**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-Q**


(Mark
      One)





**xQUARTERLY
      REPORT
      PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES**


**EXCHANGE
      ACT OF 1934**





**FOR
      THE QUARTERLY PERIOD ENDED DECEMBER 31, 2005**





**o TRANSITION
      REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES**


**EXCHANGE
      ACT OF 1934.**





***COMMISSION
      FILE NUMBER 0-31047***





**CHINA
      ENERGY SAVINGS TECHNOLOGY, INC.**


___________________________________________________________________________


(Exact
      Name of Registrant as Specified in Its Charter)


**NEVADA**
              
              **86-0995730**(State
                  or Other Jurisdiction of
                  Incorporation
                    or Organization)
              
              (I.R.S.
                  Employer Identification
                  No.)


**Central
      Plaza, 18 Harbour Road**


**Suite
      3203A, 32nd Floor**


**Hong
      Kong, China**


(Address
      of Principal Executive Offices)


(Zip
      Code)





**(852)
      2588-1228**


(Registrant’s
      Telephone
      Number, Including Area Code)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the 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
xNO
o





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act).


YES
xNO
o





Indicate
      by check mark whether the registrant is a shell company (as defined by Rule
      12b-2 of the Exchange Act).


YES
oNO
x




APPLICABLE
      ONLY TO CORPORATE ISSUERS:


Indicate
      the number of shares outstanding of the issuer’s common
      stock as
      of February
      14, 2006 :


CLASS
              
              NUMBER
                  OF SHARES OUTSTANDINGCommon
                  Stock, par value
                $0.001
                  per share
              
              25,421,853shares
















**CHINA
      ENERGY SAVINGS TECHNOLOGY, INC.**


TABLE
      OF
      CONTENTS


TO
      QUARTERLY REPORT ON FORM 10-Q


FOR
      PERIOD ENDED DECEMBER 31, 2005











PART
                I
            FINANCIAL
                INFORMATION
            PageItem
                1.
            Financial
                StatementsConsolidated
                Balance Sheets as of December 31, 2005 and September 30, 2005
                (audited)
            F-1Consolidated
                Statements of Income and Other Comprehensive Income (Loss) for the
                Three
                Months Ended December 31, 2005 and 2004
            F-2Consolidated
                Statements ofShareholders’
                Equityfor thePeriodEnded December 31, 2005
            F-3Consolidated
                Statements of Cash Flows for the Three Months Ended December 31,
                2005 and
                2004
            F-4Condensed
                Notes to Consolidated Financial Statements
            F-5Item
                2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            22Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            27Item
                4.
            Controls
                and Procedures
            27








PART
                II
            OTHER
                INFORMATIONItem
                1.
            Legal
                Proceedings
            28Item
                1A.
            Risk
                Factors
            28Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            31Item
                3.
            Defaults
                Upon Senior Securities
            31Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            31Item
                5.
            Other
                Information
            32Item
                6.
            Exhibits
            32Signatures
            
            33Exhibits
            
            34








(REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK)










CHINA
          ENERGY SAVINGS TECHNOLOGY, INC. AND SUBSIDIARIES
  CONSOLIDATED
          BALANCE SHEETS AS
            OF
            DECEMBER 31, 2005 AND SEPTEMBER 30, 2005
 A
                    S S E T SDecember
                    31,
                
                September
                    30,2005
                
                2005Unaudited
                
                AuditedCURRENT
                    ASSETS:Cash
                
                $
                25,089,074
                
                $
                30,926,619Accounts
                    receivable, trade, net of allowance for doubtfulaccounts
                    of $768,151 as of December 31, 2005 andSeptember
                    30, 2005, respectively
                
                
                11,406,561
                
                
                6,471,689Current
                    maturities of notes receivable, net
                
                
                8,833,066
                
                
                9,744,786Inventories
                
                
                4,031,982
                
                
                1,584,213Prepaid
                    expenses
                
                
                2,466,686
                
                
                1,890,688Due
                    from related party
                
                
                122,115
                
                
                123,602Total
                    current assets
                
                
                51,949,484
                
                
                50,741,597PLANT
                    AND EQUIPMENT, net
                
                
                424,596
                
                
                443,600OTHER
                    ASSETS:Long-term
                    loan receivable
                
                
                1,978,480
                
                
                1,857,000Long-term
                    notes receivable, net
                
                
                22,716,619
                
                
                21,166,175Other
                    receivables
                
                
                635,671
                
                
                419,859Other
                    assets
                
                
                75,400
                
                
                77,743Total
                    other assets
                
                
                25,406,170
                
                
                23,520,777Total
                    assets
                
                $
                77,780,250
                
                $
                74,705,974L I
                    A B I L I T I E S  A N D  S H A R E H O L D E R S’ 
E
                    Q U
                    I T YCURRENT
                    LIABILITIES:Accounts
                    payable and accrued expenses
                
                $
                1,358,131
                
                $
                1,442,931Current
                    portion note payable
                
                
                8,369
                
                
                11,874Other
                    payables
                
                
                489,520
                
                
                201,391Customer
                    deposits
                
                
                1,969,230
                
                
                1,858,452Taxes
                    payable
                
                
                966,038
                
                
                4,849,550Total
                    current liabilities
                
                
                4,791,288
                
                
                8,364,198SHAREHOLDERS’
                    EQUITY:Common
                    stock, $0.001 par value, 50,000,000 shares authorized,24,699,753
                    and 24,699,753 shares issued and outstandingas
                    of December 31, 2005 and September 30, 2005,
                    respectively
                
                
                24,700
                
                
                24,700Additional
                    paid-in capital
                
                
                36,889,732
                
                
                36,889,732Statutory
                    reserves
                
                
                324,583
                
                
                324,583Deferred
                    compensation
                
                
                (4,025,744
                )
                
                (4,379,203
                )Retained
                    earnings
                
                
                38,174,186
                
                
                32,082,555Accumulated
                    other comprehensive income
                
                
                1,601,505
                
                
                1,399,409Total
                    shareholders’ equity
                
                
                72,988,962
                
                
                66,341,776Total
                    liabilities and shareholders’ equity
                
                $
                77,780,250
                
                $
                74,705,974
   The
        accompanying notes are integral part of this statement.
  F-1
  CHINA
          ENERGY SAVINGS TECHNOLOGY, INC. AND SUBSIDIARIES
 CONSOLIDATED
          STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (LOSS)
 FOR
          THE
          THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004
 RestatedThree
                    Months Ended
                
                Three
                    Months EndedDecember
                    31,
                
                December
                    31,2005
                
                2004Unaudited
                
                UnauditedREVENUES
                
                $
                10,696,397
                
                $
                11,708,690COST
                    OF GOOD SOLD
                
                
                4,161,941
                
                
                4,891,408GROSS
                    PROFIT
                
                
                6,534,456
                
                
                6,817,282OPERATING
                    EXPENSESOperating
                    expense
                
                
                467,164
                
                
                612,700Selling,
                    general and administrative expenses
                
                
                652,119
                
                
                971,839Total
                    Operating Expenses
                
                
                1,119,283
                
                
                1,584,539INCOME
                    FROM OPERATIONS
                
                
                5,415,173
                
                
                5,232,743OTHER
                    INCOME (EXPENSE)Interest
                    income
                
                
                675,847
                
                
                348,179Interest
                    expense
                
                
                -
                
                
                (514
                )Other
                    income (expense)
                
                
                611
                
                
                (2,277
                )Total
                    Other Income
                
                
                676,458
                
                
                345,388INCOME
                    BEFORE INCOME TAXES AND MINORITY INTEREST
                
                
                6,091,631
                
                
                5,578,131LESS
                    PROVISION FOR INCOME TAXES
                
                
                -
                
                
                -INCOME
                    BEFORE MINORITY INTEREST
                
                
                6,091,631
                
                
                5,578,131MINORITY
                    INTEREST
                
                
                -
                
                
                2,719,853NET
                    INCOME
                
                
                6,091,631
                
                
                2,858,278OTHER
                    COMPREHENSIVE INCOME (LOSS):Foreign
                    currency translation adjustment
                
                
                202,096
                
                
                -COMPREHENSIVE
                    INCOME
                
                $
                6,293,727
                
                $
                2,858,278Net
                    income per share - basic and diluted
                
                $
                0.25
                
                $
                0.19Weighted
                    average number of shares outstanding - basic and diluted
                
                
                24,699,753
                
                
                14,881,540
   The accompanying notes are integral part of this
        statement.
  F-2
  CHINA
          ENERGY SAVINGS TECHNOLOGY, INC. AND SUBSIDIARIES
  CONSOLIDATED
            STATEMENTS OF SHAREHOLDERS’
            EQUITY FOR
              THE
              PERIOD ENDED DECEMBER 31, 2005
   AccumulatedAdditional
                
                
                
                
                
                Unappropriated
                
                otherNumber
                
                Common
                
                Paid-in
                
                Statutory
                
                Deferred
                
                Retained
                
                comprehensiveof
                    shares
                
                stock
                
                capital
                
                Reserves
                
                Compensation
                
                Earnings
                
                income
                    (loss)
                
                TotalsBALANCE,
                    September 30, 2004, audited
                
                
                12,968,401
                
                $
                12,968
                
                $
                8,655,339
                
                $
                324,583
                
                $
                
                
                $
                9,666,676
                
                $
                3,340
                
                $
                18,662,906Stock
                    issued for the
                  acquisition
                    of additional15%
                    investment in Starway
                  Management
                    Limited
                
                
                3,346,100
                
                
                3,346
                
                
                6,102,341
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                6,105,687Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,858,278
                
                
                
                
                
                2,858,278Stock
                    issued for services
                
                
                477,683
                
                
                478
                
                
                5,327,262
                
                
                
                
                
                (4,554,945
                )
                
                
                
                
                
                
                
                772,795BALANCE,
                    December 31, 2004, unaudited
                
                
                16,792,184
                
                
                16,792
                
                
                20,084,942
                
                
                324,583
                
                
                (4,554,945
                )
                
                12,524,954
                
                
                3,340
                
                
                28,399,666Stock
                    issued for the
                  acquisition
                    of additional35%
                    investment in Starway
                  Management
                    Limited
                
                
                7,807,569
                
                
                7,808
                
                
                15,808,193
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                15,816,001Stock
                    issued for services
                
                
                100,000
                
                
                100
                
                
                996,597
                
                
                
                
                
                175,742
                
                
                
                
                
                
                
                
                1,172,439Foreign
                    currency translation adjustments
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,396,069
                
                
                1,396,069Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                19,557,601
                
                
                
                
                
                19,557,601BALANCE,
                    September 30, 2005, audited
                
                
                24,699,753
                
                
                24,700
                
                
                36,889,732
                
                
                324,583
                
                
                (4,379,203
                )
                
                32,082,555
                
                
                1,399,409
                
                
                66,341,776Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                6,091,631
                
                
                
                
                
                6,091,631Amortization
                    of deferred compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                353,459
                
                
                
                
                
                
                
                
                353,459Foreign
                    currency translation adjustments
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                202,096
                
                
                202,096BALANCE,
                    December 31, 2005, unaudited
                
                
                24,699,753
                
                $
                24,700
                
                $
                36,889,732
                
                $
                324,583
                
                $
                (4,025,744
                )
                $
                38,174,186
                
                $
                1,601,505
                
                $
                72,988,962
   The accompanying notes are integral part of this
        statement.
  F-3
  CHINA
          ENERGY SAVINGS TECHNOLOGY, INC. AND SUBSIDIARIES
  CONSOLIDATED
          STATEMENTS OF CASH FLOWS
 FOR
          THE
          THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004
 RestatedDecember
                    31,
                
                
                December
                    31,2005
                
                
                2004Unaudited
                
                
                UnauditedCASH
                    FLOWS FROM OPERATING ACTIVITIES:Net
                    income
                
                $
                6,091,631
                
                $
                2,858,278Adjustments
                    to reconcile net income to cashprovided
                    by (used in) operating activities:Minority
                    interest income
                
                
                
                
                
                2,719,853Depreciation
                    and amortization
                
                
                372,463
                
                
                15,808Stock
                    issued for services
                
                
                
                
                
                772,795Change
                    in operating assets and liabilities:(Increase)
                    decrease in assets:Accounts
                    receivable
                
                
                (4,934,872
                )
                
                (487,315
                )Inventories
                
                
                (2,447,769
                )
                
                9,748Prepaid
                    expenses
                
                
                (575,998
                )
                
                388,056Amount
                    due from related parties
                
                
                1,487
                
                
                101,290Other
                    receivables
                
                
                (215,812
                )
                
                (194,788
                )Long-term
                    notes receivable, net
                
                
                (760,204
                )
                
                776,965Other
                    assets
                
                
                2,343Increase
                    (decrease) in liabilities:Accounts
                    payable and accrued expenses
                
                
                (84,800
                )
                
                (529,374
                )Other
                    payable
                
                
                288,129
                
                
                210,422Customer
                    deposits
                
                
                110,778
                
                
                1,116,495Tax
                    payable
                
                
                (3,883,512
                )
                
                631,923Net
                    cash (used in) provided by operating activities
                
                
                (6,036,136
                )
                
                8,390,156CASH
                    FLOWS FROM INVESTING ACTIVITIES:Purchase
                    of equipment
                
                
                
                
                
                (3,013
                )Net
                    cash used in investing activities
                
                
                
                
                
                (3,013
                )CASH
                    FLOWS FROM FINANCING ACTIVITIES:Payments
                    on notes payable
                
                
                (3,505
                )
                
                (8,215
                )Proceeds
                    from notes payable
                
                
                
                
                
                5,080Net
                    cash (used in) financing activities
                
                
                (3,505
                )
                
                (3,135
                )EFFECT
                    OF EXCHANGE RATE ON CASH
                
                
                202,096(DECREASE)
                    INCREASE IN CASH
                
                
                (5,837,545
                )
                
                8,384,008CASH,
                    beginning of period
                
                
                30,926,619
                
                
                18,442,862CASH,
                    end of period
                
                $
                25,089,074
                
                $
                26,826,870SUPPLEMENTAL
                    DISCLOSURE OF CASH FLOW INFORMATION:Cash
                    paid for interest expense
                
                $
                
                
                $
                514NON-CASH
                    TRANSACTIONS:Stock
                    issued to acquire additional interest in StarwayManagement
                    Limited
                
                $
                
                
                $
                6,095,901Stock
                    issued for services
                
                $
                
                
                $
                5,327,740
  The accompanying notes are integral part of this
          statement.
 F-4
  CHINA
        ENERGY SAVINGS TECHNOLOGY, INC.
 AND
        SUBSIDIARIES
 
 CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 **Note
        1 - Organization**
 
 Organization
 
 On
        August
        23, 2004, China Energy Savings Technology, Inc. (the “Company”) formally changed
        its name from Rim Holdings Inc. to China Energy Savings Technology, Inc.
 
 On
        June
        30, 2004 (“the Closing Date”) Rim Holdings Inc., a Nevada corporation (“Rim”)
        and Eurofaith Holdings, Inc., a British Virgin Islands Corporation
        (“Eurofaith”), entered into a Stock Purchase Agreement (the “Eurofaith
        Stock
        Purchase Agreement”). Pursuant to the Eurofaith Stock Purchase Agreement, Rim
        acquired 50% of the outstanding shares of Starway Management Ltd., a British
        Virgin Islands company (“Starway”) from Eurofaith (the “Acquisition”). The
        purchase price for such stock was $120,000,000 payable by Rim’s issuance of a
        convertible promissory note on the Closing Date. The Note's Maturity Date
        was
        December 31, 2004.  The Interest Rate was 5% per annum. The note may be
        convertible into 223,073,380 shares of Rim’s common stock upon maturity at the
        discretion of Rim. Eurofaith may also convert at any time prior to the maturity.
        On June 30, 2004, the fair value of the convertible note payable was discounted
        to the fair value of the equity interest acquired of $6,633,440 which is
        50% of
        the net book value of Starway as December 31, 2003. On August  25, 2004 a 1
        for 20 reverse split reduced the outstanding shares to 887,048.  The next
        day, on August 26, 2004 Eurofaith converted the note and received 11,153,669
        shares post-split shares (223,073,380 pre split). Of these shares, 6,900,000
        were transferred to New Solomon Consultants Limited. (“New Solomon”), New
        Solomon is 55% owned by Mr. Sun Li (through Mr. Li’s sole
        ownership
        of Able Stars Enterprises Ltd., which owns 55% of New Solomon), who owned
        50% of
        Eurofaith and who became the Chairman and CEO of the Company. 
Thus,  after the acquisition on August 26, 2004 New Solomon owned
        6,900,000 shares of common stock (55.9%) of the Issuer.
  Immediately
        after the closing of this transaction, Rim redeemed 1,000,000 shares pre-split
        shares (50,000 shares post-split) of its common stock from Christina M. Strauch
        in exchange for all of the shares of Rimmer Computer, Inc., an Arizona
        corporation (“Rimmer”). The following is a summary of the shares issued due to
        the recapitalization:
 No.
                    of SharesIssuedShares
                    issued to current stock holdersin
                    connection with recapitalization
                
                
                1,234,632Shares
                    issued to Eurofaith due to note conversion
                
                
                11,153,669Shares
                    redeemed from Christina Strauch
                
                
                (50,000
                )Net
                    shares issued due to recapitalization
                
                
                12,338,301
  Prior
        to
        the transaction, Rim was a holding company holding all of the shares of Rimmer.
        Rimmer was an approved technical service provider for computer hardware and
        software system manufacturers. All of Rimmer’s customers were located in the
        Phoenix, Arizona area. Since the closing, Rim’s primary operations consist of
        the operations of Starway.
 
 As
        a
        result, the transaction was treated for accounting purposes as a
        recapitalization by the accounting acquirer Starway Management Limited. The
        stock issuance represented 50% of the issued and outstanding stock of Starway
        Management Limited at the time of issuance. The acquisition of Starway
        Management Limited by the Company was accounted for as a recapitalization
        of
        Starway Management Limited, pursuant to which the accounting basis of Starway
        Management Limited continued unchanged subsequent to the transaction date.
  F-5
  CHINA
        ENERGY SAVINGS TECHNOLOGY, INC.
 AND
        SUBSIDIARIES
 
 CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 **Note
        1 - Organization, (continued)**
 
 Organization
        (continued)
 
 The
        historical financial statements of the Company relate to Starway Management
        Limited and its subsidiaries Shenzhen Dicken Industrial Development Limited
        and
        Shenzhen Dicken Technology Development Limited. The financial statements
        have
        been restated to reflect the recapitalization as if the transaction happened
        as
        of January 1, 2002.
 
 On
        November 17, 2004, the Company acquired an additional 15% of Starway Management
        Limited from Eurofaith in exchange for 3,346,100 new shares of the Company’s
        Common Stock, or the same exchange ratio as it had paid for the first 50%
        of
        Sarway to bring its stock ownership to 65% as of December 31, 2004, as further
        described in note 14. On February 1, 2005, the Company acquired the remaining
        35% of Starway Management Limited, as described in note 14, from Sky Beyond
        Investments Limited and Starway Management Limited became a wholly owned
        subsidiary of the Company at that time.
 
 Starway
        was incorporated in the British Virgin Islands on September 15, 1998. Starway
        owns all of the equity interest in Shenzhen Dicken Industrial Development
        Limited, a company incorporated in the People’s Republic of China on November
        20, 1996 (SDID), which in turn owns all of the equity interest in Shenzhen
        Dicken Technology Development Limited, a company incorporated in the People’s
        Republic of China on November 9, 1999 (SDID). In 2003, Eurofaith, the
        shareholder of SDID exchanged 100% of the common shares of SDID for 100 shares
        of Starway.
  Activities
 
 Starway,
        through its two subsidiaries SDTD and SDID, is a People’s Republic
        of
        China-based marketer, distributor and manufacturer of energy saving products
        for
        use in commercial and industrial settings. SDID is a foreign-owned enterprise
        and responsible for the operation and sales of its products. SDTD is a
        wholly-owned subsidiary of SDID and is a limited liability company incorporated
        in the PRC and is responsible for the development of energy saving projects
        of
        Shenzhen Dicken Group. The Company through its subsidiaries mainly sells
        their
        products within the People’s Republic of China.
 
 **NOTE
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 Basis
        of presentation
 
 The
        accompanying financial statements have been prepared in accordance with
        accounting principles generally accepted in the United States of America.
        The
        accompany consolidated financial statements include the accounts of Starway
        Management Limited, Shenzhen Dicken Technology Development Limited and Shenzhen
        Dicken Industrial Development Limited, (collectively the “Company”). All
        material intercompany transactions and balances have been eliminated in the
        consolidation.
 
  F-6
  CHINA
        ENERGY SAVINGS TECHNOLOGY, INC.
 AND
        SUBSIDIARIES
 
 CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 **Note
        2 - Summary of significant accounting polices, (continued)**
 
 Use
        of
        Estimates
 
 In
        preparing financial statements in conformity with generally accepted accounting
        principles, management is required to make estimates and assumptions that
        affect
        the reported amounts of assets and liabilities and the disclosure of contingent
        assets and liabilities at the date of the financial statements and revenues
        and
        expenses during the reported period. Actual results could differ from these
        estimates.
 
 Cash
        and Cash Equivalents
 
 For
        purposes of the cash flow statements, the Company considers all highly liquid
        investments with original maturities of three months or less at the time
        of
        purchase to be cash equivalents.
  Notes
        Receivable
 
 The
        Company carries its notes receivable at the net present value of the notes,
        net
        of allowance for doubtful accounts. The Company uses the best lending rate
        in
        China as of the quarter ending in determining the net present value of notes
        receivable outstanding on energy savings sharing contracts at the time the
        contract was entered into. In accordance with APBO 21, Interest on Receivables
        and Payables, the Company believes that using this rate reflects what a company
        would be charged on this type of transaction if the funds were borrowed from
        an
        independent lender. The interest rates used to discount the notes receivable
        are
        reviewed on a monthly basis compared to the current market rates to determine
        if
        the rates used are still applicable. The interest rates used in determining
        this
        discount may change if the Company determines that a permanent decline in
        interest rates has occurred.
 
 Inventory
 
 Inventory
        is stated at the lower of cost or market value, cost being determined on
        a
        first-in, first-out (FIFO) method.
 
 Allowance
        for doubtful accounts
 
 The
        Company reviews its accounts and notes receivable on a monthly basis to
        determine if the allowance for bad debts is sufficient. As of December 31,
        2005
        and September 30, 2005, the allowance for doubtful accounts amounted to $768,151
        and $768,151, respectively.
 F-7
  CHINA
        ENERGY SAVINGS TECHNOLOGY, INC.
 AND
        SUBSIDIARIES
 
 CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 **Note
        2 - Summary of significant accounting polices, (continued)**
 
 Plant
        and Equipment
 
 The
        Company’s plant and equipment are stated at cost. Depreciation is provided over
        the estimated useful lives of the respective assets on a straight-line basis
        from five to fifteen years.
 
 Intangibles
 
 Under
        the
        Statement of Accounting Standards (“SFAS”) No. 142,“Goodwill and Other
        Intangible Assets”, all goodwill and certain intangible assets determined to
        have indefinite lives will not be amortized but will be tested for impairment
        at
        least annually. Intangible assets other than goodwill will be amortized over
        their useful lives of 10 years and reviewed for impairment in accordance
        with
        SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived
        Assets.”
 
 Impairment
        of Long-Lived Assets
 
 Per
        SFAS
        No. 144, long-lived assets will be analyzed annually for indications of
        impairment. Impairment of long-lived assets is assessed by the Company whenever
        there is an indication that the carrying amount of the asset may not be
        recovered. Recoverability if these assets are determined by comparing the
        forecasted undiscounted cash flows generated by those assets to the assets'
        net
        carrying value. The amount of impairment loss, if any, is measured as the
        difference between the net book value of the assets and the estimated fair
        value
        of the related assets.
 
 The
        Company evaluates the recoverability of long-lived assets by measuring the
        carrying amount of the assets against the estimated undiscounted future cash
        flows associated with them. At the time such flows of certain long-lived
        assets
        are not sufficient to recover the carrying value of such assets, the assets
        are
        adjusted to their fair values.
 
 Revenue
        and Deferred Revenue Recognition
 
 The
        Company recognizes revenue when all four of the following criteria are met:
        (1)
        persuasive evidence has been received that an arrangement exists; (2) delivery
        of the products and/or services has occurred; (3) the selling price is fixed
        or
        determinable; and (4) collectibility is reasonably assured. The Company follows
        the provisions of SAB No. 104 which sets forth guidelines in the timing of
        revenue recognition based upon factors such as passage of title, installation,
        payments and customer acceptance. Any amounts received prior to satisfying
        the
        Company’s revenue recognition criteria is recorded as deferred
        revenue.
 
 F-8
  CHINA
        ENERGY SAVINGS TECHNOLOGY, INC.
 AND
        SUBSIDIARIES
 
 CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 **Note
        2 - Summary of significant accounting polices, (continued)**
 
 Revenue
        and Deferred Revenue Recognition (continued)
 
 The
        Company has two types of contracts for its product sales: energy savings
        sharing
        contracts and equipment sales contracts.
 
 (a)
              Energy
                  savings sharing
 
 Under
        this arrangement, the customers do not need to bear the initial cost of the
        energy saving equipments. They have to make energy savings sharing contracts
        with the Company which is entitled to receive a share of the aggregated amount
        of estimated energy saving within a specified period of the arrangement.
 
 The
        Company’s revenue arising from sales of energy savings equipments and notes
        receivable under this arrangement is recognized when:
 
 1.
              the
                  agreement of energy savings sharing is signed by both
                  parties;2.
              the
                  original estimated cost savings can be ascertained; and3.
              the
                  equipment is installed and tested for an average rate of energy
                  savings.
 
 The
        receipt of each installment made by the customer during the period of the
        contract will be recognized as the repayments of the outstanding notes
        receivable when the amount of energy savings can be quantified and agreed
        by
        both parties. The excess amount received of the original estimated savings
        stated in the contract will be recognized as interest income by the
        Company.
 
 Effective April
        2005, the Company changed the terms of its energy saving contracts to include
        a
        minimum interest rate that will be earned on customer contracts. If the amount
        of energy savings does not meet this minimum rate of return, the customer
        is now
        required to pay the minimum rate of return stated in the contract.
 
 (b)
              Outright
                  equipment sales
 
 Under
        this arrangement, the Company’s customer has to pay the cost of the energy
        saving equipments and then they can keep all benefits of energy saving to
        them.
 
 Revenue
        arising from the sales of the energy saving equipment to customers is
        only recognized when the goods are taken and accepted by the customer and
        the customer assumes all the related risks and rewards of ownership. Revenue
        represents the sales value of goods to customers after allowances for goods
        returned, excludes value added tax (“VAT”) and is after deduction of any trade
        discounts.
 
  F-9
  CHINA
        ENERGY SAVINGS TECHNOLOGY, INC.
 AND
        SUBSIDIARIES
 
 CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 **Note
        2 - Summary of significant accounting polices, (continued)**
 
 Product
        Development Costs
 
 Product
        development costs incurred in the process of developing product improvements
        and
        enhancements or new products are charged to expense as incurred. Statement
        of
        Financial Accounting Standards (“SFAS”) No. 86, Accounting for the Costs of
        Computer Software to be Sold, Leased or Otherwise Marketed, requires
        capitalization of certain software development costs subsequent to the
        establishment of technological feasibility. Based on the Company’s product
        development process, technological feasibility is established upon the
        completion of a working model. Costs incurred by the Company between the
        completion of the working model and the point at which the product is ready
        for
        general release have been insignificant.
 
 Foreign
        Currency Translation
 
 The
        functional currency of the Company is the Chinese Renminbi. The financial
        statements of the Company are translated to United Stated dollars using year-end
        exchange rates as to assets and liabilities and average exchange rates as
        to
        revenues and expenses. Capital accounts are translated at their historical
        exchange rates when the capital transaction occurred. Net gains and losses
        resulting from foreign exchange translations are included in the statements
        of
        operations and stockholders' equity as other comprehensive income.
 
 This
        quotation of the exchange rates does not necessarily imply free convertibility
        of RMB to other foreign currencies. All foreign exchange transactions continue
        to take place either through the People’s Bank of China or other banks
        authorized to buy and sell foreign currencies at the exchange rate quoted
        by the
        People’s Bank of China.
 
 Approval
        of foreign currency payments by the People’s Bank of China or other institutions
        requires submitting a payment application form together with invoices, shipping
        documents and signed contracts.
 
 Translation
        adjustments resulting from this process are included in accumulated other
        comprehensive income in the consolidated statement of shareholders’ equity and
        amounted to $1,601,505 and $1,399,409 as of December 31, 2005 and September
        30,
        2005, respectively. The balance sheet amounts with the exception of equity
        at
        December 31, 2005 were translated at 8.06 RMB to $1.00 USD compare to 8.07
        to
        $1.00 USD at September 30, 2005. The equity accounts were stated at their
        historical rate. The average translation rate of 8.07 RMB for the three months
        ended December 31, 2005 was applied to income statement accounts.
 
 Comprehensive
        Income (Loss)
 
 This
        foreign currency translation gain or loss resulting from the translation
        of the
        financial statements expressed in Chinese Renminbi to United States dollars
        is
        reported as other comprehensive income (loss) in the statement of income
        and
        stockholders’ equity.
 
  F-10
  CHINA
        ENERGY SAVINGS TECHNOLOGY, INC.
 AND
        SUBSIDIARIES
 
 CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 **Note
        2 - Summary of significant accounting polices, (continued)**
 
 Income
        Taxes
 
 The
        Company accounts for income taxes under the Statement of Financial Accounting
        Standards No. 109, “Accounting for Income Taxes” (“Statement 109”).
 
 Under
        Statement 109, deferred tax assets and liabilities are recognized for the
        future
        tax consequences attributable to differences between the financial statement
        carrying amounts of existing assets and liabilities 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. Under Statement 109,
        the
        effect on deferred tax assets and liabilities of a change in tax rates is
        recognized in income in the period that includes the enactment
        date. Starway is organized in the British Virgin Islands and both SDID and
        SDTD are organized in the People’s Republic
        of
        China and no tax benefit is expected from the tax credits in the future.
        The
        Company located its factories in a special economic region in China. This
        economic region allows foreign enterprises a two-year income tax exemption
        and a
        50% income tax reduction for the following three years. The Company's wholly
        owned subsidiary, SDID, was approved as a wholly owned foreign enterprise
        in
        2004. The Company has income tax exemption for 2004 and 2005 and 50% income
        tax
        reduction for 2006, 2007 and 2008.
  Fair
        Value of Financial Instruments
 
 The
        carrying amounts of the Company’s financial instruments including accounts
        receivable, stockholder loans and notes payable approximate fair value due
        to
        the relatively short period to maturity of these instruments.
 
 The
        fair
        value of short-term and long-term notes receivable was determined using a
        discounted cash flow analysis based on the Company’s borrowing rate. At December
        31, 2005 and September 30, 2005, the carrying value of these notes approximated
        their fair value.
 
 Earnings
        Per Share
 
 The
        Company reports earnings per share in accordance with the provisions of SFAS
        No.
        128, “Earnings Per Share.” SFAS No. 128 requires presentation of basic and
        diluted earnings per share in conjunction with the disclosure of the methodology
        used in computing such earnings per share. Basic earnings per share excludes
        dilution and is computed by dividing income available to common stockholders
        by
        the weighted average common shares outstanding during the period. Diluted
        earnings per share takes into account the potential dilution that could occur
        if
        securities or other contracts to issue common stock were exercised and converted
        into common stock.
 
  F-11
  CHINA
        ENERGY SAVINGS TECHNOLOGY, INC.
 AND
        SUBSIDIARIES
 
 CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 **Note
        2 - Summary of significant accounting polices, (continued)**
 
 Earnings
        Per Share, (continued)
 
 On
        February 1, 2005, the Company acquired the remaining 35% interest (the “Acquisition”) in
        Starway Management Limited (“Starway”) from Sky Beyond Investments Limited (“Sky
        Beyond”) by issuing a total of 7,807,569 shares of common stock of the Company
        to Sky Beyond and its assignees.
        Sky Beyond had acquired the 35% interest in Starway from Golden Resorts Group
        Limited (formerly known as “Meditech Group Company Limited”). However,
        management of the Company then learned that the stock sale between Sky Beyond
        and Golden Resorts Group Limited was subject to approval by the shareholders
        of
        Golden Resorts. On July 28, 2005, the shareholders of Golden Resorts approved
        the sale of the Starway interest to Sky Beyond. In the financial statements
        of
        the Company as of March 31, 2005, the Company took a conservative approach
        in
        reflecting the acquisition of Starway and did not record the additional earnings
        and additional paid in capital attributed to the acquisition. Since the
        transaction has been approved, the Company has reflected the earnings and
        additional paid-in-capital from February 1, 2005 in its financial statements
        as
        of September 30, 2005.
 
 Concentrations
        and Credit Risks
 
 During
        2005 and 2004, 100% of the Company’s sales were to companies located in the PRC.
        At December 31, 2005 and September 30, 2005, all the Company’s assets were
        located in the PRC. For the three months ended December 31, 2005, approximately
        $1.9 million or approximately 19% of the total sales revenue was generated
        from
        energy savings sharing contracts with one customer. There was no revenue
        generated from energy savings sharing contract for the three months ended
        December 31, 2004.
 
 The
        Company’s operations may be adversely affected by significant political,
        economic and social uncertainties in China. Although the Chinese government
        has
        pursued economic reform policies in the past, there is no assurance that
        the
        Chinese government will continue to pursue such policies or that such policies
        may not be significantly altered, especially in the event of a change in
        leadership, social or political disruption or unforeseen circumstances affect
        China’s political, economic and social conditions. There is also no guarantee
        that the Chinese government’s pursuit of economic reforms will be consistent or
        effective.
 
 Cash
        in Bank Accounts
 
 Cash
        includes cash on hand and demand deposits in accounts maintained with
        state-owned banks within the People’s Republic of China. The total cash balance
        in state-owned banks at December 31, 2005 and September 30, 2005 amounted
        to
        $24,962,957 and $30,896,309, respectively, of which no deposits are covered
        by
        insurance. The Company has not experienced any losses in such accounts and
        believes it is not exposed to any risks on its cash in bank accounts.
 
  F-12
  CHINA
        ENERGY SAVINGS TECHNOLOGY, INC.
 AND
        SUBSIDIARIES
 
 CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 **Note
        2 - Summary of significant accounting polices, (continued)**
 
 Recently
        issued accounting pronouncements
 
 In
        October 2005, FASB Staff Position (FSP) FAS 13-1, “Accounting for Rental Costs
        Incurred during a Construction Period” was issued. This FSP concluded that
        rental costs associated with ground or building operating leases that are
        incurred during a construction period should be expensed. The guidance in
        the
        FSP is required to be applied to the first reporting period beginning after
        December 15, 2005. The Company’s adoption of this pronouncement is not expected
        to have a material impact on the Company’s financial position or results of
        operations.
  **Note
        3 - Condensed financial statements and condensed footnotes**
  The
        interim condensed consolidated financial statements presented herein have
        been
        prepared by the Company and include the unaudited accounts of the Company
        and
        its subsidiaries. All significant inter-company accounts and transactions
        have
        been eliminated in the consolidation.
 
 These
        condensed consolidated financial statements have been prepared in accordance
        with generally accepted accounting principles in the United States for interim
        financial information and the instructions to Form 10-Q and Article 10 of
        Regulation S-X. Certain information and footnote disclosures normally included
        in financial statements presented in accordance with generally accepted
        accounting principles have been condensed or omitted. Management of the Company
        believes the disclosures made are adequate to make the information presented
        not
        misleading.
 
 The
        condensed consolidated financial statements should be read in conjunction
        with
        the Company’s audited financial statements for the period ended September 30,
        2005 and notes thereto included in the Company’s Form 10-K dated December 19,
        2005.
 
 In
        the
        opinion of management, the unaudited condensed consolidated financial statements
        reflect all adjustments (which include only normal recurring adjustments)
        necessary to present fairly the financial position of the Company as of December
        31, 2005 and the results of operations for the three months ended December
        31,
        2005 and 2004, respectively. Interim results are not necessarily indicative
        of
        full year performance because of the impact of seasonal and short-term
        variations.
 
  F-13
  CHINA
        ENERGY SAVINGS TECHNOLOGY, INC.
 AND
        SUBSIDIARIES
 
 CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 **Note
        4 - Accounts receivable**
 
 Accounts
        receivable as of December 31, 2005 and September 30, 2005 consisted of the
        following:
 December
                    31,
                
                September
                    30,2005
                
                2005Unaudited
                
                AuditedAccounts
                    receivable
                
                $
                12,174,712
                
                $
                7,239,840Less:
                    allowance fordoubtful
                    accounts
                
                
                768,151
                
                
                768,151Totals
                
                $
                11,406,561
                
                $
                6,471,689
 
 **Note
        5 - Notes receivable**
 
 The
        notes
        receivable represent amounts due on energy savings sharing contracts. The
        Company carries its notes receivable at the net present value of the discounted
        contract price. The notes receivable are secured by the related equipment.
        The
        notes receivable amounted to the following:
  December
                    31,
                
                September
                    30,2005
                
                2005Unaudited
                
                AuditedNotes
                    receivable
                
                $
                31,549,685
                
                $
                30,910,961Less:Current
                    portion of notes receivable
                
                
                8,833,066
                
                
                9,744,786Totals
                
                $
                22,716,619
                
                $
                21,166,175
 The
        following table represents as of December 31, 2005 the estimated principal
        collections on notes receivable for the next five years:
  Period
                    EndingDecember
                    31,
                
                Amount2006
                
                $
                8,833,0662007
                
                
                7,860,3422008
                
                
                6,154,8142009
                
                
                5,328,9932010
                
                
                3,372,470
   F-14
  CHINA
        ENERGY SAVINGS TECHNOLOGY, INC.
 AND
        SUBSIDIARIES
 
 CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 **Note
        6 - Inventories**
 
 Inventories
        as of December 31, 2005 and September 30, 2005 consisted of the
        following:
 December
                    31,
                
                September
                    30,2005
                
                2005Unaudited
                
                AuditedRaw
                    materials
                
                $
                1,517,947
                
                $
                719,530Work
                    in progress
                
                
                
                
                
                1,937Finished
                    goods
                
                
                2,514,035
                
                
                862,746Totals
                
                $
                4,031,982
                
                $
                1,584,213
 **Note
        7 - Prepaid expenses**
 
 Prepaid
        expenses at December 31, 2005 and September 30, 2005 amounted to $2,466,686
        and
        $1,890,688, respectively. Prepaid expenses represent advances to suppliers
        on
        inventory purchases.
 
 **Note
        8 - Plant and equipment**
 
 Plant
        and
        equipment as of December 31, 2005 and September 30, 2005 are summarized as
        follows:
 December
                    31,
                
                September
                    30,2005
                
                2005Unaudited
                
                AuditedBuilding
                
                $
                419,373
                
                $
                419,373Office
                    equipment
                
                
                87,877
                
                
                86,613Furniture
                    and fixtures
                
                
                42,328
                
                
                42,328Plant,
                    machinery and equipment
                
                
                81,981
                
                
                81,981Vehicle
                
                
                152,024
                
                
                152,024783,583
                
                
                782,319Less:
                    accumulated depreciation
                
                
                358,987
                
                
                338,719Plant
                    and equipment, net
                
                $
                424,596
                
                $
                443,600
  Depreciation
        expense for the three months ended December 31, 2005 and 2004 amounted to
        $$20,268 and $15,808, respectively.
 
  F-15
  CHINA
        ENERGY SAVINGS TECHNOLOGY, INC.
 AND
        SUBSIDIARIES
 
 CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
  **Note
        9 - Related party transactions**
  As
        of
        December 31, 2005, the amount due from related parties was $122,115. A
        majority of this amount was generated from making cash advances to the
        shareholders for ordinary business expenses. In addition, certain shareholders
        had collected payments on receivables on the Company’s behalf from the customers
        and those payments had not been repaid to the Company by December 31, 2005.
        These amounts are unsecured, interest free and have no fixed terms of repayment.
  **Note
        10 - Customer deposits**
 
 The
        Company requires its customers to deposit monies with the Company when they
        place an order for their products. The Company does not pay interest on these
        amounts in customer deposits which amounted to $1,969,230 and $1,858,451
        as of
        December 31, 2005 and September 30, 2005, respectively.
 
 **Note
        11 - Taxes payable**
  Taxes
        payable at December 31, 2005 and September 30, 2005 consisted of the
        following:
  Taxes
        Payable
 December
                    31,
                
                September
                    30,2005
                
                2005Unaudited
                
                AuditedUrban
                    maintenance andconstruction
                    tax
                
                $
                8,750
                
                $
                43,925Education
                    tax
                
                
                1,099
                
                
                5,523Value
                    added tax
                
                
                956,189
                
                
                4,800,102Totals
                
                $
                966,038
                
                $
                4,849,550
   F-16
  CHINA
        ENERGY SAVINGS TECHNOLOGY, INC.
 AND
        SUBSIDIARIES
 
 CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
  **Note
        11 - Taxes payable, (continued)**
  Provision
        for Income Taxes (continued)
  The
        following table reconciles the U.S. Statutory rates to the Company’s effective
        tax rate:
 December
                    31,2005
                
                2004U.S.
                    Statutory rates
                
                
                34.0
                %
                
                34.0
                %Foreign
                    income not recognized in USA
                
                
                (34.0
                )
                
                (34.0
                )China
                    income taxes
                
                
                -
                
                
                17.0Totals
                
                
                -
                %
                
                17.0
                %
 The
        Company’s factories are located in a special economic region in China. This
        economic region allows foreign enterprises to take a two-year income tax
        exemption and a 50% income tax reduction for the following three years. The
        Company’s wholly-owned subsidiary, SDID, was approved as a wholly-owned foreign
        enterprise in 2004. The Company has income tax exemption throughDecember 31, 2005 and 50% income tax reduction for the years ending
        September 30, 2006, 2007 and 2008.
 
 The
        estimated tax savings for the three months ending December 31, 2005 amounted
        to
        $979,032. The net effect on earnings per share if the income tax had been
        applied would decrease earnings per share from $0.25 to $0.19.
 
 The
        Company has a net operating loss carry forward of $9,946,234 for US income
        tax
        purposes that will expire during the year 2025. The Company has recorded
        a
        valuation allowance for the entire amount of the loss carry forward. Since
        the
        Company’s main operations are located in the PRC and any income subject to US
        income taxes will be dependent upon the Company having operations in the
        US or
        other US taxable events will have to occur. Since the Company is not sure
        at
        this time that the Company will be able utilize the tax benefits of this
        operating loss management has decided to record a valuation allowance for
        the
        entire amount of the operating loss.
 
 **Note
        12** - **Commitments
        and contingencies**
 
 Operating
        Leases
  The
        Company leases its facilities under long term, non-cancelable operating lease
        agreements expiring through June 2009. The non-cancelable operating lease
        agreements provide that the Company pays certain operating expenses applicable
        to the leased premises. The Company leased a new office space in Hong Kong
        during the last quarter of 2005. The lease is for twelve months expiring
        in
        September 2006 at a monthly rental rate of $7,800.
 
 Total
        rent expense for the three months ended December 31, 2005 and 2004 amounted
        to
        $17,397 and $36,719, respectively.
  F-17
 
 CHINA
        ENERGY SAVINGS TECHNOLOGY, INC.
 AND
        SUBSIDIARIES
 
 CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 **Note
        12** - **Commitments
        and contingencies, continued**
 
 As
        of
        December 31, 2005, the future minimum annual lease payments required under
        the
        operating leases for the next five years are as follows:
 Period
                    EndingDecember
                    31,
                
                Amount2006
                
                
                108,1172007
                
                
                58,4362008
                
                
                58,4362009
                
                
                40,580
  **Note
        13 - Equity incentive plan**
 
 On
        September 8, 2004, the Company adopted the China Energy Savings Technology,
        Inc.
        2004 Equity Incentive Plan (the “Plan”). The purpose of this plan is to provide
        incentives to attract, retain and motivate eligible persons whose current
        and
        potential contributions are important to the success of the Company by offering
        them an opportunity to participate in the Company’s future performance through
        awards of Options, the right to purchase common stock and stock bonuses.
        A total
        of 1,200,000 shares of common stock have been registered with the Securities
        and
        Exchange Commission (the “SEC”) under this Plan pursuant to a Registration
        statement on form S-8 filed with the SEC on September 17, 2004.
 
 On
        September 17, 2004, the Company issued 10,000 shares to non-employee consultants
        and 620,000 shares of its common stock to certain qualifying employees at
        $12.70
        per share. The total shares were valued at $8,001,000, based upon the closing
        price of the stock at the date the shares were issued of $12.70 per share.
        The
        stock is fully vested.
 
 The
        Company accounts for its employee stock option grants in accordance with
        the fair
        value provisions of Statement of Financial Accounting Standards No. 123,
        “Accounting for Stock-Based Compensation” (SFAS 123). SFAS 123 established a
        fair-value-based method of accounting for stock-based compensation
        plans. Pursuant
        to the transition provisions of SFAS 148, “Accounting for Stock-Based
        Compensation -
        Transition and Disclosure” (SFAS 148), the Company has elected the prospective
        method and will apply the fair value method of accounting to all equity
        instruments issued to employees. As of September 30, 2004, total stock based
        compensation expense amounted to $7,874,000.
  F-18
  CHINA
        ENERGY SAVINGS TECHNOLOGY, INC.
 AND
        SUBSIDIARIES
 
 CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 **Note
        13 - Equity incentive plan, (continued)**
 
 Compensation
        expense related to stock options granted to non-employees is accounted for
        under
        Statement of Financial Accounting Standards No. (SFAS) 123, “Accounting for
        Stock-Based Compensation” and Emerging Issues Task Force (EITF)
        96-18 ,
        “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in conjunction with Selling, Goods, or Services,”
which require entities to recognize an expense, based on the fair value of
        the
        related awards. As of September 30, 2005 and 2004, total stock compensation
        to
        non-employees amounted to $996,697 and $127,000, respectively.
 
 During
        October and November 2004, the Company issued 470,000 shares to non-employee
        consultants of its common stock at $11.00 and $13.15 per share. The total
        shares
        were valued at $5,256,000, based upon the closing price of the stock at the
        date
        the shares were issued.
 
 On
        April
        15, 2005, the Company issued to non-employee consultants and an employee
        100,000
        shares  of its common stock at $10.00 per share as compensation for
        services performed. The total shares were valued at $996,697.
 
 **Note
        14 - Shareholders’ equity**
  Stock
        Issuances
  On
        November 17, 2004, the Company completed an acquisition of an additional
        15%
        interest in Starway. Prior to the acquisition, the Company owned 50% of the
        outstanding shares of capital stock of Starway. After the acquisition, the
        Company owns a total of 65% of the outstanding shares of Starway capital
        stock.
        The Company acquired the additional 15% interest in Starway from Eurofaith.
        The
        sole director of Eurofaith is also a director and Corporate Secretary of
        the
        Company. The Company’s former CEO, Mr. Sun Li then owned 50% of Eurofaith and
        was the controlling shareholder of New Solomon, the Company’s principal
        shareholder.
 
 The
        Company acquired the 15% interest in Starway by issuing a total of 3,346,100
        shares of common stock of the Company. The amount of consideration given
        by the
        Company for the acquisition was determined with reference to the acquisition
        of
        shares of Starway capital stock as reported in the Company’s Current Report on
        Form 8-K filed on June 30, 2004, as amended by a Form 8-K/A filed on August
        20,
        2004. The closing of the Acquisition (the “Closing”) occurred on November 17,
        2004 (the “Closing Date”). The sole consideration for the Acquisition was common
        stock of the Company.
 
 In
        accordance with SFAS 141, the Company is required to record the acquisition
        of a
        minority interest in accordance with purchase accounting. However entities
        that
        are under common control are required to record the acquisition of the assets
        and liabilities transferred at their carrying amounts. Due to the common
        majority ownership in the Company by New Solomon and Eurofaith, by Sun Li
        who also controls New Solomon,  the Company and Eurofaith are deemed to be
        under common control in accordance with SAB No. 47. Due to the common control
        element in accordance with SFAS 141 the Company has recorded the 15% acquisition
        from Eurofaith at historical cost value of $6,095,901.
 
 During
        November and December 2004, the Company issued 7,683 shares of common stock
        for
        legal services and director fees. The total shares were valued at
        $71,740.
 
 F-19
   CHINA
        ENERGY SAVINGS TECHNOLOGY, INC.
 AND
        SUBSIDIARIES
 
 CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
  **Note
        14 - Shareholders’ equity, (continued)**
  Stock
        Issuances (continued)
  The
        Company acquired the remaining 35% interest (the “Acquisition”) in Starway
        Management Limited (“Starway”) from Sky Beyond Investments Limited (“Sky
        Beyond”) on February 1, 2005 by issuing a total of 7,807,569 shares of common
        stock of the Company to Sky Beyond and its assignees. Sky Beyond had acquired
        the 35% interest in Starway from Golden Resorts Group Limited (formerly known
        as
“Meditech Group Company Limited”). The amount of consideration given by the
        Company for the Acquisition was determined with reference to the acquisitions
        of
        the 50% and subsequently the 15% interest in Starway as reported in the
        Company’s
        Form 8-K filed on June 30, 2004 and November 18, 2004, respectively. The
        closing
        of the Acquisition (the “closing”) occurred on February 1, 2005 and the Company
        owns 100% of Starway after the Acquisition.
 
 Preferred
        Stock
  The
        Company has 10,000,000 shares of preferred stock authoized $.001 par value
        per
        share. As of December 31, 2005, there was no preferred stock issued and
        outstanding.
  Common
        Stock
  As
        of
        December 31, 2005, the Company had 24,418,853 common shares outstanding of
        which
        719,100 shares of common stock was inadvertently issued by the transfer agent.
        The Company is in the process of having the shares cancelled and reissued
        in the
        correct amounts. The shares of common stock that should be outstanding at
        December 31, 2005 is 24,699,753.
  Statutory
        Reserves and Restricted Retained earnings
  The
        Company is required to make appropriations to reserve funds, comprising the
        statutory surplus reserve, statutory public welfare fund and discretionary
        surplus reserve, based on after-tax net income determined in accordance with
        generally accepted accounting principles of the People’s Republic
        of
        China (the “PRC GAAP”). Appropriation to the statutory surplus reserve should be
        at least 10% of the after tax net income determined in accordance with the
        PRC
        GAAP until the reserve is equal to 50% of the entities’ registered
        capital. Appropriations to the statutory public welfare fund are at 5% to
        10% of
        the after tax net income determined in accordance with the PRC
        GAAP.
 
 The
        statutory public welfare fund is established for the purpose of providing
        employee facilities and other collective benefits to the employees and is
        non-distributable other than in liquidation. Appropriations to the discretionary
        surplus reserve are made at the discretion of the Board of Directors.
 
 **Note
        15 - Restatement**
 
 The
        Company had restated the financial statements for the period ended December
        31,
        2004 in order to include information regarding the stock issuance of 470,000
        shares in the amount of $5,256,000 to consultants and other service providers.
        The effect of the restatement on the Company’s previously released consolidated
        income statements was a reduction of net income of $772,795 for the three
        months
        ended December 31, 2004. The effect on earnings per share is to reduce earnings
        per share from $0.25 as previously reported to $0.19.
 
 
 F-20
 
 
 CHINA
        ENERGY SAVINGS TECHNOLOGY, INC.
 AND
        SUBSIDIARIES
 
 CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 **Note
        16 - Subsequent event**
  On
        January 17, 2006, the Company entered into a placement agreement with Empire
        Financial Group, Inc. (the “Placement Agent”) in order to raise $50 million
        through a private placement of the Company’s preferred stock. The proceeds from
        the private placement will be used to finance acquisitions of new infrastructure
        and energy ventures. The Placement Agent will earn a placement fee of 8%
        of the
        aggregate purchase price of the preferred stock. In addition, at the closing
        of
        the sale of the preferred shares of stock, the Company will issue the Placement
        Agent warrants to purchase shares of common stock in the Company in an amount
        equal to 8.0% of the total amount raised. The warrants shall be exercisable
        at
        the price paid for any common stock sold in the offering.
  On
          January 20, 2006, the Company filed two Form S-3 registration statements
          with
          the United States Securities and Exchange Commission (the “SEC”) under which the
          Company intends to register 10,000,000 shares of its Common Stock by itself,
          and
          6,050,000 additional shares by New Solomon Consultants Limited, principal
          stockholder of the Company.
 
 The
          independent auditors of the Company and the Company itself were advised
          by the
          SEC on January 31, 2006 and February 9, 2006 respectively that the SEC
          is
          conducting an informal and non public inquiry in the “Matter of China Energy
          Savings Technology, Inc”, and requested that the Company and its auditors
          furnish certain documents. The Company intends to fully cooperate with
          these
          inquiries and supply all available materials requested.
   F-21


**ITEM
        2.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**
 The
          following discussion of our financial condition and results of operations
          should
          be read in conjunction with the financial statements and related notes
          thereto.
  OVERVIEW
 
 We
        are a
        Nevada corporation headquartered in Hong Kong, China that invests in, develops,
        markets, distributes and manufactures energy saving products for use in
        commercial and industrial settings. Since February 2005 we owned 100% of
        Starway
        Management Limited, a British Virgin Islands corporation (“Starway”) which owns
        all of the equity interests in Shenzhen Dicken Industrial Development Limited,
        a
        company incorporated in the Republic of China on November 20, 1996 (“SDID”)
        which, in turn, owns all of the equity interest in Shenzhen Dicken Technology
        Development Limited, a company incorporated in the Republic of China on November
        9, 1999 (“SDTD”). SDID and SDTD develop, market distribute and manufacture
        energy saving products for use in commercial and industrial settings in
        China.
  RESTATEMENT
        DECEMBER 31, 2004
 
 The
        Company had restated the financial statements for the period ending December
        31,
        2004 in order to include information regarding the stock issuance of 470,000
        shares in the amount of $5,256,000 to consultants and other service providers.
        The effect of the restatement on the Company’s previously released consolidated
        income statements was a reduction of net income of $772,795 for the three
        months
        ended December 31, 2004. The effect on earnings per share was to reduce earnings
        per share from $0.25 as previously reported to $0.19. The December 31, 2004
        amounts discussed in this 10Q reflect the restated amounts.
 
 CRITICAL
        ACCOUNTING POLICIES
 
 Our
        management’s discussion and analysis of its financial condition and results of
        operations is based upon our consolidated financial statements, which have
        been
        prepared in accordance with accounting principles generally accepted in the
        United States. Our financial statements reflect the selection and application
        of
        accounting policies which require management to make significant estimates
        and
        judgments. See note 1 to the Company’s consolidated financial statements,
“Summary of Significant Accounting Policies.” Our management bases their
        estimates on historical experience and on various other assumptions that
        are
        believed to be reasonable under the circumstances. Actual results may differ
        substantially from these estimates under different assumptions or conditions.
        We
        believe that the following reflect the more critical accounting policies
        that
        currently affect our financial condition and results of operations.
 
 Revenue
        and Deferred Revenue Recognition
 
 We
        recognize product sales under the following two types of contracts:
 
 1)
              Equipment
                  sale contract - Under the Equipment sale contract, we recognize
                  revenue
                  when persuasive evidence of an arrangement exists, the sales price
                  to the
                  buyer is fixed or determinable, collectability is reasonably assured,
                  delivery has occurred and accepted by the
                  buyers.
 
 2)
              Energy
                  savings sharing contract - Under this contract, we grant customers
                  extended payment terms under contracts of sale. These contracts
                  are
                  generally for a period of one to five years at prevailing interest
                  rates
                  and are collateralized by the related equipment, which if repossessed,
                  may
                  be less than the receivable balance outstanding. We recognize revenue
                  under profit sharing agreements when the amounts are fixed and
                  determinable and collectability is reasonably assured. Amounts
                  received by
                  us in excess of the original estimated cost savings on the contract
                  is
                  recorded as interest income.
 
 22
  RESULTS
        OF OPERATIONS
 
 QUARTER
        ENDED DECEMBER 31, 2005 COMPARED TO THE QUARTER ENDED DECEMBER 31,
        2004.
 Quarter
                    EndedDecember
                    31,
                
                2005
                
                2004
                
                ChangeRevenues
                
                $
                10,696,397
                
                $
                11,708,690
                
                
                -8.65
                %Cost
                    of goods sold
                
                
                4,161,941
                
                
                4,891,408
                
                
                -14.91
                %Gross
                    profit
                
                
                6,534,456
                
                
                6,817,282
                
                
                -4.15
                %Operating
                    expenses
                
                
                1,119,283
                
                
                1,584,539
                
                
                -29.36
                %Other
                    income
                
                
                676,458
                
                
                345,388
                
                
                95.85
                %Income
                    beforeminority
                    interest
                
                
                6,091,631
                
                
                5,578,131
                
                
                9.21
                %Net
                    Income (AfterMinority
                    Interest)
                
                
                6,091,631
                
                
                2,858,278
                
                
                113.12
                %
  INCOME
        BEFORE MINORITY INTEREST AND NET INCOME
 
 Our
        net
        income before minority interest for the three months ended December 31, 2005
        and
        December 31, 2004 was $6,091,631 and $5,578,131, respectively. Our net income
        before minority interest for the three months ended December 31, 2005 increased
        by approximately 9.21% when compared to our net income before minority interest
        for the three months ended December 31, 2004. Such increase in net income
        before
        minority interest was due to a decrease in cost of goods sold and operating
        expenses as further discussed below.
 
 As
        of
        December 31, 2004, we held a 65% interest in Starway which incurred a minority
        interest charge to our profit and loss statement of $2,719,853 for the period
        ended December 31, 2004. As a result, our net income after minority interest
        for
        the three months ended December 31, 2005 and December 31, 2004 was $6,091,631
        and $2,858,278, respectively.
 
 REVENUES
 
 Our
        revenues are derived primarily from SDID’s sales of its energy savings products
        and entering into energy savings sharing contracts. Revenues for the three
        months ended December 31, 2005 were $10,696,397, a net decrease of approximately
        8.65% compared with revenues of $11,708,690 for the three months ended December
        31, 2004. The decrease was a result of an energy savings sharing contract
        amounting to $2,800,000 under installation during this quarter, which was
        not
        yet completed in this quarter and will contribute to the revenue in the next
        quarter. Our management expects that revenue will grow in 2006 because of
        our
        marketing and sales efforts and strong demand for our products due to
        electricity shortages in many parts of China. Further, our management believes
        that we will be able to maintain our price levels due to strong demand and
        a
        lack of strong competitive products. While our products may be used
        internationally, we currently have focused our sales efforts in China, targeting
        large businesses and local governments. Management hopes to continue to increase
        our market share in China.
 
 GROSS
        PROFIT
 
 We
        had a
        gross profit of $6,534,456 and $6,817,282 for the three months ended December
        31, 2005 and December 31, 2004, respectively, resulting in a 4.15% decrease.
        The
        decrease in our cost of goods sold is a result of a slight decrease in revenues
        and better cost control.
 
 The
        main
        factor for the decrease in cost of goods sold is a result of better control
        over
        production costs. We have seen an increase in suppliers for the supplies
        and
        materials used for the production of our products which results in more
        competitive pricing for such supplies and materials. As a result, the cost
        of
        materials such as chipsets and other hardware used in the production of our
        products has decreased substantially which in turn produces better profit
        margins for us. Such a decrease is expected to continue in the short term
        but we
        expect it to be minimized in the future.
  23
 
 OPERATING
        EXPENSES
 
 Below
        is
        a breakdown comparison of the operating expenses for the Three Months Ended
        December 31, 2005 and December 31, 2004:
 Three
                    MonthsEnded
                    December 31,
                
                2005
                
                2004
                
                ChangesOperating
                    expenses
                
                $
                467,164
                
                $
                612,700
                
                
                -23.75
                %Sales,
                    marketing andadministrative
                    expenses
                
                
                652,119
                
                
                971,839
                
                
                -32.90
                %Total
                    operating expenses
                
                $
                1,119,283
                
                $
                1,584,539
                
                
                -29.36
                %
 
 There
        was
        a 29.36% decrease in total operating expenses from $1,584,539 to $1,119,283
        for
        the three months ended December 31, 2004 and December 31, 2005, respectively.
        The decrease in sales, marketing and administrative expenses was mainly due
        to
        the decrease in consulting expenses. We believe expenses related to the
        marketing and selling of our products will continue to increase substantially
        to
        handle our growing sales volume. We expect that professional fees and expenses
        to ensure compliance with U.S. securities laws, the Sarbanes-Oxley Act and
        marketplace rules for the NASDAQ National Market will increase
        substantially.
 
 MATERIAL
        CHANGES IN FINANCIAL CONDITION
 
 FINANCIAL
        CONDITION AS AT DECEMBER 31, 2005 COMPARED TO FINANCIAL CONDITION AS AT
        SEPTEMBER 30, 2005
 
 The
        material changes in financial condition is discussed as follows:
 
 CASH
 
 Cash
        as
        at December 31, 2005 and September 30, 2005 was $25,089,074 and $30,926,619
        respectively. Cash as at December 31, 2005 decreased by 18.88% as compared
        to
        cash as at September 30, 2005. Such large decrease in cash was mainly due
        to
        payment of accrued value added tax accumulated as at September 30, 2005.
        As at
        September 30, 2005, the Company was trying to obtain wavier of accrued value
        added tax by the local Chinese tax authority. However, the Company confirmed
        that it could not obtain the waiver successfully and paid the accrued value
        added tax accumulated as at September 30, 2005 in this quarter.
 
 ACCOUNTS
        RECEIVABLE, TRADE, NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
 
 Accounts
        receivable as at December 31, 2005 and September 30, 2005 was $11,406,561
        and
        $6,471,689, respectively. Accounts receivable as at December 31, 2005 increased
        by 76.25% as compared to accounts receivable as at September 30, 2005. Such
        a
        large increase in accounts receivable was mainly due to an increase in current
        accounts receivable aged within three months. The Company considered that
        adequate provision has been made for doubtful accounts and has confidence
        in
        collecting the remaining accounts receivable.
 
 INVENTORIES
 
 Inventories
        as at December 31, 2005 and September 30, 2005 was $4,031,982 and $1,584,213
        respectively. Inventories as at December 31, 2005 increased by 154.51% as
        compared to inventories as at September 30, 2005. Such a large increase in
        inventories was mainly due to an energy savings sharing contract amounting
        to
        $2,800,000 under installation during this quarter, which was not yet completed
        as at the end of this quarter. Moreover, more raw materials were purchased
        during this quarter in order to prepare for the orders of our customers.
  24
  PREPAID
        EXPENSES
 
 Prepaid
        expenses as at December 31, 2005 and September 30, 2005 was $2,466,686 and
        $1,890,688 respectively. Prepaid expenses as at December 31, 2005 increased
        by
        30.46% as compared to prepaid expenses as at September 30, 2005. Such a large
        increase in prepaid expenses was mainly due to an increase in deposits paid
        to
        suppliers in light of the purchase orders placed to the
        suppliers.
 
 TAXES
        PAYABLE
 
 Taxes
        payable as at December 31, 2005 and September 30, 2005 was $966,038 and
        $4,849,550, respectively. Taxes payable as at December 31, 2005 decreased
        by
        80.08% as compared to taxes payable as at September 30, 2005. Such a large
        decrease in taxes payable was mainly due to payment of accrued value added
        tax
        accumulated as at September 30, 2005. As at September 30, 2005, the Company
        was
        trying to obtain a wavier of accrued value added tax by the local Chinese
        tax
        authority. However, the Company confirmed that it could not obtain the waiver
        successfully and paid the accrued value added tax accumulated as at September
        30, 2005 in this quarter.
  25
  LIQUIDITY
        AND CAPITAL RESOURCES
 Three
                    MonthsEnded
                    December 31,
                
                2005
                
                2004
                
                ChangeNet
                    cash provided by (used in)operating
                    activities
                
                
                (6,036,136
                )
                
                8,390,156
                
                
                (14,426,292
                )Net
                    cash (used in)investing
                    activities
                
                
                -
                
                
                (3,013
                )
                
                3,013Net
                    cash (used in)financing
                    activities
                
                
                (3,505
                )
                
                (3,135
                )
                
                (370
                )
 
  The
        increase of $14,426,292 in net cash used in operating activities primarily
        reflects increase in notes and account receivables and increase in inventories
        and repayment of taxes payable.
 
 The
        decrease of $3,013 in net cash used in investing activities was due to no
        equipment was purchased during the quarter.
 
 The
        increase of $370 in net cash used in financing activities was due to
        payments on notes payable.
 
 We
        believe that we have adequate capital resources to continue our operations
        and
        will not need to raise capital in the near future. We believe that our current
        cash balance and the revenues that will be generated will cover anticipated
        operating expenses for a period of at least one year without supplementing
        our
        cash reserves. We may, however, raise additional capital to further develop
        our
        other products.
 
 EFFECT
        OF
        FLUCTUATION IN FOREIGN EXCHANGE RATES
 
 Our
        operating subsidiaries are located in China, and our Company buys all raw
        materials in China and sells all our products in China using Chinese Renminbi
        as
        the functional currency. Based on China government regulation, all foreign
        currencies under the category of current accounts are allowed to be freely
        exchanged with hard currencies. During the past two years of operation, there
        were no significant changes in exchange rates; however, unforeseen developments
        may cause a significant change in exchange rates.
 
 INVESTMENT
        IN SUBSIDIARIES
 
 As
        of
        December 31, 2005, we owned a 100% interest in Starway.
 
 Starway
        holds 100% interest in Shenzhen Dicken Industrial Development Limited (“SDID”),
        which subsequently holds 100% interest in the energy savings project, Shenzhen
        Dicken Technology Development Limited (“SDTD”) as well as owns the intellectual
        property of their energy savings products in China.
 
 OFF-BALANCE
        SHEET ARRANGEMENTS
 
 We
        do not
        have any off-balance sheet arrangements.
  Forward
        Looking Statements
  Statements
        in this Item 2 “Management’s Discussion and Analysis of Financial Condition and
        Results of Operations” and elsewhere in this document are certain statements
        which are not historical or current fact and constitute “forward-looking
        statements” within the meaning of such term in Section 27A of the 
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
        1934.  Such forward-looking statements involve known and unknown risks,
        uncertainties and other factors that could cause the actual financial or
        operating results of the Company to be materially different from the historical
        results or from any future results expressed or implied by such forward-looking
        statements.  Such risks include, among others, the following:
        international, national and local general economic and market conditions:
        our
        ability to sustain, manage or forecast our growth; raw material costs and
        availability; new product development and introduction; existing government
        regulations and changes in, or the failure to comply with, government
        regulations; adverse publicity; competition; the loss of significant customers
        or suppliers; fluctuations and difficulty in forecasting operating results;
        changes in business strategy or development plans; business disruptions;
        the
        ability to attract and retain qualified personnel; the ability to protect
        technology; and other factors referenced in this and previous filings. 
Such forward looking statements are based on our best estimates of future
        results, performance or achievements, based on currrent conditions and the
        most
        recent results of the Company. In addition to statements which explicitly
        describe such risks and uncertainties, readers are urged to consider statements
        labeled with the terms “may”, “will”, “potential”, “opportunity”, “believes”,
“belief”, “expects”, “intends”, “estimates”, “anticipates” or “plans” to be
        uncertain and forward-looking.  The forward-looking statements contained
        herein are also subject generally to other risks and uncertainties that are
        also
        subject generally to other risks and uncertainties that are described from
        time
        to time in the Company’s reports and registration statements filed with the
        Securities and Exchange Commission.
  Consequently,
        all of the foward-looking statements made in this Form 10-Q are qualified
        by
        these cautionary statements and there can be no assurance that the actual
        results anticipated by management will be realized or, even if substantially
        realized, that they will have the expected consequences to or effects on
        our
        business operations.
  As
        used
        in this Form 10-Q, unless the context requires otherwise, “we” or “us” or the
“Company” means China Energy Savings Technology, Inc. and its
        subsidiaries.
  26
 **ITEM
          3.** **QUANTITATIVE
          AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**
 
 While
          our
          reporting currency is the U.S. dollar, to date, virtually all of our revenues
          and costs are denominated in Renminbi and a significant portion of our
          assets
          and liabilities are denominated in Renminbi. As
          a
          result, we are exposed to foreign exchange risk as our revenues and results
          of
          operations may be impacted by fluctuations in the exchange rate between
          U.S.
          Dollars and Renminbi. If the Renminbi depreciates against the U.S. Dollar,
          the
          value of our Renminbi revenues and assets as expressed in our U.S. Dollar
          financial statements will decline. We do not hold any derivative or other
          financial instruments that expose us to substantial market risk.
  The
          Renminbi is currently freely convertible under the “ current
          account ” ,
          which
          includes dividends, trade and service-related foreign exchange transactions,
          but
          not under the “ capital
          account ” ,
          which
          includes foreign direct investment.  To date,
          we have not entered into any hedging transactions in an effort to reduce
          our
          exposure to foreign currency exchange risk. While
          we
          may decide to enter into hedging transactions in the future, the effectiveness
          of these hedges may be limited and we may not be able to successfully hedge
          our
          exposure at all. Accordingly,
          we may incur economic losses in the future due to foreign exchange rate
          fluctuations, which could have a negative impact on our financial condition
          and
          results of operations.
 
 **ITEM
          4.** **CONTROLS
          AND PROCEDURES**
 
 (a)
          EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
 
 The
          Company maintains disclosure controls and procedures designed to ensure
          that
          information required to be disclosed in the reports that the Company files
          or
          submits under the Securities Exchange Act of 1934 (the “Exchange Act”), is
          recorded, processed, summarized and reported within the time period specified
          in
          the rules and forms of the Securities and Exchange Commission. As of the
          end of
          the period covered by this Report, the Company’s management, including its Chief
          Executive Officer and Chief Financial Officer, conducted an evaluation
          of the
          effectiveness of the design of the Company’s disclosure controls and procedures,
          as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act. Based
          on
          that evaluation, the Company’s Chief Executive Officer and Chief Financial
          Officer concluded that the Company’s disclosure controls and procedures were not
          effective as of December 31, 2005, because of the material weaknesses disclosed
          in “Management’s Report on Internal Control over Financial Reporting” included
          in its Form 10-K for the fiscal year ended September 30, 2005.
  During
          the fiscal quarter ended December 31, 2005, the Company implemented the
          following changes in its internal control over financial reporting that
          has
          materially affected, or is reasonably likely to materially affect, the
          Company’s
          internal control over financial reporting. The Company began to execute
          the
          remediation plans identified under “Management’s Report on Internal Control over
          Financial Reporting” in Item 9A of its Form 10-K.
 Since
            October 1, 2005, the Company’s management has commenced the following steps to
            address the existing material weaknesses already identified:
 
 1.
                  We
                      have hired one more PRC qualified accounting staff person and
                      engaged an
                      outside contractor with technical accounting expertise to review
                      and
                      reorganize the accounting and finance department;
                      and
 
 2.
                  We
                      have interviewed prospective new Directors and recruited a
                      new CEO who
                      joined our Board.
  The
          Company will continue to execute the remediation plans during the second
          fiscal
          quarter of 2006.
  In
            light
            of these material weaknesses, the Company performs additional analyses
            and other
            pre and post-closing procedures to ensure that our consolidated financial
            statements are presented fairly in all material respects in accordance
            with
            generally accepted accounting principles in the United States. These
            procedures
            include monthly business reviews led by our Chief Executive Officer and
            monthly
            operating and financial statement reviews by various levels of our management
            team, including our executive officers. Accordingly, management believes
            that
            the consolidated financial statements and schedules included in this
            Form 10-Q
            fairly present in all material respects our financial position, results
            of
            operations and cash flows for the periods presented.
  There
          was
          no change in our internal control over financial reporting during the quarter
          ended December 31, 2005 that has materially affected, or is reasonably
          likely to
          materially affect, our internal control over financial reporting, other
          than the
          remediation measures which are described above.
 
 Moore
          Stephens Wurth Frazer and Torbet, LLP (MSFT), our independent registered
          public
          accounting firm, has audited management’s assessment of the effectiveness of the
          Company’s internal control over financial reporting as of September 30, 2005 as
          stated in their report which appears in this Annual Report on Form 10-K.
          Since
          we were unable to complete our assessment of internal control, MSFT has
          disclaimed an opinion on the effectiveness of our controls.
  27


**PART
      II - OTHER INFORMATION**





**ITEM
        1. LEGAL PROCEEDINGS**
 
 The
        management of China Energy Savings Technology, Inc. is not aware of any material
        legal proceedings pending against it, Starway or its subsidiaries.




**ITEM
      1A.**  **RISK
      FACTORS**





We
      are
      subject to various risks. You should carefully consider the following risk
      factors, as well as other information included in this Form 10-Q.





A
      DROP IN
      THE RETAIL PRICE OF ELECTRICAL ENERGY MAY HAVE A NEGATIVE EFFECT ON OUR BUSINESS.





A
      customer’s decision to purchase our products
      is primarily driven by return on investment resulting from the increased energy savings. Although
      management believes that current retail energy prices support
      an attractive return on investment for our products, there
      can
      be no assurances that
      future retail pricing of electrical energy will remain at current levels.





THERE
      CAN
      BE NO ASSURANCE THAT WE CAN KEEP
      UP WITH THE RAPID TECHNOLOGICAL CHANGE IN THE ENERGY SAVINGS
      PRODUCT INDUSTRY.





We
      believe that our energy saving products are able to compete in the marketplace
      based upon, among other things, our intellectual property. Although
      the Company is developing and marketing its products with what it believes to
      be state-of-the art technology, these
      technologies, as well as those under development for future projects are
      evolving technologies. There is no assurance that any applications of our
      technologies or those of third parties, if developed, will not be rendered
      superfluous or obsolete by research efforts and technological advances by others
      in these fields .
      As new
      technologies are developed, we may need
      to adapt and change our products
      and services, our method
      of marketing or delivery or alter our current
      business in ways that may adversely affect revenue and our ability
      to achieve our proposed
      business goals. Accordingly, there is a risk that our technologies at a later date will not
      support a viable commercial enterprise.




WE MUST
      CONTINUALLY RESEARCH AND DEVELOP NEW TECHNOLOGIES AND PRODUCTS TO REMAIN
      COMPETITIVE.





There
      are
      approximately 50 companies in China that engage in the production and sale
      of
      energy savings products. Many competitors have considerably greater financial,
      technological, marketing and personnel resources than those currently available
      to us. We expect competition to intensify in all fields in which we are involved
      in view of the world’s need to conserve energy.





To
      achieve our strategy
      and obtain market share, we will
      need
      to continually research, develop and refine
      new technologies and offer new products. Many
      factors may limit our ability
      to develop and refine new products, including access to new products and
      technologies, as well as marketplace resistance to new products and
      technology.





WE
      MAY
      NOT BE SUCCESSFUL IN OUR PREVIOUSLY COMMENCED DIVERSIFICATION
      PROJECTS.





To
      date,
      our business concerns energy savings products using a soft switching system.
      We
      have recently announced several projects (“Projects”) with third parties to
      develop hydrogen fuel cell generators and Thermo - photovoltaic Cell Technology.
      Management anticipates that the fuel cell project will require many years and
      substantial capital to complete, which capital may not be available when needed.
      We do not expect to be in a position to generate significant revenues from
      any
      Project during its research and development stages. If we incur substantial
      costs for such research and development activities, until such time, if ever,
      that we derive meaningful revenues from such Projects, it is expected that
      such
      costs will have an adverse effect on our profitability, if any. Furthermore,
      if
      we enter into arrangements with third parties for the commercial development
      of
      such products through license, joint-venture or other agreements, there is
      no
      assurance that any product will be successfully manufactured and marketed since
      we would, in all likelihood, be required to give up control of such activities.





28


IF
      WE ARE
      UNABLE TO ADEQUATELY PROTECT OR ENFORCE OUR RIGHTS TO OUR INTELLECTUAL PROPERTY,
      WE MAY LOSE VALUABLE RIGHTS, EXPERIENCE REDUCED MARKET SHARE, IF ANY, OR INCUR
      COSTLY LITIGATION TO PROTECT SUCH RIGHTS.





We
      generally require our employees, consultants, advisors and collaborators to
      execute appropriate confidentiality agreements with the Company. These
      agreements typically provide that all material and confidential information
      developed or made known to the individual during the course of the individual’s
      relationship with us be kept confidential and not disclosed to third parties
      except in specific circumstances. These agreements may be breached, and in
      some
      instances, we may not have an appropriate remedy available for breach of the
      agreements. Furthermore, our competitors may independently develop substantial
      equivalent proprietary information and techniques, reverse engineer information
      and techniques, or otherwise gain access to our proprietary technology. In
      addition, the laws of China may not project proprietary rights to the same
      extent as U.S. law. Therefore, we may be unable to meaningfully protect our
      rights in trade secrets, technical know-how and other non-patented
      technology.





We
      may
      have to resort to litigation to protect our rights for certain intellectual
      property, or to determine their scope, validity or enforceability. Enforcing
      or
      defending our rights is expensive and may distract management from its
      development of the business if not properly managed. Such efforts may not prove
      successful. There is always a risk that patents, if issued, may be subsequently
      invalidated, either in whole or in part and this could diminish or extinguish
      protection for any technology we may license. Any failure to enforce or protect
      our rights could cause us to lose the ability to exclude others from issuing
      technology to develop or sell competing products.





WE MUST
      ATTRACT AND RETAIN HIGHLY SKILLED AND MOTIVATED EMPLOYEES TO SUCCESSFULLY MANAGE OUR GROWTH
      AND COMPETE IN THE ENERGY
      SAVINGS MARKETPLACE.





Our ability
      to manage our growth
      and operations going
      forward will depend on, among
      other things: expanding, training
      and managing our employee
      base, including attracting, retaining
      and motivating highly skilled personnel; developing or outsourcing our customer
      interface, operations, administration and maintenance systems; and
      controlling our expenses. We cannot
      assure that we will
      succeed in developing all or any of these capabilities.





OUR CURRENT
      STOCKHOLDERS EXERCISE SUBSTANTIAL CONTROL AND MAY MAKE DECISIONS THAT YOU DO
      NOT
      CONSIDER TO BE IN YOUR BEST INTERESTS.





As
      of
      January 12, 2006, our executive officers and principal shareholder beneficially owned in the
      aggregate approximately 56 %
      of the
      outstanding Common Stock prior to
      this Offering .
      It is
      expected that these individuals will maintain a majority control of the Company. As
      a
      result, these stockholders, acting together, will be able to exercise control
      over all matters requiring approval of the stockholders of the
      Company.




OUR
      STOCK
      PRICE IS HIGHLY VOLATILE




The
      trading price of our common stock has fluctuated significantly. Our
      stock
      price could be subject to wide fluctuations in the future in response to many
      events or factors, including those discussed in the preceding risk factors
      relating to our operations, as well as:




·
            actual
                or anticipated fluctuations in operating results, actual or anticipated
                gross profit as a percentage of net sales, levels of inventory, our
                actual
                or anticipated rate of growth and our actual or anticipated earnings
                per
                share;




·
            changes
                in expectations as to future financial performance or changes in
                financial
                estimates or buy/sell recommendations of securities
                analysts;




·
            changes
                in governmental regulations or policies in
                China;




29




·
            our,
                or a competitor’s, announcement of new products, services or technological
                innovations;




·
            the
                operating and stock price performance of other comparable companies;
                and




·
            news
                and commentary emanating from the media, securities analysts or government
                bodies in China relating to us and to the industry in
                general.







General
      market conditions and domestic or international macroeconomic factors unrelated
      to our performance may also affect our stock price.  For
      these reasons, investors should not rely on recent trends to predict future
      stock prices or financial results. In addition, following periods of volatility
      in a company’s securities, securities class action litigation against a company
      is sometimes instituted. This type of litigation could result in substantial
      costs and the diversion of management’s time and resources.





PAST
      ACTIVITIES OF THE COMPANY AND ITS AFFILIATES MAY LEAD TO FUTURE LIABILITY FOR
      THE COMPANY.





Prior
      to
      the acquisition of Starway, the Company engaged in businesses unrelated to
      its
      current operations. Although
      the major shareholders of the Company prior to the acquisition of Starway
      indemnified Rim Holdings against any loss, liability, claim, damage or expense
      arising out of or based on any breach of or inaccuracy in any of their
      representations and warranties made regarding such acquisition, any liabilities
      relating to such prior business against which the Company is not completely
      indemnified may have a material adverse effect on the Company.





OUR
      AUDITORS ARE UNABLE TO EXPRESS AN OPINION ON MANAGEMENT’S ASSESSMENT OR ON THE
      EFFECTIVENESS OF OUR INTERNAL CONTROLS OVER FINANCIAL REPORTING





In
      connection with the audit of our financial statements for the fiscal year ended
      September 30, 2005, we were unable to complete management’s assessment of
      internal control over financial reporting. Because of that scope limitation,
      our
      auditors were unable to perform any procedures required in an audit of internal
      control over financial reporting or an audit of management’s assessment of the
      effectiveness of internal control over financial reporting. During the fiscal
      quarter ended December 31, 2005, we began to execute remediation plans discussed
      under Controls and Procedures in Item 4 of Part I of this Report.  Until
      such time as we are able to complete our assessment of internal controls, we
      can
      give no assurance that we can prevent or detect misstatements. Also, any
      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.
      While we expect to complete our assessment during the first half of calendar
      2006, there can be no assurance of such, which could have a material adverse
      affect on the accuracy of our financial statements.





RISKS
      RELATED TO DOING BUSINESS IN THE PRC





ADVERSE
      CHANGES IN ECONOMIC AND POLITICAL POLICIES OF THE PRC GOVERNMENT COULD HAVE
      A
      MATERIAL ADVERSE EFFECT ON THE OVERALL ECONOMIC GROWTH OF CHINA, WHICH COULD
      ADVERSELY AFFECT OUR BUSINESS.





All
      of
      our business operations are conducted in China. Accordingly, our results of
      operations, financial condition and prospects are subject to a significant
      degree to economic, political and legal developments in China. China’s
      economy differs from the economies of most developed countries in many respects,
      including with respect to the amount of government involvement, level of
      development, growth rate, control of foreign exchange and allocation of
      resources. While
      the
      PRC economy has experienced significant growth in the past 20 years, growth
      has
      been uneven across different regions and among various economic sectors of
      China. The
      PRC
      government has implemented various measures to encourage economic development
      and guide the allocation of resources. Some of these measures benefit the
      overall PRC economy, but may also have a negative effect on us. For
      example, our financial condition and results of operations may be adversely effected by
      government control over capital investments or changes in tax regulations that
      are applicable to us. Since
      early 2004, the PRC government has implemented certain measures to control
      the
      pace of economic growth. Such measures may cause a decrease in the level of
      economic activity in China, which in turn could adversely affect our results
      of
      operations and financial condition.





30


FUTURE
      FLUCTUATION IN THE VALUE OF THE RENMINBI MAY NEGATIVELY AFFECT OUR ABILITY
      TO CONVERT OUR RETURN
      ON OPERATIONS TO U.S. DOLLARS IN A PROFITABLE MANNER AND OUR SALES
      GLOBALLY.





Until
      1994, the Renminbi experienced a gradual but significant devaluation against
      most major currencies, including U.S. 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. On
      July
      21, 2005, the PRC government changed its decade-old policy of pegging the value
      of the RMB to the U.S. dollar. Under
      the
      new policy, the RMB is permitted to fluctuate within a narrow and managed band
      against a basket of certain foreign currencies. This
      change in policy has resulted in an approximately 2.0% appreciation of the
      RMB
      against the U.S. dollar. While
      the
      international reaction to the RMB revaluation has generally been positive,
      there
      remains significant international pressure on the PEC government to adopt an even more flexible currency policy, which could result
      in
      a further and more significant revaluation of the RMB against the U.S. dollar. Any
      significant revaluation of RMB may be attributable to adjustments resulting
      from
      the translation of our financial statements, which will be recorded as part of accumulated
      comprehensive income in shareholders’ equity.





If
      any
      devaluation of the Renminbi were to occur in the future, our
      return on our operations in China, which are expected to be in the form of Renminbi, will
      be
      negatively affected upon conversion to U.S. dollars We
      attempt to have
      most future payments, mainly repayments of loans and capital contributions,
      denominated in U.S. dollars. If
      any
      increase in the value of the Renminbi were to occur in the future, the sales
      of our products
      in China and in other countries may be negatively affected.





UNCERTAINTIES
      WITH RESPECT TO THE CHINESE LEGAL SYSTEM MAY ADVERSELY AFFECT US.





Our
      business is generally subject to laws and regulations applicable to foreign
      investment in China. Accordingly, our business will be affected by
      China ’ s
      developing legal system. Since 1978, many new laws and regulations covering
      general economic matters have been promulgated in China, and government policies
      and internal rules promulgated by governmental agencies may not be published
      in
      time, or at all. As a result, we may operate our business in violation of new
      rules and policies without having any knowledge of their existence. In addition,
      there are uncertainties regarding the interpretation and enforcement of laws,
      rules and policies in China. The Chinese legal system is based on written
      statutes, and prior court decisions have limited precedential value. Because
      many laws and regulations are relatively new and the Chinese legal system is
      still evolving, the interpretations of many laws, regulations and rules are
      not
      always uniform. Moreover, the relative inexperience of China ’ s
      judiciary in many cases creates additional uncertainty as to the outcome of
      any
      litigation, and the interpretation of statutes and regulations may be subject
      to
      government policies reflecting domestic political changes. Finally, enforcement
      of existing laws or contracts based on existing law may be uncertain and
      sporadic, and it may be difficult to obtain swift and equitable enforcement,
      or
      to obtain enforcement of a judgment by a court of another jurisdiction. Any
      litigation in China may be protracted and result in substantial costs and
      diversion of resources and management ’ s
      attention.





**ITEM
      2.**  **UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**





None





**ITEM
      3.**  **DEFAULTS
      UPON SENIOR SECURITIES**





Not
      Applicable.





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





Not
      Applicable.





31


**ITEM
      5.**  **OTHER
      INFORMATION**





(a)  None.





(b)  There
      were no changes to the procedures by which security holders may recommend
      nominees to our board of directors.





**ITEM
      6.**  **EXHIBITS**





**Exhibit**
              **Number**
            
            **Description**3.1
            
            Certificate
                of Incorporation (2)3.2
            
            Bylaws
                (2)10.1
            
            Agreement
                and Plan of Share Exchange dated November 16, 2004 by and between
                Eurofaith Holdings, Inc. and China Energy Savings Technology, Inc.
                (1)10.2
            
            Agreement
                and Plan of Share Exchange dated February 1, 2005 by and between
                Sky
                Beyond Investments Limited and China Energy Savings Technology, Inc.
                (3)10.3
            
            China
                Energy Savings Technology, Inc. 2004 Equity Incentive Plan
                (4)14
            
            Code
                of Business Ethics (5)21
            
            Subsidiaries
                of Registrant (5)31.1
            
            Certification
                of Chief Executive Officerpursuant
                to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to
                Section302 of the Sarbanes-Oxley Act of 2002 (6)31.2
            
            Certification
                of Chief Financial Officerpursuant
                to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to
                Section302 of the Sarbanes-Oxley Act of 2002 (6)32.1
            
            Certification
                of Chief Executive Officerpursuant
                to 18 U.S.C. 1350, as adopted pursuant to Section906 of the Sarbanes-Oxley Act of 2002 (6)32.2
            
            Certification
                of Chief Financial Officerpursuant
                to 18 U.S.C. 1350, as adopted pursuant to Section906 of the Sarbanes-Oxley Act of 2002
                (6)


___________





(1)
            Previously
                filed with theSECas
                Exhibit 10.1 to the Company’s Current Report on Form 8-K
                filed on November 18, 2004 and incorporated herein by
                reference.


(2)
            Previously
                filed with theSECas
                an exhibit to the Registration Statement on Form 10 filed on July
                11, 2000
                and incorporated herein by
                reference.


(3)
            Previously
                filed with theSECas
                Exhibit 10.1 to the Company’s Current Report on Form 8-K
                filed on February 4, 2005 and incorporated herein by
                reference.


(4)
            Previously
                filed with theSECas
                an exhibit to the Form S-8on
                September 17, 2004.


(5)
            Previously
                filed with theSECas
                an exhibit to the Form 10-Kfiled on January 13, 2005.


(6)
            Filed
                herewith.





**[SIGNATURES
      PAGE FOLLOWS]**




32


**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
      as
      amended, the registrant caused this report to be signed on its behalf by the
      undersigned, thereunto duly authorized.




**CHINA
                ENERGY SAVINGS TECHNOLOGY, INC.**
              (Registrant)Date:
                February 14, 2006
            By:
            /s/
              Kwun-Luen SiuKwun-Luen
                Siu
              Chief
                Executive Officer




Date:
                February 14, 2006
            By:
            /s/
              Lawrence Lok Yuen-MingLawrence
                Lok Yuen-Ming
              Chief
                Financial Officer





33