UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~FORM~~Form 6-K

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE

~~THE~~ SECURITIES EXCHANGE ACT OF 1934

For the month of ~~April~~May, 2011.

Commission File Number: 000-51625

~~China~~CHINA ~~Linen~~LINEN ~~Textile~~TEXTILE ~~Industry~~INDUSTRY, ~~Ltd~~LTD.

(Translation of registrant’s name into English)

Chengdong Street

Lanxi County, Heilongjiang Province

People’s Republic of China ~~151500~~

(Address of ~~Principal~~principal ~~Executive~~executive ~~Offices~~office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F. Form 20-F x Form 40-F ¨

Form 20-F x Form 40-F¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨

Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨

~~Election~~Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of ~~Directors~~a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and ~~Establishment~~make public under the laws of ~~Board~~the ~~Committees~~jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant’s “home country”), or under the rules of the home country exchange on which the registrant’s securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant’s security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.

OnIndicate ~~April~~by ~~20,~~check ~~2011,~~mark ~~the~~whether ~~Board of Directors (~~the ~~“Board”)~~registrant ~~of China Linen Textile Industry, Ltd. (the “Company”),~~ by ~~unanimous~~furnishing ~~written consent, accepted~~ the ~~resignation~~information ofcontained ~~Mr.~~in ~~Teng~~this ~~Yunhai~~Form asis ~~director~~also ofthereby furnishing the ~~Board~~information ~~and~~to ~~approved~~ the ~~appointment~~Commission ofpursuant ~~Mr.~~to XuRule ~~Jianzhong and Mr. Xu Jixiang~~ 12g3-2(~~“New Directors”~~b) tounder ~~serve as independent directors of~~ the ~~Company~~Securities ~~for~~Exchange aAct ~~term~~ of ~~one~~1934. Yes ¨ ~~year~~No ~~or until their resignations or removals from office, or until their successors are elected and qualified.~~x

~~Along~~ If ~~with~~“Yes” ~~the~~is ~~appointment of New Directors~~marked, ~~the~~indicate ~~Board~~below ~~established~~ the ~~Audit~~file ~~Committee,~~number ~~the~~assigned ~~Compensation~~to ~~Committee and~~ the ~~Nominating~~registrant ~~Committee~~in ofconnection ~~the~~with ~~Company~~Rule ~~and~~12g3-2(b): ~~adopted respective committee charters and a code of ethics, a copy of which are attached hereto as exhibits to the Form 6~~82-K_______________.

~~Upon~~EXPLANATORY ~~establishment of the three committees, the Board appointed Mr. Stephen Monticelli as chairman of the Audit Committee and member of the Nominating Committee and the Compensation Committee.~~NOTE

~~The~~This ~~Board~~Report ~~appointed~~of ~~Mr.~~Foreign XuPrivate ~~Jianzhong~~Issuer ason ~~chairman~~Form of6-K contains forward-looking statements within the ~~Compensation~~meaning ~~Committee~~of ~~and~~Section ~~member~~27A of the ~~Nominating~~Securities ~~Committee~~Act of 1933, and Section 21E of the ~~Audit~~Securities ~~Committee~~Exchange Act of 1934. ~~Mr.~~ XuThese ~~Jianzhong~~statements relate to future events or the Company’s ~~compensation~~future asfinancial ~~director~~performance. ofThe Company has attempted to identify forward-looking statements by terminology including “anticipates”, “believes”, “expects”, “can”, “continue”, “could”, “estimates”, “intends”, “may”, “plans”, “potential”, “predict”, “should” or “will” or the ~~Company~~negative isof ~~set~~these ~~forth~~terms inor aother ~~director~~comparable ~~appointment~~terminology. ~~letter~~These ~~with~~statements are only predictions, uncertainties and other factors may cause the Company’s ~~dated~~actual ~~April~~results, 20levels of activity, ~~2011.~~performance Heor ~~will~~achievements to be ~~paid~~materially andifferent ~~annual~~from ~~fee~~any future results, levels of ~~RMB36~~activity,~~000~~ ~~(approximately~~performance $5or achievements expressed or implied by these forward-looking statements. The information in this Report on Form 6-K is not intended to project future performance of the Company. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable,~~516)~~ the Company does not guarantee future results, ~~payable~~levels onof aactivity, ~~quarterly~~performance ~~basis~~or achievements. AThe ~~copy~~Company expectations are as of the ~~appointment~~date ~~letter~~this Form 6-K is ~~attached~~filed, ~~hereto~~and asthe anCompany ~~exhibit~~does not intend to update any of the forward-looking statements after the date this Report on Form 6-K is filed to confirm these statements to actual results, unless required by law.

The ~~Board~~forward-looking ~~also~~statements ~~appointed~~included ~~Mr.~~in Xuthis ~~Jixiang~~Form as6-K ~~chairman~~are ofsubject ~~the~~to ~~Nominating~~risks, ~~Committee~~uncertainties and ~~member~~assumptions ofabout ~~the~~our ~~Audit~~businesses ~~Committee~~and business environments. These statements reflect our current views with respect to future events and ~~the~~are ~~Compensation~~not ~~Committee.~~a Mrguarantee of future performance. XuActual ~~Jixiang’s~~results ~~compensation~~of our operations may differ materially from information contained in the forward-looking statements as ~~director~~a result of risk factors some of which include, among other things: continued compliance with government regulations; changing legislation or regulatory environments; requirements or changes affecting the businesses in which the Company is ~~set~~engaged; ~~forth~~industry intrends, aincluding ~~director~~factors ~~appointment~~affecting ~~letter~~supply ~~with~~and demand; labor and personnel relations; credit risks affecting the Company’s ~~dated~~revenue ~~April~~and ~~20,~~profitability; ~~2011.~~changes Hein ~~will~~the becommercial ~~paid~~vehicle anindustry; ~~annual~~the ~~fee~~Company’s ofability ~~RMB36,000~~to ~~(approximately~~effectively ~~$5,516)~~manage its growth, ~~payable~~including onimplementing aeffective ~~quarterly~~controls ~~basis.~~and Aprocedures ~~copy~~and attracting and retaining key management and personnel; changing interpretations of ~~the~~generally ~~appointment~~accepted ~~letter~~accounting isprinciples; general ~~attached~~economic ~~hereto~~conditions; asand another ~~exhibit~~relevant torisks detailed in the ~~Form~~Company’s ~~6-K~~filings with the Securities and Exchange Commission.

~~Mr.~~CERTAIN Xu Jianzhong, 51, is a professor and PhD supervisor at Harbin Engineering University, School of Economics and Management since March 2005. He also served as vice president of School of Economics and Management from March 2005 to March 2006. He has participated in over 20 national or provincial research projects and his studies and researches focus on development and competitiveness of enterprises. Currently he also serves as an expert on Heilongjiang Province Science and Technology Advisory Committee, executive director and secretary general of Heilongjiang Academy of Management and vice president of Heilongjiang Academy of Business Administration. Mr. Xu Jianzhong received his Bachelor of Science, Master of Economics and PhD in Management from Harbin Engineering University in 1982, 1992 and 2003, respectively.INFORMATION

~~Mr.~~Unless Xuotherwise ~~Jixiang,~~indicated ~~56,~~and ~~has~~except ~~over~~where ~~30 years’ experience in~~ the ~~textile~~context ~~industry.~~otherwise ~~He has served as president of China Linen Textile Industry Association since December 2009. From December 2008 to December 2009~~requires, he was the director of the Industry Department of China Textile Industry Association. From January 2006 to December 2008, he was the chairman of China Textile Technology Development Co., Ltd. Mr. Xu Jixiang received his Bachelor of Science in ~~cotton~~this ~~textile~~report ~~from~~on ~~Donghua~~Form ~~University~~6-K ~~(formerly,~~references ~~China Textile University) in 1978.~~to:

~~There~~· is“Bright” norefers ~~family~~to ~~relationship~~our ~~between~~wholly ~~the~~owned ~~New~~subsidiary ~~Directors~~Bright ~~and~~International ~~any~~Group ~~of our other officers and directors~~Co., ~~Except the aforementioned appointment letters~~Ltd., ~~the~~a ~~New~~Republic ~~Directors have not had any transaction with the Company since the beginning~~ of ~~the~~Vanuatu ~~last fiscal year.~~corporation;

~~Exhibits~~· “China Linen,” “we,” “us,” “our,” “our company” or “the company” refer to China Linen Textile Industry, Ltd. (together with its subsidiaries, Bright and Lanxi Sunrise);

10.1	Director Appointment Letter for Xu Jianzhong
10.2	Director Appointment Letter for Xu Jixiang
14.1	Code of Ethics
99.1	Audit Committee Charter
99.2	Nominating Committee Charter
99.3	Compensation Committee Charter

“Creation” refers to Creation International Development Investments Limited, an exempted company incorporated under the laws of the Cayman Islands that holds approximately 40.51% of our ordinary shares;

~~SIGNATURE~~· “dollars” or “$” refer to the legal currency of the United States;

“Lanxi Sunrise” refers to Heilongjiang Lanxi Sunrise Linen Textile Industry Co., Ltd., a People’s Republic of China corporation of which Bright is a 95% holder and Mr. Gao Ren, our Chief Executive Officer and chairman, is a 5% holder;

“Lanxi Tianxianfang” refers to Heilongjiang Lanxi Tianxianfang Linen Co., Ltd., a People’s Republic of China corporation of which Lanxi Sunrise is the 100% parent and holder;

“ordinary shares” or “our ordinary shares” refers to the ordinary shares of the company, par value $0.007 per share;

“PRC” or “China” refer to the People’s Republic of China; and

“RMB” refers to Chinese Renminbi.

Results of Operations and Financial Condition.

Following this cover page are the unaudited consolidated financial results for the three-month period ended March 31, 2011 of China Linen Textile Industry, Ltd. (the “Company”), which are followed by our management’s discussion and analysis thereof.

CHINA LINEN TEXTILE INDUSTRY, LTD.

TABLE OF CONTENTS

		Page
Financial Statements
Condensed Consolidated Balance Sheets		4
Condensed Consolidated Statements of Operations		5
Condensed Consolidated Statements of Changes in Shareholders’ Equity		6
Condensed Consolidated Statements of Cash Flows		7
Notes to Condensed Consolidated Financial Statements		9

CHINA LINEN TEXTILE INDUSTRY, LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2011 and December 31, 2010

(Stated in US Dollars)

		March 31		December 31
	Notes	2011		2010
		Unaudited		Audited
		$		$
ASSETS
Current assets
Cash			1,529,870		4,162,069
Bank checks and commercial paper			-		-
Accounts receivable, net	4		11,848,065		13,310,770
Inventory	5		23,038,843		9,908,789
Prepaid expenses			953,507		984,960
Other receivables			270,734		201,896
Due from related parties	6		-		79,879
Deferred assets	7		500,200		577,667
Governmental subsidy receivable			75,484		2,890,197
Deferred tax assets	14		174,070		113,440
Total current assets			38,390,773		32,229,667
Non-current assets
Property, plant and equipment, net	8		16,172,059		16,153,577
Land use right, net	9		876,125		872,324
Governmental subsidy receivable, non-current			1,937,609		1,918,212
Deferred tax assets, non-current	14		472,475		473,470
TOTAL ASSETS			57,849,041		51,647,250

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank loans	10		1,372,705		3,623,900
Accounts payable			8,265,844		3,510,701
Accrued expenses and other payables			930,657		920,535
Taxes payable	14		1,802,796		1,186,208
Deferred revenue			412,714		202,709
Deferred governmental subsidy			92,535		91,608
Deferred tax liabilities	14		18,871		722,549
Total current liabilities			12,896,122		10,258,210
Non-current liabilities
Deferred governmental subsidy, non-current			1,748,115		1,753,516
Deferred tax liabilities, non-current	14		484,402		479,553
Convertible notes payable, net	15		6,998,260		6,991,439
TOTAL LIABILITIES			22,126,899		19,482,718

STOCKHOLDER’S EQUITY
Common stock
$0.007 par value, 142,857,142.86 shares authorized; 5,832,118 shares issued and outstanding as of March 31, 2011 and December 31, 2010	16		42,698		42,698
Additional paid-in capital			3,437,264		3,437,264
Statutory reserves			2,768,269		2,768,269
Retained earnings			26,602,067		23,450,326
Accumulated other comprehensive income			2,871,844		2,465,975
TOTAL STOCKHOLDER’S EQUITY			35,722,142		32,164,532
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY			57,849,041		51,647,250

The accompanying notes are an integral part of these condensed consolidated financial statements.

CHINA LINEN TEXTILE INDUSTRY, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

For the Three Months Ended March 31, 2011 and 2010

(Stated in US Dollars)

		Three months ended
		March 31,
	Notes	2011			2010
		$				$
Revenues
Net sales	12		15,756,115			8,787,093
Costs of goods sold	12		10,091,535			6,073,682
Gross profit	12		5,664,580			2,713,411
Operating expenses
Selling expenses			231,341			140,207
General and administrative expenses			1,003,199			394,494
Total operating expenses			1,234,540			534,701

Operating income			4,430,040			2,178,710
Other income (expense)
Interest income			1,538			51,952
Interest expense			(196,569	)		(81,274	)
Government subsidies			23,017			532,723
Other income			80,704			22,251
Total other income			(91,310	)		525,652

Income before tax			4,338,730			2,704,362
Income tax	14		1,186,989			606,654
Net income			3,151,741			2,097,708
Other comprehensive income
Effects of foreign currency conversion			405,869			3,592

Comprehensive income			3,557,610			2,101,300

Basic earnings per share	13		0.54			0.36

Diluted earnings per share	13		0.46			0.36

The accompanying notes are an integral part of these condensed consolidated financial statements.

CHINA LINEN TEXTILE INDUSTRY, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

For the Three Months Ended March 31, 2011 and 2010

(Stated in US Dollars)

	Common Stock		Additional Paid-in Capital		Statutory Reserves		Retained Earnings		Accumulated Other Comprehensive Income		Total

Balances at January 1, 2010 (Audited)	$	42,274	$	3,093,816	$	1,593,559	$	15,060,004	$	1,683,959	$	21,473,612
Share compensation for IR services		30		25,770		-		-		-		25,800
Net income		-		-		-		2,097,708		-		2,097,708
Other comprehensive income effects of foreign currency Conversion		-		-		-		-		3,592		3,592
Balances at March 31, 2010 (Unaudited)	$	42,304	$	3,119,586	$	1,593,559	$	17,157,712	$	1,687,551	$	23,600,712

Balances at January 1, 2011 (Audited)	$	42,698	$	3,437,264	$	2,768,269	$	23,450,326	$	2,465,975	$	32,164,532
Net income		-		-		-		3,151,741		-		3,151,741
Other comprehensive income effects of foreign currency Conversion		-		-		-		-		405,869		405,869
Balances at March 31, 2011 (Unaudited)	$	42,698	$	3,437,264	$	2,768,269	$	26,602,067	$	2,871,844	$	35,722,142

The accompanying notes are an integral part of these condensed consolidated financial statements.

CHINA LINEN TEXTILE INDUSTRY, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

For the Three Months Ended March 31, 2011 and 2010

(Stated in US Dollars)

	Three months ended
	March 31,
	2011			2010

Cash Flows from Operating Activities
Net income	$	3,151,741		$	2,097,708
Adjustments to reconcile net income to net cash provided by operating activities:
Fair value of common stock expensed for services		46,061			25,800
Depreciation		277,880			148,792
Amortization		82,462			2,201
Deferred government subsidy		(23,017	)		-
Deferred income taxes		(760,837	)		51,441
Interest expense on convertible notes		6,821			-
Changes in:
Bank checks and commercial paper		-			1,920,220
Accounts receivables, net		1,589,271			(1,784,242	)
Inventory		(12,964,305	)		(534,144	)
Prepaid expenses		(6,368	)		(479,513	)
Other receivables		(66,695	)		(66,978	)
Governmental subsidy, net		2,829,632			(135,170	)
Accounts payable		4,695,899			1,590,974
Accrued expenses and other payables		2,309			321,973
Taxes payable		601,551			(1,728,784	)
Deferred revenue		206,909			22,551
Due to/from related parties		80,281			1,828,586
Net cash provided by operating activities	$	(250,405	)	$	3,281,415

Cash Flows from Investing Activities
Purchase of property, plant and equipment	$	(133,741	)	$	(6,652	)
Net cash used in investing activities	$	(133,741	)	$	(6,652	)

CHINA LINEN TEXTILE INDUSTRY, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

For the Three Months Ended March 31, 2011 and 2010

(Stated in US Dollars)

	Three months ended
	March 31,
	2011			2010
Cash Flows from Financing Activities
Proceeds from bank loans	$	1,365,799		$	5,427,926
Repayments of bank loans		(3,642,130	)		(4,048,939	)
Net cash used in financing activities	$	(2,276,331	)	$	1,378,987

Increase in cash		(2,660,477	)		4,653,750
Effects of foreign currency conversion on cash		28,278			11,894
Cash at beginning of period		4,162,069			2,320,656
Cash at end of period	$	1,529,870		$	6,986,300

Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest paid on bank loan	$	56,269		$	81,274
Interest paid on convertible notes	$	167,964		$	-
Income taxes	$	1,188,071		$	1,793,302

The accompanying notes are an integral part of these condensed consolidated financial statements.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010

(Stated in US Dollars)

1.	ORGANIZATION AND PRINCIPAL ACTIVITIES

China Linen Textile Industry, Ltd. (the “Company”) is principally engaged in the business of production and distribution of various types of linen products, such as linen yarn, linen fabric, and blending linen, etc. The Company is also involved in consultation and research and development related to of linen technology and linen products.

The Company was incorporated under the laws of the Cayman Islands B.W.I. on February 3, 2000 as Aquasol Envirotech, Ltd. The Company conducts its business activities through its operating subsidiary, Heilongjiang Lanxi Sunrise Linen Textile Industry Co., Ltd. (“Lanxi Sunrise”) which was incorporated in Lanxi County, Heilongjiang Province, the People's Republic of China (the "PRC") on June 11, 2002, as a state-owned holding company under the Company Law of PRC and changed into a privately owned business enterprise in June 2007. Lanxi Sunrise manufacturing facility is located in Lanxi County, Heilongjiang Province.

Bright International Group Co., Ltd. (“Bright”), incorporated in the Republic of Vanuatu on July 4, 2007, is an investment holding company with 95% equity ownership interest in Lanxi Sunrise.

2.	INFORMATION OF THE COMPANY

The Company was incorporated under the laws of the Cayman Islands B.W.I. on February 3, 2000 as Aquasol Envirotech, Ltd. The Company was formed to engage in the business of developing, acquiring and marketing water and waste water technology solutions. The Company built a pilot facility in Squamish, British Columbia, Canada in 2001 and conducted limited operations to test its Bio Trap system for wastewater treatment and reuse. The pilot facility was closed in 2001 after completion of the test, the Company ceased operations and became a shell company.

The Company entered into a share exchange transaction on July 9, 2008 as detailed below which resulted in a change of control of the Company. This transaction was accounted for as a reverse merger whereby the historical financial statements and operations of the accounting acquirer are included in the financial statements of the Company.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010

(Stated in US Dollars)

2.	INFORMATION OF THE COMPANY (Continued)

Business Acquisition

On August 5, 2007, the owners of Lanxi Sunrise entered into a Share Purchase Agreement (the “Agreement”) with Bright. Pursuant to the Agreement, the owners of Lanxi Sunrise agreed to transfer their 95% equity ownership interest to Bright for a cash consideration of $750,000 (RMB 5,700,000). The remaining 5% equity ownership interest was kept by Mr. Ren Gao, CEO of Lanxi Sunrise. On April 8, 2008, the local government approved the transaction as indicated on the Lanxi Sunrise's new business license. Upon completion of the acquisition, Lanxi Sunrise became an enterprise with foreign investment in PRC and a 95%-owned subsidiary of Bright.

Reverse Acquisition

On July 9, 2008, the Company entered into a share exchange transaction with Bright in which the Company acquired all the issued and outstanding capital stock of Bright in return for the issuance of 18,963,005 shares of the Company’s common stock. As a result of the reverse merger, the Company effectively issued 1,136,998 shares (post split) of common stock on July 9, 2008. As a result of the transaction, Bright became a wholly owned subsidiary of the Company. The transaction was accounted for as a reverse acquisition from accounting perspective since Bright has become the controlling shareholder of the Company after the share exchange transaction. For accounting purpose, Bright is regarded as the acquirer while the Company before the reverse acquisition is deemed to have been acquired by Bright. As a result, these consolidated financial statements have been prepared as a continuation of the consolidated financial statements of Bright. In anticipation of completion of the Reverse Acquisition, the Company changed its name to China Linen Textile Industry, Ltd.

Share Split

On June 30, 2008, prior to completion of the Share Exchange transaction, the Company completed a 1:2 reverse split of its issued and outstanding common stock, thereby reducing the number of issued and outstanding shares from 649,713 to approximately 324,857.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010

(Stated in US Dollars)

2.	INFORMATION OF THE COMPANY (Continued)

Acquisition of Lanxi Tianxianfang Linen Co., Ltd.

On November 15, 2010, we, through our indirect 95% owned subsidiary, Lanxi Sunrise, entered into a Share Acquisition Agreement (the “Acquisition Agreement”) with Lanxi Tianxianfang Linen Co., Ltd. (the “Target”, “Lanxi Tianxianfang”) and Shufan Wang (“Wang”) and Lijie Fu (“Fu”), the two shareholders of the Target. Pursuant to the Acquisition Agreement, Lanxi Sunrise has purchased all of the equity of the Target for a price of RMB 44,401,485 (approximately $6.7 million) (the “Purchase Price”), which Purchase Price was based on an appraisal report of the Target’s assets, liabilities and net assets as of March 31, 2010 by Heilongjiang Zhongming Guolin Asset Appraisal Co., Ltd.

The Purchase Price was paid in one installment by Lanxi Sunrise to Wang and Fu on November 16, 2010. Wang and Fu deposited RMB 22,750,642 (approximately $3.4 million) into a bank account of the Target for the repayment of the sum of the debts of the Target outstanding on March 31, 2010, which funds will be distributed by the Company in accordance with a payment schedule for such debts.

On November 24, 2010, the equity transfer was officially completed upon the effectiveness of the change in registration of the equity interest from Wang and Fu to Lanxi Sunrise with the relevant PRC authority.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010

(Stated in US Dollars)

2.	INFORMATION OF THE COMPANY (Continued)

Share Consolidation

On March 23, 2011 the Company filed an Amended and Restated Memorandum of Association of the Company, which consolidates the share capital of the Company at a ratio of 3.5:1 by increasing the par value of the Company’s share capital from US$0.002 par value each to US$0.007 par value each, thereby reducing the number of authorized shares from US$1,000,000 divided into 500,000,000 ordinary shares of US$0.002 par value each to US$1,000,000 divided into 142,857,142.86 ordinary shares of US$0.007 par value each (the “Share Consolidation”). The market date of effectiveness of the Share Consolidation is March 30, 2011. As of March 31, 2011, the number of shares issued and outstanding, was consolidated from 20,412,203 ordinary shares into approximately 5,832,118 ordinary shares.

3.	SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

Basis of Consolidation

The accompanying consolidated financial statements include the accounts of the Company, Bright, Lanxi Sunrise and Lanxi Tianxianfang, (hereafter, collectively referred to as “the Group”). All significant intercompany accounts and transactions have been eliminated in consolidation.

Statement of Cash Flows

In accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the Group’s operations is calculated based upon the functional currency. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010

(Stated in US Dollars)

3.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

Economic and Political Risks

The Group’s operations are conducted solely in the PRC. There are significant risks associated with doing business in the PRC, among others, political, economic, legal and foreign currency exchange risks. The Group’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.

Use of Estimates

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

Concentrations of Credit Risk

The Group sells its products primarily to PRC domestic customers. Credit is extended based on an evaluation of the customer's financial condition. At both March 31, 2011 and December 31, 2010, the major five customers accounted for approximately 25.2% and 48.1% of its accounts receivable balances respectively. Due to the longstanding nature of its relationships with these customers and contractual obligations, the Group is confident that it will recover these amounts. The Group establishes an allowance for doubtful accounts based on factors surrounding the credit risk of specific customers and other information.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010

(Stated in US Dollars)

3.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

Concentrations of Credit Risk (Continued)

The Group maintains its cash and cash equivalents with high-quality institutions. Deposits held with banks in PRC may not be insured or exceed the amount of insurance provided on such deposits.

Property, plant and equipment

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

When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the reporting period of disposition.

Depreciation of property, plant and equipment is calculated to written off the cost, less their estimated residual value, if any, using the straight-line method over their estimated useful lives. The principal annual rates are as follows:

Leasehold land and buildings	20~40 years
Plant and machinery	10~18 years
Motor vehicles	5 years
Office equipment	5 years

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

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010 (Stated in US Dollars)

3.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accounting for the Impairment of Long-Lived Assets

The Group adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Live Assets” (“SFAS 144”), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Group periodically evaluates the carrying value of long-lived assets to be held and used in accordance with SFAS 144. SFAS 144 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Group believes that, as of March 31, 2011 and December 31, 2010, there were no significant impairments of its long-lived assets.

Land Use Right

All land is owned by the Government in the PRC. Enterprises and individuals can pay the State a fee to obtain a right to use land for commercial purposes for an initial period of 50 years. The land use right can be sold, purchased, and exchanged in the market. The successor owner of the land use right will reduce the amount of time which has been consumed by the predecessor owner.

(1)	Land Use Right – Town East Street

In August 2006, Lanxi Sunrise obtained the land use right of a piece of land, approximately 11 acres, located in the Lanxi County, Heilongjiang Province for $333,321 (RMB 2,600,000). The land use right is for commercial use purposes for a 50-year period ended August 15, 2056. The cost of this land use right is amortized over its prospective beneficial period, using the straight-line method. Most of Lanxi Sunrise’s production facilities and headquarters are located on this land. The local government refunded the full amount of the purchase price of $333,321 (RMB 2,600,000) to Lanxi Sunrise, which recorded the amount as deferred governmental subsidy to be recognized over the land use right's amortization period.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010 (Stated in US Dollars)

3.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

Land Use Right (Continued)

(2)	Land Use Right – Lixin Street

In January 2005, Lanxi Sunrise obtained the land use right of two adjacent pieces of land, approximately 2 acres, also located in Lanxi County, Heilongjiang Province for $49,600 (RMB 400,000). The land use right is for commercial use purposes for a 50-year period ended December 29, 2054. The cost of this land use right is amortized over its prospective beneficial period, using the straight-line method. A portion of Lanxi Sunrise’s production facilities are located in these two pieces of land.

In January 2005, the local government also granted the buildings attached to these two pieces of land to Lanxi Sunrise as a governmental subsidy. Lanxi Sunrise pledged the use rights of the two pieces of land and the buildings attached, as collateral to provide a guarantee for a related party through April 10, 2008 to receive an import letter of credit.

Governmental Subsidies

The Company’s subsidiary, Lanxi Sunrise, is considered to be a leading manufacture enterprise by the local government, Lanxi Government ("Lanxi Government"), which has a long-term desire to encourage Lanxi Sunrise to expand its production capacity and to create more job opportunities for local residents. For that purpose, the local government has granted various subsidies to Lanxi Sunrise as follows:

(1)	Income Tax Refund Grant

On May 19, 2006, the local government ran an incentive program exclusively for Lanxi Sunrise. Among other things, the program provided Lanxi Sunrise to receive government grants equal to Lanxi Sunrise's income taxes for the years 2006, 2007, and 2008, and 40% of the local income taxes for the years 2009 and 2010. To be eligible for the grants, Lanxi Sunrise needs to pay income taxes to the tax authority as required by tax laws and regulation, and then submits the proof of payment to Lanxi Government, which will deposit the grants to Lanxi Sunrise's bank account. The Lanxi Government further granted Lanxi Sunrise the deferral of income tax payments for 2006, 2007 and 2008 until 2009, 2010 and 2011, respectively.

Lanxi Sunrise records the present value of income tax refund grant as governmental subsidies receivable and governmental subsidy revenue at the same time when the income taxes payable are recorded. For the three months ended March 31, 2011, Lanxi Sunrise has received the refund of income tax payment from the local government for the year of 2007 and 2008, amounted to $2,829,632 (RMB18,646,002).

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010 (Stated in US Dollars)

3.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

Governmental Subsidies (Continued)

(2)	Land Subsidy

Included in the incentive program described in the preceding paragraph, the local government provided $333,321 (RMB 2,600,000) subsidy for Lanxi Sunrise to purchase a land use right. Lanxi Sunrise purchased the land use right in August 2006 for $333,321 (RMB 2,600,000), as more fully disclosed in the "Land Use Right" section of this note. The local government refunded the full amount of the purchase price to Lanxi Sunrise, which recorded the amount as deferred governmental subsidy to be recognized over the land use right's amortization period.

(3)	Building Subsidy

In January 2005, the local government granted the buildings attached to two adjacent pieces of land to Lanxi Sunrise as government subsidy, as more fully disclosed in the "Land Use Right" section of this note. Lanxi Sunrise obtained the title documents of these buildings on February 2, 2006. Management estimated the fair value of these buildings at $794,345 (RMB 5,793,572.), based on an appraisal report issued by an independent appraiser certified by the local government. Lanxi Sunrise treated the full amount as deferred governmental subsidy, and began to recognize governmental subsidy revenue when Lanxi Sunrise complied with all conditions attached to the grant in December 2007, over these buildings' estimated useful life of 20 years.

(4)	Sewage Facilities Improvement Subsidy

In December 2008, the local government granted $776,045 (RMB 5,300,000) to Lanxi Sunrise for sewage facilities improvement. This subsidy is regarded as deferred government subsidy whose primary condition for qualification is to improve the sewage facilities of the production plant by acquiring certain long-term assets. The government grant is recognized as income over the periods necessary to match them with the related costs of the assets purchased which they are intended to compensate over the periods and in the proportions in which depreciation on those assets is charged.

(5) Monetary Grant

The local government granted various funds to Lanxi Sunrise, such as leading enterprise fund and financial supporting fund. Lanxi Sunrise recorded these funds as liabilities upon receipt. Government subsidy revenue is recognized only when there is reasonable assurance that Lanxi Sunrise has complied with all conditions attached to the grant.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010

(Stated in US Dollars)

3.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

Foreign Currencies Transactions

The Company and Bright maintain its books and accounting records in USD, which is determined as the functional currency. However, the functional currency of the Company’s subsidiary, Lanxi Sunrise, is in PRC currency “Renminbi” (“RMB”). Transactions denominated in currencies other than RMB are translated into RMB at the exchange rates quoted by the People’s Bank of China (“PBOC”) prevailing at the date of the transactions. Monetary assets and liabilities denominated in currencies other than RMB are translated into RMB using the applicable exchange rates quoted by the PBOC at the balance sheet dates. Gain and losses resulting from foreign currency transactions are included in operations.

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

	2011		2010
Three Month end US$: RMB exchange rate as of March 31		6.5564		6.8161
Three Months Average US$: RMB exchange rate		6.5896		6.8166

RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.

Revenue Recognition

Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers. Revenue is recognized when all of the following criteria are met:

l	Persuasive evidence of an arrangement exists;

l	Delivery has occurred or services have been rendered;

l	The seller’s price to the buyer is fixed or determinable; and

l	Collectability is reasonably assured. Payments have been established.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010

(Stated in US Dollars)

3.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue Recognition (Continued)

The return policy of goods is recognized in actual basis when the goods sold were being returned by customer then the closing balance of the period/year is actually deducted by the increment of relevant cost of sales. As the sales return rate is low and immaterial, no such provision is required to be made.

Deferred Revenue

Deferred revenue consists of prepayments to the Group for products that have not yet been delivered to the customers. Payments received prior to satisfying the Group’s revenue recognition criteria are recorded as deferred revenue.

Research and Development Costs

Research and development costs relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed when incurred. The major components of these research and development costs include experimental materials and labor costs. Research and development costs were immaterial for the Group for three months ended March 31, 2011 and 2010, respectively, and are included in general and administration expenses.

Comprehensive Income

The Group has adopted ASC 220 “Comprehensive Income’’ which establishes the rules for the reporting of comprehensive income and its components. Comprehensive income as defined includes all changes in equity during a period from non-owner sources. Accumulated comprehensive income, as presented in the accompanying statements of changes in owners' equity consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.

Value-added Tax (VAT)

Sales revenue represents the invoiced value of goods, net of value-added tax (VAT). All of the Group’s products that are sold in PRC are subject to Chinese value-added tax at a rate of 17% of the gross sales price or at a rate approved by the Chinese local government. This VAT may be offset by VAT paid on purchases of raw materials or paid for processing fees, repairment fees and service fees included in the producing cost and expenses.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010

(Stated in US Dollars)

3.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

Advertising Costs

Advertising costs are expensed as incurred and included as part of selling and marketing expenses. Advertising costs were immaterial for the Group in the three months ended March 31, 2011 and 2010, respectively.

Share-based compensation

The issuance of the Company’s common stock for non-cash consideration have been assigned a per share amount equaling the fair value. The fair value is determined by the management by reference to the market price of the Company’s shares on the measurement date. The non-cash consideration received pertains to services rendered by the consultant and salary compensation.

Share-based compensation (Continued)

The Company accounts for equity instruments issued to the consultant in exchange for services in accordance with the provisions of EITF Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services, and EITF Issue No. 00-18, Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other than Employees. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant is reached or (ii) the date at which the consultant’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

The Company accounts for equity instruments issued to the employee in exchange for compensation in accordance with the provisions of FASB Statement NO.123, Accounting For Stock-Based Compensation. The fair value of shares or stock options granted should be measured at the grant date, based on market prices if available, taking into account the terms and conditions upon which those shares or stock options were granted.

The Company records the fair value of the fully vested, non-forfeitable common stock issued for future consulting services as prepaid consulting in its consolidated balance sheet.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010 (Stated in US Dollars)

3.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

Statutory Reserves

Pursuant to the applicable laws in PRC, PRC entities are required to make appropriations to three non-distributable reserve funds, the statutory surplus reserve, statutory public welfare fund, and discretionary surplus reserve, based on after-tax net earnings as determined in accordance with the PRC GAAP, after offsetting any prior years’ losses. Appropriation to the statutory surplus reserve should be at least 10% of the after-tax net earnings until the reserve is equal to 50% of the entity's registered capital.

The Group has passed a resolution in January 2010 whereby Lanxi Sunrise will continue to allocate 10% of the after-tax net earnings to statutory surplus reserve despite the reserve having reached 50% of Lanxi Sunrise’s registered capital. The allocation will be made at the end of each year.

Appropriation to the statutory public welfare fund is 5% to 10% of the after-tax net earnings. The statutory public welfare fund is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation. Beginning January 1, 2006, the Group has no further requirements to make appropriations to the statutory public welfare fund. The Group does not make appropriations to the discretionary surplus reserve fund.

The Group has contributed $1,174,710 to the statutory surplus reserve fund during the year of 2010. Statutory reserves consist of the followings:

	Statutory		Statutory		Total
	Surplus		Welfare		Statutory
	Reserve		Reserve		Reserves

Balance on January 1, 2010	$	1,451,224	$	142,335	$	1,593,559

Contribution in 2010	$	1,174,710		-		1,174,710

Balance on December 31, 2010 and March 31, 2011	$	2,625,934	$	142,335	$	2,768,269

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010 (Stated in US Dollars)

3.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

Related Party Transactions

For the purposes of these financial statements, parties are considered to be related if one party has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Group and the party are subject to common control or common significant influence. Related parties may be individuals or other entities. The Group’s relationships with related parties are described as follows:

Name		Relationship

Ren Gao		CEO and Chairman of the Group

Harbin Zhongyi Sunshine Linen Co., Ltd.		Under the control by Ren Gao

Harbin Sunshine Linen Textile Co., Ltd.		Under the control by Jun Gao*

* Jun Gao, the elder brother of Ren Gao, is considered as a related party of the Group.

Due from/to Related Parties

The Group used to purchase some raw materials from, and sell some finished goods to related parties. In addition, Harbin Zhongyi Sunshine Linen Co., Ltd and Harbin Sunshine Linen Textile Co., Ltd., at times act as the Group’s agents in importing raw materials and exporting products on similar terms with unrelated parties. Due from/to related parties derived from such transactions are disclosed separately from arm's length trading accounts receivable and payable. Cash flows from these activities are classified as cash flows from operating activities.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010 (Stated in US Dollars)

3.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes

The Group accounts for income taxes under ASC 740 “Income Taxes”, which method are called the asset and liability method. 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 and operating loss and tax credit carry-forwards. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of income and comprehensive income in the periods that includes the enactment date.

Commitments and Contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.

Fair Value Measurements

In August 2009, the FASB issued Accounting Standards Update “ASU” 2009-5 “Measuring Liabilities at Fair Value”. This ASU provides amendments to ASC 820-10 “Fair Value Measurements and Disclosures” to address concerns regarding the determination of the fair value of liabilities. Because liabilities are often not “traded”, due to restrictions placed on their transferability, there is typically a very limited amount of trades (if any) from which to draw market participant data. As such, many entities have had to determine the fair value of a liability through the use of a hypothetical transaction. This ASU clarifies the valuation techniques that must be used when the liability subject to the fair value determination is not traded as an asset in an active market.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010 (Stated in US Dollars)

3.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

Fair Value Measurements (Continued)

The Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2 - Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3 - Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The carrying amounts reported in the balance sheets for cash, accounts receivable, other receivables, short-term borrowings, accounts payable and accrued expenses, customer advances, and amounts due from related parties approximate their fair market value based on the short-term maturity of these instruments.

ASC 825-10 “Financial Instruments,” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company uses Level 3 inputs to value its derivative liabilities.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010 (Stated in US Dollars)

3.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

Fair Value Measurements (Continued)

In April 2009, the FASB issued ASC 820-10-65-4 (formerly FSP No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”). This standard emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants. This standard provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity.

In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. This standard is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The adoption of this standard did not have a material effect on our consolidated financial statements.

Earnings Per Share

The Company reports basic earnings per share in accordance with ASC Topic 260, “Earnings Per Share”. Basic earnings/(loss) per share is computed by dividing net income/ (loss) by weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010 (Stated in US Dollars)

3.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements

In January 2010, the FASB issued ASU No. 2010-06 (“ASU 2010-06”), Improving Disclosures About Fair Value Measurements. The ASU amends ASC 820 (formerly Statement No. 157, Fair Value Measurements) to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurement on a gross basis rather than as a net basis as currently required. ASU 2010-06 also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. ASU 2010-06 is effective for annual and interim periods beginning after December 15, 2009, except for the requirement to provide the level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for annual and interim periods beginning after December 15, 2010. Early application is permitted and in the period of initial adoption, entities are not required to provide the amended disclosures for any previous periods presented for comparative purposes. The Group is currently evaluating the impact of adoption on its consolidated financial statements.

In March 2010, the FASB issued authoritative guidance on effect of denominating the exercise price of a share-based payment award in the currency of the market in which the underlying equity securities trades and that currency is different from (1) entity's functional currency, (2) functional currency of the foreign operation for which the employee provides services, and (3) payroll currency of the employee. The guidance clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades should be considered an equity award assuming all other criteria for equity classification are met. The guidance will be effective for interim and annual periods beginning on or after December 15, 2010, and will be applied prospectively. Affected entities will be required to record a cumulative catch-up adjustment for all awards outstanding as of the beginning of the annual period in which the guidance is adopted. The Company is in the process of evaluating the effect of adoption of this pronouncement.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010 (Stated in US Dollars)

3.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

In May 2010, the FASB issued ASU No. 2010-19 “ Foreign Currency (Topic 830): Foreign Currency Issues: Multiple Foreign Currency Exchange Rates (SEC Update)”. The purpose of this Update is to codify the SEC Staff Announcement made at the March 18, 2010 meeting of the FASB Emerging Issues Task Force (EITF) by the SEC Observer to the EITF. The Staff Announcement provides the SEC staff’s view on certain foreign currency issues related to investments in Venezuela. None of the new pronouncements has current application to the Company.

In December 2010, the FASB issued ASU No. 2010-29 “ Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force)”. The amendments in this Update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this Update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. None of the new pronouncements has current application to the Company.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010

(Stated in US Dollars)

4.	ACCOUNTS RECEIVABLE

Accounts receivable consist of the following:

	March 31,			December 31,
	2011			2010
Accounts receivable	$	12,091,251		$	14,576,559
Less: Allowance for doubtful accounts		(243,185	)		(1,265,789	)
Accounts receivable, net	$	11,848,065		$	13,310,770

INVENTORY

Inventory consists of the followings:

	March 31,		December 31,
	2011		2010
Finished goods	$	4,322,440	$	2,540,407
Work-in-progress		658,755		433,489
Raw materials		16,964,899		5,519,497
Subcontract stocks		1,073,029		1,395,873
Supplies and low-value materials		19,720		19,523
	$	23,038,843	$	9,908,789

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010

(Stated in US Dollars)

6.	DUE FROM RELATED PARTIES

Due from related parties consist of the followings:

Name of Related Parties	March 31,		December 31,
	2011		2010
Harbin Sunshine Linen Textile Co., Ltd.	$	-	$	79,879
	$	-	$	79,879

7.	DEFERRED ASSETS

Deferred assets consist of the followings:

	March 31,		December 31,
	2011		2010
Issuance cost capitalized for equity component	$	5,144	$	5,144
Issuance cost capitalized for liability component		495,056		572,523
	$	500,200	$	577,667

Amortization expense charged to operations was $77,467 and $0 for the three months ended March 31, 2011 and 2010, respectively.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010

(Stated in US Dollars)

8.	PROPERTY, PLANT AND EQUIPMENT

The following is a summary of property, plant and equipment:

	March 31,			December 31,
	2011			2010
Building and warehouses	$	8,904,579		$	8,901,351
Machinery and equipment		11,013,103			10,781,186
Office equipment and furniture		193,411			191,475
Motor vehicles		169,789			45,178
Leasehold improvement		982,153			1,023,495
Total	$	21,263,035		$	20,942,685
Less: Accumulated depreciation		(5,160,209	)		(4,857,648	)
Subtotal		16,102,826			16,085,037
Idle fixed assets		69,233			68,540
Total	$	16,172,059		$	16,153,577

Depreciation expense charged to operations was $277,880 and $148,792 for the three months ended March 31, 2011 and 2010, respectively.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010 (Stated in US Dollars)

9.	LAND USE RIGHT

The following is a summary of land use right, less amortization:

	March 31,			December 31,
	2011			2010
Land use right	$	957,122		$	947,540
Less: Amortization		(80,997	)		(75,216	)
Land use right, net	$	876,125		$	872,324

Amortization expense charged to operations was $4,995 and $2,201 for the three months ended March 31, 2011 and 2010, respectively.

10.	BANK LOANS

Bank loans consist of the following as of March 31, 2011:

Loan from Financial Institutions	Annual Interest Rate			Loan period	Loan Amount		Collateral
Lanxi Branch of Agriculture Bank of China		7.878	%	3/21/2011 – 3/20/2012	$	1,372,705	The Group's equipment and buildings
Total					$	1,372,705

Interest expense charged to operations for the bank loans was $56,269 for the three months ended March 31, 2011.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010 (Stated in US Dollars)

10.	BANK LOANS (Continued)

Bank loans consist of the following as of December 31, 2010:

Loan from Financial Institutions	Annual Interest Rate			Loan period	Loan Amount		Collateral
Lanxi Branch of Agriculture Bank of China		6.903	%	2/24/2010 – 2/23/2011	$	2,264,938	The Group's equipment and buildings
Lanxi Branch of Agriculture Bank of China		6.903	%	3/22/2010 – 3/21/2011		1,358,962
Total					$	3,623,900

Interest expense charged to operations for these bank loans was $180,062 for the year ended December 31, 2010.

11.	RELATED PARTY TRANSACTIONS

	For the Three Months Ended March 31,
	2011					2010
Transactions	Amount		Percentage of Total Similar Transactions			Amount		Percentage of Total Similar Transactions

(a) Selling finished goods to Harbin Sunshine Linen Textile Co., Ltd.	$	-		0	%	$	183,522		2.1	%

(b) Selling finished goods to Harbin Zhongyi Sunshine Linen Co., Ltd	$	-		0	%	$	1,099,639		12.5	%

Purchasing raw materials from Harbin Zhongyi Sunshine Linen Co., Ltd	$	-		0	%	$	2,330,406		53.4	%

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010 (Stated in US Dollars)

12.	SEGMENT BY PRODUCT AND CONCENTRATION

Segment by Product

	For the Three Months Ended March 31, 2011
Major Product	Revenue		Cost of goods sold		Gross profit		Gross profit ratio			Percentage of Total Revenue

Linen fabric	$	11,953,884	$	7,277,311	$	4,676,573		39	%		76	%
Linen yarn		3,802,231		2,814,224		988,007		26	%		24	%

Total	$	15,756,115	$	10,091,535	$	5,664,580		36	%		100	%

Segment by Product

	For the Three Months Ended March 31, 2010
Major Product	Revenue		Cost of goods sold		Gross profit		Gross profit ratio			Percentage of Total Revenue

Linen fabric	$	8,787,093	$	6,073,682	$	2,713,411		30.9	%		100	%
Linen yarn		-		-		-		-			-

Total	$	8,787,093	$	6,073,682	$	2,713,411		30.9	%		100.0	%

Geographic Areas Information

All of the Group's assets exist mainly in the PRC.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010 (Stated in US Dollars)

12.	SEGMENT BY PRODUCT AND CONCENTRATION (Continued)

Geographic Areas Information (Continued)

Major Customers

Major customers with sales over 5% of the Group’s total sales for the three months ended March 31, 2011 and 2010 are summarized in the following:

	For the Three Months Ended March 31,
	2011					2010
Major Customers	Revenue		Percentage of Total Revenue			Revenue		Percentage of Total Revenue

Harbin Zhongyi Sunshine Linen Co., Ltd .	$	-		0	%	$	1,099,639		12.5	%
Three/four unrelated customers		2,833,645		18.0	%		7,361,301		83.8	%

Total	$	2,833,645		18.0	%	$	8,460,940		96.3	%

Major Suppliers

There were a few major suppliers for the three months ended March 31, 2011 and 2010 which the Group purchased over 5% of the Group’s total purchase, as summarized in the following:

	For the Three Months Ended March 31,
	2011					2010
Major Suppliers	Purchase		Percentage of Total Purchase			Purchase		Percentage of Total Purchase

Harbin Zhongyi Sunshine Linen Co., Ltd.	$	-		0	%	$	2,330,406		42.7	%
Four/three unrelated suppliers	$	15,127,562		82.5	%		1,368,090		25.1	%

Total	$	15,127,562		82.5	%	$	3,698,496		67.8	%

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010 (Stated in US Dollars)

13.	EARNINGS PER SHARE

	For the Three Months Ended March 31,
	2011		2010
Net income for basic earnings per share	$	3,151,741	$	2,097,708
Weighted average number of shares		5,786,140		5,773,191
Basic earnings per share	$	0.54	$	0.36

Net income for diluted earnings per share	$	3,290,656	$	2,097,708
Weighted average number of shares		7,110,388		5,773,191
Diluted earnings per share	$	0.46	$	0.36

As of March 23, 2011, the Company filed an Amended and Restated Memorandum of Association of the Company, which consolidates the share capital of the Company at a ratio of 3.5:1 by increasing the par value of the Company’s share capital from US$0.002 par value each to US$0.007 par value each, thereby reducing the number of authorized shares from US$1,000,000 divided into 500,000,000 ordinary shares of US$0.002 par value each to US$1,000,000 divided into 142,857,142.86 ordinary shares of US$0.007 par value each (the “Share Consolidation”). The market date of effectiveness of the Share Consolidation is March 30, 2011.

14.	INCOME TAX

The Group is subject to income taxes on an entity basis, that is, on income arising in or derived from the tax jurisdiction in which the entity is domiciled.

The income tax on consolidated statements of operation represented the provision of income taxes for the operating subsidiary, Lanxi Sunrise only. No provision for the Company and Bright has been made as both companies have no operation nor assessable profits for the three months ended March 31, 2011 and 2010.

All Chinese enterprises are governed by the PRC Income Tax Law and various local income tax laws, pursuant to which a company generally is subject to an income tax at an effective rate of 25% on income as reported in its statutory financial statements after appropriate tax adjustments.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010 (Stated in US Dollars)

14.	INCOME TAX (Continued)

The provision for income taxes consists of the followings:

	For the Three Months Ended March 31,
	2011			2010
Current Income Tax	$	1,947,826		$	555,213
Deferred Income Tax		(760,837	)		51,441
Income Tax	$	1,186,989		$	606,654

The components of net deferred tax liabilities are as follows:

	March 31,			December 31,
	2011			2010
Deferred tax assets:
Accrued Expenses	$	59,483		$	-
Bad Debt Allowance		91,453			90,538
Fixed assets provision		35,446			35,091
Deferred Subsidy Income		460,163			461,281
Total deferred tax assets	$	646,545		$	586,910
Deferred tax liabilities:
Subsidy Receivable	$	(503,273	)	$	(1,202,102	)
Net deferred taxes	$	143,272		$	(615,192	)

Reported as:
Current deferred tax assets	$	174,070		$	113,440
Current deferred tax liabilities		(18,871	)		(722,549	)
Non-current deferred tax assets		472,475			473,470
Non-current deferred tax liabilities		(484,402	)		(479,553	)
Net deferred taxes	$	143,272		$	(615,192	)

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010 (Stated in US Dollars)

14.	INCOME TAX (Continued)

The effective tax rate differed from the statutory income tax rate is as follows:

	March 31,			December 31,
	2011			2010
China statutory income tax rate		25	%		25	%
Effect of:
Non-assessable income and deductible expense		0.22	%		(3.57	)%
Effective Tax Rate		25.22	%		21.43	%

15.	CONVERTIBLE NOTES

On November 3, 2010, the Company entered into a securities purchase agreement (the “Purchase Agreement”), with certain institutional and accredited investors (the “Investors”) for the issuance and sale of an aggregate of approximately $7,045,000 of 7.5% notes (the “Notes”) that are convertible into the Company’s ordinary shares, par value $.007 per share (the “Ordinary Shares”) for aggregate net proceeds of $6,418,293.

The Notes carry a fixed conversion price of $5.32, which is equal to 115% of the 10-day volume weighted average price prior to November 3, 2010, and have a two-year repayment term during which interest payments are due quarterly. The conversion price of the Notes is subject to adjustment in the event that the Company issues or sells Ordinary Shares for a price less than the conversion price in effect at the time of such issuance or sales, to such lower issuance or sale price. The principal and accrued interest under the Notes may be converted into Ordinary Shares at any time after the closing date, subject to certain limitations described in the Notes. At any time after the one-year anniversary of the closing date, the Company may elect to redeem all or any portion of the outstanding amount due under the Notes for a sum equal to 107% of such outstanding amount, plus any accrued and unpaid interest and other charges due on such amount.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010 (Stated in US Dollars)

15.	CONVERTIBLE NOTES (Continued)

In the event of a change in control of the Company, a majority of the holders of the aggregate principal amount of the Notes then outstanding may require the Company to redeem all or any portion of the then-outstanding amounts due under the Notes, on a pro-rata basis among holders of the Notes, in cash at a price equal to the greater of (a) 110% of such amount, plus any accrued and unpaid interest and other charges due on such amount (the “Conversion Amount”), and (b) the product of (i) the Conversion Amount being redeemed multiplied by (ii) the quotient determined by dividing (x) the greatest closing sale price of the Ordinary Shares during the period beginning on the date immediately preceding the earlier to occur of (1) the consummation of the change of control of the Company and (2) the public announcement of such change of control of the Company, and ending on the date the holder delivers the change of control redemption notice by (y) the conversion price then in effect.

In connection with the Offering, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with the Investors. Pursuant to the Registration Rights Agreement, the Company has file a registration statement (the “Registration Statement”) with the U.S. Securities and Exchange Commission (the “SEC”) to register for resale the Ordinary Shares issuable under the Notes within 60 calendar days of the closing date of the Offering, and the filing is currently under review by the SEC.

As of November 3, 2010, the fair value of the Notes was evaluated as $8,580,000 by Roma Appraisals Limited, a Hong Kong professional appraisal and consulting firm. The effective interest rate of the Notes was 7.948% per annum and the liabilities on straight bond were $6,987,000. The embedded conversion option and call option of the Notes was $1,654,000 and ($61,000).

	March 31			December 31,
	2011			2010
Convertible notes payable:
-par value	$	7,045,000		$	7,045,000
-discount on liabilities		(57,828	)		(57,828	)
-interest adjustment		11,088			4,267

	$	6,998,260		$	6,991,439

Interest expense for the three months ended March 31, 2011 was $138,915.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010 (Stated in US Dollars)

16.	COMMON STOCK ISSUED FOR SERVICES AND SALARY COMPENSATION

On November 14, 2009, the Company signed an agreement with an investor relations company to authorize the issuance of 28,571 shares of common stock to for services to be provided to the Company from November 16, 2009 through November 15, 2010. The shares were valued at $107,804 and during the year ended December 31, 2009, the Company recorded general and administrative expense of approximately $9,000 related to the agreement.

On February 23, 2010, the Board of Directors authorized the issuance of 4,286 shares of common stock to the above investor relations company pursuant to the supplement agreement of the above one dated November 14, 2009. The shares were valued at $25,800 and during the period ended March 31, 2010, the Company recorded it in general and administrative expense.

The Company and Mr. Qi entered into a Severance Agreement dated August 28, 2010. Pursuant to the terms of the Severance Agreement, Mr. Qi will receive 8,572 restricted ordinary shares of the Company, par value $0.007 per share. On December 3, 2010, the Company issued 8,572 Ordinary Shares to Mr. Qi. The value of the shares issued to Mr. Qi was $44,100.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010 (Stated in US Dollars)

16. COMMON STOCK ISSUED FOR SERVICES AND SALARY COMPENSATION (Continued)

The Company entered into an Investor Relations Consulting Agreement on May 5, 2010 (the “Agreement”) with Hayden Communications International, Inc. (“HCI”) (the “Agreement”) for the provision of certain investor relations services, dated as of May 5, 2010, which was subsequently as supplemented and amended by the Amendment to Investor Relations Consulting Agreement entered into between the Company and HCI dated as of October 13, 2010. In partial consideration for the provision of such investor relations services, the Company had agreed to issue to Hayden Communications International, Inc. HCI and/or its designees 19,200 restricted ordinary shares on the terms and conditions set forth in the Agreement and the Amendment to Investor Relations Consulting Agreement. On December 6, 2010, the Company issued 15,087, 2,743 and 1,372 Ordinary Shares to HCI and its designees, Feng Peng and Scott Powell, respectively. The value of the shares issued to HCI was $102,144.

Stephen Monticelli entered into an employment agreement with the Company on August 30, 2010 to serve as an independent director of the Company. In consideration for his services as director, the Company had agreed to issue Mr. Monticelli 28,572 shares of restricted ordinary shares. On December 6, 2010, the Company issued 28,572 Ordinary Shares to Stephen Monticelli. The value of the shares issued to Stephen Monticelli was $114,000.

17.	COMMITMENTS AND CONTINGENCIES

PRC’s Political and Economic System

The Group faces a number of risks and challenges not typically associated with companies in North America and Western Europe, since its assets exist mainly in the PRC, and its revenues are derived from its operations therein. The PRC is a developing country with an early stage market economic system, overshadowed by the state. Its political and economic systems are very different from the more developed countries and are in a state of change. The PRC also faces many social, economic and political challenges that may produce major shocks and instabilities and even crises, in both its domestic arena and in its relationships with other countries, including the United States. Such shocks, instabilities and crises may in turn significantly and negatively affect the Group’s performance.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010 (Stated in US Dollars)

17.	COMMITMENTS AND CONTINGENCIES (Continued)

Environmental

In the ordinary course of its business, the Group is subject to numerous environmental laws and regulations covering compliance matters or imposing liability for the costs of, and damages resulting from, cleaning up sites, past spills, disposals and other releases of hazardous substances. Currently, the Group's environmental compliance costs principally include the routine inspection fees paid to the local environmental department. These amounts are immaterial to the Group's operating costs. However, future extension of its production line or changes in the environmental laws and regulations may significantly increase its environmental compliance costs and therefore have a material adverse effect on the Group’s financial position and results of operations. Also, any failure by the Group to adequately comply with such laws and regulations could subject the Group to significant future liabilities.

Governmental Control of Currency Conversion

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. The Group receives most of its revenues in Renminbi, which is currently not a freely convertible currency. Shortages in the availability of foreign currency may restrict the Group’s ability to remit sufficient foreign currency to 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 China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies.

CHINA LINEN TEXTILE INDUSTRY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010 (Stated in US Dollars)

17.	COMMITMENTS AND CONTINGENCIES (Continued)

Governmental Control of Currency Conversion (Continued)

The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents the Group from obtaining sufficient foreign currency to satisfy its currency demands, the Group may not be able to pay certain of its expenses as they come due.

Capital Commitment

Contractual commitments for capital expenditure approximated $0 and $812,026 (RMB5,534,850) relating to the construction of sewage facilities and acquisition of equipment as of March 31, 2011 and 2010.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

OVERVIEW

China Linen Textile Industry, Ltd. (“Company,” “we,” “us,” “our,” or “our company”) is an exempted company incorporated under the Companies Law (1998 Revision) of the Cayman Islands on February 3, 2000.

We are an exempted company incorporated under the Companies Law (1998 Revision) of the Cayman Islands on February 3, 2000 as Aquasol Envirotech, Ltd. On June 9, 2008, we changed our name to China Linen Textile Industry, Ltd. On July 9, 2008, we acquired all of the shares of capital stock of Bright International Group Co., Ltd., or “Bright,” from its shareholders in exchange for the issuance of 5,418,001 of our ordinary shares and Bright became our wholly owned subsidiary. Through Bright, which is the registered beneficial owner of 95% of Heilongjiang Lanxi Sunrise Linen Textile Industry Co., Ltd., or “Lanxi Sunrise,” we are engaged in research, production and sales of linen textile products. Mr. Gao Ren, our chief executive officer and chairman, is the owner of the remaining 5% of Lanxi Sunrise.

On November 24, 2010, Lanxi Sunrise completed the acquisition of Lanxi Tianxianfang Linen Co., Ltd (“Lanxi Tianxianfang”). As a result, we have increased our yarn spinning production capacity. Further, we have extended the industry chain of production by adding the step of bleaching in the production of linen fabric.

The linen industry chain involves a 5-step process including (i) yarn spinning; (ii) fabric weaving; (iii) bleaching; (iv)dyeing; and (v) finishing. Our current operations are focused on three of the steps in this process: yarn spinning, fabric weaving and bleaching. Generally, sales of bleached fabric have a higher added value than gray, or unbleached fabric, which consequently can yield a higher margin of profits. Currently, the Company engages in the process of bleaching solely as part of our linen production process. While bleaching can be a separate service and source of revenue offered by the Company, currently, the Company does not offer such a separate linen bleaching service currently. In the future, we plan to expand our operations to other segments of the industry chain including dyeing and finishing.

We import flax primarily from France, Belgium and the Netherlands. The raw flax is put through a multi-step process at our manufacturing facility to make yarn. A portion of the yarn is sold to customers and a portion is used by us to weave various types of linen fabric. Our primary products include linen yarn, linen fabric, gray linen fabric, linen/cotton interwoven fabric and linen/rayon interwoven fabric.

We operate one yarn-spinning factory, one bleaching factory and two weaving factories at our facility in Lanxi County, PRC. The main products we produce at this facility are linen yarn and linen fabric. We also design and produce other linen fabrics in various specifications requested by our customers including linen fabric, interwoven or blended fabrics including both cotton/linen blend and a rayon/linen blend, semi-bleached fabric, piece-dyed fabric and jacquard fabric.

We process raw flax into yarn through an automated multi-step process. The annual production capacity totals approximately 2,220 tons with 50 different types of yarn and 10 million meters of fabric with 110 types including linen gray fabric, linen fabric, blended or interwoven fabric such as cotton/linen and rayon/linen blends, and semi-bleached linen fabric. The revenue for sales of linen fabric accounted for 76% and linen yarn accounted for 24% of our sales revenue in the first quarter of 2011.

Our products and services are divided into four principal groups:

Linen Fabric

We can produce over 100 types of linen fabric. We mainly produce linen gray fabric and semi-bleached fabric. Linen fabric is produced by arranging the flax yarn both horizontally and vertically on the loom during the production process. Linen gray fabric is the main raw material for dyeing and finishing plants. In the future, we plan to expand our production of linen fabric in order to accomplish our development strategy.

Linen Yarn

Linen yarn is thin and long, which has tensile strength and flexibility due to being twisted through several processes. Linen yarn is an unfinished product in linen textile industry, and is a main raw material for weaving. Linen yarn is supplied to weaving mills to process into fabric. There are approximately 50 types of yarn produced by our company, which are mainly used by us for weaving fabric. In the future, we plan to increase our production capacity of linen yarn in order to accomplish our development strategy.

Linen Fabric Processing

We have a subcontracting business that processes linen yarn provided by other factories into linen fabric by using our weaving machines, for which we charge a processing fee. In the first quarter of 2011, we did not accept any subcontracting business for linen fabric processing because we were operating at maximum capacity and were unable to meet demand from our own customers. Although we may continue this line of business, it will not be our primary source of revenue or focus and is not part of our long-term growth strategy.

Linen Yarn Processing

We have a subcontracting business that processes flax provided by other factories into linen yarn by using our weaving machines, for which we charge a processing fee. In the first quarter of 2011,we didn’t accept any subcontracting business for linen yarn processing because we were operating at maximum capacity and were unable to meet own demand from our own customers. Although we may continue this line of business, it will not be our primary source of revenue or focus and is not part of our long-term growth strategy.

Distribution and Marketing

Our products are sold to both wholesalers and end users. Except direct selling, both the import of raw materials and the export of finished goods were partially done through Agency Agreements with Harbin Zhongyi Sunshine Linen Co., Ltd. (“Harbin Zhongyi”) and Harbin Sunshine Linen Textile Co., Ltd. (“Harbin Sunshine”), our affiliates, which are controlled by Gao Ren, our Chief Executive Officer and Chairman. Under the terms of the Agency Agreements, Harbin Zhongyi and Harbin Sunshine purchase and import flax on our behalf and resell it to us at a price equal to cost plus 6%. Harbin Zhongyi and Harbin Sunshine also act as our agents for export of finished goods, but do not charge a fee as part of the export process. Accordingly, finished goods to be exported are sold to Harbin Zhongyi and Harbin Sunshine at a price equal to the price to be paid by the overseas buyer of the goods. For the three months ended March 31, 2011, no products were sold to or purchased from Harbin Zhongyi or Harbin Sunshine.

Harbin Zhongyi was established in 2006 and Harbin Sunshine was established in 1997, engaging in the import/export business and having special licenses from the central government of the PRC which allow them to take advantage of waivers of import/export taxes created to encourage business development in certain areas of northeast China. By importing raw materials and exporting finished goods through Harbin Zhongyi and Harbin Sunshine, we are able to benefit from the special licenses held by Harbin Zhongyi and Harbin Sunshine. In the process of distributing finished goods, we also benefit from our Agency Agreements with Harbin Zhongyi and Harbin Sunshine by taking advantage of long-term customer contacts established by Harbin Zhongyi and Harbin Sunshine.

As discussed above, on March 23, 2011 the Company filed an Amended and Restated Memorandum of Association of the Company, which consolidates the share capital of the Company at a ratio of 3.5:1 by increasing the par value of the Company’s share capital from US$0.002 par value each to US$0.007 par value each, thereby reducing the number of authorized shares from US$1,000,000 divided into 500,000,000 ordinary shares of US$0.002 par value each to US$1,000,000 divided into 142,857,142.86 ordinary shares of US$0.007 par value each (the “Share Consolidation”). The market date of effectiveness of the Share Consolidation is March 30, 2011. As of March 31, 2011, the number of shares issued and outstanding was consolidated from 20,412,203 ordinary shares into approximately 5,832,118 ordinary shares.

RESULTS OF OPERATIONS

Three Months ended March 31, 2011 as compared to the Three Months ended March 31, 2010

Overview

	Three Months ended March 31
	2011			2010			Change in
	$			$			$			%
Revenues		15,756,115			8,787,093			6,969,022			79	%
Costs of goods sold		10,091,535			6,073,682			4,017,853			66	%
Gross profit		5,664,580			2,713,411			2,951,169			109	%
GP Ratio		36	%		31	%		5	%		16	%
Operating expenses
Selling expenses		231,341			140,207			91,134			65	%
General and administrative expenses		1,003,199			394,494			608,705			154	%
Total operating expenses		1,234,540			534,701			699,839			131	%
Operating income		4,430,040			2,178,710			2,251,330			103	%
Other income (expense)
Interest income		1,538			51,952			(50,414	)		(97	)%
Interest expense		(196,569	)		(81,274	)		(115,295	)		142	%
Government subsidies		23,017			532,723			(509,706	)		(96	)%
Other income		80,704			22,251			58,453			263	%
Total other income		(91,310	)		525,652			(616,962	)		(117	)%
Income before tax		4,338,730			2,704,362			1,634,368			60	%
Income tax		1,186,989			606,654			580,335			96	%
Net income		3,151,741			2,097,708			1,054,033			50	%
Other comprehensive income
Effects of foreign currency conversion		405,869			3,592			402,277			11,199	%
Comprehensive income		3,557,610			2,101,300			1,456,310			69	%

Revenues

The following table sets forth the revenues generated from each of our products, both in absolute amount and as a percentage of total revenues for the period indicated.

Segment by Product

	For the Three Months Ended March 31, 2011
Major Product	Revenue		Cost of goods sold		Gross profit		Gross profit ratio			Percentage of Total Revenue
	$		$		$
Linen fabric		11,953,884		7,277,311		4,676,573		39	%		76	%
Linen yarn		3,802,231		2,814,224		988,007		26	%		24	%
Total		15,756,115		10,091,535		5,664,580		36	%		100	%

	For the Three Months Ended March 31, 2010
Major Product	Revenue		Cost of goods sold		Gross profit		Gross profit ratio			Percentage of Total Revenue
	$		$		$
Linen fabric		8,787,093		6,073,682		2,713,411		30.9	%		100	%
Linen yarn		-		-		-		-			-
Total		8,787,093		6,073,682		2,713,411		30.9	%		100	%

Our revenues during the three months ended March 31, 2011 increased by $6,969,022 or 79% as compared with the three months ended March 31, 2010, resulting from a $3,166,791 or 36% increase in sales of linen fabric from $8,787,093 for the three months ended March 31, 2010 to $11,953,884 for the three months ended March 31, 2011. The increase in sales of our linen fabric can be attributed to our increased efforts in marketing such fabric. Additionally we also increased the distribution channels for linen yarn which resulted in sales of $3,802,231, 24% of our revenue for the three months ended March 31, 2011 as compared to $0 for the three months ended March 31, 2010.

We had no subcontracting business to process linen fabric or linen yarn for other companies during the three months ended March 31, 2011 and 2010.

Cost of Goods Sold

	Three months ended March 31, 2011					Three months ended March 31, 2010
Product Group	Amount		% of Goods Sold			Amount		% of Goods Sold
Linen fabric	$	7,277,311		61	%	$	6,073,682		69	%
Linen yarn		2,814,224		74	%		-		-
Total	$	10,091,535		64	%	$	6,073,682		69	%

Cost of goods sold increased from $6,073,682 for the three months ended March 31, 2010 to $10,091,535 for the three months ended March 31, 2011, representing an increase of $4,017,853 or 66%. The increase in cost of goods sold was primarily attributable to the increase in sales.

Gross Profit

Product Group	Three Months Ended March 31, 2011		Three Months Ended March 31, 2010		Increase/ (Decrease)		% Increase/ % (Decrease)
Linen fabric	$	4,676,573	$	2,713,411	$	1,963,162		72	%
Linen yarn		988,007		-		988,007		-
Total	$	5,664,580	$	2,713,411	$	2,951,169		109	%

Gross profit increased by $2,951,169, or approximately 109%, for the three months ended March 31, 2011 as compared to the same period in 2010. Gross profit of linen fabric increased by $1,963,162, driving the overall growth of gross profit up for the first quarter of 2011. Gross margin for the first quarter of 2011 was approximately 36% as compared to 31% for the same period of 2010, mainly due to sales price increases and our ability to efficiently control production costs.

General and Administrative Expenses

General and administrative expenses for the three months ended March 31, 2011 were $1,003,199, representing an increase of $608,705 or 154%, as compared to the same period in 2010. This increase was mainly due to an increase of $209,349 in depreciation and amortization in connection with the increase of fixed assets. In addition, research fees of new product development increased by $130,638, for the three months ended March 31, 2011, as compared to the same period in 2010.

Other income/(expenses)

	Three months ended March 31,
	2011			2010
Interest income	$	1,538		$	51,952
Interest expense		(196,569	)		(81,274	)
Government subsidies		23,017			532,723
Other income		80,704			22,251
Total other income (expenses)	$	(91,310	)	$	525,652

Total other expenses totaled $91,310 for the three months ended March 31, 2011, as compared to $525,652 total other income in the same period of 2010, representing a decrease of $616,962 or 117%. This decrease is mainly due to a decrease of $509,706 or 96% in government subsidies in the first quarter of 2011 as compared to the same period in 2010.

Interest Expense

Interest expense was $196,569 for the three months ended March 31, 2011, which represents an increase of $115,295 or 142%, as compared to the same period in 2010. The increase was attributable to foreign currency conversion resulting from changes in the applicable exchange rates and interest expense from convertible note.

Income Tax

Income tax was $1,186,989 for the first quarter of 2011. Income tax increased by $580,335 or 96%, as compared to the same period in 2010. The increase of income tax was primarily attributed by the increase of income before taxes. 　　

Net Income

Net income was $3,151,741 for the first quarter of 2011. Net income increased by $1,054,033 or approximately 50%, as compared to the same period in 2010. The increase in net income was primarily attributable to an increase of $6,969,022 in revenue as compared to the same period in 2010. Income before tax increased by $1,634,368 or 60% for the three months ended March 31, 2011, as compared to the same period in 2010, which was primarily attributed by an increase of $2,951,169 in gross profit.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2011, we had cash and cash equivalents of $1,529,870 and total current assets of $38,390,773. Management believes we have sufficient cash and current assets to fund current operations for the foreseeable future. As of March 31, 2011, we had a working capital surplus of $25,494,651. We anticipate that the combination of our sales and collection of accounts receivables, customer deposits and proceeds from bank and shareholder loans will generate sufficient cash flow to sustain our working capital needs. However we may require other sources of capital.

As of March 31, 2011, we had outstanding loans from the Agricultural Bank of China equal to $1,372,705 with an annual interest rate of 7.878%. As of December 31, 2010, we had outstanding loans from the Agricultural Bank of China equal to $3,623,900 with an annual interest rate of 6.903%. These bank loans are collateralized by our buildings and equipment.

Inventory increased from $9,908,789 as of December 31, 2010 to $23,038,843 as of March 31, 2011, as the Company purchased significant amount of raw materials to meet future sales orders and to protect from any potential price increase in raw materials in the future.

Governmental subsidy receivable decreased from $2,890,197 as of December 31, 2010 to $75,484 as of March 31, 2011, mainly due to the cash received from local government by $2,829,632 (RMB18,646,002) for the income tax subsidy of the fiscal year of 2007 and 2008.

The following chart illustrates the percentage of accounts receivable attributable to our five largest customers in the three months ended March 31, 2011.

Customers	Percentage of Revenue			Percentage of Accounts Receivable
Jaya Shree Textiles A Unit Of Aditya Birla Nuvo Ltd		8	%		5	%
Ambadi Enterprises Ltd		50	%		2	%
Sedatex S.A.		53	%		4	%
Zhejiang Shaoxing Xinsanjiang Printing And Dyeing Co, Ltd.		49	%		3	%
Nilas Tekstil Sanayi Ve Ticaret Ltd Sti		46	%		3	%

Off-Balance Sheet Arrangements

We currently do not engage in any off-balance sheet arrangements.

Recently Adopted Accounting Pronouncements

In December 2010, the FASB issued ASU No. 2010-29 “Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force)”. The amendments in this Update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this Update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. None of the new pronouncements has current application to the Company.

Critical Accounting Policies and Estimates

In the application by us of accounting policies, which are described in the notes of the unaudited financial statements, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both the current and future periods.

The followings are the key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

(a)

Impairment of property, plant and equipment

Our property, plant and equipment comprise a significant portion of our total assets. Changes in technology or industry conditions may cause the estimated period of use or the value of these assets to change. Long-lived assets including property, plant and equipment are reviewed for impairment at least annually or whenever events or changes in circumstances have indicated that their carrying amounts may not be recoverable. If any such indication exists, the recoverable amount is estimated. The recoverable amount of an asset is the greater of its net selling price and value-in-use. In assessing value-in-use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset, which requires significant judgment relating to level of revenue and amount of operating costs. We use all readily available information in determining an amount that is a reasonable approximation of the recoverable amount, including estimates based on reasonable and supportable assumptions and projections of revenue and operating costs. Changes in these estimates could have a significant impact on the carrying value of the assets and could result in additional impairment charge or reversal of impairment in future periods.

(b)

Depreciation

Depreciation is calculated to write off the cost of items of property, plant and equipment, less their estimated residual value, if any, using the straight-line method over their estimated useful lives.

We review the estimated useful lives and residual values of the assets annually in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives and residual values are based on our historical experience with similar assets and taking into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.

(c)

Impairment loss for doubtful accounts

We assess impairment loss for doubtful accounts based upon evaluation of the recoverability of the accounts receivable and other receivables at each balance sheet date. The estimates are based on the ageing of the accounts receivable and other receivables balances, customer credit-worthiness and the historical write-off experience, net of recoveries. If the financial condition of the customers were to deteriorate, actual write-offs would be higher than estimated.

(d)

Allowance for inventories

We make allowances for inventories based on assessment of the net realizable value of inventories. These estimates are based on the current market condition and the historical experience of manufacturing and selling products of similar nature. In addition, these estimates could change significantly as a result of change in customer preference and competitor actions in response to serve industry cycles. Allowance is applied to inventories where events or changes in circumstances indicate that the net realizable value is lower than the cost of inventories. The identification of obsolete inventories required the use of judgment and estimates on the conditions and usefulness of the inventories.

Impact of Inflation

In recent years, inflation has not had a material impact on our results of operations. According to the National Bureau of Statistics of China the annual average percent changes in the consumer price index in China for 2008, 2009 and 2010 were an increase of 5.9%, a decrease of 0.7% and an increase of 3.3%, respectively. Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected in the future by higher rates of inflation in China. Increased operation costs that are subject to inflation, such as labor and supply costs, may not be recoverable through selling price increases.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

China Linen Textile Industry, Ltd. By: /s/ Gao Ren Name: Gao Ren Title: Chief Executive Officer and Chairman

	CHINA LINEN TEXTILE INDUSTRY, LTD.

Date: May 23, 2011	By:	/s/ Gao Ren
		Name: Gao Ren
		Title : Chairman and Chief Executive Officer

~~Dated: April 21, 2011~~51

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