NOTE 3

FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS

ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

Level one — Quoted market prices in active markets for identical assets or liabilities;

Level two — Inputs other than level one inputs that are either directly or indirectly observable; and

Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter.

Assets and liabilities measured at fair value on a recurring basis using significant observable inputs (Level 2) from January 1, 2011 to June 30, 2011 are summarized as follows:

	Warrant Liability
Balance at January 1, 2011	$	8,682,441
Exercise of warrants		(4,983,189	)
Change in fair value included in earnings		(2,554,252	)
Balance at June 30, 2011	$	1,145,000

The Company did not identify any other assets and liabilities that are required to be presented on the condensed consolidated balance sheets at fair value in accordance with the relevant accounting standards.

The carrying values of cash and cash equivalents, trade receivables and payables, and short-term bank loans and debts approximate their fair values due to the short maturities of these instruments.

Derivative Instruments – Warrants

The Company’s warrants have been classified as derivatives in accordance with the guidance provided in FASB ASC 815-40-15-7I, because they are denominated in U.S. dollars, which is different from the Company’s functional currency (Renminbi).

The Company estimates the fair value of its warrants as of June 30, 2011 using the Black-Scholes option pricing model using the following assumptions:

Market price of common stock:	$	6.09		$	6.09
Exercise price:	$	3.50		$	4.80
Remaining contractual life (years):		2.33			3.18
Dividend yield:		−			−
Expected volatility:		32.36	%		43.80	%
Risk-free interest rate:		0.57	%		0.88	%

During the six months ended June 30, 2011, 542,300 warrants were exercised at $3.50 each in cash and 174,664 warrants were exercised on a cashless basis to purchase 104,824 shares of common stock. The Company accounted for the exercise of these warrants as extinguishment of debts in accordance with ASC 815-10-40-1, “Derivatives and Hedges – Derecognition”. In accordance with ASC 470-50-40, “Debt – Modification and Extinguishments – Derecognition”, an aggregate gain of $60,724 was recognized. For details, please refer to the following table.

Exercise date:	January 14,			March 3,			March 14,			March 17,			April 7,
Market price of common stock:	$	10.64		$	10.98		$	10.19		$	9.79		$	8.39
Exercise warrants:		549,300			20,000			28,814			74,000			44,850
Exercise price:	$	3.50		$	3.50		$	4.80		$	3.50		$	4.80
Remaining contractual life (years):		2.79			2.66			3.47			2.62			3.41
Dividend yield:		−			−			−			−			−
Expected volatility:		46.34	%		48.00	%		44.05	%		48.54	%		44.05	%
Risk-free interest rate:		0.90	%		1.09	%		1.27	%		0.86	%		1.46	%
Fair values:	$	7.2301		$	7.7083		$	6.0599		$	6.5324		$	4.4485
Gain on extinguishment of warrant liabilities	$	48,210		$	8,153		$	5,722		$	(1,361	)	$	26,531