UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K


(Mark
One)





x ANNUAL REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the
fiscal year ended: October 31,
2008




o  TRANSITION REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the
transition period from __________ to __________





Commission
file number: 000-51704





PERFECTENERGY INTERNATIONAL
LIMITED


(Name of
small business issuer in its charter)





Nevada
                98-0548438(State
      or other jurisdiction of incorporation or organization)
                (IRS
      Employer Identification
No.)





No.
479 You Dong Road,


Xinzhuang
Town, Shanghai 201100


People’s Republic of
China


(Address
of principle executive offices)





(8621)
5488-0958


(Registrant’s
telephone number)





Securities
registered under Section 12(b) of the Exchange Act: None


Securities
registered under Section 12(g) of the Exchange Act: Shares of
Common Stock, $0.001 par value





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.   oYes xNo





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.   oYes xNo





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 requirement for
the past 90 days. x
Yes  o
No





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





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





Large
      accelerated filer  o
              Accelerated
      filer  oNon-accelerated
      filer  o
              Smaller
      reporting company x





State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter:  $54,809,794 as of July 31, 2008, based upon the average bid
and asked price of such common stock as reported on the OTC Bulletin Board
(29,626,916 shares at $1.85 per share).









APPLICABLE
ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY


PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:





Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.  o
Yes  o
No





(APPLICABLE
ONLY TO CORPORATE REGISTRANTS)





Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the last practicable date:  29,626,916 shares of common
stock as of January 5, 2009.





DOCUMENTS
INCORPORATED BY REFERENCE





None









TABLE
OF CONTENTS




Page No.PART
      IItem
      1. Business
                    4Item
      1A. Risk Factors
                    11Item
      2. Properties
                    22Item
      3. Legal Proceedings
                    23Item
      4. Submission of Matters to a Vote of Security Holders
                    23PART
      IIItem
      5. Market for the Registrant’s Common Equity, Related Stockholder Matters
      and Issuer Purchases of Equity Securities
                    24Item
      6. Selected Financial Data
                    25Item
      7. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                    25Item
      7A. Quantitative and Qualitative Disclosures About Market
    Risk
                    31Item
      8. Financial Statements and Supplementary Data
                    31Item
      9. Changes in and Disagreements With Accountants on Accounting and
      Financial Disclosure
                    32Item
      9A(T). Controls and Procedures
                    32Item
      9B. Other Information
                    32PART
      IIIItem
      10. Directors, Executive Officers and Corporate Governance
                    33Item
      11. Executive Compensation
                    35Item
      12. Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
                    39Item
      13. Certain Relationships and Related Transactions, and Director
      Independence
                    40Item
      14. Principal Accounting Fees and Services
                    41PART
      IVItem
      15. Exhibits, Financial Statement Schedules
                    42SIGNATURES




2




CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION





This
annual report on Form 10-K contains forward-looking statements.  Such
forward-looking statements include statements regarding, among other things, (a)
our projected sales and profitability, (b) our growth strategies, (c)
anticipated trends in our industry, (d) our future financing plans, and (e) our
anticipated needs for working capital.  Forward-looking statements
that involve assumptions and describe our future plans, strategies, and
expectations are generally identifiable by use of the words "may," "will,"
"should," "expect," "anticipate," "estimate," "believe," "intend," or "project"
or the negative of these words or other variations on these words or comparable
terminology.  This information may involve known and unknown risks,
uncertainties, and other factors that may cause our actual results, performance,
or achievements to be materially different from the future results, performance,
or achievements expressed or implied by any forward-looking
statements.  These statements may be found under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Description of Business," as well as in this annual report
generally.  Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under "Risk Factors" and
matters described in this annual report generally.  This annual report
may contain market data related to our business that may have been included in
articles published by independent industry sources.  Although we
believe these sources are reliable, we have not independently verified this
market data.  This market data includes projections that are based on
a number of assumptions.  If any one or more of these assumptions
turns out to be incorrect, actual results may differ materially from the
projections based on these assumptions.  In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this annual report will in fact occur.  In addition to
the information expressly required to be included in this annual report, we will
provide such further material information, if any, as may be necessary to make
the required statements, in light of the circumstances under which they are
made, not misleading.




Each
forward-looking statement should be read in context with, and with an
understanding of, the various other disclosures concerning our company and our
business made elsewhere in this annual report as well as other public reports
that may be filed with the United States Securities and Exchange
Commission.  You should not place undue reliance on any
forward-looking statement as a prediction of actual results or
developments.  We are not obligated to update or revise any
forward-looking statement contained in this annual report to reflect new events
or circumstances, unless and to the extent required by applicable
law.  Neither the Private Securities Litigation Reform Act of 1995 nor
Section 27A of the Securities Act of 1933 provides any protection for statements
made in this annual report.





When used
in this annual report, the terms the "Company," "Perfectenergy Nevada," "we,"
"us," "our," and similar terms refer to Perfectenergy International Limited, a
Nevada corporation, and our subsidiaries.




3




PART I





ITEM
1.                      BUSINESS





Corporate
Overview





We were
originally incorporated on February 25, 2005 in the State of Nevada under our
former name “Crestview Development Corporation.”  On April 16, 2007,
we changed our name to “Perfectenergy International Limited.”





We
conduct operations through our wholly owned subsidiary, Perfectenergy
International Limited, a private British Virgin Islands corporation
(“Perfectenergy BVI”), and Perfectenergy BVI’s three wholly owned subsidiaries
(i) Perfectenergy (Shanghai) Limited, a company organized under the laws of the
People’s Republic of China (“Perfectenergy Shanghai”), (ii) Perfectenergy GmbH,
a German corporation (“Perfectenergy GmbH”), and (iii) Perfectenergy Solar-Tech
(Shanghai) Ltd., a company organized under the laws of the People’s Republic of
China (“Perfectenergy Solar-Tech”).





Perfectenergy
BVI was incorporated under the laws of the British Virgin Islands as an
International Business Company on April 1, 2005.  Perfectenergy
Shanghai was organized under the laws of the People’s Republic of China (the
“PRC” or “China”) on July 8, 2005.  Perfectenergy Solar-Tech was
incorporated in the PRC on February 28, 2008.  Perfectenergy BVI,
through Perfectenergy Shanghai and Perfectenergy Solar-Tech, is principally
engaged in the research, development, manufacturing, and sale of solar cells,
solar modules, and photovoltaic systems.  Its principal offices are
located at No. 479 You Dong Road, Xinzhuang Town, Shanghai 201100, People’s
Republic of China.





We
conduct sales in Europe through Perfectenergy GmbH, which was formed in Germany
on November 9, 2007.  The principal function of Perfectenergy GmbH is
marketing, installation, and other after-sales services for our PV
products.  Perfectenergy GmbH’s office is located at Tannenweg 8,
53757 Sankt Augustin, Germany, and their telephone number is (49)
2241-9320-935.





Share
Exchange





On March
29, 2007, we entered into a share exchange agreement (the “Exchange Agreement”)
with Perfectenergy BVI and the stockholders of Perfectenergy
BVI.  Pursuant to the terms of the Exchange Agreement, we agreed to
acquire all of the issued and outstanding shares of Perfectenergy BVI’s common
stock in exchange for the issuance of 57,190,261 shares of our common stock to
the stockholders of Perfectenergy BVI (“Perfectenergy BVI Stockholders”)
(hereinafter this share exchange transaction is described as the
“Exchange”).




On August
8, 2007, we entered into an Amended and Restated Share Exchange Agreement
(“Amended Agreement”) with Perfectenergy BVI, the Perfectenergy BVI
Stockholders, and Crown Capital Partners, S.A.  The Amended Agreement
had the effect of terminating the Exchange Agreement entered into by the same
parties on March 29, 2007.  Pursuant to the terms of the Amended
Agreement, we agreed to acquire all of the issued and outstanding shares of
Perfectenergy BVI’s common stock in exchange for the issuance of 60,000,000
shares of our common stock to the Perfectenergy BVI Stockholders on the basis of
57,197.33079 common shares of Perfectenergy Nevada for every one share of
Perfectenergy BVI. The terms of the Amended Agreement included the following
closing conditions:





1.
            Perfectenergy
      Nevada agreeing to complete a private placement financing with a minimum
      of $12 million being subscribed for and funded into escrow by the
      investors for the purchase of units at a price of $0.70 per unit, with
      each unit consisting of one share of our common stock and one-half (1/2)
      of one common share purchase warrant, with each whole warrant entitling
      the holder to purchase one additional share of our common stock at an
      exercise price of $0.95 per common share for a period of thirty (30)
      months. The closing of this private placement financing was to be
      completed concurrent with or before the closing of the Exchange under the
      Amended Agreement;





2.
            Perfectenergy
      BVI having no more than 1,049 common shares issued and outstanding on the
      closing date of the Exchange;





3.
            Perfectenergy
      Nevada’s board of directors having adopted resolutions appointing Wennan
      Li, Min Fan, Yunxia Yang, and Adam Roseman to our board of
      directors;





4.
            Perfectenergy
      Nevada’s board of directors having adopted resolutions appointing Wennan
      Li, Hongbo Li, and Diping Zhou as new executive officers, effective on the
      closing date;





5.
            The
      cancellation of 37,700,000 common shares held by former sole director and
      officer Philip McDonald concurrent with the closing of the
      Exchange;





6.
            Perfectenergy
      Nevada and Perfectenergy BVI having received duly executed copies of all
      third-party consents and approvals necessary to consummate the
      Exchange;




4




7.
            No
      material adverse change will have occurred with the business or assets of
      Perfectenergy Nevada or Perfectenergy BVI as of the closing date of the
      Exchange;




8.
            No
      suit, action, or proceeding will have been pending or threatened which
      would (i) prevent the consummation of any of the transactions contemplated
      by the Amended Agreement, or (ii) cause the transaction to be rescinded
      following the consummation; and





9.
            The
      resignation of Philip McDonald as executive officer of the Perfectenergy
      Nevada concurrent with the closing of the Exchange, and Mr. McDonald’s
      resignation following the completion of the 10-day period following the
      mailing of the Schedule 14f-1 Information Statement to our stockholders
      regarding the change in the majority of the members of our board of
      directors in compliance with Section 14(f) of the Securities Act of 1933,
      as amended, and Rule 14(f)-1
thereunder.




The
closing of the Exchange contemplated by the Amended Agreement, and the closing
of a related $18.4 million private placement financing (the “Financing”),
occurred on August 8, 2007 (the “Closing Date” or the
“Closing”).  Following the Closing Date, Perfectenergy BVI became our
wholly owned subsidiary and our new operating business.




Our
Operations





Our
operations consist of the research, development, manufacturing, and sale of
solar cells, solar modules, and photovoltaic (“PV”) systems.  Our
manufacturing and research facility is located in Shanghai, China.





Currently,
we have a 45 megawatt (“MW”) solar cell production line and a 60 MW solar panel
lamination line.  In our facility’s solar cell and solar panel
lamination production lines, we are able to produce different kinds of cells,
for example, 6-inch cells and 8-inch cells, mono-crystalline cells and
multi-crystalline cells, as well as different types and sizes of solar
modules.  After manufacturing, our products are put through a rigid
quality assurance process.  All of our products are strictly in
accordance with international standards (IEC61215, TUV Safe Class II, UL1703) in
order to maintain our competitiveness in international
markets.





We
believe that our manufacturing processes allow us to produce PV
solar products at a much lower cost than traditional solar cell
manufacturing for the same levels of production due to our lower capital
cost.  Our production line requires less capital
investment than traditional solar cell production lines for the same levels
of production due to the proprietary nature and in-house manufacturing of our
capital equipment, while the competition must import costly capital equipment
from Germany and Japan.





We also
have a sales and marketing force, led by our Chief Executive
Officer.  Our targeted customers, besides our existing clients, are
mainly system integrators and distributors in Europe, the United States, and the
PRC.





Principal
Products and Services





PV
Cells





We
design, manufacture, and market crystalline solar cells (approximately 6 inch
squares composed of silicon and glass) sold as crystalline solar modules (metal
grid structures housing 72 cells).





A
photovoltaic (“PV”) cell is a silicon semiconductor device that converts
sunlight into electricity by a process known as the photovoltaic
effect.  The following table sets forth the specifications for samples
of two types of PV cells we currently produce:





PV
      Cell Type
                      
                      Dimensions
                        (mm×mm)
                      
                      Conversion
                        Efficiency (%)
                      
                      Thickness
                        (microns)Monocrystalline
      silicon cell
                      
                      
                      125x125
                      
                      
                      16.50
      - 16.80
                      %
                      
                      200-230Multicrystalline
      & Monocrystalline silicon cell
                      
                      
                      156x156
                      
                      
                      16.50
      - 16.80
                      %
                      
                      200-230





The key
technical efficiency measurement of PV cells is the conversion efficiency
rate.  In general, the higher the conversion efficiency rate, the
lower the production cost of PV modules per watt because more power can be
incorporated into a given size package.  The average conversion
efficiency rate of our monocrystalline PV cells reached 16.8% in June 2007,
representing an increase from 15% in December 2005 when we began producing PV
cells.  We currently produce a variety of PV cells ranging from 200
microns to 230 microns in thickness.  In order to further lower our
production costs, we intend to focus on producing PV cells with decreasing
thickness levels.




5




PV Modules





A PV
module is an assembly of PV cells that have been electrically interconnected and
laminated in a durable and weatherproof package.  Our solar cells are
often sold as components of assembled modules.  We are also developing
PV modules with higher power to meet the rising expansion of on-grid
configurations.  The majority of the PV modules we currently offer to
our customers range in power between 10W and 180W.  We also perform
limited original equipment manufacturing work for other solar cell producers,
such as selling standalone solar modules.  We sell approximately 90%
of our PV modules under our “Perfectenergy” brand, and approximately 10% of our
PV modules under the brand names of our customers.





We
believe our PV cells and modules are highly competitive with other products in
the solar energy market in terms of efficiency and quality.  We expect
to continue improving the conversion efficiency and power, and reducing the
thickness, of our solar products as we continue to devote significant financial
and human resources in our various research and development
programs.




Distribution





We sell
our products to a number of systems integrators and distributors, primarily
located in Germany, Spain, and Italy, who purchase their solar modules, purchase
software, and hardware from other vendors and integrate and install the
end-product for customers.  Many of our customers, in turn, sell
turnkey solar systems to end-users that include individual owners of
agricultural buildings, owners of commercial warehouses, offices and industrial
buildings, public agencies and municipal government authorities that own
buildings suitable for solar system deployment, owners of land designated as
former agricultural land, waste land, or conversion land, such as former
military bases or industrial areas, and financial investors that desire to own
large scale solar projects.





Market
and Industry Overview





The solar
power market has experienced rapid growth in the past several
years.  According to Solarbuzz LLC (“Solarbuzz”), an independent solar
energy research firm, the global solar power market, as measured by annual solar
power system installed capacities, increased from 427 MW in 2002 to 1,744 MW in
2006, representing a compound annual growth rate, or CAGR, of
42%.  Under the lowest of three different projections, Solarbuzz
expects annual solar power system installed capacities to further increase to
4,177 MW in 2011.  Solar power industry revenue is expected to
increase from $10.6 billion in 2006 to $18.6 billion in 2011, representing a
CAGR of 12%.  Currently, the majority of installed solar systems
employ crystalline silicon technology.  The solar cell production
industry is currently dominated by a small number of
manufacturers.  According to Photon International, the top 10 solar
cell manufacturers together accounted for 54% of the solar cell production
worldwide in 2007 compared to 66% of worldwide cell production with significant
increased outputs from small manufacturers around the world.




According
to Solarbuzz, the global solar power industry as measured by MW of solar power
system annually installed capacities is estimated to grow from just under 2,000
in 2006 to over 4,000 in 2011.




We
also believe the solar power market will continue to experience growth as a
result of the growing adoption of government incentives for solar energy
sources, rising energy demand and limited fossil energy sources, and the growing
awareness of the advantages of solar energy, all of which are discussed
below:





Growing
Adoption of Government Incentives for Solar and Other Renewable Energy
Sources





In
response to the increasing environmental concerns worldwide, many governments
have promulgated regulations and implemented policies to limit the release of
hazardous and “greenhouse” gases, such as carbon dioxide, and to encourage the
use of renewable energy sources.  Due to the fact that most renewable
energy sources are currently less cost competitive than traditional energy
sources, a growing number of countries have created incentive programs for the
solar sector, including:





·
            direct
      subsidies to end users to counter costs of equipment and
      installation;





·
            net
      metering laws enabling on-grid end users to sell electricity back to the
      grid at retail prices;





·
            government
      standards mandating minimum consumption levels of renewable energy
      sources; and





·
            low
      interest loans and tax incentives to finance solar power
      systems.





Due
to government support in the past decade, solar energy has become an attractive
alternative to traditional energy sources.  Set forth below are brief
descriptions of the incentive programs adopted by the following selected
countries:




China.China’s government has
been introducing various laws, regulations, and initiatives to support renewable
energy, including solar energy, over the last few years.  In 2000, the
Chinese government initiated the Brightness Program, a rural electrification
program, to provide electricity to rural areas in China.  Under the
initial phase of the Brightness Program relating to township electrification, an
estimated 20 MW of PV or PV/ wind systems were installed from 2002-2004,
impacting 1,000 municipalities.  According to Solarbuzz, a second
phase of the Brightness Program relating to village electrification contemplates
installing village PV systems and solar home systems with a total capacity of
over 250 MW from 2005-2010.




6




In
February 2005, China enacted the Renewable Energy Law, which became effective in
January 2006.  The Renewable Energy Law provides certain financial
incentives for the development of renewable energy projects.  Various
local authorities have also introduced initiatives to encourage the adoption of
renewable energy, including solar energy.  We expect that the increase
in solar energy consumption in local municipalities will encourage further
growth of the solar energy industry in China.




The
Chinese government granted us an income tax exemption for the years ended
December 31, 2006 and 2005, and we are entitled to receive a 50% reduction of
our regular income tax rate of 33% from January 2007 to December 31,
2009.  The Chinese government also granted us a refund on value added
taxes (“VAT”), which are imposed on exported goods in the rate of
17%.  Enterprises or individuals who sell products, engage in repair
and maintenance, or import and export goods in China are subject to VAT in
accordance with Chinese laws.  The standard VAT is 17% of the gross
sales price.  To the best of our knowledge, we are not eligible to
receive similar subsidies or incentive from any other government.




Germany.  Under
Germany’s Renewable Energy Sources Act, the country aims to increase the share
of electricity from renewable energy to 12.5% by 2010 and 20% by
2020.  In particular, the Renewable Energy Sources Act requires
electricity transmission grid operators to connect various renewable energy
sources to their electricity transmission grids and to purchase all electricity
generated by such sources at guaranteed feed-in tariffs.  Additional
regulatory support measures include investment cost subsidies, low-interest
loans, and tax relief to end users of renewable energy.





Italy.  Before 2005,
the Italian PV market benefited primarily from regional support for PV
installations with grants of up to 65% of investment, in the absence of national
incentive funds.  In 2005, Italy passed a new law that sets fixed
feed-in tariffs for electricity produced from renewable energy
sources.  The incentives are available to individuals, companies, and
public bodies.  In January 2006, the Italian government approved
various measures relating to PV feed-in tariffs, including increasing the PV
feed-in tariff cap to 500 MW by 2015.





Japan.  The Japanese
government has implemented a series of incentive programs, including the "PV
2030" roadmap, which outlines government policies to support solar power
electricity.  Japan also provides government subsidies for research
and development.  According to Solarbuzz, due to those incentive
programs, there are over 200,000 PV installations on residential housing in
Japan.





Spain.  The
incentive regime in Spain includes a national net metering program and favorable
interest loans. The actual feed-in tariff for solar energy in Spain is fully
guaranteed for 25 years and guaranteed at 80% for subsequent
years.  The target for cumulative installed generation capacity from
PV in 2010 was recently raised by the Spanish government to
400 MW.





United
States.  At the federal level, several recent developments are
favorable to the PV industry in general.  The United States Congress
approved the Energy Policy Act of 2005, which provides a 30% investment tax
credit for PV installations.  With the “Extension and Modification of Solar
Energy and Fuel Cell Investment Tax Credit” bill passed by Congress in 2008, the
tax credit for PV installation was extended through 2016.  This bill lifted
a limitation that prevented public utilities from claiming the investment tax
credit, which may increase solar panel sales to U.S. utilities that now qualify
to receive a 30% tax credit for their first PV installation.  The bill
also allows these credits to be used to offset the alternative minimum tax
(AMT).  Further, President Obama’s New Energy for America plan sets
forth the goal for 10% of electricity generated in the U.S. to come from
renewable energy sources by 2012 and 25% by 2025.  In addition, a
number of states, including California and New Jersey, have committed
substantial resources to developing and implementing renewable energy
programs.  Under the California Solar Initiative, an investment of
$3.2 billion will be made from 2006 to 2017 for the installation of 1 million PV
plants with the total output of more than 3,000MW.  Investors in these
PV plants will get refunds from the state and federal governments of
approximately 75% of their total investment, and the investors are to receive a
guaranteed profit of 12% on average for the electricity produced by their PV
plants with certificates of green power.  In April 2006, the New
Jersey Board of Public Utilities voted to approve new regulations which expand
the state’s Renewable Portfolio Standard by extending the existing goals out to
2020 and increasing the required amount of renewable energy and solar
energy.  Under the newly adopted regulations, 20% of New Jersey’s
electricity must come from renewable sources by 2020.  The New Jersey
regulations also include a 2% solar set aside, which is forecast to require
1,500MW of electricity to be generated through solar power, the largest solar
commitment relative to population and electricity consumption in the United
States.





Rising
Energy Demand and Limited Fossil Energy Sources with Increasing
Prices





In recent
years, global economic development has resulted in surging energy demand and
rising energy prices.  Electric power demand is expected to increase
from 16.1 trillion kilowatt hours in 2002 to 31.7 trillion kilowatt hours by
2030 globally.  Meanwhile, the generation of electric power is
capacity-constrained and dependent upon fossil fuel feedstock.  The
situation is compounded by the finite supply of traditional energy sources, such
as natural gas, coal, and petroleum.  In addition, petroleum prices
have risen dramatically because of war, political instability, labor unrest, and
the threat of terrorism in oil-producing regions.  Further, for
national security reasons, many governments seek to further develop domestic
sources of energy.  Thus, future energy demand is increasingly
expected to be met by renewable energy sources, such as solar
energy.




7




Growing Awareness
of the Advantages of Solar Power





Solar
power offers a variety of advantages over other sources of power, including an
absence of the need for fuel, environmental cleanliness, location based energy
production, greater efficiency during peak demand periods, high reliability, and
modularity.  These advantages include the following:




No fossil fuel
requirement.
  Solar power relies solely on sunlight rather than traditional fossil
fuels that have historically experienced supply constraints, volatile pricing
and delivery risk.





Clean energy production.   Unlike
traditional fossil fuel energy sources and many other renewable energy sources,
solar power systems generate electricity with no emissions or noise
impact.





Location-based energy
production.   Solar power is a distributed energy source,
meaning that the electricity can be generated at the site of
consumption.  This provides a significant advantage to the end user
who is therefore not reliant upon the traditional electricity infrastructure for
delivery of electricity to the site of use.





Energy generated to match peak usage
times.   Peak energy usage and high electricity costs typically
occur mid-day, which also generally corresponds to peak sunlight hours and solar
power electricity generation.





Reliable Source of
Electricity. Solar power systems generally do not contain
moving parts, nor do they require significant ongoing maintenance.  As
a result, we believe solar power systems are one of the most reliable forms of
electricity generation.





Modular. Solar
power systems are made from interconnecting and laminating solar cells into
solar modules.  Given this method of construction, solar power
products can be deployed in many different sizes and configurations to meet
specific customer needs.





Challenges
Facing the Solar Power Industry





Although
solar power has several advantages and is an attractive alternative to
traditional energy sources, there remain certain key challenges that the solar
power industry must overcome to accomplish broad commercialization of its
products, including the following:





Possible Reduction or Elimination of
Government Subsidies and Incentives.  The current growth of the
solar power industry substantially relies on the availability and size of
government subsidies and economic incentives, such as capital cost rebates,
reduced tariffs, tax credits, net metering, and other
incentives.  Governments may eventually decide to reduce or eliminate
these subsidies and economic incentives.  It remains a challenge for
the solar power industry to reach sufficient scale to be cost-effective in a
non-subsidized marketplace.





High Cost of Solar Power.
  Generally, the per kilowatt-hour cost of generating solar
electricity, including the upfront capital costs, is greater than retail
electricity rates.  While government policy mechanisms and heightened
consumer awareness are driving solar power adoption, the cost of solar power
products remains an impediment to growth.  To address this issue,
manufacturers must improve the cost efficiency of solar power systems through
innovation and continuous improvement of production techniques.  For
example, improving conversion efficiencies of solar cells will reduce raw
material requirements and lower costs required to manufacture a solar power
system with a given output.  Higher conversion efficiencies also
decrease the size of the solar power system, and thereby lower the system
installation costs.





Shortages of Raw
Materials.  Polysilicon is the main raw material used in
manufacturing our solar cells.  Currently, there is an industry-wide
shortage of polysilicon, which is expected to last in the near
future.  As a result of this raw material shortage, we believe the
growth of the solar industry will be hindered in the near term.  An
industry-wide shortage of polysilicon will or will reasonably likely have a
material impact on our liquidity because suppliers will likely require more
advance payments for the polysilicon that they supply to us as our production
expands.  Further, a shortage may also have a material effect on our
results of operations because a shortage will likely cause the price of
polysilicon to rise.  Such increase will likely cause an increase in
the cost of producing our products especially if we need to obtain more
polysilicon in the market to produce our products as our production expands in
the future.  In addition, we believe effective supply chain management
is critical to ensure continued growth for the industry.





Competition





The
global solar power market is highly competitive and has been rapidly
evolving.  Various government incentive and subsidy programs
implemented in Europe, the United States, China, Japan, and other countries in
recent years have further induced competition in solar energy product
marketplace.  In particular, a large number of manufacturers have
entered the solar market.





Our main
overseas competitors are, among others, BP Solar, Kyocera Corporation,
Mitsubishi Electric Corporation, Motech Industries Inc., Sharp Corporation,
Q-Cells AG, Sanyo Electric Co., Ltd., and Sunpower Corporation.  Our
primary competitors in China include Suntech Power Holding’s Co., Ltd., Baoding
Tianwei Yingli New Energy Resources Co., Ltd., and Nanjing PV-Tech Co.,
Ltd.  We compete primarily on the basis of the power efficiency,
quality, performance, and appearance of our products, price, strength of supply
chain and distribution network, after-sales service, and brand
image.




8




Many of
our competitors have longer operating histories and significantly greater
financial or technological resources than we do and enjoy greater brand
recognition.  Some of our competitors are vertically integrated and
design and produce upstream silicon wafers, mid-stream PV cells and modules, and
downstream solar application systems, which provide them with greater synergies
to achieve lower production costs.  During periods when there is a
shortage of silicon and silicon wafers, we compete intensely with our
competitors in obtaining adequate supplies of silicon wafers. Moreover, many of
our competitors are developing next-generation products based on new PV
technologies, including amorphous silicon, transparent conductive oxide thin
film, carbon material, and nano-crystalline technologies, which, if successful,
will compete with the crystalline silicon technology we currently use in our
manufacturing processes.  We are also seeking to develop new
technologies and products through our research collaborations.





We, like
other solar energy companies, also face competition from traditional non-solar
energy industries, such as the petroleum and coal industries.  The
production cost per watt of solar energy is significantly higher than other
types of energy.  As a result, we cannot assure you that solar energy
will be able to compete with other energy industries, especially if there is a
reduction or termination of government incentives and other forms of
support.





Sources
and Availability of Raw Materials





Our
manufacturing process uses approximately 20 types of raw materials and
components that undergo a qualification process to construct a complete solar
module.  We currently source these raw materials and components from
domestic suppliers in China, and most of our critical materials and components
are either sourced from only one supplier or supplied by a limited number of
suppliers.  Supply of these materials is stable for the most part as a
result of the maturity of solar related production in China.





One key
raw material in our production process is silicon wafers.  We purchase
all of our silicon wafers from a limited number of suppliers.  We have
long term supply contracts with two major suppliers, which provides for monthly
price adjustments based on the spot rate of silicon, which contracts are more
fully described below under “Principal Suppliers.”





Principal
Suppliers





Silicon
is essential for manufacturing our products and, as noted above, silicon
manufacturers are not currently able to keep up with demand.  We
have three-year silicon supply agreements with both Tianjin Huan-ou
Semiconductor Material Technology Co., Ltd. (“Tianjin Huan-ou”) and Chengdu
Jiayang Silicon Technology, Inc., Ltd. (“Chengdu”), which were executed in 2006
and are in place through 2009.  Our purchase obligations under the
long-term silicon wafer supply agreement with Tianjin Huan-ou are 2.5
million silicon wafers in 2007, 5 million silicon wafers in 2008, and 10 million
silicon wafers in 2009.  Tianjin Huan-ou has long-term contracts to
get the silicon material produced by Renewable Energy Corporation (REC) for up
to 150 tons of silicon in 2007, up to 300 tons of silicon in 2008, and up to 500
tons of silicon in 2009, all at market prices.  Our purchase
obligations under the long-term silicon supply contract with Chengdu are
800,000 silicon wafers in 2007, 1.5 million silicon wafers in 2008, and 3
million silicon wafers in 2009.  We have an oral understanding with
both Tianjin Huan-ou and Chengdu that if there is a shortage of silicon, then
each of the suppliers will reduce our minimum purchase obligations under the
respective agreement.





We also
entered into a five-year long-term supply contract with Tianjin Huan-ou on July
20, 2008, which became effective on January 1, 2009.  Under the
contract, Perfectenergy Shanghai must make an advanced payment in the aggregate
amount of approximately $14,700,000 (the “Advanced Payment”) to Tianjin Huan-ou
by April 20, 2009, 20% of which will be refunded by Tianjin Huan-ou to
Perfectenergy Shanghai by October 31 of each year during the term of the
agreement, starting in 2009.  As of January 16, 2009, Perfectenergy
Shanghai paid approximately $4,400,000 of the Advanced Payment to Tianjin
Huan-ou.  During the effectiveness of the agreement, Tianjin Huan-ou
is to supply Perfectenergy Shanghai with monocrystalline silicon solar wafers
pursuant to the following annual supply schedule:  12.75 million pieces in
2009; 17.15 million pieces in 2010; 17.20 million pieces in 2011; 17.26 million
pieces in 2012; and 17.35 million pieces in 2013.





We
believe that this will help us obtain a sufficient supply of silicon at a
reasonable price for the coming years and when we expand our production
capacity.




Other
materials needed to produce cells and modules, such as chemicals, special-made
glasses, etc. are relatively easy to purchase from multiple vendors, and we
intend to work with two to three vendors to ensure the best pricing and quality
of these supplies.




Customers





We sell
our products to a number of systems integrators and distributors, mostly located
in Europe and China, who purchase solar cells and solar modules from us,
software and hardware from other vendors, and then integrate and install the
end-product for their customers.  These systems integrators sell
turnkey solar systems to end-users that include the following:




·
            Individual
      owners of agricultural buildings,




9




·
            Owners
      of commercial warehouses, offices and industrial
  buildings,





·
            Public
      agencies and municipal government
authorities,





·
            Owners
      of land designated as former agricultural land, waste land or conversion
      land, such as former military bases or industrial areas,
    and





·
            Financial
      investors interested in owning large scale solar
  projects.





Our top
three customers by value, who accounted for 53% of our revenue during the fiscal
year ended October 31, 2008, are as follows:





·
            Heltron
      GmbH, accounting for 22% of
revenue;




·
            Sky
      Solar International Co., Ltd., accounting for 20% of revenue;
      and





·
            Proinso
      S.A., accounting for 11% of
revenue.





Intellectual
Properties and Licenses





The
following table describes the intellectual property owned by the Company:





Type
                            
                            Name
                            
                            Issued
      by
                            
                            Duration
                            
                            DescriptionTrademark
                            
                            
                            
                            Trademark
      Bureau of the People’s Republic of China
                            
                            Ten
      years (and renewable within six months prior to the end of each ten-year
      term for additional ten-year periods)
                            
                            Logo,
      brand name used in our productsPatent
                            
                            Solar
      cell fire furnace equipment
                            
                            Intellectual
      Property Bureau of the People’s Republic of China
                            
                            May
      25, 2006 to May 25, 2016 (10 years)
                            
                            To
      increase cell efficiency with proper cell production
    techniquePatent
                            
                            Solar
      wafer drying equipment
                            
                            Intellectual
      Property Bureau of the People’s Republic of China
                            
                            May
      17, 2006 to May 17, 2016 (10 years)
                            
                            To
      dry wafers more effectively, thus improving quality and increasing
      yield




We
have completed the testing processes for IEC and TUV certification of our
products, and we recently received the official certificates for our IEC61215
and Safety Class II certifications for TUV in August 2007.  We also
applied for UL certification in the United States, and we expect this
certification process to be completed in early 2009.  Both IEC and TUV
are international standards for electronic appliances.





We have
also filed applications for three patents in Shanghai, which are currently being
reviewed by local authority.





Research
and Development





During
the fiscal years ended October 31, 2008 and October 31, 2007, we incurred
$221,016 and $92,303, respectively, for research and development primarily
related to the development of new types of crystalline PV cells as well as
improvement on the conversion efficiency of PV cell and module
products.  We plan to continue increasing internal research and
development with a goal of offering our customers the best and most efficient
crystalline PV products.





Environmental
Matters





Our
manufacturing processes generate noise, wastewater, gaseous wastes, and other
industrial wastes.  We have installed various types of anti-pollution
equipment in our facilities to reduce, treat, and, where feasible, recycle the
wastes generated in our manufacturing process.  We outsource the
treatment of some of our wastewater and other liquid wastes to third-party
contractors.





Our
operations are subject to regulation and periodic monitoring by local
environmental protection authorities in Shanghai.  In conjunction with
our efforts with the construction of our new solar cell production facility, we
are planning to further improve management of the environmental issues relating
to our operations, including application for ISO 14001 certification in
2009.  ISO 14001 prescribes standards for management of
organizations to achieve an effective environmental management
system.




10




Employees





As of
January 12, 2009, we had approximately 280 employees, all of which are full-time
employees.





Principal
Executive Offices





Our
principal executive office is located at No. 479 You Dong Road, Xinzhuang Town,
Shanghai 201100, People’s Republic of China, and our telephone number is (8621)
5488-0958.






ITEM
1A.                      RISK
FACTORS





The
statements contained in or incorporated into this report that are not historic
facts are forward-looking statements that are subject to risks and uncertainties
that could cause actual results to differ materially from those set forth in or
implied by forward-looking statements.  If any of the following risks
actually occurs, our business, financial condition, or results of operations
could be harmed.





Risks Related to Our Company
and Our Industry





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




We have a
limited operating history.  We completed our first PV cell
manufacturing line in October 2005, and our first PV lamination line was
completed in December 2005.  We also began commercial shipment of our
PV cells and modules in December 2005.  Our limited operating history and
the unpredictability of our industry make it difficult for investors to evaluate
our business and future operating results.  The risks and difficulties
we face include challenges in accurate financial planning as a result of limited
historical data and the uncertainties resulting from having had a relatively
limited time period in which to implement and evaluate our business strategies
as compared to older companies with longer operating histories.




In
August 2007, we raised $18.4 million in a private offering of our common stock
and warrants that we plan to use for our operations. We may be unable to manage
the expansion of our operations effectively, which could have an adverse effect
on our business and results of operations.





We raised
$18,400,000 through a private offering of our common stock and warrants on
August 8, 2007.  We have used and continue to use funds raised in this
financing for our operations and continued expansion of our business to address
the growth in demand for solar power products and services, as well as to
capture new market opportunities.  These expansion plans included, but
were not limited to, the construction of additional production lines, the hiring
of additional management and personnel, and the purchase of assets from other
companies.  We cannot, however, make assurances that our current and
planned operations, personnel, systems, and internal procedures and controls
will be adequate to support this growth.  If we are unable to manage
our growth effectively, we may be unable to take advantage of market
opportunities, execute our business strategies, or respond to competitive
pressures, any of which could have an adverse affect on our business and results
of operations.





The reduction or
elimination of government subsidies and economic incentives for on-grid solar
energy applications could cause a reduction in demand for our products and lead
to a decrease in revenue.




We
believe that the growth in many of the markets for our products, including our
current largest markets, Germany and Spain, depends in part on the availability
and amounts of government subsidies and economic incentives. At present, the
cost of solar energy substantially exceeds the retail price of electricity in
most markets in the world.  As a result, federal and local
governmental bodies in many countries, most notably Germany, Spain, and the
United States, have provided subsidies in the form of cost reductions, tax
write-offs, and other incentives to end users, distributors, systems
integrators, and manufacturers of solar power products.  Reduction or
elimination of these government subsidies and economic incentives because of
policy changes, fiscal tightening, or other reasons may result in the diminished
competitiveness of solar energy and materially and adversely affect the growth
of these markets and our revenues.  Electric utility companies that
have significant political lobbying powers may push for a change in the relevant
legislation in their markets.  The reduction or elimination of
government subsidies and economic incentives for on-grid solar energy
applications, especially those in our target markets, could cause our revenues
to decline and materially and adversely affect our business, financial
condition, and results of operations.





If
solar power technology is not suitable for widespread adoption, or sufficient
demand for our products does not develop or takes longer to develop than we
anticipated, our sales may not continue to increase or may even decline, and we
may be unable to sustain profitability.





The solar
power market is at a relatively early stage of development and the extent to
which our solar power products will be widely adopted is
uncertain.  Historical and current market data in the solar power
industry are not as readily available as those in other more established energy
industries where trends can be assessed more reliably from data gathered over a
longer period of time.  If solar power technology proves unsuitable
for widespread adoption or if demand for our products fails to develop
sufficiently, we may be unable to grow our business or generate sufficient
revenues to sustain our profitability.  In addition, demand for solar
power products in our targeted markets, including China and the United States,
may not develop or may develop to a lesser extent than we
anticipate.  Many factors may affect the viability of widespread
adoption of solar technology and demand for solar products,
including:




11




·
            performance
      and reliability of solar power products compared to conventional and other
      non-solar energy sources and products;·
            cost-effectiveness
      of solar power products compared to conventional and other non-solar
      energy sources and products;·
            availability
      of government subsidies and incentives to support the development of the
      solar power industry;·
            fluctuations
      in economic and market conditions that affect the viability of
      conventional and non-solar alternative energy sources, such as increases
      or decreases in the prices of oil and other fossil
  fuels;·
            capital
      expenditures by end-users of solar power products, which tend to decrease
      when economy slows down;·
            success
      of other alternative energy generation technologies, such as fuel cells,
      wind power, and biomass technologies; and·
            de-regulation
      of the electric power industry and broader energy
  industry.





The
failure of the market for solar energy products to develop or the development of
the solar energy product market to a lesser extent than we anticipate could have
a material adverse effect on our business.





Because
we face intense competition from other companies producing solar energy and
other renewable energy products and many of our competitors have greater
resources than we do, we may be unable to compete successfully and may lose or
be unable to gain market share.





The
market for solar energy products is intensely competitive and rapidly evolving.
Many of our competitors have established more prominent market positions, and if
we fail to attract and retain customers and establish successful distribution
networks in our target markets for our products, we will be unable to increase
our sales.  Our competitors include solar power divisions of large
conglomerates such as BP Solar, Kyocera, Royal Dutch Shell, Sharp Corporation,
and Sanyo, as well as specialized cell and module manufacturers such as Q-Cells
AG and Solarfun Power Holdings Co., Ltd. as well as integrated manufacturers of
PV products such as SolarWorld AG. Some of our competitors, such as Renewable
Energy Corporation, have also become vertically integrated, from upstream
silicon wafer manufacturing to solar system integration.  We expect to
compete with future entrants to the solar energy product market that offer new
technological solutions.  We may also face competition from
semiconductor manufacturers, a few of which have already announced their
intention to start production of PV cells.  Many of our competitors
are developing or currently producing products based on new solar energy
technologies, including amorphous silicon, ribbon, sheet, and nano technologies,
which they believe will ultimately cost the same as or less than crystalline
silicon technologies.  In addition, the entire solar energy industry
also faces competition from conventional and non-solar renewable energy
technologies.  Due to the relatively high manufacturing costs compared
to most other energy sources, solar energy is generally not as competitive with
other energy sources without government incentive and subsidy
programs.




Many of
our existing and potential competitors have substantially greater financial,
technical, manufacturing, and other resources than we do.  Our
competitors’ greater size in some cases provides them with a competitive
advantage with respect to manufacturing costs because of their economies of
scale and their ability to purchase raw materials at lower
prices.  For example, those of our competitors that also manufacture
semiconductors may source both semiconductor grade silicon wafers and solar
grade silicon wafers from the same supplier.  As a result, those
competitors may have stronger bargaining power with the supplier and have an
advantage over us in negotiating favorable pricing, as well as securing silicon
wafer supplies at times of shortages.  Many of our competitors also
have greater brand name recognition, more established distribution networks, and
larger customer bases.  Also, many of our competitors have
well-established relationships with our current and potential distributors and
have extensive knowledge of our target markets.  As a result, they may
be able to devote greater resources to the research, development, promotion, and
sale of their products or respond more quickly to evolving industry standards
and changes in market conditions than we can.  Our failure to adapt to
changing market conditions and to compete successfully with existing or new
competitors may materially and adversely affect our financial condition and
results of operations.





Our failure to
further refine our technology and develop and introduce new solar energy
products could render our products uncompetitive or obsolete, and reduce our
sales and market share.





The solar
energy industry is characterized by rapid increases in the diversity and
complexity of technologies, products, and services.  We will need to
invest significant financial resources in research and development to keep pace
with technological advances in the solar energy industry, evolving industry
standards, and changing customer requirements.  Research and
development activities, however, are inherently uncertain, and we may encounter
practical difficulties in commercializing our research results.  Our
significant expenditures on research and development may not reap corresponding
benefits.  A variety of competing solar energy technologies that other
companies may develop could prove to be more cost-effective and have better
performance than our solar energy products.  Therefore, our
development efforts may be rendered obsolete by the technological advances of
others.  Breakthroughs in solar energy technologies that do not use
crystalline silicon could mean that companies such as ours that rely entirely on
crystalline silicon would encounter a sudden, sharp drop in
sales.  Our failure to further refine our technology and develop and
introduce new solar energy products could render our products uncompetitive or
obsolete, and result in a decline in our market share.




12




Our future
success substantially depends on our ability to significantly increase both our
manufacturing capacity and output.  Our ability to achieve our
expansion goals is subject to a number of risks and uncertainties.





Our
future success depends on our ability to significantly increase both our
manufacturing capacity and output.  If we are unable to do so, we may
be unable to expand our business, decrease our costs per watt, maintain our
competitive position, and improve our profitability.  Our ability to
establish additional manufacturing capacity and increase output is subject to
significant risks and uncertainties, including the following:




·
            the
      need to raise significant additional funds to purchase and prepay for raw
      materials and to build additional manufacturing facilities, which we may
      be unable to obtain on reasonable terms or at all;·
            delays
      and cost overruns as a result of a number of factors, many of which may be
      beyond our control, such as increases in raw materials prices and problems
      with equipment vendors;





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





·
            diversion
      of significant management attention and other resources;
    and





·
            failure
      to execute our expansion plan
effectively.





If we are
unable to establish or successfully operate additional manufacturing capacity or
to increase manufacturing output, or if we encounter any of the risks described
above, we may be unable to expand our business as planned.  Moreover,
we cannot provide assurances that if we do expand our manufacturing capacity and
output we will be able to generate sufficient customer demand for our PV
products to support our increased production levels.




Our
inability to obtain sufficient quantities of silicon and silicon wafers could
adversely affect our business and results of operations and limit our ability to
further expand.





Silicon
wafers are the essential raw materials for making our solar power
products.  To maintain competitive manufacturing operations, we will
depend on our suppliers’ timely delivery of quality silicon wafers in sufficient
quantities and at acceptable prices.  Silicon wafer suppliers, in
turn, depend on silicon manufacturers to supply silicon required for the
production of silicon wafers.  We formed a strategic multi-party
alliance with both upstream and downstream partners in an effort to obtain a
reliable supply of silicon.  Significant growth of the solar power
industry, however, has resulted in a significant increase in demand for silicon
and silicon wafers, and some producers have, from time to time, experienced late
delivery and supply shortages.  In particular, some suppliers of
silicon also supply to silicon wafer manufacturers for the semiconductor
industry, which typically have greater buying power and market influence than
manufacturers for the solar power industry.  As a result, increases in
the demand for silicon from the semiconductor industry may, in the future,
result in late deliveries or supply shortages with respect to the specialized
silicon that silicon wafer suppliers need as raw materials.  To date,
our business has not been impacted by a supplier’s late delivery or any supply
shortages of silicon.  Any shortage of silicon or our inability to get
silicon when we need it, however, could result in a reduction of manufacturing
output, delayed or missed shipments, damaged customer relationships, and
decreased revenues, any of which may adversely affect our business, our results
of operations, and our future expansion plans.





Our gross margins
may be materially and adversely affected as a result of entering into fixed
price, prepaid arrangements with our suppliers.





We plan
to secure our supply of silicon wafers increasingly through long-term contracts
with suppliers.  We currently have two three-year silicon wafer supply
contracts with Tianjin Huan-ou Semiconductor Material Technology Co., Ltd.
(“Tianjin Huan-ou”) and Chengdu Jiayang Silicon Technology, Inc., Ltd., under
which these suppliers agreed to provide us with specified quantities of silicon
wafers at agreed prices from 2007 through 2009.  We also have a
five-year supply contract with Tianjin Huan-ou, under which Tianjin Huan-ou
agreed to provide us with specified quantities of solar wafers at agreed prices
through 2013.   Tianjin Huan-ou has had a long-time cooperation
relationship with REC Silicon, which is one of the top silicon manufacturers in
the United States, and we believe that this alliance will help us obtain a
sufficient supply of silicon at a reasonable price for the coming
years.  If the price of silicon or silicon wafers were to decrease in
the future and we were locked into fixed price, prepaid arrangements, we may be
unable to adjust our materials costs, which may negatively affect our gross
margins.  Additionally, if demand for our solar power products
decreases, we may incur costs associated with carrying excess materials, which
may have a material adverse effect on our operating expenses.  To the
extent that we are unable to pass these costs and expenses to our customers, our
business, results of operations, and financial condition may be materially and
adversely affected.  Moreover, since some of our supply contracts may
require pre-payment of a substantial portion of the contract price, we may be
unable to recover such pre-payments and would suffer losses should such
suppliers fail to fulfill their delivery obligations under the
contracts.




13




Our dependence on
a limited number of third-party suppliers for key raw materials and customized
manufacturing equipment could prevent us from timely delivering our products to
our customers in the required quantities, which could result in order
cancellations and decreased revenues.





We
purchase raw materials from a limited number of third-party
suppliers.  Our suppliers of silicon include Tianjin Huan-ou
Semiconductor Material Technology Co., Ltd. and Chengdu Jiayang Silicon
Technology Inc. Ltd.  If we fail to develop or maintain our
relationships with these or our other suppliers, we may be unable to manufacture
our products or our products may be available at a higher cost or after a long
delay, and we could be prevented from delivering our products to our customers
in the required quantities and at prices that are
profitable.  Problems of this kind could cause us to experience order
cancellations and loss of market share.  The failure of a supplier to
supply materials and components that meet our quality, quantity, and cost
requirements in a timely manner could impair our ability to manufacture our
products or increase our costs, particularly if we are unable to obtain these
materials and components from alternative sources on a timely basis or on
commercially reasonable terms.  In addition, certain of our
manufacturing equipment has been designed and made specifically for
us.  As a result, such equipment is not readily available from
multiple vendors and would be difficult to repair or replace.  Any
significant damage to, or break down of, our customized manufacturing equipment
could cause material interruptions to our operations and, consequentially, could
have a material adverse effect on our business and results of
operations.




Our
dependence on a limited number of customers may cause significant fluctuations
or declines in our revenues.





During
the fiscal year ended October 31, 2008, our top two customers accounted for
approximately 47% of our total net revenues and sales to our largest customer
accounted for approximately 27% of our total net revenues.  Sales to
our other customers are typically made through non-exclusive, short-term
arrangements.  We anticipate that our dependence on a limited number
of customers will continue for the foreseeable future.  Consequently,
any one of the following events may cause material fluctuations or declines in
our revenues and have a material adverse effect on our results of
operations:





·
            reduction,
      delay, or cancellation of orders from one or more of our significant
      customers;·
            selection
      by one or more of our significant distributor customers of products
      competitive with our products;·
            loss
      of one or more of our significant customers and our failure to identify
      additional or replacement customers; and·
            failure
      of any of our significant customers to make timely payment for our
      products.




We
face risks associated with the marketing, distribution, and sale of our PV
products internationally, and if we are unable to effectively manage these
risks, our ability to expand our business abroad could be impaired.





In the
fiscal year ended October 31, 2008, we sold 86% of our products to customers
outside of China.  The marketing, international distribution, and sale
of our PV products expose us to a number of risks, including the
following:




·
            fluctuations
      in currency exchange rates;·
            difficulty
      in engaging and retaining distributors who are knowledgeable about and,
      can function effectively in, overseas markets;·
            increased
      costs associated with maintaining marketing efforts in various
      countries;·
            difficulty
      and costs relating to compliance with the various commercial and legal
      requirements of the overseas markets in which we offer our
      products;·
            inability
      to obtain, maintain, or enforce intellectual property
      rights; and·
            trade
      barriers such as export requirements, tariffs, taxes, and other
      restrictions and expenses, which could increase the prices of our products
      and make us less competitive in some
countries.




Our business
depends substantially on the continuing efforts of our executive officers and
our ability to maintain a skilled labor force, and our business may be severely
disrupted if we lose such services.





Our
future success depends substantially on the continued services of our executive
officers, especially Wennan Li, our Chairman of the Board and Chief Executive
Officer.  We do not maintain key man life insurance on any of our
executive officers.  If one or more of our executive officers are
unable or unwilling to continue in their present positions, we may be unable to
replace them readily, if at all.  In such a situation, our business
may be severely disrupted, and we may incur additional expenses to recruit and
retain new officers.  In addition, if any of our executives joins a
competitor or forms a competing company, we may lose some of our
customers.  Each of our executive officers has entered into employment
agreements with us or with our subsidiary, which contain confidentiality and
non-competition provisions.  If, however, any dispute arises between
our executive officers and the Company, we cannot assure you, in light of
uncertainties associated with the Chinese legal system, the extent to which any
of these agreements could be enforced in China, where some of our executive
officers reside and hold assets.




14




If we are unable
to attract, train, and retain technical personnel, our business may be
materially and adversely affected.





Our
future success depends, to a significant extent, on our ability to attract,
train, and retain technical personnel.  Recruiting and retaining
capable personnel, particularly those with expertise in the solar power
industry, are vital to our success.  There is substantial competition
for qualified technical personnel, and there can be no assurance that we will be
able to attract or retain our technical personnel.  We depend on our
Chief Executive Officer to recruit and train such capable personnel, but if he
is unable to attract and retain qualified employees, our business may be
materially and adversely affected.




Our failure to
protect our intellectual property rights may undermine our competitive position,
and litigation to protect our intellectual property rights or defend against
third-party allegations of infringement may be costly.





We rely
primarily on patent, trademark, trade secret, copyright law, and other
contractual restrictions to protect our intellectual
property.  Nevertheless, these afford only limited protection and the
actions we take to protect our intellectual property rights may not be
adequate.  For example, we have two issued patents and three pending
patent applications in China.  We cannot assure you that our patent
applications will be issued with claims sufficiently broad for our
business.  As a result, third parties may infringe or misappropriate
our proprietary technologies or other intellectual property rights, which could
have a material adverse effect on our business, financial condition, or
operating results. In addition, policing unauthorized use of proprietary
technology can be difficult and expensive.  Litigation may be
necessary to enforce our intellectual property rights, protect our trade
secrets, or determine the validity and scope of the proprietary rights of
others.  We cannot assure you that the outcome of such potential
litigation will be in our favor.  Such litigation may be costly and
may divert management attention as well as expend our other resources away from
our business.  An adverse determination in any such litigation will
impair our intellectual property rights and may harm our business, prospects,
and reputation.  In addition, we have no insurance coverage against
litigation costs and would have to bear all costs arising from such litigation
to the extent we are unable to recover them from other parties.  The
occurrence of any of the foregoing could have a material adverse effect on our
business, results of operations, and financial condition.





Implementation
of China’s intellectual property-related laws has historically been lacking,
primarily because of ambiguities in China’s laws and difficulties in
enforcement.  Accordingly, intellectual property rights and
confidentiality protections in China may not be as effective as in the United
States or other countries.





We may be exposed
to infringement or misappropriation claims by third parties, which, if
determined adversely to us, could cause us to pay significant damage
awards.





Our
success also depends largely on our ability to use and develop our technology
and know-how without infringing the intellectual property rights of third
parties. The validity and scope of claims relating to solar power technology
patents involve complex scientific, legal and factual questions, and analysis
and, therefore, may be highly uncertain.  We may be subject to
litigation involving claims of patent infringement or violation of intellectual
property rights of third parties.  The defense and prosecution of
intellectual property suits, patent opposition proceedings, and related legal
and administrative proceedings can be both costly and time-consuming and may
significantly divert the efforts and resources of our technical and management
personnel.  An adverse determination in any such litigation or
proceeding to which we may become a party could subject us to significant
liability to third parties, require us to seek licenses from third parties, pay
ongoing royalties, redesign our products, or subject us to injunctions
prohibiting the manufacture and sale of our products or the use of our
technologies.  Protracted litigation could also result in our
customers or potential customers deferring or limiting their purchase or use of
our products until resolution of such litigation.





Although
we sell a substantial portion of our products outside of China, we currently
only hold patents issued in China.  Our business, results of
operations, and financial condition would be materially and adversely affected
if our sales outside China were restricted by intellectual property claims by
third parties.





We have a
two issued patents and three pending patent applications in China. We do not
have, and have not applied for, any patent for our proprietary technologies
outside China, although we have sold, and expect to continue to sell, a
substantial portion of our products outside China.  Since the
protection afforded by our patents is effective only in China, others may
independently develop substantially equivalent technologies, or otherwise gain
access to our proprietary technologies, and obtain patents for such intellectual
properties in other jurisdictions, including the countries to which we sell our
products.  If any third parties are successful in obtaining patents
for technologies that are substantially equivalent or the same as the
technologies we use in our products in any of our markets before we do and
enforce their intellectual property rights against us, our ability to sell
products containing the allegedly infringing intellectual property in those
markets will be materially and adversely affected.  If we are required
to stop selling such allegedly infringing products, seek licenses and pay
royalties for the relevant intellectual properties, or redesign such products
with non-infringing technologies, our business, results of operations, and
financial condition may be materially and adversely affected.




15




Problems
with product quality or product performance may cause us to incur warranty
expenses, damage our market reputation, and prevent us from achieving increased
sales and market share.





Our
products may contain defects that are not detected until after they are shipped
or are installed.  Our PV modules are typically sold with a two-year
limited product warranty for defects in materials and workmanship, and a five,
ten, and twenty-year warranty against declines of initial power generation
capacity by more than 10%, 10%, and 15%, respectively.  As a result,
we bear the risk of extensive warranty claims long after we sell our products
and recognize revenues.  We estimate and record a warranty obligation
in cost of revenue at the time revenue is recognized.  As we began
selling PV modules only since September 2005, none of our PV modules has been in
use for more than five years.  Due to the short usage history of our
products, we cannot assure you that our assumptions regarding the durability and
reliability of our products are reasonable.  Our warranty provisions
may be inadequate, and we may have to incur substantial expense to repair or
replace defective products in the future.  Any increase in the defect
rate of our products could cause us to increase the amount of our warranty
reserves and have a correspondingly negative impact on our operating
results.  Furthermore, widespread product failures may damage our
market reputation, reduce our market share, and cause our sales to
decline.





The lack or
inaccessibility of government and private sector financing for off-grid solar
energy applications could cause our sales to decline.





Our
products are used for off-grid solar energy applications in developed and
developing countries.  In some developing countries, government
agencies and the private sector have, from time to time, provided subsidies or
financing on preferred terms for rural electrification programs.  We
believe that the availability of financing could have a significant effect on
the level of sales of off-grid solar energy applications particularly in
developing countries where users may not have sufficient resources or credit to
otherwise acquire PV systems.  If existing financing programs for
off-grid solar energy applications are eliminated or if financing is
inaccessible, the growth of the market for off-grid solar energy applications
may be materially and adversely affected, which could cause our sales to
decline.  In addition, a rise in interest rates could render existing
financings more expensive and be an obstacle for potential financings that would
otherwise spur the growth of the PV industry.





Changes to
existing regulations over the utility sector and the PV industry may present
technical, regulatory, and economic barriers to the purchase and use of PV
products, which may significantly reduce demand for our products.





The
market for power generation products is heavily influenced by government
regulations and policies concerning the electric utility industry, as well as
the internal policies of electric utilities companies.  These
regulations and policies often relate to electricity pricing and technical
interconnection of end user-owned power generation.  In a number of
countries, these regulations and policies are being modified and may continue to
be modified.  End users’ purchases of alternative energy sources,
including PV products, could be deterred by these regulations and policies,
which could result in a significant reduction in the potential demand for our PV
products.  For example, utility companies commonly charge fees to
larger, industrial customers for disconnecting from the electricity transmission
grid or for having the capacity to use power from the electricity transmission
grid for back-up purposes.  These fees could increase end users’ costs
of using our PV products and make our PV products less desirable, thereby having
an adverse effect on our business, prospects, results of operations, and
financial condition.




We
anticipate that our PV products and their installation will be subject to
oversight and regulation in accordance with national and local ordinances
relating to building codes, safety, environmental protection, utility
interconnection, and metering and related matters in various
countries.  It is also burdensome to track the requirements of
individual localities and design equipment to comply with the varying
standards.  Any new government regulations or utility policies
pertaining to our PV products may result in significant additional expenses to
us, our distributors, and end users and, as a result, could cause a significant
reduction in demand for our PV products.





Fluctuations in
exchange rates could adversely affect our business.





A portion
of our sales is currently denominated in U.S. dollars with the remainder in
Renminbi and Euros, while a substantial portion of our costs and expenses is
denominated in U.S. dollars and Renminbi with the remainder in
Euros.  Therefore, fluctuations in currency exchange rates could have
a material adverse effect on our financial condition and results of
operations.  Fluctuations in exchange rates, particularly among the
U.S. dollar, Renminbi, and Euro, affect our gross and net profit margins
and could result in foreign exchange and operating losses.




We had
net foreign currency translation adjustment gains of $1,147,270 and $192,466 as
of October 31, 2008 and October 31, 2007, respectively.  We cannot
predict the impact of future exchange rate fluctuations on our results of
operations and may incur net foreign currency losses in the
future.  We plan to reduce the effect of such exposure through hedging
arrangements, such as entering into forward exchange contracts and foreign
currency option contracts, but we cannot give assurances that such hedging
activities will be effective in managing our foreign exchange risk
exposure.




Our
financial statements are expressed in U.S. dollars, but our functional
currency is Renminbi.  The value of any investment in our stock will
be affected by the foreign exchange rate between U.S. dollars and
Renminbi.  To the extent that we hold assets denominated in
U.S. dollars, any appreciation of the Renminbi against the U.S. dollar
could result in a change to our income statement.  On the other hand,
a decline in the value of Renminbi against the U.S. dollar could reduce the
U.S. dollar equivalent amounts of our financial results, the value of any
investment in our company, and the dividends we may pay in the future, if any,
all of which could have a material adverse effect on the prices of our
stock.




16




Compliance with
environmental regulations can be expensive, and noncompliance with these
regulations may result in adverse publicity and potentially significant monetary
damages and fines.





As our
manufacturing processes generate noise, wastewater, and gaseous and other
industrial wastes, we are required to comply with all national and local
regulations regarding protection of the environment. We are in compliance with
present environmental protection requirements and have all necessary
environmental permits to conduct our business.  If more stringent
regulations are adopted in the future, however, the costs of compliance with
these new regulations could be substantial.  We believe that we have
all necessary permits to conduct our business as it is presently
conducted.  If we fail to comply with present or future environmental
regulations, though, we may be required to pay substantial fines, suspend
production, or cease operations.  We use, generate, and discharge
toxic, volatile, and otherwise hazardous chemicals and wastes in our research
and development and manufacturing activities.  Any failure by us to
control the use of, or to restrict adequately the discharge of, hazardous
substances could subject us to potentially significant monetary damages and
fines or suspensions in our business operations.




We have limited
insurance coverage and may incur losses resulting from product liability claims
or business interruptions.





As with
other PV product manufacturers, we are exposed to risks associated with product
liability claims in the event that the use of the PV products we sell
results in injury or death.  Since our products are electricity
producing devices, it is possible that users could be injured or killed by our
products, whether by product malfunctions, defects, improper installation, or
other causes.  We only commenced commercial shipment of our products
in December 2005 and, due to limited historical experience, we are unable to
predict whether product liability claims will be brought against us in the
future or the effect of any resulting adverse publicity on our
business.  Moreover, we do not have any product liability insurance
and may not have adequate resources to satisfy a judgment in the event of a
successful claim against us.  The successful assertion of product
liability claims against us could result in potentially significant monetary
damages and require us to make significant
payments.   Additionally, because the insurance industry in China
is still in its early stages of development, business interruption insurance,
which we do not currently have, available in China offers limited coverage
compared to that offered in many other countries.  Any business
disruption or natural disaster could result in substantial costs and diversion
of resources.





Our
officers and directors own a substantial portion of our outstanding common
stock, which will enable them to influence many significant corporate actions
and in certain circumstances may prevent a change in control that would
otherwise be beneficial to our stockholders.





As of
January 5, 2009, our directors and executive officers control approximately
50.35% of our outstanding shares of stock entitled to vote.  These
stockholders, acting together, could have a substantial impact on matters
requiring the vote of the stockholders, including the election of our directors
and most of our corporate actions.  This control could delay, defer,
or prevent others from initiating a potential merger, takeover, or other change
in our control even if these actions would benefit our stockholders and
us.  This control could adversely affect the voting and other rights
of our other stockholders and could depress the market price of our common
stock.





Risks Related to Doing
Business in China





Adverse changes
in political and economic policies of the Chinese government could have a
material adverse effect on the overall economic growth of China, which could
reduce the demand for our products and materially and adversely affect our
competitive position.





All of
our business operations are conducted in China and some of our sales are made in
China.  Thus, our business, financial condition, results of
operations, and prospects are affected significantly by economic, political, and
legal developments in China.  The Chinese economy differs from the
economies of most developed countries in many respects, including the amount of
government involvement, the level of development, the growth rate, the control
of foreign exchange, and the allocation or resources.





While the
Chinese economy has grown significantly in the past 20 years, the growth
has been uneven, both geographically and among various sectors of the
economy.  The Chinese government has implemented various measures
to encourage economic growth and guide the allocation of
resources.  Some of these measures benefit the overall Chinese
economy, but may also have a negative effect on the Company.  For
example, our financial condition and results of operations may be adversely
affected by government control over capital investments or changes in tax
regulations that are applicable to us.





The
Chinese economy has been transitioning from a planned economy to a more
market-oriented economy.  Although in recent years the
Chinese government has implemented measures emphasizing the utilization of
market forces for economic reform, the reduction of state ownership of
productive assets and the establishment of sound corporate governance in
business enterprises, a substantial portion of the productive assets in China is
still owned by the Chinese government.  The continued control of these
assets and other aspects of the national economy by the Chinese government
could materially and adversely affect our business.  The
Chinese government also exercises significant control over Chinese economic
growth through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy, and providing
preferential treatment to particular industries or companies.  Efforts
by the Chinese government to slow the pace of growth of the Chinese economy
could result in decreased capital expenditure by solar energy users, which in
turn could reduce demand for our products.




17




Any
adverse change in the economic conditions or government policies in China could
have a material adverse effect on the overall economic growth and the level of
renewable energy investments and expenditures in China, which in turn could lead
to a reduction in demand for our products and consequently have a material
adverse effect on our businesses.





Uncertainties
with respect to the Chinese legal system could have a material adverse effect on
us.





We
conduct substantially all of our business through our subsidiaries, some of
which are established in China.  Perfectenergy Shanghai and
Perfectenergy Solar-Tech are generally subject to laws and regulations
applicable to foreign investment in China and, in particular, laws applicable to
wholly foreign-owned enterprises.  China’s legal system is based
on written statutes.  Prior court decisions may be cited for reference
but have limited precedential value.  Since 1979,
Chinese legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in
China.  Since these laws and regulations are relatively new and
China’s legal system continues to rapidly evolve, the interpretations of many
laws, regulations, and rules are not always uniform, and enforcement of these
laws, regulations, and rules involve uncertainties, which may limit legal
protections available to us.  In addition, any litigation in China may
be protracted and result in substantial costs and diversion of resources and
management attention.





You may
experience difficulties in effecting service of legal process, enforcing foreign
judgments, or bringing original actions in China based on United States laws or
other foreign laws against us or our management.





We conduct a substantial portion of our
operations in China, and the majority of our assets are located in the
PRC.  In addition, all of our executive officers and most of
our directors reside within China.  As a result, it may not be
possible to effect service of process within the United States or in China
against us or upon our executive officers or directors, including with respect
to matters arising under U.S. federal securities laws or applicable state
securities laws.  Moreover, there is uncertainty that the courts of
China would enforce judgments of U.S. courts against us or our directors and
officers based on the civil liability provisions of the securities laws of the
United States or any state, or entertain an original action brought in China
based upon the securities laws of the United States or any
state.





We expect to rely
on dividends paid by our subsidiaries for our cash needs in the future.





We
conduct substantially all of our operations through our direct and indirect
subsidiaries, some of which were formed in the PRC.  We expect to rely
on dividends paid by Perfectenergy Shanghai, and Perfectenergy Solar-Tech for
our cash needs in the future, including the funds necessary to pay dividends and
other cash distributions to our stockholders, to service any debt we may incur,
and to pay our operating expenses.  The payment of dividends by
entities organized in China is subject to limitations.  Regulations in
China currently permit payment of dividends only out of accumulated profits as
determined in accordance with accounting standards and regulations in
China.  Our Chinese subsidiaries are also required to set aside at
least 10% of their after-tax profit based on China’s accounting standards each
year to their respective general reserves until the accumulative amount of such
reserves reach 50% of the respective company’s registered
capital.  These reserves are not distributable as cash
dividends.  Our Chinese subsidiaries are also required to allocate a
portion of their after-tax profits to their respective staff welfare and bonus
funds, which may not be distributed to equity owners except in the event of
liquidation.  In addition, if any of our Chinese subsidiaries incurs
debt on their own behalf, the instruments governing the debt may restrict their
ability to pay dividends or make other distributions to us.





Fluctuation in
the value of the Renminbi may have a material adverse effect on your
investment.





The
change in value of the Renminbi against the U.S. dollar, Euro, and other
currencies is affected by, among other things, changes in China’s political and
economic conditions.  On July 21, 2005, the Chinese government
changed its decade-old policy of pegging the value of the Renminbi to the
U.S. dollar.  Under the new policy, the Renminbi is permitted to
fluctuate within a narrow and managed band against a basket of certain foreign
currencies.  This change in policy has resulted in approximately 2.1%
appreciation of Renminbi against U.S. dollar.  While the
international reaction to the Renminbi revaluation has generally been positive,
there remains significant international pressure on the Chinese government to
adopt an even more flexible currency policy, which could result in a further and
more significant appreciation of the Renminbi against the
U.S. dollar.  As a portion of our costs and expenses is
denominated in Renminbi, the revaluation in July 2005 and potential future
revaluation has and could further increase our costs.  In addition, as
we expect to rely on dividends paid to us by our operating Chinese subsidiaries,
any significant revaluation of the Renminbi may have a material adverse effect
on our revenues and financial condition, and the value of, and any of our
dividends payable on our ordinary shares in foreign currency
terms.  For example, to the extent that we need to convert
U.S. dollars into Renminbi for our operations, appreciation of the Renminbi
against the U.S. dollar would have an adverse effect on the Renminbi amount
we receive from the conversion.  Conversely, if we decide to convert
our Renminbi into U.S. dollars for the purpose of making payments for
dividends on our ordinary shares or for other business purposes, appreciation of
the U.S. dollar against the Renminbi would have a negative effect on the
U.S. dollar amount available to us.




Restrictions on
currency exchange may limit our ability to receive and use our revenues
effectively.





Certain
portions of our revenues and expenses are denominated in Renminbi.  If
our revenues denominated in Renminbi increase or expenses denominated in
Renminbi decrease in the future, we may need to convert a portion of our
revenues into other currencies to meet our foreign currency obligations,
including, among others, payment of dividends declared, if any, in respect of
our ordinary shares.  Under China’s existing foreign exchange
regulations, our Chinese subsidiary, Perfectenergy Shanghai, is able to pay
dividends in foreign currencies, without prior approval from the State
Administration of Foreign Exchange (SAFE) by complying with certain procedural
requirements.  We cannot, however, make assurances that the Chinese
government will not take further measures in the future to restrict access to
foreign currencies for current account transactions.




18




Foreign
exchange transactions by Perfectenergy Shanghai and Perfectenergy Solar-Tech
under the capital account continue to be subject to significant foreign exchange
controls and require the approval of China’s governmental authorities, including
SAFE.  In particular, if either subsidiary borrows foreign currency
loans from us or other foreign lenders, these loans must be registered with
SAFE, and if we finance either subsidiary by means of additional capital
contributions, these capital contributions must be approved by certain
government authorities including the Ministry of Commerce or its local
counterparts.  These limitations could affect the ability of
Perfectenergy Shanghai or Perfectenergy Solar-Tech to obtain foreign exchange
through debt or equity financing.





Failure
to comply with PRC regulations relating to the establishment of offshore special
purpose companies by PRC residents may subject our PRC resident stockholders to
personal liability, limit our ability to acquire PRC companies or to inject
capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to
distribute profits to us, or otherwise materially adversely affect
us.





In
October 2005, SAFE issued a public notice, the Notice on Relevant Issues in the
Foreign Exchange Control over Financing and Return Investment Through Special
Purpose Companies by Residents Inside China, or the SAFE Notice, which requires
PRC residents to register with the competent local SAFE branch before using
onshore assets or equity interests held by them to establish offshore special
purpose companies (“SPVs”), for the purpose of overseas equity
financing.  Under the SAFE Notice, such PRC residents must also file
amendments to their registration in connection with any increase or decrease of
capital, transfer of shares, mergers and acquisitions, equity investment, or
creation of any security interest in any assets located in China to guarantee
offshore obligations.  Moreover, if the SPVs were established and
owned the onshore assets or equity interests before the implementation date of
the SAFE Notice, a retroactive SAFE registration is required to have been
completed before March 31, 2006.  If any PRC resident stockholder of
any SPV fails to make the required SAFE registration and amended registration,
the PRC subsidiaries of that SPV may be prohibited from distributing their
profits and the proceeds from any reduction in capital, share transfer, or
liquidation to the SPV.  Failure to comply with the SAFE registration
and amendment requirements described above could also result in liability under
PRC laws for evasion of applicable foreign exchange restrictions.





Because
of uncertainty over how the SAFE Notice will be interpreted and implemented, and
how or whether SAFE will apply it to us, we cannot predict how it will affect
our business operations or future strategies.  For example, our
present and prospective PRC subsidiaries’ ability to conduct foreign exchange
activities, such as the remittance of dividends and foreign currency-denominated
borrowings, may be subject to compliance with the SAFE Notice by our PRC
resident beneficial holders.  In addition, such PRC residents may not
always be able to complete the necessary registration procedures required by the
SAFE Notice.  We also have little control over either our present or
prospective direct or indirect stockholders or the outcome of such registration
procedures.  A failure by our PRC resident beneficial holders or
future PRC resident stockholders to comply with the SAFE Notice, if SAFE
requires it, could subject these PRC resident beneficial holders to fines or
legal sanctions, restrict our overseas or cross-border investment activities,
limit our subsidiaries’ ability to make distributions or pay dividends, or
affect our ownership structure, which could adversely affect our business and
prospects.





Our business
benefits from certain Chinese government incentives.  Expiration of,
or changes to, these incentives could have a material adverse effect on our
financial condition and operating results.





The
Chinese government has provided various incentives to high-technology companies,
including Perfectenergy Shanghai, in order to encourage development of the
high-technology industry.  Such incentives include reduced tax rates
and other measures.  For example, Perfectenergy Shanghai, which is
registered and operating in a high-tech zone in Shanghai, has been qualified as
a “high or new technology enterprise.”  As a result, it is entitled to
a preferential enterprise income tax rate of 15% so long as it continues to
operate in the high-tech zone and maintains its “high or new technology
enterprise” status.  We were entitled to a two-year exemption from the
enterprise income tax for our first two profitable years of operation, which
were 2005 and 2006.  In 2007, we were entitled to a 50% deduction of
the income tax rate of 33%, which is a rate of 18%. For 2008 and 2009, we are
entitled to a 50% deduction of the income tax rate of 25%, which is a rate of
12.5%.  When the currently applicable tax benefit expires, our
effective tax rate may, however, increase.





On
January 1, 2008, a new Enterprise Income Tax (“EIT”) law replaced the old laws
for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
(“FIEs”).  The key changes were: (a) the new standard EIT rate of 25%
replaced the 33% rate previously applicable to both DES and FIEs, except for
high-tech companies, which pay a reduced rate of 15%; and (b) companies
established before March 16, 2007 continue to enjoy tax holiday treatment
approved by local government for a grace period of 5 years or until the tax
holiday term is completed, whichever is sooner.  These companies will
pay the standard tax rate as defined in point “a” above during the grace
period.  Since Perfectenergy Shanghai was established before March 16,
2007, we are qualified for the 12.5% tax rate as described
above.  Before the grant of “high-tech company” status is provided by
the government, a 25% tax rate will be applicable to us and our subsidiaries
after the end of each respective tax holiday term.  Perfectenergy
Solar-Tech was established in February 2008, and, thus, is subject to a 25% tax
rate before the “high-tech company” status is provided. Any increase to our EIT
rate could have a material adverse effect on our financial condition and results
of operations.




19




We
face risks related to health epidemics and other outbreaks.





Our
business could be adversely affected by the effects of avian flu, SARS, or
another epidemic or outbreak.  China reported a number of cases of
SARS in April 2004.  In 2005, there were reports on the occurrences of
avian flu in various parts of China, including a few confirmed human
cases.  Any prolonged recurrence of avian flu, SARS, or other adverse
public health developments in China may have a material adverse effect on our
business operations.  These could include our ability to travel or
ship our products outside of China, as well as temporary closure of our
manufacturing facilities.  Such closures or travel or shipment
restrictions would severely disrupt our business operations and adversely affect
our results of operations.  We have not adopted any written preventive
measures or contingency plans to combat any future outbreak of avian flu, SARS,
or any other epidemic.





We
may be unable to complete a business combination transaction efficiently or on
favorable terms due to complicated merger and acquisition regulations in the PRC
that became effective on September 8, 2006.





On August
8, 2006, six PRC regulatory agencies, including the China Securities Regulatory
Commission or CSRC, promulgated the Regulation on Mergers and Acquisitions of
Domestic Companies by Foreign Investors, which became effective on September 8,
2006.  This new regulation, among other things, governs the approval
process by which a PRC company may participate in an acquisition of assets or
equity interests.  Depending on the structure of the transaction, the
new regulation will require the PRC parties to make a series of applications and
supplemental applications to the government agencies.  In some
instances, the application process may require the presentation of economic data
concerning a transaction, including appraisals of the target business and
evaluations of the acquirer that are designed to allow the government to assess
the transaction.  Government approvals will have expiration dates by
which a transaction must be completed and reported to the government
agencies.  Compliance with the new regulations is likely to be more
time consuming and expensive than in the past, and the government can now exert
more control over the combination of two businesses.  Accordingly, due
to the new regulation, our ability to engage in business combination
transactions has become significantly more complicated, time consuming, and
expensive, and we may not be able to negotiate a transaction that is acceptable
to our stockholders or sufficiently protect their interests in a
transaction.





Additionally,
we may seek to structure transactions in a manner that avoids the need to make
applications or a series of applications with Chinese regulatory authorities
under these new M&A regulations.  If we fail to effectively
structure an acquisition in a manner that avoids the need for such applications
or if the Chinese government interprets the requirements of the new M&A
regulations in a manner different from our understanding of such regulations,
then acquisitions that we have effected may be unwound or subject to
rescission.  Also, if the Chinese government determines that our
structure of any of our acquisitions does not comply with these new regulations,
then we may also be subject to fines and penalties.





Risks Relating to Ownership
of Our Securities





The
OTC Bulletin Board is a quotation system, not an issuer listing service, market,
or exchange. Therefore, buying and selling stock on the OTC Bulletin Board is
not as efficient as buying and selling stock through an exchange.  As
a result, it may be difficult for you to sell your common stock or you may not
be able to sell your common stock for an optimum trading price.





The OTC
Bulletin Board is a regulated quotation service that displays real-time quotes,
last sale prices, and volume limitations in over-the-counter
securities.




Because
trades and quotations on the OTC Bulletin Board involve a manual process, market
information for such securities cannot be guaranteed.  In addition,
quote information, or even firm quotes, may not be available.  The
manual execution process may delay order processing, and intervening price
fluctuations may result in the failure of a limit order to execute or the
execution of a market order at a significantly different
price.  Execution of trades, execution reporting, and the delivery of
legal trade confirmations may be delayed significantly.  Consequently,
one may not be able to sell shares of our common stock at the optimum trading
prices.





When
fewer shares of a security are being traded on the OTC Bulletin Board,
volatility of prices may increase and price movement may outpace the ability to
deliver accurate quote information. Lower trading volumes in a security may
result in a lower likelihood of an individual’s orders being executed, and
current prices may differ significantly from the price one was quoted by the OTC
Bulletin Board at the time of the order entry.





Orders
for OTC Bulletin Board securities may be canceled or edited like orders for
other securities. All requests to change or cancel an order must be submitted
to, received and processed by the OTC Bulletin Board. Due to the manual order
processing involved in handling OTC Bulletin Board trades, order processing and
reporting may be delayed, and an individual may not be able to cancel or edit
his order. Consequently, one may not able to sell shares of common stock at the
optimum trading prices.





The
dealer’s spread (the difference between the bid and ask prices) may be large and
may result in substantial losses to the seller of securities on the OTC Bulletin
Board if the common stock or other security must be sold immediately. Further,
purchasers of securities may incur an immediate “paper” loss due to the price
spread. Moreover, dealers trading on the OTC Bulletin Board may not have a bid
price for securities bought and sold through the OTC Bulletin Board. Due to the
foregoing, demand for securities that are traded through the OTC Bulletin Board
may be decreased or eliminated.




20




We
are subject to the penny stock rules, and these rules may adversely affect
trading in our common stock.




Our
common stock is a “low-priced” security under rules promulgated under the
Securities Exchange Act of 1934.  In accordance with these rules,
broker-dealers participating in transactions in low-priced securities must first
deliver a risk disclosure document which describes the risks associated with
such stocks, the broker-dealer’s duties in selling the stock, the customer’s
rights and remedies, and certain market and other
information.  Furthermore, the broker-dealer must make a suitability
determination approving the customer for low-priced stock transactions based on
the customer’s financial situation, investment experience, and
objectives.  Broker-dealers must also disclose these restrictions in
writing to the customer, obtain specific written consent from the customer, and
provide monthly account statements to the customer.  The effect of
these restrictions may decrease the willingness of broker-dealers to make a
market in our common stock, decrease liquidity of our common stock, and increase
transaction costs for sales and purchases of our common stock as compared to
other securities.




Our
stock price may be volatile, which may result in losses to our
stockholders.




The stock
markets have experienced significant price and trading volume fluctuations, and
the market prices of companies quoted on the Over-The-Counter Bulletin Board,
the stock market in which shares of our common stock are quoted, generally have
been very volatile and have experienced sharp share price and trading volume
changes.  The trading price of our common stock could fluctuate widely
in response to many of the following factors, some of which are beyond our
control:





·
            variations
      in our operating results;·
            announcements
      of technological innovations, new services, or product lines by us or our
      competitors;·
            changes
      in expectations of our future financial performance, including financial
      estimates by securities analysts and investors;·
            changes
      in operating and stock price performance of other companies in our
      industry;·
            additions
      or departures of key personnel; and·
            future
      sales of our common stock.




Domestic
and international stock markets often experience significant price and volume
fluctuations.  These fluctuations, as well as general economic and
political conditions unrelated to our performance, may adversely affect the
price of our common stock.  In particular, following initial public
offerings, the market prices for stocks of companies often reach levels that
bear no established relationship to the operating performance of these
companies.  These market prices are generally not sustainable and
could vary widely.  In the past, following periods of volatility in
the market price of a public company’s securities, securities class action
litigation has often been initiated.




We
incur increased costs and compliance risks as a result of becoming a public
company.





As a
public company, we incur significant legal, accounting, and other expenses that
Perfectenergy BVI did not incur as a private company prior to the share exchange
transaction between the Company and Perfectenergy BVI that closed on August 8,
2007.  We incur costs associated with our public company reporting
requirements and costs associated with corporate governance requirements,
including certain requirements under the Sarbanes-Oxley Act of 2002 and rules
implemented by the SEC and the Financial Industry Regulatory
Authority.  Complying with these requirements is time-consuming and
costly.  Like many smaller public companies, we face a significant
impact from required compliance with Section 404 of the Sarbanes-Oxley Act of
2002.  Section 404 requires management of public companies to evaluate
the effectiveness of internal control over financial reporting and the
independent auditors to attest to the effectiveness of such internal controls
and the evaluation performed by management.  The SEC has adopted rules
implementing Section 404 for public companies as well as disclosure
requirements.  The Public Company Accounting Oversight Board has
adopted documentation and attestation standards that the independent auditors
must follow in conducting its attestation under Section 404.  There
can be no assurance that we will be able to effectively meet all of the
requirements of Section 404 as currently known to us in the currently mandated
timeframe.  Any failure to implement effectively new or improved
internal controls, or to resolve difficulties encountered in their
implementation, could harm our operating results, cause us to fail to meet
reporting obligations, or result in management being required to give a
qualified assessment of our internal controls over financial reporting or our
independent auditors providing an adverse opinion regarding management’s
assessment.  Any such result could cause investors to lose confidence
in our reported financial information, which could have a material adverse
effect on our stock price.





If
we fail to maintain the adequacy of our internal controls, our ability to
provide accurate financial statements and comply with the requirements of the
Sarbanes-Oxley Act of 2002 could be impaired, which could cause our stock price
to decrease substantially.





Since,
prior to the Share Exchange, Perfectenergy BVI operated as a private company
without public reporting obligations, Perfectenergy BVI has committed limited
personnel and resources to the development of the external reporting and
compliance obligations that are required of a public
company.  Recently, we have taken measures to address and improve our
financial reporting and compliance capabilities, and we are in the process of
instituting changes to satisfy our obligations in connection with joining a
public company, when and as such requirements become applicable to
us.  Prior to taking these measures, we did not believe we had the
resources and capabilities to do so.  We plan to obtain additional
financial and accounting resources to support and enhance our ability to meet
the requirements of being a public company.  We will need to continue
to improve our financial and managerial controls, reporting systems and
procedures, and documentation thereof.  If our financial and
managerial controls, reporting systems, or procedures fail, we may be unable to
provide accurate financial statements on a timely basis or comply with the
Sarbanes-Oxley Act of 2002 as it applies to us.  Any failure of our
internal controls or our ability to provide accurate financial statements could
cause the trading price of our common stock to decrease
substantially.




21




We
do not anticipate paying any cash dividends.





We
presently do not anticipate that we will pay any dividends on any of our capital
stock in the foreseeable future.  The payment of dividends, if any,
would be contingent upon our revenues and earnings, if any, capital
requirements, and general financial condition.  The payment of any
dividend is within the discretion of our Board of Directors.  We
presently intend to retain all earnings, if any, to implement our business plan;
accordingly, we do not anticipate the declaration of any dividends in the
foreseeable future.





We
may engage in future issuances of our equity securities to fund our operations,
including our planned expansions, diluting the percentage ownership of our
shareholders.





We may
need to raise additional money through public or private sales of our equity
securities in order to fund our current and future operations.  We
currently have plans to construct a new solar cell production facility on
certain land in Shanghai under an Investment Agreement we entered into in
October 2007 with Shanghai Zizhu Science Park Development Co.,
Ltd.  Part of this construction will be funded by additional
financing.  To the extent that money is raised through the sale of our
securities to fund our new construction on the Shanghai land or to fund our
operations in other ways, the issuance of those securities could result in
dilution to our existing shareholders.







ITEM
2.                      PROPERTIES





Offices
and Facilities





The table
below provides a general description of our offices and facilities:




Location
              
              Principal Activities
              
              Area (sq. meters)
              
              Lease Expiration DateNo.
      479 You Dong Road, Xinzhuang Town, Shanghai, People’s Republic
      of China 201100
              
              headquarters;
                manufacturing
      facility
              
              6,200
              
              May
      31, 2011Tannenweg
      8-10, 53757 Sankt Augustin,
                Germany
              
              European
      sales and marketing office
              
              274
              
              November
      2010569
      Zhuan Sheng Road, Shanghai, People’s Republic of China
      201100
              
              Perfectenergy
      Solar-Tech production facility
              
              1,943
              
              March
      2010





We lease
the space for our headquarters and factory premises under a property lease
agreement that expires on May 31, 2011, with an option to renew the
lease.  We lease the space for our sales and marketing office in
Germany under a property lease agreement that expires in November
2010.  The additional production facility used by Perfectenergy
Solar-Tech is leased under a property lease agreement that expires in March
2010.  At October 31, 2008, minimum future commitments under the lease
agreements were as follows:




Year
      Ended October 31
                                
                                Amount2009
                                
                                $
                                289,9582010
                                
                                $
                                262,2792011
                                
                                $
                                120,467Thereafter
                                
                                $
                                ―





Captain
Black Property





Although
we continue to own the “Captain Black Property,” which consists of a 100%
interest in one mineral claim, comprising 22 claim units, known as the Captain
Black property located in the Omenica Mining District, British Columbia
approximately 72 km southwest of Houston, British Columbia, we have completely
ceased all mining operations.  This mineral claim was in good
standing until January 13, 2008.  We acquired the Captain Black
property pursuant to a mineral purchase and sale agreement, dated October 27,
2005, with Kleinebar Resources Ltd. in consideration for the payment of $5,000
to Kleinebar Resources and an additional $10,000 in exploration and development
costs on the Captain Black property that we were required to pay by July 30,
2006.  On April 27, 2006, we completed our acquisition of this mineral
claim by paying the sum of $10,000 to Kleinebar Resources, who conducted and
completed the initial phases of the exploration program on the
property.  As disclosed in our previously filed reports, however, as
result of our failure to generate revenues from this mineral claim, the
anticipated costs of further exploration activities, lengthy delays in our
ability to generate revenues, and the conclusions contained in the geological
report for the Captain Black Property, our management decided that it was not in
our best interests to pursue the mining business, and thus we abandoned all
mining operations on this mineral claim and sought other business opportunities
to substantiate stockholder value, resulting in the Share Exchange transaction
that closed on August 8, 2007.





22





ITEM
3.                      LEGAL
PROCEEDINGS




We know
of no material, existing or pending legal proceedings against us, nor are we
involved as a plaintiff in any material proceeding or pending
litigation.  There are no proceedings in which any of our directors,
officers, or affiliates, or any registered or beneficial holder of more than 5%
of our voting securities, or any associate of such persons, is an adverse party
or has a material interest adverse to our company.






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




On
September 2, 2008, we held an annual meeting of our security holders (the
“Annual Meeting”) for three purposes.





Re-election
of Directors





The first purpose of the Annual Meeting
was to re-elect five directors to serve until the 2009 annual meeting of
shareholders.  Each of the five director-nominees was re-elected by
casting of the following votes:





Name of Nominee
                            
                            FOR
                            
                            WITHHELDWennan
      Li
                            
                            14,658,611
                            
                            500Min
      Fan
                            
                            14,658,611
                            
                            500Yunxia
      Yang
                            
                            14,658,611
                            
                            500Adam
      Roseman
                            
                            14,658,611
                            
                            500Yajun
      Wu
                            
                            14,658,611
                            
                            500





Ratification
of Auditors





The
second purpose of the Annual Meeting was to ratify the appointment of Moore
Stephens Wurth Frazer and Torbet, LLP (“Moore Stephens”) as our independent
registered public accounting firm for the 2008 fiscal year.  The
appointment of Moore Stephens as our independent registered public accounting
firm for the 2008 fiscal year was ratified by casting of the following
votes:





FOR
                            
                            AGAINST
                            
                            ABSTENTION14,659,111
                            
                            0
                            
                            0





Ratification
of Stock Plan





The third
purpose of the Annual Meeting was to ratify our 2007 Stock Incentive
Plan.  Our 2007 Stock Incentive Plan was ratified by casting of the
following votes:





FOR
                            
                            AGAINST
                            
                            ABSTENTION14,658,611
                            
                            500
                            
                            0


23




PART II




ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES




Market
Information





Our
common stock is traded on the Over-The-Counter Bulletin Board ("OTCBB") under
the symbol "PFGY."  The following table sets forth, for the periods
indicated, the reported high and low closing bid quotations for our common stock
as reported on the OTCBB for each quarterly period within our two most recent
fiscal years.  The bid prices reflect inter-dealer quotations, do not
include retail markups, markdowns, or commissions, and do not necessarily
reflect actual transactions.





Common
Stock





Quarter
      Ended
                    
                    High
      Bid
                    
                    
                    Low
      BidOctober
      31, 2008
                    
                    $
                    1.85
                    
                    
                    $
                    0.28July
      31, 2008
                    
                    $
                    2.85
                    
                    
                    $
                    1.35April
      30, 2008 (1)
                    
                    $
                    5.20
                    
                    
                    $
                    2.04January
      31, 2008 (1)
                    
                    $
                    7.96
                    
                    
                    $
                    5.00October
      31, 2007 (1)
                    
                    $
                    6.00
                    
                    
                    $
                    4.60July
      31, 2007 (1)
                    
                    $
                    6.20
                    
                    
                    $
                    5.00April
      30, 2007 (1)(2)
                    
                    $
                    4.00
                    
                    
                    $
                    0.03January
      31, 2007 (2)
                    
                    $
                    0.03
                    
                    
                    $
                    0.03





(1)
We effected a 4-for-1 reverse stock split on March 24, 2008, and the high and
low bid information in the table for the period April 17, 2007 to March 24, 2008
reflects the reverse split.


(2) We
effected a 1-for-7.54 forward stock split on April 16, 2007, and the high and
low bid information in the table for the period November 1, 2006 to April 16,
2007 reflects the forward split.




As of
January 16, 2009, the closing sales price for shares of our common stock was
$0.60 per share on the Over-The-Counter Bulletin Board.





Holders





As of
January 5, 2009, we have approximately 31 stockholders of record of our issued
and outstanding common stock based upon a shareholder list provided by our
transfer agent.  Our transfer agent is Holladay Stock Transfer, Inc.
located at 2939 North 67th Place, Suite C, Scottsdale, Arizona 85251, and their
telephone number is (480) 481-3940.




Dividend
Policy




We do not
currently intend to pay any cash dividends in the foreseeable future on our
common stock and, instead, intend to retain earnings, if any, for
operations.  Any decision to declare and pay dividends in the future
will be made at the discretion of our board of directors and will depend on,
among other things, our results of operations, cash requirements, financial
condition, contractual restrictions, and other factors that our board of
directors may deem relevant.





Securities
Authorized for Issuance under Equity Compensation Plans





The
following table sets forth, as of October 31, 2008, certain information related
to our compensation plans under which shares of our common stock are authorized
for issuance.





Plan
      Category
                                                      
                                                      COLUMN
      A:
                                                        Number of Securities
                                                        to be Issued upon
                                                        Exercise of
                                                        Outstanding Options
                                                        Warrants and Rights
                                                      
                                                      
                                                      Weighted-Average Exercise
                                                        Price of Outstanding
                                                        Options, Warrants and
                                                        Rights
                                                      
                                                      
                                                      Number of Securities
                                                        Remaining Available
                                                        For Future Issuance
                                                        Under Equity
                                                        Compensation Plans
                                                        (Excluding Securities
                                                        Reflected in COLUMN
      A)Equity
      compensation plans approved by security holders
                                                      
                                                      
                                                      1,218,060
                                                      (1)
                                                      
                                                      $
                                                      2.93
                                                      
                                                      
                                                      
                                                      281,940
                                                      (2)Equity
      compensation plans not approved by security holders
                                                      
                                                      
                                                      ―
                                                      
                                                      
                                                      
                                                      ―
                                                      
                                                      
                                                      
                                                      ―Total
                                                      
                                                      
                                                      1,218,060
                                                      
                                                      
                                                      $
                                                      $2.93
                                                      
                                                      
                                                      
                                                      281,940




(1)
            Includes
      outstanding options granted pursuant to the Company’s 2007 Stock Incentive
      Plan.(2)
            Includes
      shares remaining available for future issuance under the Company’s 2007
      Stock Incentive Plan.




24






On
September 5, 2007, our board of directors approved the 2007 Stock Incentive Plan
(the “Plan”), which was also approved by a majority of our shareholders at our
annual shareholder meeting held on September 2, 2008.  All of our
employees, officers, and directors, and those of our consultants and advisors
who (i) are natural persons and (ii) provide bona fide services to the Company
not connected to a capital raising transaction or the promotion or creation of a
market for our securities are eligible to be granted options or restricted stock
awards (each, an “Award”) under the Plan.  The Plan is administered by
our board, and the board establishes certain terms of option awards, including
the exercise price and duration, in the applicable option
agreement.  Awards may be made under the Plan for up to 1,500,000
shares of our common stock, and the maximum number of shares of common stock
with respect to which Awards may be granted to any participant under the Plan is
500,000 shares of common stock.  The Plan allows for adjustments for
changes in common stock and certain other events, including, but not limited to,
any stock split, reverse stock split, stock dividend, recapitalization,
combination of shares, reclassification of shares, spin-off, any distribution to
holders of common stock other than a normal cash dividend, and liquidation or
dissolution.





Recent
Sales of Unregistered Securities




None.







ITEM
      6.
            SELECTED
      FINANCIAL DATA





Not
applicable.







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





The
following discussion and analysis of the results of operations and financial
condition of Perfectenergy International Limited for the fiscal years ending
October 31, 2008 and 2007 should be read in conjunction with our financial
statements and the notes to those financial statements that are included
elsewhere in this report.  Our discussion includes forward-looking
statements based upon current expectations that involve risks and uncertainties,
such as our plans, objectives, expectations, and intentions.  Actual
results and the timing of events could differ materially from those anticipated
in these forward-looking statements as a result of a number of factors,
including those set forth under the Risk Factors, Cautionary Statement Regarding
Forward-Looking Information, and Business sections in this report.  We
use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and
similar expressions to identify forward-looking statements.





OVERVIEW





We were
originally incorporated on February 25, 2005 in the State of Nevada under our
former name “Crestview Development Corporation.”  As a result of a
share exchange transaction that closed on August 8, 2007, our business is the
research, development, manufacturing, and sale of solar cells, solar modules,
and photovoltaic (“PV”) systems through our direct and indirect wholly owned
subsidiaries.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





This
discussion and analysis are based on our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States.  The preparation of these financial
statements requires us 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 as well as the
reported net sales and expenses during the reporting periods.  On an
ongoing basis, we evaluate our estimates and assumptions.  We base our
estimates on historical experience and on various other factors that we believe
are reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources.  Actual results may differ from
these estimates under different assumptions or conditions.





While our
significant accounting policies are more fully described in Note 2 to our
consolidated financial statements included in this report, we believe that the
following accounting policies are the most critical to aid you in fully
understanding and evaluating this management discussion and
analysis:




25




Inventories





Inventories
are stated at the lower of cost or market, using a weighted average cost
method.  We regularly review inventory quantities on hand and record
any inventory believed to be impaired down to its net realizable
value.  If actual demand or market conditions are less favorable than
projected demand, additional inventory write-downs may be required that could
adversely impact financial results for the period in which the additional excess
or obsolete inventory is identified.





Inventories
constitute a majority of our current assets as reflected in our balance sheets
as of October 31, 2008 and 2007.  The manner in which we estimate the
value of our inventories is a significant component in determining the
carrying value of our inventories.





We
estimate the amount of excess inventories by comparing inventory on hand with
the estimated sales that can be sold within our operating cycle.  To
estimate the amount of obsolete inventories, we analyze movement of our
products, monitor competing technology, and evaluate acceptance of our products
in the marketplace.  Based on this information, we estimate
inventories that cannot be sold at all or can only be sold at deeply discounted
prices.





We
determine the market value of our inventory by assessing current
market prices as of the reporting date.  If the market value is higher
than our purchase price, we report the amount of the inventories at the original
purchase price, and if the market value is lower than our purchase price, then
we write-off the difference between our purchase price and the market value to
the net realizable value.





Revenue
Recognition





We derive
revenue principally from sales of solar cells and modules.  Revenue
from sales of products is recognized when the following elements are satisfied:
(i) there are no uncertainties regarding customer acceptance; (ii) there is
persuasive evidence that an agreement exists; (iii) delivery has occurred; (iv)
the sales price is fixed or determinable; and (v) collectability is reasonably
assured. Please see Note 2 to our financial statements, under the caption
“Revenue Recognition.”  Sales revenue represents the invoiced value of
goods, net of value-added tax (VAT).




Research
and Development





Research
and development expense include salaries, consult fees, supplies and materials,
as well as costs related to other overhead such as facilities, utilities, and
other departmental expenses.  The costs we incur with respect to
internally developed technology and engineering services are included in
research and development expense as incurred as they do not directly related to
any particular licensee, licensee agreement, or licenses fee.





Deferred
Tax Assets





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.  The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income (loss)
in the period that includes the enactment date.  A valuation allowance
is established when necessary to reduce deferred tax assets to amounts expected
to be realized.  We do not expect a valuation allowance to be
made against deferred tax assets.





Derivative
Instruments





In
connection with the sale of debt or equity instruments, we may sell warrants to
purchase our common stock.  In certain circumstances, these warrants
may be classified as derivative liabilities, rather than as
equity.  Additionally, the debt or equity instruments may contain
embedded derivative instruments, such as conversion options, which in certain
circumstances may be required to be bifurcated from the associated host
instrument and accounted for separately as a derivative instrument
liability.




The
identification of, and accounting for, derivative instruments is
complex.  Our derivative instrument liabilities are re-valued at the
end of each reporting period, with changes in the fair value of the derivative
liability recorded as charges or credits to income in the period in which the
changes occur.  For warrants and bifurcated conversion options that
are accounted for as derivative instrument liabilities, we determine the fair
value of these instruments using the Cox-Ross-Rubinstein binomial option pricing
model.  That model requires assumptions related to the remaining term
of the instruments and risk-free rates of return, our current common stock price
and expected dividend yield, and the expected volatility of our common stock
price over the life of the instruments.  The value of the warrants and
options were based on our common stock price on the date the warrants and
options were issued or granted.  The identification of, and accounting
for, derivative instruments and the assumptions used to value them may
significantly affect our financial statements.





Recently
Issued Accounting Standards





In
December 2007, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin No. 110 (“SAB 110”).  SAB 110 amends and replaces
Question 6 of Section D.2 of Topic 14, Share-Based Payment of the
Staff Accounting Bulletin series.  Question 6 of Section D.2 of Topic
14 expresses the views of the staff regarding the use of the “simplified” method
in developing an estimate of expected term of “plain vanilla” share options and
allows usage of the “simplified” method for share option grants prior to
December 31, 2007.  SAB 110 allows public companies that do not have
historically sufficient experience to provide a reasonable estimate to continue
use of the “simplified” method for estimating the expected term of “plain
vanilla” share option grants after December 31, 2007.  We currently
use the “simplified” method to estimate the expected term for share option
grants as we do not have enough historical experience to provide a reasonable
estimate.  We will continue to use the “simplified” method until we
have enough historical experience to provide a reasonable estimate of expected
term in accordance with SAB 110.  SAB 110 was effective for the
Company on January 1, 2008.




26




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest, and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated.  SFAS 160 also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling
owners.  SFAS 160 is effective for fiscal years beginning after
December 15, 2008.  The Company has not determined the effect that the
application of SFAS 160 will have on its consolidated financial
statements.





In
December 2007, SFAS 141(R), Business Combinations, was
issued.  SFAS No. 141R replaces SFAS No. 141, Business
Combinations.  SFAS 141R retains the fundamental requirements
in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the
purchase method) be
used for all business combinations and for an acquirer to be identified for each
business combination.  SFAS 141R requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions.  This replaces SFAS 141’s cost-allocation
process, which required the cost of an acquisition to be allocated to the
individual assets acquired and liabilities assumed based on their estimated fair
values.  SFAS 141R also requires the acquirer in a business
combination achieved in stages (sometimes referred to as a step acquisition) to
recognize the identifiable assets and liabilities, as well as the noncontrolling
interest in the acquiree, at the full amounts of their fair values (or other
amounts determined in accordance with SFAS 141R).  SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.  An entity may not apply it before that
date.  The Company is currently evaluating the impact that adopting
SFAS No. 141R will have on its financial statements.





In March
2008, the FASB issued SFAS 161, “Disclosures About Derivative Instruments and
Hedging Activities—an amendment of FASB Statement No. 133.”  SFAS 161
expands quarterly disclosure requirements in SFAS 133 about an entity’s
derivative instruments and hedging activities.  SFAS 161 is effective
for fiscal years beginning after November 15, 2008.  We are currently
assessing the impact of SFAS 161 on our financial position and results of
operations.





In May
2008, the FASB issued SFAS 162, "The Hierarchy of Generally Accepted Accounting
Principles."  SFAS 162 is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with GAAP for nongovernmental entities.  SFAS 162 is
effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles."  This
statement had no material impact on the Company’s results of operations,
financial position, or cash flows.





In June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
No. 07-5”).  EITF No. 07-5 is effective for financial statements
issued for fiscal years beginning after December 15, 2008 and interim periods
within those fiscal years.  Early application is not
permitted.  Paragraph 11(a) of Statement of Financial Accounting
Standard No 133 “Accounting for Derivatives and Hedging Activities” (“SFAS 133”)
specifies that a contract that would otherwise meet the definition of a
derivative but is both (a) indexed to the Company’s own stock and
(b) classified in stockholders’ equity in the statement of financial
position would not be considered a derivative financial
instrument.  EITF No.07-5 provides a new two-step model to be applied
in determining whether a financial instrument or an embedded feature is indexed
to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph
11(a) scope exception.  This standard triggers liability accounting on
all options and warrants exercisable at strike prices denominated in any
currency other than the functional currency of the operating entity in the PRC
(Renminbi) and in Germany (the Euro).  Management is currently
evaluating the impact of adoption of EITF No. 07-5.





In June
2008, the FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to
Issue No. 98-5.”  The objective of EITF 08-4 is to provide transition
guidance for conforming changes made to EITF No. 98-5, “Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios,” that result from EITF No. 00-27 “Application of
Issue No. 98-5 to Certain Convertible Instruments,” and SFAS 150, “Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity.”  This Issue is effective for financial statements issued for
fiscal years ending after December 15, 2008.  Early application is
permitted.  Management is currently evaluating the impact of adoption of
EITF 08-4.





On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not
active.  FSP 157-3 became effective on October 10, 2008, and its
adoption did not have a material impact on our financial position or results for
year ended October 31, 2008.




27




RESULTS
OF OPERATIONS





We
reported the results of our operations for the transition period from January 1,
2007 to October 31, 2007 on a Form 10-KSB, and  the following table
sets forth the results of our operations for the fiscal years ended October 31,
2008 and 2007 and the ten months ended October 31, 2007:





Fiscal
      Year ended October 31,
                                    
                                    
                                    Ten
      Months Ended% of
                                    
                                    
                                    2007
                                    
                                    
                                    % of
                                    
                                    
                                    October
      31,
                                    
                                    
                                    % of2008
                                    
                                    
                                    Revenues
                                    
                                    
                                    (Unaudited)
                                    
                                    
                                    Revenues
                                    
                                    
                                    2007
                                    
                                    
                                    RevenuesREVENUES
                                    
                                    $
                                    63,660,023
                                    
                                    
                                    
                                    100.0
                                    %
                                    
                                    $
                                    10,135,296
                                    
                                    
                                    
                                    100.0
                                    %
                                    
                                    $
                                    8,565,494
                                    
                                    
                                    
                                    100.0
                                    %COST
      OF REVENUES
                                    
                                    
                                    60,973,113
                                    
                                    
                                    
                                    95.8
                                    %
                                    
                                    
                                    9,810,500
                                    
                                    
                                    
                                    96.8
                                    %
                                    
                                    
                                    8,370,686
                                    
                                    
                                    
                                    97.7
                                    %GROSS
      PROFIT
                                    
                                    
                                    2,686,910
                                    
                                    
                                    
                                    4.2
                                    %
                                    
                                    
                                    324,796
                                    
                                    
                                    
                                    3.2
                                    %
                                    
                                    
                                    194,808
                                    
                                    
                                    
                                    2.3
                                    %SELLING,
      GENERAL, AND ADMINISTRATIVE EXPENSES
                                    
                                    
                                    6,256,817
                                    
                                    
                                    
                                    9.8
                                    %
                                    
                                    
                                    1,761,741
                                    
                                    
                                    
                                    17.4
                                    %
                                    
                                    
                                    1,467,800
                                    
                                    
                                    
                                    17.1
                                    %INCOME
      (LOSS) FROM OPERATIONS
                                    
                                    
                                    (3,569,907
                                    )
                                    
                                    
                                    (5.6
                                    )%
                                    
                                    
                                    (1,436,945
                                    )
                                    
                                    
                                    (14.2
                                    )%
                                    
                                    
                                    (1,272,992
                                    )
                                    
                                    
                                    (14.9
                                    )%OTHER
      EXPENSES (INCOME), NET
                                    
                                    
                                    (11,714,749
                                    )
                                    
                                    
                                    (18.4
                                    )%
                                    
                                    
                                    307,082
                                    
                                    
                                    
                                    3.0
                                    %
                                    
                                    
                                    296,743
                                    
                                    
                                    
                                    3.5
                                    %INCOME
      (LOSS) BEFORE PROVISION FOR INCOME TAXES
                                    
                                    
                                    8,144,842
                                    
                                    
                                    
                                    12.8
                                    %
                                    
                                    
                                    (1,744,027
                                    )
                                    
                                    
                                    (17.2
                                    )%
                                    
                                    
                                    (1,569,735
                                    )
                                    
                                    
                                    (18.3
                                    )%PROVISIONS
      FOR INCOME TAXES
                                    
                                    
                                    63,652
                                    
                                    
                                    
                                    0.1
                                    %
                                    
                                    
                                    (73,985
                                    )
                                    
                                    
                                    (0.7
                                    )%
                                    
                                    
                                    (73,985
                                    )
                                    
                                    
                                    (0.9
                                    )%NET
      INCOME (LOSS)
                                    
                                    
                                    8,081,190
                                    
                                    
                                    
                                    12.7
                                    %
                                    
                                    
                                    (1,670,042
                                    )
                                    
                                    
                                    (16.5
                                    )%
                                    
                                    
                                    (1,495,750
                                    )
                                    
                                    
                                    (17.5
                                    )%OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation adjustment
                                    
                                    
                                    954,668
                                    
                                    
                                    
                                    1.5
                                    %
                                    
                                    
                                    144,401
                                    
                                    
                                    
                                    1.4
                                    %
                                    
                                    
                                    135,404
                                    
                                    
                                    
                                    1.6
                                    %COMPREHENSIVE
      INCOME
                                    
                                    
                                    9,035,858
                                    
                                    
                                    
                                    14.2
                                    %
                                    
                                    
                                    (1,525,641
                                    )
                                    
                                    
                                    (15.1
                                    )%
                                    
                                    
                                    (1,360,346
                                    )
                                    
                                    
                                    (15.9
                                    )%





REVENUES.  During
the fiscal year ended October 31, 2008, we had revenues of $63.7 million as
compared to revenues of $10.1 million (unaudited) during the fiscal year ended
October 31, 2007, an increase of approximately 528%.  The increase in
revenues is attributable to the continued increase in sales of our solar cells
and solar modules from our expanded production, which is six times larger in
size from 2007.  In August 2007, we also obtained
TUV certification of our products, which provides safety and quality
verification helping us achieve continued growth in European
markets.  During the fiscal year ended October 31, 2008, the increase
in our European sales was attributable to the TUV certification of our
products.




28




COST OF
REVENUES.  Cost of revenues for the fiscal year ended October
31, 2008 was $61.0 million as compared to $9.8 million (unaudited) for the
fiscal year ended October 31, 2007, an increase of approximately
522%.   The increase in revenue costs is attributable to
generally in line with our increased sales with cost savings as a result of
capacity expansion compared to that in 2007.





GROSS
PROFIT.Our
gross profit for the fiscal year ended October 31, 2008 was $2.7 million as
compared to a gross profit of $0.3 million (unaudited) for the fiscal year ended
October 31, 2007, representing gross margins of approximately 4.2 % and 3.2%,
respectively.  The increase in gross profits is attributable to
was mainly due to increased
average selling price of our PV module products and our increased use of
self-manufactured PV cells in the production of our solar module products. The
falling of Euro against Chinese Yuan has a negative impact on the selling price
in the fourth quarter, which lowered our overall gross margin for the
year.




SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES.  Selling, general, and administrative expenses
totaled $6.3 million for the fiscal year ended October 31, 2008 as compared to
$1.8 million (unaudited) for the fiscal year ended October 31, 2007, an increase
of approximately 255%.  The increase was caused by sales-related
expenses such as transportation costs and additional expenses incurred for the
expansion of our office facilities and hiring of new employees, including
expenses such as rental, utilities, and for salaries. Other extra expense items
include those paid for consulting, legal, and other services related to being a
public company in the U.S. The increase is also attributable to the increase in
stock based compensation, which totaled approximately $1.6 million for the
fiscal year ended October 31, 2008 as compared to approximately $0.3 million
(unaudited) for the fiscal year ended October 31, 2007.  This increase
is mainly attributed to increased issuances of options to our employees under
our stock option plan adopted in September 2007, which covers certain qualified
employees, officers, and directors of the Company.





OTHER EXPENSES
(INCOME).  Other income for the fiscal year ended October 31,
2008 consisted ofnon-operating income,
interest income and change in fair value of derivative instruments. We had other
income of $11.7 million for the fiscal year ended October 31, 2008 as compared
to other expenses of $0.3 million (unaudited) for the fiscal year ended October
31, 2007,The
increase in other income was mainly due to a decrease in the fair market value
of our outstanding warrants.





NET INCOME (LOSS).  We
had net income of $8.1 million for the fiscal year ended October 31, 2008 as
compared to a loss of $1.7 million (unaudited) for the fiscal year ended October
31, 2007.  The increase in net income is attributable to additional
profits generated from expanded production facilities as well as the positive
impact from a change in the fair market value of outstanding
warrants.





LIQUIDITY





Cash
Flows





Net cash
flow used in operating activities was $3.6 million (unaudited) for the
fiscal year ended October 31, 2007, while net cash flow used in operating
activities was $2.6 million for the fiscal year ended October 31,
2008.  The decrease in net cash flow used in operating
activities was mainly due to better utilized credits from our suppliers and an
increase in customer deposits.





Net cash
flow used in investing activities was $5.3 million and $1.9 million
(unaudited) for the fiscal year ended October 31, 2008 and 2007,
respectively.  The increase in net cash flow used in investing
activities was due to an increase in equipment purchases and leasehold
improvements for capacity expansion during the fiscal year ended October 31,
2008.





Net cash flow provided
by financing activities was $26,000 for the fiscal year ended October 31,
2008, while net cash flow provided by financing activities was $15.1
million (unaudited) for the fiscal year ended October 31, 2007.  The
decrease in net cash flow provided by financing activities was mainly due
to the issuance of common
stock valued at $16.0 million during the fiscal year ended October 31, 2007 as
compared to $26,000 during the fiscal year ended October 31,
2008.




Material
Impact of Known Events on Liquidity





In
October 2007, we entered into an Investment Agreement with Shanghai Zizhu
Science Park Development Co., Ltd. (“Science Park”), under which we planned to
construct a new solar cell production facility on certain land in the Shanghai
Zizhu Science-Based Industrial District of Shanghai, China, allowing us to
expand our lamination lines and our cell production lines to 200MW of total new
production capacity.  Construction began in June 2008 and is expected
to be completed in May 2009.  As required by the Investment Agreement,
on February 28, 2008, we formed Perfectenergy Solar-Tech (Shanghai) Ltd.
(“Perfectenergy Solar-Tech”) under PRC laws as a wholly owned subsidiary of
Perfectenergy BVI.  Perfectenergy BVI is required to contribute
$20,000,000 to the registered capital of Perfectenergy Solar-Tech, of which
$4,000,000 has been contributed with the remaining $16,000,000 to be contributed
by February 28, 2010.  Perfectenergy Solar-Tech obtained the land use
rights from Science Park, for which Perfectenergy Solar-Tech is to pay Science
Park approximately $2.71 million, $0.28 million of which was paid during the
fiscal year ended October 31, 2008 and the reminder of which must be paid by
March 18, 2009.  In addition to the land use right purchase, we are
also obligated to spend, at a minimum, approximately $11.4 million under the
Investment Agreement on our Science Park facility, which amount we plan to use
for the construction of a manufacturing plant and additional cell production and
lamination lines over the next two years.  We expect to fund this
expansion with our existing working capital and additional private
financing.  These planned expenditures will not materially impact our
short-term liquidity, but they are reasonably likely to have a material impact
on our long-term liquidity if we fail to raise more equity capital.




29




CAPITAL
RESOURCES





We have
financed our operations primarily with cash flows from operations and net
proceeds of $15.99 million from a private placement financing transaction that
closed in August 2007.  Thus, we believe that our current cash and
cash equivalents, anticipated cash flow from operations, and net proceeds from
the private placement financing will be sufficient to meet our anticipated cash
needs, including our cash needs for working capital and capital expenditures for
at least the next 8 months.  The proceeds from the private placement
financing will continue to be used for general working capital purposes,
including funding the purchase of additional equipment for the solar energy
product production lines, advertising and marketing expenses, research and
development, and the purchase of silicon that we need for
our operations.  We cannot, however, provide assurances that the
proceeds raised in the August 2007 financing will be sufficient for the planned
expansion of our operations.  Further, we may require additional cash
due to changes in business conditions or other future developments, including
any investments or acquisitions we may decide to pursue.  To the
extent it becomes necessary to raise additional cash in the future, we may seek
to raise it through the sale of debt or equity securities, funding from
joint-venture or strategic partners, debt financing or loans, issuance of common
stock, or a combination of the foregoing.  We currently do not have
any binding commitments for, or readily available sources of, additional
financing.  We cannot provide any assurances that we will be able to
secure the additional cash or working capital we may require to continue our
operations, either now or in the future.





OFF-BALANCE
SHEET ARRANGEMENTS





We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties.  We have not
entered into any derivative contracts that are indexed to our shares and
classified as stockholder’s equity or that are not reflected in our consolidated
financial statements.  Furthermore, we do not have any retained or
contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity, or market risk support to such
entity.  We do not have any variable interest in any unconsolidated
entity that provides financing, liquidity, market risk, or credit support to us
or engages in leasing, hedging, or research and development services with
us.





CONTRACTUAL
OBLIGATIONS





We have
certain fixed contractual obligations and commitments that include future
estimated payments.  Changes in our business needs, cancellation
provisions, changing interest rates, and other factors may result in actual
payments differing from the estimates.  We cannot provide certainty
regarding the timing and amounts of payments.  We present in the table
below a summary of the most significant assumptions used in our determination of
amounts in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash
flows.





As
mentioned above under “Material Impact of Known Events on Liquidity,”
Perfectenergy Solar-Tech has a contractual obligation to pay approximately $2.43
million by March 18, 2009 for acquiring the land use rights for certain land in
the Shanghai Zizhu Science-Based Industrial District of Shanghai, China from the
local government.  We expect to make such payments after obtaining
pre-construction approvals from local authorities.




The
following table summarizes our contractual obligations as of October 31, 2008,
and the effect such obligations are expected to have on our liquidity and cash
flows in future periods.





Payments Due by PeriodTotal
                      
                      
                      Less than 1 year
                      
                      
                      1-3 Years
                      
                      
                      3-5 Years
                      
                      
                      5 Years +In
      ThousandsContractual Obligations :Bank
      Indebtedness
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —Other
      Indebtedness
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —Capital
      Lease Obligations
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —Operating
      Leases (1)
                      
                      $
                      672
                      
                      
                      $
                      290
                      
                      
                      $
                      382
                      
                      
                      $
                      —
                      
                      
                      $
                      —Purchase
      of Land Use Rights
                      
                      $
                      2,430
                      
                      
                      $
                      2,430
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —Purchase
      Obligations (2)
                      
                      $
                      35,878
                      
                      
                      $
                      8,872
                      
                      
                      $
                      21,287
                      
                      
                      $
                      5,719
                      
                      
                      $
                      —Total
      Contractual Obligations:
                      
                      $
                      38,980
                      
                      
                      $
                      11,592
                      
                      
                      $
                      21,669
                      
                      
                      $
                      5,719
                      
                      
                      $
                      —




(1)
            Operating
      lease amounts include the lease for our main office and manufacturing
      facility.  All leases are on a fixed repayment
      basis.  None of the leases includes contingent
      rentals.





(2)
            Purchase
      obligations consist of obligations under our silicon wafers supply
      purchase contracts.  The amounts disclosed are actual
      obligations and estimated future obligations that we have with Tianjin
      Huan-ou.  For more information on these purchase contracts,
      please see the descriptions above under the section titled
      “Business.”




30





ITEM 7A.
            QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET RISK




Not applicable.







ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA





Our consolidated financial statements
for the fiscal years ending October 31, 2008 and 2007 begin on the following
page.


31


PERFECTENERGY
INTERNATIONAL LIMITED


CONSOLIDATED
FINANCIAL STATEMENTS





October
31, 2008 and 2007





Index to
Consolidated Financial Statements




PagesReport
      of Independent Registered Public Accounting Firm
                
                
                F-2Consolidated
      Balance Sheets
                
                
                F-3Consolidated
      Statements of Operations and Other Comprehensive Income
    (Loss)
                
                
                F-4Consolidated
      Statements of Shareholders’ Equity
                
                
                F-5Consolidated
      Statements of Cash Flows
                
                
                F-6Notes
      to Consolidated Financial Statements
                
                
                F-7


F-1




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the
Board of Directors and Stockholders of
 Perfectenergy
International Ltd. and subsidiaries
  We have
audited the accompanying consolidated balance sheets of Perfectenergy
International Ltd. and subsidiaries as of October 31, 2008 and 2007 and the
related consolidated statements of operations and other comprehensive income
(loss), shareholders’ equity, and cash flows for the year ended October 31, 2008
and the ten months ended October 31, 2007.  Perfectenergy
International Ltd’s management is responsible for these consolidated financial
statements. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Perfectenergy International
Ltd. and subsidiaries as of October 31, 2008 and 2007, and the results of its
operations and its cash flows for the year ended October 31, 2008 and the ten
months ended October 31, 2007, in conformity with accounting principles
generally accepted in the United States of America.
   /s/  Moore
Stephens Wurth Frazer and Torbet, LLP
  Walnut,
California
 January
21, 2009
  F-2
 PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES
 
 CONSOLIDATED
BALANCE SHEETS
 AS OF
OCTOBER 31, 2008 AND 2007
 ASSETS2008
                
                
                2007CURRENT
      ASSETS:Cash
                
                $
                2,022,052
                
                
                $
                9,701,545Accounts
      receivable
                
                
                3,880,053
                
                
                
                13,834Other
      receivables
                
                
                47,356
                
                
                
                14,901Inventories
                
                
                6,201,743
                
                
                
                4,106,808Prepayments
                
                
                6,225,170
                
                
                
                1,375,401Prepaid
      income taxes
                
                
                110,420
                
                
                
                -Refundable
      taxes credit on export sales
                
                
                242,154
                
                
                
                -Deferred
      expenses
                
                
                -
                
                
                
                348,993Deferred
      tax assets
                
                
                17,259
                
                
                
                75,725Total
      current assets
                
                
                18,746,207
                
                
                
                15,637,207EQUIPMENT
      AND LEASEHOLD IMPROVEMENTS, net
                
                
                8,105,990
                
                
                
                1,866,527OTHER
      ASSETS:Advances
      on equipment purchases
                
                
                373,873
                
                
                
                1,169,616Total
      assets
                
                $
                27,226,070
                
                
                $
                18,673,350LIABILITIES AND
      SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                
                $
                6,019,634
                
                
                $
                238,209Accrued
      liabilities
                
                
                1,062,595
                
                
                
                55,403Customer
      deposits
                
                
                3,656,179
                
                
                
                1,348,574Other
      payables
                
                
                443,145
                
                
                
                270,868Taxes
      payable
                
                
                196,690
                
                
                
                3,772Total
      current liabilities
                
                
                11,378,243
                
                
                
                1,916,826FAIR
      VALUE OF DERIVATIVE INSTRUMENTS
                
                
                729,688
                
                
                
                12,466,686COMMITMENTS
      AND CONTINGENCIES
                
                
                -
                
                
                
                -SHAREHOLDERS'
      EQUITY:Common
      stock, $.001 par value, 94,250,000 shares authorized,
      29,626,916and
      29,575,761 shares issued and outstanding as of October 31,
      2008and
      October 31, 2007, respectively
                
                
                29,627
                
                
                
                29,576Additional
      paid-in capital
                
                
                6,509,898
                
                
                
                4,717,506Statutory
      reserves
                
                
                110,068
                
                
                
                110,068Retained
      earnings (deficit)
                
                
                7,321,412
                
                
                
                (759,778
                )Accumulated
      other comprehensive income
                
                
                1,147,134
                
                
                
                192,466Total
      shareholders' equity
                
                
                15,118,139
                
                
                
                4,289,838Total
      liabilities and shareholders' equity
                
                $
                27,226,070
                
                
                $
                18,673,350
 
   F-3
  PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
 FOR THE
YEAR ENDED OCTOBER 31, 2008 AND TEN MONTHS ENDED OCTOBER 31,
2007
  Year
      ended
                
                
                Ten
      months endedOctober
      31, 2008
                
                
                October
      31, 2007REVENUES
                
                $
                63,660,023
                
                
                $
                8,565,494COST
      OF REVENUES
                
                
                60,973,113
                
                
                
                8,370,686GROSS
      PROFIT
                
                
                2,686,910
                
                
                
                194,808OPERATING
      EXPENSES:Selling,
      general and administrative
                
                
                6,035,801
                
                
                
                1,375,497Research
      and development
                
                
                221,016
                
                
                
                92,303Total
      operating expenses
                
                
                6,256,817
                
                
                
                1,467,800LOSS
      FROM OPERATIONS
                
                
                (3,569,907
                )
                
                
                (1,272,992
                )OTHER
      INCOME (EXPENSE):Interest
      expense and other bank charges
                
                
                (20,083
                )
                
                
                (59,741
                )Interest
      income
                
                
                86,691
                
                
                
                3,084Non-operating
      income
                
                
                22,059
                
                
                
                -Non-operating
      expense
                
                
                (110,916
                )
                
                
                -Change
      in fair value of derivative instruments
                
                
                11,736,998
                
                
                
                (240,086
                )Total
      other income (expense), net
                
                
                11,714,749
                
                
                
                (296,743
                )INCOME
      (LOSS) BEFORE PROVISION FOR INCOME TAXES
                
                
                8,144,842
                
                
                
                (1,569,735
                )PROVISION
      FOR INCOME TAXES
                
                
                63,652
                
                
                
                (73,985
                )NET
      INCOME (LOSS)
                
                
                8,081,190
                
                
                
                (1,495,750
                )OTHER
      COMPREHENSIVE INCOME:Foreign
      currency translation adjustments
                
                
                954,668
                
                
                
                135,404COMPREHENSIVE
      INCOME (LOSS)
                
                $
                9,035,858
                
                
                $
                (1,360,346
                )EARNINGS
      PER SHARE:Basic
                
                $
                0.27
                
                
                $
                (0.06
                )Diluted
                
                $
                0.27
                
                
                $
                (0.06
                )WEIGHTED
      AVERAGE NUMBER OF SHARES:Basic
                
                
                29,609,117
                
                
                
                24,337,345Diluted
                
                
                29,713,312
                
                
                
                24,337,345
  The
accompanying notes are an integral part of this statement.
 See
report on independent registered public accounting firm.
  F-4
  PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
  AccumulatedAdditional
                    
                    
                    Retained
      earnings (deficit)
                    
                    
                    otherCommon
      stock
                    
                    
                    paid-in
                    
                    
                    Statutory
                    
                    
                    
                    
                    
                    comprehensiveShares
                    
                    
                    Par
      value
                    
                    
                    capital
                    
                    
                    reserves
                    
                    
                    Unrestricted
                    
                    
                    income
                    
                    
                    TotalBALANCE,
      December 31, 2006
                    
                    
                    22,303,048
                    
                    
                    $
                    22,303
                    
                    
                    $
                    1,279,263
                    
                    
                    $
                    110,068
                    
                    
                    $
                    735,972
                    
                    
                    $
                    57,062
                    
                    
                    $
                    2,204,668Issuance
      of common stock for cash
                    
                    
                    6,571,986
                    
                    
                    
                    6,572
                    
                    
                    
                    3,999,799
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4,006,371Issuance
      of common stock for services
                    
                    
                    700,727
                    
                    
                    
                    701
                    
                    
                    
                    (240,701
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (240,000
                    )Reversal
      of capital contribution receivable
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (658,637
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (658,637
                    )Options
      issued to employees
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    337,782
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    337,782Net
      loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (1,495,750
                    )
                    
                    
                    
                    
                    
                    
                    (1,495,750
                    )Foreign
      currency translation adjustments
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    135,404
                    
                    
                    
                    135,404BALANCE,
      October 31, 2007
                    
                    
                    29,575,761
                    
                    
                    $
                    29,576
                    
                    
                    $
                    4,717,506
                    
                    
                    $
                    110,068
                    
                    
                    $
                    (759,778
                    )
                    
                    $
                    192,466
                    
                    
                    $
                    4,289,838Issuance
      of common stock for cash
                    
                    
                    9,375
                    
                    
                    
                    9
                    
                    
                    
                    26,241
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    26,250Issuance
      of common stock for late registration penalty
                    
                    
                    41,780
                    
                    
                    
                    42
                    
                    
                    
                    167,078
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    167,120Options
      issued to employees
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,599,073
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,599,073Net
      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    8,081,190
                    
                    
                    
                    
                    
                    
                    
                    8,081,190Foreign
      currency translation adjustments
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    954,668
                    
                    
                    
                    954,668BALANCE,
      October 31, 2008
                    
                    
                    29,626,916
                    
                    
                    $
                    29,627
                    
                    
                    $
                    6,509,898
                    
                    
                    $
                    110,068
                    
                    
                    $
                    7,321,412
                    
                    
                    $
                    1,147,134
                    
                    
                    $
                    15,118,139
 The
accompanying notes are an integral part of this statement.
 See
report on independent registered public accounting firm.
  F-5
  PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
YEAR ENDED OCTOBER 31, 2008 AND TEN MONTHS ENDED OCTOBER 31,
2007
  Year
      ended
                      
                      
                      Ten
      months endedOctober
      31, 2008
                      
                      
                      October
      31, 2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                      
                      $
                      8,081,190
                      
                      
                      $
                      (1,495,750
                      )Adjustments
      to reconcile net income to cashused
      in operating activities:Depreciation
                      
                      
                      329,115
                      
                      
                      
                      144,644Bad
      debt
                      
                      
                      8,737
                      
                      
                      
                      -Inventory
      written off
                      
                      
                      163,921
                      
                      
                      
                      40,685Loss
      (gain) from disposal of equipment
                      
                      
                      334
                      
                      
                      
                      (131
                      )Compensation
      expense for options issued to employees
                      
                      
                      1,599,073
                      
                      
                      
                      337,782Change
      in fair value of derivative instruments
                      
                      
                      (11,736,998
                      )
                      
                      
                      240,866Late
      registration penalties
                      
                      
                      167,120
                      
                      
                      
                      -Changes
      in assets and liabilities:Accounts
      receivable
                      
                      
                      (3,882,644
                      )
                      
                      
                      512,344Other
      receivables
                      
                      
                      (31,088
                      )
                      
                      
                      7,464Inventories
                      
                      
                      (1,839,510
                      )
                      
                      
                      (2,428,930
                      )Prepayments
                      
                      
                      (4,708,209
                      )
                      
                      
                      (1,099,668
                      )Prepaid
      income taxes
                      
                      
                      (107,255
                      )
                      
                      
                      -Refundable
      taxes credit on export sales
                      
                      
                      (235,211
                      )
                      
                      
                      -Deferred
      expenses
                      
                      
                      370,609
                      
                      
                      
                      (340,971
                      )Deferred
      tax assets
                      
                      
                      63,652
                      
                      
                      
                      (73,984
                      )Accounts
      payable
                      
                      
                      5,658,242
                      
                      
                      
                      (774,020
                      )Accrued
      liabilities
                      
                      
                      982,233
                      
                      
                      
                      29,568Customer
      deposits
                      
                      
                      2,171,189
                      
                      
                      
                      1,039,902Other
      payables
                      
                      
                      171,929
                      
                      
                      
                      180,819Taxes
      payable
                      
                      
                      181,198
                      
                      
                      
                      (33,514
                      )Net
      cash used in operating activities
                      
                      
                      (2,592,373
                      )
                      
                      
                      (3,712,894
                      )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of equipment and leasehold improvements
                      
                      
                      (4,984,344
                      )
                      
                      
                      (721,785
                      )Advances
      on equipment purchases
                      
                      
                      (363,155
                      )
                      
                      
                      (1,142,732
                      )Net
      cash used in investing activities
                      
                      
                      (5,347,499
                      )
                      
                      
                      (1,864,517
                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of common stock
                      
                      
                      26,250
                      
                      
                      
                      15,992,971Payments
      on shareholders and officers loan
                      
                      
                      -
                      
                      
                      
                      (840,506
                      )Net
      cash provided by financing activities
                      
                      
                      26,250
                      
                      
                      
                      15,152,465EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                      
                      
                      234,129
                      
                      
                      
                      37,282(DECREASE)
      INCREASE IN CASH
                      
                      
                      (7,679,493
                      )
                      
                      
                      9,612,336CASH,
      beginning of year
                      
                      
                      9,701,545
                      
                      
                      
                      89,209CASH,
      end of year
                      
                      $
                      2,022,052
                      
                      
                      $
                      9,701,545Supplemental
      disclosures:Interest
      paid
                      
                      $
                      -
                      
                      
                      $
                      68,874Income
      taxes paid
                      
                      $
                      107,255
                      
                      
                      $
                      -
 The
accompanying notes are an integral part of this statement.
 See
report on independent registered public accounting firm.
  F-6




PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008







Note
1 – Background





Perfectenergy
International Limited (“PFGY” or “the Company”) was incorporated in the State of
Nevada on February 25, 2005.  The Company, through its subsidiaries,
is principally engaged in the research, development, manufacturing, and sale of
solar cells, solar modules, and photovoltaic (“PV”) systems.  The
Company’s manufacturing and research facility is located in Shanghai, China, and
it has sales and services offices in Shanghai, China, and Germany.





On August
8, 2007, the Company entered into an Amended and Restated Share Exchange
Agreement (“Amended Agreement”) with Perfectenergy International Limited
(“Perfectenergy BVI”), the Perfectenergy BVI Shareholders, and Crown Capital
Partners, S.A.  Pursuant to the terms of the Amended Agreement, the
Company agreed to acquire all of the issued and outstanding shares of
Perfectenergy BVI’s common stock in exchange for the issuance of 15,000,000
shares of our common stock to the Perfectenergy BVI Shareholders on the basis of
14,299.3327 common shares in the capital of PFGY for every one share of
Perfectenergy BVI.  For accounting purposes, the acquisition of
Perfectenergy BVI was treated as a recapitalization of Perfectenergy BVI with
Perfectenergy BVI as the acquirer.  Thus, the historical financial
statements of Perfectenergy BVI were recapitalized with the historical equity
shares of the Company.  Immediately after the closing of the Amended
Agreement, the Company had 22,303,048 shares of common stock issued and
outstanding, including the 8,001,825 shares of common stock owned by the
pre-exchange shareholders of PFGY.





Perfectenergy
BVI was incorporated in the British Virgin Islands as an International Business
Company on April 1, 2005.





Perfectenergy
(Shanghai) Limited ( “Perfectenergy Shanghai”) was established in Minhang
District, Shanghai City, People’s Republic of China (“PRC”) on July 8, 2005 with
a registered capital of $310,000 (RMB 2,500,000). Perfectenergy Shanghai is
wholly owned by Perfectenergy BVI.  On August 28, 2007, pursuant to a
change in bylaws, the registered capital of Perfectenergy Shanghai was increased
from $1,232,687 (RMB 10,000,000) to $9,210,635 (RMB 70,000,000).





Under an
agreement between Xiaochun Haas and Perfectenergy BVI dated September 20, 2007
(“GmbH Agreement”), Perfectenergy GmbH, was formed in Germany on November 9,
2007 as a corporation that markets, installs, and provides after-sales services
for the Company’s PV products sold in the European market.  The GmbH
Agreement supplemented an oral understanding between the parties dated August
26, 2007, on which day the parties agreed that Ms. Haas would form Perfectenergy
GmbH in Germany as a private company and would become the sole shareholder and
Chief Executive Officer of Perfectenergy GmbH with all expenses relating to the
formation paid by the Company.  Pursuant to the GmbH Agreement, Ms.
Haas was to transfer her ownership in Perfectenergy GmbH to Perfectenergy BVI as
soon as practicable.  The parties completed the transfer of
Perfectenergy GmbH’s equity securities to Perfectenergy BVI in March
2008.




F-7


PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008







In
October 2007, the Company entered into an Investment Agreement with Shanghai
Zizhu Science Park Development Co., Ltd. (“Science Park”), under which the
Company plans to construct a new solar cell production facility on certain land
in the Shanghai Zizhu Science-Based Industrial District of Shanghai, China,
which will expand lamination and cell production capacity.  As
required by the Investment Agreement, on February 28, 2008, the Company formed
Perfectenergy Solar-Tech (Shanghai) Ltd. (“Perfectenergy Solar-Tech”) under PRC
laws as a wholly owned subsidiary of Perfectenergy BVI.  Perfectenergy
BVI is required to contribute $20,000,000 to the registered capital of
Perfectenergy Solar-Tech, of which $4,000,000 has been contributed with the
remaining $16,000,000 to be contributed by February 28, 2010.  As of
October 31, 2008, this subsidiary was still in the pre-operating
stage.





Note
2 – Summary of Significant Accounting Policies





(a) Basis of Presentation and
Principles of Consolidation





The
consolidated financial statements reflect the activities of the Company and its
wholly owned subsidiaries, Perfectenergy International Limited (“Perfectenergy
BVI”), Perfectenergy (Shanghai) Limited (“Perfectenergy Shanghai”),
Perfectenergy GmbH (“Perfectenergy GmbH”), and Perfectenergy Solar-Tech
(Shanghai) Ltd. (“Perfectenergy Solar-Tech”).




The
accompanying consolidated financial statements have been prepared in accordance
with the rules of the Securities and Exchange Commission (“SEC”).  The
accompanying consolidated financial statements are in U.S. dollars and include
PFGY and each of its wholly-owned subsidiaries.  All significant
intercompany balances and transactions have been eliminated in
consolidation.  The Company has reclassified certain prior year
amounts to conform to the current year presentation.




(b) Change of Year
End





Prior to
the acquisition, Perfectenergy BVI’s and Perfectenergy Shanghai’s reporting year
end was December 31.  PFGY’s reporting year end is October
31.  For purposes of consistency, Perfectenergy BVI and Perfectenergy
Shanghai changed each of their fiscal year ends to October 31.





(c) Use of
Estimates





The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates that affect the
amounts reported in the financial statements and accompanying
notes.  Management considers many factors in selecting appropriate
operational and financial accounting policies and controls, and in developing
the assumptions used to prepare these financial
statements.  Management must apply significant
judgment.  Among the factors, but not fully inclusive of all factors
that may be considered by management, are the following: the range of accounting
policies permitted by accounting principles generally accepted in the United
States of America; management’s understanding of the Company’s business - both
historical results and expected future results; the extent to which operational
controls exist that provide high degrees of assurance that all desired
information to assist in the estimation is available and reliable or whether
there is greater uncertainty in the information that is available upon which to
base the estimate; expectations of the future performance of the economy, both
domestically, and globally, within various areas that serve the Company’s
principal customers and suppliers of goods and services; expected rates of
exchange, sensitivity and volatility associated with the assumptions used in
developing estimates; and whether historical trends are expected to be
representative of future trends.




F-8





PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008







The
estimation process often times may yield a range of potentially reasonable
estimates of the ultimate future outcomes and management must select an amount
that lies within that range of reasonable estimates based upon the quantity,
quality, and risks associated with the variability that might be expected from
the future outcome and the factors considered in developing the
estimate.  This estimation process may result in the selection of
estimates that could be viewed as conservative or aggressive by
others.  Management attempts to use its business and financial
accounting judgment in selecting the most appropriate estimate; actual amounts,
however, may differ from those estimates.




(d) Financial
Instruments





Statement
of Financial Accounting Standards No. 107 (SFAS 107), “Disclosures about Fair
Value of Financial Instruments,” requires disclosure of the fair value of
financial instruments held by the Company.  SFAS 107 defines the fair
value of financial instruments as the amount at which the instrument could be
exchanged in a current transaction between willing parties.  The
Company considers the carrying amount of cash, accounts receivable, other
receivables, accounts payable, accrued liabilities, and other payables to
approximate their fair values because of the short period of time between the
origination of such instruments, their expected realization, and their current
market rate of interest.





(e) Foreign Currency
Translation





The
reporting currency of the Company is the U.S. dollar.  The Company’s
principal operating subsidiaries established in the PRC use the local currency,
Renminbi (“RMB”), as their functional currency.  The Company’s sales
offices in Germany use the Euro (“EUR”) as their functional
currency.  The assets and liabilities of the Company’s Chinese
subsidiaries at October 31, 2008 were translated at 6.826 RMB to $1.00 as
compared to 7.46 RMB to $1.00 at October 31, 2007.  The assets and
liabilities of the Company’s German subsidiary at October 31, 2008 were
translated at €0.766 to $1.00.  Equity accounts were stated at their
historical rate.  The average translation rates applied to income
statement accounts of the Company’s Chinese subsidiaries for the year ended
October 31, 2008 and ten months ended October 31, 2007 were 7.03 RMB and 7.70
RMB, respectively.  The average translation rates applied to income
statement accounts of the Company’s German subsidiary for the year ended October
31, 2008 were €0.668 to $1.00.  For the periods presented, adjustments
resulting from translating financial statements into U.S. dollars are reported
as cumulative translation adjustments and are shown as a separate component of
other comprehensive income (loss).  Transaction gains and losses that
arise from exchange rate fluctuations on transactions denominated in a currency
other than the functional currency are included in the results of operations as
incurred.





(f) Cash and Cash
Equivalents





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


F-9


PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008











(g) Inventories





Inventories
are stated at the lower of cost or market, using a weighted average cost
method.  The Company reviews its inventory periodically for possible
obsolete goods or to determine if any reserves are necessary for potential
obsolescence.  The Company wrote-off inventory totaling $163,921 and
$40,685 for the year ended October 31, 2008 and the ten months ended October 31,
2007, respectively.  As of October 31, 2008, the Company determined
that no reserves are necessary.





(h) Equipment and Leasehold
Improvements





Equipment
and leasehold improvements are stated at cost.  Depreciation is
computed by using the straight-line method at rates based on the estimated
useful lives of the various classes of property.  Estimates of useful
lives are based upon a variety of factors including durability of the asset, the
amount of usage that is expected from the asset, the rate of technological
change, and the Company’s business plans for the asset.  Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease term or estimated useful life of the asset.  Should the Company
change its plans with respect to the use and productivity of property and
equipment, it may require a change in the useful life of the asset or incur a
charge to reflect the difference between the carrying value of the asset and the
proceeds expected to be realized upon the asset’s sale or
abandonment.  Expenditures for maintenance and repairs are expensed as
incurred and significant major improvements are capitalized.





Estimated
useful lives of the Company’s assets are as follows:




Useful LifeLeasehold
      improvements
                        
                        5
      yearsTransportation
      equipment
                        
                        5
      yearsMachinery
                        
                        5 -
      10 yearsOffice
      equipment
                        
                        5
      years




(i) Impairment of Long-Lived
Assets





The
Company evaluates long-lived assets for impairment annually, and more often if
an event or circumstance occurs that triggers an impairment
test.  Substantial judgment is necessary in the determination as to
whether an event or circumstance has occurred that may trigger an impairment
analysis and in the determination of the related cash flows from the
asset.  Estimating cash flows related to long-lived assets is a
difficult and subjective process that applies historical experience and future
business expectations to revenues and related operating costs of
assets.  Should impairment appear to be necessary, subjective judgment
must be applied to estimate the fair value of the asset, for which there may be
no ready market, which oftentimes results in the use of discounted cash flow
analysis and judgmental selection of discount rates to be used in the
discounting process.  If the Company determines an asset has been
impaired based on the projected undiscounted cash flows of the related asset or
the business unit over the remaining amortization period, and if the cash flow
analysis indicates that the carrying amount of an asset exceeds related
undiscounted cash flows, the carrying value is reduced to the estimated fair
value of the asset or the present value of the expected future cash
flows.  As of October 31, 2008, the Company expects these assets to be
fully recoverable.




F-10





PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008











(j) Customer
deposits





Customer
deposits are prepayments from our customers.  A majority of our sales
require customers to prepay before delivery is made.  Such prepayments
are recorded in our financial statements as customer deposits until delivery has
occurred.





(k) Value Added
Tax





The
Company’s sales of products in the PRC and Germany are subject to a value added
tax (“VAT”) in accordance with tax laws.  The value added tax applied
is 17% in the PRC and 19% in Germany, respectively, of the gross sales
price.  A credit is available whereby VAT paid on the purchases of
semi-finished products or raw materials used in the production of the Company’s
finished products, and payment of freight expenses can also be used to offset
the VAT due on sales of the finished product.





(l) Provision for Income
Taxes





Statement
of Financial Accounting Standards No. 109 (SFAS 109), “Accounting for Income
Taxes,” requires the recognition of deferred income tax liabilities and assets
for the expected future tax consequences of temporary differences between income
tax basis and financial reporting basis of assets and
liabilities.  Provision for income taxes consist of taxes currently
due plus deferred taxes.





The
Company adopted FASB Interpretation 48 (FIN 48), “Accounting for Uncertainty in
Income Taxes,” as of January 1, 2007.  A tax position is recognized as
a benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to
occur.  The amount recognized is the largest amount of tax benefit
that is greater than 50% likely of being realized on examination.  For
tax positions not meeting the “more likely than not” test, no tax benefit is
recorded.  FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosures, and transition.





The
Company accounts for income taxes using the asset and liability
method.  Deferred tax liabilities and assets are determined based on
temporary differences between the basis of assets and liabilities for income tax
and financial reporting purpose of the Company.  The deferred tax
assets and liabilities are classified according to the financial statement
classification of the assets and liabilities generating the
differences.  Valuation allowances are established when necessary
based upon the judgment of management to reduce deferred tax assets to the
amount expected to be realized and could be necessary based upon estimates of
future profitability and expenditure levels over specific time horizons in
particular tax jurisdictions.




F-11





PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008









(m) Revenue
Recognition





The
Company's revenue recognition policies are in accordance with Staff Accounting
Bulletin (“SAB”) 104.  Revenues from solar cells, solar modules, and
PV systems are recognized upon shipment of the products only if no significant
Company obligations remain, the fee is fixed or determinable, and collection is
received or the resulting receivable is deemed probable.  Revenue is
recognized, net of discount and allowances, at the time of product
shipment.  All of the Company’s products that are sold in the PRC are
subject to a Chinese value-added tax at a rate of 17% of the gross sales price
or at a rate approved by the PRC local government.  All of the
Company’s products that are sold in Germany are subject to a Germany value-added
tax at a rate of 19% of the gross sales price or at a rate approved by the
Germany government.  In general, the Company does not accept product
returns; only under special situations, when both the Company and customers
agree, is a product exchange allowed.  Historically, the Company has
not experienced any product returns.  For solar cells, solar modules,
and PV systems, the Company is covered by product quality insurance, and product
liability insurance.  The product quality insurance retroactively
covers the period from July 1, 2007 to the end of the insurance period on June
30, 2009.




(n) Shipping and
Handling





Costs
related to shipping and handling of the products sold is included in selling,
general, and administrative expenses.  Shipping and handling expense
of sales amounted to $682,166 and $12,640 for the year ended October 31, 2008
and the ten months ended October 31, 2007, respectively.





(o) Advertising





Advertising
and promotion expenses are expensed as incurred.  Advertising expense
amounted to $24,268 and $3,440 for the year ended October 31, 2008 and the ten
months ended October 31, 2007, respectively.





(p) Research and Development
Costs





Research
and development expenses are expensed as incurred.  Research and
development expenses include salaries, consultant fees, supplies and materials,
as well as costs related to other overhead such as facilities, utilities, and
other departmental expenses.  The costs we incur with respect to
internally developed technology and engineering services are included in
research and development expenses.




(q) Earnings Per
Share





SFAS No.
128, "Earnings per Share," requires the presentation of earnings per share (EPS)
as basic EPS and diluted EPS in conjunction with the disclosure of the
methodology used in computing such earnings per share.  Basic EPS
excludes dilution and is computed by dividing net income (loss) attributable to
common stockholders by the weighted average number of common shares outstanding
for the period.  Diluted EPS 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.





The
following is a reconciliation of the basic and diluted earnings per share
computation:




F-12





PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008









Year
      Ended
                                        October
      31,
                                      
                                      
                                      Ten
      Months Ended
                                        October
      31,2008
                                      
                                      
                                      2007Net
      income (loss) for basic earnings per share
                                      
                                      $
                                      8,081,190
                                      
                                      
                                      $
                                      (1,495,750
                                      )Weighted
      average shares used in basic computation
                                      
                                      
                                      29,609,117
                                      
                                      
                                      
                                      24,337,345Diluted
      effect of options and warrants
                                      
                                      
                                      103,195
                                      
                                      
                                      
                                      -Weighted
      average shares used in diluted computation
                                      
                                      
                                      29,712,312
                                      
                                      
                                      
                                      24,337,345Weighted
      Average Earnings per shareBasic
                                      
                                      $
                                      0.27
                                      
                                      
                                      $
                                      (0.06
                                      )Diluted
                                      
                                      $
                                      0.27
                                      
                                      
                                      $
                                      (0.06
                                      )





For the
year ended October 31, 2008, the average stock price was greater than the
exercise prices of the 460,000 warrants and 407,169 options, which resulted in
additional weighted average diluted common stock equivalents of 103,195;
outstanding warrants in the amount of 3,515,714 were excluded from the diluted
earnings per share calculation as they are anti-dilutive.





The Company has a net loss for the ten
months ended October 31, 2007, and none of the 4,052,897 potentially dilutive
securities were included in the calculation of diluted earnings per share since
their effect would be anti-dilutive.





(r) Derivative Financial
Instruments




The
Company determines the classification of all debt and equity pursuant to the
terms of SFAS 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity ,” SFAS No.133, “Accounting for
Derivatives Instruments and Hedging Activity,” and EITF 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock.”  Often, the terms of various agreements result
in liability accounting for equity instruments that must be marked to market
each reporting period with the change in fair value recorded in other income and
expenses.




F-13





PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008







(s) Stock-Based
Compensation





The
Company records and reports stock based compensation pursuant to SFAS 123R,
“Accounting for Stock-Based Compensation,” which defines a fair-value-based
method of accounting for stock based employee compensation and transactions in
which an entity issues its equity instruments to acquire goods and services from
non-employees.  Stock compensation for stock granted to non-employees
has been determined in accordance with SFAS 123R and the Emerging Issues Task
Force consensus Issue No. (EITF) 96-18, "Accounting for Equity Instruments that
are issued to Other than Employees for Acquiring, or in Conjunction with Selling
Goods or Services," as the fair value of the consideration received or the fair
value of equity instruments issued, whichever is more reliably
measured.





Note
3 – Recently Issued Accounting Standards




In
September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), Fair Value
Measurements.  SFAS 157 establishes a framework for measuring fair
value and expands disclosures about fair value measurements.  The
changes to the current practice resulting from the application of this statement
relates to the definition of fair value, the methods used to measure fair value,
and the expanded disclosures about fair value measurements.  SFAS 157
is effective for financial statements for fiscal years beginning after November
15, 2007, with earlier adoption permitted.  The Company is evaluating
the impact, if any, that the adoption of this statement will have on its
consolidated results of operations and financial position.





In
December 2007, the SEC issued SAB 110.  SAB 110 amends and replaces
Question 6 of Section D.2 of Topic 14, Share-Based Payment of the
Staff Accounting Bulletin series.  Question 6 of Section D.2 of Topic
14 expresses the views of the staff regarding the use of the “simplified” method
in developing an estimate of expected term of “plain vanilla” share options and
allows usage of the “simplified” method for share option grants prior to
December 31, 2007.  SAB 110 allows public companies that do not have
historically sufficient experience to provide a reasonable estimate to continue
use of the “simplified” method for estimating the expected term of “plain
vanilla” share option grants after December 31, 2007.  The Company
currently uses the “simplified” method to estimate the expected term for share
option grants as it does not have sufficient historical experience to provide a
reasonable estimate.  The Company will continue to use the
“simplified” method until it feels that it has sufficient historical experience
to provide a reasonable estimate of expected terms in accordance with SAB
110.  SAB 110 became effective for the Company on January 1,
2008.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest, and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated.  SFAS 160 also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling
owners.  SFAS 160 is effective for fiscal years beginning after
December 15, 2008.  The Company has not determined the effect that the
application of SFAS 160 will have on its consolidated financial
statements.




F-14





PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008







In
December 2007, SFAS 141(R), Business Combinations, was
issued.  SFAS No. 141R replaces SFAS No. 141, Business
Combinations.  SFAS 141R retains the fundamental requirements
in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the
purchase method ) be
used for all business combinations and for an acquirer to be identified for each
business combination.  SFAS 141R requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions.  This replaces SFAS 141’s cost-allocation
process, which required the cost of an acquisition to be allocated to the
individual assets acquired and liabilities assumed based on their estimated fair
values.  SFAS 141R also requires the acquirer in a business
combination achieved in stages (sometimes referred to as a step acquisition) to
recognize the identifiable assets and liabilities, as well as the noncontrolling
interest in the acquiree, at the full amounts of their fair values (or other
amounts determined in accordance with SFAS 141R).  SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.  An entity may not apply it before that
date.  The Company is currently evaluating the impact that adopting
SFAS No. 141R will have on its financial statements.





In
February 2008, the FASB issued FASB Staff Position No. FAS 157-1 ("FSP FAS
157-1"), "Application of FASB Statement No. 157 to FASB Statement No. 13 and
Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement
13."  FSP FAS 157-1 does not apply under FASB Statement No. 13
(“Statement 13”), "Accounting for Leases," and other accounting pronouncements
that address fair value measurements for purposes of lease classification or
measurement under Statement 13.  This scope exception does not apply
to assets acquired and liabilities assumed in a business combination that are
required to be measured at fair value under SFAS No. 141 or SFAS No. 141R,
regardless of whether those assets and liabilities are related to
leases.





In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2 ("FSP FAS
157-2"), "Effective Date of FASB Statement No. 157."  With the
issuance of FSP FAS 157-2, the FASB agreed to: (a) defer the effective date in
SFAS No. 157 for one year for certain nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually), and (b) remove
certain leasing transactions from the scope of SFAS No. 157.  The
deferral is intended to provide the FASB time to consider the effect of certain
implementation issues that have arisen from the application of SFAS No. 157 to
these assets and liabilities.





In March
2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and
Hedging Activities—an amendment of FASB Statement No. 133.  SFAS 161
expands quarterly disclosure requirements in SFAS 133 about an entity’s
derivative instruments and hedging activities.  SFAS 161 is effective
for fiscal years beginning after November 15, 2008.  We are currently
assessing the impact of SFAS 161 on our financial position and results of
operations.





In May
2008, the FASB issued SFAS 162, "The Hierarchy of Generally Accepted Accounting
Principles."  SFAS 162 is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with GAAP for nongovernmental entities.  SFAS 162 is
effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles."  The
adoption of this statement did not have a material impact on the Company’s
results of operations, financial position, or cash flows.




F-15







PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008







In June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
No. 07-5”). EITF No. 07-5 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years.  Early application is not
permitted.  Paragraph 11(a) of Statement of Financial Accounting
Standard No 133, “Accounting for Derivatives and Hedging Activities” (“SFAS
133”), specifies that a contract that would otherwise meet the definition of a
derivative but is both (a) indexed to the Company’s own stock and
(b) classified in stockholders’ equity in the statement of financial
position would not be considered a derivative financial
instrument.  EITF No.07-5 provides a new two-step model to be applied
in determining whether a financial instrument or an embedded feature is indexed
to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph
11(a) scope exception.  This standard triggers liability accounting on
all options and warrants exercisable at strike prices denominated in any
currency other than the functional currency of the operating entity in the PRC
(Renminbi) and in Germany (the Euro).  Management is currently
evaluating the impact of adoption of EITF No. 07-5.





In June
2008, the FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to
Issue No. 98-5.”  The objective of EITF 08-4 is to provide transition
guidance for conforming changes made to EITF No. 98-5, “Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios,” that result from EITF No. 00-27 “Application of
Issue No. 98-5 to Certain Convertible Instruments,” and SFAS 150, “Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity.”  EITF 08-4 is effective for financial statements issued for
fiscal years ending after December 15, 2008.  Early application is
permitted.  Management is currently evaluating the impact of adoption of
EITF 08-4.





On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not
active.  Management is currently evaluating the impact of adoption of
SFAS 157-3.





Note
4 – Accounts Receivable





The
Company conducts its business operations in the PRC.  Management
believes that the trade accounts are fully collectible.  Management
reviews its accounts receivable on a regular basis to determine if the bad debt
allowance is adequate and adjusts the allowance when necessary.  At
October 31, 2008, there was no allowance for doubtful accounts as all account
balances were considered collectible.





Accounts
receivable consisted of the following:





October 31,
                            2008
                          
                          
                          October 31,
                            2007Accounts
      receivable
                          
                          $
                          3,880,053
                          
                          
                          $
                          13,834Less:
      allowance for doubtful accounts
                          
                          
                          ―
                          
                          
                          
                          ―Total
                          
                          $
                          3,880,053
                          
                          
                          $
                          13,834






F-16




PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2008









Note
5 – Inventories





Inventories consisted of the
following:





October 31,
                              2008
                            
                            
                            October 31,
                              2007Raw
      materials
                            
                            $
                            1,231,574
                            
                            
                            $
                            1,900,208Finished
      goods
                            
                            
                            3,896,110
                            
                            
                            
                            1,854,882Work
      in progress
                            
                            
                            1,070,513
                            
                            
                            
                            310,192Supplies
                            
                            
                            3,546
                            
                            
                            
                            41,526Totals
                            
                            $
                            6,201,743
                            
                            
                            $
                            4,106,808





Note
6 – Prepayments





Prepayments are monies deposited or
advanced to outside vendors on future inventory purchases.  Some of
the Company’s vendors require a certain amount of money to be deposited with
them as a guarantee that the Company will receive their purchase on a timely
basis and lower than market price.  This amount is refundable and
bears no interest.  Total outstanding prepayments for inventory
purchases were$6,225,170and $1,375,401 as of October 31, 2008
and 2007, respectively.





Note
7 – Equipment and Leasehold Improvements





Equipment
and leasehold improvements consisted of the following:





October
      31,
                          
                          
                          October
      31,2008
                          
                          
                          2007Leasehold
      Improvements
                          
                          $
                          650,167
                          
                          
                          $
                          76,648Transportation
      equipment
                          
                          
                          275,070
                          
                          
                          
                          208,570Machinery
                          
                          
                          2,311,735
                          
                          
                          
                          843,939Office
      equipment
                          
                          
                          154,070
                          
                          
                          
                          66,646Construction
      in progress
                          
                          
                          5,317,155
                          
                          
                          
                          913,267Totals
                          
                          
                          8,708,197
                          
                          
                          
                          2,109,070Less
      accumulated depreciation
                          
                          
                          (602,207
                          )
                          
                          
                          (242,543
                          )Totals
                          
                          $
                          8,105,990
                          
                          
                          $
                          1,866,527





Depreciation
expense for the year ended October 31, 2008 and ten months ended October 31,
2007 amounted to $329,115 and $144,644, respectively.




F-17




PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2008


Note
8 – Advances on Equipment Purchases





Advances
on equipment purchases represent partial payments for deposits on equipment
purchases and amounted to $373,873 and $1,169,616 as of October 31, 2008 and
2007, respectively.





Note
9 – Late Registration Penalties





In
connection with the issuance of common stock and warrants (the “Securities”) on
August 8, 2007, pursuant to Section 1(b) of the Registration Rights Agreement
between the holder of the Securities (“Investors”) and the Company, the Company
was required to have a registration statement relating to the resale of the
Securities declared effective by the Securities and Exchange Commission by
January 5, 2008.  A late registration entitled the Investors to a
payment by the Company of an amount equal to 2% of the purchase price paid for
the Securities due for January 7, 2008 and each 30 days thereafter, not to
exceed in the aggregate 15% of the purchase price of the
Securities.  The registration statement was declared effective on
March 5, 2008.  The Company owed the Investors a total of $1,079,467
as a late registration payment, which was accrued and charged to earnings during
the period.





In lieu
of making cash payments, the Company offered to issue restricted common stock at
a valuation of $4.00 per share for the first 30 days that the registration
statement was late in being declared effective by the SEC, which to which
certain of the Investors agreed.  Thus, the Company owed the Investors
taking cash payments a total of $912,347 as late registration
payments.  As of October 31, 2008, the Company paid $390,738 to the
Investors and issued an aggregate 41,780 shares to seven of the Investors in
lieu of a cash payment.





Note
10 – Retirement Benefit Plans





Regulations
in the PRC require the Company to contribute to a defined contribution
retirement plan for all permanent employees.  All permanent employees
are entitled to an annual pension equal to their basic salaries at
retirement.  The PRC government is responsible for the benefit
liability to these retired employees.  The Company is required to make
contributions to the state retirement plan at 22% of the monthly basic salaries
of the current employees.  For the year ended October 31, 2008 and the
ten months ended October 31, 2007, the Company made pension contributions in the
amount of $157,971, and $76,883, respectively.





Note 11 – Shareholder’s
Equity





In June
2006, pursuant to an agreement between the shareholders of Perfectenergy BVI
prior to the share exchange transaction (“Original Shareholders”), the Original
Shareholders agreed to increase the capital of Perfectenergy BVI from $360,000
to $1,232,687 (RMB 10,000,000).  In July 2007, the Original
Shareholders cancelled the increase of capital requirement and the remaining
$658,637 is no longer required to be contributed by the Original
Shareholders.




F-18





PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2008


On August
8, 2007, the Company sold an aggregate total of 6,571,986 units at $2.80 per
Unit (or an aggregate purchase price of $18,400,000) for total net proceeds of
$15,992,971.  Each unit consisted of one common share and one-half
purchase warrant (“Investor Warrants”), with each whole warrant entitling the
holder to purchase an additional common share at an exercise price of $3.80 for
a period of 30 months.  In connection with the offering, the Company
paid a placement fee of 7% totaling $1,288,000 and an advisory fee of 1% of the
gross proceeds totaling $184,000 in cash.





Concurrent
with the private placement, the Company issued 1,840,000 and 920,000 warrants to
the placement and advisory agents (collectively, as “Placement and Advisory
Warrants”) with an exercise price of $2.80 and $3.80,
respectively.  These warrants have a 3-year term.





In
connection with the recapitalization on August 8, 2007, the Company entered into
a consulting agreement (the “Fee Agreement”) with Transworld Capital Group Inc.,
a Hong Kong limited liability company (referred to as the
“Consultant”).  Based on this Fee Agreement, the Company had to pay
consulting fees totaling $240,000 in cash upon closing of the Amended Agreement
(see Note 1).  In addition, Perfectenergy BVI issued 49 Perfectenergy
BVI shares to the Consultant.  These 49 Perfectenergy BVI shares were
part of the shares exchanged for 770,727 shares of PFGY‘s common
shares.  The $240,000 was recorded as a reduction of capital as the
consulting services were provided in connection with the private
placement.





Note
12 – Derivative Instruments





In order
for the Investor Warrants to be accounted for as equity, such warrants must
comply with FAS 133 and EITF 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settle in, a Company’s Own Stock” (“EITF
00-19”).  EITF 00-19 required that the Investor Warrants contain a
provision permitting the holder to redeem the warrants for cash, based on a
Black-Scholes valuation, in the event of a change in control deemed not to be
within the Company’s control, but the Investor Warrants failed such test,
resulting in a classification of the Investor Warrants as derivative instrument
liabilities rather than as equity instruments.  The Company allocated
the proceeds received between the common stock and Investor Warrants first to
the Investor Warrants based on the fair value on the date the proceeds were
received with the balance to common stock. Net proceeds were allocated as
follows:





Warrants
                  
                  $
                  12,226,600Common
      stock
                  
                  
                  3,766,371Total
      net proceeds
                  
                  $
                  15,992,971





The
change in the fair value of the Investor Warrants, determined under the
Cox-Ross-Rubinstein binomial model, at each reporting date will result in either
an increase or decrease the amount recorded as liability, based on the
fluctuation of the Company’s stock price with a corresponding adjustment to
other income (or expense).  For the ten months ended October 31, 2007,
a loss of $240,086 was recognized in the accompanying income statement based on
the increase in fair value since issuance.For the year ended October
31, 2008, a gain of $11,736,998 was recognized in the accompanying income
statements based on the decrease in fair value since the last reporting
date.  At October 31, 2008, the fair value of the derivative
instrument totaled $729,688.




F-19





PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2008


The value
of the Investor Warrants at October 31, 2008 was determined using the
Cox-Ross-Rubinstein binomial model using the following assumptions: volatility
120%; risk free interest rate 1.45%; dividend yield of 0%; and expected term of
1.27 years of the Investor Warrants and 1.77 years of the Placement and Advisory
Warrants.  The volatility of the Company’s common stock was estimated
by management based on the historical volatility of our common stock, the risk
free interest rate was based on Treasury Constant Maturity Rates published by
the U.S. Federal Reserve for periods applicable to the expected life of the
warrants, the expected dividend yield was based on the Company’s current and
expected dividend policy, and the expected term is equal to the contractual life
of the warrants.





As of
October 31, 2008, the Company had warrants as follows:




Weighted
                  
                  AverageWarrants
                  
                  Warrants
                  
                  Average Exercise
                  
                  Remaining ContractualOutstanding
                  
                  Exercisable
                  
                  Price
                  
                  LifeBalance,
      December 31, 2006
                  
                  
                  ―
                  
                  ―
                  
                  
                  ―
                  
                  ―Granted
                  
                  
                  3,975,714
                  
                  3,975,714
                  
                  $
                  3.68
                  
                  2.59Forfeited
                  
                  
                  ―
                  
                  ―
                  
                  
                  ―
                  
                  ―Exercised
                  
                  
                  ―
                  
                  ―
                  
                  
                  ―
                  
                  ―Balance,
      October 31, 2007
                  
                  
                  3,975,714
                  
                  3,975,714
                  
                  $
                  3.68
                  
                  2.35Granted
                  
                  
                  ―
                  
                  ―
                  
                  
                  ―
                  
                  ―Forfeited
                  
                  
                  ―
                  
                  ―
                  
                  
                  ―
                  
                  ―Exercised
                  
                  
                  ―
                  
                  ―
                  
                  
                  ―
                  
                  ―Balance,
      October 31, 2008
                  
                  
                  3,975,714
                  
                  3,975,714
                  
                  $
                  3.68
                  
                  1.36





Note 13 – Accounting for Stock-Based
Compensation





Perfectenergy BVI Stock
Options





On
November 30, 2005, March 15, 2006, October 31, 2006, and March 21, 2007,
Perfectenergy BVI issued a total of 50 options to employees of Perfectenergy
BVI.  Originally, approximately 30% of the options were to vest after
one year, 60% after two years, and 10% after three years.  On March
21, 2007, Perfectenergy BVI modified the options so that all unvested amounts
became fully vested on that date.





Perfectenergy
BVI used the Cox-Ross-Rubinstein binomial model to value the options at the time
they were issued, based on the stated exercise prices and expiration dates of
the instruments and using a risk-free rate of 4.50%.  Because
Perfectenergy BVI does not have a history of employee stock options, the
estimated life is based on one-half of the sum of the vesting period and the
contractual life of the option.  This is the same as assuming that the
options are exercised at the mid-point between the vesting date and expiration
date.




F-20





PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2008


Perfectenergy
BVI’s stock was not traded when the options were granted.  Therefore,
Perfectenergy BVI had to estimate the market value of its
shares.  There was no significant change in the business between
December 2005 and March 21, 2007, and Perfectenergy BVI used an August 2006
transaction price of $468 per share as the market price.  At that
market price, the 50 employee options had a fair value of approximately $9,445,
and they are being amortized over the vesting period.





On July
27, 2007, Perfectenergy BVI entered into Termination Agreements for Options with
employees who were granted such stock options and cancelled all outstanding
stock options.  There was no effect on the financial statements when
the options were cancelled.





PFGY Stock
Options





On
September 5, 2007, the Company adopted the “Perfectenergy International Limited
2007 Stock Incentive Plan” (the “Stock Incentive Plan”).  The Company
reserved 1,500,000 shares of its common stock pursuant to the Stock Incentive
Plan.  During the ten months ended October 31, 2007, under the Stock
Incentive Plan, the Company issued 1,282,358 options to the employees and the
directors of the Company, of which 164,298 options were cancelled in December
2007 and 25,000 were cancelled in March 2008.  75,000 of such issued
options vested immediately, 1,168,060 of such options were to vest evenly on an
annual basis over the three years following the grant date of August 8, 2007, of
which 164,298 options were cancelled in December 2007, and 25,000 were cancelled
in March 2008, and 39,298 of such options were to vest evenly on a monthly basis
over the thirty-six months following the grant date of August 8,
2007.  The Company used the Cox-Ross-Rubinstein binomial model to
value the options at the time they were issued, based on volatility of 70%,
dividend yield of 0% and the stated exercise prices and expiration dates of the
instruments and using an average risk-free rate of 4.5%.





On
February 1, 2008, the Company issued 125,000 options to the Company’s Chief
Financial Officer.  All options vest evenly on an annual basis over
the three years following the date of grant.  The Company used the
Cox-Ross-Rubinstein binomial model to value the options at the time they were
issued, based on volatility of 70%, dividend yield of 0% and the stated exercise
prices of the instruments and using an average risk-free rate of
2.36%.





The
volatility of the Company’s common stock was estimated by management based on
the historical volatility of the Company’s common stock, the risk free interest
rate was based on Treasury Constant Maturity Rates published by the U.S. Federal
Reserve for periods applicable to the estimated life of the options, and the
expected dividend yield was based on the current and expected dividend
policy.  The value of the options was based on the Company’s common
stock price on the date each option was granted. Because the Company does not
have a history of employee stock options, the estimated life is based on
one-half of the sum of the vesting period and the contractual life of each
option.  This is the same as assuming that the options are exercised
at the mid-point between the vesting date and expiration date.




F-21





PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2008


Stock-based
award activity during the quarter ended October 31, 2008 was as
follows:




WeightedOptions
                
                
                Average
                  Exercise
                
                
                AggregateOutstanding
                
                
                Price
                
                
                Intrinsic ValueBalance,
      October 31, 2006
                
                
                ―
                
                
                
                ―
                
                
                
                ―Granted
                
                
                1,
      282,358
                
                
                $
                2.80
                
                
                $
                2,906,953Forfeited
                
                
                ―
                
                
                
                ―
                
                
                
                ―Exercised
                
                
                ―
                
                
                
                ―
                
                
                
                ―Balance,
      October 31, 2007
                
                
                1,282,358
                
                
                $
                2.80
                
                
                $
                3,130,565Granted
                
                
                125,000
                
                
                
                4.08
                
                
                
                90,000Forfeited
                
                
                (189,298
                )
                
                
                2.80
                
                
                
                ―Exercised
                
                
                (9,375
                )
                
                
                2.80
                
                
                
                ―Balance,
      October 31, 2008
                
                
                1,208,685
                
                
                $
                2.93
                
                
                $
                ―





As of
October 31, 2008, approximately $2.93 million of estimated expense with respect
to non-vested stock-based awards has yet to be recognized and will be recognized
as an expense over the employee’s remaining weighted average service period of
approximately 1.77 years.  As of October 31, 2008, 407,169 of the
outstanding options are exercisable. Compensation expenses for the year ended
October 31, 2008 and the ten months ended October 31, 2007 were $1,599,073 and
$337,782, respectively.




Stock-based
award as of October 31, 2008 is as follows:





Outstanding Options
                
                Exercisable OptionsNumber
                  of Options
                
                Exercise
                  Price
                
                Average
                  Remaining
                  Contractual
                  Life
                
                Number
                  of Options
                
                Exercise
                  Price
                
                Average
                  Remaining
                  Contractual
                  Life1,083,685
                
                $
                2.80
                
                
                8.78
                
                
                407,169
                
                $
                2.80
                
                
                8.78125,000
                
                $
                4.08
                
                
                4.51
                
                
                ―
                
                $
                ―
                
                
                ―





Note
14 – Statutory Reserves





The laws
and regulations of the PRC require that before an enterprise distributes profits
to its owners, it must first satisfy all tax liabilities, provide for losses in
previous years, and make allocations to investors, in proportions determined at
the discretion of the board of directors, after the statutory
reserve.  The statutory reserve includes the surplus reserve fund and
the enterprise fund.  The statutory reserve represents restricted
retained earnings.





Surplus Reserve
Fund





Pursuant
to the PRC’s accounting standards, Perfectenergy Shanghai and Perfectenergy
Solar-Tech are required to set aside 10% of their after-tax profit each year to
their general reserves until the accumulative amount of such general reserves
reaches 50% of their respective registered capital.  These allocations
must be made before Perfectenergy Shanghai or Perfectenergy Solar-Tech can
distribute any cash dividends to each of their sole shareholder, Perfectenergy
BVI.  For the fiscal year ended October 31, 2008 and the ten months
ended October 31, 2007, neither Perfectenergy Shanghai nor Perfectenergy
Solar-Tech made any contribution to their respective surplus reserve
fund.




F-22





PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2008


In
addition to using the funds in their surplus reserves to distribute cash
dividends to their shareholders, Perfectenergy Shanghai and Perfectenergy
Solar-Tech may also use such funds (i) during a liquidation, (ii) to cover a
previous years’ losses, if any, (iii) for business expansion, or (iv) for
conversion to registered capital by issuing new shares to existing shareholders
in proportion to their holdings, provided that the remaining surplus reserve
fund balance after such issue is not less than 25% of each of their registered
capital, or by increasing the par value of the shares currently held by existing
shareholders.





Enterprise
Fund





The
enterprise fund may be used to acquire plant and equipment or to increase
working capital to expand on production and business operations.  No
minimum contribution is required, and neither Perfectenergy Shanghai nor
Perfectenergy Solar-Tech made any contributions to their respective enterprise
fund for the fiscal year ended October 31, 2008 and the ten months ended October
31, 2007.





Note
15 – Income Taxes




Under the
income tax laws of the PRC, Chinese companies are generally subject to an income
tax at an effective rate of 33% (30% state income taxes plus 3% local income
taxes) on income reported in the statutory financial statements after
appropriate tax adjustments, unless the enterprise is located in a specially
designated region where enterprises are granted a three-year income tax
exemption and a 50% income tax reduction for the next three years or the
enterprise is a manufacturing related joint venture with a foreign enterprise or
a wholly owned subsidiary of a foreign enterprise, which are granted a two-year
income tax exemption and a 50% income tax reduction for the next three
years.





Perfectenergy
Shanghai was established on July 8, 2005 as a wholly owned subsidiary of the
Company, a foreign enterprise in the PRC.  Thus, Perfectenergy
Shanghai was granted an income tax exemption for the years ended December 31,
2006 and 2005, was entitled to a 50% reduction of the income tax rate of 33% for
2007 (or a rate of 16.5%), and is entitled to a 50% reduction of the income tax
rate of 25% for 2008 and 2009 (or a rate of 12.5%).





Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
existing laws for Domestic Enterprises (“DES’s”) and Foreign Invested
Enterprises (“FIEs”).  The key changes are as follows:




a.
            The
      new standard EIT rate of 25% will replace the 33% rate currently
      applicable to both DES’s and FIEs, except for high tech companies that pay
      a reduced rate of 15%;





b.
            Companies
      established before March 16, 2007 will continue to enjoy tax holiday
      treatment approved by local government for a grace period of 5 years or
      until the end of the tax holiday term, whichever is
  sooner.







F-23





PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2008


The
following table reconciles the U.S. statutory tax rates to the Company’s
effective tax rate as of October 31, 2008:





Year Ended
      October 31,
                      
                      
                      Ten Months Ended
      October 31,2008
                      
                      
                      2007U.S.
      statutory rates
                      
                      
                      34.0
                      %
                      
                      
                      34.0
                      %Foreign
      income not recognized in U.S.
                      
                      
                      (34.0
                      )
                      
                      
                      (34.0
                      )China
      income taxes
                      
                      
                      25.0
                      
                      
                      
                      33.0China
      income tax exemption
                      
                      
                      (12.5
                      )
                      
                      
                      (16.5
                      )Effective
      income tax rates
                      
                      
                      12.5
                      %
                      
                      
                      16.5
                      %




Since
Perfectenergy Shanghai had an operating loss for the ten months ended October
31, 2007, the loss can be carried forward to offset income for the next five
years.  The Company recorded deferred tax assets of $17,259 and
$75,725 as of October 31, 2008 and 2007, respectively.  Based on the
foregoing information, the Company believes that a valuation allowance is not
deemed necessary for the deferred assets for the following reasons: (i) there
will be sufficient operating income generated in future years based on the fact
that the Company’s wholly owned subsidiary, Perfectenergy Shanghai, is expected
to generate profits based on sales orders received for future periods, and (ii)
the current operating loss of Perfectenergy Shanghai can be carried forward for
five years to offset future operating income under PRC tax
regulations.





Perfectenergy
GmbH’s aggregated tax burden, including corporate income tax, plus solidarity
surcharge and trade tax is 30.875%.  Losses may be carried forward and
utilized against future profits without a time limit but with some limits on the
amount of losses that may be carried forward against future
profits.  Perfectenergy GmbH is currently in a loss position and is
not subject to the aforementioned taxes at present.





PFGY was
incorporated in the United States and has incurred net operating losses of
$740,541 and $289,166 for income tax purposes for the fiscal year ended October
31, 2008 and the ten months ended October 31, 2007, respectively.  The
net operating losses are carried forward for United States income tax purposes,
and may reduce taxable income in future years.  These carry forwards
will expire, if not utilized, between 2027 and 2028.  Management
believes that the realization of the benefits from these losses appears
uncertain due to the Company’s limited operating history and continuing losses
for United States income tax purposes.  Accordingly, the Company has
provided a 100% valuation allowance on the deferred tax asset benefit to reduce
the asset to zero. Management will review this valuation allowance periodically
and make adjustments as warranted.




F-24





PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2008


Taxes
Payable





Taxes
payable consisted of the following:





October 31,
                      
                      October 31,2008
                      
                      2007Value-added
      taxes payable
                      
                      $
                      187,195
                      
                      
                      $
                      ―Employee
      individual income tax withheld
                      
                      
                      9,495
                      
                      
                      
                      3,772Total
                      
                      $
                      196,690
                      
                      
                      $
                      3,772





Note
16 – Concentration of Risk





Cash





Cash
includes cash on hand and demand deposits in accounts maintained with either
state owned banks or renowned local banks within the PRC, the United States,
Hong Kong, and Germany.  Certain financial instruments, which subject
the Company to concentration of credit risk, consist of cash.  The
Company maintains cash balances at financial institutions which, from time to
time, may exceed Federal Deposit Insurance Corporation insured limits for the
banks located in the United States, may exceed Hong Kong Deposit Protection
Board insured limits for the banks located in Hong Kong, or may exceed
Compensation Scheme of German Banks and Deposit Protection Fund of Association
of German Banks insured limits for the banks located in
Germany.  Balances at financial institutions or state owned banks
within the PRC are not covered by insurance.  Total cash in banks at
which the Company’s deposits are not covered by insurance amounted to $1,453,983
and $9,659,158 at October 31, 2008 and 2007, respectively.  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.





Major
Customers





For the
fiscal year ended October 31, 2008 and the ten months ended October 31, 2007,
five customers accounted for approximately 68% and 84%, respectively, of the
Company's sales.  These customers accounted for approximately 37% and
21.8% of the Company’s accounts receivable as of October 31, 2008 and 2007,
respectively.





Major
Vendors





For the
fiscal year ended October 31, 2008 and the ten months ended October 31, 2007,
the Company purchased approximately 85% and 92%, respectively, of their raw
materials from three major suppliers.  These suppliers represented
26.8% and 0% of the Company’s total accounts payable as of October 31, 2008 and
2007, respectively.





The
Company also entered into a five-year long-term supply contract with Tianjin
Huan-ou Semiconductor Technology Inc., Ltd. (“Tianjin Huan-ou”) on July 20,
2008, the effectiveness of which was conditioned upon (i) Perfectenergy Shanghai
making an advance payment in the aggregate amount of approximately $14,700,000
(the “Advanced Payment”) to Tianjin Huan-ou by December 20, 2008, 20% of which
will be refunded by Tianjin Huan-ou to Perfectenergy Shanghai by October 31 of
each year during the term of the agreement, starting in 2009; and (ii)
shareholder approval by both parties.  As of October 31, 2008, the
Company paid approximately $4,400,000 of the Advanced Payment to Tianjin
Huan-ou.  During the effectiveness of the agreement, Tianjin Huan-ou
is required to supply Perfectenergy Shanghai with monocrystalline silicon solar
wafers pursuant to the following annual supply schedule: 12.75 million pieces in
2009; 17.15 million pieces in 2010; 17.20 million pieces in 2011; 17.26 million
pieces in 2012; and 17.35 million pieces in 2013.  Please see Note 18
for a related “subsequent event.”




F-25





PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2008


Political and Economic
Risk





The
Company's major operations are carried out in the PRC.  Accordingly,
the Company's business, financial condition, and results of operations may be
influenced by the political, economic, and legal circumstances in the PRC and by
the general state of the PRC's economy.





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





Revenue by Geographic
Area





Revenues
are attributed to geographic areas based on the final shipping destination of
the Company’s products.  The following table summarizes the financial
information for the Company’s revenues based on geographic area:




Geographic Area
                            
                            Year Ended
                              October 31,
                            
                            
                            Ten Months
                              Ended
                              October 31,2008
                            
                            
                            2007China
                            
                            $
                            8,670,694
                            
                            
                            $
                            8,147,848Germany
                            
                            
                            31,267,812
                            
                            
                            
                            54,118Spain
                            
                            
                            23,255,326
                            
                            
                            
                            363,528Other
      European Countries
                            
                            
                            466,191
                            
                            
                            
                            ―Total
      revenues
                            
                            $
                            63,660,023
                            
                            
                            $
                            8,565,494





Note 17 – Commitments





Operating Lease
Commitments





The
Company’s office lease for Perfectenergy Shanghai is under a five-year term
expiring May 31, 2011.  The Company entered into a three-year office
lease for Perfectenergy GmbH expiring November 30, 2010 with a monthly rent of
approximately $2,176 (approximately EUR 1,452).  The Company entered
into a two-year lease for Perfectenergy Solar-Tech expiring March 14, 2010 with
a monthly rent of $5,553 (approximately RMB40,000).  At October 31,
2008, total future minimum lease payments under an operating lease were as
follows:




F-26





PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2008




Year Ended October 31
                          
                          Amount2009
                          
                          $
                          289,9582010
                          
                          
                          262,2792011
                          
                          
                          120,467Thereafter
                          
                          
                          ―




Total
rent expense for the fiscal year ended October 31, 2008 and the ten months ended
October 31, 2007 amounted to $315,038 and $168,549, respectively.





Long-Term Silicon Supply
Agreements





To assure
a long-term supply, the Company entered into a five-year long-term supply
contract with Tianjin Huan-ou, a major supplier, on July 20,
2008.  The effectiveness of the supply contract was conditioned on
prepayment of 4% of the contract value to Tianjin Huan-ou and shareholder
approval from both parties.  As of October 31, 2008, the Company paid
1.25% of the contract value to Tianjin Huan-ou.  At October 31, 2008,
total future minimum purchase obligations under this agreement were as
follows:





Year Ended October 31,
                    
                    Amount2009
                    
                    $
                    8,872,4062010
                    
                    
                    8,793,6632011
                    
                    
                    6,551,4802012
                    
                    
                    5,942,1872013
                    
                    
                    5,718,994Thereafter
                    
                    
                    ―





Note
18 – Subsequent Events





On
January 21, 2009, Perfectenergy Shanghai entered into an agreement with Tianjin
Huan-ou that supplemented the supply agreement entered into between the parties
on July 20, 2008.  Under the supplemental agreement, the parties
defined the effective date of the supply agreement as January 1, 2009 and agreed
that the outstanding portion of the Advanced Payment, as more fully described in
Note 16 above, is due to be paid by Perfectenergy Shanghai to Tianjin Huan-ou by
April 20, 2009.  In addition, the price per piece for future
deliveries was amended from a fixed price to a price to be negotiated by the
parties based on the then-current market price.




F-27




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





There
have been no changes in or disagreements with our independent auditors, Moore
Stephens Wurth Frazer and Torbet.







ITEM
      9A(T).
            CONTROLS
      AND PROCEDURES




Disclosure
Controls and Procedures





Regulations
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
require public companies to maintain “disclosure controls and procedures,” which
are defined to mean a company’s controls and other procedures that are designed
to ensure that information required to be disclosed in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized, and
reported, within the time periods specified in the SEC’s rules and
forms.  Our Chief Executive Officer and Chief Financial Officer
carried out an evaluation of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report.  Based
on those evaluations, as of October 31, 2008, our CEO, President, and CFO
believe that:





(i)
            our
      disclosure controls and procedures are designed to ensure that information
      required to be disclosed by us in the reports we file under the Exchange
      Act is recorded, processed, summarized, and reported within the time
      periods specified in the SEC’s rules and forms, and that such information
      is accumulated and communicated to our management, including the CEO and
      CFO, as appropriate, to allow timely decisions regarding required
      disclosure; and





(ii)
            our
      disclosure controls and procedures are
  effective.





Internal
Control over Financial Reporting





(a)           Management’s annual report on
internal control over financial reporting





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





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





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





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





Because
of its inherent limitations, the Company’s internal control over financial
reporting may not prevent or detect misstatements.  Therefore, even
those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and
presentation.  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.





Our
management assessed the effectiveness of our internal control over financial
reporting as of October 31, 2008.  In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control—Integrated
Framework.





Based on
our assessment, management believes that, as of October 31, 2008, our internal
control over financial reporting is effective based on those
criteria.





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




(b)           Changes
in internal control over financial reporting





There
were no changes in our internal control over financial reporting identified in
connection with the evaluation required by Rule 13a-15(d) or
Rule15d-15(d) promulgated under the Exchange Act that occurred during our
fourth fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.







ITEM
      9B.
            OTHER
      INFORMATION





None.




32




PART
III




ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE




Current
Management




The
following table identifies our current executive officers and directors, their
respective offices and positions, and their respective dates of election or
appointment:




Name
                                                  
                                                  Age
                                                  
                                                  Positions Held:
                                                  
                                                  Date
      of Election
                                                    or Appointment
                                                  
                                                  Term
      of OfficeWennan
      Li
                                                  
                                                  
                                                  42
                                                  
                                                  Chief
      Executive Officer, President, and Chairman of the Board of Directors
                                                  
                                                  August
      8, 2007
                                                  
                                                  2
      years as director *
                                                    6
      years as officeXiaolin
      Zhuang
                                                  
                                                  
                                                  37
                                                  
                                                  Chief
      Financial Officer and Secretary
                                                  
                                                  February
      1, 2008
                                                  
                                                  3
      yearsDiping
      Zhou
                                                  
                                                  
                                                  41
                                                  
                                                  Vice
      President of Operations
                                                  
                                                  October
      8, 2008
                                                  
                                                  6
      yearsMin
      Fan
                                                  
                                                  
                                                  43
                                                  
                                                  Director
                                                  
                                                  August
      25, 2007
                                                  
                                                  2
      years *Yunxia
      Yang
                                                  
                                                  
                                                  51
                                                  
                                                  Director
                                                  
                                                  August
      25, 2007
                                                  
                                                  2
      years *Adam
      Roseman
                                                  
                                                  
                                                  30
                                                  
                                                  Director
                                                  
                                                  August
      25, 2007
                                                  
                                                  3
      years *Yajun
      Wu
                                                  
                                                  
                                                  49
                                                  
                                                  Director
                                                  
                                                  November
      20, 2007
                                                  
                                                  3
      years
*





* Our
directors are up for re-election every year at our annual stockholder
meetings.





Wennan Li, Chairman of the Board, Chief
Executive Officer, and President, has extensive experience with
technological development, production management, and international marketing in
the PV industry.  Mr. Li is the founder, director, and general manager
of Perfectenergy Shanghai, our operating subsidiary.  From November
2002 to August 2005, Mr. Li was the Vice President of Topsolar Shanghai Limited,
a leading PV company in China.  He has also served as a PV industry
expert advising the Shanghai government in matters relating to the PV
industry.  Mr. Li received a master’s degree in 1991 from the
Management School of Shanghai Jiaotong University and a bachelor’s degree in
1988 from Xi’an Jiaotong University in Electrical Automation.




Xiaolin Zhuang, Chief Financial
Officer and Secretary, served as the China Financial Controller of
Synthesis Energy Systems, Inc. prior to joining the Company from April 2007 to
January 2008.  From November 2003 to May 2007, Mr. Zhuang served as
the Finance Manager and Group Internal Auditor Head for Jebsen & Co. (China)
Ltd. & Jebsen & Co. Ltd.  Since September 1995, Mr. Zhuang has
served as a member of the China Institute of Certified Public Accountants
(CICPA).  Mr. Zhuang earned a bachelor’s degree in Economics in 1994
from the Shanghai University of Finance and Economics.





Diping Zhou, Vice President of
Operations, has extensive accounting experience.  Ms. Zhou also
previously served as our Chief Accounting Officer, Treasurer, and Secretary,
and, concurrent to her position with the Company, she also serves as Vice
President and an accountant for Perfectenergy Shanghai.  From 2002
through 2005, Ms. Zhou was the manager of budget and financial department in
Topsolar Shanghai Limited, a leading Chinese solar energy products
manufacturer.  Ms. Zhou received a bachelor’s degree in Accounting
from Shanghai Lixin University of Commerce in 1988.  Ms. Zhou has
extensive accounting experience.




Min Fan, Director, is one of
the co-founders of Ctrip.com International Ltd. (Nasdaq: CTRP), a Chinese-based
travel services business with a $1.7 billion market
capitalization.  Mr. Fan has served as CTRP’s Chief Executive Officer
since January 2006 and as a director since October 2006.  He also
served as CTRP’S Chief Operating Officer from November 2004 to January 2006, and
as CTRP’s Executive Vice President from 2000 to November 2004.  Mr.
Fan is also a founding stockholder of Home Inns & Hotels Management, Inc.
(Nasdaq: HMIN), an economy hotel developer, operator, and franchisor with a $500
million market capitalization.  Mr. Fan obtained a master’s and
bachelor’s degree from Shanghai Jiao Tong University, and studied at the
Lausanne Hotel Management School of Switzerland in 1995.





Yunxia Yang, Director, has
been a professor in the School of Materials Science and Engineering at the East
China University of Science & Technology since 1987, and is one China’s
leading solar energy researchers with extensive experience in solar products
development.  Ms. Yang received a bachelor’s degree in 1982 and a
master’s degree in 1987 in the study of Application (Macromolecule) Materials,
both from East China University of Science & Technology.





Adam Roseman, Director, has
extensive experience in finance and management.  He is the founder and
Chief Executive Officer of ARC Investment Partners, LLC.  Mr. Roseman
has been an investment banker in various sectors at Lehman Brothers, Piper
Jaffray, and Goldman Sachs.





Yajun Wu, Director, is,
concurrent to his position with the Company, the Executive Vice President and
Deputy Chief Financial Officer of Alcatel Shanghai Bell Co., Ltd. in Shanghai, a
position which he has held since February 2003.  From July 2002 to
February 2003, Mr. Wu served Alcatel Shanghai Bell Co., Ltd. as the Director of
Credit Management.  From March 1999 to July 2002, Mr. Wu served as
Vice President and Deputy Chief Financial Officer of Shanghai Bell Alcatel
Mobile Communication System Co., Ltd.




33




To the
best of our knowledge, none of the officers or directors appointed following the
Closing, including any of their affiliates, currently beneficially own any
equity securities or rights to acquire any securities of Perfectenergy Nevada,
and no such persons have been involved in any transaction with Perfectenergy
Nevada or any of its directors, executive officers or affiliates that is
required to be disclosed pursuant to the rules and regulations of the SEC, other
than with respect to the transactions that have been described
herein.




Family
Relationships




There are
no family relationships between or among any of the current directors, executive
officers, or persons nominated or charged by the Company to become directors or
executive officers.




Involvement
in Certain Legal Proceedings





None of
our directors or executive officers has, during the past five
years:




·
            Had
      any petition under the federal bankruptcy laws or any state insolvency law
      filed by or against, or had a receiver, fiscal agent, or similar officer
      appointed by a court for the business or property of such person, or any
      partnership in which he was a general partner at or within two years
      before the time of such filing, or any corporation or business association
      of which he was an executive officer at or within two years before the
      time of such filing;




·
            Been
      convicted in a criminal proceeding or a named subject of a pending
      criminal proceeding (excluding traffic violations and other minor
      offenses);




·
            Been
      the subject of any order, judgment, or decree, not subsequently reversed,
      suspended, or vacated, of any court of competent jurisdiction, permanently
      or temporarily enjoining him from, or otherwise limiting, the following
      activities:




(i)
            Acting
      as a futures commission merchant, introducing broker, commodity trading
      advisor, commodity pool operator, floor broker, leverage transaction
      merchant, any other person regulated by the Commodity Futures Trading
      Commission, or an associated person of any of the foregoing, or as an
      investment adviser, underwriter, broker or dealer in securities, or as an
      affiliated person, director or employee of any investment company, bank,
      savings and loan association or insurance company, or engaging in or
      continuing any conduct or practice in connection with such
      activity;




(ii)
            Engaging
      in any type of business practice;
or




(iii)
            Engaging
      in any activity in connection with the purchase or sale of any security or
      commodity or in connection with any violation of federal or state
      securities laws or federal commodities
laws;




·
            Been
      the subject of any order, judgment, or decree, not subsequently reversed,
      suspended, or vacated, of any federal or state authority barring,
      suspending, or otherwise limiting for more than 60 days the right of such
      person to engage in any activity described in (i) above, or to be
      associated with persons engaged in any such
  activity;




·
            Been
      found by a court of competent jurisdiction in a civil action or by the SEC
      to have violated any federal or state securities law, where the judgment
      in such civil action or finding by the SEC has not been subsequently
      reversed, suspended, or vacated; or




·
            Been
      found by a court of competent jurisdiction in a civil action or by the
      Commodity Futures Trading Commission to have violated any federal
      commodities law, where the judgment in such civil action or finding by the
      Commodity Futures Trading Commission has not been subsequently reversed,
      suspended, or vacated.




Compliance
with Section 16(a) of the Securities Exchange Act of 1934





Section
16(a) of the Exchange Act requires our executive officers, directors, and
persons who beneficially own more than 10% of a registered class of our equity
securities to file with the SEC initial statements of beneficial ownership,
reports of changes in ownership, and annual reports concerning their ownership
of our common shares and other equity securities on Forms 3, 4, and 5
respectively.  Executive officers, directors, and greater than 10%
stockholders are required by SEC regulations to furnish us with copies of all
Section 16(a) reports they file.  Based on a review of the copies of
such forms received by us, and to the best of our knowledge, all executive
officers, directors, and greater than 10% stockholders filed the required
reports during the fiscal year ended October 31, 2008 in a timely manner, except
that (i) 1 report was untimely filed and 1 transaction was untimely reported for
Xiaolin Zhuang, and (ii) 3 reports were untimely filed and 11 transactions were
untimely reported for Adam Roseman.





34




Code
of Ethics




We have
adopted a Code of Business Conduct and Ethics that applies to our executive
officers, directors, and employees, which code is attached to this annual report
as Exhibit 14.1.





Recommendation
of Nominees to the Board





We formed a Nominating Committee to our
board of directors and approved the charter for such committee on July 29,
2008.  The Nominating Committee evaluates candidates to the board
proposed by our shareholders under criteria similar to the evaluation of
candidates proposed by directors and members of our management, except that the
Nominating Committee may consider, as one of the factors in its evaluation of
shareholder-recommended nominees, the size and duration of the interest of the
recommending shareholder or shareholder group in the Company’s
equity.  The Nominating Committee may also consider the extent to
which the recommending shareholder intends to continue holding its interest in
the Company, including, the case of nominees recommended for election at an
annual meeting of shareholders, whether the recommending shareholder intends to
continue holding its interest at least through the time of such annual
meeting.  Prior to the formation of our Nominating Committee and the
adoption of its charter, we had no procedures in place for evaluating nominees
to the board recommended by our shareholders.





Audit
Committee; Audit Committee Financial Expert





We formed
an Audit Committee of our board of directors and approved the charter for such
committee on July 29, 2008.  The members of our Audit Committee are
Yajun Wu, Adam Roseman, and Yunxia Yang.  Mr. Wu is the Audit
Committee’s Chairman, and he is an independent member of the board, as defined
by the SEC and the Nasdaq Capital Market.  The board of directors has
determined that Mr. Wu is also an “audit committee financial expert” as defined
by SEC rules.







ITEM
      11.
            EXECUTIVE
      COMPENSATION




The
following summary compensation table indicates the cash and non-cash
compensation earned during the fiscal years ended October 31, 2008, 2007,
and 2006 by (i) our Chief Executive Officer (principal executive officer), (ii)
our Chief Financial Officer (principal financial officer), (iii) the three most
highly compensated executive officers other than our CEO and CFO who were
serving as executive officers at the end of our last completed fiscal year,
whose total compensation exceeded $100,000 during such fiscal year ends, and
(iv) up to two additional individuals for whom disclosure would have been
provided but for the fact that the individual was not serving as an executive
officer at the end of our last completed fiscal year, whose total compensation
exceeded $100,000 during such fiscal year ends.  The compensation
amounts reflected in the table below are expressed in U.S. Dollars based on the
interbank exchange rate of RMB6.8259 for each 1.00 U.S. Dollar, on October
31, 2008.




SUMMARY COMPENSATION TABLE
  Name
      and principal
                                              position
                                            
                                            Year
                                            
                                            Salary
                                              ($)
                                            
                                            
                                            Bonus
                                              ($)
                                            
                                            
                                            Stock
                                              Awards
                                              ($)
                                            
                                            
                                            Option
                                              Awards
                                              ($)(1)
                                            
                                            
                                            Non-Equity
                                              Incentive
                                              Compensa-
                                              tion
                                              ($)
                                            
                                            
                                            Non-
                                              qualified
                                              Deferred
                                              Compensa-
                                              tion
                                              Earnings
                                              ($)
                                            
                                            
                                            All
      Other
                                              Compen-
                                              sation
                                              ($)
                                            
                                            
                                            Total
                                              ($)Wennan
      Li,
                                            
                                            2008
                                            
                                            $
                                            106,618
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            567,125
                                            (3)
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            673,743Chief
      Executive Officer
                                            
                                            2007
                                            
                                            $
                                            48,552
                                            (2)
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            130,160
                                            (3)
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            178,7122006
                                            
                                            $
                                            54,415
                                            (4)
                                            
                                            $
                                            5,195
                                            (4)
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            59,610Xiaolin
      Zhuang,
                                            
                                            2008
                                            
                                            $
                                            66,176
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            81,731
                                            (5)
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            4,320
                                            (6)
                                            
                                            $
                                            152,227Chief
      Financial Officer
                                            
                                            2007
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―2006
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―Diping
      Zhou,
                                            
                                            2008
                                            
                                            $
                                            74,265
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            273,609
                                            (7)
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            347,874Vice
      President of
                                            
                                            2007
                                            
                                            $
                                            27,500
                                            (8)
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            62,795
                                            (7)
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            90,295Operations
                                            
                                            2006
                                            
                                            $
                                            21,429
                                            (9)
                                            
                                            $
                                            3,896
                                            (8)
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            25,325


(1)
            Reflects
      dollar amount expensed by the Company during the applicable fiscal year
      for financial statement reporting purposes pursuant to FAS
      123R.  FAS 123R requires the Company to determine the overall
      value of the options as of the date of grant based upon the Black-Scholes
      method of valuation, and to then expense that value over the service
      period over which the options become exercisable (vested).  As a
      general rule, for time in service based options, the Company will
      immediately expense any option or portion thereof that is vested upon
      grant, while expensing the balance on a pro rata basis over the remaining
      vesting term of the option.


35








(2)
            This
      amount differs from Mr. Li’s base salary described below under “Employment
      Agreements” because Mr. Li had an oral agreement with Perfectenergy
      Shanghai after Perfectenergy Shanghai suffered first quarter losses, under
      which Mr. Li agreed to be paid 75% of his base salary.  This
      agreement only covered his 2007 salary through August 2007, and Mr. Li was
      paid 100% of his base salary starting in September
  2007.





(3)
            On
      August 8, 2007, Mr. Li was granted options to purchase an aggregate
      407,274 shares of our common stock at $2.80 per share, vesting at 33.33%
      per year.  Mr. Li’s options expire on August 8,
      2017.  We used the Cox-Ross-Rubinstein binomial model to value
      the options at the time they were issued, based on volatility of 70%,
      dividend yield of 0%, the stated exercise prices, and expiration dates of
      the instruments and using an average risk-free rate of
      4.5%.  Because we do not have a history of employee stock
      options, the estimated life is based on one-half of the sum of the vesting
      period and the contractual life of 10 years of the option.  This
      is the same as assuming that the options are exercised at the mid-point
      between the vesting date and expiration
date.





(4)
            Mr.
      Li and Perfectenergy Shanghai had an oral understanding in place from the
      beginning of Mr. Li’s employment, which understanding was not in effect in
      2007, that if profits reached half of the target level of $600,000, then
      Mr. Li would be paid half of his base salary; if profits reached 70% of
      the target level of $600,000, then Mr. Li would be paid 100% of his base
      salary.  Perfectenergy Shanghai, however, met the applicable
      target profit level.  Nonetheless, Mr. Li’s base salary for 2006
      was reduced pursuant to an oral agreement between Mr. Li and Perfectenergy
      Shanghai, under which Mr. Li agreed to reduce his total salary to 80% of
      the amount owed to him under his employment agreement due to a loss that
      Perfectenergy Shanghai incurred by moving their factory in
      2006.(5)
            On
      February 1, 2008, Mr. Zhuang was granted options to purchase an aggregate
      125,000 shares of our common stock at $4.08 per share, vesting at 33.33%
      per year.  Mr. Zhuang’s options expire on February 1,
      2013.  We used the Cox-Ross-Rubinstein binomial model to value
      the options at the time they were issued, based on volatility of 70%,
      dividend yield of 0%, the stated exercise prices, and expiration dates of
      the instruments and using an average risk-free rate of
      4.5%.  Because we do not have a history of employee stock
      options, the estimated life is based on one-half of the sum of the vesting
      period and the contractual life of 5 years of the option.  This
      is the same as assuming that the options are exercised at the mid-point
      between the vesting date and expiration date.(6)
            This
      amount includes statutory benefits under the laws of the People’s Republic
      of China, including pension, housing, medical, and unemployment insurance
      benefits.(7)
            On
      August 8, 2007, Ms. Zhou was granted options to purchase an aggregate
      196,488 shares of our common stock at $2.80 per share, vesting at 33.33%
      per year.  Ms. Zhou’s options expire on August 8,
      2017.  We used the Cox-Ross-Rubinstein binomial model to value
      the options at the time they were issued, based on volatility of 70%,
      dividend yield of 0%, the stated exercise prices, and expiration dates of
      the instruments and using an average risk-free rate of
      4.5%.  Because we do not have a history of employee stock
      options, the estimated life is based on one-half of the sum of the vesting
      period and the contractual life of 10 years of the option.  This
      is the same as assuming that the options are exercised at the mid-point
      between the vesting date and expiration date.(8)
            This
      amount differs from Ms. Zhou’s base salary described below under
      “Employment Agreements” because Ms. Zhou had an oral agreement with
      Perfectenergy Shanghai after Perfectenergy Shanghai suffered first quarter
      losses, under which Ms. Zhou agreed to be paid 80% of her base
      salary.  This agreement only covered her 2007 salary through
      August 2007, and Ms. Zhou was paid 100% of her base salary starting in
      September 2007.(9)
            Ms.
      Zhou and Perfectenergy Shanghai had an oral understanding in place from
      the beginning of Ms. Zhou’s employment, which understanding was not in
      effect in 2007, that if profits reached half of the target level of
      $600,000, then Ms. Zhou would be paid half of her base salary; if profits
      reached 70% of the target level of $600,000, then Ms. Zhou would be paid
      100% of her base salary.  Perfectenergy Shanghai, however, met
      the applicable target profit level.  Nonetheless, Ms. Zhou’s
      base salary for 2006 was reduced pursuant to an oral agreement between Ms.
      Zhou and Perfectenergy Shanghai, under which Ms. Zhou agreed to reduce her
      total salary to 90% of the amount owed to her under her employment
      agreement due to a loss that Perfectenergy Shanghai incurred by moving
      their factory in 2006.





Grants
of Plan-Based Awards




Estimated
      Future Payouts Under
                                                                  Non-Equity
      Incentive Plan Awards
                                                                
                                                                
                                                                Estimated
      Future Payouts Under
                                                                  Equity
      Incentive Plan AwardsName
                                                                
                                                                Grant
                                                                    Date
                                                                
                                                                Thres-
                                                                  hold
      ($)
                                                                
                                                                
                                                                Target
                                                                  ($)
                                                                
                                                                
                                                                Max-
                                                                  imum
      ($)
                                                                
                                                                
                                                                Thres-
                                                                  hold
      ($)
                                                                
                                                                
                                                                Target
                                                                  ($)
                                                                
                                                                
                                                                Max-
                                                                  imum
      ($)
                                                                
                                                                
                                                                All
      Other
                                                                    Stock
                                                                    Awards:
                                                                    Number
                                                                    of
      Shares
                                                                    of
      Stock
                                                                    or
      Units
                                                                    (#)
                                                                
                                                                
                                                                All
      Other
                                                                    Option
                                                                    Awards:
                                                                    Number
                                                                    of
                                                                    Securities
                                                                    Underly-
                                                                    ing
                                                                    Options
                                                                    (#)
                                                                
                                                                
                                                                Exercise
                                                                    or
      Base
                                                                    Price
      of
                                                                    Option
                                                                    Awards
                                                                    ($/Sh)
                                                                
                                                                Grant Date
                                                                    Fair Value
                                                                    of Stock
                                                                    and Option
                                                                    AwardsXiaolin
      Zhuang
                                                                
                                                                2/1/08
                                                                
                                                                $
                                                                ―
                                                                
                                                                
                                                                $
                                                                ―
                                                                
                                                                
                                                                $
                                                                ―
                                                                
                                                                
                                                                $
                                                                ―
                                                                
                                                                
                                                                $
                                                                ―
                                                                
                                                                
                                                                $
                                                                ―
                                                                
                                                                
                                                                
                                                                ―
                                                                
                                                                
                                                                
                                                                125,000
                                                                
                                                                
                                                                $
                                                                4.08
                                                                
                                                                $ 6
      00,000
  On
February 1, 2008, Mr. Zhuang was granted options to purchase 125,000 shares of
our common stock with an exercise price of $4.08.  The fair value of
the options on the date of grant of these options under FAS 123R was $600,000.
There were no other equity or share-based awards granted during the year ended
October 31, 2008 to the named executive
officers.




36


Employment
Agreements





The
Company entered into an Amended and Restated Employment Agreement with Xiaolin
Zhuang on December 29, 2008 for his services as Chief Executive Officer, which
agreement restated the Employment Agreement between Mr. Zhuang and Perfectenergy
Shanghai dated February 1, 2008.  Under his employment agreement, Mr.
Zhuang’s annual salary is RMB600,000 (approximately US$87,782).  He is
entitled to a bonus equal to one months’ salary payable during the Chinese New
Year holiday, which falls in either January or February of each year, following
each year of service, pro-rated for 2008.  Pursuant to the employment
agreement, Mr. Zhuang was issued options to purchase 125,000 shares of the
Company’s common stock at $4.08 per share under the Company’s 2007 Stock
Incentive Plan.  The options were granted on February 1, 2008 and
expire on February 1, 2013, and they vest according to the following schedule:
one-third on each of the first, second, and third anniversary of the grant
date.  In the event of termination, all vested options must be
exercised within six months of the termination date.  If Perfectenergy
Shanghai terminates Mr. Zhuang’s employment due to (i) Mr. Zhuang’s inability to
perform his duties due to a non-work related illness, (ii) Mr. Zhuang’s
inability to adequately perform his duties or his unwilling to perform his
duties, (iii) a corporate event such as a merger or acquisition of Perfectenergy
Shanghai, or (iv) a statutory reorganization or financial difficulties of
Perfectenergy Shanghai, Mr. Zhuang is entitled to one months’ salary for each
year of service.   The term of the employment agreement is three
years, and it may be renewed upon mutual agreement by the parties.





The
Company entered into an Employment Agreement with Wennan Li, which became
effective on September 2, 2008, for his services as the Company’s Chief
Executive Officer.  Mr. Li’s annual salary is RMB720,000
(approximately US$105,306).  The term of the employment agreement is
four years.





The
Company entered into an Employment Agreement with Diping Zhou, which became
effective on September 2, 2008, for her services as the Company’s Vice President
of Operations.  Ms. Zhou’s annual salary is RMB480,000 (approximately
US$70,204).  The term of the employment agreement is four
years.





Outstanding
Equity Awards as of October 31, 2008





Option
      Awards
                            
                            Stock
      AwardsName
                            
                            Number of
                              Securities
                              Underlying
                              Unexercised
                              Options
      (#)
                              Exercisable
                            
                            Number of
                              Securities
                              Underlying
                              Unexercised
                              Options
      (#)
                              Unexercisable
                            
                            Equity
                              Incentive
                              Plan
                              Awards:
                              Number of
                              Securities
                              Underlying
                              Unexercised
                              Unearned
                              Options
      (#)
                            
                            Option
                              Exercise
                              Price
      ($)
                            
                            Option
                              Expiration
                              Date
                            
                            Number
                              of
      Shares
                              or Units
                              of Stock
                              That
                              Have
      Not
                              Vested
                              (#)
                            
                            Market
                              Value
      of
                              Shares or
                              Units of
                              Stock That
                              Have Not
                              Vested
      ($)
                            
                            Equity
                              Incentive
                              Plan
                              Awards:
                              Number of
                              Unearned
                              Shares,
                              Units,or
                              Other
                              Rights
                              That
                              Have Not
                              Vested
      (#)
                            
                            Equity
                              Incentive
                              PlanAwards:
                              Market or
                              Payout
                              Value
      of
                              Unearned
                              Shares,Units,
                              or Other
                              RightsThat
                              Have Not
                              Vested
      (#)Wennan
      Li
                            
                            135,758
                            (1)
                            271,516
                            (1)
                            ―
                            
                            $
                            2.80
                            
                            8/8/17
                            
                            ―
                            
                            
                            ―
                            
                            ―
                            
                            ―Xiaolin
      Zhuang
                            
                            ―
                            
                            125,000
                            (2)
                            ―
                            
                            $
                            4.08
                            
                            2/1/13
                            
                            ―
                            
                            
                            ―
                            
                            ―
                            
                            ―Diping
      Zhou
                            
                            65,496
                            (2)
                            130,992
                            (3)
                            ―
                            
                            $
                            2.80
                            
                            8/8/17
                            
                            ―
                            
                            
                            ―
                            
                            ―
                            
                            ―










(1)
            33.33%
      of Mr. Li’s options vest(ed) on August 8, 2008, August 8, 2009, and August
      8, 2010.




(2)
            33.33%
      of Mr. Zhuang’s options vest on February 1, 2009, February 1, 2010, and
      February 1, 2011.(3)
            33.33%
      of Ms. Zhou’s options vest(ed) on August 8, 2008, August 8, 2009, and
      August 8, 2010.





Director
Compensation





The
following table provides compensation information for our directors during the
fiscal year ended October 31, 2008:





Name
                        
                        Fees
                          Earned or
                          Paid in
                          Cash ($)
                        
                        
                        Stock
                          Awards ($)
                        
                        
                        Option
                          Awards ($) (1)
                        
                        
                        Non-Equity
                          Incentive Plan
                          Compensation
                          ($)
                        
                        
                        Non-Qualified
                          Deferred
                          Compensation
                          Earnings ($)
                        
                        
                        All Other
                          Compensation
                          ($)
                        
                        
                        Total ($)Wennan
      Li (2)
                        
                        $
                        ―
                        
                        
                        $
                        ―
                        
                        
                        $
                        ―
                        
                        
                        $
                        ―
                        
                        
                        $
                        ―
                        
                        
                        $
                        ―
                        
                        
                        $
                        ―Min
      Fan
                        
                        $
                        14,700
                        
                        
                        $
                        ―
                        
                        
                        $
                        70,841
                        (3)
                        
                        $
                        ―
                        
                        
                        $
                        ―
                        
                        
                        $
                        ―
                        
                        
                        $
                        85,541Yunxia
      Yang
                        
                        $
                        14,700
                        
                        
                        $
                        ―
                        
                        
                        $
                        70,841
                        (4)
                        
                        $
                        ―
                        
                        
                        $
                        ―
                        
                        
                        $
                        ―
                        
                        
                        $
                        85,541Adam
      Roseman
                        
                        $
                        60,000
                        
                        
                        $
                        ―
                        
                        
                        $
                        343,937
                        (5)
                        
                        $
                        ―
                        
                        
                        $
                        ―
                        
                        
                        $
                        ―
                        
                        
                        $
                        403,937Yajun
      Wu
                        
                        $
                        14,700
                        
                        
                        $
                        ―
                        
                        
                        $
                        70,841
                        (6)
                        
                        $
                        ―
                        
                        
                        $
                        ―
                        
                        
                        $
                        ―
                        
                        
                        $
                        85,541







(1)
            Reflects
      dollar amount expensed by the Company during applicable fiscal year for
      financial statement reporting purposes pursuant to FAS
      123R.  FAS 123R requires the Company to determine the overall
      value of the options as of the date of grant based upon the Black-Scholes
      method of valuation, and to then expense that value over the service
      period over which the options become exercisable (vested).  As a
      general rule, for time in service based options, the company will
      immediately expense any option or portion thereof which is vested upon
      grant, while expensing the balance on a pro rata basis over the remaining
      vesting term of the option.





37





(2)
            Mr.
      Li’s compensation as a director is reflected in the table titled “Summary
      Compensation Table” above.




(3)
            Mr.
      Fan had options to purchase an aggregate 50,000 shares of our common stock
      outstanding as of October 31, 2008.  We used the
      Cox-Ross-Rubinstein binomial model to value the options at the time they
      were issued, based on volatility of 70%, dividend yield of 0%, the stated
      exercise prices, and expiration dates of the instruments and using an
      average risk-free rate of 4.5%.  Because we do not have a
      history of employee stock options, the estimated life is based on one-half
      of the sum of the vesting period and the contractual life of 10 years of
      the option.  This is the same as assuming that the options are
      exercised at the mid-point between the vesting date and expiration
      date.




(4)
            Ms.
      Yang had options to purchase an aggregate 50,000 shares of our common
      stock outstanding as of October 31, 2008.  We used the
      Cox-Ross-Rubinstein binomial model to value the options at the time they
      were issued, based on volatility of 70%, dividend yield of 0%, the stated
      exercise prices, and expiration dates of the instruments and using an
      average risk-free rate of 4.5%.  Because we do not have a
      history of employee stock options, the estimated life is based on one-half
      of the sum of the vesting period and the contractual life of 10 years of
      the option.  This is the same as assuming that the options are
      exercised at the mid-point between the vesting date and expiration
      date.




(5)
            Mr.
      Roseman had options to purchase an aggregate 240,625 shares of our common
      stock outstanding as of October 31, 2008.  We used the
      Cox-Ross-Rubinstein binomial model to value the options at the time they
      were issued, based on volatility of 70%, dividend yield of 0%, the stated
      exercise prices, and expiration dates of the instruments and using an
      average risk-free rate of 4.5%.  Because we do not have a
      history of employee stock options, the estimated life is based on one-half
      of the sum of the vesting period and the contractual life of 10 years of
      the option.  This is the same as assuming that the options are
      exercised at the mid-point between the vesting date and expiration
      date.




(6)
            Mr.
      Wu had options to purchase an aggregate 50,000 shares of our common stock
      outstanding as of October 31, 2008.  We used the
      Cox-Ross-Rubinstein binomial model to value the options at the time they
      were issued, based on volatility of 70%, dividend yield of 0%, the stated
      exercise prices, and expiration dates of the instruments and using an
      average risk-free rate of 4.5%.  Because we do not have a
      history of employee stock options, the estimated life is based on one-half
      of the sum of the vesting period and the contractual life of 10 years of
      the option.  This is the same as assuming that the options are
      exercised at the mid-point between the vesting date and expiration
      date.





We compensate Min Fan, Yunxia Yang, and
Yajun Wu with RMB100,000 (approximately $14,700) per annum each for their
services as a director.  Mr. Fan, Ms. Yang, and Mr. Wu each received
options to purchase 50,000 shares of our common stock at $2.80 per share, of
which 33.33% vests/vested on the first, second, and third year anniversary of
the grant date of such options.





We are
party to a three-year agreement with Adam Roseman for his services as a
director, under which he receives $5,000 per month as compensation for his
services.  Mr. Roseman received options to purchase 250,000 shares of
our common stock at $2.80 per share, of which 30% vested on the grant date and
70% vests on a monthly basis over a period of two years from the grant
date.  Mr. Roseman is entitled to certain travel and administrative
expenses in connection with his services as a director and is provided liability
insurance.





Compensation
Committee Interlocks and Insider Participation





During the fiscal year ended October
31, 2008, our Compensation Committee was comprised of Min Fan, Wennan Li, and
Yunxia Yang.  Mr. Fan serves as the Chairman of the Compensation
Committee.  During the fiscal year ended October 31, 2008, Mr. Li also
served as an executive officer of the Company.





During
the fiscal year ended October 31, 2008:





(i) none
of our executive officers served as a member of the compensation committee (or
other board committee performing equivalent functions or, in the absence of any
such committee, the entire board of directors) of another entity, one of whose
executive officers served on our Compensation Committee;





(ii) none
of our executive officers served as a director of another entity, one of whose
executive officers served on our Compensation Committee; and





(iii)
none of our executive officers served as a member of the compensation committee
(or other board committee performing equivalent functions or, in the absence of
any such committee, the entire board of directors) of another entity, one of
whose executive officers served as a member of our Board of
Directors.




38




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




Securities
Authorized for Issuance under Equity Compensation Plans or Individual
Compensation Arrangements





Please
see the section titled “Securities Authorized for Issuance under Equity
Compensation Plans” under Item 5 above.





Security
Ownership of Certain Beneficial Owners and Management




The
following table sets forth information regarding the beneficial ownership of our
common stock as of January 5, 2009 for each of our directors and officers; all
directors and officers as a group; and each person known by us to beneficially
own five percent or more of our common stock.




Beneficial
ownership is determined in accordance with SEC rules.  Unless
otherwise indicated in the table, the persons and entities named in the table
have sole voting and sole investment power with respect to the shares set forth
opposite the shareholder’s name.  Unless otherwise indicated, the
address of each beneficial owner listed below is No. 479 You Dong Road,
Xinzhuang Town, Shanghai 201100, People’s Republic of China.





Name of Beneficial Owner and
      Address
                          
                          Number of Shares of
                            Common Stock Beneficially
                            Owned (1)
                          
                          
                          Percent of Sharesof
                            Common Stock
                            Beneficially Owned (1)(2)Executive
      Officers and/or Directors:Wennan
      Li
                          
                          
                          6,530,977
                          (3)
                          
                          
                          21.94
                          %Min
      Fan
                          
                          
                          4,084,267
                          (4)
                          
                          
                          13.78
                          %Yunxia
      Yang
                          
                          
                          4,084,267
                          (5)
                          
                          
                          13.78
                          %Diping
      Zhou
                          
                          
                          136,984
                          (6)
                          
                          
                          *Xiaolin
      Zhuang
                          
                          
                          0
                          
                          
                          
                          *Adam
      Roseman (7)
                          
                          
                          148,959
                          (7)
                          
                          
                          *Yajun
      Wu
                          
                          
                          16,667
                          (8)
                          
                          
                          *5%
      Beneficial Owners:Olivier
      Couriol (9)
                          
                          
                          2,786,896
                          (9)
                          
                          
                          9.12
                          %All
      Executive Officers and Directors as a Group
      (7 persons)
                          
                          
                          15,002,121
                          
                          
                          
                          50.35
                          %




* Less
than 1%




(1)
            Under
      Rule 13d-3, a beneficial owner of a security includes any person who,
      directly or indirectly, through any contract, arrangement, understanding,
      relationship, or otherwise has or shares: (i) voting power, which includes
      the power to vote, or to direct the voting of shares; and (ii) investment
      power, which includes the power to dispose or direct the disposition of
      shares.  Certain shares may be deemed to be beneficially owned
      by more than one person (if, for example, persons share the power to vote
      or the power to dispose of the shares).  In addition, shares are
      deemed to be beneficially owned by a person if the person has the right to
      acquire the shares (for example, upon exercise of an option) within 60
      days of the date as of which the information is provided.  In
      computing the percentage ownership of any person, the amount of shares
      outstanding is deemed to include the amount of shares beneficially owned
      by such person (and only such person) by reason of these acquisition
      rights.  As a result, the percentage of outstanding shares of
      any person as shown in this table does not necessarily reflect the
      person's actual ownership or voting power with respect to the number of
      shares of common stock actually
outstanding.





(2)
            The
      percentage of class beneficially owned is based on 29,626,916 shares of
      common stock outstanding on January 5,
2009.




(3)
            135,758
      of these shares represent the number of shares of common stock that Wennan
      Li has the right to acquire upon exercise of an option granted on August
      8, 2007.





(4)
            16,667
      of these shares represent the number of shares of common stock that Min
      Fan has the right to acquire upon exercise of an option granted on August
      8, 2007.





(5)
            16,667
      of these shares represent the number of shares of common stock that Yunxia
      Yang has the right to acquire upon exercise of an option granted on August
      8, 2007.





(6)
            65,496
      of these shares represent the number of shares of common stock that Diping
      Zhou has the right to acquire upon exercise of an option granted on August
      8, 2007.





(7)
            123,959
      of these shares represent the number of shares of common stock that Adam
      Roseman has the right to acquire upon exercise of an option granted on
      August 8, 2007.  Mr. Roseman’s address is 9440 Little Santa
      Monica Blvd., Suite 401, Beverly Hills, CA
  90210.





(8)
            16,667
      of these shares represent the number of shares of common stock that Yajun
      Wu has the right to acquire upon exercise of an option granted on August
      8, 2007.





(9)
            Olivier
      Couriol, as the natural control person of each of RIG III Fund, Sequoia
      Aggressive Growth Fund, and Sequoia Diversified Growth Fund, is deemed to
      beneficially own the securities held by such entities, which securities
      include (i) 1,125,000 shares held by RIG III Fund; (ii) 562,500 shares
      issuable upon exercise of warrants held by RIG III Fund; (iii) 250,000
      shares held by Sequoia Aggressive Growth Fund; (iv) 125,000 shares
      issuable upon exercise of warrants held by Sequoia Aggressive Growth Fund;
      (v) 469,500 shares held by Sequoia Diversified Growth Fund; and (vi)
      234,750 shares issuable upon exercise of warrants held by Sequoia
      Diversified Growth Fund.  Olivier Couriol’s address is c/o
      Semper Geshon S.A., 40A, Route de Malagnov, Geneva, Switzerland
      1208.




39





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





Transactions
with Related Persons





Perfectenergy
Nevada





On March
29, 2007, we entered into a share exchange agreement (the “Exchange Agreement”)
with Perfectenergy International Limited, a private British Virgin Islands
corporation (“Perfectenergy BVI”) and Wennan Li, Min Fan, Yunxia Yang, and
Transworld Capital Group, Ltd. (collectively, the Perfectenergy BVI
Stockholders”).  Pursuant to the terms of the Exchange Agreement, we
agreed to acquire all of the issued and outstanding shares of Perfectenergy
BVI’s common stock in exchange for the issuance of 57,190,261 shares of our
common stock to the Perfectenergy BVI Stockholders (hereinafter this share
exchange transaction is described as the “Share Exchange”).





On August
8, 2007, we entered into an Amended and Restated Share Exchange Agreement
(“Amended Agreement”) with Perfectenergy BVI, the Perfectenergy BVI
Stockholders, and Crown Capital Partners, S.A.  The Amended Agreement
had the effect of terminating the Exchange Agreement.  Pursuant to the
terms of the Amended Agreement, we acquired all of the issued and outstanding
shares of Perfectenergy BVI’s common stock in exchange for the issuance of
60,000,000 shares of our common stock to the Perfectenergy BVI Stockholders on
the basis of 57,197.33079 common shares in the capital of Perfectenergy Nevada
for every one share of Perfectenergy BVI.





On August
8, 2007, shares held by our former sole officer and director were cancelled
immediately after the closing of the Share Exchange.  Philip McDonald
was our Chief Executive Officer, Chief Financial Officer, Secretary, Treasurer,
and sole director prior to the Share Exchange, and he owned 37,700,000 (post-
7.54-to-1 forward stock split), or approximately 54.08% of the outstanding
shares of our common stock.  Such shares were cancelled in connection
with the Share Exchange pursuant to the Amended Agreement and pursuant to an
agreement between Mr. McDonald and the Company in return for
$35,000.





Perfectenergy
BVI




On
September 28, 2007, Perfectenergy BVI repaid in full an unsecured loan made by
Fengying Zhang on February 18, 2007 to Perfectenergy BVI with a principal of
RMB2,000,000 (approximately US$270,000) and at an interest rate of 7.2% per
annum.  Ms. Zhang is the spouse of Min fan, a director of the
Company.  The loan was originally due on February 17, 2007 but was
later extended to June 17, 2007, and the interest rate was changed to 5% per
annum.





On September 26, 2007, Perfectenergy
BVI repaid in full an unsecured loan made by Ms. Zhang on September 5, 2006 to
Perfectenergy BVI with a principal of RMB2,000,000 (approximately US$270,000)
and at an interest rate of 7.2% per annum.  The loan was originally
due on March 4, 2007 but was later extended to July 4, 2007, and the interest
rate was changed to 5% per annum.





On
September 21, 2007, Perfectenergy BVI repaid in full an unsecured loan made by
Wennan Li on September 5, 2006 to Perfectenergy BVI with a principal of
RMB2,000,000 (approximately US$270,000) and at an interest rate of 7.2% per
annum.  Mr. Li is our Chairman, Chief Executive Officer, and
President.  The loan was originally due on March 4, 2007 but was later
extended to July 4, 2007, and the interest rate was changed to 5% per
annum.





On March
15, 2007, Perfectenergy BVI repaid in full an unsecured loan made by Mr. Li to
Perfectenergy BVI with a principal of RMB1,000,000 (approximately US$135,000)
and at an interest rate of 7.2% per annum.  The loan was due on March
16, 2007.





Director
Independence




Our
board of directors has determined that it currently has
4 members who qualify as "independent" as the term is used in Item 407
of Regulation S-K as promulgated by the SEC and Nasdaq’s Marketplace Rule
4200.  The independent directors are Min Fan, Yunxia Yang, Adam
Roseman, and Yajun Wu.  All of the members of our Audit Committee
qualify as independent.  All of the members of each of our Nominating
and Compensation Committees qualify as independent, except for Wennan
Li.




40




ITEM
14.      PRINCIPAL ACCOUNTING FEES AND
SERVICES





Moore
Stephens Wurth Frazer and Torbet served as our independent registered public
accounting firm for our fiscal years ending October 31, 2008 and
2007.  The following table shows the fees that were billed for audit
and other services provided by this firm during the fiscal years
indicated:




Fiscal Year Ended October
    31,2008
            
            
            2007Audit
      Fees (1)
            
            $
            125,000
            
            
            $
            110,000Audit-Related
      Fees (2)
            
            
            ―
            
            
            
            ―Tax
      Fees (3)
            
            
            ―
            
            
            
            ―All
      Other Fees (4)
            
            
            ―
            
            
            
            ―Total
            
            $
            125,000
            
            
            $
            110,000





(1)
              Audit Fees – This
      category includes the audit of our annual financial statements, review of
      financial statements included in our Quarterly Reports on Form 10-Q, and
      services that are normally provided by independent auditors in connection
      with the engagement for fiscal years.  This category also
      includes advice on audit and accounting matters that arose during, or as a
      result of, the audit or the review of interim financial
      statements.





(2)
              Audit-Related Fees –
      This category consists of assurance and related services by our
      independent auditors that are reasonably related to the performance of the
      audit or review of our financial statements and are not reported above
      under "Audit Fees."  The services for the fees disclosed under
      this category include consultation regarding our correspondence with the
      SEC.





(3)
              Tax Fees – This category
      consists of professional services rendered by our independent auditors for
      tax compliance and tax advice.  The services for the fees
      disclosed under this category include tax return preparation and technical
      tax advice.





(4)
              All Other Fees – This
      category consists of fees for other miscellaneous
  items.




Pre-Approval
Policies and Procedures of the Audit Committee





Our Audit Committee approves the
engagement of our independent auditors and is also required to pre-approve all
audit and non-audit expenses.  In the fiscal year ended October 31,
2008, 100%, 0%, and 0% of our Audit-Related Fees, Tax Fees, and All Other Fees,
respectively, were pre-approved by the Audit Committee.


41


PART
IV





ITEM
15.      EXHIBITS, FINANCIAL STATEMENT
SCHEDULES





Financial
Statements; Schedules





Our consolidated financial statements
for the fiscal years ending October 31, 2008 and 2007 begin on page F-1 of this
annual report on Form 10-K.  We are not required to file any financial
statement schedules.





Exhibits





The Exhibit Table on the following page
lists those documents that we are required to file with this annual report on
Form 10-K.


42


EXHIBIT
TABLE





Exhibit
                    Number
                  
                  Description2.1
                  
                  Share
      Exchange Agreement between the Company, Perfectenergy International
      Limited, and the selling the stockholders of Perfectenergy International
      Limited, dated March 29, 2007 (1)2.2
                  
                  Amended
      and Restated Share Exchange Agreement between the Company, Perfectenergy
      International Limited, Crown Capital Partners, S.A., and the selling
      the stockholders of Perfectenergy International Limited, dated August 8,
      2007 (4)3.1
                  
                  Articles
      of Incorporation (2)3.2
                  
                  Bylaws (2)3.3
                  
                  Articles
      of Merger filed with the Secretary of State of Nevada on April 10, 2007
      (3)3.4
                  
                  Certificate
      of Change filed with the Secretary of State of Nevada on April 10, 2007
      and effective on April 16, 2007 (3)3.5
                  
                  Certificate
      of Change filed with the Secretary of State of Nevada on March 6, 2008 and
      effective March 17, 2008 (5)10.1
                  
                  Long
      Term Supply Contract, between Perfectenergy (Shanghai) Co., Ltd. and
      Chengdu Jiayang Silicon Technology Inc., Ltd. (English translation)
      (4)10.2
                  
                  Long
      Term Supply Contract, between Perfectenergy (Shanghai) Co., Ltd. and
      Tianjin Huan-ou Semiconductor Technology Inc., Ltd. (English translation)
      (4)10.3
                  
                  Form
      of Securities Purchase Agreement (4)10.4
                  
                  Form
      of Registration Rights Agreement (4)10.5
                  
                  Form
      of Warrant (4)10.6
                  
                  Placement
      Agent Agreement between Knight Capital Markets LLC, Canaccord Adams Inc.,
      and Canaccord Adams Ltd., and Perfectenergy International Limited, dated
      May 23, 2007, and subsequent amendments (4)10.7
                  
                  Letter
      Agreement Re: Indemnification between Knight Capital Markets LLC and
      Perfectenergy International Limited, dated
                    May
      23, 2007 (4)10.8
                  
                  Premises
      Lease Agreement (English translation) (6)10.9
                  
                  Letter
      of Agreement from the Company to Adam Roseman, dated August 8, 2007
      (6)10.10
                  
                  Employment
      Agreement between Diping Zhou and Perfectenergy (Shanghai) Co., Ltd.
      (English translation) (6)10.11
                  
                  Employment
      Agreement between Wennan Li and Perfectenergy (Shanghai) Co., Ltd.
      (English translation) (6)10.12
                  
                  Letter
      of Agreement from the Company to Adam Roseman, dated November 19, 2007
      (7)10.13
                  
                  Letter
      of Agreement from the Company to Adam Roseman, dated December 20, 2007
      (7)10.14
                  
                  Three
      Party Strategic Cooperation Agreement between Tianjin Huan-ou
      Semiconductor Material Technology Co., Ltd., Perfectenergy (Shanghai) Co.,
      Ltd., and Shanghai Solar Science & Technology Co., Ltd., dated June 6,
      2007 (English translation) (7)10.15
                  
                  Loan
      Agreement dated November 28, 2007 between Perfectenergy International Ltd.
      (BVI) and Perfectenergy GmbH, dated November 28, 2007
  (7)10.16
                  
                  2007
      Stock Incentive Plan (7)10.17
                  
                  Agreement
      between Perfectenergy International Ltd. (BVI) and Xiaochun Haas, dated
      September 20, 2007
(8)




43





10.18
                    
                    Sales
      Contract between Sky Solar (Hong Kong) International Co., Ltd., Shanghai
      Forever Imp. & Exp. Co. Ltd., and Perfectenergy (Shanghai) Co., Ltd.,
      dated December 20, 2007 (8)10.19
                    
                    Investment
      Agreement between Shanghai Zizhu Science Park Development Co., Ltd. and
      Perfectenergy International Limited, dated October 2007 (English
      translation) (9)10.20
                    
                    Approval
      of Extended Term of Validity of Land Purchase Confirmation issued by the
      Administration of Housing and Land of Minxing District, Shanghai to
      Perfectenergy Solar-Tech (Shanghai) Ltd., dated December 18, 2008 (English
      translation) *10.21
                    
                    Contract
      between Isofoton and Perfectenergy (Shanghai) Co., Ltd., dated October 11,
      2007 (9)10.22
                    
                    Contract
      between Isofoton and Perfectenergy (Shanghai) Co., Ltd., dated October 11,
      2007 (9)10.23
                    
                    Contract
      between Isofoton and Perfectenergy (Shanghai) Co., Ltd., dated October 11,
      2007 (9)10.24
                    
                    Foreign
      Trade Agreement between Isofoton and Perfectenergy (Shanghai) Co., Ltd.,
      dated October 11, 2007 (English translation) (9)10.25
                    
                    Monocrystalline
      Silicon Modular Long Term Supply Contract between Tianjin Huan-ou
      Semiconductor Technology Inc. Ltd. and Perfectenergy (Shanghai) Co., Ltd.,
      dated July 20, 2008 (English translation) (10)10.26
                    
                    Amended
      and Restated Employment Agreement between Xiaolin Zhuang and Perfectenergy
      International Limited, dated December 29, 2008 *10.27
                    
                    Sales
      Contract between Perfectenergy (Shanghai) Co., Ltd. and Proinso S.A.,
      dated March 3, 2008  *10.28
                    
                    Sales
      Contract between Perfectenergy GmbH and Heltron GmbH, dated May 22, 2008
      *10.29
                    
                    Lease
      Agreement between Shanghai Changlong Industry Co. and Perfectenergy
      Solar-Tech (Shanghai) Ltd., dated March 11, 2008  (English
      translation) *10.30
                    
                    Leasing
      Contract between Tannenweg 10 Vermögensverwaltung GbR and Perfectenergy
      GmbH, dated October 3, 2007
                      (English
      translation) *10.31
                    
                    Addendum
      of the Tenancy Contract between Tannenweg 10 Vermögensverwaltung GbR and
      Perfectenergy GmbH, dated January 25, 2008 (English translation)
      *10.32
                    
                    Employment
      Agreement between the Company and Wennan Li, dated January 16, 2009
      *10.33
                    
                    Employment
      Agreement between the Company and Diping Zhou, dated January 16, 2009
      *10.34
                    
                    Sales
      Contract between ABIDAS AG and Perfectenergy (Shanghai) Co., Ltd., dated
      January 8, 2009 (Portions of this exhibit have been omitted pursuant to a
      request for confidential treatment.) (11)10.35
                    
                    Monocrystalline
      Silicon Modular Long Term Supply Supplemental Agreement between Tianjin
      Huan-ou Semiconductor Technology Inc. Ltd. and Perfectenergy (Shanghai)
      Co., Ltd., dated January 21,  2009 (English translation)
      (12)14.1
                    
                    Code
      of Business Conduct and Ethics *21.1
                    
                    List
      of Subsidiaries *31.1
                    
                    Section
      302 Certificate of Chief Executive Officer *31.2
                    
                    Section
      302 Certificate of Chief Financial Officer *32.1
                    
                    Section
      906 Certificate of Chief Executive Officer *32.2
                    
                    Section
      906 Certificate of Chief Financial Officer
*









* Filed
herewith.


44




(1)
            Filed
      on April 5, 2007 as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by reference.





(2)
            Filed
      on December 8, 2005 as an exhibit to the Company’s Registration Statement
      on Form SB-2 and incorporated herein by reference.(3)
            Filed
      on April 19, 2007 as an exhibit to the Company’s Current Report on Form
      8-K and incorporated herein by
reference.




(4)
            Filed
      on August 13, 2007 as an exhibit to the Company’s Current Report on Form
      8-K and incorporated herein by
reference.




(5)
            Filed
      on March 21, 2008 as an exhibit to our Current Report on Form 8-K and
      incorporated herein by reference.




(6)
            Filed
      on November 23, 2007 as an exhibit to the Company’s Amendment No. 1 to
      Registration Statement on Form SB-2 and incorporated herein by
      reference.





(7)
            Filed
      on January 22, 2008 as an exhibit to the Company’s Amendment No. 2 to
      Registration Statement on Form SB-2 and incorporated herein by
      reference.(8)
            Filed
      on February 19, 2008 as an exhibit to the Company’s Registration Statement
      on Form S-1 (Amendment No. 3 to Registration Statement on Form SB-2) and
      incorporated herein by reference.





(9)
            Filed
      on February 28, 2008 as an exhibit to the Company’s Amendment No. 4 to
      Registration Statement on Form S-1 and incorporated herein by
      reference.





(10)
            Filed
      on November 5, 2008 as an exhibit to our Current Report on Form 8-K and
      incorporated herein by reference.





(11)
            Filed
      on January 14, 2009 as an exhibit to our Current Report on Form 8-K and
      incorporated herein by reference.




(12)
            Filed
      on January 23, 2009 as an exhibit to our Current Report on Form 8-K and
      incorporated herein by reference.




45




SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





PERFECTENERGY
      INTERNATIONAL LIMITED/s/ Wennan LiWennan
      Li, Chief Executive Officer and PresidentDate:
      January 26, 2009





In
accordance with the Securities Exchange of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.





NAME
                  
                  TITLE
                  
                  DATE/s/
      Wennan Li
                  
                  Chairman
      of the Board, Chief Executive Officer (Principal Executive Officer), and
      President
                  
                  January
      26, 2009Wennan
      Li/s/
      Xiaolin Zhuang
                  
                  Chief
      Financial Officer (Principal Financial Officer) and
    Secretary
                  
                  January
      26, 2009Xiaolin
      Zhuang/s/
      Diping Zhou
                  
                  Vice
      President of Operations
                  
                  January
      26, 2009Diping
      Zhou/s/
      Min Fan
                  
                  Director
                  
                  January
      26, 2009Min
      Fan/s/
      Yunxia Yang
                  
                  Director
                  
                  January
      26, 2009Yunxia
      Yang/s/
      Adam Roseman
                  
                  Director
                  
                  January
      26, 2009Adam
      Roseman/s/
      Yajun Wu
                  
                  Director
                  
                  January
      26, 2009Yajun
      Wu




46