U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission File Number: 000-54107

COLORSTARS GROUP

 (Exact name of registrant as specified in its charter)

                                     10F, No. 566 Jung Jeng Rd. Sindian City, Taipei County 231 Taiwan, R.O.C. 

(Address of principal executive offices)

(989) 509-5924

(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 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 website, 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 ¨ 

Check whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Check whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨    No  x 

As of November 14, 2011, there were 67,448,890 shares of common stock, par value $0.001, issued and outstanding.

COLORSTARS GROUP

FORM 10-Q

INDEX

PART I---FINANCIAL INFORMATION

Item 1. Financial Statements.

COLORSTARS GROUP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 (IN US$)

The accompanying notes are an integral part of the financial statements.

COLORSTARS GROUP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(IN US$)

The accompanying notes are an integral part of the financial statements.  

COLORSTARS GROUP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

The accompanying notes are an integral part of the financial statements.

COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Nature of Business and Basis of Presentation

Nature of Business – Circletronics Inc., now ColorStars Group (“the Company”), was incorporated in Canada on January 21, 2005. Circletronics Inc., was redomiciled to Nevada and its name changed to ColorStars Group on November 3, 2005. ColorStars Group owns 100% of the shares of ColorStars Inc.

Color Stars Inc. (Color Stars TW) was incorporated as a limited liability company in Taiwan, Republic of China in April 2003 and commenced its operations in May 2003. The Subsidiary is mainly engaged in manufacturing, designing and selling light-emitting diode and lighting equipment.

Basis of Presentation – The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for a complete presentation of the financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included in the accompanying financial statements. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Note 2 - Recently Issued Accounting Pronouncements

Intangibles – Goodwill and other - In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08, Intangibles –Goodwill and other Topic 350. The company has the option to assess qualitative factors to determine whether the existence of events leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The company does not need to perform the two-step impairment test if it determines the fair value of a reporting unit is less than its carrying amount after considering the totality of circumstances. This amendment simplifies how the entities test goodwill for impairment. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is permitted. The Company does not expect that the adoption will have a material effect on the consolidated financial statements.

Comprehensive Income - In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). Effective January 1, 2012, the Company will adopt the accounting standards update that amends the presentation requirements for comprehensive income and requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  Additionally, the update requires presentation of reclassification adjustments from other comprehensive income to net income on the face of the financial statements where the components of net income and the components of other comprehensive income are presented regardless of whether an entity chooses to present total comprehensive income in a single continuous statement or in two separate but consecutive statements.  The update is effective for interim and annual periods beginning after December 15, 2011.  The Company does not expect that the adoption will have a material effect on the consolidated financial statements.

COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 –Comprehensive Income (Loss)

U.S. GAAP generally requires that recognized revenues, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as separate components of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income or (loss). 

The ending accumulated other comprehensive income is as follows:

The reconciliation from net (loss) income to comprehensive (loss) is as follows:

Note 4 – Earnings per share

Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock outstanding during the period.

The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated:

COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 – Long term investment

Anteya Technology Corp is a private company incorporated in Taiwan.  The equity interest held by the Company is 20%.  Accordingly, the Company adopted the equity method of accounting with respect to the investment in Anteya. 

On July 5, 2010, the Company’s board of directors approved the sale of 30.4% equity (or 456,000 shares) in Fin-Core Corporation (FCC) to a third party at the consideration of NTD13,680,000.  After the disposal, the equity interest of the Company in FCC decreased from 50.4% to 20%. 

On July 5, 2010, the Company’s board of directors approved the participation in subscribing FCC's newly issued shares and maintains the overall equity interest of 20%.  The Company subscribed 500,000 shares at consideration of NTD10,000,000.  The Company adopted the equity method of accounting to the investment in FCC.

Phocos AG is a private company incorporated in Germany.  The equity interest held by the Company is 2.38%.

COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 – Long term investment (continued)

The unaudited financial information of Anteya Technology Corp. as of September 30, 2011 and December 31, 2010 and for nine months ended September 30, 2011 and 2010 (in US dollars) are as follows:

Note 6 – Inventory

Inventories stated at the lower of cost or market value are as follows:

COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 – Income taxes

The Company is subject to U.S. federal income tax as well as income tax in states and foreign jurisdictions. For the major taxing jurisdictions, the tax years 2006 through 2010 remain open for state and federal examination.  The Company believes assessments, if any, would be immaterial to its consolidated financial statements. 

The income tax provision information is provided as follows:

Note 8 – Accrued expenses

COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 - Bank short term debt

The Company signed a revolving credit agreement with various lending institutions. The interest rate on short-term borrowings outstanding as of September 2011 ranges from 2.946% to 3.117% per annum, as of December 31, 2010, interest rate ranges from 2.604% to 3.070% per annum.  The short term debt is secured by:

1. personal guarantee from the director
2. the realty property from spouse of the director

Note 10- Geographic Information

Product revenues for the three and nine months ended September 30, 2011 and 2010 are as follows:

Note 11 – Related Party Transactions

The Company has recorded expenses for the following related party transactions for nine months ended September 30, 2011 and 2010:

COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11 – Related Party Transactions (continued)

As of the balance sheet date indicated, the Company had the following liabilities recorded with respect to related party transactions:

The Company leases office space from Mr. Wei-Rur Chen which the term for the agreement is from November 2010 to November 2015. 

The Company conducted business with related party companies, Anteya Technology Corp and Fin-Core Corporation. The Company owns 20% of the outstanding common stock of Anteya Technology Corp and Fin-Core Corporation as of September 30, 2011.  All transactions were at market-based prices.

The stockholder, Mr. Wei-Rur Chen, provided a personal loan of USD$100,000 to the company.  The personal loan is unsecured, interest free and repayable on demand.  Mr. Chen demanded the loan to be repaid before the end of this year.

Note 12 – Commitments

The company leases offices in Taiwan and in California, US under operating leases.  Minimum future rental payments due under non-cancelable operating leases with remaining terms at September 30, 2011 are as follows:

COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13– Subsequent Events

The Company evaluated all events subsequent to September 30, 2011 through the date of the issuance of the financial statements and concluded that except the following matter, there are no other significant or material transactions to be reported.

In October 2011, the associated company, Fin-Core Corporation, has decided to raise its capital by issuing 3,000,000 new shares at par value of NTD10 per share.  The Company is entitled to subscribe for up to 600,000 shares for NTD6,000,000.  However the Company chose not to participate the subscription of any newly issued shares of Fin-Core.  As a result, the Company’s equity interest in Fin-Core will be decreased to 11.43% from the current 20% after issuance of 3,000,000 new shares.  Fin-Core will complete the shares allotment in November 2011.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operation.

Forward Looking Statements

                Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements generally are identified by the words “believes”, “project”, “expects”, “anticipates”, “estimates”, “intends”, “strategy”, “plan”, “may”, “will”, “would”, “will be”, “will continue”, “will likely result”, and similar expressions.  We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements.  Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles.  These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.  Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.

Overview

(a)           Business Overview. 

ColorStars Group (“we”, “us”, “our”, the “Company”) was initially incorporated in the Province of Ontario, Canada on January 21, 2005.  On November 3, 2005, we converted to a Nevada corporation.  We are a vertically integrated lighting company that develops light emitting diodes (“LED”) based lighting products for general consumer applications as well as LED lighting products for professional lighting installations. Our LED lighting application development activity ranges from LED packaging to optical lens and heat management, from retrofit LED lamps and bulbs to lighting fixtures designed for general and special lighting applications.

(b)           Recent Transactions. 

On March 20, 2009, ColorStars Taiwan acquired 50.4% of the outstanding common shares of Fin-Core Corporation, a Taiwanese corporation (“Fin-Core”) for a cash consideration of US $468,262.  This resulted in Fin-Core becoming a subsidiary of ours. The purchase price for the common shares of Fin-Core was determined through private negotiations between the parties and was not based upon any specific criteria of value. Fin-Core is principally engaged in the design and manufacturing of thermal management devices, the design and manufacturing of electrical and lighting devices and trade, and the import and export of electrical and lighting devices.

On July 7, 2010, ColorStars Taiwan sold 30.4% of its common shares of Fin-Core to Meiloon Industrial Co., Ltd., a publicly traded company on the Taiwan Stock Exchange, for a cash offering of US $434,000.  As a result of this transaction, ColorStars Taiwan now owns only 20% of the outstanding common shares of Fin-Core.

On August 10, 2009, ColorStars Taiwan acquired a 51% equity interest in Jun Yee Industrial Co., Ltd., a Taiwanese corporation (“Jun Yee”) for a cash consideration of US $536,000.  The purchase price for the equity interest in Jun Yee was determined through private negotiations between the parties and was not based upon any specific criteria of value.  Upon acquiring the equity interest, Jun Yee became a subsidiary of ours.  The principal activity of Jun Yee is the manufacturing of LED light.

On November 26, 2010, ColorStars Taiwan entered into two related stock purchase agreements whereby ColorStars Taiwan sold all of its shares of Jun Yee common stock to Mr. Ming-Chun Tung and Ms. Ming-Fong Tung. Pursuant to the stock purchase agreement entered into with Mr. Ming-Chun Tung, ColorStars Taiwan sold 265,000 shares of its Jun Yee common stock to Mr. Ming-Chun Tung at a price per share of NTD $23 (USD $0.76) for a total purchase price of NTD $6,095,000 (USD $200,427).  Furthermore, pursuant to the stock purchase agreement entered into with Ms. Ming-Fong Tung, ColorStars Taiwan sold 500,000 shares of its Jun Yee common stock to Ms. Ming-Fong Tung at a price per share of NTD $23 (USD $0.76) for a total purchase price of NTD $11,500,000 (USD $378,165).  As a result of the transactions consummated above, Jun Yee is no longer our subsidiary.

Results of Operations

Comparison of Three Months Ended September 30, 2011 to Three Months Ended September 30, 2010

                Net Sales.  Net  sales decreased to $958,162 for the three months ended September 30, 2011 from $1,519,729 for the three months ended September 30, 2010. The decrease in sales was due to the disposition of our equity interest in Jun Yee.

                Cost of Goods Sold.  Cost of goods sold decreased to $693,937 for the three months ended September 30, 2011 from $948,549 for the three months ended September 30, 2010. The decrease in cost of goods sold was due to a decrease in net sales as a result of the disposition of our equity interest in Jun Yee.

                Gross Profit.  Gross profit decreased to $264,225 (27.6%) for the three months ended September 30, 2011 from $571,180 (37.6%) for the three months ended September 30, 2010. The decrease in gross profit was due to a decrease in net sales as a result of the disposition of our equity interest in Jun Yee.

Gross Profit Percentage.  Gross profit percentage decreased to 27.6% for the three months ended September 30, 2011 from 37.6% for the three months ended September 30, 2010. The decrease in gross profit percentage was due to the depreciation of the US dollar against the New Taiwanese Dollar (NTD). 

                Selling, General and Administrative Expenses.   Selling, general and administrative expenses decreased to $313,715 for the three months ended September 30, 2011 from $327,425 for the three months ended September 30, 2010. The decrease in selling, general and administrative expenses is primarily related to the disposition of our equity interest in Jun Yee.

                Research and Development Expenses.  Research and development (R&D) expenses decreased to $(5,708) for the three months ended September 30, 2011 from $16,832 for the three months ended September 30, 2010.  The decrease in R&D expenses is due to the disposition of our equity interest in Jun Yee and more weighted R&D expenses allocated in the first and second quarter of 2011.

                Depreciation and Amortization.  Depreciation and amortization decreased to $8,651 for the three months ended September 30, 2011 from $12,842 for the three months ended September 30, 2010 as a result of the disposition of our equity interest in Jun Yee.

                Interest Expense.  Interest expense decreased to $3,127 for the three months ended September 30, 2011 compared with $9,896 for the three months ended September 30, 2010. The decrease in interest expense was due to the disposition of our equity interest in Jun Yee.

                Net Income (loss).  For the three months ended September 30, 2011, we incurred a net loss of ($25,473) as compared to net gain of $344,773 for the three months ended September 30, 2010.  The net loss was primarily a result of a decrease of gross profit due to the disposition of our equity interest in Jun Yee and increased operational costs of our US operations based out of Irvine, California.

Comparison of Nine Months Ended September 30, 2011 to Nine Months Ended September 30, 2010

Net Sales.  Net  sales decreased to $2,997,182 for the nine months ended September 30, 2011 from $4,825,540 for the nine months ended September 30, 2010. The decrease in sales was due to the disposition of our equity interest in Jun Yee.

                Cost of Goods Sold.  Cost of goods sold decreased to $2,180,320 for the nine months ended September 30, 2011 from $3,419,955 for the nine months ended September 30, 2010. The decrease in cost of goods sold was due to a decrease in our net sales as a result of the disposition of our equity interest in Jun Yee.

                Gross Profit.  Gross profit decreased to $816,862 for the nine months ended September 30, 2011 from $1,405,585 for the nine months ended September 30, 2010. The decrease in gross profit was due to a decrease in our net sales as a result of the disposition of our equity interest in Jun Yee and a decrease of our gross profit margin in terms of percentage.

                Selling, General and Administrative Expenses.   Selling, general and administrative expenses decreased to $821,461 for the nine months ended September 30, 2011 from $1,327,854 for the nine months ended September 30, 2010. The decrease in selling, general and administrative expenses is primarily related to the disposition of our equity interest in Jun Yee.

                Research and Development Expenses.  Research and development (R&D) expenses increased to $86,631 for the nine months ended September 30, 2011 from $69,683 for the nine months ended September 30, 2010.  The increase in R&D expenses is due to increased product development activities and increased R&D staff.

                Depreciation and Amortization.  Depreciation and amortization decreased to $20,867 for the nine months ended September 30, 2011 from $107,764 for the nine months ended September 30, 2010 as a result of the disposition of our equity interest in Jun Yee.

                Interest Expense.  Interest expense decreased to $8,882 for the nine months ended September 30, 2011 compared with $31,301 for the nine months ended September 30, 2010. The decrease in interest expense was due to the disposition of our equity interest in Jun Yee.

                Net Income (loss).  For the nine months ended September 30, 2011, we incurred a net loss of $(132,715) as compared to net gain of $166,286 for the nine months ended September 30, 2010.  The decrease in net gain was primarily a result of decreased profit margins due to the exchange rate, increased R&D expenses, increased marketing activities in our US office, and the disposition of our equity interest in Jun Yee.

Financial Condition, Liquidity and Capital Resources

Our revenues are primarily derived from sales of the LED devices and systems described above. Although our financial results are mainly dependent on sales, general and administrative, compensation and other operating expenses, our financial results have also been dependent on the level of market adoption of LED technology as well as general economic conditions.

Lighting products remained relatively static for 50 years until recently, when lighting became one of the last major markets to be transformed substantially by new technology. Because LED technology remains an emerging and expensive technology that has only recently become more economically viable, market adoption has been slow. Given the current economic downturn, liquidity has been constrained forcing institutions and individuals to substantially reduce capital spending to focus only on critical path expenditures. LED lighting products have been a discretionary rather than mandatory investment, and as a result, sales of our devices and systems have been negatively impacted. We believe that as the global economy grows and provides institutions and individuals with greater liquidity, sales of our devices and systems will increase.

Increased market awareness of the benefits of LED lighting, increasing energy prices and the social movement influencing individuals and institutions towards greater investment in energy-efficient products and services will have, we believe, an increasingly positive impact on our sales in the future. Additionally, we intend to utilize our strategic partnerships to help us reduce the component and production costs of our devices and systems in order to offer them at competitive prices. Further, we believe our ability to provide attractive financing options to our clients with respect to the purchase of our devices and systems will positively affect our sales. Similar to many manufacturing companies, we expect to benefit from economies of scale, meaning that as unit sales increase, our cost of production per unit should decrease, which would positively impact our financial results. Our financial results for recent periods, however, do not support this contention. We believe that this contention is not supported because of our prior investments in Fin-Core and Jun Yee.  Fin-Core and Jun Yee, as manufacturing factories, have lower gross margins. As a result, these lower gross margins cause the overall gross margin from the previous period to decrease.  Also, Jun Yee relocated their manufacturing factory in February of 2010, and during the relocation, the factory was completely shut down for an entire week.  As a consequence, this relocation increased the operating costs of Jun Yee and further decreased the overall consolidated gross margin.

As described in further detail in the Recent Transactions section of Item 2, ColorStars Taiwan acquired controlling interests in Fin-Core and Jun Yee in 2009 and then disposed of these interests in July and November 2010, respectively.

ColorStars Taiwan initially acquired Fin-Core due to the fact that Fin-Core has a very effective and unique heat-sink design and patent for building certain LED lighting products for commercial applications.  We believed that Fin-Core’s ability to efficiently and effectively develop LED Lighting products using their unique heat –sink design would help us to develop more world-wide sales channels in the commercial lighting segment for our LED products.   However, by the end of June 2010, Fin-Core's financial situation had deteriorated as it had spent most of its capital in product development, certification, and production machinery.  At that time, we were unable to provide additional funding to Fin-Core.  As such, in order to provide more funding for the continuation and operation of Fin-Core, on July 7, 2010, ColorStars Taiwan sold 30.4% of its common shares of Fin-Core to Meiloon Industrial Co., Ltd., a publicly traded company on the Taiwan Stock Exchange, for a cash offering of US $434,000.00.  As a result of this transaction, ColorStars Taiwan now owns only 20% of the outstanding common shares of Fin-Core.

As Jun Yee is an expert in LED linear and panel lighting design and manufacturing, we initially acquired Jun Yee in order to expand our LED linear and panel lighting design product offering. However, after maintaining the controlling stake in Jun Yee for a year, we observed that Jun Yee had a high debt ratio, low current ratio, and no profit.  As such, on November 26, 2010, ColorStars Taiwan entered into two related stock purchase agreements whereby ColorStars Taiwan sold all of its shares of Jun Yee common stock to Mr. Ming-Chun Tung and Ms. Ming-Fong Tung, as discussed in further detail in the Recent Transactions section of Item 2.

Net cash provided by (used in) operating activities.  During the three months ended September 30, 2011, net cash used in operating activities was $(153,302) compared with $(172,987) used in operating activities for the three months ended September 30, 2010.  The cash flow used in operating activities in the three months ended September 30, 2011 was primarily the result of account receivables, taxes payable, and receipt in advance and other current liabilities. The cash flow used in operating activities in the three months ended September 30, 2010 was primarily the result of the gain realized from the disposition of our investment and inventory.

Net cash provided by (used in) investing activities. During the three months ended September 30, 2011, net cash used in investing activities was $(64,593) compared with $32,349 provided by investing activities for the three months ended September 30, 2010.  The cash flow used in investing activities in the three months ended September 30, 2011 was primarily the result of our investments in tooling for manufacturing. The cash flow provided by investing activities in the three months ended September 30, 2010 was primarily the result of proceeds derived from the sale of our investments and the disposition of our fixed assets.

Net cash provided by (used in) financing activities. During the three months ended September 30, 2011, net cash provided by financing activities was $100,000 compared with $(5) used in financing activities for the three months ended September 30, 2010.  The cash flow provided by financing activities in the three months ended September 30, 2011 was primarily derived from a personal loan granted to the Company from a stockholder for funding of our US operations. The cash flow used in financing activities in the three months ended September 30, 2010 was primarily the result of our repayment on a bank loan.

Net cash provided by (used in) operating activities.  During the nine months ended September 30, 2011, net cash used in operating activities was $(107,412) compared with $(496,867) used in operating activities for the nine months ended September 30, 2010.  The cash flow used in operating activities in the nine months ended September 30, 2011 was primarily the result of the Company’s operating loss, accounts receivable, and accrued expenses. The cash flow used in operating activities in the nine months ended September 30, 2010 was primarily related to our inventory.

Net cash provided by (used in) investing activities. During the nine months ended September 30, 2011, net cash used in investing activities was $(124,200) compared with $(141,161) used in investing activities for the nine months ended September 30, 2010.  The cash flow used in investing activities in the nine months ended September 30, 2011 was primarily the result of the addition of fixed assets pertaining to manufacturing tooling. The cash flow used in investing activities in the nine months ended September 30, 2010 was primarily the result of the addition of intangible and fixed assets.

Net cash provided by (used in) financing activities. During the nine months ended September 30, 2011, net cash provided by financing activities was $100,000 compared with $(18,824) used in financing activities for the nine months ended September 30, 2010.  The cash flow provided by financing activities in the nine months ended September 30, 2011 was primarily the result of a personal loan granted to the Company from a stockholder. The cash flow used in financing activities in the nine months ended September 30, 2010 was primarily the result of our repayment on a bank loan.

We currently anticipate that our available cash in hand and cash resources from expected revenues will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next twelve months.

We currently have outstanding short-term loans with Hua Nan Commercial Bank of Taiwan. We entered into three written, short-term loan agreements with this bank on August 22, 2011, June 24, 2011, and July 29, 2011, respectively.  The terms of the loan agreements are described in further detail in the chart below:

(1) NTD $3,000,000 is approximately USD $99,667.48

(2) NTD $6,000,000 is approximately USD $199,334.96.

                Additionally, on July 20, 2011, our Chairman, Mr. Wei-Rur Chen, provided a personal loan to the Company in an amount equal to One Hundred Thousand and No/100 Dollars (US $100,000).  The personal loan is unsecured, interest free and repayable on demand. We did not enter into a written loan agreement with Mr. Chen.

Our continued existence is dependent upon several factors, including increased sales volumes, collection of existing receivables and the ability to achieve profitability from the sale of our products. In order to increase our cash flow, we are continuing our efforts to stimulate sales.

Inflation

                At this time, we do not believe that inflation and changes in price will have a material effect on operations.

Off-Balance Sheet Arrangements

                We have no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

                As we are a smaller reporting company, we are not required to provide the information required by this item.

 Item 4.  Controls and Procedures.

Evaluation of disclosure controls and procedures. 

We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.  As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this report, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of that date.

Changes in internal control over financial reporting. 

                There were no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II---OTHER INFORMATION

Item 1.  Legal Proceedings.

                There are no legal proceedings that have occurred within the past five years concerning our directors or control persons which involved a criminal conviction, a criminal proceeding, an administrative or civil proceeding limiting one’s participation in the securities or banking industries, or a finding of securities or commodities law violations.

Item 1A.  Risk Factors.

                As we are a smaller reporting company, we are not required to provide the information required by this item.

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

(a)           Unregistered Sales of Equity Securities. 

                None. 

(b)           Use of Proceeds. 

                Not applicable.

(c)           Affiliated Purchases of Common Stock. 

                None.  

Item 3.  Defaults Upon Senior Securities.

                None.

Item 4.  (Removed and Reserved).

Item 5.  Other Information.

                None.

Item 6. Exhibits.

                                                                                INDEX TO EXHIBITS

SIGNATURES

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