UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 8-K

CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): February 5, 2007

DIVERSIFAX, INC.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE
(State or Other Jurisdiction of Incorporation)

        000-20936                                      13-3637458
------------------------                    ---------------------------------
(Commission File Number)                    (IRS Employer Identification No.)

Shennan Zhong Road,
P.O. Box 031-114, Shenzhen City, P.R. China
(Address of Principal Executive Offices) (Zip Code)

212-561 3604
(Registrant's Telephone Number, Including Area Code)

N/A
(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

|_| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))


Item 1.01. Entry into a Material Definitive Agreement.

On February 5, 2007, Diversifax, Inc. (the "Registrant", or "DSFX"), Upper Class Group Limited ("UCG"), Shouguang City Haoyuan Chemical Company Limited ("SCHC"), Shouguang Yuxin Chemical Industry Company Limited ("SYCI"), and the shareholders of Shouguang Yuxin Chemical Industry Company Limited (the "Shareholders"), entered into a Share Exchange Agreement (the "Share Exchange Agreement") pursuant to which SCHC will acquire 100% of SYCI in a stock and cash transaction valued at approximately USD18,900,000. Pursuant to the Share Exchange Agreement, in exchange of surrendering their shares in SYCI, the SYCI Shareholders will receive an aggregate of 16,188,118 newly issued shares of the Registrant's common stock, which are to be divided proportionally among the SYCI Shareholders in accordance with their respective ownership interests in SYCI immediately before the completion Share Exchange Transaction, and interest-free promissory notes in the aggregate principal amount of $2,550,000, divided proportionally among the SYCI Shareholders in accordance with their respective ownership interests in SYCI immediately before the completion Share Exchange Transaction, with a maturity date of August 5, 2007 (or six months from the closing of the Share Exchange Transaction). A copy of the Share Exchange Agreement is filed as Exhibit 10.1 to this Current Report.

DSFX, UCG, SCHC, SYCI and the SYCI Shareholders have made customary representations, warranties and covenants in the Agreement. Consummation of the transactions set forth in the Agreement are subject to certain conditions, including, among others, (i) absence of any law or order prohibiting the consummation of the Share Exchange; (ii) the continued accuracy of each party's representations and warranties contained in the Agreement; and (iii) compliance with each party's covenants. The Agreement contains certain termination rights for both DSFX, on the one hand, and SYCI and the Shareholders, on the other hand.

The transaction described in the Share Exchange Agreement is referred to in this Current Report as the "Share Exchange Transaction." A summary of the Share Exchange Transaction, as well as the material terms and conditions of the Share Exchange Agreement, are set forth below, but such summary is qualified in its entirety by the terms and condition of the Share Exchange Agreement, which are incorporated herein by this reference.

1. The Parties to the Share Exchange Agreement

SCHC is a wholly own subsidiary of UCG, and UCG is a wholly own subsidiary of DSFX. SYCI is a corporation formed under the laws of the China and is engaged in manufacturing and sales of chemical products. Shandong Haoyuan Industry Group Ltd. and Wenxiang Yu are the shareholders of SYCI (the "SYCI Shareholders"). In addition, Ming Yang is the Chairman and Chief Executive Office of Shandong Haoyuan Industry Group Ltd.

2. The Share Exchange Transaction

Pursuant to the Share Exchange Agreement, SCHC will acquire 100% of the issued and outstanding capital stock of SYCI. As a result of the Share Exchange Transaction, SYCI will become a wholly owned subsidiary of SCHC, which, in turn, will make the Registrant the indirect owner of SYCI.

3. The Consideration

Pursuant to the Share Exchange Agreement, in exchange of surrendering their shares in SYCI, the SYCI Shareholders will receive a combination of the aggregate of 16,188,118 shares of the Registrant's common stock and promissory notes in the aggregate principal amount of $2,550,000, bearing no interest, with a maturity date of August 5, 2007.


4. The Share Exchange Agreement

The Share Exchange Agreement contains customary terms and conditions for a transaction of this type, including representations, warranties and covenants, as well as provisions describing the consideration, the process of exchanging the consideration and the effect of the share exchange. The Share Exchange Agreement contains reciprocal indemnification provisions that provide for indemnification in the event of a breach of a representation or warranty. The indemnification provisions survive the closing of the Share Exchange Transaction for 18 months.

5. Material Relationships

Since December 2006, Ming Yang, a shareholder and Chairman of Shandong Haoyuan Industry Group Ltd. and chief executive officer of SYCI, has also served as the chairman of the board and the chief executive officer of the Registrant and has been a member of the board of directors of the Registrant (the "Board of Directors"). Mr. Yang has been a holder of the Registrant's common stock since December 2006. Immediately prior to the Share Exchange Transaction, Mr. Yang held approximately 18.6% of the Registrant's issued and outstanding common stock. Min Li, the chief financial officer of both Shandong Haoyuan Industry Group Ltd. and SYCI, has also served as the chief financial officer of the Registrant. Wenxiang Yu has been a holder of the Registrant's common stock since December 2006. Immediately prior to the Share Exchange Transaction, Mr. Yu held approximately 18.6% of the Registrant's issued and outstanding common stock.

Apart from the aforementioned relationships, there were no material relationships between the Registrant or its affiliates and any of the parties to the Share Exchange Agreement, other than in respect of the Share Exchange Agreement.

Item 2.01 Completion of Acquisition or Disposition of Assets.

On February 5, 2007, the Registrant entered into, and consummated, the Share Exchange Agreement, pursuant to which the Registrant acquired SYCI from the SYCI Shareholders. Further information about the Share Exchange Agreement and the Share Exchange Transaction is provided above under Item 1.01 of this Current Report.

In exchange for transferring SYCI to the Registrant, the SYCI Shareholders received an aggregate of 16,188,118 newly issued shares of the Registrant's common stock and two non-interest bearing promissory notes in the aggregate principal amount of $2,550,000. Further information about the consideration is provided above under Item 1.01 of this Current Report.

SYCI is engaged in manufacturing and sales of chemical products. SYCI is located in Shouguang City and organized under the laws of China. The physical location of SYCI is 2nd Living District, Qinghe Oil Factory, Shouguang City, Shandong Province, P. R. China. The company has certified with ISO9001-2000 and received the Quality Products and Services Guarantee Certificate from China Association for Quality, accredited by the Shandong as the Provincial Credit Enterprises and is a Class One supplier for both China Petroleum & Chemical Corporation (SINOPC) and PetroChina Company Limited. SYCI has been engaged in the product innovation and R&D projects with Shandong University, Shandong Institute of Light Industry, Southeast University and other higher education institutions. SYCI also has hired 3 college professors and 3 professional who hold PhD degree to lead their R& D department.

SYCI concentrates its effort on the productions and sales of chemical products that is use in oil and gas field explorations, oil and gas distribution, oil field drilling, wastewater processing, papermaking chemical agents, and inorganic chemical. SYCI also spends high amount of R&D on commonly used chemical products as well as medicine intermediates. Currently, SYCI's annual productions of oil & gas field explorations and related chemical products are over 10,000 tons, and papermaking-related chemical products are over 7,000 tons. The sales of these products are mainly distributed to large domestic papermaking manufacturers and major oilfields such as Shengli Oilfield, Daqing Oilfield, Zhongyuan Oilfield, Huabei Oilfield, and Talimu Oilfields.


Item 2.03 Creation Of A Direct Financial Obligation Or An Obligation Under An Off-Balance Sheet Arrangement Of A Registrant

Pursuant to the Share Exchange Agreement, on February 5, 2007, in exchange for the SYCI Shareholders surrendering their shares of SYCI, the Registrant issued to the SYCI Shareholder non-interest bearing promissory notes in the aggregate principal amount of $2,550,000, which is due and payable on August 5, 2007, and which contain customary terms and conditions. A copy of the form of the promissory note is filed as Exhibit 4.1 to this Current Report.

Item 3.02 Unregistered Sales of Equity Securities.

On February 5, 2007, pursuant to the Share Exchange Agreement, in exchange for the SYCI Shareholders surrendering their shares of SYCI, the Registrant issued to the SYCI Shareholders an aggregate of 16,188,118 shares of the Registrant's common stock, which were divided proportionally among the SYCI Shareholders in accordance with their respective ownership interests in SYCI immediately before the completion Share ExchangeTransaction.

1. Section 4(2) of the Securities Act

The shares of the Registrant's common stock were issued to the SYCI Shareholders without registration under Section 5 of the Securities Act of 1933, as amended (the "Securities Act") in reliance on the exemption from registration contained in Section 4(2) of the Securities Act.

The Registrant believes that all of the requirements to qualify to use the exemption from registration contained in Section 4(2) of the Securities Act have been satisfied in connection with the issuance of the shares to the SYCI Shareholders. Specifically, (1) the Registrant has determined that the SYCI Shareholders are knowledgeable and experienced in finance and business matters and thus they are able to evaluate the risks and merits of acquiring the Registrant's securities; (2) the SYCI Shareholders have advised the Registrant that they are able to bear the economic risk of purchasing the Registrant's common stock; (3) the Registrant has provided the SYCI Shareholders with access to the type of information normally provided in a prospectus; (4) pursuant to the Share Exchange Agreement, the SYCI Shareholders have agreed not to resell or distribute the securities to the public; and (5) the Registrant did not use any form of public solicitation or general advertising in connection with the issuance of the shares.

2. Regulation S under the Securities Act

In addition, the shares of the Registrant's common stock were issued to the SYCI Shareholders without registration under Section 5 of the Securities Act, in reliance on the exemption from registration contained in Regulation S under the Securities Act.

The Registrant, which is located in the United States, believes that the issuance of its common stock to Shandong Haoyuan Industry Group Ltd. and Wenxiang Yu (the "Offshore SYCI Shareholders") constituted an offshore transaction. Each of the Offshore SYCI Shareholders is a resident of China. At the time the Registrant offered to issue its shares to the Offshore SYCI Shareholders, each of the Offshore SYCI Shareholders was located in China. Furthermore, at the time the Registrant issued its common stock to the Offshore SYCI Shareholders, the Registrant reasonably believed that each of the Offshore SYCI Shareholders was outside the United States. As a result, the Registrant believes that these facts enable it to also rely on Regulation S for an exemption from the registration requirements of Section 5 of the Securities Act with respect to the issuances to the Offshore SYCI Shareholders.

Item 9.01. Financial Statements and Exhibits.

(a) Financial Statements of Business Acquired. The following financial statements are hereby included as part of this Current Report.


Shouguang Yuxin Chemical Industry Company Limited Financial Statements as of December 31, 2005 and September 30, 2006

(b) Pro Forma Financial Information. The following financial statements are hereby included as part of this Current Report.

Pro Forma Combined Financial Statements

(c) Exhibits

4.1 Form of Promissory Note of Diversifax, Inc.

10.1 Share Exchange Agreement, dated as of February 5, 2007, by and among Diversifax, Inc., a Delaware corporation ("DSFX"), Upper Class Group Limited, a British Virgin Island corporation and a wholly own subsidiary of DSFX ("UCG"), Shouguang City Haoyuan Chemical Company Limited, a wholly own subsidiary of UCG ("SCHC"), Shouguang Yuxin Chemical Industry Co, Ltd., a Shouguang corporation in China ("SYCI"), and the shareholders of SYCI.

99.1 Shonguang Yuxin Chemical Industry Company Limited Financial Statements

99.2 Pro Forma Combined Financial Statements


SIGNATURES

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

Date: February 5, 2007                            DIVERSIFAX, INC.


                                                  By: /s/ Ming Yang
                                                      --------------------------
                                                  Name: Ming Yang
                                                  Title: Chief Executive Officer


FORM OF PROMISSORY NOTE

DIVERSIFAX, INC.

PROMISSORY NOTE

NO. ___ $____________ ______, 2007

FOR VALUE RECEIVED, the undersigned, Diversifax, Inc., a Delaware corporation (the "Maker"), hereby promises to pay to the order of ___________________(the "Payee"), the principal amount of _________________, all in accordance with the provisions of this promissory note.

1. Payment of Principal. The full amount of the principal of this promissory note shall be due and payable on __________________ (the "Maturity Date").

2. No Interest. Under no circumstances shall interest accrue or be charged on the unpaid principal balance of this promissory note.

3. Method of Payment. Payments hereunder shall be in lawful money of the United States and shall be made to Payee at the following address or at such other place as Payee may designate to Maker in writing: c/o ____________________________________________________.

4. Prepayment. This promissory note may be prepaid in whole or in part at any time without penalty or premium by payment of all or any part of the outstanding principal amount.

5. Unconditional Payment Obligation. No provision of this promissory note shall alter or impair the obligation of the Maker, which is absolute and unconditional, to pay the principal of this promissory note at the time and place and in the currency herein prescribed.

6. Events of Default. If any of the following events ("Events of Default") shall occur, Payee may, by notice to Maker, declare this promissory note and all amounts payable hereunder to be due and payable, whereupon the same shall become immediately due and payable:

(a) Maker shall become insolvent or admit in writing its inability to pay its debts as they become due, or shall make a general assignment for the benefit of creditors;

(b) Any proceedings shall be instituted by or against Maker seeking either (i) an order for relief with respect to, or reorganization, arrangement, adjustment or composition of, its debts under the United States Bankruptcy Code or under any other law relating to bankruptcy, insolvency, reorganization, or relief of debtors, or (ii) appointment of a trustee, receiver or similar official for Maker or for any substantial part of its property;

(c) Maker's failure to conduct business in the ordinary course, dissolution or termination of existence; or

(d) Maker's failure after the Maturity Date to repay the amounts due hereunder within ten (10) days of receiving written notice from Payee that such amounts are due and payable.

7. Waiver of Notice. Maker hereby waives presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this promissory note, and assents to extension of the time of payment or forbearance or other indulgence without notice.

8. Governing Law. This promissory note shall be construed in accordance with the laws of the State of New York, without regard to its conflicts of laws rules.


9. Notices. All notices, requests, demands and other communications with respect to this promissory note shall be given in person or forwarded by first class United States mail, postage prepaid, registered or certified mail, with return receipt requested, addressed to the party's address. Any notice, request, demand or communication shall be deemed validly given and received upon delivery if given in person, and on the 5th business day after deposit in the United States mail if given by mail as provided for in the preceding sentence.

IN WITNESS WHEREOF, the Maker has executed and delivered this Note effective as of February 5, 2007.

DIVERSIFAX, INC.

By:

Ming Yang Chief Executive Officer

SHARE EXCHANGE AGREEMENT

AMONG

DIVERSIFAX, INC

UPPER CLASS GROUP LIMITED

SHOUGUANG CITY HAOYUAN CHEMICAL COMPANY LIMITED

SHOUGUANG YUXIN CHEMICAL INDUSTRY CO, LTD.

AND

THE SHAREHOLDERS
OF

SHOUGUANG YUXIN CHEMICAL INDUSTRY CO, LTD.

LISTED ON SCHEDULE 1

DATED AS OF

February 5, 2007


INDEX OF SCHEDULES AND EXHIBITS

Exhibits:

A. Certain Definitions

B. Form of Promissory Note

Schedules:

1. Shareholders of Shouguang Yuxin Chemical Industry Co, Ltd.

2. Shouguang Yuxin Chemical Industry Co, Ltd. Disclosure Schedule


SHARE EXCHAGE AGREEMENT

This Share Exchange Agreement (the "Agreement") dated as of February 5, 2007, is entered into by and among Diversifax, Inc., a Delaware corporation ("DSFX"), Upper Class Group Limited, a British Virgin Island corporation and a wholly own subsidiary of DSFX ("UCG"), Shouguang City Haoyuan Chemical Company Limited, a wholly own subsidiary of UCG ("SCHC"), Shouguang Yuxin Chemical Industry Co, Ltd., a Shouguang corporation in China ("SYCI"), and the shareholders of SYCI listed on Schedule 1 to this Agreement (each, a "Shareholder" and, collectively, the "Shareholders").


RECITALS

A. The Shareholders collectively own 100% of the issued and outstanding shares of capital stock of SYCI (the "Shares") in accordance with on Schedule 1 to this Agreement.

B. SCHC is a wholly own subsidiary of UCG, and UCG is a wholly own subsidiary of DSFX. SCHC desires to purchase from the Shareholders, and the Shareholders desire to sell to SCHC the Shares in exchange for shares of DSFX Common Stock, all on the terms and subject to the conditions set forth in this Agreement (the "Exchange").

C. As a result of the Exchange, SCHC will become the sole shareholder of SYCI. DSFX will own SYCI through UCG and SCHC.

D. Certain capitalized terms used in this Agreement are defined on Exhibit A.

AGREEMENT

In consideration of the agreements, provisions and covenants set forth below, DSFX, UCG, SCHC, the Shareholders and SYCI, hereby agree as follows:

ARTICLE I.
EXCHANGE OF SHARES

1.1 AGREEMENT TO SELL.

Upon the terms and subject to all of the conditions contained herein, each of the Shareholders hereby agrees to sell, assign, transfer and deliver to SCHC, and SCHC hereby agrees to purchase and accept from each of the Shareholders, on the Closing Date, the Shares.

1.2 PURCHASE PRICE.

As full consideration for the sale, assignment, transfer and delivery of the Shares by the Shareholders to SCHC, and upon the terms and subject to all of the conditions contained herein, DSFX shall issue to the Shareholders an aggregate of 16,188,118 shares of Restricted DSFX Common Stock (the "Acquisition Shares") at $1.01 per share and pay cash (the "Cash Component") of $2,550,000 to the Shareholders. The Cash Component is payable by SCHC as follows: $2,550,000 is payable within six months after the Closing as evidenced by the promissory note annexed hereto as Exhibit B. The parties understand and acknowledge that such exchange is based upon an approximate valuation of SYCI at US $18,900,000.

1.3 MECHANICS OF EXCHANGE.

(a) At the Closing, each Shareholder shall be entitled to surrender the certificate or certificates that immediately prior to the Closing represented the SYCI Common Stock (the "Certificates") to the exchange agent designated by SCHC in exchange for the Acquisition Shares and the Cash Component.

(b) Promptly after the Closing, DSFX or its designated exchange agent shall make available to each Shareholder a letter of transmittal and instructions for use in effecting the surrender of Certificates in exchange for the Acquisition Shares. Upon surrender of a Certificate to such exchange agent together with the letter of transmittal, duly executed, the Shareholder shall be entitled to receive in exchange therefore such number of Acquisition Shares as such Shareholder has the right to receive in respect of the Certificate so surrendered pursuant to the provisions of this Article I.


1.4 NO FRACTIONAL SHARES.

No fraction of a share of DSFX Common Stock shall be issued in the Exchange. In lieu of fractional shares, the Shareholders upon surrender of their Certificates as set forth in Section 1.3 shall be paid an amount in cash, without interest, rounded to the nearest cent, determined by multiplying the fractional interest to which such Shareholder would otherwise be entitled by the DSFX Stock Price as of $1.01 per share agreed by all parties.

1.5 CLOSING.

The closing of the transactions contemplated by this Agreement (the "Closing") shall take place in New York, on or before February 15, 2007, (the "Closing Date"); provided, however, that if all of the other conditions set forth in Articles VI and VII hereof are not satisfied or waived, unless this agreement has been terminated under Section 9 hereof, or at such date, the Closing Date shall be the business day following the day on which all such conditions have been satisfied or waived, or at such other date, time and place as DSFX, UCG, SCHC, SYCI, and the Shareholders shall agree.

ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF SYCI

Except as set forth in the Disclosure Schedule attached hereto provided by SYCI (the "SYCI Disclosure Schedule"), the parts of which are numbered to correspond to the section numbers of this Agreement, each of SYCI and the Shareholders represents and warrants jointly and severally to DSFX and SCHC as follows:

2.1 ORGANIZATION AND QUALIFICATION.

SYCI is duly incorporated, validly and in good standing existing under the laws of China, has all requisite authority and power (corporate and other), governmental licenses, authorizations, consents and approvals to carry on its business as presently conducted and as contemplated to be conducted, to own, hold and operate its properties and assets as now owned, held and operated by it, to enter into this Agreement, to carry out the provisions hereof except where the failure to be in good standing or to have such governmental licenses, authorizations, consents and approvals will not, in the aggregate, either (i) have a Material Adverse Effect on the business, assets or financial condition of SYCI, or (ii) impair the ability of SYCI to perform its material obligations under this Agreement. SYCI duly qualified, licensed or domesticated as a foreign corporation in good standing in each jurisdiction wherein the nature of its activities or its properties owned or leased requires such qualification, licensing or domestication, except where the failure to be so qualified, licensed or domesticated will not have a Material Adverse Effect. Set forth on Part 2.1 of the SYCI Disclosure Schedule is a list of those jurisdictions in which SYCI presently conducts its business, owns, holds and operates its properties and assets.

2.2 SUBSIDIARIES.

SYCI do not own directly or indirectly, any equity or other ownership interest in any corporation, partnership, joint venture or other entity or enterprise. SYCI do not have any direct or indirect interests of stock ownership or otherwise in any corporation, partnership, joint venture, firm, association or business enterprise, and is not party to any agreement to acquire such an interest.

2.3 ARTICLES OF INCORPORATION AND BYLAWS.

The copies of the Articles of Incorporation and bylaws of SYCI (collectively, the "Organizational Documents") that have been delivered to DSFX and SCHC prior to the execution of this Agreement are true and complete and have not been amended or repealed. SYCI are not in violation or breach of any of the provisions of the Organizational Documents, except for such violations or breaches which, in the aggregate, will not have a Material Adverse Effect on SYCI.


2.4 AUTHORIZATION AND VALIDITY OF THIS AGREEMENT.

This Agreement and each of the Transaction Agreements constitute the legal, valid and binding obligation of each person or entity who is a party thereto (other than SCHC and DSFX), enforceable against each such person or entity in accordance with its terms, except as such enforcement is limited by general equitable principles, or by bankruptcy, insolvency and other similar laws affecting the enforcement of creditors rights generally. Each of the Shareholders and SYCI has all requisite legal capacity to execute and deliver this Agreement and the Transaction Agreements to which he or she is a party, and to perform its, his or her obligations hereunder and thereunder. The execution and delivery by SYCI and each Shareholders of this Agreement and the Transaction Agreements (to the extent either is a party thereto), and the consummation of the transactions contemplated herein and therein (the "Transactions") have been authorized by all necessary corporate or other action on the part of SYCI and each of the Shareholders. This Agreement and the Transaction Agreements have been duly executed and delivered by the parties thereto (other than SCHC and DSFX).

2.5 NO VIOLATION.

Neither the execution nor delivery of this Agreement or the Transaction Agreements, nor the consummation or performance of any of the Transactions by SYCI or the Shareholders will directly or indirectly:

(i) violate or conflict with any provision of the Organizational Documents of SYCI; (B) result in (with or without notice or lapse of time) a violation or breach of, or conflict with or constitute a default or result in the termination or in a right of termination or cancellation of, or accelerate the performance required by, or require notice under, any agreement, promissory note, lease, instrument or arrangement to which SYCI or any of its assets are bound or result in the creation of any Liens upon SYCI or any of its assets; (C) violate any order, writ, judgment, injunction, ruling, award or decree of any Governmental Body; ("Governmental Body"); (D) violate any statute, law or regulation of any jurisdiction as such statute, law or regulation that relates to the Shareholders, SYCI or any of the assets of SYCI; or (E) result in cancellation, modification, revocation or suspension of any permits, licenses, registrations, consents, approvals, authorizations or certificates issued or granted by any Governmental Body which are held by or granted to the Shareholders, or SYCI or which are necessary for the conduct of SYCI's business; or

(ii) to the knowledge of SYCI or any of the Shareholders, cause SYCI to become subject to, or to become liable for the payment of, any Tax (as hereinafter defined) or cause any of the assets owned by SYCI to be reassessed or revalued by any taxing authority or other Governmental Body.

None of SYCI or the Shareholders is or will be required to give any notice to or obtain any approval, consent, ratification, waiver or other authorization (a "Consent") from any person or entity (including, without limitation, any Governmental Body) in connection with (i) the execution and delivery of this Agreement or any of the Transaction Agreements, or (ii) the consummation or performance of any of the Transactions.

2.6 CAPITALIZATION AND RELATED MATTERS.

(a) Capitalization. The registered capital amount of SYCI is RMB 10,990,000, which equal to 100% ownership percentage of SYCI. Except as set forth in the preceding sentence, no other class of capital stock or other security of SYCI is authorized, issued, reserved for issuance or outstanding. The Shareholders, as of the Closing Date, are the lawful, record and beneficial owners of the Shares in accordance with the percentages set forth opposite each Seller's name on


Schedule 1 attached hereto. Shouguang City Haoyuan Group Ltd. and Wenxiang Yu, as of the Closing Date, are the lawful, record and beneficial owners of the total ownership interest of SYCI. Each of the Shareholders have, as of the date hereof and as of the Closing Date, valid and marketable title to their respective ownership interest of SYCI, free and clear of all Liens (including, without limitation, any claims of spouses under applicable community property laws) and are the lawful, record and beneficial owners of all of the Shares. Except as is issued to and held by the Shareholders or SYCI, no other class of capital stock or other security of SYCI, as applicable, is authorized, issued, reserved for issuance or outstanding. At the Closing, DSFX will be vested with good and marketable title to the ownership or the Shares, free and clear of all Liens (including, without limitation, any claims of spouses under applicable community property laws). No legend or other reference to any purported Lien appears upon any certificate representing the Shares. Each of the Shares has been duly authorized and validly issued and is fully paid and nonassessable. None of the outstanding capital or other securities of SYCI was issued, redeemed or repurchased in violation of the Securities Act of 1933, as amended (the "Securities Act"), or any other securities or "blue sky" laws.

(b) No Redemption Requirements. There are no authorized or outstanding options, warrants, equity securities, calls, rights, commitments or agreements of any character by which SYCI or any of the Shareholders is obligated to issue, deliver or sell, or cause to be issued, delivered or sold, any shares of capital stock or other securities of SYCI. There are no outstanding contractual obligations (contingent or otherwise) of SYCI to retire, repurchase, redeem or otherwise acquire any outstanding shares of capital stock of, or other ownership interests in, SYCI or to provide funds to or make any investment (in the form of a loan, capital contribution or otherwise) in any other entity.

2.7 COMPLIANCE WITH LAWS AND OTHER INSTRUMENTS.

Except as would not have a Material Adverse Effect, the business and operations of SYCI have been and are being conducted in accordance with all applicable foreign, federal, provincial and local laws, rules and regulations and all applicable orders, injunctions, decrees, writs, judgments, determinations and awards of all courts and governmental agencies and instrumentalities. There are no permits, bonuses, registrations, consents, approvals, authorizations, certificates, or any waiver of the foregoing, which are required to be issued or granted by a Governmental Body for the conduct of the Business as presently conducted or the ownership of the assets of SYCI. Except as would not have a Material Adverse Effect, SYCI is not, and has not received notice alleging that it is, in violation of, or (with or without notice or lapse of time or both) in default under, or in breach of, any term or provision of the Organizational Documents or of any indenture, loan or credit agreement, note, deed of trust, mortgage, security agreement or other material agreement, lease, license or other instrument, commitment, obligation or arrangement to which SYCI is a party or by which any of SYCI's properties, assets or rights are bound or affected. To the knowledge of SYCI, no other party to any material contract, agreement, lease, license, commitment, instrument or other obligation to which SYCI is a party is (with or without notice or lapse of time or both) in default thereunder or in breach of any term thereof. SYCI is not subject to any obligation or restriction of any kind or character, nor is there, to the knowledge of SYCI, any event or circumstance relating to SYCI that materially and adversely affects in any way its business, properties, assets or prospects or that prohibits SYCI from entering into this Agreement and the Transaction Agreements or would prevent or make burdensome its performance of or compliance with all or any part of this Agreement, the Transaction Agreements or the consummation of the Transactions contemplated hereby or thereby.

2.8 CERTAIN PROCEEDINGS.

There are no outstanding or pending Proceeding that has been commenced against or involving SYCI or any of its assets and, to the knowledge of SYCI and the Shareholders, no matters of the foregoing nature are contemplated or threatened. None of SYCI or the Shareholders have been charged with, and is not threatened with, or under any investigation with respect to, any allegation concerning any violation of any provision of any federal, provincial, local or foreign law, regulation, ordinance, order or administrative ruling, and is not in default with respect to any order, writ, injunction or decree of any Governmental Body.


2.9 NO BROKERS OR FINDERS.

None of SYCI, the Shareholders, or any officer, director, independent contractor, consultant, agent or employee of SYCI has agreed to pay, or has taken any action that will result in any person or entity becoming obligated to pay or entitled to receive, any investment banking, brokerage, finder's or similar fee or commission in connection with this Agreement or the Transactions. SYCI and the Shareholders shall jointly and severally indemnify and hold DSFX harmless against any liability or expense arising out of, or in connection with, any such claim.

2.10 TITLE TO AND CONDITION OF PROPERTIES.

SYCI has good, valid and marketable title to all of its properties and assets (whether real, personal or mixed, and whether tangible or intangible) reflected as owned in its books and records, free and clear of all Liens. SYCI owns or holds under valid leases or other rights to use all real property, plants, machinery, equipment and all assets necessary for the conduct of its business as presently conducted, except where the failure to own or hold such property, plants, machinery, equipment and assets would not have a Material Adverse Effect on SYCI. No Person other than SYCI owns or has any right to the use or possession of the assets used in SYCI's business. The material buildings, plants, machinery and equipment necessary for the conduct of the business of SYCI as presently conducted are structurally sound, are in good operating condition and repair and are adequate for the uses to which they are being put or would be put in the Ordinary Course of Business, in each case, taken as a whole, and none of such buildings, plants, machinery or equipment is in need of maintenance or repairs, except for ordinary, routine maintenance and repairs that are not material in nature or cost.

2.11 ABSENCE OF UNDISCLOSED LIABILITIES.

SYCI have no debt, obligation or liability (whether accrued, absolute, contingent, liquidated or otherwise, whether asserted or unasserted, whether due or to become due, whether or not known to SYCI) arising out of any transaction entered into prior to the Closing Date or any act or omission prior to the Closing Date which individually or taken together would constitute a Material Adverse Effect on SYCI and have no debt, obligation or liability to each other or any of the Shareholders or their affiliates, except to the extent specifically set forth on or reserved against on the Balance Sheet of SYCI.

The financial statements are consistent with the books and records of SYCI and fairly present in all material respects the financial condition, assets and liabilities of SYCI, as applicable, taken as a whole, as of the dates and periods indicated, and were prepared in accordance with GAAP (except as otherwise indicated therein or in the notes thereto).

2.12 CHANGES.

SYCI has not, since September 30, 2006:

(a) Ordinary Course of Business. Conducted its business or entered into any transaction other than in the Ordinary Course of Business, except for this Agreement.

(b) Adverse Changes. Suffered or experienced any change in, or affecting, its condition (financial or otherwise), properties, assets, liabilities, business, operations, results of operations or prospects which would have a Material Adverse Effect;

(c) Loans. Made any loans or advances to any Person other than travel advances and reimbursement of expenses made to employees, officers and directors in the Ordinary Course of Business;


(d) Compensation and Bonuses. Made any payments of any bonuses or compensation other than regular salary payments, or increase in the salaries, or payment on any of its debts in the Ordinary Course of Business, to any of its shareholders, directors, officers, employees, independent contractors or consultants or entry into by it of any employment, severance, or similar contract with any director, officer, or employee, independent contractor or consultant; Adopted, or increased in the payments to or benefits under, any profit sharing, bonus, deferred compensation, savings, insurance, pension, retirement, or other employee benefit plan for or with any of its employees;

(e) Liens. Created or permitted to exist any Lien on any of its properties or assets other than Permitted Liens;

(f) Capital Stock. Issued, sold, disposed of or encumbered, or authorized the issuance, sale, disposition or encumbrance of, or granted or issued any option to acquire any shares of its capital stock or any other of its securities or any Equity Security, or altered the term of any of its outstanding securities or made any change in its outstanding shares of capital stock or its capitalization, whether by reason of reclassification, recapitalization, stock split, combination, exchange or readjustment of shares, stock dividend or otherwise; changed its authorized or issued capital stock; granted any stock option or right to purchase shares of its capital stock; issued any security convertible into any of its capital stock; granted any registration rights with respect to shares of its capital stock; purchased, redeemed, retired, or otherwise acquired any shares of its capital stock; declared or paid any dividend or other distribution or payment in respect of shares of capital stock of any other entity;

(g) Dividends. Declared, set aside, made or paid any dividend or other distribution to any of its shareholders;

(h) Material Contracts. Terminated or modified any of its Material Contract except for termination upon expiration in accordance with the terms of such agreements, a description of which is included in the SYCI's Disclosure Schedule;

(i) Claims. Released, waived or cancelled any claims or rights relating to or affecting SYCI in excess of $10,000 in the aggregate or instituted or settled any Proceeding involving in excess of $10,000 in the aggregate;

(j) Discharged Liabilities. Paid, discharged, cancelled, waived or satisfied any claim, obligation or liability in excess of $10,000 in the aggregate, except for liabilities incurred prior to the date of this Agreement in the Ordinary Course of Business;

(k) Indebtedness. Created, incurred, assumed or otherwise become liable for any Indebtedness or commit to any endeavor involving a commitment in excess of $10,000 in the aggregate, other than contractual obligations incurred in the Ordinary Course of Business;

(l) Guarantees. Guaranteed or endorsed in a material amount any obligation or net worth of any Person;

(m) Acquisitions. Acquired the capital stock or other securities or any ownership interest in, or substantially all of the assets of, any other Person;

(n) Accounting. Changed its method of accounting or the accounting principles or practices utilized in the preparation of its financial statements, other than as required by GAAP;

(o) Agreements. Entered into any agreement, or otherwise obligated itself, to do any of the foregoing.


2.13 MATERIAL CONTRACTS.

SYCI has delivered to DSFX, prior to the date of this Agreement, true, correct and complete copies of each of its Material Contracts.

(a) No Defaults. The Material Contracts of SYCI are valid and binding agreements of SYCI, as applicable, and are in full force and effect and are enforceable in accordance with their terms. Except as would not have a Material Adverse Effect, SYCI is not in breach or default of any of its Material Contracts to which it is a party and, to the knowledge of SYCI, no other party to any of its Material Contracts is in breach or default thereof. Except as would not have a Material Adverse Effect, no event has occurred or circumstance has existed that (with or without notice or lapse of time) would (a) contravene, conflict with or result in a violation or breach of, or become a default or event of default under, any provision of any of its Material Contracts or (b) permit SYCI or any other Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate or modify any of its Material Contracts. SYCI has not received any notice and have no knowledge of any pending or threatened cancellation, revocation or termination of any of its Material Contracts to which it is a party, and there are no renegotiations of, or attempts to renegotiate.

2.14 TAX RETURNS AND AUDITS.

(a) Tax Returns. (a) All material Tax Returns required to be filed by or on behalf of SYCI have been timely filed and all such Tax Returns were (at the time they were filed) and are true, correct and complete in all material respects;
(b) all Taxes of SYCI required to have been paid (whether or not reflected on any Tax Return) have been fully and timely paid, except those Taxes which are presently being contested in good faith or for which an adequate reserve for the payment of such Taxes has been established on SYCI Balance Sheet; (c) no waivers of statutes of limitation have been given or requested with respect to SYCI in connection with any Tax Returns covering SYCI or with respect to any Taxes payable by it; (d) no Governmental Body in a jurisdiction where SYCI does not file Tax Returns has made a claim, assertion or threat to SYCI that SYCI is or may be subject to taxation by such jurisdiction; (e) SYCI has duly and timely collected or withheld, paid over and reported to the appropriate Governmental Body all amounts required to be so collected or withheld for all periods under all applicable laws; (f) there are no Liens with respect to Taxes on the property or assets of SYCI other than Permitted Liens; (g) there are no Tax rulings, requests for rulings, or closing agreements relating to SYCI for any period (or portion of a period) that would affect any period after the date hereof; and (h) any adjustment of Taxes of SYCI made by a Governmental Body in any examination that SYCI is required to report to the appropriate provincial, local or foreign taxing authorities has been reported, and any additional Taxes due with respect thereto have been paid. No state of fact exists or has existed which would constitute ground for the assessment of any tax liability by any Governmental Body. All Tax Returns filed by SYCI are true, correct and complete.

(b) No Adjustments, Changes. Neither SYCI nor any other Person on behalf of SYCI
(a) has executed or entered into a closing agreement pursuant to Section 7121 of the Code or any predecessor provision thereof or any similar provision of provincial, local or foreign law; or (b) has agreed to or is required to make any adjustments pursuant to Section 481(a) of the Code or any similar provision of provincial, local or foreign law.

(c) No Disputes. There is no pending audit, examination, investigation, dispute, proceeding or claim with respect to any Taxes of or Tax Return filed or required to be filed by SYCI, nor is any such claim or dispute pending or contemplated. SYCI has made available to DSFX true, correct and complete copies of all Tax Returns, examination reports and statements of deficiencies assessed or asserted against or agreed to by SYCI since January 1, 2004, and any and all correspondence with respect to the foregoing. SYCI does not have any outstanding closing agreement, ruling request, requests for consent to change a method of accounting, subpoena or request for information to or from a Governmental Body in connection with any Tax matter.


(d) No Tax Allocation, Sharing. SYCI is not a party to any Tax allocation or sharing agreement. Other than with respect to the Tax Group of which SYCI is the common parent, SYCI (a) has not been a member of a Tax Group filing a consolidated income Tax Return under Section 1501 of the Code (or any similar provision of provincial, local or foreign law), and (b) do not have any liability for Taxes for any Person under Treasury Regulations Section 1.1502-6 (or any similar provision of provincial, local or foreign law) as a transferee or successor, by contract or otherwise.

2.15 MATERIAL ASSETS.

The financial statements of SYCI reflect the material properties and assets (real and personal) owned or leased by them.

2.16 INSURANCE COVERAGE.

SYCI has made available to DSFX, prior to the date of this Agreement, true, correct and complete copies of all insurance and general liability policies maintained by SYCI on their properties and assets all claims made under any such current or prior insurance policies. All of such policies (a) taken together, provide adequate insurance coverage for the properties, assets and operations of SYCI for all risks normally insured against by a Person carrying on the same business as SYCI, and (b) are sufficient for compliance with all applicable Laws and Material Contracts of SYCI. All of such policies are valid, outstanding and in full force and effect and, by their express terms, will continue in full force and effect following the consummation of the transactions contemplated by this Agreement. Except as set forth on Schedule 3.19, SYCI have not received and has no knowledge of (a) any refusal of coverage or any written notice that a defense will be afforded with reservation of rights, or (b) any notice of cancellation or any other indication in writing or otherwise that any insurance policy is no longer in full force or effect or will not be renewed or that the issuer of any policy is not willing or able to perform its obligations thereunder. All premiums due on such insurance policies on or prior to the date hereof have been paid. There are no, and SYCI and the Shareholders have no knowledge of any circumstances or facts which, with or without notice of lapse of time or both would lead to any: (i) pending or threatened claims with respect to SYCI or their properties or assets under any such insurance policies; (ii) claims as to which the insurers have notified SYCI that they intend to deny liability; and (iii) existing defaults on the part of SYCI under any such insurance policies.

2.17 LITIGATION; ORDERS.

There is no Proceeding (whether federal, provincial, local or foreign) pending or, to the knowledge of SYCI, threatened or appealable against or affecting SYCI or any of its properties, assets, business or employees. To the knowledge of SYCI, there is no fact that might result in or form the basis for any such Proceeding. SYCI is not subject to any Orders and have not received any written opinion or memorandum or legal advice from their legal counsel to the effect that SYCI is exposed, from a legal standpoint, to any liability which would be material to its business. SYCI is not engaged in any legal action to recover monies due it or for damages sustained by any of them.

2.18 LICENSES.

Except as would not have a Material Adverse Effect, SYCI possesses from the appropriate Governmental Body all licenses, permits, authorizations, approvals, franchises and rights that are necessary for it to engage in its business as currently conducted and to permit it to own and use its properties and assets in the manner in which it currently owns and uses such properties and assets (collectively, "Permits"). Except as would not have a Material Adverse Effect, SYCI has not received any written notice from any Governmental Body or other Person that there is lacking any license, permit, authorization, approval, franchise or right necessary for SYCI to engage in its business as currently conducted and to permit SYCI to own and use its properties and assets in the


manner in which it currently owns and uses such properties and assets. Except as would not have a Material Adverse Effect, the Permits are valid and in full force and effect. Except as would not have a Material Adverse Effect, no event has occurred or circumstance exists that may (with or without notice or lapse of time): (a) constitute or result, directly or indirectly, in a violation of or a failure to comply with any Permit; or (b) result, directly or indirectly, in the revocation, withdrawal, suspension, cancellation or termination of, or any modification to, any Permit. Neither SYCI nor the Shareholders has received any written notice from any Governmental Body or any other Person regarding: (a) any actual, alleged, possible or potential contravention of any Permit; or (b) any actual, proposed, possible or potential revocation, withdrawal, suspension, cancellation, termination of, or modification to, any Permit. All applications required to have been filed for the renewal of such Permits have been duly filed on a timely basis with the appropriate Persons, and all other filings required to have been made with respect to such Permits have been duly made on a timely basis with the appropriate Persons. All Permits are renewable by their terms or in the Ordinary Course of Business without the need to comply with any special qualification procedures or to pay any amounts other than routine fees or similar charges, all of which have, to the extent due, been duly paid.

2.19 INTERESTED PARTY TRANSACTIONS.

No officer, director or shareholder of SYCI or any Affiliate, Related Person or "associate" (as such term is defined in Rule 405 of the Commission under the Securities Act) of any such Person, either directly or indirectly, (1) has an interest in any Person which (a) furnishes or sells services or products which are furnished or sold or are proposed to be furnished or sold by SYCI, or (b) purchases from or sells or furnishes to, or proposes to purchase from, sell to or furnish SYCI any goods or services; (2) has a beneficial interest in any contract or agreement to which SYCI is a party or by which it may be bound or affected; or (3) is a party to any material agreements, contracts or commitments in effect as of the date hereof with SYCI. "Related Person" means: (i) with respect to a particular individual, the individual's immediate family which shall include the individual's spouse, parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-law, and brothers and sisters-in-law; and
(ii) with respect to a specified individual or entity, any entity or individual that, directly or indirectly, controls, is controlled by, or is under common control with such specified entity or individual.

2.20 GOVERNMENTAL INQUIRIES.

SYCI has made available to DSFX a copy of each material written inspection report, questionnaire, inquiry, demand or request for information received by SYCI from (and the response of SYCI thereto), and each material written statement, report or other document filed by SYCI with, any Governmental Body since January 1, 2003.

2.21 BANK ACCOUNTS AND SAFE DEPOSIT BOXES.

Part 2.22 of the SYCI Disclosure Schedule discloses the title and number of each bank or other deposit or financial account, and each lock box and safety deposit box used by SYCI, the financial institution at which that account or box is maintained and the names of the persons authorized to draw against the account or otherwise have access to the account or box, as the case may be.

2.22 INTELLECTUAL PROPERTY.

Any Intellectual Property SYCI uses in its business as presently conducted is owned by SYCI or properly licensed.

2.23 STOCK OPTION PLANS; EMPLOYEE BENEFITS.

(a) Set forth on Part 2.23 of the SYCI Disclosure Schedule is a complete list of all stock option plans providing for the grant by SYCI of stock options to directors, officers or employees. All such stock option plans are Approved Plans.


(b) Except as set forth on Part 2.23 of the SYCI Disclosure Schedule, SYCI does not have any employee benefit plans or arrangements covering their present and former employees or providing benefits to such persons in respect of services provided to SYCI. SYCI has no commitment, whether formal or informal and whether legally binding or not, to create any additional plan, arrangement or practice similar to the Approved Plans.

(c) The consummation of the transactions contemplated hereby will not result in
(i) any payment (including, without limitation, severance, unemployment compensation or bonus payments) becoming due from SYCI or due to any Person,
(ii) any increase in the amount of compensation or benefits payable to any Person or (iii) any acceleration of the vesting or timing of payment of any compensation, award or determination of options, warrants, rights, severance payments or other contingent obligations of any nature whatsoever of SYCI in favor of any Person. No agreement, arrangement or other contract of SYCI provides benefits or payments contingent upon, triggered by, or increased as a result of a change in the ownership or effective control of SYCI.

(d) SYCI is not a party to or bound by any written or oral agreement or understanding to employ, subsequent to the Closing, any of its respective present or former directors, officers, independent contractors, consultants, agents or employees.

2.24 EMPLOYEE MATTERS.

(a) No former or current employee of SYCI is a party to, or is otherwise bound by, any agreement or arrangement (including, without limitation, any confidentiality, non-competition or proprietary rights agreement) that in any way adversely affected, affects, or will affect (i) the performance of his, her or its duties to SYCI, or (ii) the ability of SYCI to conduct its business.

(b) None of SYCI has employees, directors, officers, consultants, independent contractors, representatives or agents whose contract of employment or engagement cannot be terminated by three months' notice. (c) SYCI are not required or obligated to pay, and since January 1, 2003, have not paid any moneys other than in respect of remuneration, pension or other benefits pursuant to plans described in Part 2.23 of the SYCI Disclosure Schedule, to or for the benefit of, any director, officer, employee, consultant, independent contractor, representative or agent of SYCI. (d) SYCI are in compliance with all applicable laws respecting employment and employment practices, terms and conditions or employment and wages and hours, and are not engaged in any unfair labor practice. There is no labor strike, dispute, shutdown or stoppage actually pending or, to the knowledge of SYCI or the Shareholders, threatened against or affecting SYCI.

2.25 ENVIRONMENTAL AND SAFETY MATTERS.

Except as would not have a Material Adverse Effect:

(a) Each of SYCI has at all time been and is in compliance with all Environmental Laws and Orders applicable to SYCI, as applicable.

(b) There are no Proceedings pending or, to the knowledge of SYCI, threatened against SYCI alleging the violation of any Environmental Law or Environmental Permit applicable to SYCI or alleging that SYCI is a potentially responsible party for any environmental site contamination. None of SYCI or the Shareholders are aware of, or has ever received notice of, any past, present or future events, conditions, circumstances, activities, practices, incidents, actions or plans which may interfere with or prevent continued compliance, or which may give rise to any common law or legal liability, or otherwise form the basis of any claim, action, suit, proceeding, hearing or investigation, based on or related to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling, or the emission, discharge, release or threatened release into the environment, of any pollutant, contaminant, or hazardous or toxic material or waste.


(c) Neither this Agreement nor the consummation of the transactions contemplated by this Agreement shall impose any obligations to notify or obtain the consent of any Governmental Body or third Persons under any Environmental Laws applicable to SYCI.

2.26 MATERIAL CUSTOMERS.

Since January 1, 2003, none of the Material Customers (as hereinafter defined) of SYCI has notified any of SYCI or the Shareholders of their intent to terminate their business with SYCI business because of any dissatisfaction on the part of any such person or entity. The Transactions have not caused any of the Material Customers of SYCI to terminate or provide notice of their intent or threaten to terminate their business with SYCI or to notify SYCI or the Shareholders of their intent not to continue to do such business with SYCI after the Closing. As used herein, "Material Customers" means those customers from whom SYCI derives annual revenues in excess of RMB 100,000.

2.27 INVENTORIES.

All inventories of SYCI are of good, usable and merchantable quality in all material respects, and, except as set forth in the SYCI Disclosure Schedule, do not include a material amount of obsolete or discontinued items. Except as set forth in the SYCI Disclosure Schedule, (a) all such inventories are of such quality as to meet in all material respects the quality control standards of SYCI, (b) all such inventories are recorded on the books at the lower of cost or market value determined in accordance with GAAP, and (c) no write-down in inventory has been made or should have been made pursuant to GAAP during the past two years.

2.28 MONEY LAUNDERING LAWS.

The operations of SYCI are and have been conducted at all times in compliance with applicable financial record-keeping and reporting requirements of the money laundering statutes of all U.S. and non-U.S. jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any Governmental Body (collectively, the "Money Laundering Laws") and no Proceeding involving SYCI with respect to the Money Laundering Laws is pending or, to the knowledge of SYCI , threatened.

2.29 DISCLOSURE.

(a) Any information set forth in this Agreement, the SYCI Disclosure Schedule, or the Transaction Agreements shall be true, correct and complete in all material respects.

(b) No statement, representation or warranty of SYCI or the Shareholders in this Agreement (taken with the Schedules) or the Transaction Agreements or any exhibits or schedules thereto contain any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein or therein, taken as a whole, in light of the circumstances in which they were made, not misleading.

(c) Except as set forth in the SYCI Disclosure Schedule, the Shareholders, SYCI have no knowledge of any fact that has specific application to SYCI (other than general economic or industry conditions) and that adversely affects the assets or the business, prospects, financial condition, or results of operations of SYCI.

(d) In the event of any inconsistency between the statements in the body of this Agreement and those in the Schedules (other than an exception expressly set forth as such in the Schedules with respect to a specifically identified representation or warranty), the statements in the Schedules shall control.


(e) The books of account, minute books and stock record books of SYCI, all of which have been made available to DSFX, are complete and accurate and have been maintained in accordance with sound business practices. Without limiting the generality of the foregoing, the minute books of SYCI contain complete and accurate records of all meetings held, and corporate action taken, by the shareholders, the boards of directors, and committees of the boards of directors of SYCI, as applicable, and no meeting of any such shareholders, board of directors, or committee has been held for which minutes have not been prepared and are not contained in such minute books.

2.30 FINDERS AND BROKERS.

(a) None of SYCI, the Shareholders or any Person acting on behalf of SYCI or the Shareholders has engaged any finder, broker, intermediary or any similar Person in connection with the Exchange.

(b) None of SYCI, the Shareholders nor any Person acting on behalf of SYCI or the Shareholders has entered into a contract or other agreement that provides that a fee shall be paid to any Person or Entity if the Exchange is consummated.

ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF DSFX

DSFX hereby represents and warrants to the Shareholders as of the date hereof:

3.1 ORGANIZATION; GOOD STANDING.

DSFX is duly incorporated, validly and in good standing existing under the laws of Delaware, has all requisite authority and power (corporate and other), governmental licenses, authorizations, consents and approvals to carry on its business as presently conducted and as contemplated to be conducted, to own, hold and operate its properties and assets as now owned, held and operated by it, to enter into this Agreement, to carry out the provisions hereof except where the failure to be in good standing or to have such governmental licenses, authorizations, consents and approvals will not, in the aggregate, either (i) have a Material Adverse Effect on the business, assets or financial condition of DSFX, or (ii) impair the ability of DSFX to perform its material obligations under this Agreement. DSFX is duly qualified, licensed or domesticated as a foreign corporation in good standing in each jurisdiction wherein the nature of its activities or its properties owned or leased requires such qualification, licensing or domestication, except where the failure to be so qualified, licensed or domesticated will not have a Material Adverse Effect.

3.2 DSFX COMMON STOCK.

As of February 4, 2007, there were 27,017,262 shares of DSFX's common stock issued and outstanding. The Acquisition Shares, when issued in connection with this Agreement and the other Transactional Agreements, will be duly authorized, validly issued, fully paid and nonassessable.

3.3 AUTHORITY; BINDING NATURE OF AGREEMENTS.

(a) The execution, delivery and performance of this Agreement, the Transactional Agreements, and all other agreements and instruments contemplated to be executed and delivered by DSFX in connection herewith have been duly authorized by all necessary corporate action on the part of DSFX and its board of directors.

(b) This Agreement, the Transactional Agreements, and all other agreements and instruments contemplated to be executed and delivered by DSFX constitute the legal, valid and binding obligation of DSFX, enforceable against DSFX in accordance with their terms, except to the extent that enforceability may be limited by applicable bankruptcy, Exchange, insolvency, moratorium or other laws affecting the enforcement of creditors' rights generally and by general principles of equity regardless of whether such enforceability is considered in a proceeding in law or equity.


(c) There is no pending Proceeding, and, to DSFX's knowledge, no Person has threatened to commence any Proceeding that challenges, or that may have the effect of preventing, delaying, making illegal or otherwise interfering with, the Exchange or DSFX's ability to comply with or perform its obligations and covenants under the Transactional Agreements, and, to the knowledge of DSFX, no event has occurred, and no claim, dispute or other condition or circumstance exists, that might directly or indirectly give rise to or serve as a basis for the commencement of any such Proceeding.

3.4 NON-CONTRAVENTION; CONSENTS.

The execution and delivery of this Agreement and the other Transactional Agreements, and the consummation of the Exchange, by DSFX will not, directly or indirectly (with or without notice or lapse of time):

(a) contravene, conflict with or result in a material violation of (i) DSFX's Certificate of Incorporation or Bylaws, or (ii) any resolution adopted by DSFX Board or any committee thereof or the stockholders of DSFX;

(b) to the knowledge of DSFX, contravene, conflict with or result in a material violation of, or give any Governmental Body the right to challenge the Exchange or to exercise any remedy or obtain any relief under, any legal requirement or any Order to which DSFX or any material assets owned or used by it are subject;

(c) to the knowledge of DSFX, cause any material assets owned or used by DSFX to be reassessed or revalued by any taxing authority or other Governmental Body;

(d) to the knowledge of DSFX, contravene, conflict with or result in a material violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or modify, any Governmental Authorization that is held by DSFX or that otherwise relates to DSFX's business or to any of the material assets owned or used by DSFX, where such contraventions, conflict, violation, revocation, withdrawal, suspension, cancellation, termination or modification would have a Material Adverse Effect on DSFX;

(e) contravene, conflict with or result in a material violation or material breach of, or material default under, any Contract to which DSFX is a party;

(f) give any Person the right to any payment by DSFX or give rise to any acceleration or change in the award, grant, vesting or determination of options, warrants, rights, severance payments or other contingent obligations of any nature whatsoever of DSFX in favor of any Person, in any such case as a result of the Exchange; or

(g) result in the imposition or creation of any material Lien upon or with respect to any material asset owned or used by DSFX.

Except for Consents, filings or notices required under the state and federal securities laws or any other laws or regulations or as otherwise contemplated in this Agreement and the other Transactional Agreements, DSFX will not be required to make any filing with or give any notice to, or obtain any Consent from, any Person in connection with the execution and delivery of this Agreement and the other Transactional Agreements or the consummation or performance of the Exchange.


3.5 FINDERS AND BROKERS.

(a) Neither DSFX nor any Person acting on behalf of DSFX has engaged any finder, broker, intermediary or any similar Person in connection with the Exchange.

(b) DSFX has not entered into a contract or other agreement that provides that a fee shall be paid to any Person or Entity if the Exchange is consummated.

3.6 REPORTS AND FINANCIAL STATEMENTS; ABSENCE OF CERTAIN CHANGES.

(a) DSFX has filed all reports required to be filed with the SEC pursuant to the Exchange Act since September 30, 2006 (all such reports, including those to be filed prior to the Closing Date and all registration statements and prospectuses filed by DSFX with the SEC, are collectively referred to as the "DSFX SEC Reports"). All of the DSFX SEC Reports, as of their respective dates of filing (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing): (i) complied in all material respects as to form with the applicable requirements of the Securities Act or Exchange Act and the rules and regulations thereunder, as the case may be, and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The audited financial statements of DSFX included in the DSFX SEC Reports comply in all material respects with the published rules and regulations of the SEC with respect thereto, and such audited financial statements (i) were prepared from the books and records of DSFX, (ii) were prepared in accordance with GAAP applied on a consistent basis (except as may be indicated therein or in the notes or schedules thereto) and (iii) present fairly the financial position of DSFX as of the dates thereof and the results of operations and cash flows for the periods then ended. The unaudited financial statements included in the DSFX SEC Reports comply in all material respects with the published rules and regulations of the SEC with respect thereto; and such unaudited financial statements (i) were prepared from the books and records of DSFX, (ii) were prepared in accordance with GAAP, except as otherwise permitted under the Exchange Act and the rules and regulations thereunder, on a consistent basis (except as may be indicated therein or in the notes or schedules thereto) and
(iii) present fairly the financial position of DSFX as of the dates thereof and the results of operations and cash flows (or changes in financial condition) for the periods then ended, subject to normal year-end adjustments and any other adjustments described therein or in the notes or schedules thereto.

(b) Except as specifically contemplated by this Agreement or reflected in the DSFX SEC Reports, since September 30, 2006, there has not been (i) any material adverse change in DSFX's business, assets, liabilities, operations, and, to the knowledge of DSFX, no event has occurred that is likely to have a material adverse effect on DSFX's business, assets, liabilities or operations, (ii) any declarations setting aside or payment of any dividend or distribution with respect to the DSFX Common Stock other than consistent with past practices,
(iii) any material change in DSFX's accounting principles, procedures or methods, (iv) cancellation in writing of any material customer contract or (v) the loss of any customer relationship which would have a material adverse effect on DSFX's business, assets, liabilities or operations.

3.7 COMPLIANCE WITH APPLICABLE LAW.

Except as disclosed in the DSFX SEC Reports filed prior to the date of this Agreement and except to the extent that the failure or violation would not in the aggregate have a Material Adverse Effect on the business, results of operations or financial condition of DSFX, to DSFX's knowledge DSFX holds all Governmental Authorizations necessary for the lawful conduct of its business under and pursuant to, and the business of DSFX is not being conducted in violation of, any Governmental Authorization applicable to DSFX.


3.8 COMPLETE COPIES OF REQUESTED REPORTS.

DSFX has delivered or made available true and complete copies of each document that has been reasonably requested by SYCI or the Shareholders.

3.9 FULL DISCLOSURE.

(a) Neither this Agreement (including all Schedules and Exhibits hereto) nor any of the Transactional Agreements contemplated to be executed and delivered by DSFX in connection with this Agreement contains any untrue statement of material fact; and none of such documents omits to state any material fact necessary to make any of the representations, warranties or other statements or information contained therein not misleading.

(b) All of the information set forth in the prospectus and all other information regarding DSFX and the business, condition, assets, liabilities, operations, financial performance, net income and prospects of either that has been furnished to SYCI or the Shareholders by or on behalf of DSFX or any of the DSFX's Representatives, is accurate and complete in all material respects.

ARTICLE IV.
COVENANTS OF SYCI

4.1 ACCESS AND INVESTIGATION.

Each of SYCI and the Shareholders shall ensure that, at all times during the Pre-Closing Period:

(a) SYCI and their Representatives provide DSFX and its Representatives access, at reasonable times and with twenty-four (24) hours notice from DSFX to SYCI , to all of the premises and assets of SYCI , to all existing books, records, Tax Returns, work papers and other documents and information relating to SYCI , and to responsible officers and employees of SYCI, and SYCI and its Representatives provide DSFX and its Representatives with copies of such existing books, records, Tax Returns, work papers and other documents and information relating to SYCI as DSFX may request in good faith;

(b) Each of SYCI and their Representatives confer regularly with DSFX upon its request, concerning operational matters and otherwise report regularly (not less than semi-monthly and as DSFX may otherwise request) to DSFX and discuss with DSFX and its Representatives concerning the status of the business, condition, assets, liabilities, operations, and financial performance of SYCI , and promptly notify DSFX of any material change in the business, condition, assets, liabilities, operations, and financial performance of SYCI , or any event reasonably likely to lead to any such change.

4.2 OPERATION OF BUSINESS.

Each of SYCI and the Shareholders shall ensure that, during the Pre-Closing Period:

(a) SYCI conducts its operations in the Ordinary Course of Business and in the same manner as such operations have been conducted prior to the date of this Agreement;

(b) SYCI uses its commercially reasonable efforts to preserve intact its current business organization, keep available and not terminate the services of its current officers and employees and maintain its relations and goodwill with all suppliers, customers, landlords, creditors, licensors, licensees, employees and other Persons having business relationships with SYCI;


(c) SYCI does not declare, accrue, set aside or pay any dividend or make any other distribution in respect of any shares of its capital stock, and does not repurchase, redeem or otherwise reacquire any shares of its capital stock or other securities, except with respect to the repurchase of shares of SYCI Common Stock upon termination of employees at the original purchase price pursuant to agreements existing at the date hereof;

(d) SYCI does not sell or otherwise issue (or grant any warrants, options or other rights to purchase) any shares of capital stock or any other securities, except the issuance of shares of SYCI Common Stock pursuant to option grants to employees made under the Option Plan in the Ordinary Course of Business;

(e) SYCI does not amend its Articles of Incorporation, Bylaws or other Organizational Documents, and does not effect or become a party to any recapitalization, reclassification of shares, stock split, reverse stock split or similar transaction;

(f) SYCI does not form any subsidiary or acquire any equity interest or other interest in any other Entity;

(g) SYCI does not establish or adopt any Employee Benefit Plan, and does not pay any bonus or make any profit sharing or similar payment to, or increase the amount of the wages, salary, commissions, fringe benefits or other compensation or remuneration payable to, any of its directors, officers or employees;

(h) SYCI does not change any of its methods of accounting or accounting practices in any respect;

(i) SYCI does not make any Tax election;

(j) SYCI does not commence or take any action or fail to take any action which would result in the commencement of any Proceeding;

(k) SYCI does not (i) acquire, dispose of, transfer, lease, license, mortgage, pledge or encumber any fixed or other assets, other than in the Ordinary Course of Business; (ii) incur, assume or prepay any indebtedness, Indebtedness or obligation or any other liabilities or issue any debt securities, other than in the Ordinary Course of Business; (iii) assume, guarantee, endorse for the obligations of any other person, other than in the Ordinary Course of Business;
(iv) make any loans, advances or capital contributions to, or investments in, any other Person, other than in the Ordinary Course of Business; or (v) fail to maintain insurance consistent with past practices for its business and property;

(l) SYCI pays all debts and Taxes, files all of its Tax Returns (as provided herein) and pays or performs all other obligations, when due;

(m) SYCI does not enter into or amend any agreements pursuant to which any other Person is granted distribution, marketing or other rights of any type or scope with respect to any of its services, products or technology;

(n) SYCI does not hire any new officer-level employee;

(o) SYCI does not revalue any of its assets, including, without limitation, writing down the value of inventory or writing off notes or accounts receivable, except as required under GAAP and in the Ordinary Course of Business;

(p) Except as otherwise contemplated hereunder, SYCI does not enter into any transaction or take any other action outside the Ordinary Course of Business; and

(q) SYCI does not enter into any transaction or take any other action that likely would cause or constitute a Breach of any representation or warranty made by it in this Agreement.


4.3 FILINGS AND CONSENTS; COOPERATION.

Each of SYCI the Shareholders shall ensure that:

(a) Each filing or notice required to be made or given (pursuant to any applicable Law, Order or contract, or otherwise) by SYCI or the Shareholders in connection with the execution and delivery of any of the Transactional Agreements, or in connection with the consummation or performance of the Exchange, is made or given as soon as possible after the date of this Agreement;

(b) Each Consent required to be obtained (pursuant to any applicable Law, Order or contract, or otherwise) by SYCI or the Shareholders in connection with the execution and delivery of any of the Transactional Agreements, or in connection with the consummation or performance of the Exchange, is obtained as soon as possible after the date of this Agreement and remains in full force and effect through the Closing Date;

(c) SYCI promptly delivers to DSFX a copy of each filing made, each notice given and each Consent obtained by SYCI during the Pre-Closing Period; and

(d) During the Pre-Closing Period, SYCI and its Representatives cooperate with DSFX and DSFX's Representatives, and prepare and make available such documents and take such other actions as DSFX may request in good faith, in connection with any filing, notice or Consent that DSFX is required or elects to make, give or obtain.

4.4 NOTIFICATION; UPDATES TO DISCLOSURE SCHEDULES.

(a) During the Pre-Closing Period, SYCI shall promptly notify DSFX in writing of:

(i) the discovery by it of any event, condition, fact or circumstance that occurred or existed on or prior to the date of this Agreement which is contrary to any representation or warranty made by it in this Agreement or in any of the other Transactional Agreements, or that would upon the giving of notice or lapse of time, result in any of its representations and warranties set forth in this agreement to become untrue or otherwise cause any of the conditions of Closing set forth in Article VI or Article VII not to be satisfied;

(ii) any event, condition, fact or circumstance that occurs, arises or exists after the date of this Agreement (except as a result of actions taken pursuant to the express written consent of DSFX) and that is contrary to any representation or warranty made by it in this Agreement, or that would upon the giving of notice or lapse of time, result in any of its representations and warranties set forth in this agreement to become untrue or otherwise cause any of the conditions of Closing set forth in Article VI or Article VII not to be satisfied;

(b) If any event, condition, fact or circumstances that is required to be disclosed pursuant to Section 4.4(a) requires any material change in the SYCI Disclosure Schedule, or if any such event, condition, fact or circumstance would require such a change assuming the SYCI Disclosure Schedule were dated as of the date of the occurrence, existence or discovery of such event, condition, fact or circumstances, then SYCI, as applicable, shall promptly deliver to DSFX an update to the SYCI Disclosure Schedule specifying such change (a "Disclosure Schedule Update").

(c) It will promptly update any relevant and material information provided to DSFX after the date hereof pursuant to the terms of this Agreement.


4.5 Commercially Reasonable Efforts.

During the Pre-Closing Period, each of SYCI and the Shareholders shall use commercially reasonable efforts to cause the conditions set forth in Article VI and Article VII to be satisfied on a timely basis and so that the Closing can take place on or before February 15, 2007, in accordance with Section 1.5, and shall not take any action or omit to take any action, the taking or omission of which would or could reasonably be expected to result in any of the representations and warranties of SYCI set forth in this Agreement becoming untrue, or in any of the conditions of Closing set forth in Article VI or Article VII not being satisfied.

4.6 CONFIDENTIALITY; PUBLICITY.

Each of SYCI and the Shareholders shall ensure that:

(a) SYCI and its Representatives keep strictly confidential the existence and terms of this Agreement prior to the issuance or dissemination of any mutually agreed upon press release or other disclosure of the Exchange; and

(b) neither SYCI nor any of its Representatives issues or disseminates any press release or other publicity or otherwise makes any disclosure of any nature (to any of its suppliers, customers, landlords, creditors or employees or to any other Person) regarding any of the Exchange; except in each case to the extent that it is required by law to make any such disclosure regarding such transactions or as separately agreed by the parties; provided, however, that if it is required by law to make any such disclosure, SYCI advises DSFX, at least five business days before making such disclosure, of the nature and content of the intended disclosure.

ARTICLE V.
COVENANTS OF DSFX

5.1 NOTIFICATION.

During the Pre-Closing Period, DSFX shall promptly notify SYCI in writing of:

(a) the discovery by DSFX of any event, condition, fact or circumstance that occurred or existed on or prior to the date of this Agreement which is contrary to any representation or warranty made by DSFX in this Agreement; and,

(b) any event, condition, fact or circumstance that occurs, arises or exists after the date of this Agreement (except as a result of actions taken pursuant to the written consent of SYCI) and that is contrary to any representation or warranty made by DSFX in this Agreement;

5.2 FILINGS AND CONSENTS; COOPERATION.

DSFX shall ensure that:

(a) Each filing or notice required to be made or given (pursuant to any applicable Law, Order or contract, or otherwise) by DSFX in connection with the execution and delivery of any of the Transactional Agreements, or in connection with the consummation or performance of the Exchange, is made or given as soon as possible after the date of this Agreement;

(b) Each Consent required to be obtained (pursuant to any applicable Law, Order or contract, or otherwise) by DSFX in connection with the execution and delivery of any of the Transactional Agreements, or in connection with the consummation or performance of the Exchange, is obtained as soon as possible after the date of this Agreement and remains in full force and effect through the Closing Date;


(c) DSFX promptly delivers to SYCI a copy of each filing made, each notice given and each Consent obtained by DSFX during the Pre-Closing Period; and

(d) During the Pre-Closing Period, DSFX and its Representatives cooperate with SYCI and its Representatives, and prepare and make available such documents and take such other actions as SYCI may request in good faith, in connection with any filing, notice or Consent that SYCI is required or elects to make, give or obtain.

5.3 COMMERCIALLY REASONABLE EFFORTS.

During the Pre-Closing Period, DSFX shall use its commercially reasonable efforts to cause the conditions set forth in Article VI and Article VII to be satisfied on a timely basis and so that the Closing can take place on or before February 15, 2007or as soon thereafter as is reasonably practical, in accordance with Section 1.5, and shall not take any action or omit to take any action, the taking or omission of which would or could reasonably be expected to result in any of the representations and warranties or DSFX set forth in this Agreement becoming untrue or in any of the conditions of closing set forth in Article VI or Article VII not being satisfied.

5.4 DISCLOSURE OF CONFIDENTIAL INFORMATION.

(a) Each of DSFX, SYCI and the Shareholders acknowledges and agrees that it may receive Confidential Information in connection with this Transaction including without limitation, the SYCI Disclosure Schedule and any information disclosed during the due diligence process, the public disclosure of which will harm the disclosing party's business. The Receiving Party may use Confidential Information only in connection with the Transaction. The results of the due diligence review may not be used for any other purpose other than in connection with the Transaction. Except as expressly provided in this Agreement, the Receiving Party shall not disclose Confidential Information to anyone without the Disclosing Party's prior written consent. The Receiving Party shall take all reasonable measures to avoid disclosure, dissemination or unauthorized use of Confidential Information, including, at a minimum, those measures it takes to protect its own confidential information of a similar nature. The Receiving Party shall not export any Confidential Information in any manner contrary to the export regulations of the governmental jurisdiction to which it is subject.

(b) The Receiving Party may disclose Confidential Information as required to comply with binding orders of governmental entities that have jurisdiction over it, provided that the Receiving Party (i) gives the Disclosing Party reasonable notice (to the extent permitted by law) to allow the Disclosing Party to seek a protective order or other appropriate remedy, (ii) discloses only such information as is required by the governmental entity, and (iii) uses commercially reasonable efforts to obtain confidential treatment for any Confidential Information so disclosed.

(c) All Confidential Information shall remain the exclusive property of the Disclosing Party. The Disclosing Party's disclosure of Confidential Information shall not constitute an express or implied grant to the Receiving Party of any rights to or under the Disclosing Party's patents, copyrights, trade secrets, trademarks or other intellectual property rights.

(d) The Receiving Party shall notify the Disclosing Party immediately upon discovery of any unauthorized use or disclosure of Confidential Information or any other breach of this Agreement by the Receiving Party. The Receiving Party shall cooperate with the Disclosing Party in every reasonable way to help the Disclosing Party regain possession of such Confidential Information and prevent its further unauthorized use.


(e) The Receiving Party shall return or destroy all tangible materials embodying Confidential Information (in any form and including, without limitation, all summaries, copies and excerpts of Confidential Information) promptly following the Disclosing Party's written request; provided, however, that, subject to the provisions of this Agreement, the Receiving Party may retain one copy of such materials in the confidential, restricted access files of its legal department for use only in the event a dispute arises between the parties related to the Transaction and only in connection with that dispute. At the Disclosing Party's option, the Receiving Party shall provide written certification of its compliance with this Section.

5.5 INDEMNIFICATION.

(a) Each of SYCI and the Shareholders, jointly and severally, each shall defend, indemnify and hold harmless DSFX, and its respective employees, officers, directors, stockholders, controlling persons, affiliates, agents, successors and assigns (collectively, the "DSFX Indemnified Persons"), and shall reimburse the DSFX Indemnified Person, for, from and against any loss, liability, claim, damage, expense (including costs of investigation and defense and reasonable attorneys' fees) or diminution of value, whether or not involving a third-party claim (collectively, "Damages"), directly or indirectly, relating to, resulting from or arising out of:

(i) any untrue representations, misrepresentations or breach of warranty by or of SYCI or the Shareholders contained in or pursuant to this Agreement, and the SYCI Disclosure Schedule;

(ii) any breach or nonfulfillment of any covenant, agreement or other obligation by or of SYCI or the Shareholders (only to the extent made or occurring prior to or at the Closing) contained in or pursuant to this Agreement, the Transaction Agreements executed by SYCI or any of the Shareholders in their individual capacity, the SYCI Disclosure Schedule, or any of the other agreements, documents, schedules or exhibits to be entered into by SYCI or any of the Shareholders in their individual capacity pursuant to or in connection with this Agreement;

(iii) all of Pre-Closing liabilities of SYCI or the Shareholders; and

(iv) any liability, claim, action or proceeding of any kind whatsoever, whether instituted or commenced prior to or after the Closing Date, which directly or indirectly relates to, arises or results from, or occurs in connection with facts or circumstances relating to the conduct of business of SYCI, or the assets of SYCI, or events or circumstances existing on or prior to the Closing Date.

(b) DSFX shall defend, indemnify and hold harmless SYCI and its respective affiliates, agents, successors and assigns (collectively, the "SYCI Indemnified Persons"), and shall reimburse the SYCI Indemnified Persons, for, from and against any Damages, directly or indirectly, relating to, resulting from or arising out of:

(i) any untrue representation, misrepresentation or breach of warranty by or of DSFX contained in or pursuant to this Agreement;

(ii) any breach or nonfulfillment of any covenant, agreement or other obligations by or of DSFX contained in or pursuant to this Agreement, the Transaction Agreements or any other agreements, documents, schedules or exhibits to be entered into or delivered to pursuant to or in connection with this Agreement.

(c) Promptly after receipt by an indemnified Party under Section 5.5 of this Agreement of notice of a claim against it ("Claim"), such indemnified Party shall, if a claim is to be made against an indemnifying Party under such Section, give notice to the indemnifying Party of such Claim, but the failure to so notify the indemnifying Party will not relieve the indemnifying Party of any liability that it may have to any indemnified Party, except to the extent that the indemnifying Party demonstrates that the defense of such action is prejudiced by the indemnified Party's failure to give such notice.


(d) A claim for indemnification for any matter not involving a third-party claim may be asserted by notice to the Party from whom indemnification is sought.

ARTICLE VI.
CLOSING CONDITIONS OF DSFX

DSFX's obligations to effect the Closing and consummate the Exchange are subject to the satisfaction of each of the following conditions:

6.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES.

The representations and warranties of SYCI and the Shareholders in this Agreement shall have been true and correct as of the date of this Agreement and shall be true and correct on and as of the Closing. SYCI and the Shareholders shall have performed all obligations in this Agreement required to be performed or observed by them on or prior to the Closing.

6.2 ADDITIONAL CONDITIONS TO CLOSING.

(a) All necessary approvals under federal and state securities laws and other authorizations relating to the issuance of the Acquisition Shares and the transfer of the Shares shall have been received.

(b) DSFX shall have obtained an opinion stating that the terms of the Exchange are fair, just and equitable to DSFX and its shareholders.

(c) No preliminary or permanent injunction or other order by any federal, state or foreign court of competent jurisdiction which prohibits the consummation of the Exchange shall have been issued and remain in effect. No statute, rule, regulation, executive order, stay, decree, or judgment shall have been enacted, entered, issued, promulgated or enforced by any court or governmental authority which prohibits or restricts the consummation of the Exchange. All authorizations, consents, orders or approvals of, or declarations or filings with, and all expirations of waiting periods imposed by, any Governmental Body which are necessary for the consummation of the Exchange, other than those the failure to obtain which would not materially adversely affect the consummation of the Exchange or in the aggregate have a material adverse effect on DSFX and its subsidiaries, taken as a whole, shall have been filed, occurred or been obtained (all such permits, approvals, filings and consents and the lapse of all such waiting periods being referred to as the "Requisite Regulatory Approvals") and all such Requisite Regulatory Approvals shall be in full force and effect.

(d) There shall not be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Exchange, by any Governmental Body which, in connection with the grant of a Requisite Regulatory Approval, imposes any material condition or material restriction upon DSFX or its subsidiaries or SYCI, including, without limitation, requirements relating to the disposition of assets, which in any such case would so materially adversely impact the economic or business benefits of the Exchange as to render inadvisable the consummation of the Exchange.

6.3 PERFORMANCE OF AGREEMENTS.

SYCI or the Shareholders, as the case may be, shall have executed and delivered each of the agreements, instruments and documents required to be executed and delivered, and performed all actions required to be performed by SYCI or any of the Shareholders, as the case may be, pursuant to this Agreement, except as DSFX has otherwise consented in writing.


6.4 CONSENTS.

Each of the Consents identified or required to have been identified in the SYCI Disclosure Schedule shall have been obtained and shall be in full force and effect, other than those Consents, which have been expressly waived by DSFX.

6.5 NO MATERIAL ADVERSE CHANGE AND SATISFACTORY DUE DILIGENCE.

There shall not have been any material adverse change in the business, condition, assets, liabilities, operations or financial performance of SYCI since the date of this Agreement as determined by DSFX in its discretion. DSFX shall be satisfied in all respects with the results of its due diligence review of SYCI.

6.6 SYCI CLOSING CERTIFICATES.

In addition to the documents required to be received under this Agreement, DSFX shall also have received the following documents:

(a) copies of resolutions of SYCI , certified by a Secretary, Assistant Secretary or other appropriate officer of SYCI, authorizing the execution, delivery and performance of this Agreement and other Transactional Agreements;

(b) good standing certificate from China of SYCI; and

(c) such other documents as DSFX may request in good faith for the purpose of
(i) evidencing the accuracy of any representation or warranty made by SYCI, (ii) evidencing the compliance by SYCI, or the performance by SYCI of, any covenant or obligation set forth in this Agreement or any of the other Transactional Agreements, (iii) evidencing the satisfaction of any condition set forth in Article VII or this Article VI, or (iv) otherwise facilitating the consummation or performance of the Exchange.

6.7 TRANSACTIONAL AGREEMENTS.

Each Person (other than DSFX) shall have executed and delivered prior to or on the Closing Date all Transactional Agreements to which it is to be a party.

6.8 RESIGNATION OF DIRECTORS AND OFFICERS.

DSFX shall have received a written resignation from each of the directors and officers of SYCI effective as of the Closing.

6.9 DELIVERY OF STOCK CERTIFICATES, MINUTE BOOK AND CORPORATE SEAL.

The Shareholders shall have delivered to DSFX the stock books, stock ledgers, minute books and corporate seals of SYCI.

ARTICLE VII.
CLOSING CONDITIONS OF THE SHAREHOLDERS

The Shareholders' obligations to effect the Closing and consummate the Exchange are subject to the satisfaction of each of the following conditions:


7.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES.

The representations and warranties of DSFX in this Agreement shall have been true and correct as of the date of this Agreement and shall be true and correct on and as of the Closing and DSFX shall have performed all obligations in this Agreement required to be performed or observed by them on or prior to the Closing.

7.2 ADDITIONAL CONDITIONS TO CLOSING.

(a) All necessary approvals under federal and state securities laws and other authorizations relating to the issuance and transfer of the Acquisition Shares by DSFX and the transfer of the Shares by SYCI shall have been received.

(b) No preliminary or permanent injunction or other order by any federal, state or foreign court of competent jurisdiction which prohibits the consummation of the Exchange shall have been issued and remain in effect. No statute, rule, regulation, executive order, stay, decree, or judgment shall have been enacted, entered, issued, promulgated or enforced by any court or governmental authority which prohibits or restricts the consummation of the Exchange. All Requisite Regulatory Approvals shall have been filed, occurred or been obtained and all such Requisite Regulatory Approvals shall be in full force and effect.

(c) There shall not be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Exchange, by any federal or state Governmental Body which, in connection with the grant of a Requisite Regulatory Approval, imposes any condition or restriction upon the Surviving Corporation or its subsidiaries (or, in the case of any disposition of assets required in connection with such Requisite Regulatory Approval, upon DSFX, its subsidiaries or SYCI or any of their subsidiaries), including, without limitation, requirements relating to the disposition of assets, which in any such case would so materially adversely impact the economic or business benefits of the Exchange as to render inadvisable the consummation of the Exchange.

7.3 DSFX CLOSING CERTIFICATES.

The Shareholders shall have received the following documents:

(a) copies of resolutions of DSFX, certified by a Secretary, Assistant Secretary or other appropriate officer of DSFX, authorizing the execution, delivery and performance of the Transactional Agreements and the Exchange;

(b) good standing certificates for the State of Delaware; and

(c) such other documents as SYCI may request in good faith for the purpose of
(i) evidencing the accuracy of any representation or warranty made by DSFX, (ii) evidencing the compliance by DSFX with, or the performance by DSFX of, any covenant or obligation set forth in this Agreement or any of the other Transactional Agreements, (iii) evidencing the satisfaction of any condition set forth in Article VI or this Article VII, or (iv) otherwise facilitating the consummation or performance of the Exchange.

7.4 NO MATERIAL ADVERSE CHANGE.

There shall not have been any material adverse change in DSFX's business, condition, assets, liabilities, operations or financial performance since the date of this Agreement.


7.5 PERFORMANCE OF AGREEMENTS.

DSFX shall have executed and delivered each of the agreements, instruments and documents required to be executed and delivered, and performed all actions required by DSFX pursuant to this Agreement, except as SYCI and the Shareholders have otherwise consented in writing.

7.6 CONSENTS.

Each of the Consents identified or required to have been identified in Section 3.4 shall have been obtained and shall be in full force and effect, other than those Consents the absence of which shall not have a material adverse effect on DSFX.

7.7 DSFX STOCK.

On the Closing Date, shares of DSFX Common Stock shall be eligible for quotation on the OTC Bulletin Board.

ARTICLE VIII.
FURTHER ASSURANCES

Each of the parties hereto agrees that it will, from time to time after the date of the Agreement, execute and deliver such other certificates, documents and instruments and take such other action as may be reasonably requested by the other party to carry out the actions and transactions contemplated by this Agreement, including the closing conditions described in Articles VI and VII. SYCI and the Shareholders shall reasonably cooperate with DSFX in its of the books and records of SYCI, or in preparing any solicitation materials to be sent to the shareholders of DSFX in connection with the approval of the Exchange and the transactions contemplated by the Transactional Agreements.

ARTICLE IX.
TERMINATION

9.1 TERMINATION.

This Agreement may be renegotiated or terminated and the Exchange abandoned at any time prior to the Closing Date:

(a) by mutual written consent of DSFX, UCG, SCHC, SYCI and the Shareholders;

(b) by DSFX if it is not satisfied with the results of its due diligence of SYCI for any reason;

(c) by DSFX if (i) there is a material Breach of any covenant or obligation of SYCI or the Shareholders; provided however, that if such Breach or Breaches are capable of being cured prior to the Closing Date, such Breach or Breaches shall not have been cured within 10 days of delivery of the written notice of such Breach, or (ii) DSFX reasonably determines that the timely satisfaction of any condition set forth in Article VI has become impossible or impractical (other than as a result of any failure on the part of DSFX to comply with or perform its covenants and obligations under this Agreement or any of the other Transactional Agreements);

(d) by SYCI if (i) there is a material Breach of any covenant or obligation of DSFX; provided however, that if such Breach or Breaches are capable of being cured prior to the Closing Date, such Breach or Breaches shall not have been cured within 10 days of delivery of the written notice of such Breach, or (ii) SYCI reasonably determines that the timely satisfaction of any condition set forth in Article VII has become impossible or impractical (other than as a result of any failure on the part of SYCI or any Shareholder to comply with or perform any covenant or obligation set forth in this Agreement or any of the other Transactional Agreements);


(e) by DSFX if the Closing has not taken place on or before February 15, 2007 (except if as a result of any failure on the part of DSFX to comply with or perform its covenants and obligations under this Agreement or in any other Transactional Agreement);

(f) by SYCI if the Closing has not taken place on or before February 15, 2007 (except if as a result of the failure on the part of SYCI or the Shareholders to comply with or perform any covenant or obligation set forth in this Agreement or in any other Transactional Agreement);

(g) by any of DSFX, on the one hand or SYCI, on the other hand, if any court of competent jurisdiction in the United States or other United States governmental body shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the Exchange and such order, decree, ruling or any other action shall have become final and non-appealable; provided, however, that the party seeking to terminate this Agreement pursuant to this clause (g) shall have used all commercially reasonable efforts to remove such order, decree or ruling; or

(h) The parties hereby agree and acknowledge that a breach of the provisions of Sections 4.1, 4.2, 4.3, 4.4 and 4.6 are, without limitation, material Breaches of this Agreement.

9.2 TERMINATION PROCEDURES.

If DSFX wishes to terminate this Agreement pursuant to Section 9.1, DSFX shall deliver to the Shareholders, SYCI a written notice stating that DSFX is terminating this Agreement and setting forth a brief description of the basis on which DSFX is terminating this Agreement. If SYCI wishes to terminate this Agreement pursuant to Section 9.1, SYCI, as applicable, shall deliver to DSFX a written notice stating that SYCI is terminating this Agreement and setting forth a brief description of the basis on which SYCI is terminating this Agreement.

9.3 EFFECT OF TERMINATION.

In the event of termination of this Agreement as provided above, this Agreement shall forthwith have no further effect. Except for a termination resulting from a Breach by a party to this Agreement, there shall be no liability or obligation on the part of any party hereto. In the event of a breach, the remedies of the non-breaching party shall be to seek damages from the breaching party or to obtain an order for specific performance, in addition to or in lieu of other remedies provided herein. Upon request after termination, each party will redeliver or, at the option of the party receiving such request, destroy all reports, work papers and other material of any other party relating to the Exchange, whether obtained before or after the execution hereof, to the party furnishing same; provided, however, that SYCI and the Shareholders shall, in all events, remain bound by and continue to be subject to Section 4.6 and all parties shall in all events remain bound by and continue to be subject to
Section 5.4 and 5.5.

Notwithstanding the above, both DSFX, on the one hand, and SYCI and the Shareholders, on the other hand, shall be entitled to announce the termination of this Agreement by means of a mutually acceptable press release.


ARTICLE X.
MISCELLANEOUS

10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.

All representations and warranties of SYCI and the Shareholders in this Agreement and the SYCI Disclosure Schedule shall survive shall survive indefinitely. The right to indemnification, reimbursement or other remedy based on such representations and warranties will not be affected by any investigation conducted by the parties.

10.2 EXPENSES.

Except as otherwise set forth herein, each of the parties to the Exchange shall bear its own expenses incurred in connection with the negotiation and consummation of the transactions contemplated by this Agreement.

10.3 ENTIRE AGREEMENT.

This Agreement and the other Transactional Agreements contain the entire agreement of the parties hereto, and supersede any prior written or oral agreements between them concerning the subject matter contained herein, or therein. There are no representations, agreements, arrangements or understandings, oral or written, between the parties to this Agreement, relating to the subject matter contained in this Agreement and the other Transaction Agreements, which are not fully expressed herein or therein. The schedules and each exhibit attached to this Agreement or delivered pursuant to this Agreement are incorporated herein by this reference and constitute a part of this Agreement.

10.4 COUNTERPARTS

This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument.

10.5 DESCRIPTIVE HEADINGS.

The Article and Section headings in this Agreement are for convenience only and shall not affect the meanings or construction of any provision of this Agreement.

10.6 NOTICES.

Any notices required or permitted to be given under this Agreement shall be in writing and shall be deemed sufficiently given on the earlier to occur of the date of personal delivery, the date of receipt or three (3) days after posting by overnight courier or registered or certified mail, postage prepaid, addressed as follows:

If to DSFX:       Chengming Industrial Park, Unit - Haoyuan Chemical Company
                  Limited, Shouguang City, Shandong, P.R. China 262714

If to SYCI:       Shouguang Yuxin Chemical Industry Co, Ltd.
                  Wo Pu Town, Qing He Oil Extraction Plant 2nd Living District,
                  Shouguang City, Shandong Province, China

If to the         To such address or addresses as a party shall have previously
Shareholders:     designated by notice to the sender given in accordance with
                  this section.


10.7 CHOICE OF LAW.

This Agreement shall be construed in accordance with and governed by the laws of the State of New York without regard to choice of law principles. The parties hereto each consent to the jurisdiction of the courts of the state of New York, county of New York and to the federal courts located in the county of New York, State of New York.

10.8 BINDING EFFECT; BENEFITS.

This Agreement shall inure to the benefit of and be binding upon the parties and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended to confer on any Person other than the parties or their respective successors and permitted assigns, the Shareholders and other Persons expressly referred to herein, any rights, remedies, obligations or liabilities under or by reason of this Agreement.

10.9 ASSIGNABILITY.

Neither this Agreement nor any of the parties' rights hereunder shall be assignable by any party without the prior written consent of the other parties and any attempted assignment without such consent shall be void.

10.10 WAIVER AND AMENDMENT.

Any term or provision of this Agreement may be waived at any time by the party, which is entitled to the benefits thereof. The waiver by any party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. The parties may, by mutual agreement in writing, amend this Agreement in any respect. SYCI and the Shareholders hereby acknowledge their intent that this Agreement includes as a party any holder of capital stock in SYCI at the time of Closing. DSFX, SCHC, SYCI and the Shareholders therefore agree that this Agreement may be amended, without the further consent of any party to this Agreement, (i) to add as a new Shareholder any existing shareholder of SYCI and (ii) to modify Schedule 1 to reflect the addition of such shareholder.

10.11 ATTORNEYS' FEES.

In the event of any action or proceeding to enforce the terms and conditions of this Agreement, the prevailing party shall be entitled to an award of reasonable attorneys' and experts' fees and costs, in addition to such other relief as may be granted.

10.12 SEVERABILITY.

If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.

10.13 CONSTRUCTION.

In executing this Agreement, the parties severally acknowledge and represent that each: (a) has fully and carefully read and considered this Agreement; (b) has or has had the opportunity to consult independent legal counsel regarding the legal effect and meaning of this document and all terms and conditions hereof; (c) has been afforded the opportunity to negotiate as to any and all terms hereof; and (d) is executing this Agreement voluntarily, free from any influence, coercion or duress of any kind. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction will be applied against any party.


IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto as of the day and year first above written.

Diversifax, Inc

By: /s/
    ----------------------------------------
    Name: Ming Yang
    Title: CEO

Shouguang Yuxin Chemical Industry Co, Ltd.

By: /s/
    ----------------------------------------
    Name: Ming Yang
    Title: President

Shareholders:


See attached Shareholder signature pages


EXHIBIT A
CERTAIN DEFINITIONS

For purposes of the Agreement (including this Exhibit A):

"Agreement" shall mean the Share Exchange Agreement to which this Exhibit A is attached (including all Disclosure Schedules and all Exhibits), as it may be amended from time to time.

"Approved Plans" shall mean a stock option or similar plan for the benefit of employees or others, which has been approved by the shareholders of SYCI.

"Breach" There shall be deemed to be a "Breach" of a representation, warranty, covenant, obligation or other provision if there is or has been any inaccuracy in or breach of, or any failure to comply with or perform, such representation, warranty, covenant, obligation or other provision.

"Certificates" shall have the meaning specified in Section 1.3 of the Agreement.

"Closing" shall have the meaning specified in Section 1.5 of the Agreement.

"Closing Date" shall have the meaning specified in Section 1.5 of the Agreement.

"Code" shall have the meaning specified in the Recitals of this Agreement.

"Confidential Information" shall mean all nonpublic information disclosed by one party or its agents (the "Disclosing Party") to the other party or its agents (the "Receiving Party") that is designated as confidential or that, given the nature of the information or the circumstances surrounding its disclosure, reasonably should be considered as confidential. Confidential Information includes, without limitation (i) nonpublic information relating to the Disclosing Party's technology, customers, vendors, suppliers, business plans, intellectual property, promotional and marketing activities, finances, agreements, transactions, financial information and other business affairs, and
(ii) third-party information that the Disclosing Party is obligated to keep confidential. Confidential Information does not include any information that (i) is or becomes publicly available without breach of this Agreement, (ii) can be shown by documentation to have been known to the Receiving Party at the time of its receipt from the Disclosing Party, (iii) is received from a third party who, to the knowledge of the Receiving Party, did not acquire or disclose such information by a wrongful or tortious act, or (iv) can be shown by documentation to have been independently developed by the Receiving Party without reference to any Confidential Information.

"Consent" shall mean any approval, consent, ratification, permission, waiver or authorization (including any Governmental Authorization).

"Disclosure Schedule Update" shall have the meaning specified in Section 4.4 of the Agreement.

"DSFX" shall have the meaning specified in the first paragraph of the Agreement.

"DSFX Common Stock" shall mean the shares of common stock of DSFX.

"DSFX SEC Reports" shall have the meaning specified in Section 4.6 of the Agreement.

"Entity" shall mean any corporation (including any non profit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, cooperative, foundation, society, political party, union, company (including any limited liability company or joint stock company), firm or other enterprise, association, organization or entity.


"Environmental Laws" shall mean any Law or other requirement relating to the protection of the environment, health, or safety from the release or disposal of hazardous materials.

"Environmental Permit" means all licenses, permits, authorizations, approvals, franchises and rights required under any applicable Environmental Law or Order.

"Equity Security" shall mean any stock or similar security, including, without limitation, securities containing equity features and securities containing profit participation features, or any security convertible into or exchangeable for, with or without consideration, any stock or similar security, or any security carrying any warrant, right or option to subscribe to or purchase any shares of capital stock, or any such warrant or right.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"GAAP" shall mean Generally Accepted Accounting Principles, applied on a consistent basis.

"Governmental Authorization" shall mean any:

(a) permit, license, certificate, franchise, concession, approval, consent, ratification, permission, clearance, confirmation, endorsement, waiver, certification, designation, rating, registration, qualification or authorization that is issued, granted, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any Law; or

(b) right under any contract with any Governmental Body.

"Governmental Body" shall mean any:

(a) nation, principality, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature;

(b) federal, state, local, municipal, foreign or other government;

(c) governmental or quasi-governmental authority of any nature (including any governmental division, subdivision, department, agency, bureau, branch, office, commission, council, board, instrumentality, officer, official, representative, organization, unit, body or Entity and any court or other tribunal); or

(d) individual, Entity or body exercising, or entitled to exercise, any executive, legislative, judicial, administrative, regulatory, police, military or taxing authority or power of any nature, including any court, arbitrator, administrative agency or commissioner, or other governmental authority or instrumentality.

"Indebtedness" shall mean any obligation, contingent or otherwise. Any obligation secured by a Lien on, or payable out of the proceeds of, or production from, property of the relevant party will be deemed to be Indebtedness.

"Intellectual Property" means all industrial and intellectual property, including, without limitation, all U.S. and non-U.S. patents, patent applications, patent rights, trademarks, trademark applications, common law trademarks, Internet domain names, trade names, service marks, service mark applications, common law service marks, and the goodwill associated therewith, copyrights, in both published and unpublished works, whether registered or unregistered, copyright applications, franchises, licenses, know-how, trade secrets, technical data, designs, customer lists, confidential and proprietary information, processes and formulae, all computer software programs or applications, layouts, inventions, development tools and all documentation and media constituting, describing or relating to the above, including manuals, memoranda, and records, whether such intellectual property has been created, applied for or obtained anywhere throughout the world.


"Knowledge" A corporation shall be deemed to have "knowledge" of a particular fact or matter only if a director or officer of such corporation has, had or should have had knowledge of such fact or matter.

"Laws" means, with respect to any Person, any U.S. or non-U.S. federal, national, state, provincial, local, municipal, international, multinational or other law (including common law), constitution, statute, code, ordinance, rule, regulation or treaty applicable to such Person.

"Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien or charge, right of first refusal, encumbrance or other adverse claim or interest of any kind, including, without limitation, any conditional sale or other title retention agreement, any lease in the nature thereof and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction and including any lien or charge arising by Law.

"Material Adverse Effect" means any change, effect or circumstance which, individually or in the aggregate, would reasonably be expected to (a) have a material adverse effect on the business, assets, financial condition or results of operations of the affected party, in each case taken as a whole or (b) materially impair the ability of the affected party to perform its obligations under this Agreement and the Transaction Agreements, excluding any change, effect or circumstance resulting from (i) the announcement, pendency or consummation of the transactions contemplated by this Agreement, (ii) changes in the United States securities markets generally, or (iii) changes in general economic, currency exchange rate, political or regulatory conditions in industries in which the affected party operates.

"Material Contract" means any and all agreements, contracts, arrangements, understandings, leases, commitments or otherwise, providing for potential payments by or to the company in excess of $10,000, and the amendments, supplements and modifications thereto.

"Order" shall mean any award, decision, injunction, judgment, order, ruling, subpoena, or verdict entered, issued, made, or rendered by any Governmental Body.

"Ordinary Course of Business" shall mean an action taken by SYCI if (i) such action is taken in normal operation, consistent with past practices, (ii) such action is not required to be authorized by the Shareholders, Board of Directors or any committee of the Board of the Directors or other governing body of SYCI and (iii) does not require any separate or special authorization or consent of any nature by any Governmental Body or third party.

"Permitted Liens" shall mean (a) Liens for Taxes not yet payable or in respect of which the validity thereof is being contested in good faith by appropriate proceedings and for the payment of which the relevant party has made adequate reserves; (b) Liens in respect of pledges or deposits under workmen's compensation laws or similar legislation, carriers, warehousemen, mechanics, laborers and materialmen and similar Liens, if the obligations secured by such Liens are not then delinquent or are being contested in good faith by appropriate proceedings conducted and for the payment of which the relevant party has made adequate reserves; and (c) statutory Liens incidental to the conduct of the business of the relevant party which were not incurred in connection with the borrowing of money or the obtaining of advances or credits and that do not in the aggregate materially detract from the value of its property or materially impair the use thereof in the operation of its business.

"Person" shall mean any individual, Entity or Governmental Body.

"Pre-Closing Period" shall mean the period commencing as of the date of the Agreement and ending on the Closing Date.

"Proceeding" shall mean any action, suit, litigation, arbitration, proceeding (including any civil, criminal, administrative, investigative or appellate proceeding and any informal proceeding), prosecution, contest, hearing, inquiry, inquest, audit, examination or investigation, commenced, brought, conducted or heard by or before, or otherwise has involved, any Governmental Body or any arbitrator or arbitration panel.


"Representatives" of a specified party shall mean officers, directors, employees, attorneys, accountants, advisors and representatives of such party, including, without limitation, all subsidiaries of such specified party, and all such Persons with respect to such subsidiaries. The Related Persons of SYCI shall be deemed to be "Representatives" of SYCI, as applicable.

"SEC" shall mean the Securities and Exchange Commission.

"Securities Act" shall mean the Securities Act of 1933, as amended.

"SYCI" shall have the meaning specified in the first paragraph of the Agreement

"SYCI Balance Sheet" shall mean SYCI's audited balance sheet at December 31, 2004 and December 31, 2005.

"SYCI Common Stock" shall mean the shares of common stock of SYCI.

"SYCI Disclosure Schedule" shall have the meaning specified in introduction to Article II of the Agreement.

"SYCI Disclosure Schedule" shall have the meaning specified in introduction to Article II of the Agreement.

"Taxes" shall mean all foreign, federal, state or local taxes, charges, fees, levies, imposts, duties and other assessments, as applicable, including, but not limited to, any income, alternative minimum or add-on, estimated, gross income, gross receipts, sales, use, transfer, transactions, intangibles, ad valorem, value-added, franchise, registration, title, license, capital, paid-up capital, profits, withholding, payroll, employment, unemployment, excise, severance, stamp, occupation, premium, real property, recording, personal property, federal highway use, commercial rent, environmental (including, but not limited to, taxes under Section 59A of the Code) or windfall profit tax, custom, duty or other tax, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest, penalties or additions to tax with respect to any of the foregoing; and "Tax" means any of the foregoing Taxes.

"Tax Group" shall mean any federal, state, local or foreign consolidated, affiliated, combined, unitary or other similar group of which SYCI is now or was formerly a member.

"Tax Return" shall mean any return, declaration, report, claim for refund or credit, information return, statement or other similar document filed with any Governmental Body with respect to Taxes, including any schedule or attachment thereto, and including any amendment thereof.

"Transactional Agreements" shall mean:

"UCG" shall have the meaning specified in the first paragraph of the Agreement

(a) this Agreement; and

(b) the Promissory Note.


EXHIBIT B

FORM OF PROMISSORY NOTE

DIVERSIFAX, INC.

PROMISSORY NOTE

NO. ___ $____________ ______, 2007

FOR VALUE RECEIVED, the undersigned, Diversifax, Inc., a Delaware corporation (the "Maker"), hereby promises to pay to the order of ___________________(the "Payee"), the principal amount of _________________, all in accordance with the provisions of this promissory note.

1. Payment of Principal. The full amount of the principal of this promissory note shall be due and payable on __________________ (the "Maturity Date").

2. No Interest. Under no circumstances shall interest accrue or be charged on the unpaid principal balance of this promissory note.

3. Method of Payment. Payments hereunder shall be in lawful money of the United States and shall be made to Payee at the following address or at such other place as Payee may designate to Maker in writing: c/o ____________________________________________________.

4. Prepayment. This promissory note may be prepaid in whole or in part at any time without penalty or premium by payment of all or any part of the outstanding principal amount.

5. Unconditional Payment Obligation. No provision of this promissory note shall alter or impair the obligation of the Maker, which is absolute and unconditional, to pay the principal of this promissory note at the time and place and in the currency herein prescribed.

6. Events of Default. If any of the following events ("Events of Default") shall occur, Payee may, by notice to Maker, declare this promissory note and all amounts payable hereunder to be due and payable, whereupon the same shall become immediately due and payable:

(a) Maker shall become insolvent or admit in writing its inability to pay its debts as they become due, or shall make a general assignment for the benefit of creditors;

(b) Any proceedings shall be instituted by or against Maker seeking either (i) an order for relief with respect to, or reorganization, arrangement, adjustment or composition of, its debts under the United States Bankruptcy Code or under any other law relating to bankruptcy, insolvency, reorganization, or relief of debtors, or (ii) appointment of a trustee, receiver or similar official for Maker or for any substantial part of its property;

(c) Maker's failure to conduct business in the ordinary course, dissolution or termination of existence; or

(d) Maker's failure after the Maturity Date to repay the amounts due hereunder within ten (10) days of receiving written notice from Payee that such amounts are due and payable.

7. Waiver of Notice. Maker hereby waives presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this promissory note, and assents to extension of the time of payment or forbearance or other indulgence without notice.


8. Governing Law. This promissory note shall be construed in accordance with the laws of the State of New York, without regard to its conflicts of laws rules.

9. Notices. All notices, requests, demands and other communications with respect to this promissory note shall be given in person or forwarded by first class United States mail, postage prepaid, registered or certified mail, with return receipt requested, addressed to the party's address. Any notice, request, demand or communication shall be deemed validly given and received upon delivery if given in person, and on the 5th business day after deposit in the United States mail if given by mail as provided for in the preceding sentence.

IN WITNESS WHEREOF, the Maker has executed and delivered this Note effective as of February 5, 2007.

DIVERSIFAX, INC.

By:

Ming Yang Chief Executive Officer


SCHEDULE 1

SYCI Shareholders

Shareholders Name              Ownership Percentage of SYCI         Shares of DSFX to be issued
----------------------         ----------------------------         ---------------------------
Shandong Haoyuan                          50.96%                         8,249,465 shares
Industry Group Ltd.
Wenxiang Yu                               49.04%                         7,938,653 shares


SCHEDULE 2

SYCI Disclosure Schedule

COUNTERPART SIGNATURE PAGE
SHARE EXCHANGE AGREEMENT
AMONG
DIVERSIFAX, INC.,
UPPER CLASS GROUP LIMITED,
SHOUGUANG CITY HAOYUAN CHEMICAL COMPANY LIMITED,
SHOUGUANG YUXIN CHEMICAL INDUSTRY CO, LTD.
AND THE SHAREHOLDERS NAMED THEREIN

A. The undersigned shareholder of Shouguang Yuxin Chemical Industry Co, Ltd ("SYCI") desires to enter into the Share Exchange Agreement dated February 5, 2007 (the "Agreement"), among Diversifax, Inc., UCG, SCHC, Shouguang Yuxin Chemical Industry Co, Ltd. ("SYCI") and the Shareholders of SYCI named therein, a copy of which has been delivered to the undersigned.

B. The undersigned hereby adopts, accepts and agrees to all of the terms and provisions of the Agreement.

C. This Counterpart Signature Page has been executed by the undersigned Shareholder. The parties to the Agreement are hereby authorized to attach this Counterpart Signature Page to a copy of the Agreement, together with executed Counterpart Signature Pages of the other Shareholders. The undersigned agrees that when this Counterpart Signature Page has been appended to the Agreement, the Agreement shall thereupon become a binding agreement between the undersigned, DSFX, UCG, SCHC, SYCI and other Shareholders who have executed similar Counterpart Signature Pages, enforceable against the undersigned in accordance with its terms, without further action by the undersigned.

IN WITNESS WHEREOF, the undersigned has executed and delivered this Counterpart Signature Page as of the (date) day of _____ , 2007.

Shareholders:

SHANDONG HAOYUAN INDUSTRY GROUP LTD

By: /s/
    -------------------------------------
Name: Ming Yang
Title: President


/s/
-----------------------------------------
Name: Wenxiang Yu


SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED

FINANCIAL STATEMENTS

DECEMBER 31, 2005


                 SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED

                                 C O N T E N T S

                                                                       PAGE
                                                                    ------------

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                  1

BALANCE SHEET                                                            2

STATEMENT OF OPERATIONS                                                  3

STATEMENT OF COMPREHENSIVE INCOME                                        4

STATEMENT OF STOCKHOLDERS' EQUITY                                        5

STATEMENT OF CASH FLOWS                                                  6

NOTES TO FINANCIAL STATEMENTS                                         7 - 11

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors
Shouguang Yuxin Chemical Industry Co., Limited
Shouguang City, Shandong Province

We have audited the accompanying balance sheet of Shouguang Yuxin Chemical Industry Co., Limited as of December 31, 2005 and the related statements of operations, comprehensive income, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Shouguang Yuxin Chemical Industry Co., Limited as of December 31, 2005 and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States.

/s/ Morison Cogen LLP

January 2, 2007

-1-

SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED
BALANCE SHEET
DECEMBER 31, 2005

ASSETS

CURRENT ASSETS

  Cash and cash equivalents                                         $  3,132,607
  Accounts receivable                                                    128,679
  Prepayments and other receivables                                       44,329
  Inventories                                                            800,548
  Prepaid land lease                                                         496
  Due from related party                                                  46,321
                                                                    ------------
                                                                       4,152,980

PROPERTY, PLANT AND EQUIPMENT, Net                                       820,553

DUE FROM RELATED PARTIES                                                 620,000

PREPAID LAND LEASE, Net of current portion                                23,312
                                                                    ------------

TOTAL ASSETS                                                        $  5,616,845
                                                                    ============

    LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Accounts payable and accrued expenses                             $    114,432
  Due to director                                                         49,380
  Taxes payable                                                          372,274
                                                                    ------------

TOTAL LIABILITIES                                                        536,086
                                                                    ------------

           STOCKHOLDERS' EQUITY

PAID-IN CAPITAL                                                        1,329,592

RETAINED EARNINGS - UNAPPROPRIATED                                     3,102,994

RETAINED EARNINGS - APPROPRIATED
  Statutory Common Reserve Fund                                          365,496
  Statutory Public Welfare Fund                                          182,748

CUMULATIVE TRANSLATION ADJUSTMENT                                         99,929
                                                                    ------------

TOTAL STOCKHOLDERS' EQUITY                                             5,080,759
                                                                    ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                          $  5,616,845
                                                                    ============

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

-2-

SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2005

REVENUE

  Net sales                                                         $  9,776,858
  Maintenance service income                                           1,371,535
                                                                    ------------
                                                                      11,148,393
                                                                    ------------
OPERATING EXPENSES
  Cost of revenue                                                      7,013,513
  General and administrative expenses                                    797,879
                                                                    ------------
                                                                       7,811,392
                                                                    ------------

INCOME FROM OPERATIONS                                                 3,337,001
                                                                    ------------

OTHER INCOME
  Rental income                                                           14,666
  Interest income                                                            415
                                                                    ------------
                                                                          15,081
                                                                    ------------

INCOME BEFORE INCOME TAXES                                             3,352,082

INCOME TAXES                                                           1,048,512
                                                                    ------------

NET INCOME                                                          $  2,303,570
                                                                    ============

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

-3-

                 SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED
                        STATEMENT OF COMPREHENSIVE INCOME
                          YEAR ENDED DECEMBER 31, 2005

NET INCOME                                                          $  2,303,570

OTHER COMPREHENSIVE INCOME
  Foreign currency translation adjustment                                 99,929
                                                                    ------------

COMPREHENSIVE INCOME                                                $  2,403,499
                                                                    ============

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

-4-

SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED
STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2005

                                                                   Retained Earnings - Appropriated
                                                                   --------------------------------
                                     Additional       Retained        Statutory       Statutory       Cumulative
                                      Paid-in         Earnings -        Common          Public       Translation
                                      capital      Unappropriated    Reserve Fund    Welfare Fund     Adjustment         Total
                                    ------------   --------------    ------------    ------------    ------------    ------------
BALANCE AT JANUARY 1, 2005          $  1,329,592    $  1,118,744     $    152,616    $     76,308    $         --    $  2,677,260

Initial capitalization                        --              --               --              --              --              --

Cumulative translation adjustment             --              --               --              --          99,929          99,929

Transfer to reserve funds                     --        (319,320)         212,880         106,440              --              --

Net income for the year ended
 December 31, 2005                            --       2,303,570               --              --              --       2,303,570
                                    ------------    ------------     ------------    ------------    ------------    ------------

BALANCE AT DECEMBER 31, 2005        $  1,329,592    $  3,102,994     $    365,496    $    182,748    $     99,929    $  5,080,759
                                    ============    ============     ============    ============    ============    ============

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

-5-

SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2005

CASH FLOWS FROM OPERATING ACTIVITIES

  Net income                                                       $  2,303,570
  Adjustments to reconcile net income
   to net cash provided by operating activities
    Depreciation and amortization                                        61,632
    Increase in assets
      Accounts receivable                                                (3,971)
      Prepayments and other receivables                                 (29,276)
      Inventories                                                      (397,585)
    Increase (decrease) in liabilities
      Accounts payable and accrued expenses                             (85,364)
      Tax payable                                                       120,327
                                                                   ------------

Net cash provided by operating activities                             1,969,333
                                                                   ------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of property, plant and equipment                             (13,807)
                                                                   ------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Increase in due to related parties                                   (656,757)
                                                                   ------------

EFFECTS OF EXCHANGE RATE CHANGE ON CASH                                  62,825
                                                                   ------------

NET INCREASE  IN CASH                                                 1,361,594

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR                         1,771,013
                                                                   ------------

CASH AND CASH EQUIVALENTS - END OF YEAR                            $  3,132,607
                                                                   ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION
    Cash paid during the period for:

     Income taxes                                                  $    941,720
                                                                   ============

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

-6-

SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005

NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of the Business

Shouguang Yuxin Chemical Industry Co., Limited (the "Company"), was incorporated in Shouguang City, Shangdong Province, the People's Republic of China (the "PRC") on October 30, 2000 for the purpose of manufacturing chemical products for use in the oil industry and paper manufacturing industry. Operations commenced in January 2004.

Reporting Currency

The Company's functional currency is Renminibi ("RMB"); however, the reporting currency is the United States dollar ("USD").

Revenue Recognition

In accordance with Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition, the Company recognizes revenue when persuasive evidence of a customer or distributor arrangement exists or acceptance occurs, receipt of goods by customer occurs, the price is fixed or determinable, and the sales revenues are considered collectible. Subject to these criteria, the Company generally recognizes revenue at the time goods are delivered to the customer, and when the customer takes ownership and assumes risk of loss based on shipping terms.

Maintenance service income for oil pipelines is recognized when services are rendered.

Rental income is recognized on a straight-line basis over the terms of the rental agreement.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates based on management's knowledge and experience. The more significant areas requiring the use of management estimates and assumptions relate to mineral reserves that are the basis for future cash flow estimates and units-of-production depreciation and amortization calculations. Accordingly, actual results could differ from those estimates.

Foreign Currency Translation

Assets and liabilities of the Company have been translated using the exchange rate at the balance sheet date. The average exchange rate for the period has been used to translate revenues and expenses. Translation adjustments are reported separately and accumulated in a separate component of equity (cumulative translation adjustment).

Comprehensive Income

The Company follows the Statement of Financial Accounting Standard ("SFAS") No. 130, Reporting Comprehensive Income. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.

Fair Value of Financial Instruments

The fair value of financial instruments classified as current assets or liabilities, including cash, receivables and payables, approximates carrying value due to the short-term maturity of the instruments.

Cash Equivalents

The Company considers all short-term securities purchased with a maturity of three months or less to be cash equivalents.

-7-

SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005

NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)

Concentration of Credit Risk

Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of cash and accounts receivable. The Company places its temporary cash investments with high credit quality financial institutions to limit its credit exposure. Concentrations of credit risk with respect to accounts receivable are limited since the Company performs ongoing credit evaluations of its customers' financial condition and due to the generally short payment terms.

Accounts Receivable

The Company considers accounts receivable to be fully collectible; accordingly, the Company has not provided for an allowance for doubtful accounts. As amounts become uncollectible, they will be charged to an allowance or operations in the period when a determination of uncollectibility is made.

Asset Retirement Obligation

The Company follows SFAS No. 143, Accounting for Asset Retirement Obligations, which established a uniform methodology for accounting for estimated reclamation and abandonment costs. SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which the legal obligation associated with the retirement of the long-lived asset is incurred. When the liability is initially recorded, the offset is capitalized by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. To settle the liability, the obligation is paid, and to the extent there is a difference between the liability and the amount of cash paid, a gain or loss upon settlement is recorded. Currently, there are no reclamation or abandonment obligations associated with the land being utilized for exploitation.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is provided to write off the cost of property, plant and equipment over their estimated useful lives using the straight-line method at the following rates per annum:

Buildings                                           20 years
Plant and machinery                                  8 years
Office furniture and equipment                       8 years

The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in the income statement.

Prepaid Land Lease

Prepaid land lease is stated at cost and amortized over the period of the lease on the straight-line basis.

Inventories

Inventories consist of finished goods and raw materials. Raw materials are used in the production of chemical products, oilfield chemical additives, paper making chemicals and pesticide intermediates. Inventories are stated at the lower of cost and net realizable value. Cost which comprises direct materials and, where applicable, direct labor costs and those overhead costs that have been incurred in bringing the inventories and work in progress to their present locations and condition, is calculated using the first-in, first-out method. Net realizable value is based on estimated selling prices less estimated selling expenses.

-8-

SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005

NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)

Income Taxes

The Company accounts for income taxes under SFAS No. 109, Accounting for Income Taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. Under the liability method, deferred income tax assets and liabilities are computed annually for temporary differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

Employee Benefits

The Company participates in employee social security plans, including pension, medical, housing and other welfare benefits, organized by the government authorities in accordance with relevant regulations. Except for the above social security benefits, the Company has no additional commitment to other employee welfare benefits.

According to the relevant regulations, premium and welfare benefit contributions are remitted to the social welfare authorities and are calculated based on percentages of the total salary of employees, subject to a certain ceiling. Contributions to the plans are charged to the income statement as incurred, which was approximately $19,000 for the year ended December 31, 2005.

Start-up Costs

Start-up costs are expensed when incurred.

Advertising Costs

Advertising costs are expensed as incurred.

Shipping and Handling Fees and Costs

The Company follows Emerging Issues Task Force ("EITF") No. 00-10, Accounting for Shipping and Handling Fees and Costs. The Company does not charge its customers for shipping and handling. The Company classifies shipping and handling costs as part of the cost of net sales. For the year ended December 31, 2005, shipping and handling costs were $362,465.

Recoverability of Long Lived Assets

The Company follows SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company is not aware of any events or circumstances which indicate the existence of an impairment which would be material to the Company's annual financial statements.

-9-

SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005

NOTE 2 - INVENTORIES

Inventories consist of the following:

Raw materials                                                       $    723,824
Finished goods                                                            76,724
                                                                    ------------

                                                                    $    800,548
                                                                    ============

NOTE 3 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

Buildings                                                           $    830,180
Plant and machinery                                                       52,824
Office furniture and equipment                                           102,854
                                                                    ------------
                                                                         985,858
Less: Accumulated depreciation                                           165,305
                                                                    ------------

                                                                    $    820,553
                                                                    ============

Depreciation and amortization expense for the year ended December 31, 2005 was $63,025.

NOTE 4 - PREPAID LAND LEASE

The prepaid land lease represents land use rights granted for the usage of a piece of land located in the PRC for a term of 50 years. The prepaid lease is amortized on a straight-line basis over the term of the lease.

NOTE 5 - DUE FROM RELATED PARTIES

Amounts represent receivables due from three companies whose shareholder and director is also a shareholder and director of the Company. The amounts due are unsecured with no stated repayment terms.

NOTE 6 - DUE TO DIRECTOR

The amount due is unsecured, interest-free and with no stated repayment terms.

NOTE 7 - RETAINED EARNINGS - APPROPRIATED

In accordance with the relevant PRC regulations and the Company's Articles of Association, the Company is required to allocate its profit after tax to the following reserves:

Statutory Common Reserve Funds

The Company is required each year to transfer 10% of the profit after tax as reported under the PRC statutory financial statements to the statutory common reserve funds until the balance reaches 50% of the registered share capital. This reserve can be used to make up any loss incurred or to increase share capital. Except for the reduction of losses incurred, any other application should not result in this reserve balance falling below 25% of the registered capital.

-10-

SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005

NOTE 7 - RETAINED EARNINGS - APPROPRIATED (Continued)

Statutory Public Welfare Funds

The Company is required each year to transfer 5% of the profit after tax as reported under the PRC statutory financial statements to the statutory public welfare funds. This reserve is restricted to capital expenditure for employees' collective welfare facilities that are owned by the Company. The statutory public welfare funds are not available for distribution to the shareholders (except on liquidation). Once capital expenditure for staff welfare facilities has been made, an equivalent amount must be transferred from the statutory public welfare funds to the discretionary common reserve funds.

NOTE 8 - INCOME TAXES

As discussed in Note 1, the Company utilizes the asset and liability method of accounting for income taxes in accordance with SFAS No. 109. The statutory PRC tax rate is equivalent to the Company's effective tax rate. No provision for deferred taxes has been made as there were no material temporary differences at December 31, 2005.

NOTE 9 - MAJOR SUPPLIER

During 2005, the Company purchased 51% of its products from four suppliers. At December 31, 2005, amounts due to those suppliers included in accounts payable were $36,828. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.

NOTE 10 - CUSTOMER CONCENTRATION

The Company sells a substantial portion of its product to a limited number of customers. During the year ended December 31, 2005, sales to the Company's four largest customers, based on net sales made to such customers, aggregated $7,962,694, or approximately 80% of total net sales, and sales to the Company's largest customer represented approximately 46% of total net sales. At December 31, 2005, amounts due from these customers were $94,240. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.

NOTE 11 - SUBSEQUENT EVENT

On February 20, 2006, the Company declared dividends in the amount of $3,172,200, which was paid on March 15, 2006.

-11-

SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED

FINANCIAL STATEMENTS

SEPTEMBER 30, 2006


                 SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED

                                 C O N T E N T S

                                                                         PAGE
                                                                       ---------

BALANCE SHEETS                                                             1

STATEMENTS OF OPERATIONS                                                   2

STATEMENTS OF COMPREHENSIVE INCOME                                         3

STATEMENT OF STOCKHOLDERS' EQUITY                                          4

STATEMENTS OF CASH FLOWS                                                   5

NOTES TO FINANCIAL STATEMENTS                                           6 - 10

                 SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED
                                 BALANCE SHEETS

                                                    September 30,   December 31,
                                                        2006            2005
                                                    ------------    ------------
                                                    (Unaudited)       (Audited)
                 ASSETS

CURRENT ASSETS
  Cash and cash equivalents                         $  2,312,835    $  3,132,607
  Accounts receivable                                    136,561         128,679
  Prepayments and other receivables                       11,394          44,329
  Inventories                                            419,686         800,548
  Prepaid land lease                                         506             496
  Due from related party                                  47,294          46,321
                                                    ------------    ------------
                                                       2,928,276       4,152,980

PROPERTY, PLANT AND EQUIPMENT, Net                       790,376         820,553

DUE FROM RELATED PARTIES                               1,266,000         620,000

PREPAID LAND LEASE, Net of current portion                23,421          23,312
                                                    ------------    ------------

TOTAL ASSETS                                        $  5,008,073    $  5,616,845
                                                    ============    ============

  LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Accounts payable and accrued expenses             $    448,816    $    114,432
  Due to director                                         50,417          49,380
  Taxes payable                                          460,468         372,274
                                                    ------------    ------------

TOTAL LIABILITIES                                        959,701         536,086
                                                    ------------    ------------

           STOCKHOLDERS' EQUITY

PAID-IN CAPITAL                                        1,329,592       1,329,592

RETAINED EARNINGS - UNAPPROPRIATED                     1,684,042       3,102,994

RETAINED EARNINGS - APPROPRIATED
  Statutory Common Reserve Fund                          571,761         365,496
  Statutory Public Welfare Fund                          285,880         182,748

CUMULATIVE TRANSLATION ADJUSTMENT                        177,097          99,929
                                                    ------------    ------------

TOTAL STOCKHOLDERS' EQUITY                             4,048,372       5,080,759
                                                    ------------    ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY          $  5,008,073    $  5,616,845
                                                    ============    ============

See accompanying notes to financial statements.

-1-

SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)

                                          Three Months      Three Months       Nine Months      Nine Months
                                             Ended              Ended             Ended            Ended
                                          September 30,     September 30,     September 30,     September 30,
                                             2006               2005              2006             2005
                                         --------------    --------------    --------------    --------------
REVENUE
  Net sales                              $    4,379,013    $    2,653,029    $   11,507,636    $    6,777,071
  Maintenance service income                         --           122,916           106,168         1,116,470
                                         --------------    --------------    --------------    --------------
                                              4,379,013         2,775,945        11,613,804         7,893,541
                                         --------------    --------------    --------------    --------------

OPERATING EXPENSES
  Cost of revenue                             3,333,678         1,889,785         8,362,876         4,886,769
  General and administrative expenses            38,507           121,203           114,643           744,040
                                         --------------    --------------    --------------    --------------
                                              3,372,185         2,010,988         8,477,519         5,630,809
                                         --------------    --------------    --------------    --------------

INCOME FROM OPERATIONS                        1,006,828           764,957         3,136,285         2,262,732
                                         --------------    --------------    --------------    --------------

OTHER INCOME
  Rental income                                   3,770             3,691            11,248            10,951
  Interest income                                   160                85               423               302
                                         --------------    --------------    --------------    --------------
                                                  3,930             3,776            11,671            11,253
                                         --------------    --------------    --------------    --------------

INCOME BEFORE INCOME TAXES                    1,010,758           768,733         3,147,956         2,273,985

INCOME TAXES                                    378,845           234,642         1,085,311           725,077
                                         --------------    --------------    --------------    --------------

NET INCOME                               $      631,913    $      534,091    $    2,062,645    $    1,548,908
                                         ==============    ==============    ==============    ==============

See accompanying notes to financial statements.

-2-

SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)

                                            Three Months      Three Months       Nine Months      Nine Months
                                                Ended             Ended             Ended            Ended
                                            September 30,     September 30,     September 30,     September 30,
                                                2006              2005              2006             2005
                                           --------------    --------------    --------------    --------------
NET INCOME                                 $      631,913    $      534,091    $    2,062,645    $    1,548,908

OTHER COMPREHENSIVE INCOME
 Foreign currency translation adjustment           41,742            97,598            77,168            97,795
                                           --------------    --------------    --------------    --------------

COMPREHENSIVE INCOME                       $      673,655    $      631,689    $    2,139,813    $    1,646,703
                                           ==============    ==============    ==============    ==============

See accompanying notes to financial statements.

-3-

SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006

                                                                     Retained Earnings - Appropriated
                                                                     --------------------------------
                                                                                        Statutory
                                                       Retained         Statutory         Public       Cumulative
                                         Paid-in       Earnings -         Common          Welfare      Translation
                                         Capital     Unappropriated    Reserve Fund        Fund         Adjustment         Total
                                      ------------    ------------     ------------    ------------    ------------    ------------
BALANCE AT DECEMBER 31, 2005
  (AUDITED)                           $  1,329,592    $  3,102,994     $    365,496    $    182,748    $     99,929    $  5,080,759

Capital contribution                            --              --               --              --              --              --

Dividend distribution                           --      (3,172,200)              --              --              --      (3,172,200)

Cumulative translation adjustment               --              --               --              --          77,168          77,168

Transfer to reserve funds                       --        (309,397)         206,265         103,132              --              --

Net income for the nine months ended
  September 30, 2006                            --       2,062,645               --              --              --       2,062,645
                                      ------------    ------------     ------------    ------------    ------------    ------------

BALANCE AT SEPTEMBER 30, 2006
  (UNAUDITED)                         $  1,329,592    $  1,684,042     $    571,761    $    285,880    $    177,097    $  4,048,372
                                      ============    ============     ============    ============    ============    ============

See accompanying notes to financial statements.

-4-

SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)

                                                        2006            2005
                                                    -----------     -----------
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                        $ 2,062,645     $ 1,548,908
  Adjustments to reconcile net income
    to net cash provided by operating activities
      Depreciation and amortization                      47,153          45,827
      (Increase) decrease in assets
        Accounts receivable                              (5,118)         93,424
        Prepayments and other receivables                33,432           3,364
        Inventories                                     392,559          32,701
      Increase (decrease) in liabilities
        Accounts payable and accrued expenses           327,736         (99,323)
        Taxes payable                                    79,359          39,966
                                                    -----------     -----------

  Net cash provided by operating activities           2,937,766       1,664,867
                                                    -----------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of property, plant and equipment                  --         (13,823)
                                                    -----------     -----------

CASH FLOWS FROM FINANCING ACTIVITIES
  Decrease in due to/from related party                (624,900)       (609,917)
  Dividend distribution                              (3,186,990)             --
                                                    -----------     -----------

  Net cash used in financing activities              (3,811,890)       (609,917)
                                                    -----------     -----------

EFFECTS OF EXCHANGE RATE CHANGE ON CASH                  54,352          61,989
                                                    -----------     -----------

NET INCREASE (DECREASE) IN CASH                        (819,772)      1,103,116

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD       3,132,607       1,771,013
                                                    -----------     -----------

CASH AND CASH EQUIVALENTS - END OF PERIOD           $ 2,312,835     $ 2,874,129
                                                    ===========     ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION
    Cash paid during the period for:

      Income taxes                                  $ 1,036,024     $   710,227
                                                    ===========     ===========

See accompanying notes to financial statements.

-5-

SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)

NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of the Business

Shouguang Yuxin Chemical Industry Co., Limited (the "Company"), was incorporated in Shouguang City, Shangdong Province, the People's Republic of China (the "PRC") on October 30, 2000 for the purpose of manufacturing chemical products for use in the oil industry and paper manufacturing industry. Operations commenced in January 2004.

Reporting Currency

The Company's functional currency is Renminibi ("RMB"); however, the reporting currency is the United States dollar ("USD").

Revenue Recognition

In accordance with Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition, the Company recognizes revenue when persuasive evidence of a customer or distributor arrangement exists or acceptance occurs, receipt of goods by customer occurs, the price is fixed or determinable, and the sales revenues are considered collectible. Subject to these criteria, the Company generally recognizes revenue at the time goods are delivered to the customer, and when the customer takes ownership and assumes risk of loss based on shipping terms.

Maintenance service income for oil pipelines is recognized when services are rendered.

Rental income is recognized on the straight-line basis over the terms of the rental agreement.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates based on management's knowledge and experience. The more significant areas requiring the use of management estimates and assumptions relate to mineral reserves that are the basis for future cash flow estimates and units-of-production depreciation and amortization calculations. Accordingly, actual results could differ from those estimates.

Foreign Currency Translation

Assets and liabilities of the Company have been translated using the exchange rate at the balance sheet date. The average exchange rate for the period has been used to translate revenues and expenses. Translation adjustments are reported separately and accumulated in a separate component of equity (cumulative translation adjustment).

Comprehensive Income

The Company follows the Statement of Financial Accounting Standard ("SFAS") No. 130, Reporting Comprehensive Income. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.

Fair Value of Financial Instruments

The fair value of financial instruments classified as current assets or liabilities, including cash, receivables and payables, approximates carrying value due to the short-term maturity of the instruments.

Cash Equivalents

The Company considers all short-term securities purchased with a maturity of three months or less to be cash equivalents.

-6-

SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)

NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)

Concentration of Credit Risk

Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of cash and accounts receivable. The Company places its temporary cash investments with high credit quality financial institutions to limit its credit exposure. Concentrations of credit risk with respect to accounts receivable are limited since the Company performs ongoing credit evaluations of its customers' financial condition and due to the generally short payment terms.

Accounts Receivable

The Company considers accounts receivable to be fully collectible; accordingly, the Company has not provided for an allowance for doubtful accounts. As amounts become uncollectible, they will be charged to an allowance or operations in the period when a determination of uncollectibility is made.

Asset Retirement Obligation

The Company follows SFAS No. 143, Accounting for Asset Retirement Obligations, which established a uniform methodology for accounting for estimated reclamation and abandonment costs. SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which the legal obligation associated with the retirement of the long-lived asset is incurred. When the liability is initially recorded, the offset is capitalized by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. To settle the liability, the obligation is paid, and to the extent there is a difference between the liability and the amount of cash paid, a gain or loss upon settlement is recorded. Currently, there are no reclamation or abandonment obligations associated with the land being utilized for exploitation.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is provided to write off the cost of property, plant and equipment over their estimated useful lives using the straight-line method at the following rates per annum:

Buildings                                           20 years
Plant and machinery                                  8 years
Office furniture and equipment                       8 years
Motor vehicles                                       5 years

The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in the income statement.

Prepaid Land Lease

Prepaid land lease is stated at cost and amortized over the period of the lease on the straight-line basis.

Inventories

Inventories consist of finished goods and raw materials. Raw materials are used in the production of chemical products, oilfield chemical additives, paper making chemicals and pesticide intermediates. Inventories are stated at the lower of cost and net realizable value. Cost which comprises direct materials and, where applicable, direct labor costs and those overhead costs that have been incurred in bringing the inventories and work in progress to their present locations and condition, is calculated using the first-in, first-out method. Net realizable value is based on estimated selling prices less estimated selling expenses.

-7-

SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)

NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)

Income Taxes

The Company accounts for income taxes under SFAS No. 109, Accounting for Income Taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. Under the liability method, deferred income tax assets and liabilities are computed annually for temporary differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

Employee Benefits

The Company participates in employee social security plans, including pension, medical, housing and other welfare benefits, organized by the government authorities in accordance with relevant regulations. Except for the above social security benefits, the Company has no additional commitment to other employee welfare benefits.

According to the relevant regulations, premium and welfare benefit contributions are remitted to the social welfare authorities and are calculated based on percentages of the total salary of employees, subject to a certain ceiling. Contributions to the plans are charged to the income statement as incurred, which was approximately $5,000 for the three months ended September 2006 and 2005, and $15,000 for the nine months ended September 30, 2006 and 2005.

Start-up Costs

Start-up costs are expensed when incurred.

Advertising Costs

Advertising costs are expensed as incurred.

Shipping and Handling Fees and Costs

The Company follows Emerging Issues Task Force ("EITF") No. 00-10, Accounting for Shipping and Handling Fees and Costs. The Company does not charge its customers for shipping and handling. The Company classifies shipping and handling costs as part of the cost of net sales. For the three months ended September 30, 2006 and 2005, shipping and handling costs were $67,040 and $62,768 and for the nine months ended September 30, 2006 and 2005, shipping and handling costs were $197,023 and $185,019.

Recoverability of Long Lived Assets

The Company follows SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company is not aware of any events or circumstances which indicate the existence of an impairment which would be material to the Company's annual financial statements.

-8-

SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)

NOTE 2 - INVENTORIES

Inventories consist of the following:

                                                        2006             2005
                                                    ------------    ------------
Raw materials                                       $    311,475    $    723,824
Finished goods                                           108,211          76,724
                                                    ------------    ------------

                                                    $    419,686    $    800,548
                                                    ============    ============

NOTE 3 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

                                                         2006            2005
                                                    ------------    ------------
Buildings                                           $    847,587    $    830,180
Plant and machinery                                       53,932          52,824
Office furniture and equipment                            55,004          53,874
Motor vehicles                                            50,006          48,980
                                                    ------------    ------------
                                                       1,006,529         985,858
Less: Accumulated depreciation                           216,153         165,305
                                                    ------------    ------------

                                                    $    790,376    $    820,553
                                                    ============    ============

Depreciation and amortization expense was $15,536 and $15,274 for the three months ended September 30, 2006 and 2005, and $47,153 and $45,827 for the nine months ended September 30, 2006 and 2005.

NOTE 4 - PREPAID LAND LEASE

The prepaid land lease represents land use rights granted for the usage of a piece of land located in the PRC for a term of 50 years. The prepaid lease is amortized on a straight-line basis over the term of the lease.

NOTE 5 - DUE FROM RELATED PARTIES

Amounts represent receivables due from three companies whose shareholder and director is also a shareholder and director of the Company. The amounts due are unsecured with no stated repayment terms.

NOTE 6 - DUE TO DIRECTOR

The amount due is unsecured, interest-free and with no stated repayment terms.

-9-

SHOUGUANG YUXIN CHEMICAL INDUSTRY CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)

NOTE 7 - RETAINED EARNINGS - APPROPRIATED

In accordance with the relevant PRC regulations and the Company's Articles of Association, the Company is required to allocate its profit after tax to the following reserves:

Statutory Common Reserve Funds

The Company is required each year to transfer 10% of the profit after tax as reported under the PRC statutory financial statements to the statutory common reserve funds until the balance reaches 50% of the registered share capital. This reserve can be used to make up any loss incurred or to increase share capital. Except for the reduction of losses incurred, any other application should not result in this reserve balance falling below 25% of the registered capital.

Statutory Public Welfare Funds

The Company is required each year to transfer 5% of the profit after tax as reported under the PRC statutory financial statements to the statutory public welfare funds. This reserve is restricted to capital expenditure for employees' collective welfare facilities that are owned by the Company. The statutory public welfare funds are not available for distribution to the shareholders (except on liquidation). Once capital expenditure for staff welfare facilities has been made, an equivalent amount must be transferred from the statutory public welfare funds to the discretionary common reserve funds.

NOTE 8 - INCOME TAXES

As discussed in Note 1, the Company utilizes the asset and liability method of accounting for income taxes in accordance with SFAS No. 109. The statutory PRC tax rate is equivalent to the Company's effective tax rate. No provision for deferred taxes has been made as there were no material temporary differences at September 30, 2006.

NOTE 9 - MAJOR SUPPLIER

During 2006, the Company purchased 55% of its products from four suppliers. At September 30, 2006, amounts due to those suppliers included in accounts payable were $113,940. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.

NOTE 10 - CUSTOMER CONCENTRATION

The Company sells a substantial portion of its product to a limited number of customers. During the nine months ended September 30, 2006, sales to the Company's four largest customers, based on net sales made to such customers, aggregated $9,264,408, or approximately 81% of total net sales, and sales to the Company's largest customer represented approximately 37% of total net sales. At September 30, 2006, amounts due from these customers were $35,911. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.

-10-

Diversifax, Inc. and Subsidiaries (DSFX) Unaudited Pro Forma Financial Statements

The following unaudited pro forma financial statements for DSFX have been prepared to illustrate the acquisition of Shouguang Yuxin Chemical Industry Co., Limited (YUXIN) in a merger transaction. Since the ownership of DSFX and YUXIN are the same, the merger is accounted for as a transaction between entities under common control, whereby DSFX recognized the assets and liabilities transferred at their carrying amounts.

The unaudited pro forma financial information combines the historical financial information of DSFX and YUXIN as of and for the year ended December 31, 2005 and for the nine months ended September 30, 2006. The unaudited pro forma balance sheet as of September 30, 2006 assumes the merger was completed on that date. The unaudited pro forma statements of operations give effect to the merger as if the merger had been completed on January 1, 2005.

Under the terms of the merger agreement, as of the effective dates describe therein, upon completion of the proposed merger, all shareholders of YUXIN will receive a total amount of 16,188,118 shares of voting common stock of DSFX in exchange for all shares of YUXIN common stock held by all shareholders. Also, upon the completion of the proposed merger, DSFX will be obligated to pay a $2,550.000 dividend to the original YUXIN shareholder

In addition, the following unaudited pro forma financial statements for DSFX have been prepared to illustrate the previous acquisition of Upper Class Group Limited and Subsidiary in a merger transaction. Under accounting principles generally accepted in the United States, the share exchange is considered to be a capital transaction in substance, rather than a business combination. That is, the share exchange is equivalent to the issuance of stock by Upper Class Group Limited and Subsidiary for the net monetary assets of DSFX, accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the share exchange will be identical to that resulting from a reverse acquisition, except no goodwill will be recorded. Under reverse takeover accounting, the post reverse acquisition comparative historical financial statements of the legal aquirer, DSFX, are those of the legal acquiree, Upper Class Group Limited and Subsidairy, which are considered to be the accounting acquirer.

The unaudited pro forma financial information combines the historical financial information of DSFX and Upper Class Group Limited as of and for the period ended December 31, 2005 and for the nine months ended September 30, 2006. The unaudited pro forma balance sheet as of September 30, 2006 assumes the merger was completed on that date. The unaudited pro forma statements of operations give effect to the merger as if the merger had been completed on January 1, 2005.

Under the terms of the merger agreement, as of the effective dates describe therein, upon completion of the proposed merger, all shareholders of Upper Class Group Limited will receive a total amount of 26,500,000 shares of voting common stock of DSFX in exchange for all shares of Upper Class Group Limited common stock held by all shareholders.

These unaudited pro forma financial statements are for information purposes only. They do not purport to indicate the results that would have actually been obtained had the acquisition been completed on the assumed dates or for the periods presented, or which may be realized in the future. The accounting adjustments reflected in these unaudited pro forma consolidated financial statements included herein are preliminary and are subject to change. The accompanying notes are an integral part of these pro forma consolidated financial statements.


Proforma Balance Sheet

SEPTEMBER 30,2006

                                                                     UPPER CLASS      Shouguang
                                                     DIVERSIFAX,        GROUP           Yuxin
                                                        INC.           LTD AND         chemical      PRO-FORMA
                                                      (8/31/06)          SUB           Industry      ADJUSTMENT       Pro Forma
                                                    -----------------------------------------------------------------------------
                    Assets

Current Assets

Cash                                                            0       3,296,672       2,312,835                       5,609,507
Prepayments and other receivables                               0               0          11,394                          11,394
Accounts receivable                                             0               0         136,561                         136,561
Inventories                                                     0         148,610         419,686                         568,296
Prepaid land lease                                              0             496             506                           1,002
Due from realted party                                          0               0          47,294                          47,294
                                                    -----------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                            0       3,445,778       2,928,276                       6,374,054
                                                    =============================================================================

Due from related party                                          0       1,166,340       1,266,000                       2,432,340
Property, plant and equipment,net                               0       2,129,095         790,376                       2,919,471
Prepaid land lease, net of current portion                      0          23,938          23,421                          47,359
Note receivable                                                 0               0               0                               0
                                                    -----------------------------------------------------------------------------
TOTAL ASSETS                                                    0       6,765,151       5,008,073                      11,773,224
                                                    =============================================================================

      LIABILITIES AND STOCKHOLDERS'EQUITY

CURRENT LIABILITIES
Current maturities of long-term debt and notes
payable                                                         0               0               0                               0
 Accounts payable and accrued expenses                          0          50,704         448,816                         499,520
Other current liabilities                                       0               0               0                               0
Accrued payroll, stockholder                                    0               0               0                               0
Loan payable, officer/stockholder                               0               0               0                               0
Due to director                                                 0           9,111          50,417                          59,528
Due to related party                                            0          47,294               0                          47,294
Taxes payable                                                   0         921,433         460,468                       1,381,901

Dividend payable                                                0               0               0       2,550,000       2,550,000
                                                    -----------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                       0       1,028,542         959,701       2,550,000       4,538,243
                                                    =============================================================================
Long-term debt and notes payables, less current .               0               0               0                               0
maturities
TOTAL LIABILITIES                                               0       1,028,542         959,701       2,550,000       4,538,243
                                                    =============================================================================

              STOCKHOLDERS'EQUITY

Paid-in capital                                                 0       1,332,430       1,329,592         256,743       2,918,765

Retained earnings unappropriated                                0       3,239,875       1,684,042      (2,550,000)      2,373,917
Retained earnings-appropriated
      Statutory common reserve fund                             0         669,447         571,761                       1,241,208
      Statutory public welfare fund                             0         334,738         285,880                         620,618
Cumulative translation adjustment                               0         128,489         177,097                         305,586
Common stock, $0.001par value, 70,000,000 shares
authorized; 27,017,262 shares issued; 27,013,997
shares outstanding                                            517          31,600               0          11,088          43,205
Additional paid-in capital                             14,617,735               0               0     -14,617,735               0
Accumulated deficit                                   -14,349,904               0               0      14,349,904               0
                                                    -----------------------------------------------------------------------------

                                                          268,348       5,736,609               0                       6,004,957
                                                    -----------------------------------------------------------------------------
Less:Treasury stock; 3,265 shares at cost                -268,348               0               0                        -268,348
TOTAL STOCKHOLDERS'EQUITY                                       0       5,736,609       4,048,372               0       9,784,981
                                                    =============================================================================

TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY                       0       6,765,151       5,008,073                      11,773,224
                                                    =============================================================================

Pro-Forma Adjustments:

1.) To record the issuance of 26,500,000 shares of DSFX common stock to acquire Upper Class Group Limited.
2.) To record the issuance of 16,188,118 shares of DSFX common stock to acquire Shouguang Yuxin Chemical Industry Co., Limited and dividend payable


PROFORMA

STATEMENTS OF OPERATIONS

30-Sep-06

                                                                                               SHOUGUANG
                                                                           Upper Class          YUXIN
                                                                          Group Limited        CHEMICAL
                                                             DSFX             and sub          INDUSTRY          Pro Forma
                                                        --------------------------------------------------------------------
REVENUE
     Net sales                                                       0        12,760,106        11,507,636        24,267,742
     Maintenance service income                                      0                 0           106,168           106,168
                                                                     0        12,760,106        11,613,804        24,373,910
                                                        --------------------------------------------------------------------
OPERATING EXPENSES                                                                                                         0
                                                                          --------------
    Cost of net sales                                                0           7518749           8362876        15,881,625
                                                                          --------------
    General and administrative expenses                              0           206,589           114,643           321,232
                                                        --------------------------------------------------------------------
                                                                     0         7,725,338         8,477,519        16,202,857
                                                        --------------------------------------------------------------------
INCOME FROM OPERATIONS                                               0         5,034,768         3,136,285         8,171,053
                                                        --------------------------------------------------------------------
                                                                                                                           0
                                                                                                                           0
OTHER(INCOME)EXPENSES                                                0
     Rental income                                                   0                 0           -11,248           -11,248
     Other income                                                  -31                 0                 0               -31
     (Gain) on sale of investments                             -64,002                 0                 0           -64,002
     Interest income                                                 0              -791              -423            -1,214
     Interest expense                                           30,054                 0                 0            30,054
                                                        --------------------------------------------------------------------
                                                               -33,979              -791           -11,671           -46,441
                                                        --------------------------------------------------------------------

NETINCOME (LOSS) FROM DISCONTINUED OPERATIONS,NET OF
TAX                                                           -225,420                 0                 0          -225,420
INCOME TAXES                                                         0         1,653,018         1,085,311         2,738,329
NET INCOME (LOSS)                                             -191,441         3,382,541         2,062,645         5,253,745
                                                        ====================================================================

EPS                                                                                                               0.12280666
Weighted Average Number of Shares
Outstanding                                                                                                       42,780,618


PROFORMA

STATEMENTS OF OPERATIONS

31-Dec-05

                                                                                               SHOUGUANG
                                                                           Upper Class          YUXIN
                                                                          Group Limited        CHEMICAL
                                                             DSFX             and sub          INDUSTRY          Pro Forma
                                                        --------------------------------------------------------------------
                                                                               (year ended 11/30/2005)
REVENUE
     Net sales                                               1,023,476        14,344,296         9,776,858        25,144,630
     Maintenance service income                                      0                 0         1,371,535         1,371,535
                                                               1023476        14,344,296        11,148,393        26,516,165
                                                        --------------------------------------------------------------------
OPERATING EXPENSES
     Cost of net sales                                         331,301         9,095,301           7013513        16,440,115
     Depreciation expense                                        9,191                 0                 0
     General and administrative expenses                       511,139           304,451           797,879         1,613,469
                                                                                            --------------------------------
                                                               851,631         9,399,752         7,811,392        18,062,775
                                                        --------------------------------------------------------------------
INCOME FROM OPERATIONS                                         171,845         4,944,544         3,337,001         8,453,390
                                                        --------------------------------------------------------------------


OTHER(INCOME)EXPENSES
     Rental income                                                   0                 0            14,666            14,666
     Other income                                              259,776                 0                 0           259,776
     (Gain) on sale of investments on Evovle One              -430,000                 0                 0          -430,000
     Interest income                                             6,984               446               415             7,845
     Interest expense                                          -42,005                 0                 0           -42,005
                                                        --------------------------------------------------------------------
                                                              -205,245               446            15,081          -189,718
                                                        --------------------------------------------------------------------

NETINCOME (LOSS) FROM DISCONTINUED OPERATIONS,NET OF
TAX                                                                  0                 0                 0                 0
INCOME TAXES                                                         0         1,632,760         1,048,512         2,681,272
NET INCOME (LOSS)                                              -33,400         3,312,230         2,303,570         5,582,400
                                                        ====================================================================

EPS                                                                                                                   0.1283
Weighted Average Number of Shares Outstanding                                                                     43,511,701