UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2011

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _________ to _________.

Commission File Number:

001-3312

DIGUANG INTERNATIONAL DEVELOPMENT CO., LTD.

(Formerly known as Online Processing, Inc.)

(Exact Name of Registrant as Specified in Its Charter)

Nevada		22-3774845
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification Number)

23rd Floor, Building A, Galaxy Century,

No. 3069, Caitian Road, Futian District,

Shenzhen, the PRC

Post Code: 518026

(Address of Principal Executive Offices)

00-86-755-2655-3152

(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes ¨ No ¨

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

Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer ¨		Smaller reporting company x
(Do not check if a smaller reporting company)

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

As of June 14, 2011, the Company had 22,072,000 shares of common stock issued and outstanding.

Diguang International Development Co., Ltd.

Form 10-Q

For the Quarter Ended March 31, 2011

Table of Contents

	Page
Part I - Financial Information	3

Item 1. Financial Statements	3

Consolidated Balance Sheets	4

Consolidated Statements of Income and Comprehensive Income	5

Consolidated Statements of Cash Flows	6

Notes to Consolidated Financial Statements	7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3. Quantitative and Qualitative Disclosures About Market Risk	19

Item 4. Controls and Procedures	19

Part II - Other Information	20

Item 1. Legal Proceedings	20

Item 1A. Risk Factors.	20

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	20

Item 3. Defaults Upon Senior Securities	20

Item 4. Reserved	20

Item 5. Other Information	20

Item 6. Exhibits	21

Signatures	22

Certifications

PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

The accompanying unaudited consolidated balance sheets, statements of income and comprehensive income, and statements of cash flows and the related notes thereto, have been prepared in accordance with generally accepted accounting principles in the United States of America, “GAAP,” for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission, the “SEC.” Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. The financial statements reflect all adjustments, consisting only of normal, recurring adjustments, which are, in the opinion of management, necessary for a fair presentation for the interim periods.

The accompanying financial statements should be read in conjunction with the notes to the aforementioned financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2010.

The results of operations for the three-month period ended March 31, 2011 are not necessarily indicative of the results to be expected for the entire fiscal year or any other period.

DIGUANG INTERNATIONAL DEVELOPMENT CO., LTD.

CONSOLIDATED BALANCE SHEETS

(In US Dollars)

	March 31,			December 31,
	2011			2010
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	4,426,251		$	6,563,211
Restricted cash					3,141,546
Accounts receivable, net of allowance for doubtful accounts $1,996,054 and $1,983,44		12,369,487			14,139,582
Inventories, net of provision $4,200,836 and $4,134,441		11,201,927			11,399,202
Other receivables, net of provision $122,323 and $122,323		677,653			752,663
VAT recoverable		(26,369	)		181,736
Advance to suppliers		2,364,932			1,502,805
Total current assets		31,013,881			37,680,745

Plant, property and equipment, net		17,310,979			17,503,777
Construction in process		9,422,222			8,085,261
Long-term prepayments		366,507			363,636
Total assets	$	58,113,589		$	63,633,419
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Bank loans	$	6,450,460		$	9,375,777
Accounts payable		23,765,397			25,264,404
Advance from customers		1,917,728			647,547
Accruals and other payables		675,796			2,549,137
Accrued payroll and related expense		866,404			945,196
Income tax payable		504,155			539,805
Amount due to stockholders – current		380,804			130,655
Total current liabilities		34,560,744			39,452,521

Long-term bank loans		8,643,464			7,437,878
Research funding advanced		703,427			697,917
Total non-current liabilities		9,346,891			8,135,795

Total liabilities		43,907,635			47,588,316

Equity:
Common stock, par value $0.001 per share, 50 million shares authorized, 22,593,000 and 22,593,000 shares issued, 22,072,000 and 22,072,000 shares outstanding		22,593			22,593
Additional paid-in capital		20,937,727			20,926,509
Treasury stock at cost		(674,455	)		(674,455	)
Appropriated earnings		802,408			802,408
Accumulated deficit		(13,746,840	)		(11,690,548	)
Translation adjustment		4,524,643			4,293,824
Total stockholders’ equity		11,866,076			13,680,331
Non-controlling interest		2,339,878			2,364,772
Total equity		14,205,954			16,045,103

Total liabilities and stockholders’ equity	$	58,113,589		$	63,633,419

See accompanying notes to financial statements

DIGUANG INTERNATIONAL DEVELOPMENT CO., LTD.

CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

(In US Dollars)

	Three months ended March 31
	2011			2010
	(Unaudited)			(Unaudited)
Revenues:
Revenues, net	$	13,409,910		$	12,484,194
Cost of sales		(13,070,023	)		(10,779,840	)

Gross profit		339,887			1,704,354

Selling expense		607,432			600,831
Research and development		520,459			528,984
General and administrative		1,145,934			1,068,932
Loss on disposing assets		-			2,686

Loss from operations		(1,933,938	)		(497,079	)

Interest income (expense), net		(285,374	)		(169,226	)
Investment income (expense)					-
Other income (expense)		120,012			38,592

Loss before income taxes		(2,099,300	)		(627,713	)

Income tax provision		(386	)		-

Net loss		(2,099,686	)		(627,713	)

Net income (loss) attributable to non-controlling interest		(43,394	)		(50,888	)

Net loss attributable to common shares	$	(2,056,292	)	$	(576,825	)

Weighted average common shares outstanding – basic		22,072,000			22,072,000

Losses per share – basic		(0.09	)		(0.03	)

Weighted average common shares outstanding – diluted		22,072,000			22,072,000

Loss per share – diluted		(0.09	)		(0.03	)

Comprehensive loss:
Net loss	$	(2,099,686	)	$	(627,713	)
Translation adjustment		249,318			(38,965	)
Comprehensive loss		(1,850,368	)		(666,678	)
Comprehensive loss attributable to non-controlling interest		(24,895	)		(50,853	)

Comprehensive income attributable to common shares	$	(1,825,473	)	$	(615,825	)

See accompanying notes to financial statements.

DIGUANG INTERNATIONAL DEVELOPMENT CO., LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Increase (Decrease) in Cash and Cash Equivalents

(In US Dollars)

	Three months ended March 31,
	2011			2010
	(Unaudited)			(Unaudited)
Cash flows from operating activities:
Net loss	$	(2,099,686	)	$	(627,713	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		505,560			446,606
Bad debts allowance		-			62,698
Inventory provision		66,131			(33,398	)
Loss on disposing assets		21,048			2,686
Share-based compensation		11,219			11,219
Changes in operating assets and liabilities:
Accounts receivable		1,751,721			(1,999,455	)
Inventory		132,832			(2,535,342	)
Other receivables		73,740			63,989
VAT recoverable		206,464			(466,465	)
Prepayments and other assets		(861,670	)		(707,798	)
Accounts payable		(1,298,342	)		1,939,835
Accruals and other payable		(1,937,684	)		28,130
Advance from customers		1,265,088			6,257
Accrued interest payable to related parties		55,057			-
Taxes payable		(35,338	)		(11,207	)

Net cash used in operating activities		(2,143,860	)		(3,819,958	)

Cash flows from investing activities:
Purchase of fixed assets		(1,895,497	)		(1,257,632	)
Proceeds from disposal of fixed assets		19,242			209

Net cash used in investing activities		(1,876,255	)		(1,257,423	)

Cash flows from financing activities:
Due to related parties		195,092			(597,568	)
Repayments for short-term bank facilities		(2,914,074	)		(1,438,624	)
Proceeds from import financing loans		-			2,970,691
Restricted cash pledged for import financing loans		-			(2,970,691	)
Proceeds from long-term loan facilities		1,211,096			6,592,731

Net cash (used)/received from financing activities		(1,507,886	)		4,556,539
Effect of changes in foreign exchange rates		265,995			(39,255	)
Net increase (decrease) in cash and cash equivalents		(5,262,006	)		(560,097	)
Cash and cash equivalents, beginning of the year		6,563,211			6,190,513
Cash and cash equivalents, end of the year	$	1,301,205		$	5,630,416

Supplemental disclosures of cash flow information:
Cash paid for interest		275,432			120,912
Cash paid for income taxes		386			-

See accompanying notes to financial statements

NOTE 1 ─ ORGANIZATION AND OVERVIEW OF BUSINESS

Diguang International Development Co., Ltd., formerly known as Online Processing, Inc., “Online,” was established under the laws of the State of Nevada in 2000. On January 10, 2006, Online entered into a stock exchange agreement with Diguang International Holdings Limited., “Diguang Holdings.” On March 17, 2006, Online issued 2.4 million shares of its common stock in exchange for the gross proceeds of $12 million and issued 18,250,000 shares of its common stock in exchange for 100% equity interest in Diguang Holdings, making Diguang Holdings a wholly owned subsidiary of Online. Consummating the above two transactions simultaneously, Online and Diguang Holdings successfully fulfilled their contractual obligations, respectively, under the stock exchange agreement on March 17, 2006. One of the conditions to closing the transaction was changing the name from Online Processing, Inc. to “Diguang International Development Co., Ltd.,” and the name was changed on February 28, 2006.

The Company specializes in the design, production and distribution of Light Emitting Diode, “LED,” and Cold Cathode Fluorescent Lamp, “CCFL,” backlights for various Thin Film Transistor Liquid Crystal Displays, “TFT-LCD,” and Super-Twisted Nematic Liquid Crystal Display, “STN-LCD,” Twisted Nematic Liquid Crystal Display, “TN-LCD,” and Mono LCDs, taking together, these applications are referred to as “LCD” applications. Those applications include color displays for cell phones, car televisions and navigation systems, digital cameras, televisions, computer displays, camcorders, PDAs and DVDs, CD and MP3/MP4 players, appliance displays and the like. In late 2009, the Company started its trial run of producing LED TV sets with two sizes.

The Company’s headquarter is located in Shenzhen, China. The Company owns its subsidiaries through Diguang Holdings. Diguang Holdings was established under the law of the British Virgin Islands on July 27, 2004 and holds equity interests in the following entities:

Well Planner Limited, a Hong Kong based entity;

Diguang Science and Technology (HK) Limited, a British Virgin Islands based entity;

Shenzhen Diguang Electronics Co., Ltd., a China based entity;

North Diamond;

Wuhan Diguang Electronics Co., Ltd.;

Dongguan Diguang Electronics Science and Technology Co., Ltd.; and

Shenzhen Optimum Electronics Co., Ltd.

Well Planner Limited, “Well Planner,” was established under the laws of Hong Kong Special Administrative Region on April 20, 2001 and has been doing major business in custom forwarding related to export and import activities conducted by Diguang Electronics for a service fee based on a service agreement, pursuant to which service fees should not be less than 2% of the goods Well Planner has sold. Well Planner mainly sells to Diguang Science and Technology (HK) Limited and has minimal sales to third-party customers.

Diguang Science and Technology (HK) Limited, “Diguang Technology,” was established under the laws of the British Virgin Islands on August 28, 2003 and has handled all sales to international customers and procurements of electronic components and materials for Diguang Electronics.

Both Well Planner and Diguang Technology do not have any office space leased in Hong Kong and British Virgin Islands.

NOTE 1 ─ ORGANIZATION AND OVERVIEW OF BUSINESS (Continued)

Shenzhen Diguang Electronics Co. Ltd., “Diguang Electronics,” was established as an equity joint venture in Shenzhen under the laws of the People’s Republic of China, the “PRC,” on January 9, 1996 with an operating life of 20 years starting on that date. As of December 31, 2006, its registered capital was RMB 85 million, equivalent to approximately $10,573,615. Diguang Electronics designs, develops and manufactures LED and CCFL backlight units. These backlight units are essential components used in illuminating display panels such as TFT-LCD and color STN-LCD panels. These display panels are used in products such as mobile phones, PDAs, digital cameras, liquid crystal computer or television displays and other household and industrial electronic devices. Diguang Electronics’ customers are located in both China and overseas.

Diguang Holdings acquired 65% interest of North Diamond on January 3, 2007. North Diamond is a holding company of Dihao (Yangzhou) Co., Ltd., “Dihao,” an operating entity, which is registered in the Yangzhou City Development Zone, Jiangsu Province, China. Dihao conducts business activities of developing, manufacturing and marketing backlight products for large size electronic display devices and provides relevant technical services in China.

Diguang Electronics and Diguang Holdings jointly set up Wuhan Diguang Electronics Co., Ltd., “Wuhan Diguang,” in Wuhan, Hubei Province, China, with a registered capital of $1 million, of which 70% was infused by Diguang Electronics and the remaining 30% by Diguang Holdings. Wuhan Diguang was established on March 13, 2007 and its business license issued by Wuhan Municipal Administrative Bureau for Industry and Commerce is valid for 20 years expiring on March 12, 2027. Wuhan Diguang manufactures and sells LED and CCFL backlight units in Central South region of China. Wuhan Diguang started operation on July 1, 2007.

On December 29, 2007, Diguang Holdings acquired 100% interest in Dongguan Diguang Electronics Science and Technology Co. Ltd., “Dongguan Diguang S&T.” On January 1, 2008, Diguang Holdings assigned 70% of interest in Dongguan Diguang S&T to Diguang Electronics. Dongguan Diguang S&T was established under the laws of the People’s Republic of China on February 16, 2004 and has been used by Diguang Electronics as the production base since its inception. Dongguan Diguang S&T has started its manufacturing activities since 2008.

On April 30, 2009, Well Planner established a wholly-owned entity named Shenzhen Optimum Electronics Co., Ltd, “Shenzhen Optimum,” a China based entity. Shenzhen Optimum concentrates in sales of large size LED TV sets manufactured by Diguang Electronics to domestic customers throughout China.

NOTE 2 ─ RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Recently Issued Accounting Pronouncements Adopted

FASB ASU 2010-09

In February 2010, FASB issued ASU No. 2010-9, “Amendments to Certain Recognition and Disclosure Requirements.” This update addresses certain implementation issues related to an entity’s requirement to perform and disclose subsequent-events procedures, removes the requirement that public companies disclose the date of their financial statements in both issued and revised financial statements. According to the FASB, the revised statements include those that have been changed to correct an error or conform to a retrospective application of U.S. GAAP. The amendment is effective immediately. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

FSAB ASU 2010-06

In January 2010, FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements.” This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. These disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

NOTE 2 ─ RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)

FASB ASU 2010-29

The FASB has issued ASU No. 2010-29, “Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations.” This ASU reflects the decision reached in EITF Issue No. 10-G. The amendments in this ASU affect any public entity as defined by Topic 805, Business Combinations,that enters into business combinations that are material on an individual or aggregate basis. The amendments in this ASU 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 also expand the supplemental pro forma disclosures 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.

The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements Not Adopted Yet

FASB ASU 2010-13

In April 2010, the FASB issued Accounting Standards Update ("ASU") No. 2010-13, “Compensation - Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades,” which addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. Topic 718 is amended to clarify that a 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 shall not be considered to contain a market, performance, or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. The amendments in this Update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. ASU 2010-13 is effective for interim and annual periods beginning on or after December 15, 2010 and is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

FASB ASU 2010-17

The FASB issued ASU No. 2010-17, “Revenue Recognition—Milestone Method (Topic 605): Milestone Method of Revenue Recognition.” This ASU codifies the consensus reached in EITF Issue No. 08-9, “Milestone Method of Revenue Recognition.” The amendments to the Codification provide guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive. Milestones should be considered substantive in their entirety and may not be bifurcated. An arrangement may contain both substantive and nonsubstantive milestones, and each milestone should be evaluated individually to determine if it is substantive. ASU 2010-17 is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. The Company is currently evaluating the impact of this ASU; however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

NOTE 3 ─ ALLOWANCE FOR ACCOUNTS RECEIVABLES

During the normal course of business, the Company extends unsecured credit to its customers. Typically credit terms require payment to be made within 90 days of the invoice date. The Company does not require collateral from its customers. The Company maintains its cash accounts at credit worthy financial institutions and closely monitors the movements of its cash positions.

The Company regularly evaluates and monitors the creditworthiness of each customer on a case-by-case basis. The Company includes any accounts balances that are determined to be uncollectible in the allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available to management, the Company believes that its allowance for doubtful accounts as of December 31, 2010 and March 31, 2011 were adequate, respectively. However, actual write-off might exceed the recorded allowance.

The following table presents allowance activities in accounts receivable.

	March 31,		December 31,
	2011		2010
	(Unaudited)

Beginning balance	$	1,983,449	$	1,529,505
Additions charged to expense		12,605		565,336
Write-off		-		(111,392	)

Ending balance	$	1,996,054	$	1,983,449

NOTE 4 ─ INVENTORIES

The inventories are as follows:

	March 31,			December 31,
	2011			2010
	(Unaudited)

Raw materials	$	8,039,847		$	7,457,009
Work in progress		1,889,479			3,046,291
Finished goods		5,196,122			3,972,411
Consignment goods		277,315			1,057,932

	$	15,402,763		$	15,533,643
Provision		(4,200,836	)		(4,134,441	)

Inventories, net	$	11,201,927		$	11,399,202

NOTE 5 ─ PROPERTY, PLANT, AND EQUIPMENT

A summary of property, plant and equipment at cost is as follows:

	March 31,			December 31,
	2011			2010
	(Unaudited)

Land usage rights	$	3,303,974		$	3,278,945
Plant and office buildings		11,978,080			11,887,337
Machinery		5,984,220			5,819,686
Office equipment		1,940,109			1,886,765
Vehicles		320,988			363,750
Software		159,767			158,556
Leasehold improvement		1,945,042			1,985,626

	$	25,632,180		$	25,380,665
Accumulated depreciation		(8,321,201	)		(7,876,888	)
	$	17,310,979		$	17,503,777

The depreciation and amortization for the three months ended March 31, 2011 and 2010 were $444,313 and $424,630 respectively.

NOTE6 ─ CONSTRUCTION IN PROCESS

The Company is constructing a manufacturing facility for the production of large-size LED products in Guangming District of Shenzhen City. The total budgeted capital investment for this facility is estimated to be $10.5 million, excluding cost of land usage right. As of March 31, 2011, the cost of construction in process was $9,422,222.

NOTE 7 ─ RELATED PARTY TRANSACTIONS

Related Party Relationships

Name of Related Parties		Relationship with the Company

Mr. Yi Song		One of the shareholders of the Company
Mr. Hong Song		One of the shareholders of the Company
Shenzhen Diguang Engine & Equipment Co., Ltd., a China based entity		80% owned by Mr. Yi Song and 20% owned by Mr. Hong Song
Sino Olympics Industrial Limited		The representative of Song’s brothers

The break-down details of due to related parties were summarized as follows:

Amount due to	Stockholders

Balance at December 31, 2009	$	130,655
Accrued interest		250,149
Balance at March 31, 2010	$	380,804

NOTE 7 ─ RELATED PARTY TRANSACTIONS (Continued)

Prior to Diguang Holdings acquiring 100% of the equity interest of Dongguan Diguang S&T, Sino Olympics Industrial Limited, “Sino Olympics,” owns 92% of the interest and Shenzhen Diguang Engine & Equipment owns the remaining 8% of the interest of Dongguan Diguang S&T. Accordingly, the entire consideration of $4.2 million from Diguang Holdings was allocated $3,864,000 to Sino Olympics and $336,000 to Shenzhen Diguang Engine & Equipment. Based on the fact that Mr. Yi Song and Mr. Hong Song are the owners of both Sino Olympics and Shenzhen Diguang Engine & Equipment, the entire consideration of the $4.2 million was treated as an amount due to Mr. Yi Song and Mr. Hong Song. Of the $4.2 million acquisition price, $2 million was paid in cash before the end of 2007 and the remaining balance of $2.2 million should have been repaid through four installment payments on June 30, 2008, December 31, 2008, March 31, 2009 and June 30, 2009, respectively. The balance of $380,804 was overdue as of March 31, 2011.

NOTE 8 ─ BANK LOANS

Bank loans from Shenzhen Ping’an Bank

Short term bank loans

Diguang Electronics has acquired bank loan facilities of RMB30 million. The RMB30 million bank loan facility was pledged by buildings in Dongguan Diguang S&T with a net book value of $3.6 million.

As of March 31, 2011, the Company fully used the RMB30 million bank facilities and borrowed RMB30 million, equivalent to $4,581,342, from Shenzhen Ping’an Bank with a prevailing annual rate of 6.5%. All of these bank loans will fall due in the first half year of 2011, among which, $1.5 million, $1.1 million, and $2.0 million will fall due on June 6, May 30, and May 13, 2011, respectively.

Loans agreements with China Development Bank

Long term loan received by Diguang Electronics

On November 10, 2009, Diguang Electronics entered into a 5 year long-term loan agreement with China Development Bank Co., Ltd. to borrow RMB100 million for the construction of the new facility located in the Guangming District of Shenzhen City. On December 30, 2009, Diguang Electronics paid RMB3 million to China Development Bank as 5 year guarantee expense for the RMB100 million bank facilities, upon which the bank facilities formally became effective. As of March 31, 2011, Diguang Electronics had received RMB66.1 million, equivalent to $10,023,385, from China Development Bank Co., Ltd.

The RMB100 million banking facilities are secured by the followings: (1) two joint and several personal guarantees from Mr. Yi Song and Mr. Hong Song, directors of the Company; (2) collateral placed on the office space owned by Diguang Electronics with a carrying amount of $2.3 million; and (3) collateral placed on the land use rights of the land on which the new manufacturing facility was located, which has a carrying amount of $2.4 million.

Long term loan received by Dongguan Diguang S&T

On May 25, 2010, Dongguan Diguang S&T entered into a loan agreement with China Development Bank Co., Ltd. for RMB30 million bank facilities. The bank facilities provided by the Bank aimed to replenish working capital for a specified customer’s purchase orders and the issuances of loan proceeds were tied up with purchase orders received from the specific customer.

The RMB30 million banking facilities are secured by the followings: (1) joint and several liabilities guarantee from Diguang Electronics; (2) all the interest and income related to the lease agreement between Dongguan Diguang S&T’s and Diguang Electronics, by which Dongguan Diguang S&T leased its plants to Diguang Electronics for an annual rental of RMB4.6 million, equivalent to $0.7 million as of December 31, 2010; and (3) all the interest and income related to sales contract between Dongguan Diguang S&T and the specified customer.

On July 9, 2010, Dongguan Diguang S&T received RMB4.0 million, equivalent to $597,863, from China Development Bank Co., Ltd. Among which RMB1.0 million, equivalent to $151,639, was repay in March.

Since Dongguan Diguang S&T had not received enough purchase orders as expected from the specific customer, the Company estimated that the rest of the bank facilities of RMB26 million was no longer available.

NOTE 9 ─ STOCK OPTIONS

The Company recognized the share-based compensation cost based on estimated grant-date fair value. There were no stock options issued before January 1, 2006.

Assumptions

The fair value of each stock option granted was estimated at the date of grant using the Black-Scholes option pricing model with the below assumptions.

The expected volatilities are essentially based on the historical volatility of the Company’s stock. The observation was made on a daily basis. The periods of observation covered were from March 17, 2006 though the grant day for all the options granted. The expected terms of stock options are based on the average vesting period and the contractual life of stock options granted. The risk-free rates are consistent with the expected terms of stock option and based on the U.S. Treasury yield curve in effect at the time of grant. The Company estimated the forfeiture rate of its stock options was 6.13%.

Stock Option Plan

The Company’s 2006 Stock Incentive Plan, the “2006 Plan,” which is shareholder-approved, permits the grant of stock options to its employees up to 1,500,000 shares of common stock. The Company believes that such awards better align the interests of its employees with those of its shareholders. Option awards are generally granted with an exercise price per share equal to the five-day average share price before the Board of Directors’ approval. These options have up to ten-year contractual life term.

Awards generally vest over four years in equal installments on the next four succeeding anniversaries of the grant date. The share-based compensation will be recognized based on graded vesting method over the four years or over the three years regarding the options granted to directors in order to match their directorship terms. A summary of option activities under the 2006 Plan during the three months ended March 31, 2010 are presented as follows:

Stock Options	Shares			Weighted- Average Exercise Price		Weighted – Average Remaining Contractual Term
Outstanding at January 1, 2010		1,131,917			1.77		5.76
Granted		-
Exercised		-
Forfeited or expired		(16,000	)
Outstanding at March 31, 2010		1,115,917			1.87		6.42
Exercisable at March 31, 2010		669,694			3.03		5.53

The trading price of the Company stock at March 31, 2011 and 2010 was $0.15 and $0.30 per share, respectively. As of March 31, 2011, the exercise price of 471,917 shares of outstanding stock option was higher than trading price of the Company’s common stock and did not have any intrinsic value; the exercise price of the other 644,000 shares granted in December 2008 was lower than trading price and reported intrinsic value. Intrinsic value for outstanding and exercisable options as of March 31, 2011 was $25,320 and $10,000, respectively.

NOTE 10 ─ EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted net earnings per share for the periods as indicated:

	Three Months Ended March 31,
	2011			2010
	(Unaudited)			(Unaudited)
Numerator:
Net income (loss) attributable to the Company	$	(2,056,292	)	$	(576,825	)
Net income (loss) used in computing diluted earnings per share	$	(2,056,292	)	$	(576,825	)

Denominator:
Weighted average common shares outstanding – basic		22,072,000			22,072,000
Weighted average common share outstanding – diluted		22,072,000			22,072,000

Basic earnings per share	$	(0.09	)	$	(0.03	)
Diluted earnings per share	$	(0.09	)	$	(0.03	)

NOTE 11 ─ SEGMENT REPORTING

The Company currently operates mainly in backlight production with portions of new products of LED monitors, LED general lighting and LED TV sets assembly. As the Company’s major production base is in China while export revenue and net income in overseas entities is accounted for a significant portion of total consolidated revenue and net income, management believes that the following tables present useful information to chief operation decision makers for measuring business performance, financing needs, and preparing corporate budget, etc.

	Three Months Ended March 31,
	2011			2010
	(Unaudited)			(Unaudited)

Sales to China domestic customers		$	4,257,335		$	6,006,812
Sales to international customers			9,152,575			6,477,382

		$	13,409,910		$	12,484,194

	China			International
	Customers			Customers			Total

As of March 31, 2010
Revenue	$	6,006,812		$	6,477,382		$	12,484,194
Gross margin		17	%		10	%		14	%
Receivable		8,332,146			7,576,732			15,908,878
Inventory		10,008,084			-			10,008,084
Property and equipment		18,698,964			-			18,698,964
Expenditures for long-lived assets		1,257,632			-			1,257,632

As of March 31, 2011
Revenue	$	4,257,335		$	9,152,575		$	13,409,910
Gross margin		5.4	%		1.2	%		2.5	%
Receivable		5,566,361			6,803,126			12,369,487
Inventory		11,201,927			-			11,201,927
Property and equipment		17,310,979			-			17,310,979
Expenditures for long-lived assets

NOTE 12 ─ UNCERTAINTY ON GOING CONCERN

The Company has incurred consecutive losses for four years since 2007 and has a working capital deficit of $3.55 million as of March 31, 2011. The cash flows from operating activities for the past three years were all negative. Management is fully aware of the current situation and knows the demand for cash from its operating activities and completion of building its manufacturing facility. Management is planning to do its best to secure more loans from commercial banks by collateralizing its properties located in Dongguan. Management believes that the Company should be able to obtain more loans from commercial banks based on the properties it owns and the fact that the market value of these properties has appreciated substantially under the trend of China property market. However, there is no assurance that management could succeed in its endeavor to obtain more loans from commercial banks.

NOTE 13 ─ SUBSEQUENT EVENTS

The Company evaluated all events or transactions that occurred after March 31, 2011 up through the date the Company issued these financial statements. During this period the Company did not have any material recognizable subsequent events.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Report contains forward-looking statements, including statements that include the words "believes," "expects," "estimates," "anticipates" or similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual results, performance or achievements to differ materially from those expressed or implied by such forward-looking statements. Risk factors include, but are not limited to, costs associated with financing new products; the Company’s ability to cost-effectively manufacture its products on a commercial scale; the concentration of the Company’s current customer base; competition; the Company’s ability to comply with applicable regulatory requirements; potential need for expansion of the Company’s production facility; the potential loss of a strategic relationship; inability to attract and retain key personnel; management's ability to effectively manage the Company’s growth; difficulties and resource constraints in developing new products; protection and enforcement of the Company’s intellectual property and intellectual property disputes; compliance with environmental laws; climate uncertainty; currency fluctuations; control of the Company’s management and affairs by principal shareholders.

The reader should carefully consider, together with the other matters referred to herein, the information contained under the caption "Risk Factors" in the Company’s most recent Annual Report on Form 10-K for a more detailed description of these significant risks and uncertainties. The Company cautions the reader, however, not to unduly rely on these forward-looking statements.

RISK FACTORS

Investment in the Company’s common stock involves risk. The investor should refer to information contained under the caption “Risk Factors” in the Company’s most recent Annual Report on Form 10-K. You should carefully consider the investing risks before deciding to invest. The market price of the Company’s common stock could decline due to any of these risks, in which case you could lose all or part of your investment. In assessing these risks, you should also refer to the other information included in this report, including the Company’s consolidated financial statements and the accompanying notes. You should pay particular attention to the fact that the Company is a holding company with substantial operations in China and is subject to legal and regulatory environments that in many respects differ from that of the United States. The Company’s business, financial condition or results of operations could be affected materially and adversely by any of the risks discussed below and any others not foreseen. This discussion contains forward-looking statements.

Business Overview

The Company specializes in the design, production and distribution of small to medium-sized Light Emitting Diode, “LED,” and Cold Cathode Fluorescent Lamp, “CCFL,” backlights for various Thin Film Transistor Liquid Crystal Displays, “TFT-LCD,” and Super-Twisted Nematic Liquid Crystal Display, “STN-LCD,” Twisted Nematic Liquid Crystal Display, “TN-LCD,” and Mono LCDs, taken together, these applications are referred to as “LCD” applications. Those applications include color displays for cell phones, car televisions and navigation systems, digital cameras, televisions, computer displays, camcorders, PDAs and DVDs, CD and MP3/MP4 players, appliance displays and the like.

The Company’s headquarter is in Shenzhen, China. The Company conducts its business principally through the operations of Shenzhen Diguang Electronics Co., Ltd., “Diguang Electronics,” based in Shenzhen along with its main backlight manufacturing operation in Dongguan, Guangdong Province, China, Dihao Co., Ltd., based in Yangzhou, “Dihao” and Wuhan Diguang Electronics Co., Ltd, based in Wuhan, “Wuhan Diguang.” Shenzhen Diguang Electronics had approximately 1,374 full-time employees as of March 31, 2011.

Dihao is a 100% wholly-owned subsidiary of North Diamond. The Company gained controlling interest of Dihao by acquiring 65% of North Diamond on January 3, 2007. As of March 31, 2011, Dihao had approximately 172 full-time employees.

Wuhan Diguang was established on March 13, 2007 and commenced its operation on July 1, 2007. Wuhan Diguang was established with the capacity to provide large inches of TFT-LCD which are mainly sold to its customers from Taiwan. Wuhan Diguang had approximately 422 employees as of March 31, 2011.

Dongguan Diguang Electronics Science and Technology Co. Ltd., “Dongguan Diguang S&T,” was established as the production base of Shenzhen Diguang Electronics Co Ltd. It became a wholly-owned subsidiary of Diguang Holdings since December 30, 2007 following the acquisition. As of March 31, 2011, Dongguan Diguang S&T had approximately 190 full-time employees.

Shenzhen Optimum Electronics Co., Ltd, “Shenzhen Optimum,” was established for sales of large size LED TV sets manufactured by Diguang Electronics to domestic customers throughout China. As of March 31, 2011, Shenzhen Optimum had approximately 19 full-time employees.

Well Planner is involved in the import of raw materials into China and export of finished products from China.

Diguang Science and Technology Limited, based in Hong Kong, is directly involved with the international buying of raw materials and selling of backlight products for Shenzhen Diguang Electronics. Diguang S&T purchases raw materials from international suppliers and acts as an international sales group for both Shenzhen Diguang Electronics and Well Planner.

Critical Accounting Policies and Estimates

There have been no significant changes in the critical accounting polices and estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the most recent Annual Report on Form 10-K.

The discussion and analysis of the Company’s financial condition presented in this section are based on the Company’s financial statements, which have been prepared in accordance with the generally accepted accounting principles in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that management believes reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.

Results of Operations

Comparison of Three Months Ended March 31, 2011 and 2010

Revenue

Net revenue was approximately $13.4 million for the three months ended March 31, 2011, an increase of $0.9 million, or 7.41%, compared with $12.5 million for the same period in the prior year. The Company’s three manufacturing facilities in Dongguan, Wuhan, and Yangzhou contributed increases in sales revenue of $-0.5 million, $1.2 million, and $0.2 million, respectively, in the first quarter of 2011.

The Company’s total net revenue can be divided into international sales and domestic sales as follows:

	Three Months Ended March 31,
	2011		2010
International sales		9,152,575		6,477,000

Domestic sales		4,257,335		6,007,000

Total		13,409,910		12,484,000

Sales to international customers totaled $9.2 million for the three months ended March 31, 2011, representing an increase of $2.7 million, or a 42% decrease, compared with $6.5 million for the first quarter of 2010. The significant increase in international sales was due to an increase in the demand of LED backlight products.

Sales to domestic customers were $4.2 million for the first quarter of 2011, representing a decrease of $1.8 million, or a 30% decrease, compared with $6.0 million for the same period of 2010. The decrease in domestic sales was due to some of the major customers starting to manufacture the LED backlight products by themselves, so the sales orders from those customers dropped significantly.

Domestic sales and international sales accounted for 32% and 68% of total sales revenue respectively in the current period, compared with 48% and 52% in the same period of the prior year. The Company expects that the proportion of domestic sales will keep increasing on a going forward basis.

Because the Company has thousands of categories of products and has constantly changed its product mixtures in order to adapt to market demands, and because the sale prices are quite different for different categories of products, it is almost impossible to discuss the impact of changes in volume and changes in product price here.

The Company already has three manufacturing facilities located in the East China region (Yangzhou), the Central China region (Wuhan), and the Southern China region (Dongguan). There are various capacities in the principal manufacturing facility of Dongguan to serve the customers which are LCD TV and monitor manufacturers and LCD assembly enterprises. The Company has commenced to produce LED general light products in the Dongguan facility since June 2008 and large size LED backlights and monitors from 2009. The Yangzhou factory used to focus on producing small and mid size CCFL and LED backlight products and began to produce new products of large size LCM products since the fourth quarter of 2009. The Wuhan facility solely manufactures large size CCFL backlight products. The Company is now establishing a new manufacturing facility in Shenzhen of Southern China. This new facility will be used to manufacture large size LED back light products and LED TV sets. Based on these manufacturing facilities, the Company believes that it has strategically deployed the production capacity in China for its long term growth.

From the product mix aspect, the sales can be divided into six main categories: LED backlight, CCFL backlight, LCM, Mini-notebook assembly products, LED general light and LED monitor as follows.

	Three Months Ended March 31,
	2011		2010
LED backlight		7,345,711		5,698,000

CCFL backlight		3,716,992		4,443,000

LCM		887,826		1,690,000

LED general lighting		27,958		236,000

Mini note-books		914,892		-

Liquid Crystal Display		516,531		417,000

Total		13,409,910		12,484,000

The Company’s product mix has changed continuously in recent years with the trend that the proportion of LED products sales is increasing and the proportion of CCFL products is decreasing. For the first quarter of 2011, sales of LED products, which included LED backlights, LED LCM, LED general lights and LED monitors, amounted to $8.75 million, representing 65% of total sales revenue, whereas the CCFL products including CCFL backlights and CCFL LCM amounted to $3.74 million, representing 28% of total sales revenue. Comparatively, the proportion of sales of LED products and CCFL products were 62% and 38% respectively in the first quarter of 2010. LED products enjoy superiorities in contrast ratio, color gamut, localized dimming and low power consumption, which meet the environmental protection requirements of the market. In addition, the small to mid size of LED backlights have advantages of lower cost than the same size of CCFL products. The Company has concentrated in research and development of LED products in recent years and has adjusted its product mix by enhancing sales proportion of LED products gradually. The Company expects the overall LED product shipments to grow and be more sustainable as the transition from CCFL to LED backlights becomes more compelling due to its high performance in all aspects.

Sales of LED backlight products totaled $7.3 million in the first quarter of 2011, representing an increase of $1.6 million, or a 28% increase, compared with $5.7 million in the same period of 2010. The increase was due to the newly developed large size LED backlight products contributing $1.6 million in increase of sales revenue.

Sales of CCFL backlights totaled $3.7 million in the first quarter of 2011, representing a decrease of $0.7 million, or a 16% decrease, compared with $4.4 million for 2010. The decrease in sale of CCFL was due to some of the major customers starting to manufacture the CCFL by themselves, so the sales orders from those customers dropped significantly.

Total revenue from sales of LCM decreased from $1.7 million in the first quarter of 2010 to $0.89 million in the first quarter of 2011, representing a decrease of approximately $0.81 million, or a 48% decrease. Sales of LED backlighted LCM and CCFL backlighted LCM was $0.81 million and $0.08 million, accounting for 91% and 9%, respectively, for the first quarter of 2011.

Sales of Liquid Crystal Display (LCD) were $516,531 in the first quarter of 2011. The sales volume was approximately the same compared to the same period last year.

Sales of LED general lights decreased slightly from $236,000 in the first quarter of 2010 to $27,958 in the first quarter of 2011 due to aggressive competition.

Cost of Sales

Since the basic materials for all backlight products are similar, the Company discusses cost of sales in aggregate for all products. Cost of sales was $13 million for the first quarter of 2011, representing an increase of $2.2 million, or a 20% increase, compared with $10.8 million for the first quarter in 2010. Increase in cost of sales was primarily due to increase in sales volume.

Raw material cost was $11.2 million for the first quarter of 2011, representing an increase of $1.9 million, or a 20% increase, compared with $9.3 million for the first quarter of 2010. The increase in raw material cost was primarily due to increases in sales volume and changes in product mix. The percentage of raw material cost to total cost of sales was 86% for the first quarter of 2011, compared with 86% for the same period of 2010; which is for the same period in the prior year. Raw materials cost accounted for 84% and 74% of total sales revenue in the first quarter of 2011 and 2010, respectively.

Labor cost was $784,201 for the first quarter of 2011, representing an increase of $7,201 or a 0.9% increase, compared with $777,000 for the same period of 2010. The percentage of labor cost to total cost of sales was 6% for the first quarter in 2011, compared with 7% for the same period in 2010. The increase of labor cost was mainly due to increased sales volume. Labor cost accounted for 6% and 6% of total sales revenue in the first quarter of 2011 and 2010 respectively.

Production overhead was $1,050,162 for the first quarter of 2011, representing an increase of $334,162, or a 47% increase, compared with $716,000 for the first quarter of 2010. The production overhead includes depreciation charges for fixed assets and amortization for building improvement, water and electricity expenses, repair expenses, and rentals, etc. Due to the semi-variable nature of production overhead, the increase of production overhead is not directly associated with the increase of cost of sales. Production overhead accounted for 12% and 6% of total sales revenue in the first quarter of 2011 and 2010 respectively.

Gross Margin

The overall gross margin for the first quarter of 2011 was 2.53%, compared with 14% for the first quarter of 2010. The management discusses the change in gross margin in the three major product categories of CCFL products, LED products and LCM below.

The gross margin of LED backlight products decreased from 10% in 2010 to 3.2% in 2011. The decrease was contributed by a competitive market and selling prices cannot be increased in line of cost of sales.

Gross margin of CCFL backlight products fell to 3% in 2011 from 14% in 2010. The Wuhan facility contributed most of the CCFL sales in 2011; but as an OEM factory, the gross margin in the Wuhan facility was very low, and the low margin in the Wuhan facility led to a decrease in the overall CCFL gross margin.

The gross margin for LCM had decreased from 6% in 2010 to -4% in 2011. The decrease was mainly caused by sales of LED LCM which had much lower selling prices in 2011 than in 2010.

Regarding international sales, the gross margin was approximately 10% for the first quarter of 2011, representing a 2% increase, compared with 10% for the first quarter of 2010. And for domestic sales, the gross margin was 17%, representing a 1% increase, compared with 17% for the first quarter of 2010.

Selling Expenses

Selling expenses were $607,432 for the first quarter of 2011, representing an increase of $6,432, or a 1% increase, compared with $601,000 for the first quarter of 2010. The increase in selling expenses was primarily attributed to increased commission paid for increased revenue.

Selling expenses accounted for 4.5% and 5% of total sales revenue in the first quarter of 2011 and 2010 respectively.

Research and Development Expenses

The net research and development expenses were $520,459 for the first quarter of 2011, representing a decrease of $3,541, or a 0.67% decrease, compared with $524,000 for the first quarter of 2010. The increase was mainly an increase in payroll expenses and raw materials costs, due to increased research and development activities on new products.

Research and development expenses accounted for 3.88% and 4% of total sales revenue in the first quarter of 2011 and 2010 respectively.

General and Administrative Expenses

General and administrative expenses were $1.14 million for the first quarter of 2011, which was approximately the same as for the first quarter of 2010. General and administrative expenses mainly include payroll, share-based compensation, water and electricity expenses, depreciation and insurance expenses, rental expenses and professional service fee, etc.

General and administrative expenses accounted for 8.54% and 9% of total sales revenue in the first quarter of 2011 and 2010 respectively.

Interest Expense

The net interest expenses was $285,374 for the first quarter of 2011, representing an increase of $116,374, or a 68.86% increase, compared with $169,000 in the first quarter of 2010. With continuous losses through its operating activities, the Company had to seek more funds from bank loans to support its working capital demands. As of March 31, 2011, the balance of short-term and long-term loans from bank was $15 million, while as of March 31, 2010, the balance of short-term and long-term bank loans was $18.3 million. The interest expenses increased in line with an increase in bank loans and other forms of financing.

Interest expenses accounted for 2.12% and 1.4% of total sales revenue in the first quarter of 2011 and 2010 respectively.

Income Tax Provision

There was no income tax provision for the first quarter of 2011 and 2010. As all operating subsidiaries of the Company suffered losses during the first quarter of 2010, no income tax was provided.

Net Loss

Net loss was $2 million for the first quarter of 2011, compared with a net loss of $577,000 for the same period of 2010. Net loss increased mainly due to increase in cost of sale.

Losses per Share

The basic losses per share were $0.09 for the first quarter of 2011, compared with basic losses per share of $0.03 for the first quarter of 2010. Increase in basic losses per share was due to an increase of net loss occurred in the first quarter of 2011.

Liquidity and Capital Resources

As of March 31, 2011 and December 31, 2010, the Company had cash and cash equivalents of $4.4 million and $6.6 million, respectively. The Company’s working capital was approximately -$3.5 million and -$1.8 million, respectively, as of March 31, 2011 and December 31, 2010.

The Company’s operations were currently financed mainly by bank loans. As of March 31, 2011, balance of short term and long term bank loans was $15.1 million. As of March 31, 2011, total bank facility of the company granted from bank was RMB 133,000,000, equivalent to $20.2 million and the bank facility available to the Company was RMB33.9 million, equivalent to $5.1 million, which was provided by China Development Bank. As the Company has the property in Dongguan facility with net carrying amount of $3.5 million not yet pledged against bank loan or loan facilities, the Company expects to be able to apply for additional bank facilities using the property as collateral.

The Company is now constructing a new manufacturing facility in the Guangming District of Shenzhen City, and the capital commitment on construction of the facility was $10.5 million as of March 31, 2011.

The cash on hand and bank facilities available are enough to meet the Company’s capital commitments and day-to-day requirements at current operating level. The Company may need to seek further financing resources to supplement operating cash flows if its operating activity expands more rapidly. As abovementioned, the Company could apply for additional bank facilities using the property as collateral.

For the three months ended March 31, 2011, net cash used by operating activities was $2.1 million, which represented a decrease of $1.7 million as compared to the net cash used by operating activities of $3.8 million for the same period of the prior year.

As of March 31, 2011, net cash from accounts receivable increased by $1.7 million, which was fully mitigated by cash provided from a decrease in accounts payables. The Company usually provided longer credit terms to domestic customers than international customers. With the proportion of domestic sales revenue increasing, more working capital was tied in accounts receivable. The Company also relied on financings from its suppliers currently, which may lead to potential risks for its future operating. As of March 31, 2011, net cash occupied by inventory increased by $1.3 million; the increased inventory was prepared for increased sales orders for the subsequent period.

Net cash used in investing activities was $43,226 for the three months ended March 31, 2011, which was paid for construction of the new manufacturing facility in the Guangming District of Shenzhen City.

Net cash used in financing activities was $83,409 for the three months ended March 31, 2011. Proceeds from bank loans provided cash of $1.2 million.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure controls and procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports under the Securities Exchange Act of 1934, as amended, the “Exchange Act,” is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s, the “SEC,” rules and forms, and that such information is accumulated and communicated to the Company’s management, including its chief executive officer, the “CEO,” and chief financial officer, the “CFO,” as appropriate, to allow timely decisions regarding required financial disclosure.

As of March 31, 2011, the Company’s management including the CEO and CFO concluded that there have been no material changes to the disclosure control and procedures previously discussed in Part II, Item 9A of the Company's Form 10-K for the year ended December 31, 2010. The Company’s management, including the CEO and CFO, concluded that as of December 31, 2010 the Company's disclosure controls and procedures were not effective because of the material weaknesses described under “Management's Report on Internal Control over Financial Reporting.” In light of the material weaknesses not having significantly changed since December 31, 2010, the Company’s management concluded that its disclosure controls and procedures were not effective as of March 31, 2011.

To address these material weaknesses, the Company performed additional analyses and other procedures to ensure that in all material respects, the Company’s financial position, the results of its operations and its cash flows for the period presented in this Form 10-Q, in conformity with the accounting principles generally accepted in the United States of America, “GAAP.”

(b) Management’s report on internal control over financial reporting

The Company’s management, including CEO and CFO, concluded that there have been no changes to the internal controls over financial reporting that occurred during the quarter that have materially affected, or are reasonably likely to materially affect internal control over financial reporting. As a result, in light of the material weaknesses not having significantly changed since December 31, 2010, the Company’s management concluded that its disclosure controls and procedures were not effective as of March 31, 2011. The Company is in the process of taking the steps necessary for remediation of the material weaknesses identified in previously filed 10-K, and will continue to monitor the effectiveness of these steps.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors previously discussed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Stock Repurchase Program

On March 26, 2007, the Company announced that its Board of Directors had authorized the repurchase of up to $5,000,000 of its common stock from the public market or in private purchases. The terms of the repurchase program permitted the Company to repurchase shares within twelve months and to repurchase shares at a pace at the discretion of management. During the three months ended March 31, 2011, no shares were repurchased in the market. As of March 31, 2011, the shares repurchased were held under the name of a security firm and presented at line of treasury stock at cost on the balance sheet at March 31, 2011.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. RESERVED.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

a. EXHIBITS

31.1		Certification of Chief Executive Officer pursuant to Rule 13a - 14 (a) of the Securities Exchange Act of 1934 (filed herewith electronically)

31.2		Certification of Chief Financial Officer pursuant to Rule 13a - 14 (a) of the Securities Exchange Act of 1934 (filed herewith electronically)

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith electronically).

32.2		Certification of Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith electronically).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

	DIGUANG INTERNATIONAL DEVELOPMENT CO., LTD

Dated: June 14, 2011	By:	/s/Yi Song
		Yi Song
		Chairman and Chief Executive Officer

Dated: June 14, 2011	By:	/s/ Junjiang Li
		Harvey Li
		Financial Controller

DIGUANG INTERNATIONAL DEVELOPMENT CO., LTD. 10-Q