**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**





**WASHINGTON,
      D.C. 20549**





**FORM
      10-K**





**x****ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF**
              **THE
                SECURITIES EXCHANGE ACT OF 1934****FOR
                THE FISCAL YEAR ENDED DECEMBER 31, 2007****OR****o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF**
              **THE
                SECURITIES EXCHANGE ACT OF 1934****FOR
                THE TRANSITION PERIOD FROM _______
                TO ___________**




**COMMISSION
      FILE NO. 000-52103**




**HONG
      KONG HIGHPOWER TECHNOLOGY, INC.**


(E *xact
      Name Of Registrant As Specified In Its Charter* )





**Delaware**
            
            **20-4062622***(State
                or other jurisdiction of*
              *incorporation
                or organization)*
            
            *(I.R.S.
                Employer*
              *Identification
                No.)***Building
                A1, Luoshan Industrial Zone,**
              **Shanxia,
                Pinghu, Longgang,**
              **Shenzhen,
                Guangdong, 518111**
              **People’s
                Republic of China**
            
            **N/A***(Address
                of principal executive offices)*
            
            *(Zip
                Code)*





*Registrant’s
      telephone number, including area code* : **(86)
      755-89686238**





SECURITIES
      REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:


None.




SECURITIES
      REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:


Common
      Stock, $.0001 par value





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes o No x




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes o No x




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




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
      be contained, to the best of registrant’s knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this Form 10-K
      or any amendment to this Form 10-K.  o







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




Large
      accelerated filer o Accelerated
      filer o




Non-accelerated
      filer x    Smaller
      reporting company o




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




There
      were 20,478,090 shares outstanding of registrant’s common stock, par value
      $.0001 per share, as of April 11, 2008. The registrant’s common stock is not
      traded or listed on any exchange.





Documents
      Incorporated by Reference: None.







**TABLE
      OF CONTENTS**




**HONG
      KONG HIGHPOWER TECHNOLOGY, INC.**


**TABLE
      OF CONTENTS TO ANNUAL REPORT ON FORM 10-K**


**For
      the Fiscal Year Ended December 31, 2007**


ITEM
                  1.
              BUSINESS
              1ITEM
                  1A:
              RISK
                  FACTORS
              10ITEM
                  1B.
              UNRESOLVED
                  STAFF COMMENTs
              24ITEM
                    2.
              PROPERTIES
              24ITEM
                  3.
              LEGAL
                  PROCEEDINGS
              25ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS
              25PART
                II
              26ITEM
                  5.
              MARKET
                  FOR REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDERMATTERS
                  AND ISSUER PURCHASES OF EQUITY SECURITIES
              26ITEM
                  6.
              SELECTED
                  CONSOLIDATED FINANCIAL DATA
              28ITEM
                  7.
              MANAGEMENT’S
                    DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
              29Item
                7A.
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              41ITEM
                  8.
              FINANCIAL
                  STATEMENTS AND SUPPLEMENTARY DATA
              42ITEM
                  9.
              CHANGES
                    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                    DISCLOSURE
              42ITEM
                  9A.
              CONTROLS
                    AND PROCEDURES
              42ITEM
                  9B.
              OTHER
                  INFORMATION
              43PART
                III
              44ITEM
                  10.
              DIRECTORS,
                  EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
              44ITEM
                  11.
              EXECUTIVE
                    COMPENSATION
              46Item
                  12.
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  STOCKHOLDERMATTERS
              49ITEM
                  13.
              CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                  INDEPENDENCE
              50ITEM
                  14.
              PRINCIPAL
                  ACCOUNTING FEES AND SERVICES.
              52PART
                IV
              53ITEM
                  15.
              EXHIBITS
                    AND FINANCIAL STATEMENT SCHEDULES
              53SIGNATURES
              
              54


i




**CAUTIONARY
      STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**




The
      information contained in this Form 10-K, includes some statements that are
      not
      purely historical and that are “forward-looking statements.” Such
      forward-looking statements include, but are not limited to, statements regarding
      our company’s and our management’s expectations, hopes, beliefs, intentions or
      strategies regarding the future, including our financial condition, results
      of
      operations, and the expected impact of the share exchange. In addition, any
      statements that refer to projections, forecasts or other characterizations
      of
      future events or circumstances, including any underlying assumptions, are
      forward-looking statements. The words “anticipates,” “believes,” “continue,”
“could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,”
“potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” and
      similar expressions, or the negatives of such terms, may identify
      forward-looking statements, but the absence of these words does not mean that
      a
      statement is not forward-looking.





The
      forward-looking statements contained in this Form 10-K are based on current
      expectations and beliefs concerning future developments and the potential
      effects on the parties and the transaction. There can be no assurance that
      future developments actually affecting us will be those anticipated. These
      forward-looking statements involve a number of risks, uncertainties (some of
      which are beyond the parties’ control) or other assumptions that may cause
      actual results or performance to be materially different from those expressed
      or
      implied by these forward-looking statements, including the
      following:




·
            Our
                reliance on our major customers for a large portion of our net
                sales;




·
            Our
                reliance on a limited number of suppliers for nickel, our principal
                raw
                material;




·
            Our
                ability to develop and market new
                products;




·
            Our
                ability to establish and maintain a strong
                brand;




·
            Protection
                of our intellectual property
                rights;




·
            The
                market acceptance of our products;




·
            Exposure
                to product liability and defect
                claims;




·
            Changes
                in the laws of the PRC that affect our
                operations;




·
            Any
                recurrence of severe acute respiratory syndrome, or
                SARS;




·
            Our
                ability to obtain and maintain all necessary government certifications
                and/or licenses to conduct our
                business;




·
            Development
                of a public trading market for our
                securities;




·
            The
                cost of complying with current and future governmental regulations
                and the
                impact of any changes in the regulations on our operations; and




·
            The
                other factors referenced in this Form 10-K, including, without limitation,
                under the sections entitled “Risk Factors,” “Financial Information,”
                “Management’s Discussion and Analysis of Financial Condition and Results
                of Operations,” and “Business.”




These
      risks and uncertainties, along with others, are also described above under
      the
      heading “Risk Factors.” Should one or more of these risks or uncertainties
      materialize, or should any of the parties’ assumptions prove incorrect, actual
      results may vary in material respects from those projected in these
      forward-looking statements. Moreover, we operate in a very competitive and
      rapidly changing environment. New risk factors emerge from time to time and
      we
      cannot predict all such risk factors, nor can we assess the impact of all such
      risk factors on our business or the extent to which any factor, or combination
      of factors, may cause actual results to differ materially from those contained
      in any forward looking statements. The Company undertakes no obligation to
      update or revise any forward-looking statements, whether as a result of new
      information, future events or otherwise, except as may be required under
      applicable securities laws.




ii




**PART
      I**




**ITEM
      1.**  **BUSINESS**





With
      respect to this discussion, the terms, “we,” “us,” or “our” refer to Hong Kong
      Highpower Technology, Inc., and our 100%-owned subsidiary Hong Kong Highpower
      Technology Company Limited (“HKHT”) and its wholly-owned subsidiary Shenzhen
      Highpower Technology Co., Ltd. (“Shenzhen Highpower”).





**Corporate
      Information**





We
      were
      incorporated in the state of Delaware on January 3, 2006. We were originally
      organized as a “blank check” shell company to investigate and acquire a target
      company or business seeking the perceived advantages of being a publicly held
      corporation. On November 2, 2007, we closed a share exchange transaction,
      pursuant to which we (i) became the 100% parent of HKHT and its wholly-owned
      subsidiary, Shenzhen Highpower, (ii) assumed the operations of HKHT and its
      subsidiary and (iii) changed our name from SRKP 11, Inc. to Hong Kong Highpower
      Technology, Inc. HKHT was incorporated in Hong Kong in 2003, under the Companies
      Ordinance of Hong Kong. Shenzhen Highpower was founded in founded in 2001.





In
      addition, on November 2, 2007, concurrently with the close of the share exchange
      transaction, we conducted a private placement transaction (the “Private
      Placement”). Pursuant to subscription agreements entered into with the
      investors, we sold an aggregate of 2,836,364 shares of Common stock at $1.10
      per
      share. As a result, we received gross proceeds in the amount of $3.12 million.





Through
      Shenzhen Highpower, we manufacture Ni-MH rechargeable batteries for both
      consumer and industrial applications. We have developed significant expertise
      in
      Ni-MH battery technology and large-scale manufacturing that enables us to
      improve the quality of our battery products, reduce costs, and keep pace with
      evolving industry standards. Our automated machinery allows us to process key
      aspects of the manufacturing process to ensure high uniformity and precision,
      while leaving the non-key aspects of the manufacturing process to manual
      labor.





**Industry**





***General***





Rapid
      advancements in electronic technology have expanded the number of
      battery-powered devices in recent years. As these devices have come to feature
      more sophisticated functions, more compact sizes and lighter weights, the
      sources of power that operate these products have been required to deliver
      increasingly higher levels of energy. This has stimulated consumer demand for
      higher-energy batteries capable of delivering longer service between recharges
      or battery replacement. In contrast to non-rechargeable batteries, after a
      rechargeable battery is discharged, it can be recharged and reused many times.
      Rechargeable batteries generally can be used in many non- rechargeable battery
      applications, as well as high energy drain applications such as electric toys,
      power tools, portable computers and other electronics, medical devices, and
      many
      other consumer products.





High
      energy density and long achievable cycle life are important characteristics
      of
      rechargeable battery technologies. Energy density refers to the total electrical
      energy per unit volume stored in a battery. High energy density batteries
      generally are longer lasting power sources providing longer operating time
      and
      necessitating fewer battery recharges. Greater energy density will permit the
      use of batteries of a given weight or volume for a longer time period. Long
      cycle life is a preferred feature of a rechargeable battery because it allows
      the user to charge and recharge many times before noticing a difference in
      performance. Long achievable cycle life, particularly in combination with high
      energy density, is desirable for applications requiring frequent battery
      recharges.





The
      initial technology for rechargeable batteries was nickel cadmium (“Ni-Cad”).
      Ni-Cad batteries are offered in a variety of sizes and shapes but suffer from
      low energy density and low cycle life. In addition, disposal of Ni-Cad batteries
      poses environmental issues due to the high toxicity level of cadmium. To meet
      the demand for higher performing rechargeable batteries, nickel-metal hydride
      (“Ni-MH”) batteries were developed. Electrically, Ni-MH batteries are similar to
      the Ni-Cad counterparts but utilize a hydrogen-absorbing alloy instead of
      cadmium. High capacity Ni-MH batteries can replace Ni-Cad batteries in many
      devices because they operate on the same voltage and possess similar power
      and
      fast charge capabilities, while offering the advantage of greater energy
      density. In devices such as power tools, electric toys, personal portable
      electronic devices and electric vehicles, Ni-MH batteries optimize equipment
      performance. Ni-MH batteries have several advantages including:





·***High
                    capacity***-
                    Because of the use of hydrogen as a cathode material, Ni-MH batteries
                    have
                    up to a 40 percent longer service life than ordinary Ni-Cad batteries
                    of
                    equivalent size.




1




·***Long
                  cycle life***-
                  Up to 1,000 charge/discharge cycles.·***No
                  memory effect***-
                  Ni-Cad batteries suffer from a memory effect - when charging, the
                  user
                  must ensure that they are totally flat first, otherwise they 'remember'
                  how much charge they used to have and die much quicker. Ni-MH batteries
                  have a negligible memory effect, making charging quicker and more
                  convenient.·***Performs
                  at extreme temperatures***-
                  Capable of operation on discharge from -20°C
                  to 50°C
                  (-4°F
                  to 122°F)
                  and charge from 0°C
                  to 45°C
                  (32°F
                  to 113oF).·***Environmentally
                  friendly*******-
                  Zero percent cadmium or other toxic chemicals such as
                  mercury.·***Cost
                  efficiency*******-
                  Rechargeable Ni-MH batteries are substantially less expensive than
                  rechargeable lithium-ion
                  batteries.





***China***





China’s
      market share of battery production is expected to increase. China has a number
      of benefits in battery manufacturing, which are expected to drive this
      growth:





—
            ***Low
                Costs*****.**China continues to have a significant low cost of labor as well as
                easy
                access to raw materials and land.





—
            ***Proximity
                to electronics supply chain*****.**Electronics manufacturing in general continues to shift to China,
                giving
                China-based manufacturers a further cost and cycle time
                advantage.





—
            ***Proximity
                to end-markets*****.**China has focused in recent years on building its research, development
                and engineering skill base in all aspects of higher end manufacturing,
                including batteries.





**Competitive
      Strengths**





We
      believe the following competitive strengths contribute to our success and
      differentiate us from our competitors:





***Experienced
      management team***





Our
      senior management team has extensive business and industry experience. Our
      principal stockholder and Chairman, Mr. Dang Yu Pan, has over 10 years of
      experience in China’s battery industry. Additionally, other members of our
      senior management team have significant experience with respect to other key
      aspects of our operations, including product design, manufacturing, and sales
      and marketing.





***Market
      position***





Since
      our
      inception, we have primarily focused on the research, development and
      manufacture of Ni-MH battery cells. We have developed significant expertise
      in
      Ni-MH battery technology and large-scale manufacturing that enables us to
      improve the quality of our products, reduce costs, and keep pace with evolving
      industry standards. Our Ni-MH rechargeable batteries have been developed to
      respond to a number of specific market requirements such as recyclability,
      high
      power, high energy density, long life, low cost and other important
      characteristics for consumer and OEM applications. They are suitable for almost
      all applications where high currents and deep discharges are
      required.




2





***Well-established
      distribution channels***





We
      sell
      our products to original equipment manufacturers and a well-established network
      of distributors and resellers, allowing us to penetrate customer markets
      worldwide. Our relationship with many of our distributors extends from our
      inception in 2001. We also continue to screen and identify our strongest
      customers in each distribution channel and to focus our sales efforts towards
      the largest and fastest growing distributors and resellers.





***Proven
      product manufacturing capabilities***





We
      selectively use automation in our manufacturing process to ensure a high
      uniformity and precision in our products while maintaining our
      cost-competitiveness. We use automated machinery in key stages of the
      manufacturing process while using manual labor for other stages to take
      advantage of the availability of low-cost, skilled labor in China. We have
      received several accreditations, including The International Organization for
      Standardization (ISO) 9001: 2000, ISO 14001, Conformity Europende (CE) and
      Underwriters Laboratories Inc. (UL), attesting to our quality management
      requirements, manufacturing safety, controls, procedures and environmental
      performance.





***Customer
      service expertise***





We
      work
      closely with our major customers in order to ensure high levels of customer
      satisfaction. To provide superior service and foster customer trust and loyalty,
      we offer flexible delivery methods and product feedback opportunities to our
      customers. Our sales representatives and marketing personnel undergo extensive
      training, providing them with the skills necessary to answer product and
      service-related questions, proactively educate potential customers about our
      products, and promptly resolve customer inquiries.





**Our
      Strategy**





Our
      goal
      is to become a global leader in the development and manufacture of rechargeable
      battery products. We intend to achieve this goal by implementing the following
      strategies:





***Continue
      to pursue cost-effective opportunities***





Our
      operating model, coupled with our modern manufacturing processes, has resulted
      in economies of scale, a low cost structure, and an ability to respond rapidly
      to customer demands. We intend to achieve greater cost-effectiveness by
      expanding our production capacity, increasing our productivity and efficiency
      in
      the manufacturing process and seeking to reducing the per unit cost of
      production through the use of advanced technologies.





***Aggressively
      pursue distribution channels***





We
      intend
      to broaden the scope of our distribution arrangements to increase sales
      penetration in targeted markets. We intend to select additional distributors
      based on their access to markets and retail outlets that are candidates for
      our
      products. In addition, we intend to expand our international sales presence
      and
      diversify our revenue sources by taking efforts to increase the percentage
      of
      our net revenues attributable to sales to emerging new markets.





***Expand
      existing and new product offerings***





Since
      the
      commencement of our battery operations in 2001, we have expanded our product
      offerings to over ten product lines, which include in each product line
      batteries of varying sizes, capacities and voltages. We intend to expand our
      existing lines of Ni-MH batteries for use in other applications, such as
      hybrid-electric cars, and devote additional resources to the development of
      a
      line of lithium-polymer batteries for higher-end, high-performance applications,
      such as laptop batteries.





***Enhance
      marketing efforts to increase brand awareness***





We
      continue to devote our efforts towards brand development and utilize marketing
      concepts in an attempt to enhance the marketability of our products.




3





**Products**





Our
      Ni-MH
      rechargeable batteries are versatile solutions for many diverse applications
      due
      to their long life, environmentally friendly materials, high power and energy,
      low cost and safe applications. Developed to meet the requirement for
      increasingly higher levels of energy demanded by today’s electronic products,
      our Ni-MH rechargeable batteries can offer up to increased capacity and higher
      energy density over similarly sized standard Ni-Cad rechargeable batteries.
      As a
      result, users can expect a longer time between charges and longer running time.
      Our Ni-MH rechargeable batteries are available in both cylindrical and prismatic
      shapes.





We
      produce an extensive line of batteries, falling into two main
      categories:





·  Consumer
      Batteries -
      Relative to ordinary Ni-Cad rechargeable batteries, as well as their
      non-rechargeable counterparts, our Ni-MH batteries offer higher power capacity
      allowing for longer working time and shortened charging time during equivalent
      working periods. We produce A, AA and AAA sized batteries in blister packing
      as
      well as chargers and battery packs.




·  Industrial
      Batteries -
      These
      batteries are designed for electric bikes, power tools and electric toys. They
      are specifically designed for high-drain discharge applications, possessing
      low
      internal resistance, more power, and longer discharging time.




We
      also
      recycle batteries and resell the recycled materials to some of our customers.
      We
      are currently testing this market and anticipate expanding our battery recycling
      operations in the future.





Net
      sales
      for each of our product segments as a percentage of net sales is set forth
      below:





Year
                Ended December 31,2007
            
            2006
            
            2005Consumer
                Batteries
            
            
            80
            %
            
            77
            %
            
            84
            %Industrial
                Batteries
            
            
            19
            %
            
            21
            
            
            14Materials
            
            
            1
            
            
            2
            
            
            2100
            %
            
            100
            %
            
            100
            %





We
      are
      currently devoting research and development and other resources towards the
      development of a line of lithium-polymer batteries for higher-end,
      high-performance applications.





**Supply
      of Raw Materials**





The
      cost
      of the raw materials used in our rechargeable batteries is a key factor in
      the
      pricing of our products. We purchase materials in volume which allows us the
      ability to negotiate better pricing with our suppliers. Our purchasing
      department locates eligible suppliers of raw materials striving to use only
      those suppliers who have previously demonstrated quality control and
      reliability.





Currently,
      we purchase our raw materials, consisting primarily of metal materials including
      nickelous oxide, nickel foam, metal hydride alloy and other battery components,
      such as membranes, from suppliers located in China and Japan. We believe that
      the raw materials and components used in manufacturing our rechargeable
      batteries are available from enough sources to be able to satisfy our
      manufacturing needs; however, some of our materials, such as nickel, are
      available from a limited number of suppliers. Our top three suppliers of nickel
      account for 56% of our nickel supply. Presently, our relationships with our
      current suppliers are generally good and we expect that our suppliers will
      be
      able to meet the anticipated demand for our products in the future.





At
      times,
      the pricing and availability of raw materials can be volatile, attributable
      to
      numerous factors beyond the Company’s control, including general economic
      conditions, currency exchange rates, industry cycles, production levels or
      a
      supplier’s tight supply. To the extent that we experience cost increases we may
      seek to pass such cost increases on to our customers, but cannot provide any
      assurance that we will be able to do so successfully or that our business,
      results of operations and financial condition would not be adversely affected
      by
      increased volatility of the cost and availability of raw materials.




4





**Quality
      Control**





We
      consider quality control an important element of our business practices. We
      have
      stringent quality control systems that are implemented by more than 100
      company-trained staff members to ensure quality control over each phase of
      the
      production process, from the purchase of raw materials through each step in
      the
      manufacturing process. Supported by advanced equipment, we utilize a scientific
      management system and precision inspection measurement, capable of supplying
      stable, high-quality rechargeable batteries. Our quality
      control department executes the following functions:





·
            setting
                internal controls and regulations for semi-finished and finished
                products;




·
            testing
                samples of raw materials from
                suppliers;




·
            implementing
                sampling systems and sample files;




·
            maintaining
                quality of equipment and instruments;
                and




·
            articulating
                the responsibilities of quality control
                staff.




We
      monitor quality and reliability in accordance with the requirements of QSR,
      or
      Quality System Review, and ISO 9001 systems. We have received European Union’s
      CE attestation, UL authentication, ISO 9001:2000 and ISO 14001 certification.
      We
      have passed stringent quality reviews and thus obtained OEM qualifications
      from
      various domestic cellular phone brand names. With our strong technological
      capabilities and use of automated equipment for core aspects of the
      manufacturing process, we believe our product quality meets or even exceeds
      in
      certain key aspects international industry standards.





**Manufacturing**





The
      manufacture of rechargeable batteries requires coordinated use of machinery
      and
      raw materials at various stages of manufacturing. We have a large-scale
      production base that includes a 484,000 square foot factory, a dedicated design,
      sales and marketing team, and approximately 2,370 company-trained employees.
      We
      use automated machinery to process key aspects of the manufacturing process
      to
      ensure high uniformity and precision, while leaving the non-key aspects of
      the
      manufacturing process to manual labor. We intend to further improve our
      automated production lines and strive to continue investing in our manufacturing
      infrastructure to further increase our manufacturing capacity, helping us to
      control the per unit cost of our products.





The
      primary raw materials used in production of rechargeable batteries include
      electrode materials, electrolytes, foils, cases and caps and separators. The
      electrodes are manufactured using active materials, conductive agents and binder
      which are mixed with liquid. These mixtures are then uniformly coated onto
      the
      thin metal foil, then after drying, the electrodes are cut down to the
      designated sizes. The positive electrode and negative electrode are then wound
      together with a separator and inserted into a can, and electrolyte is filled.
      The sealing completes the battery cell assembly. Some of these cells are then
      integrated into packages which are customized into a wide variety of
      configurations to interface with different electronic devices.





**Major
      Customers**





During
      the year ended December 31, 2007, approximately 57% of our net sales were
      generated from our five largest customers. Energizer Battery Manufacturing,
      Inc.
      and Uniross Batteries (HK) Ltd. accounted for 27% and 17%, respectively, of
      our
      net sales for the year ended December 31, 2007. The percentages of net sales
      disclosed for each of our major customers includes sales to groups of customers
      under common control or that could be deemed affiliates of such major customers.





**Sales
      and Marketing**





We
      have a
      broad sales network of approximately 45 salespersons in China and have one
      branch office in Hong Kong. Our sales staff in each of our offices targets
      key
      customers by arranging in-person sales presentations and providing post-sales
      services. Our sales staff works closely with our customers so that we can better
      address their needs and improve the quality and features of our products. We
      offer different price incentives to encourage large-volume and long-term
      customers.





Sales
      to
      our customers are based primarily on purchase orders we receive from time to
      time rather than firm, long-term purchase commitments from our customers.
      Uncertain economic conditions and our general lack of long-term purchase
      commitments with our customers make it difficult for us to predict revenue
      accurately over the longer term. Even in those cases where customers are
      contractually obligated to purchase products from us, we may elect not to
      enforce our contractual rights immediately because of the long-term nature
      of
      our customer relationships and for other business reasons, and instead may
      negotiate accommodations with customers regarding particular
      situations.




5





We
      target
      sales of our rechargeable batteries and charging systems through original
      equipment manufacturers (“OEMs”), as well as distributors and resellers focused
      on our target markets. We have contractual arrangements with distributors who
      market our products on a commission basis in particular areas. Although OEM
      agreements typically contain volume-based pricing based on expected volumes,
      typically prices are rarely adjusted retroactively if contract volumes are
      not
      achieved. We attempt to adjust future prices accordingly, but our ability to
      adjust prices is generally based on market conditions which we cannot control.





Net
      sales
      based on the location of our customers as a percentage of net sales is set
      forth
      below:





Year
                Ended December 31,2007
            
            2006
            
            2005China
                and Hong Kong
            
            
            39.5
            %
            
            65.4
            %
            
            68.5
            %Europe
            
            
            34.6
            
            
            16.4
            
            
            11.2North
                America
            
            
            17.5
            
            
            10.2
            
            
            7.5Asia
            
            
            8.1
            
            
            7.4
            
            
            12.8South
                America and Others
            
            
            0.3
            
            
            0.6
            
            
            -Total
            
            
            100
            %
            
            100
            %
            
            100
            %




*
      Less
      than 1%.





While
      the
      largest portion of our sales are made to customers in China and Hong Kong,
      our
      products are distributed worldwide, with approximately 39% of our products
      distributed to Hong Kong and China, 17% to the United States, 34% to Europe
      and
      10% to other markets.





We
      engage
      in marketing activities such as attending industry-specific conferences and
      exhibitions to promote our products and brand name. We also advertise in
      industry journals and magazines and through the Internet to market our products.
      We believe these activities help in promote our products and brand name among
      key industry participants.





**Research
      and Development**





To
      enhance our product quality, reduce cost, and keep pace with technological
      advances and evolving market trends, we have established an advanced research
      and development center. Our research and development center is not only focused
      on enhancing our Ni-MH-based technology by developing new products and improving
      the performance of our current products, but also seeks to develop alternative
      technologies such as a line of lithium-polymer batteries we are currently
      developing for higher-end, high performance applications. Our research and
      development center is currently staffed with over 100 research and development
      technicians who overlook our techniques department, product development
      department, material analysis lab, and performance testing lab. These
      departments work together to research new material and techniques, test battery
      performance, inspect products and to test performance of machines used in the
      manufacturing process.





For
      years
      ended December 31, 2007, 2006 and 2005 we expended $248,782, $443,756 and
      $250,100, respectively, in research and development.





**Competition**





We
      face
      competition from many other battery manufacturers, many of which have
      significantly greater name recognition and financial, technical, manufacturing,
      personnel and other resources than we have. We compete against other Ni-MH
      battery producers, as well as manufacturers of other rechargeable and
      non-rechargeable batteries. The main types of rechargeable batteries currently
      on the market include: lead-acid; nickel-cadmium; nickel metal hydride; liquid
      lithium-ion and lithium-ion polymer. Competition is typically based on design,
      quality, reliability, and performance. The technology behind Ni-MH rechargeable
      batteries has consistently improved over time and we continue to enhance our
      products to meet the competitive threats from its competitors. Our primary
      competitors in the nickel metal hydride battery market or other similar
      competing rechargeable battery products include SANYO Electric Co., Ltd. Global,
      Matsushita Industrial Co., Ltd. (Panasonic), BYD Company Ltd., GPI
      International, Ltd., and GS Yuasa Corporation.




6





**Intellectual
      Property**





We
      rely
      on a combination of patent and trade secret protection and other unpatented
      proprietary information to protect our intellectual property rights and to
      maintain and enhance our competitiveness in the battery industry. We currently
      hold two patents in China  and
      have
      three patent applications pending in China. We also have  two
      registered trademarks in China, which include “HFR” and its Chinese
      equivalent.





We
      recently renewed a license agreement with Ovonic Battery Company, Inc.
      (“Ovonic”) under which Ovonic granted Shenzhen Highpower (1) a royalty-bearing,
      non-exclusive license to use certain patents owned by Ovonic to manufacture
      Ni-MH batteries for portable consumer applications (“Consumer Batteries”) in the
      PRC and (2) a royalty-bearing, non-exclusive worldwide license to use certain
      patents owned by Ovonic to use, sell and distribute Consumer Batteries. The
      renewal agreement will remain in effect until the licensed patents under the
      agreement expire. Pursuant to the renewed agreement, Shenzhen Highpower will
      pay
      a license fee of up to $1.0 million based on gross sales of Consumer Batteries.





We
      also
      rely on unpatented technologies to protect the proprietary nature of our product
      and manufacturing processes. We require that our management team and key
      employees enter into confidentiality agreements that require the employees
      to
      assign the rights to any inventions developed by them during the course of
      their
      employment with us. The confidentiality agreements include noncompetition and
      nonsolicitation provisions that remain effective during the course of employment
      and for periods following termination of employment, which vary depending on
      position and location of the employee.





**PRC
      Government Regulations**





***Environmental
      Regulations***





The
      major
      environmental regulations applicable to us include the PRC Environmental
      Protection Law, the PRC Law on the Prevention and Control of Water Pollution
      and
      its Implementation Rules, the PRC Law on the Prevention and Control of Air
      Pollution and its Implementation Rules, the PRC Law on the Prevention and
      Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control
      of Noise Pollution.





We
      constructed our manufacturing facilities with the PRC’s environmental laws and
      requirements in mind. We currently outsource the disposal of solid waste to
      a
      third party-contractor. We are currently in the process of renewing
      o ur
      environmental permit, which expired in September 2007, from the Shenzhen
      Environment Protection Bureau Longgang Bureau covering our manufacturing
      operations and providing for an annual output limit of Ni-MH rechargeable
      batteries. As we anticipate moving to new facilities in 2009, we do not intend
      to have four of our current premises included in the permit. If we are unable
      to
      renew the permit or we fail to comply with the provisions of the renewed permit,
      we could be subject to fines, criminal charges or other sanctions by regulators,
      including the suspension or termination of our manufacturing
      operations. We have
      not been named as a defendant in any legal proceedings alleging violation of
      environmental laws. Other than the expiration of our environmental approval,
      we
      have no reasonable basis to believe that there is any threatened claim, action
      or legal proceedings against us that would have a material adverse effect on
      our
      business, financial condition or results of operations due to any non-compliance
      with environmental laws.





***Patent
      Protection in China***





The
      PRC’s
      intellectual property protection regime is consistent with those of other modern
      industrialized countries. The PRC has domestic laws for the protection of rights
      in copyrights, patents, trademarks and trade secrets. The PRC is also a
      signatory to most of the world’s major intellectual property conventions,
      including:





—
            Convention
                establishing the World Intellectual Property Organization (WIPO
                Convention) (June 4, 1980);




—
            Paris
                Convention for the Protection of Industrial Property (March 19,
                1985);




—
            Patent
                Cooperation Treaty (January 1, 1994);
                and




—
            The
                Agreement on Trade-Related Aspects of Intellectual Property Rights
                (TRIPs)
                (November 11, 2001).




Patents
      in the PRC are governed by the China Patent Law and its Implementing
      Regulations, each of which went into effect in 1985. Amended versions of the
      China Patent Law and its Implementing Regulations came into effect in 2001
      and
      2003, respectively.




7





The
      PRC
      is signatory to the Paris Convention for the Protection of Industrial Property,
      in accordance with which any person who has duly filed an application for a
      patent in one signatory country shall enjoy, for the purposes of filing in
      the
      other countries, a right of priority during the period fixed in the convention
      (12 months for inventions and utility models, and 6 months for industrial
      designs).





The
      Patent Law covers three kinds of patents, i.e., patents for inventions, utility
      models and designs respectively. The Chinese patent system adopts the principle
      of first to file. This means that, where more than one person files a patent
      application for the same invention, a patent can only be granted to the person
      who first filed the application. Consistent with international practice, the
      PRC
      only allows the patenting of inventions or utility models that possess the
      characteristics of novelty, inventiveness and practical applicability. For
      a
      design to be patentable, it should not be identical with or similar to any
      design which, before the date of filing, has been publicly disclosed in
      publications in the country or abroad or has been publicly used in the country,
      and should not be in conflict with any prior right of another.





PRC
      law
      provides that anyone wishing to exploit the patent of another must conclude
      a
      written licensing contract with the patent holder and pay the patent holder
      a
      fee. One rather broad exception to this, however, is that, where a party
      possesses the means to exploit a patent but cannot obtain a license from the
      patent holder on reasonable terms and in reasonable period of time, the PRC
      State Intellectual Property Office, or SIPO, is authorized to grant a compulsory
      license. A compulsory license can also be granted where a national emergency
      or
      any extraordinary state of affairs occurs or where the public interest so
      requires. SIPO, however, has not granted any compulsory license up to now.
      The
      patent holder may appeal such decision within three months from receiving
      notification by filing a suit in a people’s court.





PRC
      law
      defines patent infringement as the exploitation of a patent without the
      authorization of the patent holder. A patent holder who believes his patent
      is
      being infringed may file a civil suit or file a complaint with a PRC local
      Intellectual Property Administrative Authority, which may order the infringer
      to
      stop the infringing acts. Preliminary injunction may be issued by the People’s
      Court upon the patentee’s or the interested parties’ request before instituting
      any legal proceedings or during the proceedings. Evidence preservation and
      property preservation measures are also available both before and during the
      litigation. Damages in the case of patent infringement is calculated as either
      the loss suffered by the patent holder arising from the infringement or the
      benefit gained by the infringer from the infringement. If it is difficult to
      ascertain damages in this manner, damages may be reasonably determined in an
      amount ranging from one to more times of the license fee under a contractual
      license. The infringing party may be also fined by Administration of Patent
      Management in an amount of up to three times the unlawful income earned by
      such
      infringing party. If there is no unlawful income so earned, the infringing
      party
      may be fined in an amount of up to RMB500,000, or approximately $62,500.





***Tax***





Pursuant
      to the Provisional Regulation of China on Value Added Tax and their implementing
      rules, all entities and individuals that are engaged in the sale of goods,
      the
      provision of repairs and replacement services and the importation of goods
      in
      China are generally required to pay VAT at a rate of 17.0% of the gross sales
      proceeds received, less any deductible VAT already paid or borne by the
      taxpayer. Further, when exporting goods, the exporter is entitled to a portion
      of or all the refund of VAT that it has already paid or borne. Our imported
      raw
      materials that are used for manufacturing export products and are deposited
      in
      bonded warehouses are exempt from import VAT.





***Foreign
      Currency Exchange***





Under
      the
      PRC foreign currency exchange regulations applicable to us, the Renminbi is
      convertible for current account items, including the distribution of dividends,
      interest payments, trade and service-related foreign exchange transactions.
      Conversion of Renminbi for capital account items, such as direct investment,
      loan, security investment and repatriation of investment, however, is still
      subject to the approval of the PRC State Administration of Foreign Exchange,
      or
      SAFE. Foreign-invested enterprises may only buy, sell and/or remit foreign
      currencies at those banks authorized to conduct foreign exchange business after
      providing valid commercial documents and, in the case of capital account item
      transactions, obtaining approval from the SAFE. Capital investments by
      foreign-invested enterprises outside of China are also subject to limitations,
      which include approvals by the Ministry of Commerce, the SAFE and the State
      Reform and Development Commission.





***Dividend
      Distributions***





Under
      applicable PRC regulations, foreign-invested enterprises in China may pay
      dividends only out of their accumulated profits, if any, determined in
      accordance with PRC accounting standards and regulations. In addition, a
      foreign-invested enterprise in China are required to set aside at least 10.0%
      of
      their after-tax profit based on PRC accounting standards each year to its
      general reserves until the accumulative amount of such reserves reach 50.0%
      of
      its registered capital. These reserves are not distributable as cash dividends.
      The board of directors of a foreign-invested enterprise has the discretion
      to
      allocate a portion of its after-tax profits to staff welfare and bonus funds,
      which may not be distributed to equity owners except in the event of
      liquidation.




8





**Employees**





At
      December 31, 2007, we had approximately 2,370 employees. There are no collective
      bargaining contracts covering any of our employees. We believe our relationship
      with our employees is satisfactory.




9




**ITEM
      1A:**  **RISK
      FACTORS**





Any
      investment in our common stock involves a high degree of risk. Potential
      investors should carefully consider the material risks described below and
      all
      of the information contained in this Form 10-K before deciding whether to
      purchase any of our securities. Our business, financial condition or results
      of
      operations could be materially adversely affected by these risks if any of
      them
      actually occur. None of our securities are currently listed or quoted for
      trading on any national securities exchange or national quotation system. If
      and
      when our securities are traded, the trading price could decline due to any
      of
      these risks, and an investor may lose all or part of his investment. Some of
      these factors have affected our financial condition and operating results in
      the
      past or are currently affecting us. This report also contains forward-looking
      statements that involve risks and uncertainties. Our actual results could differ
      materially from those anticipated in these forward-looking statements as a
      result of certain factors, including the risks faced described below and
      elsewhere in this Form 10-K.





**RISKS
      RELATED TO OUR OPERATIONS**




**Our
      limited operating history may not serve as an adequate basis to evaluate our
      future prospects and results of operations.**




We
      have a
      limited operating history. We were established in GuangZhou, China in 2001
      and
      commenced operations in Shenzhen in 2002. Our limited operating history may
      not
      provide a meaningful basis for an investor to evaluate our business, financial
      performance and prospects. We may not be able to:




—
            maintain
                our leading position in the Ni-MH battery
                market;





—
            retain
                existing customers or acquire new
                customers;





—
                diversify
                    our revenue sources by successfully developing and selling our
                    products in
                    the global battery market and other
                    markets;





—
            keep
                up with evolving industry standards and market
                developments;





—
            respond
                to competitive market conditions;





—
            maintain
                adequate control of our expenses;




·
                  manage
                      our relationships with our
                      suppliers;




·
                  attract,
                      train, retain and motivate qualified personnel;
                      or




·
                  protect
                      our proprietary
                      technologies.





If
      we are
      unsuccessful in addressing any of these challenges, our business may be
      materially and adversely affected.





**Our
      business depends in large part on the growth in demand for portable electronic
      devices.**





Many
      of
      our battery products are used to power various portable electronic devices.
      Therefore, the demand for our batteries is substantially tied to the market
      demand for portable electronic devices. A growth in the demand for portable
      electronic devices will be essential to the expansion of our business. We intend
      to expand manufacturing capabilities at our manufacturing facilities in order
      to
      meet the increased demand for our products. A decrease in the demand for
      portable electronic devices would likely have a material adverse effect on
      our
      results of operations.





**Our
      success depends on the success of manufacturers of the end applications that
      use
      our battery products.**





Because
      our products are designed to be used in other products, our success depends
      on
      whether end application manufacturers will incorporate our batteries in their
      products. Although we strive to produce high quality battery products, there
      is
      no guarantee that end application manufacturers will accept our products. Our
      failure to gain acceptance of our products from these manufacturers could result
      in a material adverse effect on our results of operations.




10





Additionally,
      even if a manufacturer decides to use our batteries, the manufacturer may not
      be
      able to market and sell its products successfully. The manufacturer’s inability
      to market and sell its products successfully could materially and adversely
      affect our business and prospects because this manufacturer may not order new
      products from us. Therefore, our business, financial condition, results of
      operations and future success would be materially and adversely
      affected.





**We
      are and will continue to be subject to rapidly declining average selling prices,
      which may harm our results of operations.**





Portable
      consumer electronic devices, such as cellular phones, DVD players, and laptop
      computers are subject to rapid declines in average selling prices due to rapidly
      evolving technologies, industry standards and consumer preferences. Therefore,
      electronic device manufacturers expect suppliers, such as our company, to cut
      their costs and lower the price of their products to lessen the negative impact
      on the electronic device manufacturer’s own profit margins. As a result, we have
      previously reduced the price of some of our battery products and expect to
      continue to face market-driven downward pricing pressures in the future. Our
      results of operations will suffer if we are unable to offset any declines in
      the
      average selling prices of our products by developing new or enhanced products
      with higher selling prices or gross profit margins, increasing our sales volumes
      or reducing our production costs.





**Our
      success is highly dependent on continually developing new and advanced products,
      technologies, and processes and failure to do so may cause us to lose our
      competitiveness in the battery industry and may cause our profits to
      decline.**





To
      remain
      competitive in the battery industry, it is important to continually develop
      new
      and advanced products, technologies, and processes. There is no assurance that
      competitors’ new products, technologies, and processes will not render our
      existing products obsolete or non-competitive. Alternately, changes in
      legislative, regulatory or industry requirements or in competitive technologies
      may render certain of our products obsolete or less attractive. Our
      competitiveness in the battery market therefore relies upon our ability to
      enhance our current products, introduce new products, and develop and implement
      new technologies and processes. We currently only manufacture and market Nickel
      Metal Hydride batteries and if our competitors develop alternative products
      with
      more enhanced features than our products, our financial condition and results
      of
      operations would be materially and adversely affected.





The
      research and development of new products and technologies is costly and time
      consuming, and there are no assurances that our research and development of
      new
      products will either be successful or completed within anticipated timeframes,
      if at all. Our failure to technologically evolve and/or develop new or enhanced
      products may cause us to lose competitiveness in the battery market and may
      cause our profits to decline. In addition, in order to compete effectively
      in
      the battery industry, we must be able to launch new products to meet our
      customers’ demands in a timely manner. However, we cannot provide assurance that
      we will be able to install and certify any equipment needed to produce new
      products in a timely manner, or that the transitioning of our manufacturing
      facility and resources to full production under any new product programs will
      not impact production rates or other operational efficiency measures at our
      manufacturing facility. In addition, new product introductions and applications
      are risky, and may suffer from a lack of market acceptance, delays in related
      product development and failure of new products to operate properly. Any failure
      by us successfully to launch new products, or a failure by our customers to
      accept such products, could adversely affect our results.





**We
      have historically depended on a limited number of customers for a significant
      portion of our revenues and this dependence is likely to
      continue.**





We
      have
      historically depended on a limited number of customers for a significant portion
      of our net sales. Our top five customers accounted for approximately 57%, 37.4%,
      and 35.2% of our net sales in the years ended December 31, 2007, 2006 and 2005,
      respectively. We anticipate that a limited number of customers will continue
      to
      contribute to a significant portion of our net sales in the future. Maintaining
      the relationships with these significant customers is vital to the expansion
      and
      success of our business, as the loss of a major customer could expose us to
      risk
      of substantial losses. Our sales and revenue could decline and our results
      of
      operations could be materially adversely affected if one or more of these
      significant customers stops or reduces its purchasing of our products, or if
      we
      fail to expand our customer base for our products.




11





**Significant
      order cancellations, reductions or delays by our customers could materially
      adversely affect our business.**





Our
      sales
      are typically made pursuant to individual purchase orders, and we generally
      do
      not have long-term supply arrangements with our customers, but instead work
      with
      our customers to develop nonbinding forecasts of future requirements. Based
      on
      these forecasts, we make commitments regarding the level of business that we
      will seek and accept, the timing of production schedules and the levels and
      utilization of personnel and other resources. A variety of conditions, both
      specific to each customer and generally affecting each customer’s industry, may
      cause customers to cancel, reduce or delay orders that were either previously
      made or anticipated. Generally, customers may cancel, reduce or delay purchase
      orders and commitments without penalty, except for payment for services rendered
      or products competed and, in certain circumstances, payment for materials
      purchased and charges associated with such cancellation, reduction or delay.
      Significant or numerous order cancellations, reductions or delays by our
      customers could have a material adverse effect on our business, financial
      condition or results of operations.





**Substantial
      defaults by our customers on accounts receivable or the loss of significant
      customers could have a material adverse effect on our
      business.**





A
      substantial portion of our working capital consists of accounts receivable
      from
      customers. If customers responsible for a significant amount of accounts
      receivable were to become insolvent or otherwise unable to pay for products
      and
      services, or to make payments in a timely manner, our business, results of
      operations or financial condition could be materially adversely affected. An
      economic or industry downturn could materially adversely affect the servicing
      of
      these accounts receivable, which could result in longer payment cycles,
      increased collection costs and defaults in excess of management’s expectations.
      A significant deterioration in our ability to collect on accounts receivable
      could also impact the cost or availability of financing available to
      us.





**Certain
      disruptions in supply of and changes in the competitive environment for raw
      materials integral to our products may adversely affect our
      profitability.**





We
      use a
      broad range of materials and supplies, including metals, chemicals and other
      electronic components in our products. A significant disruption in the supply
      of
      these materials could decrease production and shipping levels, materially
      increase our operating costs and materially adversely affect our profit margins.
      Shortages of materials or interruptions in transportation systems, labor
      strikes, work stoppages, war, acts of terrorism or other interruptions to or
      difficulties in the employment of labor or transportation in the markets in
      which we purchase materials, components and supplies for the production of
      our
      products, in each case may adversely affect our ability to maintain production
      of our products and sustain profitability. If we were to experience a
      significant or prolonged shortage of critical components from any of our
      suppliers and could not procure the components from other sources, we would
      be
      unable to meet our production schedules for some of our key products and to
      ship
      such products to our customers in timely fashion, which would adversely affect
      our sales, margins and customer relations.





**Our
      industry is subject to supply shortages and any delay or inability to obtain
      product components may have a material adverse effect on our
      business.**





Our
      industry is subject to supply shortages, which could limit the amount of supply
      available of certain required battery components. Any delay or inability to
      obtain supplies may have a material adverse effect on our business. During
      prior
      periods, there have been shortages of components in the battery industry and
      the
      availability of raw materials has been limited by some of our suppliers. We
      cannot assure investors that any future shortages or allocations would not
      have
      such an effect on our business. A future shortage can be caused by and result
      from many situations and circumstances that are out of our control, and such
      shortage could limit the amount of supply available of certain required
      materials and increase prices affecting our profitability.





**Our
      future operating results may be affected by fluctuations in** **costs
      of raw materials, such as nickel.******





Our
      principal raw material is nickel, which is available from a limited number
      of
      suppliers in China. The price of nickel has been volatile during 2007. The
      price
      of nickel rose 67% from January 2007 to May 2007, but dropped 45% from May
      2007
      to September 2007. The prices of nickel and other raw materials used to make
      our
      batteries increase and decrease due to factors beyond our control, including
      general economic conditions, domestic and worldwide demand, labor costs or
      problems, competition, import duties, tariffs, energy costs, currency exchange
      rates and those other factors described under “Certain disruptions in supply of
      and changes in the competitive environment for raw materials integral to our
      products may adversely affect our profitability.” In an environment of
      increasing prices for nickel and other raw materials, competitive conditions
      may
      impact how much of the price increases we can pass on to our customers and
      to
      the extent we are unable to pass on future price increases in our raw materials
      to our customers, our financial results could be adversely affected.




12





**Our
      operations would be materially adversely affected if third-party carriers were
      unable to transport our products on a timely basis.**





All
      of
      our products are shipped through third party carriers. If a strike or other
      event prevented or disrupted these carriers from transporting our products,
      other carriers may be unavailable or may not have the capacity to deliver our
      products to our customers. If adequate third party sources to ship our products
      were unavailable at any time, our business would be materially adversely
      affected.





**We
      may not be able to increase our manufacturing output in order to maintain our
      competitiveness in the battery industry.**





We
      believe that our ability to provide cost-effective products represents a
      significant competitive advantage over our competitors. In order to continue
      providing such cost-effective products, we must maximize the efficiency of
      our
      production processes and increase our manufacturing output to a level that
      will
      enable us to reduce the per-unit production cost of our products. Our ability
      to
      increase our manufacturing output is subject to certain significant limitations,
      including:





·
            our
                ability raise capital to acquire additional raw materials and expand
                our
                manufacturing facilities;




·
            delays
                and cost overruns, due to increases in raw material prices and problems
                with equipment vendors;




·
            delays
                or denial of required approvals and certifications by relevant government
                authorities;




·
            diversion
                of significant management attention and other resources;
                and




·
            failure
                to execute our expansion plan effectively.




If
      we are
      not able to increase our manufacturing output and reduce our per-unit production
      costs, we may be unable to maintain our competitive position in the battery
      industry. Moreover, even if we expand our manufacturing output, we may not
      be
      able to generate sufficient customer demand for our products to support our
      increased production output.





**The
      market for our products and services is very competitive and, if we cannot
      effectively compete, our business will be harmed.**





The
      market for our products and services is very competitive and subject to rapid
      technological change. Many of our competitors are larger and have significantly
      greater assets, name recognition and financial, personnel and other resources
      than we have. As a result, our competitors may be in a stronger position to
      respond quickly to potential acquisitions and other market opportunities, new
      or
      emerging technologies and changes in customer requirements. We cannot assure
      you
      that we will be able to maintain or increase our market share against the
      emergence of these or other sources of competition. Failure to maintain and
      enhance our competitive position could materially adversely affect our business
      and prospects.





**Warranty
      claims, product liability claims and product recalls could harm our business,
      results of operations and financial condition** .





Our
      business inherently exposes us to potential warranty and product liability
      claims, in the event that our products fail to perform as expected or such
      failure of our products results, or is alleged to result, in bodily injury
      or
      property damage (or both). Such claims may arise despite our quality controls,
      proper testing and instruction for use of our products, either due to a defect
      during manufacturing or due to the individual’s improper use of the product. In
      addition, if any of our designed products are or are alleged to be defective,
      then we may be required to participate in a recall of them.





Existing
      PRC laws and regulations do not require us to maintain third party liability
      insurance to cover product liability claims. Although we have obtained products
      liability insurance, if a warranty or product liability claim is brought against
      us, regardless of merit or eventual outcome, or a recall of one of our products
      is required, such claim or recall may result in damage to our reputation, breach
      of contracts with our customers, decreased demand for our products, costly
      litigation, additional product recalls, loss of revenue, and the inability
      to
      commercialize some products.




13





**Manufacturing
      or use of our battery products may cause accidents, which could result in
      significant production interruption, delay or claims for substantial damages.**





Our
      batteries can pose certain safety risks, including the risk of fire. While
      we
      implement stringent safety procedures at all stages of battery production that
      minimize such risks, accidents may still occur. Any accident, regardless of
      where it occurs, may result in significant production interruption, delays
      or
      claims for substantial damages caused by personal injuries or property
      damages.





**We
      cannot guarantee the protection of our intellectual property rights and if
      infringement of our intellectual property rights occurs, including
      counterfeiting of our products, our reputation and business may be adversely
      affected.**





To
      protect the reputation of our products, we have sought to file or register
      our
      intellectual property, as appropriate, in the PRC where we have our primary
      business presence. As of December 2007, we have registered two trademarks as
      used on our battery products, one in English and in the other in its Chinese
      equivalent. Our products are currently sold under these trademarks in the PRC,
      and we plan to expand our products to other international markets. There is
      no
      assurance that there will not be any infringement of our brand name or other
      registered trademarks or counterfeiting of our products in the future, in China
      or elsewhere. Should any such infringement and/or counterfeiting occur, our
      reputation and business may be adversely affected. We may also incur significant
      expenses and substantial amounts of time and effort to enforce our trademark
      rights in the future. Such diversion of our resources may adversely affect
      our
      existing business and future expansion plans.





As
      of
      December 2007, we held four Chinese patents and had three Chinese patent
      applications pending. Additionally, we have licensed patented technology from
      Ovonic Battery Company, Inc. related to the manufacture of Ni-MH batteries.
      We
      believe that obtaining patents and enforcing other proprietary protections
      for
      our technologies and products have been and will continue to be very important
      in enabling us to compete effectively. However, there can be no assurance that
      our pending patent applications will issue, or that we will be able to obtain
      any new patents, in China or elsewhere, or that our or our licensors’ patents
      and proprietary rights will not be challenged or circumvented, or that these
      patents will provide us with any meaningful competitive advantages. Furthermore,
      there can be no assurance that others will not independently develop similar
      products or will not design around any patents that have been or may be issued
      to us or our licensors. Failure to obtain patents in certain foreign countries
      may materially adversely affect our ability to compete effectively in those
      international markets. If a sufficiently broad patent were to be issued from
      a
      competing application in China or elsewhere, it could have a material adverse
      effect upon our intellectual property position in that particular market.


In
      addition, our rights to use the licensed proprietary technologies of our
      licensors depends on the timely and complete payment for such rights pursuant
      to
      license agreements between the parties; failure to adhere to the terms of these
      agreements could result in the loss of such rights and could materially and
      adversely affect our business.





**If
      our products are alleged to or found to conflict with patents that have been
      or
      may be granted to competitors or others, our reputation and business may be
      adversely affected.**





Rapid
      technological developments in the battery industry and the competitive nature
      of
      the battery products market make the patent position of battery manufacturers
      subject to numerous uncertainties related to complex legal and factual issues.
      Consequently, although we either own or hold licenses to certain patents in
      the
      PRC, and are currently processing several additional patent applications in
      the
      PRC, it is possible that no patents will issue from any pending applications
      or
      that claims allowed in any existing or future patents issued or licensed to
      us
      will be challenged, invalidated, or circumvented, or that any rights granted
      there under will not provide us adequate protection. As a result, we may be
      required to participate in interference or infringement proceedings to determine
      the priority of certain inventions or may be required to commence litigation
      to
      protect our rights, which could result in substantial costs. Further, other
      parties could bring legal actions against us claiming damages and seeking to
      enjoin manufacturing and marketing of our products for allegedly conflicting
      with patents held by them. Any such litigation could result in substantial
      cost
      to us and diversion of effort by our management and technical personnel. If
      any
      such actions are successful, in addition to any potential liability for damages,
      we could be required to obtain a license in order to continue to manufacture
      or
      market the affected products. There can be no assurance that we would prevail
      in
      any such action or that any license required under any such patent would be
      made
      available on acceptable terms, if at all. Failure to obtain needed patents,
      licenses or proprietary information held by others may have a material adverse
      effect on our business. In addition, if we were to become involved in such
      litigation, it could consume a substantial portion of our time and resources.
      Also, with respect to licensed technology, there can be no assurance that the
      licensor of the technology will have the resources, financial or otherwise,
      or
      desire to defend against any challenges to the rights of such licensor to its
      patents.




14





**We
      rely on trade secret protections through confidentiality agreements with our
      employees, customers and other parties; the breach of such agreements could
      adversely affect our business ands results of operations.**





We
      also
      rely on trade secrets, which we seek to protect, in part, through
      confidentiality and non-disclosure agreements with our employees, customers
      and
      other parties. There can be no assurance that these agreements will not be
      breached, that we would have adequate remedies for any such breach or that
      our
      trade secrets will not otherwise become known to or independently developed
      by
      competitors. To the extent that consultants, key employees or other third
      parties apply technological information independently developed by them or
      by
      others to our proposed projects, disputes may arise as to the proprietary rights
      to such information that may not be resolved in our favor. We may be involved
      from time to time in litigation to determine the enforceability, scope and
      validity of our proprietary rights. Any such litigation could result in
      substantial cost and diversion of effort by our management and technical
      personnel.





**The
      failure to manage growth effectively could have an adverse effect on our
      employee efficiency, product quality, working capital levels, and results of
      operations.**





Any
      significant growth in the market for our products or our entry into new markets
      may require and expansion of our employee base for managerial, operational,
      financial, and other purposes. As of December 31, 2007, we had approximately
      2,370 full time employees. During any growth, we may face problems related
      to
      our operational and financial systems and controls, including quality control
      and delivery and service capacities. We would also need to continue to expand,
      train and manage our employee base. Continued future growth will impose
      significant added responsibilities upon the members of management to identify,
      recruit, maintain, integrate, and motivate new employees.





Aside
      from increased difficulties in the management of human resources, we may also
      encounter working capital issues, as we will need increased liquidity to finance
      the purchase of raw materials and supplies, development of new products, and
      the
      hiring of additional employees. For effective growth management, we will be
      required to continue improving our operations, management, and financial systems
      and control. Our failure to manage growth effectively may lead to operational
      and financial inefficiencies that will have a negative effect on our
      profitability. We cannot assure investors that we will be able to timely and
      effectively meet that demand and maintain the quality standards required by
      our
      existing and potential customers.





**We
      are dependent on certain key personnel and loss of these key personnel could
      have a material adverse effect on our business, financial condition and results
      of operations.**





Our
      success is, to a certain extent, attributable to the management, sales and
      marketing, and operational and technical expertise of certain key personnel.
      Each of the named executive officers performs key functions in the operation
      of
      our business. The loss of a significant number of these employees could have
      a
      material adverse effect upon our business, financial condition, and results
      of
      operations.





**We
      are dependent on a technically trained workforce and an inability to retain
      or
      effectively recruit such employees could have a material adverse effect on
      our
      business, financial condition and results of operations.**





We
      must
      attract, recruit and retain a sizeable workforce of technically competent
      employees to develop and manufacture our products and provide service support.
      Our ability to implement effectively our business strategy will depend upon,
      among other factors, the successful recruitment and retention of additional
      highly skilled and experienced engineering and other technical and marketing
      personnel. There is significant competition for technologically qualified
      personnel in our business and we may not be successful in recruiting or
      retaining sufficient qualified personnel consistent with our operational
      needs.





**Our
      planned expansion into new and existing international markets poses additional
      risks and could fail, which could cost us valuable resources and affect our
      results of operations.**





We
      plan
      to expand sales of our products into new and existing international markets
      including developing and developed countries, such as  Japan,
      Russia, India, and Brazil.  These
      markets are untested for our products and we face risks in expanding the
      business overseas, which include differences in regulatory product testing
      requirements, intellectual property protection (including patents and
      trademarks), taxation policy, legal systems and rules, marketing costs,
      fluctuations in currency exchange rates and changes in political and economic
      conditions.




15





**Our
      quarterly results may fluctuate because of many factors and, as a result,
      investors should not rely on quarterly operating results as indicative of future
      results.**





Fluctuations
      in operating results or the failure of operating results to meet the
      expectations of public market analysts and investors may negatively impact
      the
      value of our securities. Quarterly operating results may fluctuate in the future
      due to a variety of factors that could affect revenues or expenses in any
      particular quarter. Fluctuations in quarterly operating results could cause
      the
      value of our securities to decline. Investors should not rely on
      quarter-to-quarter comparisons of results of operations as an indication of
      future performance. As a result of the factors listed below, it is possible
      that
      in future periods results of operations may be below the expectations of public
      market analysts and investors. This could cause the market price of our
      securities to decline. Factors that may affect our quarterly results include:




—
            vulnerability
                of our business to a general economic downturn in China;





—
            fluctuation
                and unpredictability of costs related to the raw material used to
                manufacture our
                products;




—
            seasonality
                of our business;





—
            changes
                in the laws of the PRC that affect our operations;





—
            competition
                from our competitors; and





—
            Our
                ability to obtain necessary government certifications and/or licenses
                to
                conductour
                business.





**RISKS
      RELATED TO US DOING BUSINESS IN CHINA**





**Substantially
      all of our assets are located in the PRC and substantially all of our revenues
      are derived from our operations in China, and changes in the political and
      economic policies of the PRC government could have a significant impact upon
      the
      business we may be able to conduct in the PRC and accordingly on the results
      of
      our operations and financial condition.**





Our
      business operations may be adversely affected by the current and future
      political environment in the PRC. The Chinese government exerts substantial
      influence and control over the manner in which we must conduct our business
      activities. Our ability to operate in China may be adversely affected by changes
      in Chinese laws and regulations, including those relating to taxation, import
      and export tariffs, raw materials, environmental regulations, land use rights,
      property and other matters. Under the current government leadership, the
      government of the PRC has been pursuing economic reform policies that encourage
      private economic activity and greater economic decentralization. There is no
      assurance, however, that the government of the PRC will continue to pursue
      these
      policies, or that it will not significantly alter these policies from time
      to
      time without notice.





**Our
      operations are subject to PRC laws and regulations that are sometimes vague
      and
      uncertain. Any changes in such PRC laws and regulations, or the interpretations
      thereof, may have a material and adverse effect on our business.**





The
      PRC’s
      legal system is a civil law system based on written statutes. Unlike the common
      law system prevalent in the United States, decided legal cases have little
      value
      as precedent in China. There are substantial uncertainties regarding the
      interpretation and application of PRC laws and regulations, including but not
      limited to, the laws and regulations governing our business, or the enforcement
      and performance of our arrangements with customers in the event of the
      imposition of statutory liens, death, bankruptcy or criminal proceedings.
      The Chinese government has been developing a comprehensive system of commercial
      laws, and considerable progress has been made in introducing laws and
      regulations dealing with economic matters such as foreign investment, corporate
      organization and governance, commerce, taxation and trade. However, because
      these laws and regulations are relatively new, and because of the limited volume
      of published cases and judicial interpretation and their lack of force as
      precedents, interpretation and enforcement of these laws and regulations involve
      significant uncertainties. New laws and regulations that affect existing and
      proposed future businesses may also be applied retroactively.




16




Our
      principal operating subsidiary, Shenzhen Highpower Technology Co., Ltd,
      (“Shenzhen Highpower”) is considered a foreign invested enterprise under PRC
      laws, and as a result is required to comply with PRC laws and regulations,
      including laws and regulations specifically governing the activities and conduct
      of foreign invested enterprises. We cannot predict what effect the
      interpretation of existing or new PRC laws or regulations may have on our
      businesses. If the relevant authorities find us in violation of PRC laws or
      regulations, they would have broad discretion in dealing with such a violation,
      including, without limitation:





—
            levying
                fines;





—
            revokingourbusiness license, other licenses or
                authorities;





—
            requiring
                thatwerestructure our ownership or operations;
                and





—
            requiring
                thatwediscontinue any portion or all of our
                business.





**The
      scope of our business license in China is limited, and we may not expand or
      continue our business without government approval and renewal,
      respectively.**





Our
      principal operating subsidiary, Shenzhen Highpower, is a wholly foreign-owned
      enterprise, commonly known as a WFOE. A WFOE can only conduct business within
      its approved business scope, which ultimately appears on its business license.
      Our license permits us to design, manufacture, sell and market battery products
      throughout the PRC. Any amendment to the scope of our business requires further
      application and government approval. In order for us to expand our business
      beyond the scope of our license, it will be required to enter into a negotiation
      with the authorities for the approval to expand the scope of our business.
      We
      cannot assure investors that Shenzhen Highpower will be able to obtain the
      necessary government approval for any change or expansion of its
      business.





**We
      are subject to a variety of environmental laws and regulations related to our
      manufacturing operations. Our failure to comply with environmental laws and
      regulations may have a material adverse effect on our business and results
      of
      operations.**





We
      are
      subject to various environmental laws and regulations that require us to obtain
      environmental permits for our battery manufacturing operations. Our
      environmental permit from the Shenzhen Environment Protection Bureau Longgang
      Bureau (the “Bureau”) covering our manufacturing operations expired in September
      2007. Furthermore, while the permit was in effect, we substantially exceeded
      the
      approved annual output limit of Ni-MH rechargeable batteries set forth in the
      permit. Additionally, the permit did not cover four of the existing premises
      at
      our manufacturing facility. We are currently in the process of renewing this
      permit from the Bureau and will seek an increased output limit for the
      production of Ni-MH batteries, but do not intend to have the four additional
      premises added to the permit. If we do not receive the renewed permit or we
      fail
      to comply with the provisions of the renewed permit, we could be subject to
      fines, criminal charges or other sanctions by regulators, including the
      suspension or termination of our manufacturing operations.





We
      cannot
      assure you that at all times we will be in compliance with environmental laws
      and regulations or our environmental permits or that we will not be required
      to
      expend significant funds to comply with, or discharge liabilities arising under,
      environmental laws, regulations and permits.





**Recent
      PRC regulations relating to acquisitions of PRC companies by foreign entities
      may create regulatory uncertainties that could restrict or limit our ability
      to
      operate, including our ability to pay dividends. Our failure to obtain the
      prior
      approval of the China Securities Regulatory Commission, or the CSRC, for any
      offering and the listing and trading of our common stock could have a material
      adverse effect on our business, operating results, reputation and trading price
      of our common stock.**





The
      PRC
      State Administration of Foreign Exchange, or “SAFE,” issued a public notice in
      November 2005, known as Circular 75, concerning the use of offshore holding
      companies in mergers and acquisitions in China. The public notice provides
      that
      if an offshore company controlled by PRC residents intends to acquire a PRC
      company, such acquisition will be subject to registration with the relevant
      foreign exchange authorities. The public notice also suggests that registration
      with the relevant foreign exchange authorities is required for any sale or
      transfer by the PRC residents of shares in an offshore holding company that
      owns
      an onshore company. The PRC residents must each submit a registration form
      to
      the local SAFE branch with respect to their ownership interests in the offshore
      company, and must also file an amendment to such registration if the offshore
      company experiences material events, such as changes in the share capital,
      share
      transfer, mergers and acquisitions, spin-off transactions or use of assets
      in
      China to guarantee offshore obligations. If any PRC resident stockholder of
      an
      offshore holding company fails to make the required SAFE registration and
      amended registration, the onshore PRC subsidiaries of that offshore company
      may
      be prohibited from distributing their profits and the proceeds from any
      reduction in capital, share transfer or liquidation to the offshore entity.
      Failure to comply with the SAFE registration and amendment requirements
      described above could result in liability under PRC laws for evasion of
      applicable foreign exchange restrictions. Most of our PRC resident stockholders,
      as defined in the SAFE notice, have not registered with the relevant branch
      of
      SAFE, as currently required, in connection with their equity interests in HKHT.
      Because of uncertainty in how the SAFE notice will be interpreted and enforced,
      we cannot be sure how it will affect our business operations or future plans.
      For example, Shenzhen Highpower’s ability to conduct foreign exchange
      activities, such as the remittance of dividends and foreign currency-denominated
      borrowings, may be subject to compliance with the SAFE notice by our PRC
      resident beneficial holders. Failure by our PRC resident beneficial holders
      could subject these PRC resident beneficial holders to fines or legal sanctions,
      restrict our overseas or cross-border investment activities, limit Shenzhen
      Highpower’s ability to make distributions or pay dividends or affect our
      ownership structure, which could adversely affect our business and
      prospects.




17





On
      August
      8, 2006, the PRC Ministry of Commerce (“MOFCOM”), joined by the State-owned
      Assets Supervision and Administration Commission of the State Council, the
      State
      Administration of Taxation, the State Administration for Industry and Commerce,
      the China Securities Regulatory Commission and SAFE, released a substantially
      amended version of the Provisions for Foreign Investors to Merge with or Acquire
      Domestic Enterprises (the “Revised M&A Regulations”), which took effect
      September 8, 2006. These new rules significantly revised China’s regulatory
      framework governing onshore-to-offshore restructurings and foreign acquisitions
      of domestic enterprises. These new rules signify greater PRC government
      attention to cross-border merger, acquisition and other investment activities,
      by confirming MOFCOM as a key regulator for issues related to mergers and
      acquisitions in China and requiring MOFCOM approval of a broad range of merger,
      acquisition and investment transactions. Further, the new rules establish
      reporting requirements for acquisition of control by foreigners of companies
      in
      key industries, and reinforce the ability of the Chinese government to monitor
      and prohibit foreign control transactions in key industries.





Among
      other things, the revised M&A Regulations include new provisions that
      purport to require that an offshore special purpose vehicle, or SPV, formed
      for
      listing purposes and controlled directly or indirectly by PRC companies or
      individuals must obtain the approval of the CSRC prior to the listing and
      trading of such SPV’s securities on an overseas stock exchange. On September 21,
      2006, the CSRC published on its official website procedures specifying documents
      and materials required to be submitted to it by SPVs seeking CSRC approval
      of
      their overseas listings. However, the application of this PRC regulation remains
      unclear with no consensus currently existing among the leading PRC law firms
      regarding the scope and applicability of the CSRC approval requirement.
      Highpower’s PRC counsel, Zhong Lun Law Firm has advised us that because we
      completed our onshore-to-offshore restructuring before September 8, 2006, the
      effective date of the new regulation, it is not necessary for us to submit
      the
      application to the CSRC for its approval, and the listing and trading of our
      common stock does not require CSRC approval.





If
      the
      CSRC or another PRC regulatory agency subsequently determines that CSRC approval
      was required, we may face regulatory actions or other sanctions from the CSRC
      or
      other PRC regulatory agencies. These regulatory agencies may impose fines and
      penalties on our operations in the PRC, limit our operating privileges in the
      PRC, delay or restrict the repatriation of the proceeds from an offering of
      securities into the PRC, or take other actions that could have a material
      adverse effect on our business, financial condition, results of operations,
      reputation and prospects, as well as the trading price of our common stock.
      The
      CSRC or other PRC regulatory agencies also may take actions requiring us, or
      making it advisable for us, to halt any offering before settlement and delivery
      of the securities offered. Consequently, if investors engage in market trading
      or other activities in anticipation of and prior to settlement and delivery,
      they do so at the risk that settlement and delivery may not occur.





Also,
      if
      later the CSRC requires that we obtain its approval, we may be unable to obtain
      a waiver of the CSRC approval requirements, if and when procedures are
      established to obtain such a waiver. Any uncertainties and/or negative publicity
      regarding this CSRC approval requirement could have a material adverse effect
      on
      the trading price of our common stock. Furthermore, published news reports
      in
      China recently indicated that the CSRC may have curtailed or suspended overseas
      listings for Chinese private companies. These news reports have created further
      uncertainty regarding the approach that the CSRC and other PRC regulators may
      take with respect to us.





It
      is
      uncertain how our business operations or future strategy will be affected by
      the
      interpretations and implementation of Circular 75 and the Revised M&A
      Regulations. It is anticipated that application of the new rules will be subject
      to significant administrative interpretation, and we will need to closely
      monitor how MOFCOM and other ministries apply the rules to ensure that our
      domestic and offshore activities continue to comply with PRC law. Given the
      uncertainties regarding interpretation and application of the new rules, we
      may
      need to expend significant time and resources to maintain compliance.




18





**The
      foreign currency exchange rate between U.S. Dollars and Renminbi could adversely
      affect our financial condition.**





To
      the
      extent that we need to
      convert U.S. Dollars into Renminbi for our operational needs, our financial
      position and the price of our common stock may be adversely affected should
      the
      Renminbi appreciate against the U.S. Dollar at that time. Conversely, if we decide
      to
      convert our Renminbi into U.S. Dollars for the operational needs or paying
      dividends on our common stock, the dollar equivalent of our earnings from our
      subsidiaries in China would be reduced should the dollar appreciate against
      the
      Renminbi.





Until
      1994, the Renminbi experienced a gradual but significant devaluation against
      most major currencies, including dollars, and there was a significant
      devaluation of the Renminbi on January 1, 1994 in connection with the
      replacement of the dual exchange rate system with a unified managed floating
      rate foreign exchange system. Since 1994, the value of the Renminbi relative
      to
      the U.S. Dollar has remained stable and has appreciated slightly against the
      U.S. Dollar. Countries, including the United States, have argued that the
      Renminbi is artificially undervalued due to China’s current monetary policies
      and have pressured China to allow the Renminbi to float freely in world markets.
      In July 2005, the PRC government changed its policy of pegging the value of
      the
      Renminbi to the dollar. Under the new policy the Renminbi is permitted to
      fluctuate within a narrow and managed band against a basket of designated
      foreign currencies. While the international reaction to the Renminbi revaluation
      has generally been positive, there remains significant international pressure
      on
      the PRC government to adopt an even more flexible currency policy, which could
      result in further and more significant appreciation of the Renminbi against
      the
      dollar.





**Because
      most of our sales are made in U.S. Dollars and most of our expenses are paid
      in
      RMB, devaluation of the U.S. Dollar could negatively impact our results of
      operations.**





The
      value
      of RMB is subject to changes in China’s governmental policies and to
      international economic and political developments. In January, 1994, the PRC
      government implemented a unitary managed floating rate system. Under this
      system, the People’s Bank of China, or PBOC, began publishing a daily base
      exchange rate with reference primarily to the supply and demand of RMB against
      the U.S. Dollar and other foreign currencies in the market during the previous
      day. Authorized banks and financial institutions are allowed to quote buy and
      sell rates for RMB within a specified band around the central bank’s daily
      exchange rate. On July 21, 2005, PBOC announced an adjustment of the
      exchange rate of the U.S. Dollar to RMB from 1:8.27 to 1:8.11 and modified
      the
      system by which the exchange rates are determined. This modification has
      resulted in an approximate 7.3% appreciation of the RMB against the U.S. Dollar
      from July 21, 2005 to May 2, 2007. While the international reaction to
      the RMB revaluation has generally been positive, there remains significant
      international pressure on the PRC government to adopt an even more flexible
      currency policy, which could result in further fluctuations of the exchange
      rate
      of the U.S. Dollar against the RMB, including future devaluations. Because
      most
      of our net sales are made in U.S. Dollars and most of our expenses are paid
      in
      RMB, any future devaluation of the U.S. Dollar against the RMB could negatively
      impact our results of operations.





**Inflation
      in the PRC could negatively affect our profitability and
      growth.**





While
      the
      PRC economy has experienced rapid growth, such growth has been uneven among
      various sectors of the economy and in different geographical areas of the
      country. Rapid economic growth can lead to growth in the money supply and rising
      inflation. During the past decade, the rate of inflation in China has been
      as
      high as approximately 20% and China has experienced deflation as low as
      approximately minus 2%. If prices for our products
      and services rise at a rate that is insufficient to compensate for the rise
      in
      the costs of supplies such as raw materials, it may have an adverse effect
      on our profitability. In order to control inflation in the past, the PRC government
      has
      imposed controls on bank credits, limits on loans for fixed assets and
      restrictions on state bank lending. The implementation of such policies may
      impede economic growth. In October 2004, the People’s Bank of China, the PRC’s
      central bank, raised interest rates for the first time in nearly a decade and
      indicated in a statement that the measure was prompted by inflationary concerns
      in the Chinese economy. In April 2006, the People’s Bank of China raised the
      interest rate again. Repeated rises in interest rates by the central bank would
      likely slow economic activity in China which could, in turn, materially increase our costs
      and also reduce demand for our products
      and services.





**Failure
      to comply with the United States Foreign Corrupt Practices Act could subject
      us
      to penalties and other adverse consequences.**





As
      our
      ultimate holding company is a Delaware corporation, we are subject to the United
      States Foreign Corrupt Practices Act, which generally prohibits United States
      companies from engaging in bribery or other prohibited payments to foreign
      officials for the purpose of obtaining or retaining business. Foreign companies,
      including some that may compete with us, are not subject to these prohibitions.
      Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices
      may occur from time-to-time in the PRC. We can make no assurance, however,
      that
      our employees or other agents will not engage in such conduct for which we
      might
      be held responsible. If our employees or other agents are found to have engaged
      in such practices, we could suffer severe penalties and other consequences
      that
      may have a material adverse effect on our business, financial condition and
      results of operations.




19





**If
      we make equity compensation grants to persons who are PRC citizens, they may
      be
      required to register with the State Administration of Foreign Exchange of the
      PRC, or SAFE. We may also face regulatory uncertainties that could restrict
      our
      ability to adopt an equity compensation plan for our directors and employees
      and
      other parties under PRC law.**




On
      April
      6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic
      Individuals Participating in the Employee Stock Ownership Plan or Stock Option
      Plan of An Overseas Listed Company, also know as “Circular 78.” It is not clear
      whether Circular 78 covers all forms of equity compensation plans or only those
      which provide for the granting of stock options. For any plans which are so
      covered and are adopted by a non-PRC listed company after April 6, 2007,
      Circular 78 requires all participants who are PRC citizens to register with
      and
      obtain approvals from SAFE prior to their participation in the plan. In
      addition, Circular 78 also requires PRC citizens to register with SAFE and
      make
      the necessary applications and filings if they participated in an overseas
      listed company’s covered equity compensation plan prior to April 6, 2007. We
      intend to adopt an equity compensation plan in the future and make option grants
      to our officers and directors, most of who are PRC citizens. Circular 78 may
      require our officers and directors who receive option grants and are PRC
      citizens to register with SAFE. We believe that the registration and approval
      requirements contemplated in Circular 78 will be burdensome and time consuming.
      If it is determined that any of our equity compensation plans are subject to
      Circular 78, failure to comply with such provisions may subject us and
      participants of our equity incentive plan who are PRC citizens to fines and
      legal sanctions and prevent us from being able to grant equity compensation
      to
      our PRC employees. In that case, our ability to compensate our employees and
      directors through equity compensation would be hindered and our business
      operations may be adversely affected.





**We
      have enjoyed certain preferential tax concessions and the loss of these
      preferential tax concessions may cause its tax liabilities to increase and
      its
      profitability to decline.**





Our
      operating subsidiary, Shenzhen Highpower, is subject to a reduced enterprise
      income tax rate of 15%, which is granted to all enterprises operating in the
      Shenzhen Special Economic Zone. From 2005 to 2007, Shenzhen Highpower has
      enjoyed a preferential income tax rate of 7.5% due to its status as a new
      business and
      high-tech enterprise. That
      status will expire  on December
      31, 2007 .
      The
      expiration of the preferential tax treatment will increase our tax liabilities
      and reduce our profitability. Additionally, the PRC Enterprise Income Tax Law
      (the “EIT Law”) was enacted on March 16, 2007. Under the EIT Law, effective
      January 1, 2008, China will adopt a uniform tax rate of 25.0% for all
      enterprises (including foreign-invested enterprises) and cancel several tax
      incentives enjoyed by foreign-invested enterprises. Since the PRC government
      has
      not announced implementation measures for the transitional policy with regards
      to such preferential tax rates, we cannot reasonably estimate the financial
      impact of the new tax law to us at this time. Any future increase in the
      enterprise income tax rate applicable to us or other adverse tax treatments,
      could increase our tax liabilities and reduce our net income.





**Any
      recurrence of Severe Acute Respiratory Syndrome (SARS), Avian Flu, or another
      widespread public health problem, in the PRC could adversely affect our
      operations.**





A
      renewed
      outbreak of SARS, Avian Flu or another widespread public health problem in
      China, where all of our manufacturing facilities are located and where the substantial portion of our
      sales occur, could have a negative effect on our operations. Our business
      is dependent upon its ability to continue to manufacture products. Such an
      outbreak could have an impact on our operations as a result of:





—
                quarantines
                    or closures of some ofourmanufacturing
                    facilities, which would severely disruptouroperations,





—
            the
                sickness or death ofourkey
                officers and employees, and





—
            a
                general slowdown in the Chinese
                economy.





Any
      of
      the foregoing events or other unforeseen consequences of public health problems
      could adversely affect our operations.




20





**A
      downturn in the economy of the PRC may slow our growth and
      profitability.**





The
      growth of the Chinese economy has been uneven across geographic regions and
      economic sectors. There can be no assurance that growth of the Chinese economy
      will be steady or that any downturn will not have a negative effect on our business, especially if it results in either a decreased use of our products
      or
      in pressure on us to lower our prices.





**Because
      our business is located in the PRC, we may have difficulty establishing adequate
      management, legal and financial controls, which it is required to do in order
      to
      comply with U.S. securities laws.**





PRC
      companies have historically not adopted a Western style of management and
      financial reporting concepts and practices, which includes strong corporate
      governance, internal controls and, computer, financial and other control
      systems. Most
      of
      our middle and top management staff are not educated and trained in the Western
      system, and we may difficulty hiring new employees in the PRC with such
      training. In
      addition, we may
      have
      difficulty in hiring and retaining a sufficient number of qualified employees
      to
      work in the PRC. As a result of these factors, we may
      experience difficulty in establishing management, legal and financial controls,
      collecting financial data and preparing financial statements, books of account
      and corporate records and instituting business practices that meet Western
      standards. Therefore, we may,
      in
      turn, experience difficulties in implementing and maintaining adequate internal
      controls as required under Section 404 of the Sarbanes-Oxley Act of 2002. This
      may result in significant deficiencies or material weaknesses in our internal
      controls which could impact the reliability of its financial statements and
      prevent us from
      complying with SEC rules and regulations and the requirements of the
      Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack of
      compliance could have a materially adverse effect on our business.





**Investors
      may experience difficulties in effecting service of legal process, enforcing
      foreign judgments or bringing original actions in China based upon U.S. laws,
      including the federal securities laws or other foreign laws against us or our
      management.**





Most
      of our current
      operations, including the manufacturing and distribution of our products, are
      conducted in China. Moreover, all of our directors
      and officers are nationals and residents of China or Hong Kong. All or
      substantially all of the assets of these persons are located outside the United
      States and in the PRC. As a result, it may not be possible to effect service
      of
      process within the United States or elsewhere outside China upon these persons.
      In addition, uncertainty exists as to whether the courts of China would
      recognize or enforce judgments of U.S. courts obtained against us or such
      officers and/or directors predicated upon the civil liability provisions of
      the
      securities laws of the United States or any state thereof, or be competent
      to
      hear original actions brought in China against us or such
      persons predicated upon the securities laws of the United States or any state
      thereof.





**RISKS
      RELATED TO OUR CAPITAL STRUCTURE**





**There
      is no current trading market for** **our** **common
      stock, and there is no assurance of an established public trading market, which
      would adversely affect the ability of** **our** **investors
      to sell their securities in the public market.**




Our common
      stock is not currently listed or quoted for trading on any national securities
      exchange or national quotation system. We have
      applied for the listing of our common stock on the American Stock Exchange
      (“AMEX”). There is no guarantee that the American Stock Exchange, or any other
      exchange or quotation system, will permit our shares
      to
      be listed and traded. If we fail
      to
      obtain a listing on the American Stock Exchange, we may seek quotation on the
      OTC Bulletin Board. The Financial Industry Regulatory Authority has enacted
      changes that limit quotations on the OTC Bulletin Board to securities of issuers
      that are current in their reports filed with the Securities and Exchange
      Commission. The effect on the OTC Bulletin Board of these rule changes and
      other
      proposed changes cannot be determined at this time. The OTC Bulletin Board
      is an
      inter-dealer, over-the-counter market that provides significantly less liquidity
      than the NASDAQ Global Market or AMEX. Quotes for stocks included on the OTC
      Bulletin Board are not listed in the financial sections of newspapers as are
      those for the NASDAQ Global Market or AMEX. Therefore, prices for securities
      traded solely on the OTC Bulletin Board may be difficult to obtain and holders
      of common stock may be unable to resell their securities at or near their
      original offering price or at any price.




21





**Shares
      eligible for future sale may adversely affect the market price of our common
      stock, as the future sale of a substantial amount of outstanding stock in the
      public marketplace could reduce the price of our common
      stock.**




Pursuant
      to the terms of the Share Exchange, we agreed to file a registration statement
      with the Securities and Exchange Commission to register the shares of our common
      stock issued in an equity financing that that was conducted in connection with
      the Share Exchange that closed on November 2, 2007. The investors in the Private
      Placement also entered into a lock-up agreement pursuant to which they agreed
      not to sell their shares until ninety (90) days after our common stock begins
      to
      be listed or quoted on either the New York Stock Exchange, American Stock
      Exchange, NASDAQ Global Market, NASDAQ Capital Market or the OTC Bulletin Board,
      after which their shares will automatically be released from the lock up on
      a
      monthly basis.





We
      also
      agreed to register all of the 2,843,398 shares of common stock held by our
      stockholders who were stockholders immediately prior to the Share Exchange.
      Of
      the 2,843,398 shares held by our stockholders prior to the Share Exchange,
      we
      agreed to register 1,307,936 shares in the registration statement filed in
      connection with the Private Placement and the remaining 1,535,435 shares in
      a
      subsequent registration statement filed by us within
      ten days after the end of the six-month period that immediately follows the
      date
      on which we file
      the
      registration statement to register the shares issued in the Private Placement.
      All of the shares included in an effective registration statement as described
      above may be freely sold and transferred except if subject to a lock up
      agreement.





The
      former shareholders of HKHT and/or their designees may be eligible to sell
      all
      or some of our shares
      of
      common stock by means of ordinary brokerage transactions in the open market
      pursuant to Rule 144, promulgated under the Securities Act (“Rule 144”), subject
      to certain limitations. In general, pursuant to Rule 144, a non-affiliate
      stockholder (or stockholders whose shares are aggregated) who has satisfied
      a
      six-month holding period, and provided that there is current public information
      available, may sell all of its securities. Rule 144 also permits the sale of
      securities, without any limitations, by a non-affiliate that has satisfied
      a
      one-year holding period. Any substantial sale of common stock pursuant to any
      resale prospectus or Rule 144 may have an adverse effect on the market price
      of our common
      stock by creating an excessive supply.




**Following
      the Share Exchange, the former principal shareholders of HKHT have significant
      influence over us.**





The
      former shareholders of HKHT beneficially own or control approximately 72.3%
      of
      our outstanding shares as of the close of the Share Exchange. If these
      shareholders were to act as a group, they would have a controlling influence
      in
      determining the outcome of any corporate transaction or other matters submitted
      to our stockholders for approval, including mergers, consolidations and the
      sale
      of all or substantially all of our assets, election of directors, and other
      significant corporate actions. Such shareholders may also have the power to
      prevent or cause a change in control. In addition, without the consent of the
      former HKHT shareholders, we could be prevented from entering into transactions
      that could be beneficial to us. The interests of the former HKHT shareholders
      may differ from the interests of our other stockholders.





**If
      we fail to maintain effective internal controls over financial reporting, the
      price of our common stock may be adversely affected.**





We
      are
      required to establish and maintain appropriate internal controls over financial
      reporting. Failure to establish those controls, or any failure of those controls
      once established, could adversely impact our public disclosures regarding our
      business, financial condition or results of operations. Any failure of these
      controls could also prevent us from maintaining accurate accounting records
      and
      discovering accounting errors and financial frauds. Rules adopted by the SEC
      pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual
      assessment of our internal control over financial reporting, and attestation
      of
      this assessment by our independent registered public accountants. The SEC
      extended the compliance dates for non-accelerated filers, as defined by the
      SEC.
      Accordingly, although this annual report includes management's assessment of
      our
      internal control over financial reporting as of the end of the previous fiscal
      year, the attestation requirement of management’s assessment by our independent
      registered public accountants will first apply to our annual report for the
      2008
      fiscal year. The standards that must be met for management to assess the
      internal control over financial reporting as effective are new and complex,
      and
      require significant documentation, testing and possible remediation to meet
      the
      detailed standards. We may encounter problems or delays in completing activities
      necessary to make an assessment of our internal control over financial
      reporting. In addition, the attestation process by our independent registered
      public accountants is new and we may encounter problems or delays in completing
      the implementation of any requested improvements and receiving an attestation
      of
      our assessment by our independent registered public accountants. If we cannot
      assess our internal control over financial reporting as effective, or our
      independent registered public accountants are unable to provide an unqualified
      attestation report on such assessment, investor confidence and share value
      may
      be negatively impacted.




22





In
      addition, management’s assessment of internal controls over financial reporting
      may identify weaknesses and conditions that need to be addressed in our internal
      controls over financial reporting or other matters that may raise concerns
      for
      investors. Any actual or perceived weaknesses and conditions that need to be
      addressed in our internal control over financial reporting, disclosure of
      management’s assessment of our internal controls over financial reporting, or
      disclosure of our public accounting firm’s attestation to or report on
      management’s assessment of our internal controls over financial reporting may
      have an adverse impact on the price of our common stock.





**We** **may
      not be able to achieve the benefits** **we** **expect
      to result from the Share Exchange.**




On
      October 20, 2007, we entered into the Exchange Agreement with all of the
      shareholders of HKHT, pursuant to which we agreed to acquire 100% of the issued
      and outstanding securities of HKHT in exchange for shares of our common stock.
      On November 2, 2007, the Share Exchange closed, HKHT became our 100%-owned
      subsidiary and our sole business operations became that of HKHT. We also have
      a
      new Board of Directors and management consisting of persons from HKHT and
      changed our corporate name from SRKP 11, Inc. to HKHT.





We
      may
      not realize the benefits that we hoped to receive as a result of the Share
      Exchange, which include:





—
            access
                to the capital markets of the United
                States;




—
            the
                increased market liquidity expected to result from exchanging stock
                in a
                private company
                for securities of a public company that may eventually be
                traded;




—
            the
                ability to use registered securities to make acquisition of assets
                or
                businesses;




—
            increased
                visibility in the financial
                community;




—
            enhanced
                access to the capital markets;




—
            improved
                transparency of operations; and




—
            perceived
                credibility and enhanced corporate image of being a publicly traded
                company.





There
      can
      be no assurance that any of the anticipated benefits of the Share Exchange
      will
      be realized in respect to our new business operations. In addition, the
      attention and effort devoted to achieving the benefits of the Share Exchange
      and
      attending to the obligations of being a public company, such as reporting
      requirements and securities regulations, could significantly divert management’s
      attention from other important issues, which could materially and adversely
      affect our operating results or stock price in the future.





**Compliance
      with changing regulation of corporate governance and public disclosure will
      result in additional expenses.**




Changing
      laws, regulations and standards relating to corporate governance and public
      disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC
      regulations, have created uncertainty for public companies and significantly
      increased the costs and risks associated with accessing the public markets
      and
      public reporting. Our management team will need to invest significant management
      time and financial resources to comply with both existing and evolving standards
      for public companies, which will lead to increased general and administrative
      expenses and a diversion of management time and attention from revenue
      generating activities to compliance activities.




**Our** **common
      stock may be considered a “penny stock,” and thereby be subject to additional
      sale and trading regulations that may make it more difficult to
      sell.**




Our
      common stock, which is not currently listed or quoted for trading, may be
      considered to be a “penny stock” if it does not qualify for one of the
      exemptions from the definition of “penny stock” under Section 3a51-1 of the
      Securities Exchange Act of 1934, as amended (the “Exchange Act”) once, and if,
      it starts trading. Our common
      stock may be a “penny stock” if it meets one or more of the following conditions
      (i) the stock trades at a price less than $5.00 per share; (ii) it is NOT traded
      on a “recognized” national exchange; (iii) it is NOT quoted on the Nasdaq
      Capital Market, or even if so, has a price less than $5.00 per share; or (iv)
      is
      issued by a company that has been in business less than three years with net
      tangible assets less than $5 million.




The
      principal result or effect of being designated a “penny stock” is that
      securities broker-dealers participating in sales of our common
      stock will be subject to the “penny stock” regulations set forth in Rules 15-2
      through 15g-9 promulgated under the Exchange Act. For example, Rule 15g-2
      requires broker-dealers dealing in penny stocks to provide potential investors
      with a document disclosing the risks of penny stocks and to obtain a manually
      signed and dated written receipt of the document at least two business days
      before effecting any transaction in a penny stock for the investor’s account.
      Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the
      account of any investor for transactions in such stocks before selling any
      penny
      stock to that investor. This procedure requires the broker-dealer to (i) obtain
      from the investor information concerning his or her financial situation,
      investment experience and investment objectives; (ii) reasonably determine,
      based on that information, that transactions in penny stocks are suitable for
      the investor and that the investor has sufficient knowledge and experience
      as to
      be reasonably capable of evaluating the risks of penny stock transactions;
      (iii)
      provide the investor with a written statement setting forth the basis on which
      the broker-dealer made the determination in (ii) above; and (iv) receive a
      signed and dated copy of such statement from the investor, confirming that
      it
      accurately reflects the investor’s financial situation, investment experience
      and investment objectives. Compliance with these requirements may make it more
      difficult and time consuming for holders of our common
      stock to resell their shares to third parties or to otherwise dispose of them
      in
      the market or otherwise.




23





**We
      do not foresee paying cash dividends in the foreseeable future and, as a result,
      our investors’ sole source of gain, if any, will depend on capital appreciation,
      if any.**





We
      do not
      plan to declare or pay any cash dividends on our shares of common stock in
      the
      foreseeable future and currently intend to retain any future earnings for
      funding growth. As a result, you should not rely on an investment in our
      securities if you require the investment to produce dividend income. Capital
      appreciation, if any, of our shares may be your sole source of gain for the
      foreseeable future. Moreover,
      you may not be able to resell your shares in our company at or above the price
      you paid for them.





**ITEM
      1B. UNRESOLVED STAFF COMMENTS**





Not
      applicable.





**ITEM
      2. PROPERTIES**





Our
      registered office in Hong Kong is located at Flat 4, 13/F, Block 4, Taiping
      Industrial Centre, 51A Ting Kok Road, Tai Po, N.T. Hong Kong.





All
      of
      our manufacturing operations are currently located in mainland China at Luoshan
      Industrial Zone, Pinghu, Longgang, Shenzhen, Guangdong, China, 518111. Our
      facilities cover approximately 484,000 square meters of total space, consisting
      of manufacturing plants, dormitories and research and development facilities.
      We
      lease our manufacturing facilities from various landlords under a total of
      six
      leases with varying terms ranging, which are renewed upon expiration. All leases
      have been fully prepaid until the expiration date. The table below lists the
      locations, approximate square footage, principal use and lease expiration dates
      of the facilities used in our manufacturing operations as of December 31, 2007.





**Location**
            
            **Area**
              **(square
                feet)**
            
            **Principal
                Use**
            
            **Lease**
              **expiration
                date**Workshop
                A1 & dormitory, Luo Shan Industrial Park, Shan Xia Community, Ping Hu
                Street, Long Gang District, Shenzhen
            
            58,986
            
            Industry
                & Residence
            
            September
                30, 2009Workshop
                A2 & dormitory, Luo Shan Industrial Park, Shan Xia Community, Ping Hu
                Street, Long Gang District, Shenzhen
            
            81,117
            
            Industry
                & Residence
            
            September
                30, 20094thFloor, Building A, (4thFloor, Building 1 & 2ndFloor, Building B2 ) Workshop, B2 Area, Luo Shan Industrial Park,
                Shan Xia
                Community, Ping Hu Street, Long Gang District, Shenzhen
            
            94,722
            
            Industry
                & Residence
            
            June
                14, 2010Storage,
                Building 2, (6thFloor, Building 1)Area B2, Luo Shan Industrial Park, Shan Xia Community,
                Ping Hu Street, Long Gang District, Shenzhen
            
            50,698
            
            Industry
                & Residence
            
            December
                31, 20101st-4thFloor, Building 12, (1st-7thFloor, Building 9), Da Wang Industrial Park, Xin Xia Road, Ping Hu
                Street,
                Long Gang District, Shenzhen
            
            55,897
            
            Industry
                & Residence
            
            September
                30, 2008Workshop
                & dormitory , chong Tou Hu village, Renming Road,Guang Lan Street,
                Bao
                An District, Shenzhen
            
            146,336
            
            Industry
                & Residence
            
            September
                15,2010




24




In
      China,
      only the PRC government and peasant collectives may own land. In February 2007,
      we acquired approximately 1.36 million square feet of land equity in Industry
      Development Zone, New Lake, MaAn Town, HuiCheng District, HuiZhou, GuangDong,
      China for a total of RMB26 million under land use right grant from the HuiZhou
      State-Owned Land Resource Bureau that gives us the right to use the land for
      50
      years and an agreement with the government of MaAn Town. In the event we wish
      to
      continue to use the land after the 50-year period, we must apply for an
      extension at least one year prior to the land grant’s expiration. We are
      currently in the process of designing a new manufacturing facility for
      construction on this site and anticipate that the new facility will be completed
      in the forth quarter of 2009, at which time we will move our entire
      manufacturing operations to the new location. Pursuant to the terms of the
      land
      use right, we must begin development of the land within one year from June
      2007,
      when we received the certificate of land equity. If we do not begin development
      of the land within one year after receiving the certificate, we will have to
      pay
      postponement fees to the HuiZhou State-Owned Land Resource Bureau. We plan
      to
      begin developing the land prior to June 2008.





Our
      rights with respect to the land use right grant permit us to develop the land
      and construct buildings for industrial applications. We have the right to
      transfer or rent the land and use it as collateral for our loans.




**ITEM
      3. LEGAL PROCEEDINGS**





On
      August
      20, 2007, a lawsuit was filed against Shenzhen China and various other
      defendants by Energizer, S.A. in the United States District Court for the
      Southern District of New York. The lawsuit arises out of a fire that occurred
      on
      a cargo vessel carrying batteries sold to Energizer by Shenzhen China that
      resulted in damages to various third parties. Energizer alleges that it is
      entitled to indemnification from Shenzhen Highpower for any damages or losses
      that it becomes liable to pay to third parties as a result of the fire.
      Energizer seeks indemnity and/or contribution from Shenzhen Highpower for such
      sums, together with expenses, including attorneys’ fees and costs. Our insurance
      company has provided us with counsel in this case. We believe that we have
      meritorious defenses against the claims asserted by Energizer, and intend to
      vigorously defend the lawsuit. Energizer continues to be one of our largest
      customers.




**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





No
      matters were submitted to the security holders to be voted on during the fourth
      quarter of 2007.




25







**PART
      II**




**ITEM
      5. MARKET FOR REGISTRANT’S COMMON STOCK,** R **ELATED** **STOCKHOLDER** **MATTERS** **AND** **ISSUER** **PURCHASES
      OF EQUITY SECURITIES**




**Market
      Information**





There
      has
      never been a public trading market for our common stock and our shares of common
      stock are not currently listed or quoted for trading on any national securities
      exchange or national quotation system. We have applied for the listing of our
      common stock on the American Stock Exchange. We have reserved the trading symbol
      “HPJ.”





If
      and
      when our common stock is listed or quoted for trading, the price of our common
      stock will likely fluctuate in the future. The stock market in general has
      experienced extreme stock price fluctuations in the past few years. In some
      cases, these fluctuations have been unrelated to the operating performance
      of
      the affected companies. Many companies have experienced dramatic volatility
      in
      the market prices of their common stock. We believe that a number of factors,
      both within and outside our control, could cause the price of our common stock
      to fluctuate, perhaps substantially. Factors such as the following could have
      a
      significant adverse impact on the market price of our common stock:




·
            Our
                ability to obtain additional financing and, if available, the terms
                and
                conditions of the financing;




·
            Our financial position and results of
              operations;




·
            Concern
                as to, or other evidence of, the reliability and efficiency of our
                proposed products and services or our competitors’ products and
                services;




·
            Announcements of innovations or new products or
              services
              by us or our competitors;




·
            Federal
                and state governmental regulatory actions and the impact of such
                requirements on our business;





·
            The
                development of litigation against
                us;




·
            Period-to-period
                fluctuations in our operating
                results;




·
            Changes
                in estimates of our performance by any securities
                analysts;




·
            The
                issuance of new equity securities pursuant to a future offering or
                acquisition;




·
            Changes
                in interest rates;




·
            Competitive
                developments, including announcements by competitors of new products
                or
                services or significant contracts, acquisitions, strategic partnerships,
                joint ventures or capital
                commitments;




·
            Investor
                perceptions of our company; and




·
            General
                economic and other national
                conditions.




**Stockholders**





As
      of March
      31,
      2007 ,
      we had
      92 registered stockholders.





**Dividends**





We
      do not
      expect to declare or pay any cash dividends on our common stock in the
      foreseeable future, and we currently intend to retain future earnings, if any,
      to finance the expansion of our business. The decision whether to pay cash
      dividends on our common stock will be made by our board of directors, in its
      discretion, and will depend on our financial condition, operating results,
      capital requirements and other factors that the board of directors considers
      significant.





We
      paid
      cash dividends of $665,182 during the year ended December 31, 2007. We did
      not
      pay cash dividends in the year
      ended December 31, 2006.





**Transfer
      Agent**





The
      transfer agent and registrar for our common stock is Corporate Stock Transfer,
      Inc.





**Equity
      Compensation Plan Information**





As
      of
      December 31, 2007, we did not have an equity compensation plan.




26





**Additional
      Information**





Copies
      of
      our annual reports, quarterly reports, current reports, and any amendments
      to
      those reports, are available free of charge on the Internet at www.sec.gov.
      All
      statements made in any of our filings, including all forward-looking statements,
      are made as of the date of the document in which the statement is included,
      and
      we do not assume or undertake any obligation to update any of those statements
      or documents unless we are required to do so by law.




27


**ITEM
      6. SELECTED CONSOLIDATED FINANCIAL DATA**





The
      following selected consolidated statement of operations data for the years
      ended
      December 31, 2007, 2006, 2005, 2004 and 2003 and the balance sheet data as
      of
      December 31, 2007, 2006, 2005, 2004 and 2003 are derived from the Company’s
      audited consolidated financial statements, except for data as of and for the
      year ended December 31, 2003. The following data is qualified in its entirety
      by
      and should be read in conjunction with “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations” and our consolidated financial
      statements and related notes included elsewhere in this Form
      10-K.





**Year
                Ended December 31,****Consolidated
              Statements of Operations**
            
            **2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**(unaudited)***(in
                thousands)***Net
                Sales
            
            $
            73,262
            
            $
            44,376
            
            $
            25,010
            
            $
            10,956
            
            $
            3,599Cost
                of Sales
            
            
            (63,791
            )
            
            (36,959
            )
            
            (20,757
            )
            
            (9,306
            )
            
            (3,290
            )Gross
                profit
            
            $
            9,470
            
            $
            7,417
            
            $
            4,253
            
            $
            1,651
            
            $
            309Depreciation
            
            
            (121
            )
            
            (80
            )
            
            (46
            )
            
            (25
            )
            
            (10
            )Selling
                and distributing costs
            
            
            (2,096
            )
            
            (1,634
            )
            
            (857
            )
            
            (641
            )
            
            (61
            )Administrative
                and other operating expenses
            
            
            (4,178
            )
            
            (2,160
            )
            
            (854
            )
            
            (549
            )
            
            (181
            )Income
                from operations
            
            $
            3,076
            
            $
            3,543
            
            $
            2,495
            
            $
            435
            
            $
            57Fees
                and costs related to reorganization
            
            
            719
            
            
            (75
            )
            
            -
            
            
            -
            
            
            -Other
                Income
            
            
            149
            
            
            59
            
            
            58
            
            
            33
            
            
            0Interest
                expenses
            
            
            (696
            )
            
            (254
            )
            
            (55
            )
            
            (10
            )
            
            0Income
                before taxes
            
            $
            1,809
            
            $
            3,273
            
            $
            2,499
            
            $
            458
            
            $
            57Income
                taxes
            
            
            (145
            )
            
            (240
            )
            
            (188
            )
            
            17
            
            
            0Net
                income
            
            $
            1,664
            
            $
            3,032
            
            $
            2,311
            
            $
            475
            
            $
            57Basic
                and diluted net income per common share
            
            $
            0.11
            
            $
            0.20
            
            $
            0.16
            
            $
            0.03
            
            $
            0.00Basic
                weighted average common shares outstanding
            
            
            15,731,988
            
            
            14,798,328
            
            
            14,798,328
            
            
            14,798,328
            
            
            14,798,328Dividends
                declared per common share
            
            $
            0.045
            
            
            -
            
            
            -
            
            
            -
            
            
            -





**As
                of December 31,****Consolidated
                Balance Sheets**
            
            **2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**(unaudited)***(in
                thousands)***Current
                Assets
            
            $
            40,167
            
            $
            28,573
            
            $
            12,851
            
            $
            6,322
            
            $
            1,910Total
                Assets
            
            
            48,920
            
            
            31,736
            
            
            14,585
            
            
            7,378
            
            
            2,317Current
                Liabilities
            
            
            37,366
            
            
            24,571
            
            
            10,728
            
            
            5,907
            
            
            2,056Total
                Liabilities
            
            
            37,366
            
            
            24,571
            
            
            10,728
            
            
            5,907
            
            
            2,140Total
                Stockholders’ Equity
            
            
            11,554
            
            
            7,165
            
            
            3,857
            
            
            1,472
            
            
            177





**Recapitalization**





The
      acquisition of HKHT by us pursuant to the Share Exchange Transaction was
      accounted for as a recapitalization by us. The recapitalization was, at the
      time
      of the Share Exchange, the merger of a private operating company (HKHT) into
      a
      non-operating public shell corporation (us) with nominal net assets and as
      such
      is treated as a capital recapitalization, rather than a business combination.
      As
      a result, the assets of the operating company are recorded at historical cost.
      The transaction is the equivalent to the issuance of stock by the private
      company for the net monetary assets of the shell corporation. The pre
      acquisition financial statements of HKHT are treated as the historical financial
      statements of the consolidated companies. The financial statements presented
      will reflect the change in capitalization for all periods presented, therefore
      the capital structure of the consolidated enterprise, being the capital
      structure of the legal parent, is different from that appearing in the financial
      statements of HKHT in earlier periods due to this recapitalization.




28




**ITEM
      7. MANAGEMENT’S DISCUSSION AND ANALYSIS** **AND
      RESULTS OF OPERATIONS** ****





**Forward-Looking
      Statements**





*The
      following discussion should be read in conjunction with our consolidated
      financial statements and related notes included elsewhere in this report. This
      report contains forward-looking statements. The words “anticipated,” “believe,”
“expect, “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may,” and
      similar expressions are intended to identify forward-looking statements. These
      statements include, among others, information regarding future operations,
      future capital expenditures, and future net cash flow. Such statements reflect
      our management’s current views with respect to future events and financial
      performance and involve risks and uncertainties, including, without limitation,
      general economic and business conditions, changes in foreign, political, social,
      and economic conditions, regulatory initiatives and compliance with governmental
      regulations, the ability to achieve further market penetration and additional
      customers, and various other matters, many of which are beyond our control.
      Should one or more of these risks or uncertainties occur, or should underlying
      assumptions prove to be incorrect, actual results may vary materially and
      adversely from those anticipated, believed, estimated or otherwise indicated.
      Consequently, all of the forward-looking statements made in this report are
      qualified by these cautionary statements and there can be no assurance of the
      actual results or developments.*





**Overview**





We
      were
      incorporated in the state of Delaware on January 3, 2006. We were originally
      organized as a “blank check” shell company to investigate and acquire a target
      company or business seeking the perceived advantages of being a publicly held
      corporation. On November 2, 2007, we closed a share exchange transaction
      described below, pursuant to which we (i) became the 100% parent of Hong Kong
      Highpower Technology Company Limited , a Hong Kong Company (“HKHT”), and its
      wholly-owned subsidiary, Shenzhen Highpower Technology Co., Ltd. (“Shenzhen
      Highpower”), a company formed under the laws of the People’s Republic of China
      (“PRC” or “China”), (ii) assumed the operations of HKHT and its subsidiary and
      (iii) changed our name from SRKP 11, Inc. to Hong Kong Highpower Technology,
      Inc. HKHT was incorporated in Hong Kong in 2003, under the Companies Ordinance
      of Hong Kong.





In
      addition, on November 2, 2007, concurrently with the close of the Share
      Exchange, we conducted a private placement transaction (the “Private
      Placement”). Pursuant to Subscription Agreements entered into with the
      investors, we sold an aggregate of 2,836,364 shares of Common stock at $1.10
      per
      share. As a result, we received gross proceeds in the amount of $3.12 million.





Through
      Shenzhen Highpower, we manufacture Ni-MH rechargeable batteries for both
      consumer and industrial applications. We have developed significant expertise
      in
      Ni-MH battery technology and large-scale manufacturing that enables us to
      improve the quality of our battery products, reduce costs, and keep pace with
      evolving industry standards. Our automated machinery allows us to process key
      aspects of the manufacturing process to ensure high uniformity and precision,
      while leaving the non-key aspects of the manufacturing process to manual
      labor.





We
      employ
      a broad network of salespersons in China and Hong Kong, which target key
      customers by arranging in-person sales presentations and providing post-sale
      services. The sales staff works with our customers to better address customers’
needs.





**Recent
      Events**





***Share
      Exchange***





On
      October 20, 2007, we entered into a share exchange agreement (“Exchange
      Agreement”) with all of the shareholders of HKHT, pursuant to which we agreed to
      issue an aggregate of 14,798,328 shares of our common stock in exchange for
      all
      of the issued and outstanding securities of HKHT (the “Share Exchange”). Upon
      the closing of the Share Exchange on November 2, 2007, we issued an aggregate
      of
      14,798,328 shares of our common stock to the shareholders of HKHT and/or their
      designees in exchange for all of the issued and outstanding securities of HKHT.
      In addition, immediately prior to the closing of the Share Exchange and the
      Private Placement, as described below, we and certain of our shareholders agreed
      to cancel an aggregate of 2,556,602 shares of common stock such that there
      were
      2,843,398 shares of common stock outstanding immediately prior to the Share
      Exchange and Private Placement. We issued no fractional shares in connection
      with the Share Exchange.




29





On
      October 20, 2007, we entered into a share exchange agreement (the “Exchange
      Agreement”) with all of the shareholders of HKHT. Pursuant to the Exchange
      Agreement, we agreed to issue shares of our common stock in exchange for all
      of
      the issued and outstanding securities of HKHT (the “Share Exchange”). The Share
      Exchange closed on November 2, 2007. Upon the closing of the Share Exchange,
      we
      (i) became the 100% parent of HKHT, and HKHT’s wholly-owned subsidiary Shenzhen
      Highpower, (ii) assumed the operations of HKHT and its subsidiary and (iii)
      changed our name from SRKP 11, Inc. to Hong Kong Highpower Technology,
      Inc.





Immediately
      after the closing of the Share Exchange and Private Placement, we had 20,478,090
      outstanding shares of common stock. Upon the closing of the Share Exchange,
      the
      shareholders of HKHT and their designees owned approximately 72.3% of our issued
      and outstanding common stock, the pre-existing stockholders of the Company
      owned
      13.9% and investors in the Private Placement that closed concurrently with
      the
      Share Exchange, as described below, owned 13.8% of our outstanding common stock.





Pursuant
      to the terms of the Share Exchange, we agreed to register a total of 2,843,398
      shares of common stock held by our stockholders immediately prior to the Share
      Exchange. Of these 2,843,398 shares, 1,307,963 shares would be covered by a
      resale registration statement filed in connection with the Private Placement
      (described below) and 1,535,435 shares, which are held by affiliates of WestPark
      Capital, Inc. (“WestPark”), are to be included in a subsequent registration
      statement filed by us within ten days after the end of the six-month period
      that
      immediately follows the date on which we file the registration statement to
      register the shares issued in the Private Placement. WestPark acted as the
      placement agent in the Private Placement.





With
      respect to the registration statement that we will file to cover the 1,535,435
      shares of common stock held by the WestPark affiliates, we agreed to use our
      reasonable best efforts to cause the registration statement to become effective
      within 150 days after the required filing date or the actual filing date,
      whichever is earlier, or 180 days after the required filing date or the actual
      filing date, whichever is earlier, if the registration statement is subject
      to a
      full review by the SEC. In addition, we agreed to use our reasonable best
      efforts to maintain the registration statement effective for a period of 24
      months at our expense. We also agreed to a penalty provision pursuant to which
      we will issue additional shares of our common stock to the WestPark affiliates
      if we fail to timely file and maintain the registration statement.





Immediately
      after the closing of the Share Exchange, we changed our corporate name from
      “SRKP 11, Inc.” to “Hong Kong Highpower Technology, Inc.” The shares of our
      common stock are not currently listed or quoted for trading on any national
      securities exchange or national quotation system. We have applied for the
      listing of our common stock on the American Stock Exchange.





***Private
      Placement***





On
      November 2, 2007, concurrently with the close of the Share Exchange, we received
      gross proceeds of $3.12 million in a private placement transaction (the “Private
      Placement”). Pursuant to subscription agreements entered into with the
      investors, we sold an aggregate of 2,836,364 shares of common stock at $1.10
      per
      share. The investors in the Private Placement also entered into a lock up
      agreement pursuant to which they agreed not to sell their shares until ninety
      (90) days after our common stock begins to be listed or quoted on either the
      New
      York Stock Exchange, American Stock Exchange, NASDAQ Global Market, NASDAQ
      Capital Market or the OTC Bulletin Board, when one-tenth of their shares are
      released from the lock up, after which their shares will automatically be
      released from the lock up on a monthly basis pro rata over a nine month period.
      After commissions and expenses, we received net proceeds of approximately
      $2,618,000 in the Private Placement.





We
      agreed
      to file a registration statement covering the common stock sold in the Private
      Placement within thirty days of the closing of the Share Exchange pursuant
      to
      the subscription agreement with each investor. We filed the registration
      statement within that timeframe. We are required to use our reasonable best
      efforts to cause the registration statement to become effective within one
      hundred and 150 days after the closing or 180 days after the closing if the
      registration statement is subject to a full review by the SEC. We are also
      required to use our reasonable best efforts to maintain the registration
      statement effective for a period of 24 months at our expense.





WestPark
      acted as placement agent in connection with the Private Placement. For its
      services in connection with the Share Exchange and as placement agent, WestPark
      received an aggregate commission equal to 10% of the gross proceeds from the
      Private Placement, in addition to $30,000 in connection with the execution
      of
      the Exchange Agreement and a $40,000 success fee for the Share Exchange, for
      an
      aggregate amount fee of $382,000. No other consideration was paid to WestPark
      or
      to SRKP 11 in connection with the Share Exchange or Private Placement. Some
      of
      the controlling shareholders and control persons of WestPark were also, prior
      to
      the completion of the Share Exchange, controlling shareholders and control
      persons of our company, including Richard Rappaport, who is the Chief Executive
      Officer of WestPark and was the President and a significant shareholder of
      our
      company prior to the Share Exchange, and Anthony C. Pintsopoulos, who is the
      Chief Financial Officer of WestPark and was a controlling stockholder and an
      officer and director of our company prior to the Share Exchange. Each of Messrs.
      Rappaport and Pintsopoulos resigned from all of their executive and director
      positions with our company upon the closing of the Share Exchange.




30





**Critical
      Accounting Policies, Estimates and Assumptions**





The
      SEC
      defines critical accounting policies as those that are, in management's view,
      most important to the portrayal of our financial condition and results of
      operations and those that require significant judgments and
      estimates.





The
      preparation of these consolidated financial statements requires our management
      to make estimates and assumptions that affect the reported amounts of assets,
      liabilities, revenues and expenses, as well as the disclosure of contingent
      assets and liabilities at the date of our financial statements. We base our
      estimates on historical experience, actuarial valuations and various other
      factors that we believe to be reasonable under the circumstances, the results
      of
      which form the basis for making judgments about the carrying value of assets
      and
      liabilities that are not readily apparent from other sources. Some of those
      judgments can be subjective and complex and, consequently, actual results may
      differ from these estimates under different assumptions or conditions. While
      for
      any given estimate or assumption made by our management there may be other
      estimates or assumptions that are reasonable, we believe that, given the current
      facts and circumstances, it is unlikely that applying any such other reasonable
      estimate or assumption would materially impact the financial statements. The
      accounting principles we utilized in preparing our consolidated financial
      statements conform in all material respects to generally accepted accounting
      principles in the United States of America.





***Use
      of estimates*** .
      In
      preparing financial statements in conformity with accounting principles
      generally accepted in the United States of America, management makes estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      disclosures of contingent assets and liabilities at the dates of the financial
      statements, as well as the reported amounts of revenues and expenses during
      the
      reporting periods. These accounts and estimates include, but are not limited
      to,
      the valuation of accounts receivable, inventories, deferred income taxes and
      the
      estimation on useful lives of plant and equipment. Actual results could differ
      from those estimates.





***Accounts
      receivable*** .
      Accounts receivable are stated at original amount less allowance made for
      doubtful receivables, if any, based on a review of all outstanding amounts
      at
      the period end. An allowance is also made when there is objective evidence
      that
      we will not be able to collect all amounts due according to original terms
      of
      receivables. Bad debts are written off when identified. We extend unsecured
      credit to customers in the normal course of business and believe all accounts
      receivable in excess of the allowances for doubtful receivables to be fully
      collectible. We do not accrue interest on trade accounts receivable.





***Revenue
      Recognition*** .
      We
      recognize revenue when the goods are delivered and the customer takes ownership
      and assumes risk of loss, collection of the relevant receivable is probable,
      persuasive evidence of an arrangement exists and the sales price is fixed or
      determinable. Sales of goods represent the invoiced value of goods, net of
      sales
      returns, trade discount and allowances.





We
      do not
      have arrangements for returns from customers and do not have any future
      obligations directly or indirectly related to product resales by the customer.
      We have no incentive programs.





***Inventories*** .
      Inventories are stated at the lower of cost or market value. Cost is determined
      on a weighted average basis and includes purchase costs, direct labor and
      factory overheads. In assessing the ultimate realization of inventories,
      management makes judgments as to future demand requirements compared to current
      or committed inventory levels. Our reserve requirements generally increase
      based
      on management’s projected demand requirements, and decrease due to market
      conditions and product life cycle changes. Our production process results in
      a
      minor amount of waste materials. We do not record a value for the waste in
      our
      cost accounting. We record proceeds on an as realized basis, when the waste
      is
      sold. We offset the proceeds from the sales of waste materials as a reduction
      of
      production costs.





***Income
      taxes*** .
      We use
      the asset and liability method of accounting for income taxes pursuant to SFAS
      No. 109, “Accounting for Income Taxes.” Under the asset and liability method,
      deferred tax assets and liabilities are recognized for the future tax
      consequences attributable to temporary differences between the financial
      statement carrying amounts of existing assets and liabilities and loss carry
      forwards and their respective tax bases. Deferred tax assets and liabilities
      are
      measured using enacted tax rates expected to apply to taxable income in the
      years in which those temporary differences are expected to be recovered or
      settled. Valuation allowances are established when necessary to reduce deferred
      tax assets to the amount expected to be realized. We have also adopted FIN
      48,
“Accounting for Uncertainty in Income Taxes - an interpretation of FASB
      Statement No. 109”.




31





***Foreign
      currency translation*** .
      Our
      functional currency is the Renminbi (“RMB”). We maintain our financial
      statements in the functional currency. Monetary assets and liabilities
      denominated in currencies other than the functional currency are translated
      into
      the functional currency at rates of exchange prevailing at the balance sheet
      dates. Transactions denominated in currencies other than the functional currency
      are translated into the functional currency at the exchange rates prevailing
      at
      the dates of the transaction. Exchange gains or losses arising from foreign
      currency transactions are included in the determination of net income for the
      respective periods.





For
      financial reporting purposes, our financial statements, which are prepared
      using
      the functional currency, are then translated into United States dollars. Assets
      and liabilities are translated at the exchange rates at the balance sheet dates
      and revenue and expenses are translated at the average exchange rates and
      stockholders’ equity is translated at historical exchange rates. Any translation
      adjustments resulting are not included in determining net income but are
      included in foreign exchange adjustment in other comprehensive income, a
      component of stockholders’ equity.




32





**Results
      of Operations**





The
      following table sets forth the consolidated statements of operations of the
      Company for the years ended December 31, 2007, 2006 and 2005 (U.S.
      dollars):





**Year
                Ended December 31,****2007**
            
            **2006**
            
            **2005*****(in
                thousands)***Net
                sales
            
            $
            73,262
            
            $
            44,376
            
            $
            25,010Cost
                of sales
            
            
            (63,791
            )
            
            (36,959
            )
            
            (20,757
            )Gross
                profit
            
            $
            9,470
            
            $
            7,417
            
            $
            4,253Depreciation
            
            
            (120
            )
            
            (80
            )
            
            (46
            )Selling
                and distributing costs
            
            
            (2,096
            )
            
            (1,634
            )
            
            (857
            )Administrative
                and other operating expenses
            
            
            (4,178
            )
            
            (2,160
            )
            
            (854
            )Income
                from operations
            
            $
            3,076
            
            $
            3,543
            
            $
            2,496Other
                income
            
            
            149
            
            
            59
            
            
            58Fees
                and costs related to reorganization
            
            
            (719
            )
            
            (75
            )
            
            -Interest
                expense
            
            
            (696
            )
            
            (254
            )
            
            (55
            )Income
                before taxes
            
            $
            1,809
            
            $
            3,273
            
            $
            2,499Income
                taxes
            
            
            (145
            )
            
            (240
            )
            
            (188
            )Net
                income
            
            $
            1,664
            
            $
            3,032
            
            $
            2,311Net
                income per common share - basic and diluted
            
            $
            0.11
            
            $
            0.20
            
            $
            0.16Weighted
                average common shares outstanding - basic and diluted
            
            
            15,731,988
            
            
            14,798,328
            
            
            14,798,328





**EBITDA**





In
      evaluating our business, we consider and use EBITDA, a financial measure not
      in
      accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), as
      a supplemental measure of our operating performance. We define EBITDA as net
      income (loss) before net interest expense, provision (benefit) for income taxes,
      and depreciation and amortization. We use EBITDA as a supplemental measure
      to
      review and assess our operating performance and to enhance comparability between
      periods. We also believe the use of EBITDA facilitates the use by investors
      of
      operating performance comparisons from period to period and company to company
      by backing out potential differences caused by variations in such items as
      the
      book amortization of intangible assets (affecting relative amortization
      expense), the age and book value of facilities and equipment (affecting relative
      depreciation expense), and capital structure (affecting relative interest
      expense). We also present EBITDA because we believe it is frequently used by
      securities analysts, investors and other interested parties as an alternate
      measure of financial performance. We reconcile EBITDA to net income (loss),
      the
      most comparable financial measure under U.S. GAAP.




33





We
      believe that EBITDA permits a comparative assessment of our operating
      performance, relative to our performance based on our U.S. GAAP results, while
      isolating the effects of interest, taxes, depreciation and amortization, which
      may vary from period to period without any correlation to underlying operating
      performance. We provide information relating to our EBITDA so that securities
      analysts, investors and other interested parties have the same data that we
      employ in assessing our overall operations. We believe that trends in our EBITDA
      are a valuable indicator of our operating performance and of our ability to
      produce operating cash flows to fund working capital needs, to service debt
      obligations and to fund capital expenditures.





The
      term
      EBITDA is not defined under U.S. GAAP, and is not a measure of operating income,
      operating performance or liquidity presented in accordance with U.S. GAAP.
      Our
      EBITDA has limitations as an analytical tool, and when assessing our operating
      performance, EBITDA
      should not be considered in isolation, or as a substitute for net income
      (loss) or other consolidated statement of operations data prepared in
      accordance with U.S. GAAP. Some of these limitations include, but are not
      limited to, the following:





·
            EBITDA
                (1) does not reflect our cash expenditures or future requirements for
                capital expenditures or contractual commitments; (2) does not reflect
                changes in, or cash requirements for, our working capital needs;
                (3) does not reflect the interest expense, or the cash requirements
                necessary to service interest or principal payments, on our debt;
                (4) does not reflect income taxes or the cash requirements for any
                tax payments; and (5) does not reflect all of the costs associated
                with operating our business;




·
            although
                depreciation and amortization are non-cash charges, the assets being
                depreciated and amortized often will have to be replaced in the future,
                andEBITDA
                does not reflect any cash requirements for such
                replacements;




·
            other
                companies may calculate EBITDA differently than we do, limiting its
                usefulness as a comparative
                measure.





We
      compensate for these limitations by relying primarily on our U.S. GAAP results
      and using EBITDA
      only supplementally. EBITDA
      is
      calculated as follows for the periods presented:





***Years
                Ended December 31******2007***
            
            ***2006***
            
            ***2005****$*
            
            *$*
            
            *$*Net
                income
            
            
            1,663,690
            
            
            3,032,327
            
            
            2,311,031Interest
                expense
            
            
            696,132
            
            
            253,617
            
            
            54,971Income
                taxes
            
            
            145,458
            
            
            240,487
            
            
            187,634Depreciation
            
            
            560,073
            
            
            343,841
            
            
            182,307Amortization
            
            
            -
            
            
            -
            
            
            -EBITDA
            
            
            3,065,353
            
            
            3,870,272
            
            
            2,735,943




The
      decrease in EBITDA for the year ended December 31, 2007 as compared to the
      year
      ended December 31, 2006 was due to the increased costs of nickel in 2007, which
      we could not pass along to our customers in terms of higher battery prices
      due
      to fixed-priced contracts.




34





**Years
      Ended December 31, 2007 and 2006**





Net
      sales
      for year ended December 31, 2007 were $73.3 million compared to $44.4 million
      for the year ended December 31, 2006, an increase of 65.1%. The increase in
      net
      sales for the year ended December 31, 2007 over the year ended December 31,
      2006
      was due to a 31% increase in the average selling price of our battery units
      and
      a 26% increase in the number of battery units sold, including $160,170 for
      the
      sale of scrap batteries during the year ended December 31, 2007. The 31%
      increase in the average selling price of our battery units was due to our
      agreement with our major customers in March 2007 to adjust the selling prices
      of
      our batteries in accordance with the market price of nickel. Prior to March
      2007, we fulfilled customer orders under fixed-price, long-term sales contracts
      under which the selling price of the batteries was determined according to
      nickel costs prior to the sharp increase in the cost of nickel which began
      at
      the end of fiscal 2006 and we were, therefore, unable to pass along the
      increased nickel costs on to our customers. However, after March 2007, we were
      able to adjust the sales price of our batteries based on the cost of nickel.
      The
      increase in the number of battery units sold in 2007 was primarily attributable
      to increased orders from our major customers, Energizer Battery Manufacturing,
      Inc. and Uniross Batteries (HK) Ltd.





Cost
      of
      sales consists of the cost of nickel and other materials. Costs of sales were
      $63.8 million for the year ended December 31, 2007 as compared to
      $37.0 million for the comparable period in 2006. As a percentage of net
      sales, cost of sales increased to 87.1% for the year ended December 31, 2007
      compared to 83.3% for the comparable period in 2006. This was attributable
      to a
      38% increase in the average per unit cost of goods sold during the year ended
      December 31, 2007 as compared to the comparable period in 2006, which resulted
      from a 61% increase in the average cost of nickel during the year ended December
      31, 2007 compared to the comparable period in 2006.





Gross
      profit for the year ended December 31, 2007 was $9.5 million, or 12.9% of net
      sales, compared to $7.4 million, or 16.7% of net sales, respectively, for
      the comparable period in 2006. Management considers gross profit to be a key
      performance indicator in managing our business. Gross profit margins are usually
      a factor of cost of sales, product mix and demand for product. The decrease
      in
      our gross profit margin for the year ended December 31, 2007 is primarily due
      to
      increases in the price of nickel which we did not pass along to our customers
      for a portion of 2007 due to our sales price commitments.





To
      cope
      with pressure on our gross margins we intend to control production costs by
      preparing budgets for each department and comparing actual costs with our
      budgeted figures monthly and quarterly. Additionally, we have reorganized the
      Company’s production structure and have focused more attention on employee
      training to enhance efficiency. We also intend to expand our market share by
      investing in greater promotion of our products in regions such as the U.S.,
      Russia, Europe and India, and by expanding our sales team with more experienced
      sales personnel. We also intend to start a line of Lithium Polymer batteries
      to
      complement our current Ni-MH battery products so that we are less vulnerable
      to
      price increases in nickel.




Selling
      and distribution costs were $2.1 million for the year ended December 31, 2007,
      respectively, compared to $1.6 million for the comparable period in 2006. The
      increase was due to the expansion of our market share, which increased 2%
      in terms of the worldwide market in volume and 1.5% in terms of worldwide market
      value in 2007 over 2006. Our market share increased due to our increased
      promotion of our products and our expansion of our team of sales
      representatives.




Administrative
      and other operating expenses were $4.2 million, or 5.7% of net sales, for the
      year ended December 31, 2007, compared to $2.2 million, or 4.9% of net
      sales, for the comparable period in 2006. Management considers these expenses
      as
      a percentage of net sales to be a key performance indicator in managing our
      business. The increase as a percentage of net sales was primarily due to the
      devaluation of the U.S. Dollar relative to the RMB over the period, which caused
      a 329% increase in exchange losses during the year ended December 31, 2007
      as
      compared to 2006, and an increase in labor costs. Devaluation costs increased
      $658,000 for 2007 compared to 2006. Labor costs increased $380,000 for year
      ended December 31, 2007 over the comparable period in 2006 due to the expansion
      of our technician and marketing team to expand our market share. We do not
      believe that administrative and other operation expenses as a percentage of
      net
      sales is trending upward because the increase as a percentage of net sales
      was
      primarily due to the sharp devaluation of the U.S. Dollar relative to the RMB
      over the periods which caused a 329% increase in exchange loss during fiscal
      2007 as compared to fiscal 2006. In 2008, to cope with devaluation of the U.S.
      Dollar relative to the RMB, we are engaging in currency hedging and adjusting
      the selling price of batteries to vary with the U.S. Dollar exchange rate
      relative to the RMB.




35





Interest
      expense was $696,000 for the year ended December 31, 2007, as compared to
      $254,000 for the respective comparable period in 2006. The increase was
      primarily due to higher borrowing levels. We increased our borrowings by $9.46
      million in the year ended December 31, 2007 as compared to the year ended
      December 31, 2006. Increases in borrowing rates would further increase our
      interest expense, which would have a negative effect on our results of
      operations.




During
      the year ended December 31, 2007, we recorded a provision for income taxes
      of
      $145,000, as compared to $240,000 for the respective comparable period in 2006.
      The decrease in taxes for the year ended December 31, 2007 from the year ended
      December 30, 2006 was a result of a decrease in our net income profit margin.




Net
      income for the year ended December 31, 2007 was $1.7 million, compared to a
      net
      income of $3.0 million for the comparable period in 2006.





**Years
      Ended December 31, 2006 and 2005**





Net
      sales
      for Fiscal 2006 were $44.4 million as compared to $25.0 million for
      Fiscal 2005, an increase of 78%. This increase was largely due to a 75.6%
      increase in the number of battery units sold, including an increase in the
      sales
      of scrap batteries of $356,478. We believe that this increase in net sales
      is a
      sustainable trend because worldwide demand for NiMH batteries is growing at
      a
      rate of 15% per year, excluding the market for hybrid electrical vehicle (“HEV”)
      batteries, according to a report by Avicenne Forecasts dated June 2007. With
      Japanese battery factories increasingly shifting their production to HEV
      batteries, we will be able to increase our market share for the sale of NiMH
      batteries.





Cost
      of
      sales for Fiscal 2006 was $37.0 million or 83.6% of net sales, as compared
      to
      $20.8 million for Fiscal 2005 or 83.0% of net sales. The increase in total
      dollars and as a percentage of net sales was attributable to higher costs
      associated with our products, principally due to the rising cost of nickel
      which
      began in late 2006.





Gross
      profit for Fiscal 2006 was $7.4 million, or 16.7% of net sales, compared to
      $4.3 million, or 17.0% of net sales for Fiscal 2005. The decrease in our
      gross profit margin for Fiscal 2006 is primarily due to an increase in the
      price
      of nickel that we were unable to pass along to customers in the form of higher
      prices charged for our battery products. During 2006 when the cost of nickel
      began to rise, we were unable to raise our battery prices to account for the
      increase in the cost of nickel because we sold our batteries under fixed-price
      agreement under which the prices were determined prior to the increase in the
      cost of nickel.





Administrative
      and other operating expenses were $2.2 million, or 4.9% of net sales, for Fiscal
      2006, as compared to $854,000 or 3.4% of net sales, for Fiscal 2005. The
      increase as a percentage of net sales was due to increased labor costs and
      research and development expenses and the increase expense level due to
      devaluation of the U.S. Dollar relative to the RMB over the period. Labor costs
      increased $240,000 for the year ended December 31, 2006 over the year ended
      December 31, 2005 due to the expansion of our workforce to expand production.
      Research and development expenses increased $320,000 for the year ended December
      31, 2006 over the year ended December 31, 2005 due to our increased commitment
      to advance our research and development activities.





Interest
      expense was $254,000 for Fiscal 2006 compared to $55,000 for Fiscal 2005. This
      increase is primarily attributable to higher borrowing levels to maintain
      adequate inventory. We increased our borrowings by $4.99 million during the
      year
      ended December 31, 2006 as compared to the year ended December 31,
      2005.




36





Other
      income from operations, which consists of bank interest income, exchange gains
      and losses and sundry income, was $59,000, for the year ended December 31,
      2006,
      as compared to $58,000 for the year ended December 31, 2005, an increase of
      0.01%. The increase was primarily due to an $8,000 increase in bank interest
      income and a $10,000 increase in sundry income, offset by a $17,000 decrease
      in
      net exchange gains.





During
      Fiscal 2006, we recorded a provision for income taxes of $240,000 compared
      to
      $188,000 for Fiscal 2005. The increase was the result of an increase in our
      net
      income.





Net
      income for Fiscal 2006 was $3.0 million, compared to net income of $2.3 million
      for Fiscal 2005.





**Liquidity
      and Capital Resources**





To
      provide liquidity and flexibility in funding our operations, we borrow amounts
      under bank facilities and other external sources of financing. As of December
      31, 2007, we had in place general banking facilities with five financial
      institutions aggregating $24.17 million. The maturity of these facilities
      is generally up to one year. The facilities are subject to annual review and
      approval. These banking facilities are guaranteed by us and some of our
      shareholders, including Dang Yu Pan, Wen Liang Li and Wen Wei Ma, and contain
      customary affirmative and negative covenants for secured credit facilities
      of
      this type. However, these covenants do not have any impact on our ability to
      undertake additional debt or equity financing. Interest rates are generally
      based on the banks’ reference lending rates. No significant commitment fees are
      required to be paid for the banking facilities. As of December 31, 2007, we
      had
      utilized approximately $15.41 million under such general credit facilities
      and
      had available unused credit facilities of $8.76 million.




On
      November 2, 2007, upon the closing of a private placement, we received gross
      proceeds of $3.12 million in a private placement transaction (the “Private
      Placement”). Pursuant to Subscription Agreements entered into with the
      investors, we sold an aggregate of 2,836,364 shares of Common Stock at $1.10
      per
      share. We agreed to file a registration statement covering the common stock
      sold
      in the Private Placement within 30 days of the closing of the Share Exchange
      pursuant to the subscription agreement with each investor. For its services
      in
      connection with the Share Exchange and as placement agent, the placement agent
      received an aggregate commission equal to 10% of the gross proceeds from the
      Private Placement, in addition to $30,000 in connection with the execution
      of
      the Exchange Agreement and a $40,000 success fee for the Share Exchange, for
      an
      aggregate amount fee of $382,000.





For
      the
      year ended December 31, 2007, net cash used in operating activities was
      approximately $1.5 million, as compared to $2.1 million for the comparable
      period in 2006. The decrease in net cash used by operating activities is
      primarily attributable to a decrease in inventory. For Fiscal 2006, net cash
      used in operating activities was $2.1 million as compared to net cash provided
      by operating activities of $852,000 for Fiscal 2005. The increase in net cash
      used in operating activities is primarily attributable to an increase in
      inventory.





Net
      cash
      used in investing activities was $4.9 million for the year ended
      December 31, 2007 compared to $1.7 million for the comparable period in
      2006. The increase of cash used in investing activities was primarily
      attributable to the acquisition of land equity in HuiZhou, and deposits paid
      for
      the acquisition of equipment. Net cash used in investing activities was $1.7
      million in Fiscal 2006 as compared to $839,000 for Fiscal 2005. The increase
      in
      net cash used in investing activities is primarily attributable to  the
      acquisition of plant and equipment. Net cash provided by financing activities
      was $5.9 million for the nine months ended September 30, 2007 as compared
      to $3.3 million for the comparable period in 2006. The increase in net cash
      provided by financing activities was attributable to an increase in bank
      borrowings of $2.6 million in 2007. Net cash provided by financing activities
      was approximately $3.8 million for Fiscal 2006 as compared to $149,000 for
      Fiscal 2005. The increase in net cash provided by financing activities is
      primarily attributable to an increase in bank borrowings of $5 million for
      Fiscal 2006.




For
      Fiscal 2007, 2006 and 2005, our inventory turnover was 4.25, 3.47 and 5.13
      times, respectively. The average days outstanding of our accounts receivable
      at
      December 31, 2007 were 60 days, as compared to 53 days at December 31, 2006.
      Inventory turnover and average days outstanding are key operating measures
      that
      management relies on to monitor our business.  In
      the
      next 12 months, we expect to expand our research, development and manufacturing
      of lithium-based batteries and anticipate additional capital expenditures of
      approximately $3 million.




37





We
      are
      required to contribute a portion of our employees’ total salaries to the Chinese
      government’s social insurance funds, including medical insurance, unemployment
      insurance and job injuries insurance, and a housing assistance fund, in
      accordance with relevant regulations. We expect these contributions will
      contribute to administrative and other operating expenses in an amount of
      approximately $30,000 per month based on the size of our current workforce.
      We
      expect the amount of our contribution to the government’s social insurance funds
      to increase in the future as we expand our workforce and
      operations.





Based
      upon our present plans, we believe that cash on hand, cash flow from operations
      and funds available under our bank facilities will be sufficient to fund our
      capital needs for the next 12 months. However, our ability to maintain
      sufficient liquidity depends partially on our ability to achieve anticipated
      levels of revenue, while continuing to control costs. If we did not have
      sufficient available cash, we would have to seek additional debt or equity
      financing through other external sources, which may not be available on
      acceptable terms, or at all. Failure to maintain financing arrangements on
      acceptable terms would have a material adverse effect on our business, results
      of operations and financial condition.





The
      use
      of working capital is primarily for the maintenance of our accounts receivable
      and inventory. We provide our major customers with payment terms ranging from
      30
      to 75 days. Additionally, our production lead time is approximately 30 to 40
      days, from the inspection of incoming materials, to production, testing and
      packaging. We need to keep a large supply of raw materials and work in process
      and finished goods inventory on hand to ensure timely delivery of our products
      to our customers. We use two methods to support our working capital needs:
      (1)
      paying our suppliers under payment terms ranging from 30 to 60 days; and (2)
      using short-term bank loans. We use our accounts receivable as collateral for
      our loans. Upon receiving payment for our accounts receivable, we pay our
      short-term loans. Our working capital management practices are designed to
      ensure that we maintain sufficient working capital.





**Guarantees
      of Bank Loans**





Dang
      Yu
      Pan, our Chairman and Chief Executive Officer, Wen Liang Li, our Vice President,
      Chief Technology Officer and director, and Wen Wei Ma, our Vice President of
      Manufacturing, each have provided personal guarantees under our outstanding
      banking facilities. The following table shows the amount outstanding on each
      of
      our bank loans as of December 31, 2007 and the identity of the officer(s) who
      guaranteed each loan.




Name
                of Bank
            
            Amount
              Granted
            
            Amount
              Outstanding
              Under
                Loan
            
            Guaranteed
              by
                OfficersDBS
                Bank (China) Limited
            
            $11.18
                million
            
            $5.03
                million
            
            Dang
                Yu Pan, Wen Liang Li, Wen Wei MaShenzhen
                Development Bank Co., Ltd
            
            $6.82
                million
            
            $5.17
                million
            
            Dang
                Yu PanShanghai
                Pudong Development Bank Co. Ltd.
            
            $3.9
                million
            
            $2.96
                million
            
            Dang
                Yu PanCitibank
                China Co., ltd.
            
            $2.0
                million
            
            $0.68
                million
            
            Dang
                Yu Pan, Wen Liang Li, Wen Wei Ma





Pursuant
      to the Letter of Undertaking related to the loan from DBS Bank (China) Limited,
      Mr. Pan, Mr. Li and Mr. Ma agreed to enter into a guarantee contract with the
      bank to guarantee all the outstanding debts of our subsidiary, Shenzhen
      Highpower, whether such debts are payments, obligations or liabilities already
      existing or contingent.




38





Pursuant
      to the guarantee agreement related to the loan with Shenzhen Development Bank
      Co., Ltd., Mr. Pan guaranteed all of the principal, interest, compound interest
      and penalty interest of all debts incurred by our subsidiary, Shenzhen
      Highpower, as well as expenses incurred by realization of creditor’s rights,
      which include notification costs, fees of service, survey fees, lawyer’s fees,
      legal costs, travel expenses, evaluation costs, auctioneer’s fees, attachment
      fees and enforcement charges. The guarantee is irrevocable and remains in effect
      until two years after the expiration of the credit extended pursuant to the
      loan
      agreement.





Pursuant
      to the guarantee agreement related to the loan with Shanghai Pudong Development
      Bank Co., Ltd., Mr. Pan guaranteed the principal, interests, damages,
      compensations, service charges and other fees arising out from the loan.
      Pursuant to the guarantee, Mr. Pan may not take certain actions without first
      obtaining the bank’s written consent, including: (a) selling, gifting, leasing,
      lending, transferring, mortgaging, pledging or otherwise disposing of, partially
      or fully, his substantial assets; (b) providing a guarantee for a third party,
      which materially and adversely influences his financial conditions or his
      capacity to perform its obligations under the guarantee; (c) declaring
      bankruptcy; or (d) executing any contract/agreement that substantially adversely
      influences his capacity to perform his obligations under the guarantee. Mr.
      Pan
      must also notify the bank upon the occurrence of certain events including (a)
      any event causing any of his representations or warranties to become untrue;
      (b)
      his involvement in an action or arbitration; (c) a change in his address or
      employment; or (d) a claim by other creditors for his bankruptcy. In the event
      of an enumerated event of default, the bank may declare accelerate repayment
      of
      the loan and require Mr. Pan to repay the loan in accordance with the guarantee
      or require our subsidiary, Shenzhen Highpower to supplement the security
      deposit. In addition, Mr. Pan will be liable for any damages to the bank in
      the
      event of the occurrence of an event of default.





Pursuant
      to the Letters of Guarantee related to the loan with Citibank China Co., Ltd.,
      each of the guarantors guaranteed to pay any or all of the outstanding debts,
      including principal, interest, charges, defaults interest, penalties, costs,
      expenditures, compensation, payments, and other expenses, due and payable by
      our
      subsidiary, Shenzhen Highpower. Each of the guarantors agreed not to claim,
      enforce or exercise any right of subrogation he may obtain under the guarantee.
      Additionally, each guarantor waived any right to act as a debtee or claim any
      rights to the assets of Shenzhen Highpower, or compete with the bank in the
      case
      of a bankruptcy or liquidation of Shenzhen Highpower. Each guarantor also agreed
      that should he fail to make a payment obligation under the guarantee when due
      and payable, the bank may set off such debts with any deposit or other assets
      held or controlled by the bank or with any amount owed by the bank to the
      guarantor. Pursuant to the guarantee, each of the guarantors agreed, unless
      otherwise agreed by the bank, so long as any debt remains unpaid to: (a) comply
      with all applicable laws and orders of any government authorities having
      jurisdiction; (b) pay all taxes and charges so as to not cause a lien, mortgage
      or any burden or rights on any of guarantor’s assets; (c) and sign any document
      reasonably requested by the bank. Also, the guarantors may not, without the
      bank’s prior written consent, undertake or guarantee any other obligation of any
      individual or entity or sell, lease or dispose of a material part of their
      assets. Each guarantor is jointly and severally liable for all debts with each
      other guarantor.





We
      did
      not and do not intend to pay any compensation to any of the guarantors for
      the
      guarantees.





**Contractual
      obligations**





This
      table summarizes our known contractual obligations and commercial commitments
      at
      December 31, 2007.





Payments
                due by periodTotal
            
            Less
                than 1 year
            
            1-3
                years
            
            3-5
                years
            
            More
                than 5 yearsCredit
                Facilities
            
            $
            15,410,542
            
            $
            15,410,542
            
            
            -
            
            
            -
            
            
            -Purchase
                Obligations (1)
            
            $
            19,561,118
            
            $
            19,561,118
            
            
            -
            
            
            -
            
            
            -License
                Agreement
            
            $
            1,327,026
            
            $
            1,327,026
            
            
            -
            
            
            -
            
            
            -Capital
                commitment
            
            $
            146,647
            
            $
            146,647**Total**
            
            $
            36,445,333
            
            $
            36,445,333
            
            
            -
            
            
            -
            
            
            -






(1)
            Primarily
                represents obligations to purchase specified quantities of raw
                materials.




39




**Inflation
      and Seasonality**




Inflation
      and seasonality have not had a significant impact on our operations during
      the
      last two fiscal years.





**Off-Balance
      Sheet Arrangements**





We
      do not
      have any off-balance sheet debt, nor do we have any transactions, arrangements
      or relationships with any special purpose entities.





**New
      Accounting Pronouncements**





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (“SFAS
      157”). SFAS 157 defines fair value, establishes a framework for measuring fair
      value, and expands disclosures about fair value measurements. SFAS 157 is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. Earlier
      application is encouraged, provided that the reporting entity has not yet issued
      financial statements for that fiscal year, including any financial statements
      for an interim period within that fiscal year. The provisions of this statement
      should be applied prospectively as of the beginning of the fiscal year in which
      this statement is initially applied, except in some circumstances where the
      statement shall be applied retrospectively. We are currently evaluating the
      effect, if any, of SFAS 157 on our financial statements. Management does not
      believe the adoption of SFAS 157 will have a material impact on the Company’s
      consolidated financial statements.





On
      February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities — Including an Amendment of SFAS No.
      115” (“SFAS 159”). The fair value option established by SFAS 159 permits all
      entities to choose to measure eligible items at fair value at specified election
      dates. A business entity will report unrealized gains and losses on items for
      which the fair value option has been elected in earnings (or another performance
      indicator if the business entity does not report earnings) at each subsequent
      reporting date. The fair value option: (a) may be applied instrument by
      instrument, with a few exceptions, such as investments otherwise accounted
      for
      by the equity method; (b) is irrevocable (unless a new election date occurs);
      and (c) is applied only to entire instruments and not to portions of
      instruments. SFAS 159 is effective as of the beginning of an entity’s first
      fiscal year that begins after November 15, 2007. Early adoption is permitted
      as
      of the beginning of the previous fiscal year provided that the entity makes
      that
      choice in the first 120 days of that fiscal year and also elects to apply the
      provisions of SFAS 157. We have not chosen to early adopt this statement.
      Management does not believe the adoption of SFAS 159 will have a material impact
      on the Company’s consolidated financial statements.




In
      December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
      141(R)”), which requires an acquirer to measure the identifiable assets
      acquired, the liabilities assumed, and any noncontrolling interest in the
      acquiree at their fair values on the acquisition date, with goodwill being
      the
      excess value over the net identifiable assets acquired. Acquisition-related
      costs, which are costs an acquirer incurs to effect a business combination,
      will
      be accounted for as expenses in the periods in which the costs are incurred
      and
      the services are received, except that costs to issue debt or equity securities
      will be recognized in accordance with other applicable GAAP. SFAS 141(R) is
      effective for financial statements issued for fiscal years beginning after
      December 15, 2008. Early adoption is prohibited.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements” (“SFAS 160”), which clarifies that a
      noncontrolling interest in a subsidiary should be reported as equity in the
      consolidated financial statements. The calculation of earnings per share will
      continue to be based on income amounts attributable to the parent. SFAS 160
      is
      effective for financial statements issued for fiscal years beginning after
      December 15, 2008. Early adoption is prohibited. Management does not believe
      that the adoption of the SFAS 160 will have a material impact on the company’s
      consolidated financial statements.




40





**Change
      in Accountants**





On
      November 2, 2007, we dismissed AJ. Robbins, PC (“AJ. Robbins”) as our
      independent registered public accounting firm following the change in control
      of
      our company on the closing of the Share Exchange. We engaged AJ. Robbins to
      audit our financial statements for the year ended December 31, 2006. The
      decision to change accountants was approved and ratified by our Board of
      Directors. The report of AJ. Robbins on the financial statements of our company
      for the fiscal year ended December 31, 2006 did not contain any adverse opinion
      or disclaimer of opinion and was not qualified or modified as to uncertainty,
      audit scope, or accounting principle, except for an explanatory paragraph
      relative to our ability to continue as a going concern. Additionally, during
      the
      Company’s two most recent fiscal years and any subsequent interim period, there
      were no disagreements with AJ Robbins on any matter of accounting principles
      or
      practices, financial statement disclosure, or auditing scope or
      procedure.





While
      AJ.
      Robbins was engaged by us, there were no disagreements with AJ. Robbins on
      any
      matter of accounting principles or practices, financial statement disclosure,
      or
      auditing scope or procedure with respect to our company, which disagreements
      if
      not resolved to the satisfaction of AJ. Robbins would have caused it to make
      reference to the subject matter of the disagreements in connection with its
      report on our financial statements for the fiscal year ended December 31, 2006.





We
      engaged Dominic K.F. Chan & Co. as our independent registered public
      accounting firm as of November 2, 2007. Dominic K.F. Chan & Co. has served
      as HKHT’s independent registered certified public accountants since October
      2006.




**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK** ****





*Credit
      Risk*





We
      are
      exposed to credit risk from our cash at bank, fixed deposits and contract
      receivables. The credit risk on cash at bank and fixed deposits is limited
      because the counterparts are recognized financial institutions. Contract
      receivables are subject to credit evaluations. We periodically record a
      provision for doubtful collections based on an evaluation of the collectibility
      of contract receivables by assessing, among other factors, the customer’s
      willingness or ability to pay, repayment history, general economic conditions
      and our ongoing relationship with the customers.





*Foreign
      Currency and Exchange Risk*





The
      Company maintains its financial statements in the functional currency of
      Renminbi (“RMB”). Substantially all of our operations are conducted in the PRC
      and we pay the majority of our expenses in RMB. Approximately 75% of our sales
      are made in U.S. Dollars. During the year ended December 31, 2007, the exchange
      rate of the RMB to the U.S. Dollar increased approximately 6.9% from the level
      at the end of December 31, 2006. This fluctuation resulted in a slight increase
      in our material costs during the year ended December 31, 2007. A future
      appreciation of the RMB against the U.S. Dollar would increase our costs when
      translated into U.S. Dollars and could adversely affect our margins unless
      we
      make sufficient offsetting sales. Conversion of RMB into foreign currencies
      is
      regulated by the People’s Bank of China through a unified floating exchange rate
      system. Although the PRC government has stated its intention to support the
      value of the RMB, there can be no assurance that such exchange rate will not
      continue to appreciate significantly against the U.S. Dollar. Exchange rate
      fluctuations may also affect the value, in U.S. Dollar terms, of our net assets.
      In addition, the RMB is not freely convertible into foreign currency and all
      foreign exchange transactions must take place through authorized institutions. Due
      to
      the volatility of the US Dollar to our functional currency the Company is
      putting into place in 2008 a hedging program to attempt to protect it from
      significant changes to the US Dollar which would affect the value of its US
      dollar receivables and sales. In late February 2008, the Company entered in
      a
      series of currency hedges totaling a notional amount $5,000,000 USD expiring
      from October 2008 to February 2009. The foreign currency forwards provide for
      potential losses to the Company if the dollar weakens below an average rate
      of
      6.5 RMB to the U.S. Dollar. The Company would have gains if the U.S. Dollar
      strengthens against the RMB. Settlement of the notional amounts will be made
      20%
      each month starting in October 2008 and ending in February 2009. The Company
      is
      determining the effectiveness of its hedges based on transactions in the first
      quarter of 2008 and intends to provide further information in its report for
      the
      first quarter of 2008.




41





*Country
      Risk*





The
      substantial portion of our business, assets and operations are located and
      conducted in Hong Kong and China. While these economies have experienced
      significant growth in the past twenty years, growth has been uneven, both
      geographically and among various sectors of the economy. The Chinese government
      has implemented various measures to encourage economic growth and guide the
      allocation of resources. Some of these measures benefit the overall economy
      of
      Hong Kong and China, but may also have a negative effect on us. For example,
      our
      operating results and financial condition may be adversely affected by
      government control over capital investments or changes in tax regulations
      applicable to us. If there are any changes in any policies by the Chinese
      government and our business is negatively affected as a result, then our
      financial results, including our ability to generate revenues and profits,
      will
      also be negatively affected.





**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**





The
      information required by this Item 8 is incorporated by reference to information
      begins on Page F-1 of this Form 10-K.


**ITEM
        9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE**


None.





**ITEM
      9A. CONTROLS AND PROCEDURES**





*(a)
      Evaluation of disclosure controls and procedures*




Disclosure
      controls and procedures are controls and other procedures that are designed
      to
      ensure that information required to be disclosed by us in the reports that
      we
      file or submit under the Exchange Act is recorded, processed, summarized and
      reported, within the time periods specified in the Securities and Exchange
      Commission's rules and forms. Disclosure controls and procedures include,
      without limitation, controls and procedures designed to ensure that information
      required to be disclosed by the Company in the reports that we file or submit
      under the Exchange Act is recorded, processed, summarized and reported within
      the time periods specified in the SEC’s rules and forms and that information
      required to be disclosed by us in the reports that we file or submit under
      the
      Exchange Act is accumulated and communicated to our management, including our
      principal executive and financial officers, as appropriate to allow timely
      decisions regarding required disclosure.





As
      of the
      end of the period covered by this Annual Report, we conducted an evaluation,
      under the supervision and with the participation of our Chief Executive Officer
      and Chief Financial Officer, of our disclosure controls and procedures (as
      defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon
      this evaluation, our Chief Executive Officer and Chief Financial Officer
      concluded that the Company’s disclosure controls and procedures are effective.





*(b)
      Management’s Report on Internal Control over Financial
      Reporting*





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting. Internal control over financial reporting,
      as
      defined in Exchange Act Rule 13a-15(f), is a process designed by, or under
      the
      supervision of, our principal executive and principal financial officers and
      effected by our Board of Directors, management and other personnel, to provide
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of financial statements for external purposes in accordance with
      generally accepted accounting principles and includes those policies and
      procedures that:




·
            Pertain
                to the maintenance of records that in reasonable detail accurately
                and
                fairly reflect the transactions and dispositions of our assets;




42




·
            Provide
                reasonable assurance that transactions are recorded as necessary
                to permit
                preparation of financial statements in accordance with generally
                accepted
                accounting principles, and that our receipts and expenditures are
                being
                made only in accordance with authorizations of our management and
                directors; and





·
            Provide
                reasonable assurance regarding prevention or timely detection of
                unauthorized acquisition, use of disposition of our assets that could
                have
                a material effect on the financial
                statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Projections of any evaluation of effectiveness
      to future periods are subject to the risk that controls may become inadequate
      because of changes in conditions, or that the degree of compliance with the
      policies or procedures may deteriorate. All internal control systems, no matter
      how well designed, have inherent limitations. Therefore, even those systems
      determined to be effective can provide only reasonable assurance with respect
      to
      financial statement preparation and presentation. Our
      management assessed the effectiveness of our internal control over financial
      reporting as of December 31, 2007. In making this assessment, our management
      used the criteria set forth by the Committee of Sponsoring Organizations of
      the
      Treadway Commission (COSO) in Internal Control-Integrated Framework. Based
      on
      this assessment, management believes that as of December 31, 2007, our internal
      control over financial reporting is effective based on those criteria.





This
      annual report does not include an attestation report of the Company’s registered
      public accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation by the Company’s registered
      public accounting firm pursuant to temporary rules of the Securities and
      Exchange Commission that permit the Company to provide only management’s report
      in this annual report.





*(c)
      Changes in internal control over financial reporting*




On
      November 2, 2007, we entered into a share exchange agreement with Hong Kong
      Highpower Technology Company Limited, a Hong Kong corporation (“HKHT”) and all
      of the shareholders of HKHT. Pursuant to the share exchange agreement (the
      “Exchange Agreement”), we agreed to issue an aggregate of 14,798,328 shares of
      our common stock in exchange for all of the issued and outstanding securities
      of
      HKHT (the “Share Exchange”). The Share Exchange closed on November 16, 2007.
      Following the Share Exchange, the sole business conducted by our company is
      the
      business conducted by HKHT prior to the Share Exchange, and certain of the
      officers and directors of HKHT became officers and directors of our company.
      Also, as a result of the Share Exchange, the internal control over financial
      reporting utilized by HKHT prior to the Share Exchange became the internal
      control over financial reporting of our company.




Based
      on
      the evaluation of our management as required by paragraph (d) of Rule 13a-15
      or
      15d-15 of the Exchange Act, we believe that, other than the changes described
      above, there were no changes in our internal control over financial reporting
      that occurred during our last fiscal quarter that have materially affected,
      or
      are reasonably likely to materially affect, our internal control over financial
      reporting.





**ITEM
      9B. OTHER INFORMATION**





None.




43





**PART
      III**


**ITEM
        10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
        GOVERNANCE**





The
      following individuals constitute our board of directors and executive
      management:





Name
            
            Age
            
            PositionDang
                Yu Pan
            
            39
            
            Chairman
                of the Board and Chief Executive OfficerWen
                Liang Li
            
            42
            
            Vice
                President, Chief Technology Officer and DirectorWen
                Wei Ma
            
            37
            
            Vice
                President of ManufacturingYu
                Zhi Qiu
            
            36
            
            Chief
                Financial OfficerWen
                Jia Xiao
            
            31
            
            Vice
                President of Quality ControlXinhai
                Li
            
            44
            
            DirectorChao
                Li
            
            63
            
            DirectorPing
                Li
            
            42
            
            Director





***Dang
      Yu Pan*** has been
      the Chairman of the Board and Chief Executive officer of HKHT since  July
      2003. Mr. Pan is the founder of Shenzhen Highpower and has served as the
      Chairman of the Board and Chief Executive Officer of Shenzhen Highpower since
      October 2002. From May 2001 to October 2002, Mr. Pan was the General Manager
      and
      Chairman of the Board of Guangzhou HaoPeng Technology Co., Ltd. From January
      1997 to July 2000, Mr. Pan was the Vice General Manager of Nanhai Shida Battery
      Co., Ltd. From January 1995 to December 1996, Mr. Pan served as a director
      of
      the HuangPu Aluminum Factory. Additionally, from August 1990 to December 1994,
      Mr. Pan worked in the sales department of the Guangzhou Aluminum Products
      Factory. Mr. Pan received a bachelor’s degree in metallurgical engineering from
      Central South University in China in 1990.





***Wen
      Liang Li*** has been
      a director of HKHT since July 2003. Since January 2003, Mr. Li. has served
      as a
      director and as Vice General Manager and Chief Technology Officer of Shenzhen
      Highpower . From
      January 1996 to December 2002, Mr. Li served as Vice General Manager of Zhuhai
      Taiyi Battery Co., Ltd., a battery manufacturer. Mr. Li received a master’s
      degree in Electrochemistry from the Harbin Institute of Technology in China
      in
      1991.





***Wen
      Wei Ma*** has been
      a director of HKHT since July 2003. Mr. Ma has served as a director and as
      a
      Vice General Manager of Manufacturing of Shenzhen Highpower since October 2002.
      Mr. Ma received a diploma in chymic analysis from the Guangzhou Trade School
      of
      Light Industry in China in 1989.





***Yu
      Zhi Qiu*** has
      served as the Chief Financial Officer of HKHT and Shenzhen Highpower since
      August 2005. Prior to joining HKHT and Shenzhen Highpower, Mr. Qiu served as
      the
      Deputy General Manager of Shenzhen FeiShang Industrial Development Co., Ltd.,
      an
      investment and holding company, from January 2005 to July 2005. From January
      2003 to December 2004, Mr. Qiu served as the Finance Controller of Shenzhen
      Shuangling Steel & Iron Co., Ltd., a supplier of steel and iron. From
      January 2001 to December 2002, Mr. Qiu was the Finance Controller of Neo-concept
      Fashion (Shenzhen ) Co., Ltd., a costume manufacturer. Mr. Qiu received a
      master’s degree in business administration from Xi’An Jiaotong University in
      China in 2001 and is a certified public accountant in the PRC and a Professional
      National Accountant in Australia.





***Jia
      Wei Xiao*** has
      served as Vice General Manager of Quality Control of Shenzhen Highpower since
      October 2005. From October 2002 to September 2005, Mr. Xhio served as the
      Minister of the Quality Control Department of Shenzhen Highpower. Mr. Xiao
      received a bachelor’s degree in Check Technology and Instrument in 2000 from the
      China Institute of Metrology.





***Xinhai
      Li*** has
      served as a director of the Company since January 2008. Sine August 1990, Mr.
      Li
      has served as a director and professor at the China Central South University
      Metallurgical Science and Engineering School in China. Mr. Li received a PhD
      in
      Physical Chemistry of Metallurgy from China Central South University in August
      1990.





***Chao
      Li*** has
      served as a director of the Company since January 2008. Since August 2000,
      Mr.
      Li has served as Chairman of the Guangdong Association of Productivity. From
      July 1991 to November 2004, Mr. Li served as the Vice-Chairman of the
      Development Research Center for the PRC Government of Guangdong Province. Mr.
      Li
      received a bachelor’s degree in metallurgy from Central South University in
      China in August 1969.




44





***Ping
      Li*** has
      served as a director of the Company since January 2008. Since July 2003, Mr.
      Li
      has served as the Managing Director of Investment at ChinaVest, a venture
      capital firm. From February 2002 to July 2003, Mr. Li served as Chief Financial
      Officer of Great Wall Technology Co., Ltd., an investment technology company.
      Mr. Li received a master’s degree in biology from Columbia University in 1989
      and an MBA in finance in 1994 from the Wharton School of the University of
      Pennsylvania.





**Family
      Relationships**





There
      are
      no family relationships among any of the officers and directors.





**The
      Board of Directors and Committees**





Subject
      to certain exceptions, under the listing standards of AMEX, a listed company’s
      board of directors must consist of a majority of independent directors.
      Currently, our board of directors has determined that each of the non-management
      directors, Xinhai Li, Chao Li and Ping Li, is an “independent” director as
      defined by the listing standards of AMEX currently in effect and approved by
      the
      U.S. Securities and Exchange Commission (“SEC”) and all applicable rules and
      regulations of the SEC. All members of the Audit, Compensation and Nominating
      Committees satisfy the “independence” standards applicable to members of each
      such committee. The board of directors made this affirmative determination
      regarding these directors’ independence based on discussion with the directors
      and on its review of the directors’ responses to a standard questionnaire
      regarding employment and compensation history; affiliations, family and other
      relationships; and transactions with the Company. The board of directors
      considered relationships and transactions between each director or any member
      of
      his immediate family and the Company and its subsidiaries and affiliates. The
      purpose of the board of director’s review with respect to each director was to
      determine whether any such relationships or transactions were inconsistent
      with
      a determination that the director is independent under the AMEX
      rules.





***Audit
      Committee***





We
      established our Audit Committee in January 2008. The Audit Committee consists
      of
      Xinhai Li, Chao Li and Ping Li, each of whom is an independent director. Mr.
      Ping Li, Chairman of the Audit Committee, is an “audit committee financial
      expert” as defined under Item 407(d) of Regulation S-K. The purpose of the Audit
      Committee is to represent and assist our board of directors in its general
      oversight of our accounting and financial reporting processes, audits of the
      financial statements and internal control and audit functions. The Audit
      Committee’s responsibilities include:





·
            The
                appointment, replacement, compensation, and oversight of work of
                the
                independent auditor, including resolution of disagreements between
                management and the independent auditor regarding financial reporting,
                for
                the purpose of preparing or issuing an audit report or performing
                other
                audit, review or attest services.





·
            Reviewing
                and discussing with management and the independent auditor various
                topics
                and events that may have significant financial impact on our company
                or
                that are the subject of discussions between management and the independent
                auditors.




The
      board
      of directors has adopted a written charter for the Audit Committee. A copy
      of
      the Audit Committee Charter is posted on the Company’s website at: *www.* *haopengbattery.com* .





***Compensation
      Committee***





We
      established our Compensation Committee in January 2008. The Compensation
      Committee consists of Xinhai
      Li
      and Chao Li ,
      each of
      whom is an independent director. Xinhai Li is the Chairman of the Compensation
      Committee. The Compensation Committee is responsible for the design, review,
      recommendation and approval of compensation arrangements for the Company’s
      directors, executive officers and key employees, and for the administration
      of
      our equity incentive plans, including the approval of grants under such plans
      to
      our employees, consultants and directors. The Compensation Committee also
      reviews and determines compensation of our executive officers, including our
      Chief Executive Officer. The board of directors has adopted a written charter
      for the Compensation Committee. A current copy of the Compensation Committee
      Charter is posted on the Company’s website at: *www.haopengbattery.com.*




45





***Nominating
      Committee***





The
      Nominating Committee consists of Xinhai Li and Chao Li, each of whom is an
      independent director. Chao Li is the Chairman of the Nominating Committee.
      The
      Nominating Committee assists in the selection of director nominees, approves
      director nominations to be presented for stockholder approval at our annual
      general meeting and fills any vacancies on our board of directors, considers
      any
      nominations of director candidates validly made by stockholders, and reviews
      and
      considers developments in corporate governance practices. The board of directors
      has adopted a written charter for the Nominating Committee. A current copy
      of
      the Nominating Committee Charter is posted on the Company’s website at: *www.haopengbattery.com.*





**Section
      16(a) Beneficial Ownership Reporting Compliance.**





The
      Company’s securities are currently registered under Section 12 of the Securities
      Exchange Act of 1934, as amended. As a result, and pursuant to Rule 16a-2,
      the
      Company’s directors and officers and holders of 10% or more of its common stock
      are currently required to file statements of beneficial ownership with regards
      to their ownership of equity securities under Sections 13 or 16 of the Exchange
      Act. The Company’s current officers, directors and beneficial holders of 10% or
      more of its equity securities became subject to such requirement and to date,
      based solely upon a review of Forms 3, 4 and 5 and any amendments thereto
      furnished to the Company during its most recent fiscal year, none of the
      Company’s officers or directors has failed to file on a timely basis, as
      disclosed in the above forms, reports required by Section 16(a) of the Exchange
      Act during the most recent fiscal year.





**Code
      of Ethics.**





The
      Company’s board of directors has adopted a Code of Business Conduct and Ethics,
      which applies to all directors, officers and employees. The purpose of the
      Code
      is to promote honest and ethical conduct. The Code is posted on the Company’s
      Web site located at *www.haopengbattery.com* ,
      and is
      available in print, without charge, upon written request to the Company at
      Hong
      Kong Highpower Technology, Inc., Building A1, Luoshan Industrial Zone, Shanxia,
      Pinghu, Longgang, Shenzhen, Guangdong, 518111, People’s Republic of China. The
      Company intends to post promptly any amendments to or waivers of the Code on
      its
      Web site.




**ITEM
      11. EXECUTIVE COMPENSATION**





**Compensation
      Discussion And Analysis**





Prior
      to
      the Share Exchange on November 2, 2007, we were a “blank check” shell company
      that was formed to investigate and acquire a target company or business seeking
      the perceived advantages of being a publicly held corporation.  The
      officers and directors of our company prior to the Share Exchange are no longer
      employed by or affiliated with our company.  Richard Rappaport and Anthony
      Pintsopoulos, our President and Chief Financial Officer, respectively, during
      2007 prior to Share Exchange, received no compensation or other perquisites
      for
      serving in such capacity.




Our
      Chief
      Executive Officer and Chairman of the Board, Dang Yu Pan, upon consulting with
      the board members and major stockholders of HKHT, determined the compensation
      for himself and our other current executive officers that was earned in fiscal
      2007. Our Board of Directors approved the compensation. Compensation for our
      current executive officers, which currently consists of Dang Yu Pan, Wen Liang
      Li, Wen Wei Ma, Yu Zhi Qiu and Wen Jia Xiao is determined with the goal of
      attracting and retaining high quality executive officers and encouraging them
      to
      work as effectively as possible on our behalf. Key areas of corporate
      performance taken into account in setting compensation policies and decisions
      are growth of sales, cost control, profitability, and innovation. The key
      factors may vary depending on which area of business on which a particular
      executive officer’s work is focused. Compensation is designed to reward
      executive officers for successfully meeting their individual functional
      objectives and for their contributions to our overall development. For these
      reasons, the elements of compensation of our executive officers are salary
      and
      bonus. Salary is paid to cover an appropriate level of living expenses for
      the
      executive officers and the bonus is paid to reward the executive officer for
      individual and company achievement.




46




We
      believe that the salaries paid to our executive officers during 2007 are
      indicative of the objectives of our compensation program and reflect the fair
      value of the services provided to our company, as measured by the local market
      in China.  We determine market rate by conducting a comparison with the
      local geographic area averages and industry averages in China.  In
      determining market rate, we review statistical data collected and reported
      by
      the Shenzhen City Labor Bureau which is published monthly. The statistical
      data
      provides the high, median, low and average compensation levels for various
      positions in various industry sectors. In particular, we use the data for the
      manufacturing sector as our benchmark to determine compensation levels because
      Shenzhen Highpower operates in Shenzhen city as a battery manufacturer. Our
      compensation levels are at roughly the 70 th percentile of the compensation spectrum for the manufacturing sector. Once
      we
      determine the overall compensation levels for our officers based on the
      benchmarks, we allocate a certain portion of the total compensation to salary,
      which is paid during the fiscal year, and allocate the remainder to bonus,
      which
      will be paid after the end of the fiscal year if corporate and individual
      performance goals are met. For our officers who are also board members, a
      certain portion of total compensation is also allocated to director fees.
      Corporate performance goals include sales targets, research and development
      targets, production yields, and equipment utilization. Individual performance
      goals include subjective evaluation, based on an employee’s team-work,
      creativity and management capability, and objective goals such as sales
      targets.





Our
      board
      of directors established a compensation committee in January 2008 comprised
      of
      non-employee directors. The compensation committee will perform, at least
      annually, a strategic review of the compensation program for our executive
      officers to determine whether it provides adequate incentives and motivation
      to
      our executive officers and whether it adequately compensates our executive
      officers relative to comparable officers in other companies with which we
      compete for executives. Those companies may or may not be public companies
      or
      companies located in the PRC or even, in all cases, companies in a similar
      business. Prior to the formation of the compensation committee, Mr. Pan
      determined the salaries and bonuses for himself and our executive officers,
      upon
      consultation with the board and our major stockholders. Beginning in 2008,
      our
      compensation committee will determine compensation levels for our executive
      officers. We have established a compensation program for executive officers
      for
      2008 that is designed to attract, as needed, individuals with the skills
      necessary for us achieve our business plan, to motivate those individuals,
      to
      reward those individuals fairly over time, and to retain those individuals
      who
      continue to perform at or above the levels that we expect.  For 2008,
      bonuses for executive officers will be based on company and individual
      performance factors, as described above. If we successfully complete our
      proposed listing on AMEX and offering in 2008, we may adjust our bonus
      evaluations upwards in 2008, but, in such case, we do not intend to increase
      it
      by more than 20%. That determination would likely be made towards the end of
      the
      fiscal year 2008.





In
      the
      past, officers owning a significant number of shares of our company’s stock have
      received less compensation than officers of our company who do not own a
      significant number of shares of our company’s stock, as is typical with
      companies based in the PRC. Our officers who owned a significant stake in our
      company accepted the capital appreciation of their stock in lieu of accepting
      higher compensation from the Company. Upon consulting with these officers,
      Mr.
      Pan set their compensation levels, as well as his own compensation level, below
      that of the benchmarks reported by the Shenzhen City Labor Bureau, which is
      why
      our Chief Financial Officer, Yu Zhi Qiu, received a higher salary than our
      Chief
      Executive Officer, Mr. Pan, in 2006. We are not certain whether we will continue
      to consider an officer’s stock ownership position in determining his or
      compensation if we successfully complete our proposed listing on AMEX and
      offering in 2008.





Currently,
      we have no specific plans to provide raises after we become a company with
      securities publicly traded in the United States.  Although no specific
      plans have yet been discussed, we may adopt such a plan to provide raises to
      our
      executive officers in the future.  Adopting higher compensation in the
      future may be based on the increased amount of responsibilities to be assumed
      by
      each of the executive officers after we become a publicly listed company. 
Executive compensation for 2008 will follow the same evaluation methods as
      were
      used for 2007. We may also expand the scope of our compensation, such as the
      possibility of granting options to executive officers and tying compensation
      to
      predetermined performance goals.




47





**Summary
      Compensation Table**




The
      following table sets forth information concerning the compensation for the
      fiscal years ended December 31, 2007 and 2006 of the principal executive
      officer, principal financial officer, in addition to our three most highly
      compensated officers whose annual compensation exceeded $100,000, and up to
      two
      additional individuals for whom disclosure would have been required but for
      the
      fact that the individual was not serving as an executive officer of the
      registrant at the end of the last fiscal year.





Name
                and Position
            
            Year
            
            Salary
            
            Bonus
            
            All
                other compensation (1)
            
            TotalDang
                Yu Pan
            
            
            2007
            
            $
            18,000
            
            $
            -
            
            
            25,000
            (2)
            
            43,000Chief
                Executive Officer and
            
            
            2006
            
            $
            9,000
            
            $
            -
            
            $
            24,000
            (2)
            $
            33,000Chairman
                of the BoardYu
                Zhi Qiu
            
            
            2007
            
            $
            15,000
            
            $
            16,000
            
            $
            -
            
            $
            31,000Chief
                Financial Officer
            
            
            2006
            
            $
            15,000
            
            $
            16,000
            
            $
            -
            
            $
            31,000Richard
                Rappaport(3)
            
            
            2007
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Former
                Chief Executive Officer
            
            
            2006
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -and
                Former DirectorAnthony
                Pintsopoulos (3)
            
            
            2007
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Form
                Chief Financial Officer
            
            
            2006
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -and
                Former Director







(1)
      Relates to automobile, housing and medical personal benefits.




(2)
      Includes $12,000 for fees earned or paid in cash for service as a director
      of
      HKHT.




(3)
      Messrs. Rappaport and Pintsopoulos resigned from all positions with our company
      upon the close of the Share Exchange on November 2, 2007.





**Grants
      of Plan-Based Awards in 2007**





There
      were no option grants in 2007.





**Outstanding
      Equity Awards at 2007 Fiscal Year End**





There
      were no option exercises or options outstanding in 2007





**Option
      Exercises and Stock Vested in Fiscal 2007**





There
      were no option exercises or stock vested in 2007.





**Pension
      Benefits**





There
      were no pension benefit plans in effect in 2007.





**Nonqualified
      defined contribution and other nonqualified deferred compensation
      plans**





There
      were no nonqualified defined contribution or other nonqualified deferred
      compensation plans in effect in 2007.





**Employment
      Agreements**





We
      have
      no employment agreements with any of our executive officers.




48





**Director
      Compensation**




The
      following table shows information regarding the compensation earned during
      the
      fiscal year ended December 31, 2007 by members of board of directors.
      Compensation information for Dang Yu Pan, our Chief Executive Officer and
      Chairman of the Board, is described in the summary compensation table
      above.





Name
            
            Fees
                Earned or Paid in Cash
              ($)
            
            Stock
                Awards
              ($)
            
            Option
              Awards
                ($)
            
            Non-Equity
                Incentive Plan Compensation ($)
            
            Change
                in Pension Value and Nonqualified Deferred Compensation Earnings
            
            All
                Other Compensation
              ($)
            
            Total
              ($)Wen
                Liang Li
            
            
            20,000
            (1)
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            20,000
            (1)




(1)
      Represents fees paid in cash for service on the board of HKHT.





We
      do not
      currently have an established policy to provide compensation to members of
      our
      Board of Directors for their services in that capacity. We intend to develop
      such a policy in the near future.





Dang
      Yu
      Pan and Wen Liang Li are management board members. We offer our management
      board
      members a total compensation package, which includes salary, bonus and director
      fees, based on benchmarks reported by Shenzhen Labor Bureau. Once we determine
      the total compensation for our management board members using the benchmarks,
      we
      allocate a portion of their total annual compensation to compensation for
      services rendered as board members. In the future, we expect to continue to
      allocate a portion of our management board members’ total annual compensation as
      compensation for their service as directors. We anticipate that director’s fees
      to our non-management directors will be in the range of $1,500 to $2,500 per
      month, which is comparable to fees paid to non-employee directors of other
      companies comparable in size, region and industry to our company.




**ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT** **AND RELATED STOCKHOLDER MATTERS**





Beneficial
      ownership is determined in accordance with the rules of the SEC. In computing
      the number of shares beneficially owned by a person and the percentage of
      ownership of that person, shares of common stock subject to options and warrants
      held by that person that are currently exercisable or become exercisable within
      60 days of March 30, 2008 are deemed outstanding even if they have not actually
      been exercised. Those shares, however, are not deemed outstanding for the
      purpose of computing the percentage ownership of any other person.





The
      following table sets forth as of April 11, 2008 certain information with respect
      to beneficial ownership of our common stock based on 20,478,090 issued and
      outstanding shares of common stock, by:





·
            Each
                person known to be the beneficial owner of 5% or more of the outstanding
                common stock of our company;





·
            Each
                executive officer;





·
            Each
                director; and





·
            All
                of the executive officers and directors as a
                group.





Unless
      otherwise indicated, the persons and entities named in the table have sole
      voting and sole investment power with respect to the shares set forth opposite
      the stockholder’s name, subject to community property laws, where applicable.
      Unless otherwise indicated, the address of each stockholder listed in the table
      is c/o Building A1, Luoshan Industrial Zone, Shanxia, Pinghu, Longgang,
      Shenzhen, Guangdong, 518111, People’s Republic of China.




49





**Name
                and Address**
              **of
                Beneficial Owner**
            
            **Title**
            
            **Amount
                and Nature of Beneficial Ownership**
            
            **Percent
                of Class*****Directors
                and Executive Officers***Dang
                Yu Pan
            
            Chief
              Executive Officer andChairman
              of the Board
            
            
            8,287,061
            (1)
            
            40.5
            %Wen
                Liang Li
            
            Vice
              President, Chief Technology Officer and Director
            
            
            3,255,632
            
            
            15.9
            %Wen
                Wei Ma
            
            Vice
              President of Manufacturing
            
            
            1,479,835
            
            
            7.2
            %Yu
                Zhi Qiu
            
            Chief
              Financial Officer
            
            
            306,325
            
            
            1.5
            %Wen
                Jia Xiao
            
            Vice
              President of Quality Control
            
            
            266,370
            
            
            1.3
            %Xinhai
                Li
            
            Director
            
            
            -
            
            
            -Chao
                Li
            
            Director
            
            
            -
            
            
            -Ping
                Li
            
            Director
            
            
            -
            
            
            -Officers
                and Directors as a Group (total of 8 persons)
            
            
            
            
            13,022,528
            (1)
            
            63.6
            %







(1)
            Includes
                (i) an aggregate of 2,219,747 shares over which Mr. Pan has voting
                power
                and the right to acquire ownership pursuant to a loan agreement dated
                February 5, 2007 between Mr. Pan and other shareholders, including
                Yu Zhi
                Qiu, Chief Financial Officer, who holds 306,325 shares and, Wen Jia
                Xiao,
                Vice President of Quality Control, who holds 266,370 shares, and
                (ii)
                591,933 shares held by a company that is 100% owned by Mr.
                Pan.





**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE**





**Hong
      Kong Highpower Technology Co., Ltd.**





Hong
      Kong
      Highpower Technology Co., Ltd. (“HKHT”) is a wholly-owned subsidiary of Hong
      Kong Highpower Technology, Inc., each which has interlocking executive and
      director positions with the other.





**Loans
      to** **Directors****,** **Officers****and Stockholders**





On
      July
      31, 2005 and July 2006, HKHT made advances to certain of its directors and
      executive officers, including Dang Yu Pan, Wen Liang Li and Ma Wen Wei. The
      total amounts advanced to Mr. Pan, Mr. Li and Mr. Wei were $373,398.44,
      $114,600.66 and $102,811.75, respectively. Mr. Pan, Mr. Li and Mr. Wei repaid
      the advances on September 30, 2007, prior to the closing of the Share
      Exchange.





**Share
      Exchange**





On
      November 2, 2007, we completed the Share Exchange pursuant to the share exchange
      agreement entered into with HKHT and all of the shareholders of HKHT. At the
      closing, HKHT became our wholly-owned subsidiary and 100% of the issued and
      outstanding securities of HKHT were exchanged for shares of our common stock.
      An
      aggregate of 14,798,328 shares of common stock were issued to these shareholders
      and/or their designees. The former shareholders of HKHT own 14,798,328 shares
      of
      our common stock, which is approximately 72.3% of our issued and outstanding
      stock. Prior to the closing of the Share Exchange and Private Placement, the
      shareholders of SRKP 11 agreed to the cancellation of an aggregate of 2,556,602
      shares held by them such that there were 2,843,398 shares of common stock
      outstanding immediately prior to the Share Exchange and Private Placement.
      Moreover, concurrent with the closing of the Share Exchange, our company’s board
      appointed Dang Yu Pan as Chairman of the Board and Chief Executive Officer
      and
      Yu Zhi Qiu as Chief Financial Officer.




50





**Private
      Placement**





The
      placement agent for the $3.12 million equity financing conducted by us on the
      close of the Share Exchange was Westpark Capital, Inc., which received a
      commission equal to 10% of the gross proceeds from the financing. Richard
      Rappaport, the President of SRKP 11 and one of its controlling stockholders
      prior to the Share Exchange, indirectly holds a 100% interest in the placement
      agent, a Financial Industry Regulatory Authority member. Anthony C.
      Pintsopoulos, an officer, director and significant shareholder of SRKP 11
      prior to the Share Exchange, is the Chief Financial Officer of the placement
      agent. Debbie Schwartzberg, one of SRKP 11’s controlling stockholders prior
      to the Share Exchange, is a noteholder of the parent company of the placement
      agent; her note entitles her to a 1.5% interest in the net profits of the parent
      company of the placement agent. Kevin DePrimio and Jason Stern, each employees
      of the placement agent, are also shareholders of SRKP 11. Each of Messrs.
      Rappaport and Pintsopoulos resigned from all of their executive and director
      positions with the Company upon the closing of the Share Exchange.





**Guarantee
      Agreements**





Dang
      Yu
      Pan, our Chairman and Chief Executive Officer, Wen Liang Li, our Vice President,
      Chief Technology Officer and director, and Wen Wei Ma, our Vice President of
      Manufacturing, each have provided personal guarantees under our outstanding
      banking facilities. The following table shows the amount outstanding on each
      of
      our bank loans as of December 31, 2007 and the identity of the officer(s) who
      guaranteed each loan.




Name
                of Bank
            
            Amount
                Granted
            
            Amount
              Outstanding
              Under
                Loan
            
            Guaranteed
                by OfficersDBS
                Bank (China) Limited
            
            $11.18
                million
            
            $5.03
                million
            
            Dang
                Yu Pan, Wen Liang Li, Wen Wei MaShenzhen
                Development Bank Co., Ltd
            
            $6.82
                million
            
            $5.17
                million
            
            Dang
                Yu PanShanghai
                Pudong Development Bank Co. Ltd.
            
            $3.9
                million
            
            $2.96
                million
            
            Dang
                Yu PanCitibank
                (China) Co., ltd.
            
            $2.0
                million
            
            $0.68
                million
            
            Dang
                Yu Pan, Wen Liang Li, Wen Wei Ma




**Policy
      for Approval of Related Party Transactions**





We
      do not
      currently have a formal related party approval policy for review and approval
      of
      transactions required to be disclosed pursuant to Item 404 (a) of Regulation
      S-K. We expect our board to adopt such a policy in the near future.





**Director
      Independence**





See
      Item
      10 “Directors, Officers and Corporation Governance” for a discussion of board
      member independence.




51




**ITEM
      14.** **PRINCIPAL
      ACCOUNTING FEES AND SERVICES.**





The
      following table presents fees, including reimbursements for expenses, for
      professional audit services rendered by Dominic K.F. Chan & Co. for the
      audits of the Company’s annual financial statements and interim reviews of the
      Company’s quarterly financial statements for the years ended December 31, 2007
      and December 31, 2006 and fees billed for other services rendered by Dominic
      K.F. Chan & Co. during those periods. The Company’s predecessor auditors,
      AJ. Robbins, PC, did not provide any services in relations with the audits
      of
      the accompanying audited financial statements for the years ended December
      31,
      2007 and 2006 and the reviews of the interim financial statements included
      in
      the notes of the financial statements. Accordingly, their fees for other
      services were not included.





Year
                ended December 31,2007
            
            2006Audit
                Fees(1)
            
            $
            67,000
            
            $
            85,000Audit-Related
                Fees
            
            
            -
            
            
            -Tax
                Fees
            
            
            -
            
            
            -All
                Other Fees
            
            
            -
            
            
            -Total
            
            $
            67,000
            
            $
            85,000





(1)
      These
      are fees for professional services performed by Dominic K.F. Chan & Co. for
      the audit of our annual financial statements, review of our quarterly reports,
      and review of our Registration Statement on Form S-1.





**Pre-Approval
      Policy**





The
      Audit
      Committee on an annual basis will review audit and non-audit services performed
      by the independent
      registered public accounting firm for
      such
      services. The audit committee pre-approves (i) auditing services (including
      those performed for purposes of providing comfort letters and statutory audits)
      and (ii) non-auditing services that exceed a de minimis standard established
      by
      the committee, which are rendered to the Company by its outside auditors
      (including fees).




52





**PART
      IV**





**ITEM
      15. EXHIBITS AND FINANCIAL STATEMENT** **SCHEDULES**





1.
            Financial
                Statements: See “Index to Consolidated Financial Statements” in Part II,
                Item 8 of this annual report on Form 10-K.





2.
            Financial
                Statement Schedule: Not applicable.





3.
            Exhibits:
                The exhibits listed in the accompanying “Index to Exhibits” are filed or
                incorporated by reference as part of this Form
                10-K.





53





**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized, in the City of Shenzhen, People’s
      Republic of China, on April 11, 2008.




**Hong
                Kong Highpower Technology, Inc.**(Registrant)Dated:
              April 11, 2008
            By:
            /s/
              Dang
              Yu PanDang
              Yu PanChief Executive Officer andChairman of the Board(Principal
              Executive Officer)




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the Company in the capacities
      and on the dates indicated.







**Signature**
            
            **Capacity**
            
            **Date**/s/
                Dang Yu Pan
            
            Chief
                Executive Officer and
            
            April
                11, 2008By:Dang
                Yu Pan
            
            Chairman
                of the Board(Principal
                Executive Officer)/s/
                Yu Zhi Qiu
            
            Chief
                Financial Officer
            
            April
                11, 2008By:
                Yu Zhi Qiu
            
            (Principal
                Financial and Accounting Officer)/s/
                Wen Liang Li
            
            Vice
                President,
            
            April
                11, 2008Wen
                Liang Li
            
            Chief Technology
              Officer and Director/s/
                Xinhai Li
            
            Director
            
            April
                11, 2008Xinhai
                Li/s/
                Chao Li
            
            Director
            
            April
                11, 2008Chao
                LiDirector
            
            April
                11, 2008Ping
                Li





54




**EXHIBIT
      INDEX**




Exhibit
                    Number
              
              Description2.1
              
              Share
                  Exchange Agreement, dated as of October 20, 2007, by and among
                  the
                  Registrant, Hong Kong Highpower Technology Company Limited and
                  all of the
                  shareholders of Hong Kong Highpower Technology Company Limited
                  (incorporated by reference to Exhibit 2.1 to the Registrant’s Current
                  Report on Form 8-K filed with the Securities and Exchange Commission
                  on
                  November 5, 2007).3.1
              
              Certificate
                  of Incorporation (incorporated by reference from Exhibit 3.1 to
                  the
                  Registration Statement on Form 10-SB (File No. 000-52103) filed
                  with the
                  Securities and Exchange Commission on July 5, 2006).3.2
              
              Bylaws
                  (incorporated by reference from Exhibit 3.2 to the Registration
                  Statement
                  on Form 10-SB (File No. 000-52103) filed with the Securities and
                  Exchange
                  Commission on July 5, 2006).3.3
              
              Articles
                  of Merger Effecting Name Change (incorporated by reference from
                  Exhibit
                  3.3 to the Current Report on Form 8-K filed with the Securities
                  and
                  Exchange Commission on November 5, 2007).10.1
              
              Form
                  of Subscription Agreement (incorporated by reference from Exhibit
                  10.1 to
                  the Current Report on Form 8-K filed with the Securities and Exchange
                  Commission on November 5, 2007).10.2*
              
              Amended
                  Consumer Battery License Agreement, amended as of August 8, 2007,
                  by and
                  between Shenzhen Highpower Technology Co., Ltd and Ovonic Battery
                  Company,
                  Inc.10.3
              
              State-owned
                  Land Use Rights Grant Contract No. 441302 - B - 112 dated as of
                  May 23,
                  2007, by and between the Land and Resources Bureau of Huizhou City,
                  Guangdong Province and Shenzhen Highpower Technology Co., Ltd.
                  (translated
                  to English) (incorporated by reference from Exhibit 10.4 to the
                  Current
                  Report on Form 8-K filed with the Securities and Exchange Commission
                  on
                  November 5, 2007).10.4
              
              Credit
                  Facility dated August 17, 2007 by and between DBS Bank (China)
                  Limited
                  Company Shenzhen Branch and Shenzhen Highpower Technology Co.,
                  Ltd.
                  (translated to English). (incorporated by reference from Exhibit
                  10.5 to
                  the Current Report on Form 8-K filed with the Securities and Exchange
                  Commission on November 5, 2007).10.4(a)
              
              Letter
                  of Undertaking executed by Dan Yu Pan, Wen Liang Li and Wen Wei
                  Ma on
                  behalf of Shenzhen Highpower Technology Company Limited to and
                  in favor of
                  DBS Bank (China) Limited Shenzhen Branch (translated to English)
                  (incorporated by reference from Exhibit 10.4(a) to Amendment No.
                  1 to the
                  Registration Statement on Form S-1/A filed with the Securities
                  and
                  Exchange Commission on January 28, 2008).10.5
              
              Commercial
                  Acceptance Bill Discount Quotation Agreement dated as of June 18,
                  2007 by
                  and between Shenzhen Development Bank Shenzhen Ai Guo Road Branch
                  and
                  Shenzhen Highpower Technology Co., Ltd. (translated to English)
                  (incorporated by reference from Exhibit 10.6 to the Current Report
                  on Form
                  8-K filed with the Securities and Exchange Commission on November
                  5,
                  2007).10.5(a)
              
              Guaranty
                  Contract for Maximum Credit Line dated as of June 18, 2007 by and
                  between
                  Dang Yu Pan and Shenzhen Development Bank Shenzhen Ai Guo Road
                  Branch
                  (translated to English) (incorporated by reference from Exhibit
                  10.5(a) to
                  Amendment No. 1 to the Registration Statement on Form S-1/A filed
                  with the
                  Securities and Exchange Commission on January 28,
                  2008).
  55
  10.6
              
              Facility
                  Quotation Agreement dated as of September 18, 2007 by and between
                  Shanghai
                  Pudong Development Bank Shenzhen Long Hua Branch and Shenzhen Highpower
                  Technology Co., Ltd. (translated to English) (incorporated by reference
                  from Exhibit 10.7 to the Current Report on Form 8-K filed with
                  the
                  Securities and Exchange Commission on November 5,
                  2007).10.6(a)
              
              Contract
                  for Guarantee of Maximum Line of Credit dated as of September 18,
                  2007 by
                  and between Dang Yu Pan and Shanghai Pudong Development Bank Shenzhen
                  Branch (translated to English) (incorporated by reference from
                  Exhibit
                  10.6(a) to Amendment No. 1 to the Registration Statement on Form
                  S-1/A
                  filed with the Securities and Exchange Commission on January 28,
                  2008).10.7
              
              Non-Undertaking
                  Short-Term Revolving Financing Agreement dated as of October 11,
                  2007 by
                  and between Citibank China Co., Ltd. (“Lender”) and Shenzhen Highpower
                  Technology Col, Ltd. and corresponding Letters of Guarantee between
                  Lender
                  and Dang Yu Pan, Wen Wei Ma and Wen Liang Li (translated to
                  English).16.1
              
              Letter
                  from AJ. Robbins, PC to the Securities and Exchange Commission
                  dated
                  November 2, 2007. (incorporated by reference to Exhibit 16.1 to
                  the
                  Current Report on Form 8-K filed with the Securities and Exchange
                  Commission on November 5, 2007).21.1
              
              List
                  of Subsidiaries (incorporated by reference from Exhibit 21.1 to
                  the
                  Current Report on Form 8-K filed with the Securities and Exchange
                  Commission on November 5, 2007).31.1
              
              Certification
                  of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation
                  S-K,
                  as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.31.2
              
              Certification
                  of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation
                  S-K,
                  as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.32.1**
              
              Certifications
                  of Chief Executive Officer and Chief Financial Officer pursuant
                  to 18
                  U.S.C. Section 1350 as adopted pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.
  
 *
              
              The
                  Registrant has applied with the Secretary of the Securities and
                  Exchange
                  Commission for confidential treatment of certain information pursuant
                  to
                  Rule 24b-2 of the Securities Exchange Act of 1934.  The Registrant
                  has filed separately with its application a copy of the exhibit
                  including
                  all confidential portions, which may be made available for public
                  inspection pending the Commission’s review of the application in
                  accordance with Rule 24b-2.**
              
              This
                  exhibit shall not be deemed "filed" for purposes of Section 18
                  of the
                  Securities Exchange Act of 1934 or otherwise subject to the liabilities
                  of
                  that section, nor shall it be deemed incorporated by reference
                  in any
                  filing under the Securities Act of 1933 or the Securities Exchange
                  Act of
                  1934, whether made before or after the date hereof and irrespective
                  of any
                  general incorporation language in any
                  filings.




56




**HONG
      KONG HIGHPOWER TECHNOLOGY, INC.**





**CONSOLIDATED
      FINANCIAL STATEMENTS**


**DECEMBER
      31, 2007, 2006 AND 2005**


PageReport
                  of Independent Registered Public Accounting Firm
              
              
              F-2Financial
                  Statements:Consolidated
                  Balance Sheets as of December 31, 2007 and 2006
              
              
              F-3Consolidated
                  Statements of Operations for the years endedDecember
                  31, 2007, 2006, and 2005
              
              
              F-5Consolidated
                  Statements of Stockholders' Equity for the years endedDecember
                  31, 2007, 2006 and 2005
              
              
              F-6Consolidated
                  Statements of Cash Flows for the years endedDecember
                  31, 2007, 2006 and 2005
              
              
              F-7Notes
                  to Consolidated Financial Statements
              
              
              F-8





F-1


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors and Stockholders of


Hong
      Kong
      Highpower Technology, Inc.





We
      have
      audited the accompanying consolidated balance sheets of Hong Kong Highpower
      Technology Inc. (the “Company”) and its subsidiaries (collectively referred to
      as the “Group”) as of December 31, 2007 and 2006, and the related statements of
      operations, stockholders’ equity and cash flows for the years ended December 31,
      2007, 2006 and 2005. These consolidated financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these consolidated financial statements based on our
      audits.





We
      conducted our audits 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 audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of the Company
      and
      its subsidiaries as of December 31, 2007 and 2006, and the consolidated results
      of their operations and their cash flows for the years ended December 31, 2007,
      2006 and 2005, in conformity with accounting principles generally accepted
      in
      the United States of America.





/s/
      Dominic K.F. Chan & Co.





Dominic
      K.F. Chan & Co


Certified
      Public Accountants


Hong
      Kong


17
      March,
      2008




F-2


HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





CONSOLIDATED
      BALANCE SHEETS


(Stated
      in US Dollars)





***At
                December 31,******2007***
            
            ***2006******$***
            
            ***$*****ASSETS**Current
                Assets :Cash
                and cash equivalents
            
            
            1,489,262
            
            
            488,070Restricted
                cash
            
            
            5,453,650
            
            
            1,010,580Accounts
                receivable
            
            
            15,906,175
            
            
            8,127,170Notes
                receivable
            
            
            386,482
            
            
            76,764Prepaid
                expenses and other receivables - Note 6
            
            
            2,501,796
            
            
            2,612,091Advance
                to related parties - Note 11
            
            
            -
            
            
            634,161Inventories-
                Note 7
            
            
            14,371,289
            
            
            15,623,791Prepaid
                lease payments
            
            
            58,570
            
            
            -Total
                Current Assets
            
            
            40,167,224
            
            
            28,572,627Deferred
                tax assets - Note 6
            
            
            28,277
            
            
            8,443Deposit
                paid for acquisition of machinery -Note 15
            
            
            1,115,123
            
            
            -Plant
                and equipment, net - Note 8
            
            
            3,789,382
            
            
            3,154,660Leasehold
                land - Note 9
            
            
            2,869,925
            
            
            -Intangible
                asset, net - Note 10
            
            
            950,000
            
            
            -**TOTAL
                ASSETS**
            
            
            48,919,931
            
            
            31,735,730**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****LIABILITIES**Current
                Liabilities :Accounts
                payable
            
            
            19,561,118
            
            
            17,327,402Other
                payables and accrued liabilities - Note 11
            
            
            2,320,956
            
            
            1,170,275Income
                taxes payable
            
            
            73,768
            
            
            122,710Bank
                borrowings - Note 13
            
            
            15,410,542
            
            
            5,950,626Total
                Current Liabilities
            
            
            37,366,384
            
            
            24,571,013


**COMMITMENTS
        AND CONTINGENCIES - Note 15**


(continued)




F-3




HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





CONSOLIDATED
      BALANCE SHEETS (continued)


(Stated
      in US Dollars)








***At
                December 31,******2007***
            
            ***2006******$***
            
            ***$*****STOCKHOLDERS’
                EQUITY**Preferred
                StockPar
                value: US$0.0001Authorized:
                10,000,000 sharesIssued
                and outstanding: none
            
            
            -
            
            
            -Common
                stockPar
                value : $0.0001Authorized:
                100,000,000 sharesIssued
                and outstanding: 2007 -20,478,090 shares (2006 -14,798,328
                shares)
            
            
            2,048
            
            
            1,480Additional
                paid-in capital
            
            
            2,765,102
            
            
            62,837Accumulated
                other comprehensive income
            
            
            1,157,872
            
            
            470,383Retained
                earnings
            
            
            7,628,525
            
            
            6,630,017**TOTAL
                STOCKHOLDERS’ EQUITY**
            
            
            11,553,547
            
            
            7,164,717**TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY**
            
            
            48,919,931
            
            
            31,735,730




See
      accompanying notes to consolidated financial statements.




F-4


HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND SUBSIDIARIES





CONSOLIDATED
      STATEMENTS OF OPERATIONS


(Stated
      in US Dollars)




***Years
                Ended December 31,******2007***
            
            ***2006***
            
            ***2005******$***
            
            ***$***
            
            ***$***Net
                sales
            
            
            73,261,720
            
            
            44,375,682
            
            
            25,010,030Cost
                of sales
            
            
            (63,791,248
            )
            
            (36,958,529
            )
            
            (20,757,320
            )Gross
                profit
            
            
            9,470,472
            
            
            7,417,153
            
            
            4,252,710Depreciation
            
            
            (120,517
            )
            
            (80,213
            )
            
            (46,209
            )Selling
                and distributing costs
            
            
            (2,095,594
            )
            
            (1,634,366
            )
            
            (856,526
            )Administrative
                and other operating expenses
            
            
            (4,178,468
            )
            
            (2,159,502
            )
            
            (854,246
            )Income
                from operations
            
            
            3,075,893
            
            
            3,543,072
            
            
            2,495,729Fees
                and costs related to reorganization
            
            
            (719,266
            )
            
            (75,229
            )
            
            -Other
                income - Note 3
            
            
            148,653
            
            
            58,588
            
            
            57,907Interest
                expense - Note 4
            
            
            (696,132
            )
            
            (253,617
            )
            
            (54,971
            )Income
                before taxes
            
            
            1,809,148
            
            
            3,272,814
            
            
            2,498,665Income
                taxes - Note 5
            
            
            (145,458
            )
            
            (240,487
            )
            
            (187,634
            )Net
                income
            
            
            1,663,690
            
            
            3,032,327
            
            
            2,311,031Net
                Income per share-
                Basic and diluted
            
            
            0.11
            
            
            0.20
            
            
            0.16Weighted
                average common shares outstanding-
                Basic and diluted
            
            
            15,731,988
            
            
            14,798,328
            
            
            14,798,328




See
      accompanying notes to consolidated financial statements




F-5


HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





CONSOLIDATED
      STATEMENT OF STOCKHOLDERS’ EQUITY


(Stated
      in US Dollars)





***Accumulated******Additional***
            
            ***other******Common
                stock***
            
            ***paid-in***
            
            ***comprehensive***
            
            ***Retained******Shares***
            
            ***Amount***
            
            ***capital***
            
            ***income***
            
            ***earnings***
            
            ***Total******$***
            
            ***$***
            
            ***$***
            
            ***$***
            
            ***$***
            
            ***$***Balance,
                January 1, 2005
            
            
            14,798,328
            
            
            1,480
            
            
            62,837
            
            
            43
            
            
            1,286,659
            
            
            1,351,019Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,311,031
            
            
            2,311,031Foreign
                currency translationadjustments
            
            
            -
            
            
            -
            
            
            -
            
            
            195,010
            
            
            -
            
            
            195,010Total
                comprehensive income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,506,041Balance,
                December 31, 2005
            
            
            14,798,328
            
            
            1,480
            
            
            62,837
            
            
            195,053
            
            
            3,597,690
            
            
            3,857,060Comprehensive
                incomeNet
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,032,327
            
            
            3,032,327Foreign
                currency translationadjustments
            
            
            -
            
            
            -
            
            
            -
            
            
            275,330
            
            
            -
            
            
            275,330Total
                comprehensive income
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            
            
            
            3,307,657Balance,
                December 31, 2006
            
            
            14,798,328
            
            
            1,480
            
            
            62,837
            
            
            470,383
            
            
            6,630,017
            
            
            7,164,717Shares
                Issued in connection with reverse merger
            
            
            2,834,398
            
            
            284
            
            
            (35,451
            )
            
            -
            
            
            -
            
            
            (35,167
            )Shares
                issued in private placement, net of offering cost of $382,000
            
            
            2,836,364
            
            
            284
            
            
            2,737,716
            
            
            -
            
            
            -
            
            
            2,738,000Comprehensive
                incomeNet
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,663,690
            
            
            1,663,690Foreign
                currency translationadjustments
            
            
            -
            
            
            -
            
            
            -
            
            
            687,489
            
            
            -
            
            
            687,489Total
                comprehensive income
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            
            
            
            2,351,179Dividends
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (665,182
            )
            
            (665,182
            )Balance,
                December 31, 2007
            
            
            20,478,090
            
            
            2,048
            
            
            2,765,102
            
            
            1,157,872
            
            
            7,628,525
            
            
            11,553,547




See
      accompanying notes to consolidated financial statements




F-6


HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC.  AND
      SUBSIDIARIES





CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(Stated
      in US Dollars)





***Years
                Ended December 31,******2007***
            
            ***2006***
            
            ***2005******$***
            
            ***$***
            
            ***$*****Cash
                flows from operating activities**Net
                income
            
            
            1,663,690
            
            
            3,032,327
            
            
            2,311,031Adjustments
                to reconcile net income to net cashprovided
                by (used in) operating activities :Bad
                debts written off
            
            
            3,649
            
            
            22,878
            
            
            9,645Depreciation
            
            
            560,073
            
            
            343,841
            
            
            182,307Amortization
                of intangible asset
            
            
            50,000
            
            
            -
            
            
            -Loss
                on disposal of plant and equipment
            
            
            20,046
            
            
            32,844
            
            
            5,261Changes
                in operating assets and liabilities :(Increase)
                decrease in -Accounts
                receivable
            
            
            (7,018,013
            )
            
            (3,155,007
            )
            
            (1,778,398
            )Notes
                receivable
            
            
            (309,829
            )
            
            620,101
            
            
            (511,456
            )Prepaid
                expenses and other receivables
            
            
            305,785
            
            
            (1,826,594
            )
            
            (313,424
            )Inventories
            
            
            2,183,344
            
            
            (9,556,898
            )
            
            (3,148,845
            )(Increase)
                decrease in -Accounts
                payable
            
            
            1,082,433
            
            
            8,387,286
            
            
            3,814,931Other
                payables and accrued liabilities
            
            
            78,974
            
            
            (32,771
            )
            
            154,267Income
                taxes payable
            
            
            (74,825
            )
            
            27
            
            
            126,803Net
                cash provided by (used in) operating activities
            
            
            (1,454,673
            )
            
            (2,132,020
            )
            
            852,122**Cash
                flows from investing activities**Acquisition
                of plant and equipment
            
            
            (1,030,725
            )
            
            (1,733,167
            )
            
            (849,768
            )Acquisition
                of land
            
            
            (2,832,348
            )
            
            -
            
            
            -Proceeds
                from disposal of plant and equipment
            
            
            32,976
            
            
            13,747
            
            
            11,186Deposit
                paid for acquisition of machinery
            
            
            (1,115,123
            )
            
            -
            
            
            -Net
                cash used in investing activities
            
            
            (4,945,220
            )
            
            (1,719,420
            )
            
            (838,582
            )**Cash
                flows from financing activities**Proceeds
                from issuance of common stock
            
            
            2,738,000
            
            
            -
            
            
            -Proceeds
                from new short-term bank loans
            
            
            2,374,241
            
            
            879,630
            
            
            977,681Repayment
                of short-term bank loans
            
            
            (923,316
            )
            
            (973,876
            )
            
            (274,973
            )Proceeds
                from/(repayment of) of other loans
            
            
            4,173,106
            
            
            -
            
            
            (85,547
            )Net
                advancement of other bank borrowings
            
            
            3,155,109
            
            
            4,955,996
            
            
            -Increase
                in restricted cash
            
            
            (4,234,327
            )
            
            (991,050
            )
            
            -Advance
                to related parties
            
            
            768,159
            
            
            (38,495
            )
            
            (468,151
            )Dividend
                paid
            
            
            (665,182
            )
            
            -
            
            
            -Net
                cash provided by financing activities
            
            
            7,385,790
            
            
            3,832,205
            
            
            149,010Net
                increase (decrease) in cash and cash equivalents
            
            
            985,897
            
            
            (19,235
            )
            
            162,550Effect
                of foreign currency translation on cash and cash
                equivalents
            
            
            15,295
            
            
            40,279
            
            
            5,968Cash
                and cash equivalents - beginning of year
            
            
            488,070
            
            
            467,026
            
            
            298,508Cash
                and cash equivalents - end of year
            
            
            1,489,262
            
            
            488,070
            
            
            467,026




See
      accompanying notes to consolidated financial statements.




F-7





HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





**1.**
            **Organization
                and Basis of Presentation**





SRKP
      11,
      Inc. (“SRKP 11”) was incorporated in the State of Delaware on January 3, 2006 to
      locate a suitable acquisition candidate to acquire.





On
      October 20, 2007, SRKP 11 entered into a share exchange agreement (the “Exchange
      Agreement”) with Hong Kong Highpower Technology Company Limited (“HKHTC”), which
      was incorporated in Hong Kong on July 4, 2003 under the Hong Kong Companies
      Ordinance. HKHTC was organized principally to engage in the manufacturing and
      trading of nickel metal hydride rechargeable batteries.





As
      used
      herein, the “Company” refers to SRKP 11 and its wholly-owned subsidiaries, HKHTC
      and Shenzhen Highpower Technology Co., Ltd., unless the context indicates
      otherwise.





Pursuant
      to the Exchange Agreement, SRKP 11 agreed to issue shares of its common stock
      in
      exchange for all of the issued and outstanding securities of HKHTC. On November
      2, 2007, upon the closing of the Exchange Agreement, SRKP 11 issued an aggregate
      of 14,798,328 shares of its common stock to the shareholders of HKHTC in
      exchange for all of the issued and outstanding securities of HKHTC. The
      14,798,328 shares of common stock issued to the shareholders of HKHTC in
      conjunction with this transaction have been presented as outstanding for all
      periods presented. In addition, immediately prior to the closing of the Exchange
      Agreement, SRKP 11 and certain of its stockholders agreed to cancel an aggregate
      of 2,556,602 shares of outstanding common stock, as a result of which there
      were
      2,843,398 shares of common stock outstanding immediately prior to the share
      exchange transaction.





On
      November 2, 2007, concurrently with the close of the Exchange Agreement, the
      Company received gross proceeds of $3,120,000 in a private placement transaction
      (the “Private Placement”). Pursuant to subscription agreements entered into with
      the investors, the Company sold an aggregate of 2,836,364 shares of common
      stock
      at $1.10 per share. The investors in the Private Placement also entered into
      lock-up agreements pursuant to which they agreed not to sell their shares until
      90 days after the Company’s common stock is listed or quoted on either the New
      York Stock Exchange, American Stock Exchange, NASDAQ Global Market, NASDAQ
      Capital Market or the OTC Bulletin Board, when one-tenth of their shares are
      released from the lock-up agreement, after which their shares will automatically
      be released from the lock-up agreement on a monthly basis pro rata over a
      nine-month period. After commissions and expenses, the Company received net
      proceeds of approximately $2,738,000 from the Private Placement.




F-8


HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





**1.**
            **Organization
                and Basis of Presentation
                (continued)**





Immediately
      after the closing of the Exchange Agreement and Private Placement, the Company
      had 20,478,090 shares of common stock issued and outstanding. Upon the closing
      of the Exchange Agreement, the shareholders of HKHTC and their designees owned
      approximately 72.3% of the Company’s issued and outstanding common stock, the
      pre-existing shareholders of the Company owned approximately 13.9% of the
      Company’s issued and outstanding common stock, and the investors in the Private
      Placement owned 13.8% of the Company’s issued and outstanding common stock.
      Therefore, although HKHTC became the Company’s wholly-owned subsidiary, the
      transaction was accounted for as a recapitalization in the form of a reverse
      merger of HKHTC, whereby HKHTC was deemed to be the accounting acquirer and
      was
      deemed to have retroactively adopted the capital structure of SRKP 11. Since
      the
      transaction was accounted for as a reverse merger, the accompanying consolidated
      financial statements reflect the historical consolidated financial statements
      of
      HKHTC for all periods presented, and do not include the historical financial
      statements of SRKP 11. All costs associated with the reverse merger transaction
      were expensed as incurred.





In
      December 2005, HKHTC underwent a group reorganization (the “Reorganization”),
      which was approved by authorized institutions, pursuant to which it acquired
      all
      of the outstanding common stock of Shenzhen Highpower Technology Co., Ltd.
      (“SZ
      Highpower”) from its then existing stockholders, Pan Dangyu, Li Kai Man, Li
      Wenliang and Ma Wenwei (the “Stockholders”). SZ Highpower was incorporated on
      October 8, 2002 in the People’s Republic of China.





The
      above-mentioned Stockholders were the common stockholders for both HKHTC and
      SZ
      Highpower. The acquisition was financed by a short-term loan bearing interest
      of
      $75,229 (equivalent to HK$584,000), which was charged to operations. The
      transaction was accounted for as a corporate reorganization of entities under
      common control.





As
      a
      result of the Reorganization in 2005, SZ Highpower became the wholly-owned
      subsidiary of HKHTC and became its main operating business.





**2.**
            **Summary
                of significant accounting
                policies**





Basis
      of presentation





The
      accompanying consolidated financial statements of the Company have been prepared
      in accordance with generally accepted accounting principles in the United States
      of America.





Consolidation





The
      consolidated financial statements include the accounts of the Company and its
      subsidiaries. Intercompany accounts and transactions have been eliminated in
      consolidation.




F-9




HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





**2.**
            **Summary
                of significant accounting policies
                (continued)**





Use
      of
      estimates





In
      preparing financial statements in conformity with accounting principles
      generally accepted in the United States of America, management makes estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      disclosures of contingent assets and liabilities at the dates of the financial
      statements, as well as the reported amounts of revenues and expenses during
      the
      reporting periods. These accounts and estimates include, but are not limited
      to,
      the valuation of accounts receivable, inventories, deferred income taxes and
      the
      estimation on useful lives of plant and equipment. Actual results could differ
      from those estimates.




Comparative
      amounts





Certain
      comparative amounts have been reclassified to conform to the current period’s
      presentation. These reclassifications had no effect on reported total assets,
      liabilities, stockholders’ equity or net income.





Economic
      and political risks





The
      Company’s operations are conducted in the People’s Republic of China (the
“PRC”). Accordingly, the Company’s business, financial condition and results of
      operations may be influenced by the political, economic and legal environment
      in
      the PRC and by the general state of the PRC economy.





The
      Company’s operations in the PRC are subject to special considerations and
      significant risks not typically associated with companies in North America
      and
      Western Europe. These include risks associated with, among others, the
      political, economic and legal environment and foreign currency exchange. The
      Company’s results may be adversely affected by changes in the political and
      social conditions in the PRC and by changes in governmental policies with
      respect to laws and regulations, anti-inflationary measures, currency
      conversion, remittances abroad and rates and methods of taxation, among other
      things.





Concentrations
      of credit risk





Financial
      instruments that potentially subject the Company to significant concentrations
      of credit risk consist principally of accounts receivable. The Company extends
      credit based on an evaluation of the customer’s financial condition, generally
      without requiring collateral or other security. In
      order
      to minimize the credit risk, the management of the Company has delegated a
      team
      responsible for determining credit limits, credit approvals and other monitoring
      procedures to ensure that follow-up action is taken to recover overdue
      debts. Further, the
      Company reviews the recoverable amount of each individual trade debt at each
      balance sheet date to ensure that adequate impairment losses are made for
      irrecoverable amounts. In this regard, the directors of the Company consider
      that the Company’s credit risk is significantly reduced. Other
      than set forth below, no customers represented 10% or more of the Company’s net
      sales and accounts receivable.




F-10


HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





**2**
            **Summary
                of significant accounting policies
                (continued)**





Concentrations
      of credit risk (continued)





In
      2007,
      the Company had two major customers, one representing 24% of sales and the
      other
      17% of sales; accounts receivable from these customers at December 31, 2007
      was
      $8,300,000. There were no customers representing 10% or more in sales in 2006.
      One customer represented 12.5% of sales in 2005 and $1,900,000 of accounts
      receivable at December 31, 2005.





Cash
      and cash equivalents





Cash
      and
      cash equivalents include all cash, deposits in banks and other liquid
      investments with initial maturities of three months or less.





Restricted
      cash





Certain
      cash balances are held as security for short-term bank borrowings and are
      classified as restricted cash in the Company’s balance sheets.





Accounts
      receivable





Accounts
      receivable are stated at the original amount less an allowance made for doubtful
      receivables, if any, based on a review of all outstanding amounts at period
      end.
      An allowance is also made when there is objective evidence that the Company
      will
      not be able to collect all amounts due according to the original terms of
      receivables. Bad debts are written off when identified. The Company extends
      unsecured credit to customers in the normal course of business and believes
      all
      accounts receivable in excess of the allowances for doubtful receivables to
      be
      fully collectible. The Company does not accrue interest on trade accounts
      receivable.





During
      the years ended December 31, 2007, 2006 and 2005, the Company experienced bad
      debts of $27,664, $22,878 and $9,645, respectively.





Inventories





Inventories
      are stated at the lower of cost or market value. Cost is determined on a
      weighted average basis and includes purchase costs, direct labor and factory
      overheads. There are no significant freight charges, inspection costs and
      warehousing costs incurred for any of the periods presented. In assessing the
      ultimate realization of inventories, management makes judgments as to future
      demand requirements compared to current or committed inventory levels. The
      Company’s reserve requirements generally increase based on management’s
      projected demand requirements, and decrease due to market conditions and product
      life cycle changes. During the years ended December 31, 2007, 2006 and 2005,
      the
      Company did not make any allowance for slow-moving or defective inventories.
      The
      Company’s production process results in a minor amount of waste materials. The
      Company does not record a value for the waste in its cost accounting. The
      Company records proceeds on an as realized basis, when the waste is sold. The
      Company has offset the proceeds from the sales of waste materials as a reduction
      of production costs. Proceeds from the sales of waste materials were
      approximately $160,000 in 2007, $99,000 in 2006 and $73,000 in 2005. Generally,
      waste materials on hand at the end of a year are nominal.




F-11


HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





**2.**
            **Summary
                of significant accounting policies
                (continued)**





Plant
      and equipment





Plant
      and
      equipment are stated at cost less accumulated depreciation. Cost represents
      the
      purchase price of the asset and other costs incurred to bring the asset into
      its
      existing use. Maintenance, repairs and betterments, including replacement of
      minor items, are charged to expense; major additions to physical properties
      are
      capitalized.





Depreciation
      of plant and equipment is provided using the straight-line method over their
      estimated useful lives at the following annual rates:





Furniture,
                fixtures and office equipment
            
            
            20
            %Leasehold
                improvement
            
            
            50
            %Machinery
                and equipment
            
            
            10
            %Motor
                vehicles
            
            
            20
            %





Upon
      sale
      or disposition, the applicable amounts of asset cost and accumulated
      depreciation are removed from the accounts and the net amount less proceeds
      from
      disposal is charged or credited to income.





Intangible
      Assets and Long-Lived Assets





SFAS
      No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), requires
      purchased intangible assets other than goodwill to be amortized over their
      useful lives unless these lives are determined to be indefinite. 
Accordingly, the consumer battery license is being amortized over its useful
      life of 20 years.  The Company does not have any goodwill.





The
      Company accounts for the impairment of long-lived assets, such as plant and
      equipment, leasehold land and intangible assets, under the provisions of SFAS
      No. 144, “Accounting for the Impairment of Long-Lived Assets”
(“SFAS 144”).  SFAS 144 establishes the accounting for impairment of
      long-lived tangible and intangible assets other than goodwill and for the
      disposal of a business.  Pursuant to SFAS 144, the Company periodically
      evaluates, at least annually, whether facts or circumstances indicate that
      the
      carrying value of its depreciable assets to be held and used may not be
      recoverable.  If such circumstances are determined to exist, an estimate of
      undiscounted future cash flows produced by the long-lived asset, or the
      appropriate grouping of assets, is compared to the carrying value to determine
      whether impairment exists.  In the event that the carrying amount of
      long-lived assets exceeds the undiscounted future cash flows, then the carrying
      amount of such assets is adjusted to their fair value.  The Company reports
      an impairment cost as a charge to operations at the time it is
      recognized.





There
      was
      no impairment of long-lived assets in 2005, 2006 or 2007.




F-12




HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





**2.**
            **Summary
                of significant accounting policies
                (continued)**





Revenue
      recognition





The
      Company recognizes revenue when the goods are delivered and the customer takes
      ownership and assumes risk of loss, collection of the relevant receivable is
      probable, persuasive evidence of an arrangement exists and the sales price
      is
      fixed or determinable. Sales of goods represent the invoiced value of goods,
      net
      of sales returns, trade and allowances.





The
      Company does not have arrangements for returns from customers and does not
      have
      any future obligations directly or indirectly related to product resales by
      the
      customer. The Company has no incentive programs.





Advertising
      and promotion expenses





Advertising
      and promotion expenses are charged to expense as incurred.





Advertising
      and promotion expenses amounted to $68,169, $96,045 and $117,191 for the years
      ended December 31, 2007, 2006 and 2005, respectively, and are included in
      selling and distributing costs.





Income
      taxes





The
      Company uses the asset and liability method of accounting for income taxes
      pursuant to SFAS No. 109, “Accounting for Income Taxes”. Under the asset and
      liability method, deferred tax assets and liabilities are recognized for the
      future tax consequences attributable to temporary differences between the
      financial statement carrying amounts of existing assets and liabilities and
      loss
      carry forwards and their respective tax bases. Deferred tax assets and
      liabilities are measured using enacted tax rates expected to apply to taxable
      income in the years in which those temporary differences are expected to be
      recovered or settled. Valuation allowances are established when necessary to
      reduce deferred tax assets to the amount expected to be realized.  The
      Company has also adopted FIN 48, “Accounting for Uncertainty in Income Taxes -
      an interpretation of FASB Statement No. 109”.





Comprehensive
      income





The
      Company has adopted SFAS No. 130, “Reporting Comprehensive Income”, which
      establishes standards for reporting and display of comprehensive income, its
      components and accumulated balances. Accumulated other comprehensive income
      represents the accumulated balance of foreign currency translation adjustments
      of the Company.




F-13




HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





**2.**
            **Summary
                of significant accounting policies
                (continued)**





Foreign
      currency translation





The
      functional currency of the Company is the Renminbi (“RMB”). The Company
      maintains its financial statements in the functional currency. Monetary assets
      and liabilities denominated in currencies other than the functional currency
      are
      translated into the functional currency at rates of exchange prevailing at
      the
      balance sheet dates. Transactions denominated in currencies other than the
      functional currency are translated into the functional currency at the exchange
      rates prevailing at the dates of the transaction. Exchange gains or losses
      arising from foreign currency transactions are included in the determination
      of
      net income for the respective year.





For
      financial reporting purposes, the financial statements of the Company, which
      are
      prepared using the functional currency, are then translated into United States
      dollars. Assets and liabilities are translated at the exchange rates at the
      balance sheet dates and revenue and expenses are translated at the average
      exchange rates and stockholders’ equity is translated at historical exchange
      rates. Any translation adjustments resulting are not included in determining
      net
      income but are included in foreign exchange adjustment in other comprehensive
      income, a component of stockholders’ equity.





2007
            
            2006
            
            2005Year
                end RMB : US$ exchange rate
            
            
            7.332
            
            
            7.804
            
            
            8.070Average
                yearly RMB : US$ exchange rate
            
            
            7.581
            
            
            7.958
            
            
            8.183





The
      RMB
      is not freely convertible into foreign currency and all foreign exchange
      transactions must take place through authorized institutions.  No
      representation is made that RMB amounts could have been, or could be, converted
      into US$ at rates used in translation.





Fair
      value of financial instruments





The
      carrying values of the Company’s financial instruments, including cash and cash
      equivalents, restricted cash, trade and other receivables, deposits, trade
      and
      other payables, approximate their fair values due to the short-term maturity
      of
      such instruments. The
      carrying amounts of borrowings approximate their fair values because the
      applicable interest rates approximate current market rates.





The
      Company is exposed to certain foreign currency risk from export sales
      transactions and the related accounts receivable as they will affect the future
      operating results of the Company. The Company did not have any hedging
      activities during the reporting periods.




F-14




HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





**2.**
            **Summary
                of significant accounting policies
                (continued)**





Earnings
      per share





The
      Company reports earnings per share in accordance with SFAS No. 128, “Earnings
      Per Share”. Basic earnings per share is computed using the weighted average
      number of common shares outstanding during the periods presented. The weighted
      average number of shares represents the common stock outstanding during the
      years, as adjusted retroactively to reflect the November 2007 recapitalization
      as described at Note 1. As the Company did not have any common stock equivalents
      during such years, basic and diluted earnings per share were the same for all
      periods presented.





Recent
      accounting pronouncements





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 157, “Fair Value Measurement” (“SFAS 157”). SFAS 157 defines fair value,
      establishes a framework for measuring fair value, and expands disclosures about
      fair value measurements. SFAS 157 is effective for financial statements issued
      for fiscal years beginning after November 15, 2007, and interim periods within
      those fiscal years. Earlier application is encouraged, provided that the
      reporting entity has not yet issued financial statements for that fiscal year,
      including any financial statements for an interim period within that fiscal
      year. The provisions of this statement should be applied prospectively as of
      the
      beginning of the fiscal year in which this statement is initially applied,
      except in some circumstances where the statement shall be applied
      retrospectively. The Company is currently evaluating the effect, if any, of
      SFAS
      157 on its financial statements. Management does not believe the adoption of
      SFAS 157 will have a material impact on the Company’s consolidated financial
      statements.





On
      February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities — Including an Amendment of
      SFAS No. 115” (“SFAS 159”). The fair value option established by SFAS 159
      permits all entities to choose to measure eligible items at fair value at
      specified election dates. A business entity will report unrealized gains and
      losses on items for which the fair value option has been elected in earnings
      (or
      another performance indicator if the business entity does not report earnings)
      at each subsequent reporting date. The fair value option: (a) may be applied
      instrument by instrument, with a few exceptions, such as investments otherwise
      accounted for by the equity method; (b) is irrevocable (unless a new election
      date occurs); and (c) is applied only to entire instruments and not to portions
      of instruments. SFAS 159 is effective as of the beginning of an entity’s first
      fiscal year that begins after November 15, 2007. Early adoption is permitted
      as
      of the beginning of the previous fiscal year provided that the entity makes
      that
      choice in the first 120 days of that fiscal year and also elects to apply the
      provisions of SFAS 157. The Company has not chosen to adopt this statement
      early. Management does not believe the adoption of SFAS 159 will have a material
      impact on the Company’s consolidated financial statements.




F-15




HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





**2.**
            **Summary
                of significant accounting policies
                (continued)**





Recent
      accounting pronouncements (continued)





In
      December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”
(“SFAS 141(R)”), which requires an acquirer to measure the identifiable
      assets acquired, the liabilities assumed, and any noncontrolling interest in
      the
      acquiree at their fair values on the acquisition date, with goodwill being
      the
      excess value over the net identifiable assets acquired. Acquisition-related
      costs, which are the costs an acquirer incurs to effect a business combination,
      will be accounted for as expenses in the periods in which the costs are incurred
      and the services are received, except that the costs to issue debt or equity
      securities will be recognized in accordance with other GAAP. SFAS 141(R) is
      effective for financial statements issued for fiscal years beginning after
      December 15, 2008. Early adoption is prohibited.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements” (“SFAS 160”), which clarifies that a
      noncontrolling interest in a subsidiary should be reported as equity in the
      consolidated financial statements. The calculation of earnings per share will
      continue to be based on income amounts attributable to the parent. SFAS 160
      is
      effective for financial statements issued for fiscal years beginning after
      December 15, 2008. Early adoption is prohibited. Management does not
      anticipate that the adoption of SFAS 160 will have a material impact on the
      Company’s consolidated financial statements.





**3.**
            **Other
                income**





***Years
                Ended December 31,******2007***
            
            ***2006***
            
            ***2005******$***
            
            ***$***
            
            ***$***Bank
                interest income
            
            
            75,546
            
            
            11,626
            
            
            3,625Net
                exchange gains
            
            
            -
            
            
            -
            
            
            15,989Sundry
                income
            
            
            73,107
            
            
            46,962
            
            
            37,293148,653
            
            
            58,588
            
            
            57,907




**4.**
            **Interest
                expense**





***Years
                Ended December 31,******2007***
            
            ***2006***
            
            ***2005******$***
            
            ***$***
            
            ***$***Interest
                on trade related bank loans
            
            
            547,573
            
            
            208,269
            
            
            26,610Interest
                on short-term bank loans
            
            
            135,369
            
            
            45,348
            
            
            25,795Interest
                on other loans
            
            
            13,190
            
            
            -
            
            
            2,566696,132
            
            
            253,617
            
            
            54,971





F-16




HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





**5.**
            **Income
                taxes**





The
      components of income before income taxes are:





***Years
                Ended December 31,******2007***
            
            ***2006***
            
            ***2005******$***
            
            ***$***
            
            ***$***United
                States
            
            
            (490,234
            )
            
            -
            
            
            -Hong
                Kong
            
            
            689,749
            
            
            (76,601
            )
            
            (3,122
            )People’s
                Republic of China
            
            
            1,609,633
            
            
            3,349,415
            
            
            2,501,7871,809,148
            
            
            3,272,814
            
            
            2,498,665





The
      components of the provision for income taxes are:





***Years
                Ended December 31,******2007***
            
            ***2006***
            
            ***2005******$***
            
            ***$***
            
            $PRC
                income taxCurrent
                year
            
            
            173,735
            
            
            241,313
            
            
            178,378Deferred
                taxes
            
            
            (28,277
            )
            
            (826
            )
            
            9,256145,458
            
            
            240,487
            
            
            187,634





The
      following table accounts for the differences between the actual tax provision
      and the amounts obtained by applying the applicable statutory income tax rate
      to
      income before taxes for the years ended December 31, 2007, 2006 and 2005,
      respectively.


***Years
                  Ended December 31,******2007***
              
              
              ***2006***
              
              
              ***2005******$***
              
              
              ***$***
              
              
              ***$***Income
                  before taxes
              
              
              1,809,148
              
              
              3,272,814
              
              
              2,498,665Provision
                  for income taxes at applicable income tax rate
              
              
              271,372
              
              
              490,922
              
              
              374,799Income
                  not subject to tax
              
              
              (84,614
              )
              
              (2,522
              )
              
              -Non-deductible
                  expenses for income tax purposes
              
              
              229
              
              
              11,490
              
              
              468Tax
                  exemption of PRC subsidiary
              
              
              (133,885
              )
              
              (243,835
              )
              
              (178,378
              )Tax
                  rate differential
              
              
              94,865
              
              
              825
              
              
              (9,255
              )Others
              
              
              (2,509
              )
              
              (16,393
              )
              
              -145,458
              
              
              240,487
              
              
              187,634





F-17


HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





**5.**
            **Income
                taxes (continued)**





The
      major
      components of deferred tax recognized in the consolidated balance sheets as
      of
      December 31, 2007 and 2006 are as follows :-





***At
                December 31******2007***
            
            ***2006******$***
            
            ***$***Temporary
                difference on:Recognition
                of expenses
            
            
            (24,527
            )
            
            (8,443
            )Accelerated
                tax depreciation on intangible assets
            
            
            (3,750
            )
            
            -Deferred
                tax assets, net
            
            
            (28,277
            )
            
            (8,443
            )Recognized
                in the balance sheet:Net
                deferred tax assets
            
            
            (28,277
            )
            
            (8,443
            )





In
      accordance with the relevant tax laws and regulations of PRC, the corporation
      income tax rate is 15%. However, in accordance with the relevant taxation laws
      in the PRC, from the time that the Company has its first profitable tax year,
      it
      is exempt from corporate income tax for its first two years and is then entitled
      to a 50% tax reduction for the succeeding three years. The Company’s first
      profitable tax year was 2003. SZ Highpower will be levied at the 15% tax rate
      in
      2008. The pro forma effect of this exemption is as follows





***Years
                Ended December 31,******2007***
            
            ***2006***
            
            ***2005******$***
            
            ***$***
            
            ***$***Statutory
                income tax rate
            
            
            15
            %
            
            15
            %
            
            15
            %Exempted
                income tax rate
            
            
            7.5
            %
            
            7.5
            %
            
            7.5
            %Income
                tax exemption
            
            
            133,885
            
            
            243,835
            
            
            178,378Tax
                effect derived from exemption(per
                share)
            
            $
            0.01
            
            $
            0.02
            
            $
            0.37





F-18


HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





**5.**
            **Income
                taxes (continued)**





**Accounting
      for Uncertainty in Income Taxes**





The
      Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN
      48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in
      income taxes recognized in an enterprise’s financial statements in accordance
      with SFAS No. 109, “Accounting for Income Taxes,” and prescribes a recognition
      threshold and measurement process for financial statement recognition and
      measurement of a tax position taken or expected to be taken in a tax return.
      FIN
      48 also provides guidance on derecognition, classification, interest and
      penalties, accounting in interim periods, disclosure and
      transition.





Based
      on
      the Company’s evaluation, the Company has concluded that there are no
      significant uncertain tax positions requiring recognition in its financial
      statements. The evaluation was performed for the tax years ended December 31,
      2004, 2005, 2006 and 2007, the tax years which remain subject to examination
      by
      major tax jurisdictions (PRC) as of December 31, 2007.





The
      Company may from time to time be assessed interest or penalties by major tax
      jurisdictions. In the event it receives an assessment for interest and/or
      penalties, it will be classified in the financial statements as tax
      expense.





**6.**
            **Prepaid
                expenses and other
                receivables**




***At
                December 31,******2007***
            
            ***2006******$***
            
            ***$***Purchase
                deposits paid
            
            
            264,138
            
            
            935,417Advance
                to staff
            
            
            74,502
            
            
            21,540Other
                deposits and prepayments
            
            
            1,472,503
            
            
            130,870Value-added
                tax prepayment
            
            
            1,103,063
            
            
            1,220,524Other
                receivables
            
            
            912,590
            
            
            303,7402,501,796
            
            
            2,612,091




**7.**
            **Inventories**





***At
                December 31******2007***
            
            ***2006******$***
            
            ***$***Raw
                materials
            
            
            4,507,255
            
            
            5,040,028Work
                in progress
            
            
            1,694,997
            
            
            1,415,942Finished
                goods
            
            
            8,101,083
            
            
            9,096,003Consumables
            
            
            49,197
            
            
            52,122Packing
                materials
            
            
            18,757
            
            
            19,69614,371,289
            
            
            15,623,791





F-19




HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





**8.**
            **Plant
                and equipment**





***At
                December 31,******2007***
            
            ***2006******$***
            
            ***$****Cost*Furniture,
                fixtures and office equipment
            
            
            643,196
            
            
            510,853Leasehold
                improvement
            
            
            146,622
            
            
            137,761Machinery
                and equipment
            
            
            3,940,847
            
            
            2,938,971Motor
                vehicles
            
            
            344,088
            
            
            250,6555,074,753
            
            
            3,838,240*Accumulated
                depreciation*Furniture,
                fixtures and office equipment
            
            
            211,342
            
            
            92,092Leasehold
                improvement
            
            
            100,864
            
            
            25,888Machinery
                and equipment
            
            
            834,206
            
            
            475,767Motor
                vehicles
            
            
            138,959
            
            
            89,8331,285,371
            
            
            683,580*Net*Furniture,
                fixtures and office equipment
            
            
            431,854
            
            
            418,761Leasehold
                improvement
            
            
            45,758
            
            
            111,873Machinery
                and equipment
            
            
            3,106,641
            
            
            2,463,204Motor
                vehicles
            
            
            205,129
            
            
            160,8223,789,382
            
            
            3,154,660




The
      components of depreciation charged are:




***Years
                ended December 31,******2007***
            
            ***2006******$***
            
            ***$***Included
                in factory overheads
            
            
            439,556
            
            
            263,628Included
                in operating expenses
            
            
            120,517
            
            
            80,213560,073
            
            
            343,841




F-20




HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





**9.**
            **Leasehold
                land**





***At
                December 31,******2007***
            
            ***2006******$***
            
            ***$***Cost
            
            
            2,928,495
            
            
            -*Accumulated
                amortization*
            
            
            -
            
            
            -*Net*
            
            
            2,928,495
            
            
            -Analyzed
                for reporting purposes as:Current
                asset
            
            
            58,570
            
            
            -Non-current
                asset
            
            
            2,869,925
            
            
            -2,928,495
            
            
            -




As
      at
      December 31, 2007, the carrying amount of leasehold lands pledged as security
      for the Group’s banking facilities amounted to $2,928,495.




**10.**
            **Intangible
                asset -***Consumer
                battery license*





***At
                December 31,******2007***
            
            ***2006******$***
            
            ***$***Cost*Consumer
                battery license*
            
            
            1,000,000
            
            
            -Accumulated
                amortization
            
            
            50,000
            
            
            -*Net*
            
            
            950,000
            
            
            -




Amortization
      expenses are included in selling and distributing costs during the
      years.




Shenzhen
      Highpower Technology Co., Ltd. (SZ Highpower), a wholly-owned subsidiary of
      the
      Company, entered into a Consumer Battery License Agreement with Ovonic Battery
      Company, Inc. (Ovonic), an unrelated party, dated May 14, 2004, pursuant to
      which SZ Highpower acquired a royalty-bearing, non-exclusive license to use
      certain patents owned by Ovonic to manufacture rechargeable nickel metal hydride
      batteries for portable consumer applications (Consumer Batteries) in the PRC,
      and a royalty-bearing, non-exclusive worldwide license to use certain patents
      owned by Ovonic to use, sell and distribute Consumer Batteries. SZ Highpower
      made an up-front royalty payment to Ovonic of $50,000 in 2004.




F-21




HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





**10.**
            **Intangible
                asset (continued)**





On
      August
      8, 2007, SZ Highpwer and Ovonic amended the Consumer Battery License Agreement
      pursuant to which SZ Highpower agreed to pay a total of $112,580, which was
      to
      be made in two equal payments of $56,290, one of which was to be made within
      15
      days of August 8, 2007, and the other within 45 days of August 8, 2007, as
      royalties for its use of the licensed technology in 2004, 2005 and 2006. 
Both of these payments were made during 2007 and were recorded as royalty
      expense in prior years, which was included in selling and distributing costs
      in
      the statement of operations.




The
      Consumer Battery License Agreement also requires the Company to pay an
      additional up-front royalty payment of $1,000,000 by four annual installments
      and an annual royalty fee based on the gross sales of consumer batteries over
      the term of the Consumer Battery License Agreement. During 2007, the Company
      recorded a total of approximately $327,026 as royalty expense, which was
      included in selling and distributing costs in the statement of operations. 
Accordingly, during the year ended December 31, 2007, the Company recorded
      a
      total up-front royalty payment obligation of $1,000,000, which was included
      in
      other payables and accrued liabilities at December 31, 2007, with the related
      debit recorded as an intangible asset entitled consumer battery license
      agreement. At December 2007 and 2006, accured royalty fees payable were
      $1,327,026 and $112,580, respectively (see Note 11).





The
      Company is amortizing the $1,000,000 cost of the Consumer Battery License
      Agreement over a period of 20 years on the straight line basis.  The
      accounting for the Consumer Battery License Agreement is based on the Company’s
      estimate of the useful life of the underlying technology, which is based on
      the
      Company’s assessment of existing battery technology, current trends in the
      battery business, potential developments and improvements, and the Company’s
      current business plan.  Amortization expense related to the Consumer
      Battery License Agreement included in selling and distributing costs during
      the
      years ended December 31, 2007, 2006 and 2005 were $50,000, $Nil and $Nil,
      respectively.





Amortization
      of the License for the next five years is as follows





Years
                ending December 31
            
            ***$***2008
            
            
            50,0002009
            
            
            50,0002010
            
            
            50,0002011
            
            
            50,0002012
            
            
            50,0002013
                and thereafter
            
            
            700,000





F-22


HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





**11.**
            **Other
                payables and accrued
                liabilities**





***At
                December 31,******2007***
            
            ***2006******$***
            
            ***$***Accrued
                expenses
            
            
            765,760
            
            
            622,010Accrued
                staff welfare
            
            
            90,316
            
            
            111,749Royalty
                fee
            
            
            1,327,026
            
            
            112,580Sales
                deposits received
            
            
            136,295
            
            
            86,182Other
                payables
            
            
            1,559
            
            
            237,7542,320,956
            
            
            1,170,275




**12.**
            **Advance
                to related parties**





Advance
      to related parties for working capital are as follows:





***At
                December 31,******2007***
            
            ***2006******$***
            
            ***$***Advance
                to shareholders
            
            
            -
            
            
            634,161





The
      above
      advances are interest-free, unsecured and have no fixed repayment
      terms.




F-23


HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





**13.**
            **Bank
                borrowings**





***At
                December 31,******2007***
            
            ***2006******$***
            
            ***$***Secured:Repayable
                within one yearShort
                term bank loans
            
            
            2,454,838
            
            
            896,964Other
                trade related bank loans
            
            
            12,955,704
            
            
            5,053,66215,410,542
            
            
            5,950,626





As
      of
      December 31, 2007 the Company’s banking facilities are comprised of the
      following:




**Amount****Facilities
                granted**
            
            **Granted**
            
            **Utilized**
            
            **Unused*****$***
            
            ***$***
            
            ***$***Short
                term bank loans
            
            
            4,170,000
            
            
            2,454,838
            
            
            1,715,162Other
                trade related loan facilities including:-
                Accounts payable financing
            
            
            14,000,000
            
            
            7,928,535
            
            
            6,071,465-
                Accounts receivable financing
            
            
            6,000,000
            
            
            5,027,169
            
            
            972,83124,170,000
            
            
            15,410,542
            
            
            8,759,458





As
      of
      December 31, 2007, the above bank borrowings were secured by the
      following:





(a)
            charge
                over bank deposits of $5,453,620 which is included in restricted
                cash on
                the Balance sheet;





(b)
            corporate
                guarantee executed by a third party and Shenzhen Science and Technology
                Bureau;





(c)
            personal
                guarantee executed by the directors of the
                Company;





(d)
            the
                legal charge over leasehold land with carrying amount $2,928,495
                (see Note
                9); and





(e)
            other
                financial covenant:-





The
      bank
      borrowings require one of the Company’s subsidiaries to maintain a minimum net
      worth of $10,910,330. The Company was in compliance with this requirement at
      December 31, 2007.





The
      interest rates of trade related bank loans were at bank’s prime lending rate per
      annum with various maturity dates. The rates at December 31, 2007 ranged from
      5.508% to 6.804%.





The
      interest rates of short term bank loans were at 6.804% per annum at December
      31,
      2007.




F-24


HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





**14.**
            **Pension
                plans**





For
      employees in PRC, the Company contributes on a monthly basis to various defined
      contribution plans organized by the relevant municipal and provincial government
      in the PRC based on certain percentages of the relevant employees’ monthly
      salaries. The municipal and provincial governments undertake to assume the
      retirement benefit obligations payable to all existing and future retired
      employees under these plans and the Company has no further constructive
      obligation for post-retirement benefits beyond the contributions made.
      Contributions to these plans are expensed as incurred.





Total
      pension cost was $148,193, $91,353 and $Nil for the years ended December 31,
      2007, 2006 and 2005, respectively.





**15.**
            **Commitments
                and contingencies**





Operating
      leases commitments





The
      Company leases factory and office premises under various non-cancelable
      operating lease agreements that expire at various dates through years 2008
      to
      2011,  with
      a
      options to renew the leases. All leases are on a fixed payment basis. None
      of
      the leases includes contingent rentals. Minimum future commitments under these
      agreements payable as of December 31, 2007 are as follows:-





YearS
                ending December 31
            
            ***$***2008
            
            
            612,1562009
            
            
            780,1362010
            
            
            428,5472011
            
            
            204,9522,025,791





Rental
      expense for the years ended 2007, 2006 and 2005 were $429,450, $367,582 and
      $262,819, respectively.





Capital
      commitments




The
      Company has the following capital commitments for the purchase of machinery
      as
      of December 31, 2007:




***$***Contracted
                value
            
            
            1,261,770Less:
                deposit paid
            
            
            (1,115,123
            )Capital
                commitment
            
            
            146,647





F-25


HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





**15.**
            **Commitments
                and contingencies
                (continued)**





Contingencies





From
      time
      to time, the Company sells bills receivable (letters of credits) to banks. 
At the time of the sale, all rights and privileges of holding the receivables
      are transferred to the banks.  The Company removes the asset from its books
      and records a corresponding expense for the amount of the discount.  The
      Company remains contingently liable on the amount outstanding in the event
      the
      correspondent bank, the bill issuer defaults on the letters of credit which
      is
      remote.





***At
                December 31******2007***
            
            ***2006******$***
            
            ***$***Bills
                discounted
            
            
            106,378
            
            
            1,323,442





**16.**
            **Related
                party transactions**





Apart
      from the transactions as disclosed in Notes 12 and 13, the Company entered
      into
      the following transactions with its related party during the years ended
      December 31, 2007, 2006 and 2005:-





***Year
                Ended December 31******2007***
            
            ***2006***
            
            ***2005******$***
            
            ***$***
            
            ***$***Management
                fee paid to Canhold International Limited
            
            
            21,134
            
            
            15,302
            
            
            12,138




Mr.
      Li
      Kai Man is the director of both the Company’s subsidiary, HKHTC, and Canhold
      International Limited.





**17.**
            **Segment
                information**




The
      Company uses the “management approach” in determining reportable operating
      segments.  The management approach considers the internal organization and
      reporting used by the Company’s chief operating decision maker for making
      operating decisions and assessing performance as the source for determining
      the
      Company’s reportable segments. Management, including the chief operating
      decision maker, reviews operating results solely by monthly revenue (but not
      by
      sub-product type or geographic area) and operating results of the Company and,
      as such, the Company has determined that the Company has one operating segment
      as defined by SFAS No. 131, “Disclosures about Segments of an Enterprise and
      Related Information”.




F-26


HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





**17.**
            **Segment
                information (continued)**





All
      long-lived assets of the Company are located in the PRC. Geographic information
      about the revenues and accounts based on the location of the Company’s customers
      is set out as follows:





***Years
                Ended December 31,******2007***
            
            ***2006***
            
            ***2005******Net
                revenue***
            
            ***$***
            
            ***$***
            
            ***$***Hong
                Kong and China
            
            
            28,919,384
            
            
            29,009,277
            
            
            17,126,358Asia
            
            
            5,965,339
            
            
            3,294,838
            
            
            3,198,143Europe
            
            
            25,318,608
            
            
            7,288,751
            
            
            2,807,580North
                America
            
            
            12,851,807
            
            
            4,511,914
            
            
            1,877,949South
                America
            
            
            206,582
            
            
            270,902
            
            
            -73,261,720
            
            
            44,375,682
            
            
            25,010,030





***At
                December 31,******2007***
            
            ***2006***
            
            ***2005******Accounts
                receivable***
            
            ***$***
            
            ***$***
            
            ***$***Hong
                Kong and China
            
            
            4,258,010
            
            
            5,545,244
            
            
            3,913,344Asia
            
            
            1,023,284
            
            
            262,743
            
            
            119,359Europe
            
            
            6,761,615
            
            
            1,857,294
            
            
            525,633North
                America
            
            
            3,863,266
            
            
            461,889
            
            
            212,31515,906,175
            
            
            8,127,170
            
            
            4,770,651




**18.**
            **Dividends**





The
      directors have declared and the Company has paid the following dividends in
      respect of the years ended December 31, 2007, 2006 and 2005: -





***At
                December 31,******2007***
            
            ***2006***
            
            ***2005******$***
            
            ***$***
            
            ***$******Dividends***Interim
                dividend declared and paid on September 30, 2007 of approximately$
                0.045 per share:
            
            
            665,182
            
            
            -
            
            
            -





F-27


HONG
      KONG
      HIGHPOWER TECHNOLOGY, INC. AND
      SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(Stated
      in US Dollars)





**19.**
            **Quarterly
                Results of Operations
                (unaudited)**





The
      following table sets forth unaudited quarterly results of operations for the
      years ended December 31, 2007 and 2006.  This unaudited quarterly
      information has been derived from the Company’s unaudited financial statements
      and, in the Company’s opinion, includes all adjustments, including normal
      recurring adjustments, necessary for a fair presentation of the information
      for
      the periods covered.  The operating results for any quarter are not
      necessarily indicative of the operating results for any future
      period.





Three
                Months Ended
            
            Year
                EndedMarch
                31,
            
            June
                30,
            
            September
                30,
            
            December
                31,
            
            December
                31,2007
            
            2007
            
            2007
            
            2007
            
            2007$
            
            $
            
            $
            
            $
            
            $Net
                revenue
            
            
            11,539,505
            
            
            20,466,844
            
            
            19,879,829
            
            
            21,375,542
            
            
            73,261,720Gross
                profit
            
            
            1,056,415
            
            
            2,847,274
            
            
            2,610,045
            
            
            2,956,738
            
            
            9,470,472Net
                income
            
            
            (502,663
            )
            
            1,174,090
            
            
            838,119
            
            
            154,144
            
            
            1,663,690Net
                income (loss) per common shareBasic
            
            
            (0.03
            )
            
            0.08
            
            
            0.06
            
            
            0.01
            
            
            0.11Diluted
            
            
            (0.03
            )
            
            0.08
            
            
            0.06
            
            
            0.01
            
            
            0.11Weighted
                average common shares outstandingBasic
            
            
            14,798,328
            
            
            14,798,328
            
            
            14,798,328
            
            
            18,502,521
            
            
            15,731,988Diluted
            
            
            14,798,328
            
            
            14,798,328
            
            
            14,798,328
            
            
            18,502,521
            
            
            15,731,988





Three
                Months Ended
            
            Year
                EndedMarch
                31,
            
            June
                30,
            
            September
                30,
            
            December
                31
            
            December
                31,2006
            
            2006
            
            2006
            
            2006
            
            2006$
            
            $
            
            $
            
            $
            
            $Net
                revenue
            
            
            7,612,812
            
            
            10,026,403
            
            
            13,571,303
            
            
            13,165,164
            
            
            44,375,682Gross
                profit
            
            
            1,539,541
            
            
            1,909,390
            
            
            1,615,066
            
            
            2,353,156
            
            
            7,417,153Net
                income
            
            
            808,562
            
            
            930,832
            
            
            392,134
            
            
            900,799
            
            
            3,032,327Net
                income per common shareBasic
            
            
            0.05
            
            
            0.06
            
            
            0.03
            
            
            0.06
            
            
            0.20Diluted
            
            
            0.05
            
            
            0.06
            
            
            0.03
            
            
            0.06
            
            
            0.20Weighted
                average common shares outstandingBasic
            
            
            14,798,328
            
            
            14,798,328
            
            
            14,798,328
            
            
            14,798,328
            
            
            14,798,328Diluted
            
            
            14,798,328
            
            
            14,798,328
            
            
            14,798,328
            
            
            14,798,328
            
            
            14,798,328




F-28