PARAGON TONER, INC.
FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

To the Board of Directors
Paragon Toner, Inc.
La Mirada, CA

We have reviewed the accompanying balance sheets of Paragon Toner, Inc. (an S corporation, the “Company”) as of June 30, 2009 and 2008, and the related statements of operations, changes in stockholder’s equity, and cash flows for the six months then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of the Company.

A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles in the United States of America.

Los Angeles, California
September 25, 2009

See accompanying notes to financial statements.
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See accompanying notes to financial statements.
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PARAGON TONER, INC.
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008

See accompanying notes to financial statements.
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See accompanying notes to financial statements.
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(continued)

See accompanying notes to financial statements.
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See accompanying notes to financial statements.
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Note 1 - Nature of Business

Paragon Toner, Inc. (the “Company”) was incorporated in the State of California on January 27, 2004. The Company is engaged primarily in manufacturing, and distributing compatible toners, which are sold primarily to customers in the United States.

Note 2 - Summary of Significant Accounting Policies

This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, who is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

Use of estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Estimates are primarily used for depreciation of property and equipment, amortization of intangible assets, allowances for doubtful accounts and inventory valuation. Actual results could differ from those estimates.

Revenue recognition

The Company recognizes revenues from product sales when earned. Specifically, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred (or services have been rendered), the price is fixed or determinable, and collectability is reasonably assured. Revenue is not recognized until title and risk of loss have transferred to the customer. The shipping terms for the majority of the Company’s revenue arrangements are FOB (free on board) destination. Revenue is recorded net of customer returns, allowances and discounts that occur under arrangements established with customers.

Cash and cash equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be categorized as cash and cash equivalents.

Allowance for doubtful accounts

The allowance for doubtful accounts is computed based upon the management’s estimate of uncollectible accounts and historical experience. The Company performs ongoing credit evaluations of its customers to estimate potential credit losses. Amounts are written off against the allowance in the period the Company determines that the receivable is uncollectible. The allowance for doubtful accounts is $0 and $247,793 as of June 30, 2009 and 2008, respectively.

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Note 2 - Summary of Significant Accounting Policies (continued)

Inventory

Inventory is stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Appropriate consideration is given to obsolescence, slow moving items and other factors in evaluating net realizable value.

Property and equipment

Property and equipment are stated at cost. The straight-line method is used to calculate depreciation over their estimated useful lives ranging as follows:

Leasehold improvements are depreciated to expense over the shorter of the life of the improvement or the remaining lease term. Capital expenditures that enhance the value or materially extend the useful life of the related assets are reflected as additions to property and equipment. Expenditures for repairs and maintenance are charged to expense as incurred. Upon a sale or disposition of assets, a gain or a loss is included in the statement of operations. Depreciation expense amounted to $44,032 and $39,000 for the six months ended June 30, 2009 and 2008, respectively.

Impairment of long-lived assets

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value. In management’s opinion, no such impairment existed as of June 30, 2009 and 2008.

Accrued expenses

The Company’s accrued expenses consist of amounts payable for salaries, payroll taxes and sales taxes.

Deferred rent

The Company recognizes rent expense equal to the total of the payments and free rent received due over the lease term, divided by the number of months of the lease term applying the straight-line method. The difference between rent expense recorded and the amount paid is credited or charged to deferred rent.

Shipping and handling

Certain shipping and handling fees are charged to customers and these are classified as revenue. The costs associated with all shipping to customers are recorded as operating expenses. Shipping expenses for the six months ended June 30, 2009 and 2008 amounted to $89,859 and $69,009, respectively.

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Note 2 - Summary of Significant Accounting Policies (continued)

Income taxes

The Company elected to be subject to the S corporation provisions of the Internal Revenue Code for federal and state income tax purposes effective January 27, 2004. Accordingly, as an S corporation, the Company’s taxable income or losses and applicable tax credits are passed through to its shareholder and reported on shareholder’s individual income tax return. However, the State of California requires S Corporation to pay a state franchise tax (currently 1.5% on its taxable income).

Recent pronouncements

In October 2008, the FASB issued Staff Position No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (FSP 157-3). FSP 157-3 clarifies the application of SFAS 157. The Company expects the adoption of FSP 157-3 will not have a material impact on financial condition or results of operations.

In December 2008, the FASB provided for a deferral of the effective date of FIN 48 for certain nonpublic enterprises to annual financial statements for fiscal years beginning after December 15, 2008. The Company has elected this deferral and accordingly will be required to adopt FIN 48 in its 2009 annual financial statements. Prior to adoption of FIN 48, the Company will continue to evaluate its uncertain tax positions and related income tax contingencies under Statement No. 5, Accounting for Contingencies. SFAS No. 5 requires the Company to accrue for losses it believes are probable and can be reasonably estimated.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2/124-2”). FSP FAS 115-2/124-2 requires entities to separate any other-than-temporary impairment of a debt security into two components when there are credit related losses associated with the impaired debt security for which management asserts that it does not have the intent to sell the security, and it is more likely than not that it will not be required to sell the security before recovery of its cost basis. The amount of the other-than-temporary impairment related to a credit loss is recognized in earnings, and the amount of the other-than-temporary impairment related to other factors is recorded in other comprehensive loss. FSP FAS 115-2/124-2 is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company expects the adoption of FSP FAS 115-2/124-2 will not have a material impact on its financial condition or results of operations.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 require disclosures about fair value of financial instruments in interim and annual financial statements. FSP FAS 107-1 and APB 28-1 are effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company expects the adoption of FSP FAS 107-1 and APB 28-1 will not have a material impact on its financial condition or results of operations.

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Note 2 - Summary of Significant Accounting Policies (continued)

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are Not Orderly” (“FSP FAS 157-4”). Under FSP FAS 157-4, if an entity determines that there has been a significant decrease in the volume and level of activity for the asset or the liability in relation to the normal market activity for the asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect fair value. In addition, if there is evidence that the transaction for the asset or liability is not orderly, the entity shall place little, if any weight on that transaction price as an indicator of fair value. FSP FAS 157-4 is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company expects the adoption of FSP FAS 157-4 will not have a material impact on its financial condition or results of operations.

Note 3 - Inventory

Inventory consists of the following at June 30:

The Company recorded a reserve for slow moving and obsolete inventory of $0 and $9,005 as cost of goods sold for the six months ended June 30, 2009 and 2008, respectively. Overhead allocated to the inventory amounted to $10,436 and $10,360 for the six months ended June 30, 2009 and 2008, respectively.

Note 4 - Note receivable

The Company has $15,000 and $0 of non-interest bearing note receivable from an unrelated party as of June 30, 2009 and 2008, respectively. The note is due in lump-sum repayment on maturity date of September 22, 2009.

Note 5 - Due from related parties

Advances to family members of the stockholder are unsecured, non-interest bearing and due on demand. The Company has $343,380 and $228,150 of advances due from related parties as of June 30, 2009 and 2008, respectively.

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Note 6 - Line of Credit

The Company has a line of credit with a bank with a maximum borrowing limit of $600,000. The outstanding balance was $600,000 and $540,265 as of June 30, 2009 and 2008, respectively. This line of credit matures on June 7, 2010 and is secured by the Company’s accounts receivable, inventory and other miscellaneous assets. Interest is accrued at the bank’s prime plus 1.00% (4.25% as of June 30, 2009).

The Company incurred interest expenses on this line of credit of $13,244 and $19,098 for the six months ended June 30, 2009 and 2008, respectively. This line of credit contains certain covenants, and in management opinion, the Company is in compliance with the covenants as of June 30, 2009.

Note 7 - Notes Payable

As of June 30, the Company has long term notes payable as follows;

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Note 7 - Notes Payable (continued)

Maturities of notes payable are as follows for the years ending December 31:

Total interest expenses from the notes payable were $2,857 and $5,548 for the six months ended June 30, 2009 and 2008, respectively.

Note 8 - Capital Lease Obligations

The Company entered into numerous capital lease agreements with leasing companies to purchase certain equipment and transportation vehicles. As of June 30, these assets are carried as follows:

The related future minimum lease payments under the capital lease obligations are as follows at June 30:

Maturities of capital lease obligations are as follows for the years ending December 31:

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Note 8 - Capital Lease Obligations (continued)

Total interest expenses from the capital lease obligations were $7,444 and $9,796 for the six months ended June 30, 2009 and 2008, respectively.

Note 9 - Convertible Bonds Payable

The Company has convertible bonds payable of $199,220 and $0 as of June 30, 2009 and 2008, respectively. The principal and any accrued but unpaid interest under the convertible notes will be due and payable upon demand by the holders at anytime after May 13, 2010. The bonds are convertible into the Company's common stock at a conversion price of $155 per stock at any time upon demand. The maximum number of shares that could be issued is 1,297 shares.

Note 10 - Capitalized Website Costs

The Company amortizes its website over the estimated useful life of three years. Amortizable intangible assets are tested for impairment when impairment indicators are present, and, if impaired, written down to fair value based on either discounted cash flows or appraised values. No impairment of website costs has been identified during the periods presented. The carrying amount and accumulated amortization related to the website costs are as follows as of June 30:

Estimated aggregate amortization expense for each of the succeeding years is as follows:

Total amortization expenses were $7,765 for the both six months ended June 30, 2009 and 2008.

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Note 11 - Commitments and Contingencies

The Company leases its warehouse and office from a non-affiliate. Future minimum rental payments under these leases as of June 30, 2009 are as follows:

Rent expenses amounted to $125,462 and $127,605 for the six months ended June, 30, 2009 and 2008, respectively. The Company allocated $114,933 and $119,210 of rent expenses to cost of goods sold for the six months ended June 30, 2009 and 2008, respectively.

Note 12 - Concentration of Credit Risk

Beginning December 19, 2008, the Federal Deposit Insurance Company (FDIC) began the “Transaction Account Guarantee Program”. Under that program, through December 31, 2013, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account. Coverage under the Transaction Account Guarantee Program is in addition to and separate from the coverage available under the FDIC's general deposit insurance rules. The general deposit insurance limit was also raised from $100,000 to $250,000 through December 31, 2009. As of June 30, 2009, The Company had no balances above this limit.

A significant portion of the Company’s sales and accounts receivable is concentrated in a limited number of customers. Two major customers account for 49% of total revenue and 35% of total receivable for the six months ended and as of June 30, 2009. Three major customers account for 54% of total revenue and 65% of total receivable for the six months ended and as of June 30, 2008. The Company expects that a significant portion of its sales may continue to be concentrated with a limited number of customers. The concentration of the business with a relatively small number of customers may expose the Company to a material adverse effect if one or more of large customers were to experience financial difficulty.

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Note 13 - Schedules of Selling, General and Administrative Expenses

The selling, general and administrative expenses for the six months ended June 30 are as follows:

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