of financial results, which, if material, may require future restatement thereof.  A failure to achieve and maintain effective internal controls over our financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the market value of our common stock. Moreover, we anticipate that we will incur considerable costs and devote significant management time and other resources to comply with Section 404 of the Sarbanes-Oxley Act and other requirements.

WE ACT AS GENERAL CONTRACTOR ON OUR CONSTRUCTION PROJECTS, AND IF ANY OF OUR SUBCONTRACTORS SHOULD FAIL TO COMPLETE THEIR JOBS ON TIME, OUR BUSINESS COULD BE DISRUPTED.

We act as general contractor on our construction projects. We hire unaffiliated subcontractors to do work for us. In the event that any of our subcontractors should fail to complete their jobs on time, our business could be disrupted, which will have an adverse effect on our results of operation and our financial condition.

WE ARE VULNERABLE TO CONCENTRATION RISKS BECAUSE OUR OPERATIONS ARE EXCLUSIVELY IN THE BEIJING, CHINA MARKET.

We operate our business in Beijing, China. All of our revenues will be derived from the sale of our luxury single-family houses in Beijing, China. Although some of our customers are from the neighboring areas in Beijing, we may not be able to generate adequate revenue if local business conditions in Beijing change adversely. These changes may include business downsizing, industry slowdowns, local oversupply or reduction in demand for real estate properties, and changes in local governmental policies. Operating exclusively in Beijing exposes us to greater economic risks than if we operated in several geographic regions. Any adverse changes in business conditions in Beijing, China, could adversely impact our financial condition, results of operations and cash flow.

WE DEPEND ON KEY PERSONNEL FOR THE SUCCESS OF OUR BUSINESS. OUR BUSINESS MAY BE SEVERELY DISRUPTED IF WE LOSE THE SERVICES OF OUR CEO OR FAIL TO SUCCESSFULLY RECRUIT QUALIFIED MANAGERIAL PERSONNEL HAVING EXPERIENCE IN BUSINESS.

Our success is heavily dependent upon the continued service of Yonglin Du, our chief executive officer. Mr. Du has valuable personal relationships with government agencies and executive officers in the industry. A good personal relationship is sometimes crucial for doing business in China. If Mr. Du is unable or unwilling to continue in his position, we may not be able to easily replace him. Loss of his services could delay our applications for construction permit and land acquisition, and our business may be severely disrupted. We do not maintain key-man insurance on the life of Mr. Du. In addition, in order to successfully implement and manage our business plan, we will be dependent upon, among other things, successfully recruiting qualified managerial personnel having experience in business. Competition for qualified individuals is intense. There can be no assurance that we will be able to retain existing employees or that we will be able to find, attract and retain qualified personnel on acceptable terms.

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OUR OFFICERS AND DIRECTORS ARE SUBJECT TO CONFLICTS OF INTEREST, AND THERE IS A RISK THAT THEY MAY PLACE THEIR INTERESTS AHEAD OF YOURS.

We believe that our officers and directors will be subject to conflicts of interest. The conflicts arise from their relationships with our affiliate. Yonglin Du, our chief executive officer, also serves as president and a director of Dahua Project Management Group Co. Ltd. (“Dahua Group”), a Beijing Municipal Government licensed construction project supervising business entity. Hua Meng, our chief financial officer, and Qinna Zeng, our corporate secretary, are also employed by Dahua Group. They may have conflicts of interest in allocating time, services, and functions between us and Dahua Group, in which any of them are or may become involved. Mr. Du anticipates devoting a minimum of twenty to thirty-two hours per week of his business hours, and each of Ms. Meng and Ms. Zeng fifteen to twenty hours of their business hours to our business activities. If and when the business operations increase and a more extensive time commitment is needed, they are prepared to devote more time to our affairs, in the event that becomes necessary.

To ensure that potential conflicts of interest are avoided or declared to us and to comply with the requirements of the Sarbanes-Oxley Act of 2002, our Board of Directors, on January 30, 2005, adopted a Code of Business Conduct and Ethics, among other things, to reduce potential conflicts of interest. Conflicts of interest must, to the extent possible, be avoided, and any material transaction or relationship involving a potential conflict of interest must be reviewed and approved in advance by a majority of the board of directors, or, if required by law, a majority of disinterested stockholders. No personal loans will be made to executive officers and directors.

All our transactions with affiliates have been and will be made on terms no less favorable to us than could have been obtained from unaffiliated third parties. Our policy is to require that a majority of board members approve all transactions between us and our officers, directors, principal stockholders and their affiliates.

WE HAVE NOT CARRIED PROPERTY OR CASUALTY INSURANCE. ANY BUSINESS

DISRUPTION, LITIGATION OR NATURAL DISASTER MIGHT RESULT IN SUBSTANTIAL COSTS AND DIVERSION OF RESOURCES.

The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, and do not, to our knowledge, offer business liability insurance. As a result, we do not have any business liability insurance coverage for our operations. Any business property loss, natural disaster or litigation might result in substantial costs and diversion of resources.

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OUR QUARTERLY OPERATING RESULTS, REVENUES AND EXPENSES MAY FLUCTUATE SIGNIFICANTLY, WHICH COULD HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF OUR COMMON STOCK.

Our operating results, revenues and expenses may fluctuate significantly from quarter to quarter due to a variety of factors including:

o The timing, size and execution of sales contracts and home deliveries;

o Lengthy and unpredictable sales cycles;

o Changes in our operating expenses; and

o Fluctuations in general economic conditions.

We believe that period-to-period comparisons of our results of operations are not a good indication of future performance. It is possible that our operating results will be below your expectations. In that event, the trading price of our common stock may fall.

MANY OF OUR COMPETITORS ARE SIGNIFICANTLY LARGER THAN WE ARE, AND THEY HAVE GREATER FINANCIAL RESOURCES AND HAVE MORE EXPERIENCED MANAGERS THAN WE DO.

We are a small company and have little market share in our target market. The market of residential housing development in Beijing, China, is highly competitive. We compete with numerous entities, many of which are significantly larger than we are, and have greater financial resources and have more experienced managers than we do. As a result, they may be able to respond more quickly to new or emerging house plans or construction materials and changes in customer demands or to devote greater resources to the development, promotion and sale of their products or services than we can. If we cannot compete effectively, we may never become profitable. Although no one of our competitors currently dominates or significantly influences the market, they could adversely affect us.

THE RESIDENTIAL REAL ESTATE DEVELOPMENT INDUSTRY IS A HIGH RISK INDUSTRY. IF MARKET CONDITIONS CHANGE DRAMATICALLY UNFAVORABLY TO US, WE MAY GO OUT OF BUSINESS.

The real estate development industry in general, and the residential luxury real estate development industry in particular, is a high risk industry, subject to changes in general economic conditions, fluctuating interest rates, and changing demand for the types of developments being considered. Volatility in local and regional land use demands, as well as changing supply and demand for the specific uses for which the real property is being developed, are also factors in assessing the relative risks of the business. The demand for residential real estate development is particularly sensitive to changing interest rates and shifting demographics. Both of these factors affecting the demand for residential housing are highly unpredictable over both the short-and long-term. If market conditions change dramatically and unfavorably to us, we may go out of business.

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Risks Related to Doing Business in China

POLITICAL AND ECONOMIC POLICIES IN CHINA COULD AFFECT OUR BUSINESS IN UNPREDICTABLE WAYS.

Substantially all of our assets are located in China and substantially all of our revenues are expected to derive from our operations in China. Therefore, our results of operations and prospects are subject, to a significant degree, to economic and political developments in China. The economy of China differs from the economies of most developed countries in many respects, including:

o The extent of government involvement;

o Level of development; and

o Allocation of resources.

The economy of China has been in transition from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces and the reduction of state ownership of productive assets, a substantial portion of productive assets in China is still owned by the Chinese government, which continues to play a significant role in regulating China's economic development, setting monetary policy and providing preferential treatment to particular industries or companies. Political and economic policies in China could affect our business in unpredictable ways. If there are any unfavorable changes in government policies, such as government control over capital expenditures, changes in monetary policy, or changes in planning and zoning policy, we may experience delays or other problems in obtaining government permits or licenses to start or complete our projects.

OUR ASSETS, OFFICERS AND DIRECTORS ARE LOCATED OUTSIDE OF THE U.S. IT IS DIFFICULT TO EFFECT SERVICE OF PROCESS AND ENFORCEMENT OF LEGAL JUDGMENTS UPON US AND OUR OFFICERS AND DIRECTORS.

Our assets, officers and directors are located in China. As a result, it may be difficult to effect service of process within the United States and enforce judgment of the US courts obtained against us and our executive officers and directors. Particularly, our shareholders may not be able to:

o   Effect service of process within the United States on us or any of our executive officers and directors;

o   Enforce judgments obtained in U.S. courts against us based upon the civil liability provisions of the U.S. federal securities laws;

o   Enforce, in a court in China, judgments of U.S. courts based on the civil liability provisions of the U.S. federal securities laws; and

o   Bring an original action in a court in China to enforce liabilities against us or any of our executive officers and directors based upon the U.S. federal securities laws.

GOVERNMENT CONTROL OF CURRENCY CONVERSION MAY AFFECT OUR ABILITY TO PAY DIVIDENDS DECLARED, IF ANY, IN FOREIGN CURRENCIES.

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It is expected that a substantial portion of our revenues, if any, will be in “yuan”, the national currency of China, which is currently not a freely convertible currency. A portion of our revenues may have to be converted into US dollars to make payment of dividends declared, if any, in respect of our common shares. Under China's existing foreign exchange regulations, we will be able to pay dividends in foreign currencies without prior approval from the State Administration of Foreign Exchange of China by complying with certain procedural requirements. However, the Chinese government may take measures at its discretion in the future to restrict access to foreign currencies if foreign currencies become scarce in China. We may not be able to pay dividends in foreign currencies to our shareholders if the Chinese government restricts access to foreign currencies for current account transactions.

FLUCTUATIONS IN THE EXCHANGE RATE BETWEEN THE CHINESE CURRENCY AND THE UNITED STATES DOLLAR MAY BRING DOWN OUR OPERATING INCOME.

The functional currency of our operations in China is "Yuan." Results of our operations are translated at average exchange rates into United States dollars for purposes of reporting results. As a result, fluctuations in exchange rates may adversely affect our expenses and results of operations as well as the value of our assets and liabilities. On July 21, 2005, the Chinese government changed its decade-old policy of pegging the value of yuan to the U.S. dollar. Under the new policy, Yuan 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 11.7% appreciation of the yuan against the U.S. dollar between July 21, 2005 and December 31, 2007. Our revenues and costs are denominated in yuan, and our financial assets are also denominated in yuan. Any significant fluctuations in the exchange rate between the yuan and the United States dollar may bring down our operating income and lower our stock price. We have no current plans to undertake any hedging activity to minimize exchange rate fluctuations.

Risks Related to Investment in Our Securities

OUR COMMON STOCK IS QUOTED ON THE OVER-THE-COUNTER BULLETIN BOARD WHICH MAY MAKE IT MORE DIFFICULT FOR STOCKHOLDERS TO SELL THEIR SHARES AND MAY CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECREASE.

Because our common stock is quoted on the OTC Bulletin Board, the liquidity of our common stock is impaired, not only in the number of shares that are bought and sold, but also through delays in the timing of transactions, and limited coverage by security analysts and the news media of us. As a result, prices for shares of our common stock may be lower than might otherwise prevail if our common stock was traded on NASDAQ or a national securities exchange, like the American Stock Exchange.

THERE HAS BEEN LOW VOLUME AND THEREFORE INACTIVE FOR OUR COMMON STOCK, OUR STOCK PRICE MAY BE VOLATILE OR MAY DECLINE REGARDLESS OF OUR OPERATING PERFORMANCE, AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE YOUR STOCK PURCHASE PRICE.

If you purchase shares of our common stock, you may not be able to resell those shares at or above your original purchase price. An active or liquid market in our common stock may not develop or, if it does develop, it may not be sustainable. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control.

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OUR COMMON STOCK IS DEEMED A PENNY STOCK. AS A RESULT, TRADING OF OUR SHARES IS SUBJECT TO SPECIAL REQUIREMENTS THAT COULD IMPEDE OUR SHAREHOLDERS' ABILITY TO RESELL THEIR SHARES.

The shares offered by this prospectus constitute penny stock under the Securities Exchange Act of 1934 (the “Exchange Act”). The shares will remain penny stock for the foreseeable future. As defined in Rule 3a51-1 of the Exchange Act, penny stocks generally are equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system.

Section 15(g) of the Exchange Act and Rule 15g-2 of the Exchange Act require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor's account. Moreover, Rule 15g-9 of the Exchange Act requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to:

o   Obtain from the investor information concerning his or her financial situation, investment experience and investment objectives;

o   Reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has significant knowledge and experience to be reasonably capable of evaluating the risks of penny stock transactions;

o   Provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and

o   Receive a signed and dated copy of such statement from such investor, confirming that it accurately reflects the investor's financial situation, investment experience and investment objectives.

Compliance with these requirements may make it more difficult for investors in our common stock to resell the shares to third parties or to otherwise dispose of them.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds: None

Item 3. Defaults Upon Senior Securities: None.

Item 4. Submission of Matters to a Vote of Security Holders: None.

Item 5. Other Information: None.

Item 6. Exhibits and Reports On Form 8-K.

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(a) Exhibits

Exhibit No.	Description
31.1	Section 302 Certification of CEO
31.2	Section 302 Certification of CFO
32.1	Section 906 Certification of CEO
32.2	Section 906 Certification of CFO

(b) Reports on Form 8-K: None.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DAHUA, INC.

By: /s/ Yonglin Du	By: /s/ Meng Hua
Yonglin Du, Chief Executive Officer and President	Meng Hua, Chief Financial Officer
August 14, 2008	August 14, 2008

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