UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark one)

FORM 20-F



| |  ̈ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE
ACT OF 1934
| | - | ----------------------------------------------------------------------------------------------



OR



| | x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2011.



OR



| |  ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ----------------------------------------------------------------------------------------



OR



| |  ̈ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | -------------------------------------------------------------------------------------------

Date of event requiring this shell company report:

for the transition period from __________ to ___________





---



Commission file number:  000-53465



China Dredging Group Co., Ltd.

(Exact name of the Registrant as specified
in its charter)





---



British Virgin Islands

(Jurisdiction of incorporation or organization)





---



Floor 18, Tower A, Zhongshan Building

No. 154, Hudong Road, Gulou District

Fuzhou City, Fujian Province, PRC

(Address of principal executive offices)



Xinrong Zhuo

Floor 18, Tower A, Zhongshan Building

No. 154, Hudong Road, Gulou District

Fuzhou City, Fujian Province, PRC

Tel.: +86 591 8727 1266

Fax: +86 591 8727 5290

(Name, Telephone, E-mail and/or Facsimile
Number and Address of Company Contact Person)



Securities registered or to be registered
pursuant to Section 12(b) of the Act: None



Securities registered or to be registered
pursuant to Section 12(g) of the Act: Ordinary Shares, no par value per share



Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act: Ordinary Shares, no par value per share



Indicate the number of outstanding shares of each of the issuer’s
classes of capital or common stock as of the close of the period covered by the annual report.



On December 31, 2011, the registrant
had 52,677,323 ordinary shares outstanding.



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



If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.  ̈ Yes   x No



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



Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes   ̈     
No   ̈



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





| ̈Large
Accelerated filer |  ̈Accelerated
filer | xNon-accelerated
filer
|------------------------ | ------------------ | ----------------------









Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:





|x US
    GAAP |  ̈ International
        Financial Reporting
        Standards as issued by the International
        Accounting Standards Board |  ̈ Other
|------------- | ------------------------------------------------------------------------------------------------------------------------------- | -------







If “Other” has been checked in response to the previous
question, indicate by check mark which financial statement item the registrant has elected to follow.        
 ̈ Item 17         ̈
Item 18



If this is an annual report, indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ̈
Yes           x No











TABLE OF CONTENTS



|           |  |                                                                                  |  | Page
|---------- |  | -------------------------------------------------------------------------------- |  | ----
|           |  | PART I                                                                           |  |     
|Item 1.    |  | Identity of Directors, Senior Management and Advisers                            |  | 4   
|           |  |                                                                                  |  |     
|Item 2.    |  | Offer Statistics and Expected Timetable                                          |  | 4   
|           |  |                                                                                  |  |     
|Item 3.    |  | Key Information                                                                  |  | 4   
|           |  |                                                                                  |  |     
|Item 4.    |  | Information on the Company                                                       |  | 19  
|           |  |                                                                                  |  |     
|Item 4A.   |  | Unresolved Staff Comments                                                        |  | 35  
|           |  |                                                                                  |  |     
|Item 5.    |  | Operating and Financial Review and Prospects                                     |  | 35  
|           |  |                                                                                  |  |     
|Item 6.    |  | Directors, Senior Management and Employees                                       |  | 54  
|           |  |                                                                                  |  |     
|Item 7.    |  | Major Shareholders and Related Party Transactions                                |  | 59  
|           |  |                                                                                  |  |     
|Item 8.    |  | Financial Information                                                            |  | 60  
|           |  |                                                                                  |  |     
|Item 9.    |  | The Offer and Listing                                                            |  | 61  
|           |  |                                                                                  |  |     
|Item 10.   |  | Additional Information                                                           |  | 61  
|           |  |                                                                                  |  |     
|Item 11.   |  | Quantitative and Qualitative Disclosure about Market Risk                        |  | 75  
|           |  |                                                                                  |  |     
|Item 12.   |  | Description of Securities Other than Equity Securities                           |  | 76  
|           |  |                                                                                  |  |     
|           |  | PART II                                                                          |  |     
|Item 13.   |  | Defaults, Dividend Arrearages and Delinquencies                                  |  | 76  
|           |  |                                                                                  |  |     
|Item 14.   |  | Material Modifications to the Rights Of Security Holders and Use of
    Proceeds |  | 76  
|           |  |                                                                                  |  |     
|Item 15.   |  | Controls and Procedures                                                          |  | 76  
|           |  |                                                                                  |  |     
|Item 16A.  |  | Audit Committee Financial Expert                                                 |  | 77  
|           |  |                                                                                  |  |     
|Item 16B.  |  | Code of Ethics                                                                   |  | 77  
|           |  |                                                                                  |  |     
|Item 16C.  |  | Principal Accountant Fees and Services                                           |  | 77  
|           |  |                                                                                  |  |     
|Item 16D.  |  | Exemptions from the Listing Standards for Audit Committees                       |  | 78  
|           |  |                                                                                  |  |     
|Item 16E.  |  | Purchases of Equity Securities by the Issuer and Affiliated Purchasers           |  | 78  
|           |  |                                                                                  |  |     
|Item 16F.  |  | Change in Registrant’s Certifying Accountant                                     |  | 78  
|           |  |                                                                                  |  |     
|Item 16G.  |  | Corporate Governance                                                             |  | 78  
|           |  |                                                                                  |  |     
|Item 16H.  |  | Mine Safety Disclosure                                                           |  | 78  
|           |  |                                                                                  |  |     
|           |  | PART III                                                                         |  |     
|Item 17.   |  | Financial Statements                                                             |  | 79  
|           |  |                                                                                  |  |     
|Item 18.   |  | Financial Statements                                                             |  | 79  
|           |  |                                                                                  |  |     
|Item 19.   |  | Exhibits                                                                         |  | 79  
|           |  |                                                                                  |  |     
|Signatures |  |                                                                                  |  | 81  



2







CERTAIN INFORMATION



Unless we indicate otherwise or the context otherwise requires,
and for purposes of this Report only:



| | · | All share and per share data have been presented to give retrospective effect to our
                                                                                                             reorganization as described in the section entitled “Information on the
                                                                                                             Company—Our Corporate Structure.”
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “We,” “us,” “our company,” “our” and “China
Dredging” refer to China Dredging Group Co., Ltd., a BVI company, and its subsidiaries and variable interest entities.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “China Dredging HK” refers to China Dredging (HK) Company Limited, a company organized
under the laws of Hong Kong, a wholly owned subsidiary of China Dredging.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “Fujian Service” refers to Fujian Xing Gang Port Service Co., Ltd., our operating
business in the PRC.
| | - | ------------------------------------------------------------------------------------------------------



| | · | “Fujian WangGang” refers to Fujian WangGang Dredging Construction Co., Ltd., a PRC
company, a wholly owned subsidiary of China Dredging HK and a wholly foreign-owned enterprise under PRC law.  Fujian WangGang
holds 50% of the equity interest in Fujian Service.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “Wonder Dredging” refers to Wonder Dredging Engineering LLC, a PRC company, which
holds a 50% equity interest in Fujian Service.  The shareholders of Wonder Dredging have transferred 100% of the economic
benefit of Fujian Service and full voting and management control to Fujian WangGang.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “CAC” refers to Chardan Acquisition Corp., a BVI company.
| | - | ---------------------------------------------------------



| | · | The “Merger” refers to the merger of CAC with and into China Dredging, which was
consummated on October 27, 2010.
| | - | -----------------------------------------------------------------------------------------------------------------



| | · | “2010 Private Placement” refers to our private placement, between October 2010 to
December 21, 2010, in multiple closings, of an aggregate of 10,012,987 preferred shares, at a purchase price of $5.00 per share
with gross proceeds of approximately $50.1 million.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “ADSs” refers to American depositary shares, each of which will represent one of
our ordinary shares, and “ADRs” refers to American depositary receipts, which, if issued, evidence ADSs.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “Shares” or “ordinary shares” refers to our ordinary shares, no par value
per share, and “preferred shares” refers to our Class A preferred shares, no par value per share.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “BVI” refers to the British Virgin Islands.
| | - | -------------------------------------------



| | · | “China” or the “PRC” refers to the People’s Republic of China,
excluding Hong Kong, Macau and Taiwan.
| | - | -----------------------------------------------------------------------------------------------------



| | · | The “U.S.” and the “United States” refers to the United States of America.
| | - | --------------------------------------------------------------------------



| | · | “RMB” or “Renminbi” refers to the legal currency of China and “$,”
“dollar,” “US$” or “U.S. dollar” refers to the legal currency of the United States.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------



This Report contains translations of Renminbi amounts into U.S.
dollars at specified rates solely for the convenience of the reader.  Unless otherwise noted, including in the notes
to our financial statements, all translations from Renminbi to U.S. dollars were made at the rate of US$1 = RMB6.2939 or US$1 =
RMB6.4475. The Closing rate of 6.2939 is the exchange rate at the balance sheet date while the average rate of 6.4475 used
in translating the results of operations and cash flow. We make no representation that the Renminbi or U.S. dollar amounts
referred to herein could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate
or at all.



FORWARD-LOOKING STATEMENTS



This Report contains “forward-looking
statements” that represent our beliefs, projections and predictions about future events. All statements other than statements
of historical fact are “forward-looking statements” including any projections of earnings, revenue or other financial
items, any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed
new projects or other developments, any statements regarding future economic conditions or performance, any statements of management’s
beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the foregoing. Words
such as “may,” “‘will,” “‘should,” “could,” “would,” “predicts,”
“potential,” “continue,” “expects,” “anticipates,” “future,” “intends,”
“plans,” “believes,” “estimates” and similar expressions, as well as statements in the future
tense, identify forward-looking statements.



3







These statements are necessarily subjective
and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance
or achievements, or industry results, to differ materially from any future results, performance or achievements described in or
implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements,
including with respect to correct measurement and identification of factors affecting our business or the extent of their likely
impact, the accuracy and completeness of the publicly available information with respect to the factors upon which our business
strategy is based on the success of our business.



Forward-looking statements should not be
read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether, or the times
by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time
those statements are made and management’s belief as of that time with respect to future events, and are subject to risks
and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the
forward-looking statements. Important factors that could cause such differences include, but are not limited to, those factors
discussed under the headings “Risk Factors,” “Operating and Financial Review and Prospects,” “Information
on the Company” and elsewhere in this Report.



PART I



ITEM 1. IDENTITY OF DIRECTORS, SENIOR
MANAGEMENT AND ADVISERS



A.           Directors
and Senior Management



Not applicable.



ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE



Not applicable.



ITEM 3. KEY INFORMATION



A.           Selected
Financial Data



The summary consolidated financial and operating data as
of December 31, 2011 and 2010 and for the years ended December 31, 2011, 2010 and 2009 have been derived from our audited financial
statements included elsewhere in this Report and reflect our financial results and position. This information is only a summary
and should be read together with the financial statements, the related notes, the section entitled “Operating and Financial
Review and Prospects” and other financial information included in this Report.



4







Our audited financial statements are prepared and presented
in accordance with U.S. GAAP. Our results of operations in any period may not necessarily be indicative of the results that
may be expected for any future period. See “Risk Factors” included elsewhere in this Report.



|                                                       |  | For the Years Ended |            
|------------------------------------------------------ |  | ------------------- | -----------
|                                                       |  | December 31,        |            
|Statements of Operations Data                          |  | 2011                |            
|                                                       |  |                     |            
|Contract revenue                                       |  | $                   | 226,953,070
|Cost of contract revenue                               |  |                     | (98,906,986
|Gross profit                                           |  |                     | 128,046,084
|General and administrative expenses                    |  |                     | (9,444,718 
|Income from operations                                 |  |                     | 118,601,366
|                                                       |  |                     |            
|Total other income (expense)                           |  |                     | 7,897,965  
|                                                       |  |                     |            
|Income before income taxes                             |  |                     | 126,499,331
|Income tax expense                                     |  |                     | (30,107,070
|Net income                                             |  |                     | 96,392,261 
|Accretion of discount on Class A Preferred Shares      |  |                     | (6,135,012 
|Net income attributable to ordinary shareholders       |  | $                   | 90,257,249 
|                                                       |  |                     |            
|Earnings per ordinary share                            |  |                     |            
|- Basic                                                |  | $                   | 1.71       
|- Diluted                                              |  | $                   | 1.54       
|                                                       |  |                     |            
|Weighted average number of ordinary shares outstanding |  |                     |            
|- Basic                                                |  |                     | 52,677,323 
|- Diluted                                              |  |                     | 62,690,310 



|                              |  | December 31, |            
|----------------------------- |  | ------------ | -----------
|Balance Sheets Data           |  | 2011         |            
|Assets                        |  |              |            
|Total current assets          |  | $            | 160,257,293
|Total other assets            |  |              | 123,041,949
|Total assets                  |  | $            | 283,299,242
|                              |  |              |            
|Liabilities and equity        |  |              |            
|Liabilities                   |  |              |            
|Total current liabilities     |  | $            | 24,287,264 
|Total non-current liabilities |  |              | -          
|Total liabilities             |  |              | 24,287,264 
|Class A Preferred Shares      |  |              | 50,064,935 
|Total shareholders’ equity    |  |              | 208,947,043
|Total liabilities and equity  |  | $            | 283,299,242



5







|Backlog                                                               |  | Amount |             
|--------------------------------------------------------------------- |  | ------ | ------------
|Backlog balance at December 31, 2010                                  |  | $      | 62,310,751  
|New contracts entered during the year ended December 31, 2011         |  |        | 220,006,390 
|Add: Adjustment of contracts due to change of orders during the year  |  |        | 331,734     
|Adjusted contract amount at December 31, 2011                         |  |        | 282,648,875 
|Less: Contract revenue earned during the year ended December 31, 2011 |  |        | (226,953,070
|Backlog balance at December 31, 2011                                  |  | $      | 55,695,805  



Exchange Rate Information



We conduct substantially all of our operations in China.  A
substantial portion of our sales and our costs and expenses are denominated in Renminbi.  We make no representation that
any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be,
at any particular rate, at the rates stated below, or at all.  The PRC government imposes control over its foreign currency
reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign
trade.



The following table sets forth information concerning
exchange rates between the Renminbi and the U.S. dollar for the periods indicated.  These rates are provided solely for
your convenience and are not necessarily the exchange rates that we used in this Report or will use in the preparation of other
reports or any other information to be provided to you.  For all dates and periods through December 31, 2008, exchange
rates of Renminbi into the U.S. dollar are based on the noon buying rate in The City of New York for cable transfers of Renminbi
as certified for customs purposes by the Federal Reserve Bank of New York.  For January 1, 2009 and all later dates and
periods, the exchange rate refers to the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board.



|         |  | Noon Buying Rate |       
|-------- |  | ---------------- | ------
|Period   |  | Period End       |       
|         |  |                  |       
|2008     |  |                  | 6.8225
|2009     |  |                  | 6.8259
|2010     |  |                  | 6.6000
|2011     |  |                  | 6.2939
|2012     |  |                  |       
|January  |  |                  | 6.3080
|February |  |                  | 6.2935
|March    |  |                  | 6.2975



| | (1) | Annual averages are calculated using the average of month-end rates of the relevant year. 
Monthly averages are calculated using the average of the daily rates during the relevant period.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



B.           Capitalization
and Indebtedness



Not applicable.



C.           Reasons
for the Offer and Use of Proceeds



Not applicable.



D.           Risk
Factors



RISKS RELATING TO OUR BUSINESS
AND INDUSTRY



Our performance depends upon public spending on marine transportation
infrastructure, which may significantly decline.



Our ability to generate revenues significantly depends upon
the PRC government’s public spending on marine transportation infrastructure, primarily for the construction and improvement
of ports and waterways.  Our major customers include PRC government agencies at the national, provincial and local levels,
and state-owned enterprises.  We are therefore affected by changes in public works’ budgets.  The future
growth of the dredging industry in the PRC depends significantly upon the continued availability of major marine transportation
infrastructure projects.  The nature, extent and timing of these projects will, however, be determined by the interplay
of a variety of factors, including the PRC government’s spending in the marine transportation infrastructure industry in
the PRC and the general conditions and prospects of the PRC economy.  The PRC government’s spending in the marine
transportation infrastructure industry has historically been, and we expect to continue to be, affected by general PRC economic
trends and subject to fluctuation.  Should there be a significant reduction in public spending on marine transportation
infrastructure projects in the PRC and we fail to open up new markets in or outside the PRC, our operations and profits could be
materially and adversely affected.



6







Our profitability is subject to inherent risks because of
the fixed-price nature of most of our contracts.



Our revenues are derived from our role as a subcontractor for
general contractors of dredging projects.  Substantially all of the contracts between us and the general contractors
are fixed-price contracts or fixed unit price in nature.  Under a fixed-price contract, the customer agrees to pay a
specified price for its performance of the entire contract.  Fixed-price contracts carry inherent risks, including risks
of losses from underestimating costs of materials, operational difficulties and other changes that may occur during the contract
period.  As a result, we will only realize profits on these contracts if we successfully estimate project costs and avoid
cost overruns.



One of the most significant factors affecting the profitability
of a dredging project is the weather at the project site.  Inclement or hazardous weather conditions can result in substantial
delays in dredging and additional contract expenses.  Due to these factors, it is possible that we will not be able to
perform obligations under fixed-price contracts without incurring additional expenses.  Should we significantly underestimate
the costs on one or more significant contracts, the resulting losses could have a material adverse effect on us.



In the past several years we have derived a significant portion
of our revenues from a small group of customers and we expect this to continue to be the case.  The loss of any one of
these customers could have a material adverse effect on our business, operating results and financial condition.



Our customer base has been, and we expect it to remain, highly
concentrated.  For each of the years ended December 31, 2011, 2010 and 2009, four customers accounted for 65.8%, 78.1%
and 100%, respectively, of our total revenues.  We expect our total revenues to remain heavily concentrated with a small
group of customers.  We may lose customers from time to time, and if our customer base remains highly concentrated, the
loss of, or reduction of our sales to, any such major customers could have a material adverse effect on our business, operating
results and financial condition.



Our general contractor customers may continue to expand internal
capacity and modernize their fleets which may reduce their reliance on subcontracting and limit our business growth.



Our largest general contractor customers have subcontracted
a substantial amount of dredging work in the past, reflecting a large shortfall in internal capacity.  If these customers
continue to invest in a modern fleet for larger capacity and better efficiency, they may reduce reliance on subcontracting.  Since
our prospects for growth are primarily driven by increases in subcontracting by our major customers, a reduced subcontracting
demand from those customers would adversely impact our growth prospects.



Our operations may cause substantial harm to persons, property
and the environment, which could hurt our reputation and, to the extent they are not covered contractually or by insurance could
cause us to incur substantial costs.



Our operations are subject to hazards inherent
in providing dredging and related support services, such as the risk of equipment failure, vessel collision or other transit related
accidents, industrial accidents, fire and explosion.  These hazards can cause personal injuries and losses of lives,
business interruptions, property and equipment damage, pollution and environmental damage.  We may be subject to claims
as a result of incidents relating to these and other hazards.  For example, Fujian Service was sued in four related lawsuits
brought by several individuals in Wenzhou, China, in May 2010.  The lawsuits related to a traffic accident that allegedly
caused the deaths of two people and injuries to two other people.  The plaintiffs alleged that a truck was hired for
the Wenzhou Lingkun working area multiple function port construction project, or the Lingkun Construction Project, and that the
owner, the general contractor and Fujian Service as the subcontractor of the Lingkun Construction Project, all of whom were named
as co-defendants in these lawsuits, were responsible for the damages.  The plaintiffs claimed total damages of approximately
$0.6 million.  Although in 2011 Fujian Service was held not responsible for any of the plaintiffs’ claims, similar
unpredictable events could occur in the future and adversely affect our operations.



7







We normally seek to limit our exposure to these claims and liabilities
through contractual limitations of liability and insurance.  These measures, however, may not always be effective for various reasons outside of our control, including, among others:



| | · | In some of the jurisdictions in which we operate, environmental and workers’ compensation
liabilities may be assigned to us as a matter of law and may not be limited through contracts; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Insurance coverage may not be sufficient because it may not be possible to obtain adequate insurance
against some risks on commercially reasonable terms, or at all.  Insurance products, in particular, have become increasingly
expensive and sometimes very difficult to obtain.  In this regard, consistent with what we believe is customary practice
in the PRC, we do not carry any business interruption insurance.  While we do have Ship Pollution Liability coverage
for certain environmental damage and third-party losses that arise from fuel or chemical leaks from the three vessels that we own,
there may be circumstances in which we would not be fully covered or compensated for losses and liabilities arising from interruptions
to our operations, construction accidents, defects in our work or other risks by insurance that we have maintained.  Our
Ship Pollution Liability coverage is for up to approximately $775,000 annually for Xinggangjun #66, $388,000 annually for Xinggangjun
#3, $327,000 annually for Xinggangjun #6 and $327,000 annually for Xinggangjun #9.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Failure to effectively cover these risks for any of the above
reasons could expose us to substantial costs and potentially lead to material losses.  Additionally, the occurrence of
any of these risks may harm our reputation, which may materially inhibit our ability to win more projects.



Customers pay us by way of progress payments, and delay in
progress payments may affect working capital and cash flow.



Most of our contracts provide for progress payments from our
general contractor customers based upon the value of work completed upon reaching certain milestones.  Generally a site
engineer issues a progress certificate certifying the work progress in the preceding contract stage.  The customers then
effect payments with reference to these certificates.  As a result, we are often required to commit resources to projects
prior to receiving payment from customers in amounts sufficient to cover expenditures on the projects as they are incurred.  These
progress payments may not be remitted by customers to us on a timely basis and we may not be able to efficiently manage the level
of bad debt arising from such payment practice.



Delays in progress payments from customers would increase our
working capital needs.  If a customer defaults in making its payments on a project to which we have devoted significant
resources, it would also affect our liquidity and decrease the capital resources that are otherwise available for other uses.  In
such cases, we may file a claim for compensation of the loss of a payment default, but settlement of disputes of this nature generally
takes substantial time in the PRC and expenditure of financial and other resources, and the outcome is often uncertain.



We require substantial capital and any failure to obtain
the capital needed on acceptable terms, or at all, may adversely affect our expansion plans and growth prospects.



The transportation infrastructure industry in which we operate
is generally capital intensive.  It requires significant capital to acquire, maintain and operate our vessels and facilities,
resulting in high fixed costs.  It also requires significant capital to purchase dredging equipment, develop new services
and implement new technologies.  Our capital expenditures may increase as a result of the further upgrade of our dredging
fleet and expansion of our scope of operations.



Under most of our contracts, we are required to finance dredging
equipment, and performance of engineering, construction and other work on projects for periods averaging approximately one month
before receiving progress payments from customers in amounts sufficient to cover expenditures. We may therefore have significant
working capital requirements. Our working capital requirements would materially increase if our general contractor customers impose
extended payment terms in line with their corporate averages, which approach three months. To the extent that our working capital
funding requirements exceed our financial resources, we will be required to seek additional debt or equity financing or to defer
planned expenditures. In the past, we have financed our working capital and capital expenditures through a combination of sources,
including cash flow from our operations and bank and other borrowings. If we are unable to obtain financing in a timely manner
and at a reasonable cost, our expansion plans may be delayed, project progress may be constrained, and our growth, competitive
position and future profitability may be adversely affected.



Our backlog is subject to unexpected adjustments and cancellations
and is, therefore, an uncertain indicator of our future earnings.



Backlog represents
our estimate of the contract value of work that remains to be completed on firm contracts that have not yet commenced and on
contracts in progress as at a certain date.  The contract value of a project represents the revenue we expect to
receive under the terms of the contract if it is performed in accordance with its terms.  As of December 31, 2011,
we had a backlog of approximately $55.7 million.  The revenues anticipated by our backlog may not be realized
and, if realized, may not result in profits.  Projects may remain in backlog for an extended period of
time.  In addition, project cancellations or scope adjustments may occur from time to time, which could reduce the
dollar amount of the backlog and the revenue and profits that are ultimately earned from the contracts.  For
instance, in October 2010 we formally deferred three contracts totaling approximately $44.6 million that were reported in our
backlog as of June 30, 2010, which by mutual agreement were replaced by three other one-year contracts with an aggregate
contract value of approximately $61.0 million.  Accordingly, investors should not unduly rely on the backlog
information presented in this Report as an indicator of our future earnings.  In addition, since our backlog
represents less than six months of potential revenue, our longer-term results depend significantly on our ability to convert
our bid- and negotiation-stage project pipeline into backlog, which we may be unable to do.



8







Failure to meet schedule requirements of contracts could
require us to pay liquidated damages.



Substantially all of our contracts with general contractors
are subject to specific completion schedule requirements with liquidated damages charged to us if we do not achieve the schedules.  Liquidated
damages are typically levied at an agreed rate for each day of delay that is deemed to be our responsibility.  Any failure
to meet the schedule requirements of the contracts could cause us to pay significant liquidated damages, which would reduce or
eliminate profit on the relevant contracts and could adversely affect liquidity and cash flows and have a material adverse effect
on our business, financial condition, results of operations and prospects.



We are subject to extensive environmental, safety and health
regulations in the PRC, the compliance with which may be difficult or expensive.



The PRC government has published extensive environmental, safety
and health regulations with which we need to comply.  Failure to comply with these regulations may result in penalties,
fines, suspension or revocation of our licenses or permits to conduct business, and litigation.  Given the magnitude
and complexity of these regulations, compliance with them may be difficult or involve the expenditure of significant financial
and other resources to establish effective compliance and monitoring systems.  In addition, these regulations are constantly
evolving.  The PRC government may impose additional or stricter laws or regulations, compliance with which may cause
us to incur significant costs that we may not be able to pass on to our customers.  Furthermore, some of the new overseas
markets that we are seeking to enter may have more onerous environmental, safety and health regulations than China, compliance
with which may be very costly and could hinder our endeavors to enter these new overseas markets.  In addition, we face
numerous PRC regulatory risks associated with our operations in China.  Please see “— Risks Relating
to Doing Business in the PRC” and “Business Overview — Selected PRC Government Regulations.”



Our operations depend heavily on the timely availability
of an adequate supply of supplies and consumable parts at acceptable prices and quality.



To operate successfully, we must obtain from our suppliers sufficient
quantities of supplies and consumable parts, such as mud pipe and dredge pumps at acceptable prices and quality and in a timely
manner. In 2011, 2010 and 2009, the cost of supplies and consumable parts accounted for approximately 71.3%, 73.1% and 76.8%, respectively,
of our total cost of contract revenue. During times of short supply, we may have to pay significantly higher prices to obtain the
supplies and consumable parts required for our operations. Most of our dredging contracts specify a fixed unit price and we are
responsible for procuring supplies and consumable parts needed for the projects. As a result, when prices of such supplies and
consumable parts increase, we are unlikely to be able to pass the price increases on to our customers. In addition, we have entered
into fixed price supply contracts with some of our suppliers, under which we are obligated to procure a fixed amount of supplies
and consumable parts annually. Although we negotiate these agreements on an annual basis, in the event when prices of such supplies
and consumable parts drop, we are unlikely to be able to procure the supplies and consumable parts of similar quality from a cheaper
source. The profitable performance of our contracts also requires components and supplies of high quality. If quality supplies
and consumable parts are not available, it could directly and adversely affect the quality, timeliness or efficiency of our work,
undermine our reputation and increase the chances of potential disputes and liabilities, all or any of which may negatively affect
future profits and projected growth.



We face significant competition in the markets in which we
operate, which could adversely affect our financial results and business prospects.



We face significant competition in the PRC markets in which
we operate.  Our competition comes from various sources, including the internal operations of our general contractor
customers and numerous private companies providing dredging services as general contractors or subcontractors.  Some
of our competitors may have advantages over us in terms of capacity, access to capital pricing and management expertise.  Our
market position and growth prospects depend on our ability to anticipate and respond to various competitive factors, including
pricing strategies adopted by competitors, changes in customer preferences or work priorities, availability of capital and financing
resources and the introduction of new or improved equipment, technology and services.



Our current or potential competitors may offer services or products
comparable or superior to those that we offer at the same or lower prices or adapt more quickly than we do to evolving industry
trends or changing market conditions.  We may lose our customers to our competitors if, among other things, we fail to
keep our prices at competitive levels or to sustain and upgrade our capacity and technology.  Increased competition may
result in price reductions, reduced profit margins and loss of market share.



9







Our operations require permits or licenses and the loss of
these permits or licenses could significantly hinder our business and reduce our expected revenue and profits.



We require operating permits and licenses to conduct our
business in PRC waters and we must comply with the restrictions and conditions imposed by various levels of government to
maintain our permits and licenses.  Such restrictions include limitations on foreign ownership of the enterprises
which own the PRC-registered vessels and the licensed entity performing dredging works, maintenance of sufficient number of
qualified personnel, maintenance of sufficient project track records and compliance with safety regulations and environment
protection regulations and maintenance of various licenses of the dredging vessels.  If we fail to comply with any
of the regulations required for the maintenance of our licenses, our licenses could be temporarily suspended or even revoked,
or the renewal of our licenses upon expiration of their original terms may be delayed, which would directly impact our
ability to undertake dredging work and reduce our revenue and profit.  For a detailed discussion of the effects of
restrictions on foreign ownership of the enterprise which owns the PRC-registered vessels, the licensed entity performing
dredging works and other conditions, please see “— Risks Relating to Doing Business in the PRC” and “
Business Overview — Selected PRC Government Regulations.”



We may encounter unexpected difficulties
in expanding into new markets.



As we broaden the scope of our geographical operations within
the PRC it places additional demands on our management resources.  Such expansion also increases the requirements for
spare parts and consumable inventories because our business model contemplates maintaining minimum quantities of key items close
enough to each vessel to be delivered quickly.  Further, it requires us to become familiar with and manage our operations
in keeping with local requirements with which we may not be familiar.  Any of these factors could adversely affect the
cost and efficiency of our dredging operations and our financial performance.



Although we have no plans to do so, we may expand the geographical
coverage of our operations outside the PRC to meet the evolving needs of our key customers who are expanding internationally to
places such as Vietnam, Taiwan and other Asian countries.  Expansion into overseas markets carries with it many associated
risks, including risks relating to being relatively new in such markets and unfamiliar with and unable to manage the requirements
of operating there.  Expansion into overseas markets could also stretch our capital, personnel and management resources
to a greater extent than further geographical expansion within the PRC.  In addition, there may be many established incumbent
players in these markets, who already enjoy a significant presence, and it may be difficult for us to win market share from them.  Some
of the overseas markets that we could potentially enter may have high barriers of entry to foreign competitors and any such expansion
outside of the PRC may not be successful.



Our continued success requires hiring and retaining qualified
personnel.



Our future success is dependent upon our ability to attract
and retain personnel, including executive officers and key qualified personnel, who have the necessary and required experience
and expertise.  Particularly, our success is largely attributable to the highly qualified and experienced personnel that
we have been able to attract and retain in the past such as captains and chief engineers for dredgers or construction-related geology
analysts.  Competition for qualified personnel is intense and we have periodically experienced difficulties in recruiting
suitable personnel.  We may lose these persons to those competitors who are able to offer more competitive packages,
or we may have to significantly increase our related staff costs.



We significantly depend on our Chief Executive Officer.



We are dependent on the principal members of our management
staff, and in particular Xinrong Zhuo, our Chief Executive Officer.  While we have entered into a three-year employment
agreement with Mr. Zhuo, there are circumstances under the agreement in which Mr. Zhuo may elect to terminate his employment pursuant
to the agreement.  Even if Mr. Zhuo were to terminate employment with us in breach of his agreement, we would have
little or no practical recourse against Mr. Zhuo under PRC law.  Mr. Zhuo may not continue to be employed by us for as
long as we require his services.  In addition, we rely on members of our senior management team with dredging industry
experience for important aspects of our operations, and we believe that losing the services of these executive officers could be
detrimental to our operations because they would be difficult to replace.  We do not have key-man life insurance for
any of our executive officers or other employees.



RISKS RELATING TO DOING BUSINESS IN THE PRC



The political and economic policies of the PRC government
could affect our businesses and results of operations.



The economy of the PRC differs from the economies of most developed
countries in a number of respects, including the degree of government involvement, control of capital investment, and the overall
level of development.  Before its adoption of reform and open up policies in 1978, China was primarily a planned economy.  In
recent years the PRC government has been reforming the PRC economic system and the government structure.  These reforms
have resulted in significant economic growth and social progress.  Economic reform measures, however, may be adjusted,
modified or applied inconsistently from industry to industry or across different regions of the country.  As a result,
we may not continue to benefit from all, or any, of these measures.  In addition, it cannot be predicted whether changes
in the PRC’s political, economic and social conditions, laws, regulations and policies will have any adverse effect on our
current or future business, financial condition and results of operations.



10







The PRC legal system is evolving
and has inherent uncertainties regarding interpretation and enforcement of PRC laws and regulations that could limit the legal
protections available to you.



Fujian Service, our operating company, is organized under the
laws of the PRC.  The PRC legal system is based on written statutes.  Prior court decisions may be cited for
reference but have limited weight as precedents.  Since 1979, the PRC government has been developing a comprehensive
system of commercial laws and considerable progress has been made in introducing laws and regulations dealing with economic matters
such as foreign investment, corporate organization and governance, commerce, taxation and trade.  However, because these
laws and regulations are relatively new, and because of the limited number and non-binding nature of published cases, the interpretation
and enforcement of these laws and regulations involve uncertainties.



Our operations and assets in the PRC are subject to significant
political and economic uncertainties.



Changes in PRC laws and regulations, or their interpretation,
or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of
currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business,
results of operations and financial condition.  The PRC government has been pursuing economic reform policies that encourage
private economic activity and greater economic decentralization.  The PRC government may continue to pursue these policies,
and it may significantly alter these policies from time to time without notice.



We may be required to obtain prior approval from Ministry
of Commerce and the China Securities Regulatory Commission for the Merger and the listing and trading of our securities on any
U.S. stock exchange.



On August 8, 2006, six PRC regulatory authorities, including
the Ministry of Commerce, or MOFCOM, the State Assets Supervision and Administration Commission, the State Administration for Taxation,
the State Administration for Industry and Commerce, the China Securities Regulatory Commission, or the CSRC, and the State Administration
of Foreign Exchange, or SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors,
which became effective on September 8, 2006 and was amended on June 22, 2009 by the MOFCOM, or the M&A Regulations.  The
M&A Regulations, among other things, require that the approval from MOFCOM be obtained for acquisitions of affiliated domestic
entities by foreign entities established or controlled by domestic natural persons or enterprises, and also require that an offshore
special purpose vehicle, or SPV, formed for purposes of overseas listing of equity interests in PRC companies and controlled directly
or indirectly by PRC companies or individuals, obtain the approval of the CSRC prior to the listing and trading of such SPV’s
securities on an overseas stock exchange.  On September 21, 2006, the CSRC published on its official website procedures
regarding its approval of overseas listings by SPVs.  The CSRC approval procedures require the filing of a number of
documents with the CSRC.



As of the date of this Report, the application of the M&A
Regulations remains unclear, with no consensus among leading PRC law firms regarding the scope and applicability of the CSRC approval
requirement.  Our PRC legal counsel, based on its understanding of current PRC laws, regulations and rules, has advised
us that the M&A Regulations are not applicable to us or the series of transactions we previously consummated to establish
our current corporate structure and that any potential quotation of our securities on the OTCBB or any listing and trading of our
securities on a U.S. stock exchange would not require CSRC’s approval because our founder and controlling shareholder, Mr.
Xinrong Zhuo, is not a mainland PRC natural person.  However, the relevant PRC government authorities, including MOFCOM
and the CSRC, may reach a different conclusion than our PRC counsel.  If prior approval from MOFCOM or the CSRC is required
but not obtained, we may face sanctions by MOFCOM, the CSRC or other PRC regulatory agencies.  Consequently, MOFCOM,
the CSRC or other PRC regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operations in
the PRC, or take other actions that could have a material adverse effect on our business, financial condition, results of operations,
reputation and prospects, as well as the trading price of our securities.  MOFCOM, the CSRC or other PRC regulatory agencies
may also take actions requiring us, or making it advisable for us, not to commence a public offering.



The Circular of the General Office of the State
Council on the Establishment of Security Review System Regarding the Merger and Acquisition of Domestic Enterprises by
Foreign Investors promulgated on February 3, 2011, or the Circular of Security Review, and the Regulations of Implementing
the Security Review System Regarding Merger and Acquisition of Domestic Enterprises by Foreign Investors promulgated by
MOFCOM on August 25, 2011, or the Regulations of Security Review collectively, provide that any foreign investor should file
an application with MOFCOM for the merger and acquisition of domestic enterprises in sensitive sectors or industries.
Furthermore, the Regulations of Security Review shall not be substantially evaded by VIE control or any other
methods. The Circular of Security Review was put into effect on March 5, 2011. As our current ownership structure and
contractual arrangements were established before 2011, our PRC counsel has advised us that the Regulations of Security Review
do not apply to us or the series of transactions we previously consummated to establish our current corporate
structure. However, the relevant PRC regulatory authorities may have a different view or interpretation in this regard
when implementing the Regulations of Security Review. As a result, our future mergers and acquisitions of PRC domestic
enterprises may be subject to PRC security review, which could be time-consuming and complex, and in turn affect our
ability to expand our business or maintain our market share.



11







Due to various restrictions under PRC laws on the distribution
of dividends by our PRC operating companies, we may not be able to pay dividends to our shareholders.



The Wholly-Foreign Owned Enterprise Law (1986), as amended,
The Wholly-Foreign Owned Enterprise Law Implementing Rules (1990), as amended, and the Company Law of the PRC (2006) contain the
principal regulations governing dividend distributions by Wholly-Foreign Owned Enterprises, or WFOEs.  Under these regulations,
WFOEs may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and
regulations.  Additionally, they are required to set aside each year 10% of its net profits (if any), based on PRC accounting
standards, to fund a statutory surplus reserve until the accumulated amount of such reserve reaches 50% of their respective registered
capital.  These reserves are not distributable as cash dividends except in the event of liquidation and cannot be used
for working capital purposes.  The PRC government also imposes controls on the conversion of RMB into foreign currencies
and the remittance of currencies out of the PRC.  We may experience difficulties in completing the administrative procedures
necessary to obtain and remit foreign currency for the payment of dividends from the profits of Fujian WangGang.



Furthermore, if our subsidiaries in the PRC incur debt on their
own in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments.  If
we or our subsidiaries are unable to receive all of the revenues from our operations through these contractual or dividend arrangements,
we may be unable to pay dividends on our ordinary shares.



Because our principal assets are located outside of the United
States and our directors and officers reside outside of the United States, it may be difficult for our investors to enforce their
rights based on the United States federal securities laws against us and our officers and directors in the United States or to
enforce foreign judgments or bring original actions in the PRC against us or our management.



All of our officers and directors reside outside of the United
States.  In addition, our operating subsidiaries are located in the PRC and all of their assets are located outside of
the United States.  The PRC does not have a treaty with United States providing for the reciprocal recognition and enforcement
of judgments of courts.  It may therefore be difficult for investors in the United States to enforce their legal rights
based on the civil liability provisions of the United States Federal securities laws against us in the courts of either the United
States or the PRC and, even if civil judgments are obtained in courts of the United States, to enforce such judgments in PRC courts.



In addition, since we are incorporated
under the laws of the BVI and our corporation affairs are governed by the laws of the BVI, it may not be possible for our investors
to originate actions against us or against our directors or officers based upon PRC laws, and it may be difficult, if possible
at all, to bring actions based upon BVI laws in the PRC in the event that you believe that your rights as a shareholder have been
infringed.



If the PRC government determines that our contractual arrangements
that establish the structure for our business operations do not comply with applicable PRC laws, rules and regulations, we could
be subject to severe penalties or be forced to restructure our ownership structure.



Foreign ownership of ships that are authorized to operate
within PRC waters is subject to significant restrictions under current PRC laws, rules and regulations.  According
to the Regulation of Ship Registration of the PRC and other related regulations, a ship with more than 50% foreign ownership
may not be registered with China nationality.  In addition, a ship without a China nationality is not allowed to
operate within PRC waters. According to the requirements of the Rules of PRC Governing Vessels of Foreign Nationality,
effective as of September 18, 1979, and other applicable rules and regulations, foreign vessels are required to obtain
applicable permissions from the PRC administrative authorities for port entries into, navigations in, and exits from the PRC
inland waterways and territorial seas.  Furthermore, the Regulations Related to Foreign-Invested Construction
Enterprises, or the RAFCE, provides that wholly foreign-owned construction enterprises may only undertake certain types of
construction projects prescribed by the RAFCE within the scope of their qualifications.  According to such
stipulations, the business operations of our operating company, Fujian Service, will be adversely affected if its
foreign-owned equity is increased to more than 50%.



To comply with applicable PRC laws, rules and regulations, we
directly own 50% equity interests of Fujian Service, our operating company, and entered into the VIE Agreements with Wonder Dredging,
which is a PRC domestic company and legal owner of the other 50% equity interests of Fujian Service, and the shareholders of Wonder
Dredging.  We believe these contractual arrangements give us total control and 100% beneficial interest in the 50% of
Fujian Service and 100% of Wonder Dredging that we do not directly own.  We have been advised by our PRC legal counsel
that (a) our contractual arrangements are in compliance with the requirements of applicable PRC laws and regulations and are in
full force and effect; (b) the execution, delivery, effectiveness, enforceability and performance of the such contractual arrangements
by any of the our subsidiaries do not (i) result in any violation of the provisions of the articles of association, business licenses
or other constitutive documents of such parties, (ii) conflict with or constitute a breach of any contracts, agreements, or other
instruments to which any such parties is a party or by which any of them may be bound, or to which any of the property or assets
of such parties is subject, or (iii) result in any violation of any judgment, award, order, writ or decree of any government body,
court, arbitration panel, domestic or foreign, having jurisdiction over any such party.  However, the relevant PRC regulatory
authorities have broad discretion in determining whether a particular corporate structure or contractual arrangement violates applicable
PRC laws, rules and regulations, and may take a different view from that of our PRC legal counsel.  If the current ownership
structure or contractual arrangements is found to be in violation of any existing or future PRC laws, rules or regulations, the
relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including imposition of fines,
revocation of the business and operating licenses of Fujian Service, whose business and operating licenses are essential to the
operation of our business, confiscation of our income or the income of Fujian Service, or requiring us, our PRC subsidiary and
Fujian Service to restructure the relevant ownership structure, operations or contractual arrangements and taking other regulatory
or enforcement actions that could be harmful to our business.



12







In addition, new PRC laws, rules and regulations may be introduced
to impose additional requirements that may be applicable to our corporate structure and contractual arrangements.  The
imposition of any of these penalties and the effect of any new PRC laws, rules and regulations applicable to our corporate structure
and contractual arrangements could have a material adverse effect on our financial condition and results of operations.



Contractual or other arrangements among
our affiliates may be subject to scrutiny by PRC tax authorities, and a finding that we or our affiliates owe additional taxes
could substantially reduce our profitability and the value of your investment.



As a result of our contractual arrangements, we are entitled
to substantially all of the economic benefits of ownership of Fujian Service and Wonder Dredging and also bear substantially all
of their economic risks.  If the PRC tax authorities determine that the economic terms, including pricing, of our arrangements
in respect of Fujian Service were not determined on an arm’s length basis, we could be subject to significant additional
tax liabilities and other penalties, which may materially adversely affect our operation results.



Contractual arrangements, including voting proxies, with
our affiliated entities for our dredging businesses may not be as effective in providing operational control as direct or indirect
ownership.



Since applicable PRC laws, rules and regulations restrict foreign
ownership in the enterprises which own the ships allowed to operate within PRC waters, we only directly own 50% equity interests
of Fujian Service, our operating company, and entered into a series of contractual arrangements with Wonder Dredging, which is
a PRC domestic company and legal owner of the other 50% equity interests of Fujian Service, and all the shareholders of Wonder
Dredging.  Fujian Service holds the licenses and approvals pertaining to the operation of our dredging business.  We
conduct our dredging business and derive related revenues through the direct ownership and contractual arrangements.  As
we do not have a controlling ownership interest in Fujian Service, these contractual arrangements, including the voting proxies
granted to us, may not be as effective in providing us with control over these companies as 100% direct or indirect ownership.  If
we were the controlling shareholder of Fujian Service with direct or indirect ownership, we would be able to exercise our rights
as shareholder to effect changes in the board of directors more effectively, which in turn could effect changes, subject to any
applicable fiduciary obligations, at the management level.



However, pursuant to our contractual arrangements, if Fujian
Service, Wonder Dredging or the shareholders of Wonder Dredging fail to perform their obligations under these contractual arrangements,
we may be forced to (i) incur substantial costs and resources to enforce such arrangements, including the voting proxies, and (ii)
rely on legal remedies available under PRC law, including exercising our call option right over the equity interests in Fujian
Service, seeking specific performance or injunctive relief, and claiming monetary damages.  In the event that we are
unable to enforce these contractual arrangements, or if we suffer significant time delays or other obstacles in the process of
enforcing these contractual arrangements, our business, financial condition and results of operations could be materially and adversely
affected.



If SAFE determines that its foreign exchange regulations
concerning “round-trip” investment apply to us and our shareholding structure, a failure by our shareholders or beneficial
owners to comply with these regulations may restrict our ability to distribute profits, restrict our overseas and cross-border
investment activities or subject us to liability under PRC laws, which may materially and adversely affect our business and prospects.



In October 2005, SAFE issued the Notice on Issues Relating to
the Administration of Foreign Exchange in Fundraising and Roundtrip Investment Activities of Domestic Residents Conducted via Offshore
Special Purpose Companies, which became effective as of November 1, 2005 and which was supplemented by several notices and regulations
thereafter.  We refer to them collectively as SAFE Circular No. 75.  Under SAFE Circular No. 75, PRC citizens,
residents and entities that make, or have previously made prior to the implementation of SAFE Circular No. 75, direct or indirect
investments in offshore SPVs will be required to register those investments with the local branch of SAFE.  In addition,
any PRC citizen, resident, or entity which is a direct or indirect shareholder of an SPV is required to update the previously filed
registration with the local branch of SAFE, with respect to that SPV, to reflect any material change. Moreover, the PRC subsidiary
of the SPV is required to urge its shareholders who are PRC citizens, residents, or entities to update their registration with
the local branch of SAFE.  The registration and filing procedures under SAFE Circular No. 75 are prerequisites for other
approval and registration procedures necessary for capital inflow from the offshore entity, such as inbound investments or shareholders’
loans, or capital outflow to the offshore entity, such as the payment of profits or dividends, liquidating distributions, equity
sale proceeds or the return of funds upon a capital reduction.



13







Because our founder and controlling shareholder, Mr. Xinrong
Zhuo, obtained his Hong Kong identity card in 2005 and surrendered his PRC identity subsequently thereto but still resides in mainland
China, there is a risk that he may be determined as the PRC resident defined in SAFE Circular No. 75.  Due to the uncertainty
over how SAFE Circular No. 75 will be interpreted and implemented, we cannot predict how it will affect our business operations
or future strategies.  If SAFE Circular No. 75 were determined to apply to us or any of our PRC resident shareholders,
none of whom has made registrations or filings according to SAFE Circular No. 75, a failure by any of our shareholders or beneficial
owners to comply with SAFE Circular No. 75 may subject the relevant shareholders or beneficiaries to penalties under PRC foreign
exchange administrative regulations, and may subject us 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 and
capital inflow from the offshore entity, which would have a material adverse effect on our business, financial condition, results
of operations and liquidity as well as our ability to pay dividends or make other distributions to our shareholders.  In
addition, we may not be informed of the identities of the beneficial owners of our company and our Chinese resident beneficial
owners, if any, may not comply with SAFE Circular No. 75.  The failure or inability of our beneficial owners who are
PRC citizens, residents or entities to make or amend any required registrations may subject these PRC residents or our PRC subsidiary
to fines and legal sanctions, and may also limit our ability to contribute additional capital into our PRC subsidiaries and limit
our PRC subsidiaries’ ability to make distributions or pay dividends to us, as a result of which our business operations
and our ability to distribute profits to you may be materially and adversely affected.



The dividends we receive from our Chinese subsidiaries and
our global income may be subject to Chinese enterprise income tax, which would have a material adverse effect on our results of
operations; our foreign securities holders will be subject to a Chinese withholding tax upon the dividends payable by us and subject
to the income tax on the gains on the sale of securities, if we are classified as a Chinese “resident enterprise.”



Under the PRC’s Enterprise Income Tax Law, or the EIT
Law, dividends, interests, rent, royalties and gains on transfers of property payable by a foreign-invested enterprise in China
to its foreign investor who is a non-resident enterprise will be subject to a 10% withholding tax, unless such non-resident enterprise’s
jurisdiction of incorporation has a tax treaty with China that provides for a reduced rate of withholding tax.  Under
the arrangement for avoidance of double taxation between mainland China and Hong Kong, the effective withholding tax applicable
to a Hong Kong non-resident company is 5% if it directly owns no less than a 25% stake in the Chinese foreign-invested enterprise.



Under the EIT Law, an enterprise established outside China with
its “de facto management body” within China is considered a “resident enterprise” in China and is subject
to the Chinese enterprise income tax at the rate of 25% on its worldwide income.  China Dredging, our BVI holding company,
may be deemed to be a PRC resident enterprise under the EIT Law and be subject to the PRC enterprise income tax at the rate of
25% on our worldwide income.  It is also unclear whether the dividends we receive from Fujian WangGang will constitute
dividends between resident enterprises and therefore will be exempted from income tax, even if we are deemed to be a “resident
enterprise” for PRC enterprise income tax purposes.  If the Chinese tax authorities subsequently determine that
we should be classified as a resident enterprise, foreign securities holders will be subject to a 10% withholding tax upon dividends
payable by us and subject to income tax upon gains on the sale of securities under the EIT Law.  Any such tax may reduce
the returns on your investment in our securities.



Fujian Service has operated its construction business without
the appropriate qualification certificate and therefore may be subject to various penalties.



PRC laws and regulations concerning construction
or construction enterprises require that a construction enterprise must hold a qualification certificate for the purpose of undertaking
construction projects.  Furthermore, there are three levels of qualifications for enterprises undertaking waterway engineering
projects and a license holder may only carry out projects permitted by its level of qualification.  A construction enterprise
is prohibited from undertaking projects without the requisite qualification certificate or exceeding the scope permitted by its
level of qualification, otherwise it may be subject to penalties, fines, confiscation of the gains derived from the business activities
or the suspension of operations.  In addition, if a construction enterprise without the requisite qualification certificate
is involved in any dispute in relation with the construction, the relevant court may rule the construction contract to be void.  However,
despite the void construction contract, if the construction has been completed and accepted after inspection, the construction
enterprise would be entitled to make a claim for the project payment.



Where a construction enterprise, which has acquired the construction
qualification, applies for a higher level of qualification or to add new items to its qualification, the approval authorities may
not approve its application if the construction enterprise, within a year before the day of application, has undertaken a project
beyond the scope permitted by its level of qualification.



Our operating company, Fujian Service, commenced its
business operation since January 2008 but obtained Level-III qualification only in August 2010.  In addition, all
major business contracts executed and performed by Fujian Service exceed the permitted scope for Level-III
qualification.  Although Fujian Service has received all project payments in accordance with the related
construction contracts so far, and has not received any notice from PRC authorities for its previous or existing
non-compliance, PRC authorities may impose any of the sanctions described above on Fujian Service.



14







To be eligible for the Level-II qualification,
a construction company is required to meet certain criteria as set forth in the PRC Criterion for Qualifications
of Construction Enterprises, or the Qualification Regulations.  Fujian Service meets all of the criteria for
the Level-II qualification except the following:  (i) it does not have a dredger with 2 cubic meter volume;
(ii) it does not have 150 or more engineers and financial managers; and (iii) the project manager does not have 10 years or
more experience in construction management with a minimum of mid-level class qualification.  Fujian Service plans
to recruit personnel with the requisite experience and qualifications and to purchase a dredger with 2
cubic meter volume in order to be eligible for the Level-II qualification.  However, it may take significant
time for Fujian Service to meet such criteria.  As Fujian Service has not complied with the relevant laws and
regulations, such application may not be approved.  If Fujian Service fails to upgrade its qualification in a
timely manner and meanwhile continues to undertake projects exceeding the scope of Level-III qualification, it may be subject
to fines, confiscation of the gains derived from the business activities or the suspension of operations, and the contracts
may be ruled unenforceable or void if any dispute arises, which could materially and adversely affect our business and
results of operations.



Fujian Service has not obtained the consents from
construction project owners for a substantial number of contracts in-progress, which therefore may be held invalid and
subject Fujian Service  to confiscation of the associated income.



According to the 1997 PRC Construction Law, or
the Construction Law, and other related regulations, if a general contractor subcontracts part of the projects to
subcontractors with appropriate qualifications, except for the subcontracting as permitted in the general contracting
agreement, prior approval from project owners is required.  According to the Interpretation by the PRC Supreme
Court Concerning the Application of Law in Trial of Dispute Cases Involving Construction Project Contracts, if a contractor
illegally assigns or subcontracts the construction project, such act is invalid.  The people’s court may
confiscate the illegal income already obtained by the party according to Article 134 of the Civil Law General
Principles.  Among Fujian Service’s historical subcontracts, only a few general contractors have obtained the
consent from the project owner, and of construction projects in progress no such consents have been obtained.  We
have not been involved in disputes with general contractors or project owners so far, but we may encounter such disputes in
the future.  In the event a court determines that a general contractor has subcontracted the
construction project illegally, the revenues of Fujian Service may be confiscated, which could materially and adversely
affect our business and results of operations.



Fujian Service has not obtained permits
for Above-water and Under-water Construction Works and, therefore, may be subject to fines or ordered to rebuild, move or remove
the works.



Under the Safety Administration Regulation on Above-water
and Under-water Construction Works and Navigation, or the Above-water and Under-water Regulation, promulgated by the PRC
Ministry of Transportation, or MOTRAN, the project owner or the contractor of a construction project is required to
obtain the permit for above-water and under-water construction works and navigation.  However, it is not
explicitly specified whether the project owner, the general contractor or each of the various subcontractors are ultimately
responsible for obtaining the permit.  If the permit is not obtained upon the commencement of an above-water or
under-water construction project, the relevant government authorities may impose penalties upon any of the enterprises
involved in the project for violation of such regulations.  The penalties may include fines and orders to rebuild,
move or remove the works.  Fujian Service has not obtained such permit for its construction
works.  Although Fujian Service has not received any notice regarding penalties, there is risk that it may be
subject to penalties due to non-compliance.



Fujian Service is responsible for the quality of the construction
works undertaken by it, and any non-compliance with the related regulations may subject Fujian Service to penalties that may adversely
affect our operations.



Under the Regulation on the Quality Management of
Construction Projects issued by the State Council which took effect in January 2000, or the Supervision of Quality
Regulations, the subcontractors will be jointly and severally responsible for the quality of the construction work in the
case that the general contractor subcontracts part of the project work to the subcontractors.  If Fujian Service
does not comply with Supervision of Quality Regulations, it may be subject to fines, suspension of operations,
degradation of the construction qualification, rework, repair and compensation, which may adversely affect our
operations.  Although the projects in which Fujian Service participated have all passed the inspection and
acceptance upon its completion, there is risk that it may be subject to penalties due to the future non-compliance.



Our employment practices may be adversely impacted under
the labor contract law of the PRC.



The PRC National People’s Congress promulgated the Labor
Contract Law, which became effective on January 1, 2008.  Compared to previous labor laws, the Labor Contract Law provides
stronger protection for employees and imposes more obligations on employers.  According to the Labor Contract Law, employers
have the obligation to enter into written labor contracts with employees to specify the key terms of the employment relationship.  The
law also stipulates, among other things, (i) that all written labor contracts shall contain certain requisite terms; (ii) that
the length of trial employment periods must be in proportion to the terms of the relevant labor contracts, which in any event may
not be longer than six months; (iii) that in certain circumstances, a labor contract is deemed to be without a fixed term and thus
an employee can only be terminated with cause; and (iv) that there are certain restrictions on the circumstances under which employers
may terminate labor contracts as well as the economic compensations to employees upon termination of the employee’s employment.  A
significant number of our employees are contracted through Fujian Haiyi International Ship Service Agency Co., Ltd., a third-party
agency company, in the case of the dredgers owned by Fujian Service, and through the lessors, in the case of the dredgers leased
by Fujian Service.  Fujian Haiyi International Ship Service Agency Co., Ltd. and the lessors are responsible for managing,
among others, payrolls and social insurance contributions of these employees.



15







We may be held jointly liable if Fujian Haiyi International
Ship Service Agency Co., Ltd. or the lessors fails to pay such employees their wages and other benefits or otherwise become liable
to these employees for labor law violations.  In addition, in the event we decide to significantly change or downsize
our workforce, the Labor Contract Law could restrict our ability to terminate employee contracts and adversely affect our ability
to make such changes to our work force in a manner that is most favorable to our business or in a timely and cost effective manner,
which in turn may materially and adversely affect our financial condition and results of operations.  Our employment
practices may be deemed to violate the Labor Contract Law.  If we are subject to severe penalties or incur significant
legal fees in connection with labor law disputes or investigations, our business, financial condition and results of operations
may be adversely affected.



Fujian Service has not made past housing
fund payments for and on behalf of its employees and may be required to make such payments and may be subject to fines or penalties.



Under the Administrative Regulation on Housing Fund, an employer
must make a housing fund payment and deposit registration upon its establishment and pay the housing fund for and on behalf of
its employees at a percentage between 5% and 12% of the respective employee’s monthly average wage of the preceding year.  Where
an employer fails to make the housing fund payment and deposit registration, the housing fund administration authority may order
it to complete the registration within a time limit or be assessed a fine of RMB10,000 to RMB50,000.  Where an employer
fails to make the housing fund payment for and on behalf of its employees within the time limit or under the requisite percentage,
it may be ordered by the housing fund administration authority to deposit the fund within a time limit, together with late fees
of 0.03% of such amount.  Fujian Service has not made the housing fund payment and deposit registration or paid the housing
fund for and on behalf of its employees due to inconsistent implementation and interpretation by local authorities in the PRC and
different levels of acceptance of the social security system by employees.  In the future, Fujian Service may be required
to make such past housing fund payments, pay late fees, and pay fines for non-compliance.  Any judgment or decision against
Fujian Service in respect of outstanding housing fund matters could have an adverse effect on our results of operations.



Currency fluctuations and restrictions on currency exchange
may adversely affect our business, including limiting our ability to convert Renminbi into foreign currencies and, if Renminbi
were to decline in value, reducing our revenue in U.S. dollar terms.



Our reporting currency is the U.S. dollar and our operations
in the PRC use their local currency as their functional currencies.  Substantially all of our revenue and expenses are
in Renminbi.  We are subject to the effects of exchange rate fluctuations with respect to any of these currencies.  For
example, the value of the Renminbi depends to a large extent on PRC government policies and the PRC’s domestic and international
economic and political developments, as well as supply and demand in the local market.  Since 1994, the official exchange
rate for the conversion of Renminbi to the U.S. dollar had generally been stable and the Renminbi had appreciated slightly against
the U.S. dollar.  However, in July 2005, the PRC government changed its policy of pegging the value of Renminbi to the
U.S. dollar.  Under the new policy, Renminbi may fluctuate within a narrow and managed band against a basket of certain
foreign currencies.  As a result of this policy change, Renminbi appreciated more than 20% against the U.S. dollar in
the following three years.  Since July 2008, however, the Renminbi has traded within a narrow range against the U.S.
dollar.  As a consequence, the Renminbi has fluctuated significantly since July 2008 against other freely traded currencies,
in tandem with the U.S. dollar.  On June 19, 2010, the People’s Bank of China, or the PBOC, announced that the
PRC government would further reform the Renminbi exchange rate regime and increase the flexibility of the exchange rate.  It
is difficult to predict how this new policy may impact the Renminbi exchange and the Renminbi may not be stable against the U.S.
dollar or any other foreign currency.



The statements of our operations are translated into U.S. dollars
at the average exchange rates in each applicable period.  To the extent the U.S. dollar strengthens against foreign currencies,
the translation of these foreign currency denominated transactions results in reduced revenue, operating expenses and net income
for our operations.  Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of
these foreign currency denominated transactions results in increased revenue, operating expenses and net income for our operations.  We
are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into
U.S. dollars in consolidation.  For example, our net income as measured in Renminbi was RMB620.4 million for the year
ended December 31, 2011 compared to RMB326.0 million for the year ended December 31, 2010, an increase of 90.3%.  However,
our net income as measured in U.S. dollars was $96.4 million for the year ended December 31, 2011 compared to $48.2 million for
the year ended December 31, 2010, an increase of 99.8%.  If there is a change in foreign currency exchange rates, the
conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which
is recorded as a component of other comprehensive income.  In addition, if we have assets or liabilities that are denominated
in currencies other than the relevant entity’s functional currency, changes in the functional currency value of these assets
and liabilities would create fluctuations that lead to a transaction gain or loss.  We have not entered into agreements
or purchased instruments to hedge exchange rate risks, although we may do so in the future.  The availability and effectiveness
of any hedging transaction may be limited and we may not be able to successfully hedge its exchange rate risks.



16







Although PRC governmental policies were introduced in 1996 to
allow the convertibility of Renminbi into foreign currency for current account items, conversion of Renminbi into foreign exchange
for capital items, such as foreign direct investment, loans or securities, requires the approval of SAFE, which is under the authority
of the PBOC.  These approvals, however, do not guarantee the availability of foreign currency conversion.  We
may not be able to obtain all required conversion approvals for our operations and PRC regulatory authorities may impose greater
restrictions on the convertibility of Renminbi in the future.  Because a significant amount of our future revenue may
be in the form of Renminbi, our inability to obtain the requisite approvals or any future restrictions on currency exchanges could
limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC, or to repay foreign
currency obligations, including our debt obligations, which would have a material adverse effect on our financial condition and
results of operations.



RISKS RELATING TO OUR SECURITIES



There is no public market for our shares and you may not
be able to resell our shares at or above the price you paid, or at all.



No public market currently exists for our shares.  We
may in the future pursue a trading market for our shares (or ADSs).  However,
we may not do so, and we may be unable to maintain any such a trading market.  In addition, because we became a public
reporting company as a result of a merger with public reporting, non-trading shell company, we may be unable to list on certain
U.S. stock exchanges that impose “seasoning” requirements on reverse merger companies.  Such requirements
would prohibit listing of our shares (or ADSs) unless they have traded in another market for an adequate period of time, at fixed
bid price levels, and with an adequate number of round lot shareholders.  We may be unable to meet these requirements,
which could adversely impact our ability to access U.S. stock exchanges.  If an active trading market for our shares
(or ADSs) does not develop, the value and liquidity of our shares (or ADSs) will be materially and adversely affected.  You
may need to hold your shares (or ADSs) for an indefinite period of time and may face a complete loss on your investment.



If we fail to list our shares on a qualifying
stock exchange by October 2012, we will face a redemption obligation with our preferred share holders.



The holders of our preferred shares have
the right to receive 20% of the $5.00 purchase price on the second anniversary of issuance if not yet converted. Substantially,
this is the right to $1.00 per share if we fail to have the ordinary shares underlying our preferred shares both successfully
registered with the SEC and listed on the Nasdaq Stock Market LLC, or the Nasdaq, the New York Stock Exchange, or the NYSE, or
the NYSE Amex, or another major international securities exchange. Under these circumstances, in addition to this substantive
obligation to pay the $1.00 per share, the holders of preferred shares would have the right to demand redemption of the shares
at $5.00 per share. The Nasdaq, NYSE, and NYSE Amex recently adopted a “seasoning” requirement for the listing of
former reverse merger companies, which includes trading in another market for an adequate period of time at certain minimum price
levels and completing SEC filings during this time, although there is an exception to this requirement for firmly underwritten
public offerings of at least $40 million. We do not expect that we will be able to comply with seasoning requirements for listing
prior to the listing deadline and we may be unable to qualify for the $40 million exception, which substantially increases the
possibility that we may need to pay to redeem the preferred shares.  Efforts to list on an international securities
exchange or obtain waivers from preferred shareholders may also be unsuccessful. If we must redeem the preferred shares in addition
to paying the $1.00 per share, our liquidity and financial position will be materially and adversely affected. Payment of the $1.00 per share would result in a charge of approximately $1.7 million to net income in
2012, representing the portion that has not already been reflected as a liability on the balance at December 31, 2011. The effect
on our liquidity and financial position could also have additional material and adverse affects our results of operations.



Our corporate actions are substantially controlled by our
officers, directors and principal shareholders and their affiliated entities.



Our executive officers, directors and principal
shareholders and their affiliated entities beneficially own approximately 74.2% of our outstanding shares. These
shareholders, if they acted together, would control matters requiring approval by our shareholders, including the election of
directors and the approval of mergers or other business combination transactions, and they may not act in the best interests
of our minority shareholders. This concentration of ownership may also discourage, delay or prevent a change in control of
our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale
of our company. These actions may be taken even if they are opposed by our other shareholders.



We may need additional capital, and the sale of additional
equity securities could result in additional dilution to our shareholders.



We believe that our cash and cash equivalents, and anticipated
cash flow from operations will be sufficient to meet our anticipated cash needs for the foreseeable future. We may, however, require
additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions
we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity
or debt securities or obtain a credit facility. The sale of additional equity securities could result in additional dilution to
our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating
and financing covenants that would restrict our operations. It is uncertain whether financing will be available in amounts or on
terms acceptable to us, if at all.



17







Because we do not expect to pay dividends in the foreseeable
future you must rely on price appreciation of our shares for return on your investment.



We have never declared or paid any cash dividends on our ordinary
shares or preferred shares.  We do not anticipate paying any cash dividends on our ordinary shares in the foreseeable
future and plan to retain earnings, if any, for use in the development of our business.  Therefore, you should not rely on
an investment in our shares (or ADSs) as a source for any future dividend income.   Our board of directors has significant
discretion as to whether to distribute dividends. Even if our board of directors decides to declare and pay dividends, the timing,
amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow,
our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial
position, contractual restrictions, BVI and PRC laws, and other factors deemed relevant by our board of directors.  Accordingly,
the return on your investment in our shares (or ADSs) will likely depend entirely upon any future price appreciation of our shares
(or ADSs).  Our shares (or ADSs) may not appreciate in value or even maintain the price at which you purchased our shares
(or ADSs).  You may not realize a return on your investment in our shares (or ADSs) and you may even lose your entire
investment.



Our shareholders may face difficulties in protecting their
interests, and their ability to protect their rights through the United States federal courts may be limited because
we are incorporated under BVI law, we conduct substantially all of our operations in China and all of our directors and officers
reside outside the United States.



We are incorporated in the BVI and conduct substantially all
of our operations in China through our PRC subsidiaries. All of our directors and officers reside outside the United States and
a substantial portion of their assets are located outside of the United States. As a result, it may be difficult or impossible
for you to bring an action against us or against these individuals in the BVI or in China in the event that you believe that your
rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind,
the laws of the BVI and of China may render you unable to enforce a judgment against our assets or the assets of our directors
and officers. There is no statutory recognition in the BVI of judgments obtained in the United States, although the courts of the
BVI will recognize as a valid judgment, a final and conclusive judgment in personam obtained in a federal or state court of the
United States under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or
other charges of a like nature or in respect of a fine or other penalty) and would give a judgment based thereon; provided that
(a) such courts had proper jurisdiction over the parties subject to such judgment; (b) such courts did not contravene the rules
of natural justice of the BVI; (c) such judgment was not obtained by fraud; (d) the enforcement of the judgment would not be contrary
to the public policy of the BVI; (e) no new admissible evidence relevant to the action is submitted prior to the rendering of the
judgment by the courts of the BVI; and (f) there is due compliance with the correct procedures under the laws of the BVI. The PRC
does not have a treaty with United States providing for the reciprocal recognition and enforcement of judgments of courts.



Our corporate affairs are governed by our memorandum and articles
of association, as amended and restated from time to time, or our Articles of Association, and by the statutory and common law
of the BVI. The rights of shareholders to take legal action against us and our directors, actions by minority shareholders and
the fiduciary responsibilities of our directors are to a large extent governed by the common law of the BVI. The common law of
the BVI is derived in part from comparatively limited judicial precedent in the BVI as well as from English common law, which provides
persuasive, but not binding, authority on a court in the BVI. The rights of our shareholders and the fiduciary responsibilities
of our directors under BVI law are not as clearly established as they would be under statutes or judicial precedents in the United
States. In particular, the BVI has a less developed body of securities laws than the United States and provides significantly less
protection. In addition, BVI companies may not have standing to initiate a shareholder derivative action in United States federal
courts.



As a result, our shareholders may have more difficulty in protecting
their interests through actions against us, our management, our directors or our major shareholders than would shareholders of
a corporation incorporated in a jurisdiction in the United States.



We have identified what believe would constitute a material
weakness in our internal control over financial reporting and may identify future material weaknesses which, if uncorrected, may
adversely effect our ability to accurately and timely report our financial results or prevent fraud, decrease investor confidence
in us and negatively impact the value of our securities.



We are a company with limited accounting personnel and other
resources to address our internal control over financial reporting. In connection with the audit of our financial statements included
in this Report, we identified what we believe would constitute a “material weakness” in our internal control over financial
reporting. As defined in the standards established by the Public Company Accounting Oversight Board of the United States, or the
PCAOB, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements
will not be prevented or detected on a timely basis by the company’s internal controls. The material weakness we identified
was that none of our employees had any formal training in U.S. GAAP and the rules and regulations of the U.S. Securities and Exchange
Commission, or the SEC. Our Chief Financial Officer also does not have such training, and we may not be able to remediate this
material weakness without significant expense, if at all. We have identified similar material weaknesses in the past, and we may
also face additional material weaknesses in the future. Therefore, there is a risk that our current or future financial statements
may not be properly prepared in accordance with the U.S. GAAP or that our current or future disclosures are not in compliance with
SEC rules and regulations. If we fail to timely achieve and maintain the adequacy of our internal controls, we may not be able
to conclude that we have effective internal control over financial reporting. As a result, our failure to achieve and maintain
effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial
statements, which in turn could harm our business and negatively impact the value of our securities.



18







Compliance with rules and requirements applicable to public
companies will cause us to incur additional costs, and any failure by us to comply with such rules and requirements could negatively
affect investor confidence in us and cause the value of our securities to decline.



As a public company, we will incur significant legal, accounting
and other expenses that we did not incur as a private company, many of which are not reflected in our historical financial statements.
In addition, the Sarbanes-Oxley Act, as well as rules adopted by the SEC, has required changes in the corporate governance practices
of public companies. We expect these rules and regulations to increase our legal, accounting and financial compliance costs and
to make certain corporate activities more time-consuming and costly. Complying with these rules and requirements may be especially
difficult and costly for us because we may have difficulty locating sufficient personnel in China with experience and expertise
relating to U.S. GAAP and United States public company reporting requirements, and such personnel may command high salaries. If
we cannot employ sufficient personnel to ensure compliance with these rules and regulations, we may need to rely more on outside
legal, accounting and financial experts, which may be very costly. In addition, we will incur additional costs associated with
our public company reporting requirements. We cannot predict or estimate the amount of additional costs we may incur or the timing
of such costs.



ITEM 4. INFORMATION ON THE COMPANY



A.           History
and Development of the Company



Our Corporate Structure



We are a BVI holding company incorporated on April 14, 2010.  We
conduct our dredging operations through our PRC subsidiary, Fujian Service.  Before the reorganization in May 2010, Fujian
Service was owned by Mr. Qing Lin and Mr. Panxing Zhuo, who are, respectively, the brother-in-law and the father of Mr. Xinrong
Zhuo, our Chairman and Chief Executive Officer.  Mr. Qing Lin and Mr. Panxing Zhuo, pursuant to an agreement, held their
interests as the representatives of the family.  The agreement also gave Mr. Xinrong Zhuo the exclusive right to make
executive decisions and manage Fujian Service.  China Dredging is incorporated by three entities, namely, Venus Seed
Co. Ltd., or Venus, whose beneficial owner is Kit Chan, one of our independent directors, Saturn Glory Co. Ltd., or Saturn, whose
beneficial owner is Bin Lin, our Senior Vice President, and Mars Harvest Co. Ltd., or Mars, whose beneficial owner is Xinrong Zhuo,
our Chairman and Chief Executive Officer.



Our wholly owned subsidiary, China Dredging HK, was organized
under the laws of Hong Kong on April 26, 2010 to serve as a holding company for Fujian WangGang, a PRC company organized on June
12, 2010 and a WFOE under PRC law.  On June 29, 2010, Fujian WangGang acquired a 50% direct equity interest in Fujian
Service.  The remaining 50% equity interest in Fujian Service is held by Wonder Dredging, a PRC company owned by Qing
Lin and Panxing Zhuo who, pursuant to an agreement hold their interests in Fujian Service indirectly as the representatives of
the family.  The agreement also gave Xinrong Zhuo the exclusive rights to make executive decisions and manage Fujian
Service.  Pursuant to its certificate of incorporation, Fujian Service’s corporate existence terminates on January
7, 2028.



Fujian Service, which is our operating entity with Renminbi
200,000,000 ($29,002,371 at December 31, 2011) registered capital, was incorporated in January 2008.  Before the reorganization
in May 2010, Fujian Service was originally owned by two individuals, Qing Lin and Panxing Zhuo, who respectively held 91% and 9%
ownership interests.  Pursuant to an agreement, they held their interests as representatives of the family and accepted
Xinrong Zhuo’s right to make all executive decisions and manage the business.  Qing Lin and Panxing Zhuo are the
brother-in-law and the father of Mars’ sole shareholder, Xinrong Zhuo.



In May 2010, Qing Lin and Panxing Zhuo sold all of their ownership
interests of Fujian Service to Wonder Dredging, which they also owned fully and in the same percentages as their ownership interests
in Fujian Service.  Subsequent to this transaction, Wonder Dredging owned 100% of Fujian Service.



In June 2010, Fujian WangGang acquired a 50% ownership interest
in Fujian Service from Wonder Dredging by committing to invest, as a capital contribution, approximately $23.6 million into Fujian
Service, which commitment was fully satisfied in January 2011.  This reduced Wonder Dredging’s ownership interest
in Fujian Service to 50%.



In June 2010, Fujian WangGang entered into the VIE Agreements
with Fujian Service, Wonder Dredging, Mr. Qing Lin and Mr. Panxing Zhuo to obtain irrevocable management control over both Wonder
Dredging and Fujian Service.  Through these agreements, Fujian WangGang (1) receives substantially all of the economic
benefits of Fujian Service’s ongoing operations, (2) has the right to purchase the other 50% interest in Fujian Service from
Wonder Dredging for consideration which is equivalent to the net asset value of the latest quarterly report of Fujian Service under
U.S. GAAP preceding the purchase date, (3) has the right to receive all the payment by Fujian Service payable to Wonder Dredging.



19







In October 2010, we merged with and into CAC, a public reporting,
non-trading shell company domiciled in the BVI, or the Merger.  CAC had become a public company in the U.S. in December
2008 by filing a Form 10 registration statement pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended, or
the Exchange Act.  The former executive officer and director of CAC owns less than 1% of our outstanding ordinary shares
and serves as the president of Chardan Capital Markets LLC, or Chardan, the lead placement agent in our 2010 Private Placement.  We
chose to merge with CAC because we believed becoming a public company would facilitate the consummation of a private placement
on more favorable terms than would otherwise be available to us as a private company.  We believe that investors are
more likely to give lower valuations, require warrant coverage or other economic rights, and attempt to obtain special voting and
information rights or to otherwise gain influence on corporate decisions in a private company, particularly one having substantial
operations in China, as compared to a public company that is subject to audit, internal control and public disclosure obligations.  In
addition, we believed that the Merger with CAC was in our best interest because, we may be regarded as more creditworthy, have
greater access to the capital markets, and enjoy other advantages associated with being a public company.



The terms of the Merger were set forth in the Merger Agreement,
which provided that China Dredging would continue as the surviving company following the Merger.  We have accounted for
the Merger as a recapitalization, with China Dredging being treated as the accounting acquirer.  Immediately prior to,
and in contemplation of, the consummation of the Merger, we redesignated our shares to retroactively adjust our legal capital.  At
the time of the Merger, all of the issued shares of CAC were exchanged for 500,000 of our ordinary shares, or 0.95% of our outstanding
ordinary shares, while our shareholders immediately prior to the Merger retained 52,177,323 of our ordinary shares, or 99.05% of
our outstanding ordinary share.  As a result of the Merger, we became a public reporting company.  CAC, being
the non-surviving company, ceased its corporate existence, and was removed from the Register of Companies in the BVI.



The following diagram illustrates our current corporate structure:







| | (1) | Xinrong Zhuo is our Chairman of the Board of Directors and Chief Executive Officer, Bin Lin is
our Senior Vice President, and Kit Chan is one of our independent directors.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Assumes the conversion of all of our preferred shares into ordinary shares.
| | --- | ---------------------------------------------------------------------------



| | (3) | Qing Lin is the brother-in-law of Xinrong Zhuo, our Chairman of the Board of Directors and Chief
Executive Officer, and holds 91% interest as the representative of the family.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | Panxing Zhuo is the father of Xinrong Zhuo, our Chairman of the Board of Directors and Chief
Executive Officer, and holds 9% interest as the representative of the family.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



2010 Private Placement



Concurrently with the closing of the Merger, we entered into
a securities purchase agreement, or the Purchase Agreement, with certain investors.  Pursuant to the Purchase Agreement,
through multiple closings between October and December 2010, such investors purchased 10,012,987 of our preferred shares, at a
purchase price of $5.00 per share, for aggregate proceeds of approximately $50.0 million.  Each preferred share is convertible
into one of our ordinary shares.  Chardan acted as the lead placement agent in connection with the private placement.  Net
proceeds to us, after deducting offering expenses of approximately $3.6 million, were approximately $46.4 million.  We
paid Chardan a cash fee of approximately $3.1 million in addition to a $50,000 retainer fee. In connection with the 2010 Private
Placement, we agreed to redeem our preferred shares at a 20% premium if our ordinary shares are not listed by October 2012 on the
NYSE, the Nasdaq, the NYSE Amex, or another major international securities exchange.



20







Variable Interest Entity Agreements



Under applicable PRC law, foreign ownership in certain industries
is restricted and may not exceed a government specified level.  WFOEs may only undertake certain types of construction
projects, and foreign ownership in a Chinese-foreign joint venture construction enterprise is restricted to no more than 75% according
to the RAFCE.  Additionally, as a marine contractor working on restricted projects within the PRC, Fujian Service is
required to register its vessels under the flag of the PRC, and foreign ownership of the enterprises which own the PRC-registered
vessels is limited to no more than 50%.  While Wonder Dredging qualifies as a PRC entity under PRC law and owns 50% equity
of Fujian Service, Fujian WangGang’s direct ownership of 50% of Fujian Service allows Fujian Service to meet both the requirements
for foreign ownership under its qualifications as a marine construction company and as an operator of dredging vessels within PRC
waters.



In June 2010, Fujian WangGang entered into an equity investment
agreement with Wonder Dredging pursuant to which Fujian WangGang invested approximately $23.6 million in Fujian Service in exchange
for a 50% equity interest in Fujian Service.  Accordingly, Wonder Dredging holds 50% of the equity interest of Fujian
Service and Fujian WangGang holds the other 50%.  Fujian Service, Wonder Dredging, Fujian WangGang, Mr. Qing Lin and
Mr. Panxing Zhuo have entered into the VIE Agreements that allow Fujian WangGang to, among other things, fully control Fujian Service’s
business operations, policies and management, approve all matters requiring shareholder approval, and receive 100% of the annual
net income earned by Fujian Service.  Below is a summary of the VIE Agreements.



Exclusive Purchase Right of Equity Interest



In June 2010, Wonder Dredging, Fujian WangGang and Fujian Service
entered into an exclusive option agreement, or the Exclusive Option Agreement, pursuant to which Wonder Dredging irrevocably granted
to Fujian WangGang an exclusive right to purchase up to all of the equity interest in Fujian Service that is held by Wonder Dredging,
to the extent allowed under the current PRC law.  Accordingly, if and when the current limitations on direct ownership
of Fujian Service by Fujian WangGang are eased or cease, Fujian WangGang may exercise its option to purchase and directly own the
equity interests of Fujian Service.  The purchase price for the equity interest in Fujian Service held by Wonder Dredging
would be equivalent to the net asset value reflected in Fujian Service’s then current quarterly report prepared according
to U.S. GAAP.  The term of the Exclusive Option Agreement is 20 years, which term continuously renews unless the option
is exercised in full or the agreement is otherwise terminated by the parties.  The agreement also provides that upon
consummation of the exercise of the option, Wonder Dredging will contribute, without additional consideration, any funds actually
received by it from Fujian WangGang for the transfer of its equity interest in Fujian Service to Fujian WangGang.  The
agreement further provides that, as of the date of the agreement, Fujian WangGang is entitled to all the future payments by Fujian
Service to Wonder Dredging, together with all the profits of Fujian Service.



Contracted Management Agreement



In June 2010, Wonder Dredging, Fujian WangGang and Fujian Service
entered into a management agreement, or the Management Agreement, pursuant to which Fujian WangGang has the exclusive right to
manage, operate and control the business operations of Fujian Service, including, but not limited to, establishing and implementing
policies for management, using all of the assets of Fujian Service, appointing Fujian Service’s directors and senior management,
directing Fujian Service to enter into loan agreement, making administrative decisions regarding employee wages or hiring and firing
employees and other actions customarily associated with Fujian Service’s senior management.  As consideration for
its business management services, Fujian WangGang has agreed to pay to Fujian Service an annual fee of approximately $155,000 (RMB1
million), and Fujian Service will pay to Fujian WangGang 100% of the net profits of Fujian Service.  The Management Agreement
terminates upon the earlier of (i) Fujian WangGang’s exercise in full of the option to purchase the equity interests of Fujian
Service, pursuant to the Exclusive Option Agreement, and Fujian WangGang and/or its designees individually or jointly own all of
the equity interests in Fujian Service, or (ii) June 30, 2030, subject to the right of Fujian WangGang to renew the term of the
Management Agreement for additional consecutive 20-year periods.



Equity Interest Pledge Agreement



In June 2010, Qing Lin, Panxing Zhuo, Fujian WangGang and Wonder
Dredging entered into an equity interest pledge agreement, or the Equity Interest Pledge Agreement.  To ensure that Fujian
Service and its shareholders perform their obligations under the Exclusive Option Agreement, the Management Agreement, and a letter
of undertaking whereby Wonder Dredging waived its right to receive a dividend of approximately $51.1 million declared by Fujian
Service in May 2010, Qing Lin and Panxing Zhuo, who collectively hold 100% of the equity interests in Fujian Service, pledged their
entire interest in Wonder Dredging to Fujian WangGang.  The Equity Interest Pledge Agreement terminates upon the earlier
of (i) the purchase of the entire equity interest in Fujian Service by Fujian WangGang or (ii) June 30, 2030, subject to the right
of Fujian WangGang to renew the term of the Equity Interest Pledge Agreement for additional consecutive 20 year periods.



21







Powers of Attorney



In June 2010, Wonder Dredging executed irrevocable power of
attorney granting to Fujian WangGang or its designees the power to vote, pledge or dispose of all equity interests in Fujian Service
that Wonder Dredging holds.  Additionally, the powers of attorney allow Fujian WangGang or its designees to sign and
carry out the intentions of the Management Agreement, the Equity Pledge Agreement and the Exclusive Option Agreement.  At
the same time, Qing Lin and Panxing Zhuo executed irrevocable power of attorney granting to Fujian WangGang or its designees the
power to vote, pledge, or dispose of all equity interests in Wonder Dredging, and to appoint directors and senior management of
Wonder Dredging.



Our Corporate Information



We are a BVI holding company and we conduct our dredging operations
through our PRC subsidiary and variable interest entities.  China Dredging Group Co. Ltd. was incorporated under the
BVI Business Companies Act, 2004, or the Companies Act.  China Dredging HK was organized under the Hong Kong Companies
Ordinance.  Fujian WangGang was organized under the Company Law of the PRC (2006), the Wholly-Foreign Owned Enterprise
Law (1986), as amended, and the Wholly-Foreign Owned Enterprise Law Implementing Rules (1990), as amended.  Fujian Service
was organized under the Company Law of the PRC (2006).  Wonder Dredging was organized under the Company Law of the PRC
(2006).  For further information regarding the legislation under which we operate, please see “History
and Development of the Company— Our Corporate Structure.” Our principal executive offices are located at Floor 18,
Tower A, Zhongshan Building No. 154, Hudong Road, Gulou District, Fuzhou City, Fujian Province 350001, PRC.  Our telephone
number at this address is +86-591-8727-1266.  Our registered office in the BVI is located at Kingston Chambers, PO Box
173, Road Town, Tortola, BVI.  For a description of our principal capital expenditures and divestitures in the past three
fiscal years and in progress, please see “Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Liquidity and Capital Resources.”



Investors should submit any inquiries to the address and
telephone number of our principal executive offices.  Our main website is  www.chinadredgingco.com.  The
information contained on our website is not a part of this Report.  Our agent for service of process in the United States
is C T Corporation System.



B.           Business
Overview



We provide specialized dredging services exclusively to the
Chinese marine infrastructure market and, based on the number and capacity of the dredging vessels we operate, we believe that
we are one of the leading independent (not state-owned) providers of such services in the PRC.  Since inception, we have
functioned exclusively as a specialist subcontractor, performing dredging services for other companies licensed to function as
general contractors.  We engage in capital dredging, maintenance dredging and reclamation dredging projects.  We
primarily source our projects by subcontracting projects from general contractors.  Through our management skills, efficient
operation and effective cost control, we believe that we have established a competitive edge and gained a credible reputation in
our market.  Moreover, by successfully executing numerous projects, we have strengthened our relationship with our general
contractors, an important factor in establishing a secure pipeline of future business.



Three of our customers have indicated to us through non-binding
long-term cooperation agreements their intent to increase the level of project activity subcontracted to us over the five year
period from 2010 through 2014.  Collectively, these non-binding agreements represent approximately $3.0 billion of estimated
aggregate revenue over the remaining three years and approximately $721.6 million during 2012 that we believe is potentially available
to us and that could sustain the anticipated growth of our fleet and ongoing high utilization levels.  However, as these
agreements are non-binding, they may not actually result in any potential contract value and we may realize considerably less value
under each of these agreements.



Operating Process



Our operations principally involve identifying potential projects,
signing subcontracts and carrying out the contract dredging work.  We have developed a comprehensive project management
system spanning the project execution process, including project planning, contract management, contract performance, project control
and project completion.



Our Role and Participation Level



We participate in dredging activities solely as a subcontractor
to qualified large general contractors such as China Communications and Changjiang Waterway, since our dredging projects are typically
one portion of a much larger-scale construction project that could cover elements such as port construction, cofferdam, and other
fields of work in which we do not engage.  The terms of the main contracts with the underlying customers are generally
reflected in the contracts we sign with the general contractors.



22







These general contractors with which we generally work have
strict evaluation procedures based on a number of parameters including their evaluation of subcontractor performance on previous
jobs.  We have observed that our general contractor customers prefer to maintain long and close relationships with reliable
subcontractors like us and to establish with them training programs and technical cooperation arrangements that bolster consistency
and quality of work.  We also perceive that the subcontracting levels of the PRC’s largest general contractors
have increased in the past few years as the gap continues to widen between their capacity and the national backlog of dredging
projects.  In some cases, we believe that subcontracting is appealing to our customers because it allows the subcontractors
to improve overall efficiency and make the total project more manageable by outsourcing some fraction of the work.  Accordingly,
we believe, based on the non-binding cooperation agreements that we have executed with our largest general-contractor customers
that those customers intend to increase the amount of work that is subcontracted to specialist subcontractors such as us.



Identifying Projects



We identify potential projects from a variety of sources, including
advertisements by governmental agencies, through the efforts of our business development personnel and through meetings with general
contractors and other industry participants.  After determining which projects are available, we make a decision on which
projects to pursue based on factors including project size, duration, availability of personnel, current backlog, competitive advantages
and disadvantages, prior experience, geographic location and type of contract.



Pre-Qualification



We are generally required to complete a prequalification process
with the applicable general contractor for the project.  General contractors generally require that we meet certain qualification
requirements before negotiating or accepting our application for a project.  The prequalification process may require
the submission of information concerning financial condition, past experience and the availability of personnel and equipment.  If
a general contractor determines that a prospective subcontractor does not meet its criteria it will not award the proposed project
to the subcontractor.



Project Pricing and Negotiation



Prior to agreeing on a subcontract, we perform a study of the
proposed project, including an evaluation of the technical and commercial conditions and requirements of the project followed by
a site visit.  The information we collect is then analyzed to arrive at the cost of items included in a detailed project
budget used in the negotiation of price terms with the general contractors.  Most of our dredging contracts are awarded
and carried out on a fixed-price basis, subject to adjustment factors for unforeseen conditions, with a predetermined timetable
for project completion.  These types of contracts generally commit the contractor to provide specified resources and
to complete the project for a fixed sum or at fixed unit prices on a specified schedule.  As is typical for dredging
subcontracts, our contracts to date were the result of negotiations with the general contractor customers and are not competitively
bid.



Our contracts to date have not contained escalation clauses
since they are of short duration and raw materials with volatile prices, such as fuel, are typically supplied by the prime contractor
for use on the job at no cost to us.  Correctly estimating the costs involved in a fixed-price contract is crucial to
achieving profitability.  We carefully estimate the costs of each project prior to signing a subcontract.  Our
estimates are based upon both the general contractors’ estimates of material quantities to be dredged and our own experience
in estimating project costs.  There are a number of factors that can influence the final project costs as compared to
the original contract price.  The most important factors include site and environmental conditions that differ from those
assumed in the original bid, the geographic location of the project, the availability and pricing of raw materials, and inclement
weather conditions.



Payment Terms



The specific payment terms on our subcontracts vary from project
to project.  However, they have generally provided for us to receive payments following completion of each stage of completed
work, which is customary in the industry.  Our typical short-duration subcontract provides for payment to us of 20% to
30% at the end of the second month of work, 20% to 30% at the end of the third month of work and the balance within 7 to 180 days
after completion.  Prior to payment, each stage of the project is certified as completed by a site engineer and accepted
by the general contractor.  All of our projects completed to date have been performed within the range of 10 to 366 days.  We
carefully monitor our costs throughout the life of a project to protect us against or to minimize significant cost overruns.



Project Implementation



We appoint a project manager to be responsible for all project
activities.  The project manager divides work on a project into distinct components and assigns each component to a responsible
crew based upon the nature of such work and the crew’s qualifications and experience.  Project managers typically
prepare a detailed plan for the project that includes the following elements:



| | · | project schedule (consistent with the project conditions and payment schedule);
| | - | -------------------------------------------------------------------------------



| | · | labor deployment (consistent with the skill level and the estimated number of workers for each
type of work);
| | - | -------------------------------------------------------------------------------------------------------------



| | · | provision of temporary office and public utilities, for example, water, electricity and telephone;
and
| | - | ------------------------------------------------------------------------------------------------------



23







| | · | work plans/instructions detailed for each phase of the project.
| | - | ---------------------------------------------------------------



The implementation process includes devising detailed dredging
plans, procuring materials, assigning work to captains, coordinating with general contractors or their consultants, coordinating
with suppliers, and taking charge in the overall management of the project.



Project History



As of December 31, 2011, we had successfully completed 96 projects
since our formation in January 2008.  From January 1, 2012 through the date of this Report, we commenced work on an additional
18 projects.



Vessels



As of the date of this Report, we operate trailer suction hopper
dredgers, non-self-propelling cutter suction dredgers and grab dredgers.  Trailer suction hopper dredgers are typically
self-propelled and have the general appearance of an ocean-going vessel.  The dredger has hollow hulls, or “hoppers,”
into which material is suctioned hydraulically and deposited.  Once the hoppers are filled, the dredger sails to the
designated disposal site and either bottom-dumps the material or pumps the material from the hoppers through a pipeline to a designated
location.  Hopper dredgers can operate in rough waters, and are less likely to interfere with ship traffic than other
types of dredgers.  They can also move quickly from one project to another.



Cutter suction dredgers remove material using a revolving cutter
head which cuts and churns the sediment on the ocean floor and hydraulically pumps the material by pipe to the disposal location.  These
dredgers are very powerful and can dredge some types of rock.  Certain materials can be directly pumped as far as seven
miles with the aid of booster pumps.  Cutter suction dredgers work with an assortment of support equipment that assists
with the positioning and movement of the dredger, handling of the pipelines, and the placement of the dredged material.



Grab dredgers are a type of mechanical dredger that remove hard-packed
sediments and debris and can work in tight areas, such as areas along docks or terminals.  Grab dredgers with specialized
buckets are more suitable for handling material requiring controlled disposal.  The dredged material is placed onto material
barges for transport to the designated relocation site.  The barges are emptied by bottom-dumping, direct pump-out or
removal by crane.



The following table sets forth information regarding the vessels
we operate as of the date of this Report:



|Trailer Suction
Hopper Dredgers |  | Capacity
(cubic
meters per
hour) |  | Leased/Owned |  | Purchase/Lease Date |  | Year Built
|------------------------------- |  | -------------------------------- |  | ------------ |  | ------------------- |  | ----------
|Hengshengjun #88                |  | 3,500                            |  | Leased       |  | January 2008        |  | 1983      
|Liya #10                        |  | 6,500                            |  | Leased       |  | June 2010           |  | 1990      
|Fuyuan #7                       |  | 7,000                            |  | Leased       |  | July 2011           |  | 2009      



|Non-Self-Propelling Cutter
Suction Dredgers |  | Capacity
(cubic
meters per
hour) |  | Leased/Owned |  | Purchase/Lease Date |  | Year Built
|------------------------------------------- |  | -------------------------------- |  | ------------ |  | ------------------- |  | ----------
|Xinggangjun #3                              |  | 2,000                            |  | Owned        |  | May 2008            |  | 2008      
|Xinggangjun #66                             |  | 3,500                            |  | Owned        |  | March 2008          |  | 2008      
|Xinggangjun #6                              |  | 2,500                            |  | Owned        |  | May 2008            |  | 2008      
|Xinggangjun #9                              |  | 2,500                            |  | Owned        |  | June 2008 (1)       |  | 2008      
|Xiechang #18                                |  | 2,500                            |  | Leased       |  | June 2010           |  | 2009      
|Honglinjun #19                              |  | 3,800                            |  | Leased       |  | April 2011          |  | 2009      
|Fuyuan #5                                   |  | 3,000                            |  | Leased       |  | July 2011           |  | 2009      
|Minningdejun #0099                          |  | 2,500                            |  | Leased       |  | September 2011      |  | 1986      



|Grab Dredgers |  | Capacity
(cubic
meters per
hour) |  | Leased/Owned |  | Purchase/Lease Date |  | Year Built
|------------- |  | -------------------------------- |  | ------------ |  | ------------------- |  | ----------
|Hengshunda #1 |  | 350                              |  | Leased       |  | June 2011           |  | 2007      
|Liya #2       |  | 350                              |  | Leased       |  | June 2011           |  | 2006      



| | (1) | We commenced leasing Xinggangjun #9 in June 2008 and acquired it in January 2011.
| | --- | ---------------------------------------------------------------------------------



24











In May 2009 we entered into a purchase agreement with Yiyang
Zhonghai Vellel LLC, or Yiyang, an unrelated company, for a new non-self-propelling cutter suction dredger, at a purchase price
of approximately $31.8 million, on which we made a down payment of approximately $2.4 million. The contract stipulates that payments
toward the purchase price of the new dredger, after giving effect to the down payment, are payable according to the following schedule:
30% within three months after delivery, 25% within six months after delivery, 25% within nine months after delivery and 20% within
twelve months after delivery. Delivery of the vessel is expected in or before May 2012.



In May 2011, we entered into a construction agreement with Yiyang
to build a new non-self-propelling 3,800 cubic meter per hour cutter suction dredger, for approximately $41.3 million (RMB260 million).
Construction is expected to take approximately 18 months. We made a down payment of approximately of $20.7 million. Payments toward
the construction price of the new dredger after giving effect to the down payment, are to be made by us as follows: 20% within
seven days after the completion of the main dredger hull, 20% within seven days after the dredger is launched, and 10% after completion
of mooring trial of the dredger but before delivery. Delivery of the vessel is expected in or before December 2012. We will withhold
approximately $0.1 million as quality earnest money, to be paid after a one-year warranty period.



Component Suppliers



We purchase supplies and component parts from recognized suppliers
with pricing terms negotiated on a yearly basis. These contracts are generally fixed price supply contracts, under which we are
obligated to procure a fixed amount of supplies and consumable parts annually. The following table sets forth information regarding
the suppliers that, as of December 31, 2011, 2010 and 2009 are listed below.



|Supplier                                                      |  | Vessel Component List                                                                |  | Purchase
        Amount in
        2011
        ($ in
        millions) |  | Purchase
        Amount in
        2010
        ($ in
        millions) |  | Purchase
        Amount in
        2009
        ($ in
        millions) | 
|------------------------------------------------------------- |  | ------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------- |  | ----------------------------------------------------------------------- |  | ----------------------------------------------------------------------- | 
|Dalian Locomotive and Rolling Stock Co., Ltd. CNR Group       |  | Mud tube, steel tube, floating body, anchors floating, rubber hose, etc.             |  | 8.3                                                                     |  | 9.6                                                                     |  | 19.5                                                                    | 
|Tianjin Puyou Mech. & Elec. Equipment MFG. Co., Ltd.          |  | Anchor, pump, solenoid valve,   governor rotating components, pressure sensors, etc. |  | -                                                                       |  | -                                                                       |  | 9.2                                                                     | 
|Taizhou Haiguang Mechanical Manufacturing Industrial Co., Ltd |  | Steel plate, angle iron,   one-piece compound plate, etc.                            |  | 1.6                                                                     |  | 1.4                                                                     |  | 1.5                                                                     | 
|Shijiazhuang Shengshi Pump Industry Co., Ltd                  |  | Rake head, lacquer, seal ring,  steel tube, etc.                                     |  | 10.1                                                                    |  | 9.1                                                                     |  | -                                                                       | 
|Sinohydro Bureau 13 Co., Ltd Rubber & Plastic Factory         |  | Floating pipe, rubber hose,   rubber mat, etc.                                       |  | 13.5                                                                    |  | 9.1                                                                     |  | -                                                                       | 



Purchasing of major components such as mud pipes are budgeted
and ordered after thorough on-site investigation and a calculation of the demands of each project, and usually are exclusively
used in one project. We usually buy an extra percentage of each component to use as replacement parts. All materials bought from
these four suppliers are delivered to the construction site of each project after the suppliers have received payments. After completion
of each project, used and abandoned components are sent back to the suppliers.



Dredging Service Procedure







Dredging Methods



Three dredging methods are commonly used: the stow-and-hold
method, the side discharge method and the reclamation method. Our trailing suction hopper dredgers use the stow-and-hold method,
which is illustrated in the following chart:









25







Our cutter suction dredgers use the reclamation method, which
is illustrated in the following chart:







Our grab dredgers use the side discharge method, which is illustrated
in the following chart:







Quality, Safety and Environmental Protection Control



We have established and implemented a unified quality, safety
and environmental protection control and management system that govern all projects. The management system specifies the standards
to be met in terms of quality, safety and environmental protection control, clarifies the responsibility of various departments
and personnel, identifies procedures, materials and other factors that are subject to the control of management, and provides for
measures to be undertaken to ensure that various standards are met. We are committed to achieving a high standard of quality in
the management and performance of our contract work. We believe we have established a favorable reputation for quality and technical
ability.



We have a Safety and Dispatching Department which is responsible
for regulating labor, hygiene and safety conditions, and monitoring compliance with statutory environmental regulations relating
to air, water, noise and solid waste pollution. Department managers focus on applying safety and anti-pollution measures, as well
as regular internal safety and environmental inspections, at all stages of the operational process to reduce the possibility of
work-related accidents and injuries, occupational illness and environmental contamination. Our general contractor customers also
monitor the safety of workers and environmental impact of our work. It is our policy and practice to provide safety education to
employees and safety standards have been established in connection with matters such as purchasing, installing and operating new
equipment, constructing new facilities and improving existing facilities.



We seek to develop new technology
and operational know-how to improve safety conditions and to protect the environment. Management believes that our safety control
systems, environmental protection systems and facilities are adequate to comply with applicable PRC national and local regulations.



Customers



We have established close, cooperative relationships with China
Communications, the largest state-owned general contractor in the PRC that undertakes dredging projects, and with and Changjiang
Waterway. The following table sets forth all our customers, the revenues derived from such customers, and the percent of total
revenue for the periods indicated:



|                                                                  |  | For the Years Ended December 31, |            
|----------------------------------------------------------------- |  | -------------------------------- | -----------
|                                                                  |  | 2011                             |            
|Customer                                                          |  | Revenue                          |            
|CCCC Guangzhou Dredging Co., Ltd (State-Owned)                    |  | $                                | 29,254,980 
|Shenzhen Guoyuan Engineering Co., Ltd                             |  |                                  | 8,470,170  
|CCCC Shanghai Dredging Co., Ltd (State-Owned)                     |  |                                  | 76,019,835 
|SDC Waterway Construction Co., Ltd.(Stated Owned)                 |  |                                  | 13,193,095 
|Changjiang Wuhan Waterway Engineering Company (State-Owned)       |  |                                  | -          
|Guangdong Jindonghai Holding Co., LTD                             |  |                                  | 22,754,178 
|Tianjin Hongdeshengyu Port Engineering Co., LTD                   |  |                                  | 15,541,267 
|CCCC Tianjin Dredging Co., Ltd (State-Owned)                      |  |                                  | 19,507,709 
|China Ocean Engineering Construction General Bureau-Dalian Bureau |  |                                  | 21,413,519 
|China Ocean Engineering Construction General Bureau               |  |                                  | 4,028,783  
|ShenZhen Hangfeng Dredging Engineering Co., Ltd.                  |  |                                  | -          
|Dongguan Zhongyan Engineering Co., Ltd.                           |  |                                  | 3,955,814  
|Fujian Jingwei Group Co., Ltd.                                    |  |                                  | 3,542,796  
|Lianyungang Changxing Engineering Co., Ltd.                       |  |                                  | 9,270,924  
|Total                                                             |  | $                                | 226,953,070



26







Through our performance in a diverse range of dredging projects,
we believe we have developed a favorable reputation among local governments, suppliers and contractors, as well as a loyal customer
base.



Competition



We face significant competition in the PRC markets in which
we operate. Our competition comes from various sources, including the internal operations of our general contractor customers and
numerous private companies providing dredging services as general contractors or subcontractors. Some of our competitors may have
advantages over us in terms of capacity, access to capital pricing and management expertise. Our market position and growth prospects
depend on our ability to anticipate and respond to various competitive factors, including pricing strategies adopted by competitors,
changes in customer preferences or work priorities, availability of capital and financing resources and the introduction of new
or improved equipment, technology and services.



Our current or potential competitors may offer services or products
comparable or superior to those that we offer at the same or lower prices or adapt more quickly than we do to evolving industry
trends or changing market conditions. We may lose our customers to our competitors if, among other things, we fail to keep our
prices at competitive levels or to sustain and upgrade our capacity and technology. Increased competition may result in price reductions,
reduced profit margins and loss of market share.



Intellectual Property



We have no material intellectual property.



Research and Development



As part of our ordinary business operations, we explore new
and more efficient methods of performing dredging services. However, from inception through December 31, 2011, we have not recorded
any costs that are classified as research and development expenses.



Selected PRC Government Regulations



Principal Regulatory Authorities



We are regulated by several governmental authorities in
China. MOTRAN is responsible for the administration and construction of ports and highways at the national level. The
Ministry of Construction implements centralized supervision and administration on construction works throughout China. The
Development and Reform Commission, either at the provincial or local level, is responsible for the investment plan
of transportation construction works. The transportation administration authorities, either at the provincial or local level,
are responsible for the construction plan of transportation construction works. The construction administration authorities,
either at the provincial or local level, are responsible for the examination and approval of transportation construction
works.



Administration of Qualifications



Responsible Regulatory Authorities



Under the provisions of the Port Law of the PRC, or the Port
Law, which took effect in January 2004, and the Construction Law, which took effect in March
1998, and other relevant laws and regulations, an enterprise engaged in construction, reconnaissance, design and supervision activities
for water transport and other construction engineering works may only enter into those contracts for which it is qualified. The
Ministry of Construction and the provincial level administrative authorities responsible for construction works oversee issues
relating to the issuance and application of contractor qualifications. MOTRAN and its provincial-level administrative authorities
are responsible for communications to coordinate with the Ministry of Construction and provincial-level administrative authorities
are responsible for administration and enforcement of qualification requirements for construction performed in their respective
jurisdictions.



Qualification Categories for Construction Enterprises



Qualification of construction enterprises can be divided into
three categories: general contractors, professional services contractors and labor services sub-contractors.



27







| | · | A general contractor is permitted to contract for the overall work entailed in a project. A general
contractor can perform all works that are contracted for itself, or subcontract non-core construction works or labor services to
qualified professional services contractors or qualified labor services sub-contractors.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | A qualified professional service contractor may enter into a contract to provide professional
services subcontracted out by a main contractor. Under such contracts, a professional services contractor may undertake all of
the contracted work by itself, or subcontract out the labor services to qualified labor services sub-contractors.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | A qualified labor services sub-contractor may enter into a contract to provide labor services
contracted out by a general contractor or a professional services contractor.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of the date of this Report, we function as a qualified professional
service contractor.



Criterion for Qualifications of Construction
Enterprises



The Qualification Regulations, jointly issued by MOFCOM,
the PRC Ministry of Railways and other related government authorities, set forth the criteria for three different levels of
construction work qualifications.  Fujian Service has obtained the Level-III qualification for enterprises
undertaking waterway engineering projects and plans to apply for the Level-II qualification, which is superior to the
Level-III qualification. According to the Qualification Regulations, the criteria for Level-II qualification are as follows:
(i) the applicant should have completed at least 3 out of 5 types of projects listed below in recent 5 years: 20,000 tons of
coastal or 300 tons of inland navigation channel, 2,000,000 cubic meters of dredging projects, 1,500,000 cubic meters of
reclamation projects, 10,000 cubic meters of reef removing projects, a single port contract valued at $5,860,000 or a
river navigation project contract valued at $2,930,000; (ii) the project manager of the applicant should have no less than 10
years of experience in construction management with a minimum of mid-level class qualification; the chief engineer of the
applicant should have no less than 10 years of experience in engineering construction technical management with senior
professional qualification; the chief accountant of the applicant should have a minimum of mid-level accountant
qualification; the applicant should have no less than 150 engineers and financial managers, of which at least 80 engineers
(at least 10 with senior professional qualification and 20 with mid-level qualification); (iii) the registered capital of the
applicant should be no less than $2,930,000 and the net assets should be no less than $3,660,000; (iv) the highest annual
project revenue in recent 3 years should be more than $5,860,000; (v) the applicant should have at least one 500 cubic meter
per hour trailing suction hopper dredger or one 1,000 cubic meter per hour sucking vessel, or one mud-blowing vessel, one 400
cubic meter per hour cutter suction dredger, and one dredger with 2 cubic meter volume; and (vi) the applicant should have
GPS and depth finder.  Fujian Service has met all of the criteria for Level-II qualification, except the following:
(i) it does not have a dredger with 2 cubic meter volume; (ii) it does not have 150 or more engineers and financial managers;
(iii) the project manager does not have 10 years or more experience in construction management with a minimum of mid-level
class qualification. Fujian Service plans to recruit personnel with the requisite experience and qualifications and to
purchase a dredger with 2 cubic meter volume in order to be eligible for the Level-II qualification. However, it may take
significant time for Fujian Service to meet such criteria.



Supervision of Quality



Under the Supervision of Quality Regulations, sponsoring
enterprises, reconnaissance firms, design firms, construction enterprises and project supervisory enterprises will all be
responsible for the quality of construction projects. For complex construction projects that are governed by a main contract,
the general contractor is responsible for the quality of the whole construction project and, where it subcontracts part of
the project work, the subcontractors will be jointly and severally responsible for the quality of the construction work. If
Fujian Service does not comply with the Supervision of Quality Regulations, it may be subject to fines, suspension of
operations, degradation of the construction qualification, rework, repair and compensation. As of the date of this Report,
none of these penalties has been imposed Fujian Service.
Construction enterprises should present quality guarantees and maintenance certificates to the sponsoring enterprises when
tendering the project completion report to the sponsoring enterprises.



Construction Law



According to the Construction Law and other related
regulations, if a general contractor subcontracts part of the projects to subcontractors with appropriate qualifications,
except for the subcontracting as permitted in the general contracting agreement, prior approval from project owners is
required. According to the Interpretation by the PRC Supreme Court Concerning the Application of Law in Trial of Dispute
Cases Involving Construction Project Contracts, if a contractor illegally assigns or subcontracts the construction project,
such act is invalid. The people’s court may confiscate the illegal income already obtained by the party. Among the
current and effective subcontracts to which Fujian Service is a party, only a few of them have obtained the approval from the
project owner. Fujian Service has not been involved in disputes with general contractors or project owners so far, but it may
encounter such disputes in the future. In the event a court determines that a general contractor has subcontracted the
construction project illegally, the revenues of Fujian Service may be confiscated, which could materially and adversely
affect China Dredging’s business and results of operations. See “Risk Factors — Risks Relating to
Doing Business in the PRC — Fujian Service has not obtained the consents from construction project owners for
a substantial number of contracts in-progress and which therefore may be held invalid and subject it to confiscation of the
associated income.”



28







Administration of Acceptance and Inspection for Completion



Pursuant to the Measures for Acceptance and Inspection for the
Completion of Waterway Projects which took effect on March 1, 2008, upon completion of a port or waterway project, the project
will be put into operation only after acceptance and inspection by the relevant construction authorities. It is the project owner’s
obligation to apply to the administrative construction authorities for the acceptance and inspection of the project.



Environmental Protection Rules and Regulations



The Environmental Protection Law of the PRC, which took effect
in December 1989, and the Marine Environmental Protection Law of the PRC, or the MEP Law, which took effect in March 1983 and amended
in December 1999, provide that the State Environmental Protection Administration and the State Oceanic Administration oversee land
and ocean environmental protection.



Pursuant to the Environmental Protection
Law, the State Environmental Protection Administration sets the national discharge standards for pollutants. The government of
provinces, autonomous regions and directly administered municipalities may issue local standards that are stricter than the national
standards on the pollutants which are covered by the State standards. As to the pollutants which are not covered by the State standards,
the government of provinces, autonomous regions and directly administered municipalities may issue local standards. An entity discharging
pollutants in a region that has local standards must comply with the local standard for the discharge of pollutants. Entities discharging
pollutants must report to and register with the environmental protection authorities. Entities discharging pollutants in excess
of the standards must pay a charge for the excessive discharge and assume responsibility for the remediation of the pollution.



The MEP Law prohibits the discharge of certain pollutants into
the sea under the jurisdiction of the PRC. All entities and individuals practicing direct discharge of pollutants into the sea
shall, in accordance with the State regulations, pay pollutant discharging fees. Those who dump waste shall, in accordance with
the State regulations, pay dumping fees. According to the MEP Law, the relevant government authorities may impose different penalties
against persons or enterprises in violation of the MEP Law depending on the individual circumstances and extent of contamination.
Such penalties include warnings, fines, imposition of deadlines for cure, orders to pay a pollutant discharge fee, payment of the
cost for eliminating the pollution and compensation for the losses incurred by the state. According to the Regulations of the PRC
on the Control over Prevention of Pollution by Vessels in Marine Environment promulgated by the State Council, vessels should also
be equipped with all marine environment pollution prevention documents as required by the applicable laws, regulations and international
treaties, and, the owner and the operator of the vessels of Chinese registry should establish the management system for safety
operation and pollution prevention. Furthermore, all the owners of the vessels navigating in Chinese water must purchase the Ship
Pollution Liability insurance, or obtain the relevant financial guarantee, and such insurance coverage should be no less than the
oil pollution compensation limitation required by applicable laws and international treaties.  We have Ship Pollution
Liability insurance for the dredgers we own. All the dredgers owned or leased by us are equipped with the oil pollution prevention
certificates. Compliance with these regulations requires significant financial and other resources to establish effective compliance
and monitoring systems.



Construction Work Safety Regulations



The regulations governing work safety for Fujian Service’s
business are the Work Safety Law, the Regulations on License for Work Safety and the Regulations on Administration of Work Safety
of Construction Projects.



According to the Work Safety Law of the PRC that took effect
in November 2002, the State Administration of Work Safety of the PRC is in charge of the overall administration of work safety
nationwide. The Ministry of Construction and the MOTRAN are also responsible for the administration of work safety of the relevant
industries.



The Work Safety Law provides that a production entity must meet
the state’s legal standard or industrial standard on work safety and provide work conditions set out in relevant laws, administrative
rules and State or industry standards. An entity that cannot provide required work conditions may not engage in production activities.
The designers and the design firms for the safety facilities of a construction project are liable for their designs. A production
entity must install prominent warning signs at relevant dangerous operation sites, facilities and equipment.



Pursuant to the Regulations on Licenses for Work Safety promulgated
by the State Council, which took effect in January 2004, a construction entity should not engage in construction activities unless
it has a license for work safety.  Fujian Service obtained the license for work safety on August 10, 2011.



29







Pursuant to the Regulations on Administration of Work
Safety of Construction Projects promulgated by the State Council, which took effect in February 2004, the sponsoring enterprise,
reconnaissance enterprise, design enterprise, construction enterprise, supervisory enterprise and other related entities bear their
respective responsibility for work safety. In the case of a project covered by a main contract, the general contractor will be
liable for the general work safety of the construction site, and assume joint and several obligations for the sub-contracted portions
of the project together with the sub-contractors. An entity in the construction industry must purchase accidental injury insurance
for the workers engaged in dangerous works on the construction site for injuries suffered in work-related accidents, and the insurance
premium will be paid by such entity. In the case of a construction work covered by a general contract, the insurance premium will
be paid by the general contractor. The period covered by the insurance policies should commence on the commencement date of the
construction project and terminate on the date of the acceptance and inspection upon the completion of the project.



Above-water and Under-water Construction Work Permission
Regulation



MOTRAN has promulgated the Above-water and Under-water
Regulation, which took effect in January 2000. The Above-water and Under-water Regulation provides that the project owner or the
constructing enterprise in above-water or under-water construction work must apply to the local maritime affairs authorities for
inspection of safe navigation and construction, and may not commence any construction works until it has obtained the permit for
above-water or under-water construction work upon inspection. Under the Above-water and Under-water Regulation, the project owner
or the contractor of a construction project is required to obtain the permit for above-water and under-water construction works
and navigation. However, it is not explicitly specified whether the project owner, the general contractor or the various subcontractors
are ultimately responsible for obtaining the permit. If the permit is not obtained upon the commencement of an above-water or under-water
construction project, the relevant government authorities may impose penalties upon any of the enterprises involved in the project
for violation of such regulations. The penalties may include fines and orders to rebuild, move or remove the works. Fujian
Service has not obtained such permit for its construction works. Although Fujian
Service has not received any notice regarding penalties, it may be subject to penalties due to non-compliance.



Business License



Fujian Service’s most recent business license was issued
in November 2010 by the Fujian Provincial Industry and Commerce Administration with term of operation from January 2008 to January
2028. The scope of Fujian Service’s business license covers Fujian Service’s present business to undertake port dredging
and navigation channel dredging and to sell construction material, machinery and electrical equipment and parts.



Fujian WangGang was established as a WFOE and issued a business
license in June 2010 by the Fujian Provincial Industry and Commerce Administration, with term of operation from June 2010 to June
2060. According to the articles of association and business license of Fujian WangGang, the scope of Fujian WangGang’s business
covers port dredging, navigation channel dredging and investment in other enterprises within the same industry.



Regulations Related to the Ship Nationality Registration



According to the Regulation of Ship Registration of the
PRC and other related regulations, a ship owned by the enterprise with more than 50% foreign ownership may not be registered
with China nationality. In addition, a ship without a China nationality is not allowed to operate within PRC waters. According to the requirements of the Rules of PRC Governing Vessels of Foreign Nationality, effective as of September
18, 1979, and other applicable rules and regulations, foreign vessels are required to obtain applicable permissions from the
PRC administrative authorities for port entries into, navigations in, and exits from the PRC inland waterways and territorial
seas. Consequently, the business operations of our operating company, Fujian Service, will be adversely affected if its
foreign-owned equity is increased to more than 50%.



Regulations Related to Foreign-Invested Construction Enterprises



The RAFCE provides that wholly foreign-owned
construction enterprises may only undertake certain types of construction projects prescribed by the RAFCE within the scope of
their qualifications. In the case of a Chinese-foreign construction joint venture enterprise, the foreign ownership should be no
more than 75%. The 50% equity interest of Fujian Service is held by Wonder Dredging, a domestic PRC enterprise, and the remaining
equity interest of Fujian Service is held by Fujian WangGang, a WFOE. Accordingly, the foreign ownership of Fujian Service is no
more than 50%.



Regulations on Foreign Exchange Registration of Overseas
Investment by PRC Residents



Under SAFE Circular No. 75, PRC citizens and residents without
PRC citizenship must register with the relevant local SAFE branch prior to their establishment or control of an offshore entity
established for the purpose of an overseas equity financing involving onshore assets or equity interests held by them, and must
also make filings with SAFE thereafter upon the occurrence of certain material capital changes. The registration and filing procedures
under SAFE Circular No. 75 are prerequisites for other approval and registration procedures necessary for capital inflow from the
offshore entity, such as inbound investments or shareholders’ loans, or capital outflow to the offshore entity, such as the
payment of profits or dividends, liquidating distributions, equity sale proceeds or the return of funds upon a capital reduction.



30







A notice issued by SAFE in May 2007, or Circular 106, provides
more detailed provisions and requirements regarding the foreign exchange registration under SAFE Circular No. 75. Under Circular
106, the PRC subsidiary of an offshore SPV is required to coordinate and supervise the filing of foreign exchange registrations
by the offshore holding company’s shareholders who are PRC residents in a timely manner. Furthermore, individuals who do
not have domestic legal status in the PRC but reside in the PRC habitually for the purpose of economic interests are also subject
to the foreign exchange registration procedure regardless whether he or she has a PRC statutory identification certificate. Such
procedure includes (i) individuals who have domestic permanent residence and leave their domestic permanent residence temporarily
for reasons such as overseas travel, study, medical treatment, work, or the requirements of overseas residence; (ii) individuals
who hold domestic-funded rights and interests in domestic enterprises; or (iii) individuals who hold domestic-funded rights and
interests in domestic enterprises which were converted into foreign-funded rights and interests with the same individual holding
the aforementioned rights and interests.



A notice issued by SAFE on May 20, 2011, or Circular 19, further
provides detailed provisions and requirements regarding the foreign exchange registration under SAFE Circular No. 75. Under Circular
No. 19, any PRC citizen, resident, or entity which is a direct or indirect shareholder of an SPV is required to update the previously
filed registration with the local branch of SAFE, with respect to that SPV, to reflect any material change. Moreover, any SPV which
fails to comply with Circular No. 75 may rectify to make the registration with the local branch of SAFE after fulfillment of the
administrative penalties imposed by the related SAFE branch.



We conduct business in China primarily through contractual arrangements
with Wonder Dredging and its respective shareholders. The shareholders of Wonder Dredging are Qing Lin and Panxing Zhuo. Because
our founder and controlling shareholder, Mr. Xinrong Zhuo, obtained his Hong Kong identity card in 2005 and surrendered his PRC
identity subsequently thereto but still resides in mainland China, there is a risk that he may be determined as the PRC resident
defined in SAFE Circular No. 75. Due to the uncertainty over how SAFE Circular No. 75 will be interpreted and implemented, we cannot
predict how it will affect our business operations or future strategies. If SAFE Circular No. 75 were determined to apply to us
or any of our PRC resident shareholders, none of whom has made registrations or filings according to SAFE Circular No. 75, a failure
by any of our shareholders or beneficial owners to comply with SAFE Circular No. 75 may subject the relevant shareholders or beneficiaries
to penalties under PRC foreign exchange administrative regulations, and may subject us 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 and capital inflow from the offshore entity, which would have a material adverse effect on our business,
financial condition, results of operations and liquidity as well as our ability to pay dividends or make other distributions to
our shareholders. In addition, we may not be informed of the identities of the beneficial owners of our company and our Chinese
resident beneficial owners, if any, may not comply with SAFE Circular No. 75. The failure or inability of our beneficial owners
who are PRC citizens, residents or entities to make or amend any required registrations may subject these PRC residents or our
PRC subsidiary to fines and legal sanctions, and may also limit our ability to contribute additional capital into our PRC subsidiaries
and limit our PRC subsidiaries’ ability to make distributions or pay dividends to us, as a result of which our business operations
and our ability to distribute profits to you may be materially and adversely affected.



M&A Regulations and Overseas Listings



In 2006, six PRC regulatory agencies, including the CSRC, promulgated the M&A
Regulations, which took effect in September 2006. The M&A Regulations purports to require an offshore SPV to obtain the approval
of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange, and under the M&A
Regulations, an SPV is defined as an offshore company directly or indirectly controlled by PRC domestic companies or individuals
for the purposes of listing the equity interests in PRC companies on overseas stock exchanges. In September 2006, the CSRC published
on its official website the procedures regarding its approval of overseas listings by SPVs. The approval procedures require the
filing of a number of documents and would take several months. However, it remains unclear whether the M&A Regulations and
the requirement of CSRC approval apply to an offering by us. As of the date of this Report, the CSRC has not issued any
rules or written interpretation clarifying whether offerings such as those we have conducted or may in the future conduct are subject
to this new procedure.



Our PRC legal counsel, based on its understanding of current
PRC laws, regulations and rules, has advised us that the M&A Regulations are not applicable to us or the series of transactions we
previously consummated to establish our current corporate structure, and that any potential quotation our securities on the OTCBB
or any listing and trading of our securities on a U.S. stock exchange would not require CSRC’s approval because our founder
and controlling shareholder, Mr. Xinrong Zhuo, is not a mainland PRC natural person. However, the relevant PRC government authorities,
including MOFCOM and the CSRC may reach a different conclusion than our PRC counsel. If prior approval from MOFCOM or the CSRC
is required but not obtained, we may face sanctions by MOFCOM, the CSRC or other PRC regulatory agencies. Consequently, MOFCOM,
the CSRC or other PRC regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operations in
the PRC, or take other actions that could have a material adverse effect on our business, financial condition, results of operations,
reputation and prospects, as well as the trading price of our securities. MOFCOM, the CSRC or other PRC regulatory agencies may
also take actions requiring us, or making it advisable for us, not to commence a public offering. We would have to file the documents
as required and comply with any sanctions imposed by the relevant regulatory agencies if such approval is required.



31







Regulations of Security Review



The Regulations of Security
Review provide that any foreign investor should file the application to the MOFCOM for the merger and acquisition of
domestic enterprises in sensitive sectors or industries. Furthermore, the Regulations of Security Review shall not be
substantially evaded by VIE control or any other methods. The Circular of Security Review was put into effect on March 5,
2011. As our current ownership structure and contractual arrangements were established before 2011, our PRC counsel has
advised us that the Regulations of Security Review do not apply to us or the series of
transactions we previously consummated to establish our current corporate structure. However, the relevant PRC
regulatory authorities may have a different view or interpretation in this regard when implementing the Regulations of
Security Review. As a result, our future mergers and acquisitions of PRC domestic enterprises may be subject to PRC security
review, which could be time-consuming and complex, and in turn affect our ability to expand our business or maintain our
market share.



Employment Laws



We are subject to laws and regulations governing
our relationship with our employees, including: wage and hour requirements, working and safety conditions, citizenship requirements,
work permits and travel restrictions. These include local labor laws and regulations, which may require substantial resources for
compliance. Fujian Service has been issued, and Fujian WangGang is in the process of application for the statistic registration
certificate and social insurance registration certificate.



China’s Labor Law, which became effective in January
1995, and China’s Labor Contract Law, which became effective in January 2008, provide for strong protection for the employees.
According to the Labor Contract Law, employers have the obligation to enter into written labor contracts with employees to specify
the key terms of the employment relationship. The law also stipulates, among other things, (i) that all written labor contracts
shall contain certain requisite terms; (ii) that the length of trial employment periods must be in proportion to the terms of the
relevant labor contracts, which in any event may not be longer than six months; (iii) that in certain circumstances, a labor contract
is deemed to be without a fixed term and thus an employee may only be terminated with cause; and (iv) that there are certain restrictions
on the circumstances under which employers may terminate labor contracts as well as the economic compensations to employees upon
termination of the employee’s employment.



Housing Fund Law



Under the Administrative Regulation on Housing Fund, an employer
must make a housing fund payment and deposit registration upon its establishment and pay the housing fund for and on behalf of
its employees at a percentage between 5% and 12% of the respective employee’s monthly average wage of the preceding year.
Where an employer fails to make the housing fund payment and deposit registration, the housing fund administration authority may
order it to complete the registration within a time limit or be assessed a fine of RMB10,000 to RMB50,000. Where an employer fails
to make the housing fund payment for and on behalf of its employees within the time limit or under the requisite percentage, it
may be ordered by the housing fund administration authority to deposit the fund within a time limit, together with late fees of
0.03% of such amount; otherwise, the authority may apply to the local court for enforcement.



Fujian Service has not made the housing fund payment and deposit
registration or paid the housing fund for and on behalf of its employees due to inconsistent implementation and interpretation
by local authorities in the PRC and different levels of acceptance of the social security system by employees. In the future, Fujian
Service may be required to make such past housing fund payments, pay late fees, and pay fines for non-compliance. Any judgment
or decision against Fujian Service in respect of outstanding housing fund matters could have an adverse effect on our results of
operations. See “Risk Factors — Risks Relating to Doing Business in the PRC — Fujian Service
has not made past housing fund payments for and on behalf of its employees and may be required to make such payments and may be
subject to fines or penalties.”



Regulations on Foreign Currency Exchange



Under BVI law, there is no exchange control legislation and
accordingly there are no exchange control regulations imposed under BVI law, including foreign exchange controls or restrictions,
that affect the remittance of dividends, interest or other payments to BVI nonresident holders of our shares.



Foreign currency exchange in the PRC is governed by a series
of regulations. One of the key regulations governing foreign currency exchange in China is the Foreign Exchange Administration
Regulation, most recently amended on August 5, 2008. Under this regulation, Renminbi is freely convertible only to the extent of
current account items, such as trade-related receipts and payments, interest and dividends. Capital account items, such as direct
equity investments, loans and repatriation of investment, require the prior approval from SAFE or its local branch for conversion
of Renminbi into a foreign currency, such as U.S. dollars. Payments for transactions that take place within the PRC must be made
in Renminbi. Domestic companies or individuals can repatriate foreign currency payments received from abroad, or deposit these
payments abroad subject to the requirement that such payments by repatriated within a certain period of time. Foreign-invested
enterprises may retain foreign exchange in accounts with designated foreign exchange banks. Foreign currencies received for current
account items can be either retained or sold to financial institutions that have foreign exchange settlement or sales business
without prior approval from SAFE, subject to certain regulations. Foreign exchange income under capital account can be retained
or sold to financial institutions that have foreign exchange settlement and sales business, with prior approval from SAFE, unless
otherwise provided.



32







On March 3, 2003, SAFE issued the Notice
on the Relevant Issues concerning the Improvement of Foreign Exchange Administration of Direct Investments by Foreign Investors
which provides that the capital contributions by foreign investors in a foreign-invested enterprise should be reviewed and approved
by SAFE or its local counterpart.



On August 29, 2008, SAFE issued another circular, or Circular
142, which regulates the conversion by foreign-invested enterprises of foreign currency into Renminbi by restricting how the converted
Renminbi may be used. Circular 142 requires that Renminbi converted from the foreign currency-dominated capital of a foreign-invested
enterprise may only be used for purposes within the business scope approved by the relevant government authority and may not be
used to make equity investments in PRC, unless specifically provided otherwise. SAFE further strengthened its oversight over the
flow and use of Renminbi funds converted from the foreign currency-dominated capital of a foreign-invested enterprise. The use
of such Renminbi may not be changed without approval from SAFE, and may not be used to repay Renminbi loans if the proceeds of
such loans have not yet been used. Any violation of Circular 142 may result in severe penalties, including substantial fines.



In addition, under the Regulations of Settlement, Sale and Payment
of Foreign Exchange issued by the PBOC, foreign invested enterprises are required to comply with certain procedural requirements
to settle foreign currencies, such as providing valid commercial documents and, in the case of capital account item transactions,
obtaining approval from SAFE or its local counterpart. Furthermore, the PRC entity cannot settle foreign currencies, including
loans or direct investments, from offshore entity or natural persons without the prior approval by SAFE or its local counterpart.



We have historically received substantially all of our revenues
in Renminbi and we expect that to continue to be the case in the foreseeable future. Our inability to obtain the requisite approvals
or any future restrictions on currency exchanges could limit our liability to utilize revenue generated in Renminbi to fund our
business activities outside the PRC, or to repay foreign currency obligations. See “Risk Factors — Risk Relating to
Doing Business in the PRC — Currency fluctuations and restrictions on currency exchange may adversely affect our business,
including limiting our ability to convert Renminbi into foreign currencies and, if Renminbi were to decline in value, reducing
our revenue in U.S. dollar terms.”



Furthermore, any loans or direct investments by us in our PRC
entities are subject to the applicable regulations on foreign currency exchange. We may not be able to obtain the required registration
on a timely basis.



Administration of Foreign Debts



According to the Interim Provisions on the Administration of
Foreign Debts jointly issued by the National Development and Planning Commission of the PRC, the Ministry of Finance of the PRC
and SAFE, or Rule 28, the aggregate of the accumulated medium-term and long-term debts and the balance of short-term debts incurred
by a foreign invested enterprise shall not exceed the difference between the total investment amount in projects and the registered
capital of the foreign invested enterprise approved by the related authorities. Within the range of such difference, a foreign
invested enterprise may borrow foreign loans at its discretion. If the loans exceed such difference, a foreign invested enterprise
should apply to the related approval authority to increase the total investment amount in projects before the loans are made. The
approved total investment of Fujian WangGang is equal to its registered capital. In the event that Fujian WangGang intends to borrow
any foreign loan, Fujian WangGang should apply to the related approval authority to increase its total investment amount in advance.



Regulations on Dividend Distribution



The principal regulation governing distribution of dividends
paid by WFOEs is the Company Law of the PRC (2006), the Wholly-Foreign Owned Enterprise Law (1986), as amended, and the Wholly-Foreign
Owned Enterprise Law Implementing Rules (1990), as amended. Under these regulations, foreign-invested enterprises in China may
pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations.
In addition, a foreign-invested enterprise in China is required to set aside at least 10% of its after-tax profit based on PRC
accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50% of its registered
capital. These reserves are not distributable as cash dividends except upon liquidation. The board of directors, in the case of
a foreign-invested enterprise, or the shareholders at a meeting, in the case of WFOEs, has the discretion to allocate a portion
of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of
liquidation.



33







Annual Inspections



In accordance with relevant PRC laws, all types of enterprises
incorporated under the PRC laws are required to conduct annual inspections with the State Administration for Industry and Commerce
of PRC or its local branches. In addition, foreign-invested enterprises are also subject to annual inspections conducted by other
applicable PRC government authorities. In order to reduce enterprises’ burden of submitting inspection documentation to different
government authorities, the Measures on Implementing Joint Annual Inspection issued by the MOFCOM together with other six ministries
in 1998 stipulated that foreign-invested enterprises shall participate in a joint annual inspection jointly conducted by all relevant
PRC government authorities. Fujian Service and Fujian WangGang have passed all annual inspections since their establishment.



Foreign Investment in PRC Dredging Industry



The Foreign Investment Industrial Catalogue, or the Catalogue
Regulation, jointly issued by the MOFCOM and the National Development and Reform Commission, or the NDRC, in 2007 classifies industries/businesses
into three different categories: (i) encouraged for foreign investment; (ii) restricted for foreign investment; and (iii) prohibited
from foreign investment. According to Guiding the Direction of Foreign Investment Provisions, issued by the State Council, for
any industry/business not covered by any of these three categories, they will be deemed industries/businesses permitted for foreign
investment. Except for those expressly provided restrictions, encouraged and permitted industries/businesses are usually 100% open
to foreign investment and ownership. Fujian Service’s business is not restricted or prohibited from foreign investment by
the Catalogue Regulation.



While foreign ownership of Fujian Service’s business is
permitted without limitation under the Catalogue Regulation, having more than 50% foreign ownership in Fujian Service would prevent
Fujian Service’s vessels from being registered as PRC vessels under the Regulation of Ship Registration of the PRC. To comply
with applicable PRC laws, rules and regulations, we directly own 50% equity interests of Fujian Service, our operating company,
and entered into VIE Agreements with Wonder Dredging, which is a PRC domestic company and legal owner of the other 50% equity interests
of Fujian Service, and the shareholders of Wonder Dredging. We believe these contractual arrangements give us total control and
100% beneficial interest in the 50% of Fujian Service and 100% of Wonder Dredging that we do not directly own. If the PRC government
determines that our contractual arrangements that support the structure for our business operations do not comply with applicable
PRC laws, rules and regulations, we could be subject to severe penalties or be forced to restructure our ownership structure.



C.           Organizational
Structure



We are registered in the BVI and have a 100% economic interest
and exercise 100% voting control over the subsidiaries listed in the table below:



|Subsidiary Name                                |  | Country of
        Registration |  | Economic and Voting Interest    
|---------------------------------------------- |  | ------------------------------- |  | --------------------------------
|                                               |  |                                 |  |                                 
|China Dredging (HK) Company Limited            |  | Hong Kong                       |  | 100% direct                     
|Fujian WangGang Dredging Construction Co. Ltd. |  | PRC                             |  | 100% direct                     
|Fujian Xing Gang Port Service Co. Ltd.         |  | PRC                             |  | 100% (50% direct and 50% as VIE)
|Wonder Dredging Engineering LLC                |  | PRC                             |  | 100% (as VIE)                   



All business operations are conducted in the PRC by Fujian
Service.  The corporate organization structure is also presented in diagram form under the heading “Our
Corporate Structure” and a description of the agreements that convey to us economic interests in and control rights over
Fujian Service and Wonder Dredging are described under the heading “Variable Interest Entity Agreements.”



D.           Property,
Plants and Equipment



Under current PRC law, land is owned by
the state, and parcels of land in rural areas, which is known as collective land, is owned by the rural collective economic organization.
“Land use rights” are granted to an individual or entity after payment of a land use right fee is made to the applicable
state or rural collective economic organization. Land use rights allow the holder the right to use the land for a specified long-term
period. On January 1, 2008, we entered into an office lease with Ping Lin, the wife of Xinrong Zhuo, our Chairman and Chief Executive
Officer, for approximately 1,086 square feet of space located at Floor 18, Tower A, Zhongshan Building, No. 154, Hudong Road, Gulou
District, Fuzhou City, Fujian Province, PRC. This agreement was renewed and extended from January 1, 2010 to December 31, 2015.
Annual lease payments were approximately $12,219 in 2011, $11,653 in 2010, and $8,872 in 2009.



On April 29, 2011, Wonder Dredging entered into an office lease
with Ping Lin, the wife of Xinrong Zhuo, our Chairman and Chief Executive Officer, for approximately 538 square feet of space located
in the same building. Pursuant to the lease agreement, Wonder Dredging is obligated to make annual lease payments of approximately
$6,049.



34







On June 8, 2011, Fujian WangGang entered into an office lease
with Ping Lin, the wife of Xinrong Zhuo, our Chairman and Chief Executive Officer, for approximately 645 square feet of space located
in the same building. Pursuant to the lease agreement, Fujian WangGang is obligated to make annual lease payments of approximately
$7,259.



We do not own or occupy any other property in the PRC or elsewhere
in the world, other than temporary arrangements for project office or storage/staging space that may be contracted from time to
time. We believe that our existing facilities and equipment are well maintained and in good condition, and are sufficient to meet
our needs for the foreseeable future.



ITEM 4A. UNRESOLVED STAFF COMMENTS



Not applicable.



ITEM 5. OPERATING AND FINANCIAL REVIEW
AND PROSPECTS



Management’s Discussion and Analysis
of Financial Condition and Results of Operations



You should read the following discussion and analysis of our
financial condition and results of operations in conjunction with our financial statements and the related notes included elsewhere
in this Report.  The following discussion and analysis contains forward-looking statements that involve risks and uncertainties.  Our
actual results and the timing of selected events could differ materially from those anticipated, believed, estimated or otherwise
indicated.  See “Forward-Looking Statements.” Factors that could cause or contribute to these differences
include those discussed below and elsewhere in this Report, particularly in “Risk Factors.” Unless otherwise indicated,
all results are in US$, are derived from our consolidated financial statements included in this Report, and reflect rounding for
clarity of presentation.  Our financial results include those of Fujian Service for all periods presented and our other
subsidiaries and variable interest entities from the various dates of their incorporation in 2010.



Company Overview



We provide specialized dredging services exclusively to the
Chinese marine infrastructure market.  We conduct our operations through our PRC subsidiary, Fujian Service, which began
operating dredging vessels following its inception in January 2008.  We acquired total control and a 100% ownership interest
in Fujian Service in June 2010 through subsidiary holding companies formed in Hong Kong, China Dredging HK, and the PRC, Fujian
WangGang.  As further described below under the heading “Business Combination and Recapitalization” and under
the heading “Our Corporate Structure,” the acquisition of Fujian Service was effected 50% through a direct investment
commitment and 50% through a series of contractual arrangements we refer to as the VIE Agreements.  The VIE Agreements:



| | · | transferred to Fujian WangGang voting and operational control of the 50% of Fujian Service that
it does not directly own;
| | - | -------------------------------------------------------------------------------------------------------------------------



| | · | conveyed to Fujian WangGang all profits and cash flows derived from the operations of Fujian
Service; and
| | - | ---------------------------------------------------------------------------------------------------------



| | · | granted Fujian WangGang the right to acquire all of the interests in Fujian Service that it does
not directly own for no additional consideration, after giving effect to capital contribution agreements by certain of the parties.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In the short period since the acquisition of Fujian Service,
we have not experienced or become aware of any issues related to the VIE Agreements or their implementation.  However,
the control of Fujian Service through such contractual arrangements, rather than direct ownership, does pose certain risks that
could, among other things, adversely affect our operations and profitability, limit or preclude Fujian WangGang or its parent companies
from deriving cash flow from operations or paying dividends, increase our taxes and trigger regulatory or legal action that could
cause us to modify our corporate structure.  Please see “Risk Factors — Risks Relating
to Doing Business in the PRC.”



The acquisition of Wonder Dredging and Fujian Service as VIE
subsidiaries on June 29, 2010 was deemed to be a combination of entities under common control.  Consequently, these financial
statements have been prepared as if the entities in the group had always been consolidated.  The financial statements
are principally those of Fujian Service with the other group members included from their various dates of incorporation in 2010.  The
financial statements reflect the capital structure we adopted.



Management determined that the VIE Agreements constituted a
combination of entities under common control.  Our Chief Executive Officer, Mr. Xinrong Zhuo, controlled us and our subsidiary
Fujian WangGang as the 90% owner when we were formed, and he was then diluted to 88.27% after new shareholders acquired our ordinary
shares in May 2010.  Mr. Zhuo also had the right to make all executive and management decisions for Wonder Dredging
and its subsidiary Fujian Service through an agreement with the legal owners, his brother-in-law and father, that predated the
formation of Fujian Service.  Under the agreement, Mr. Qing Lin and Mr. Panxing Zhuo, who hold 100% equity interests
in Wonder Dredging collectively and own 50% equity interests in Fujian Service indirectly, hold those interests as representatives
of the family.



35







Although our services entail dredging site surveys, project
planning, engineering, and project management, these activities are all performed in support of the operations of our dredging
vessels.  The number, type and capacity of those vessels determine the maximum level and scope of our operations.  Fujian
Service began operations with a single dredger and acquired four more dredgers during 2008 by purchase or lease.  In
June 2010, we leased and deployed four additional dredgers, sometimes referred to herein as the 2010 leases, bringing our total
fleet to nine.  In January 2011, we acquired one of the dredging vessels originally leased in 2008.  From April
to November 2011, we entered into leases for three non-self-propelling cutter suction dredgers, one trailing suction hopper dredger
and two grab dredgers, and terminated two lease agreements for one non-self-propelling cutter suction dredger and one trailing
suction hopper dredger, respectively, bringing our total fleet to thirteen. The increases in dredging capacity have permitted us
to commensurately increase the volume of dredging that we have performed.  Contract value in our industry is generally
directly related to the quantity of material dredged, typically expressed in terms of cubic meters.  Pricing for each
cubic meter, or unit, dredged can vary with project conditions and complexity, the distance that dredged material must be moved
after it is excavated, and other factors.



We own and operate four non-self-propelling cutter-suction dredgers
with capacity ranging from 2,000 to 3,500 cubic meters per hour.  We also lease and operate four non-self-propelling
cutter-suction dredgers with capacity ranging from 2,500 to 3,800 cubic meters per hour, three trailer suction-hopper dredgers
with capacities ranging from 3,500 to 7,000 cubic meters per hour, and two grab dredgers with capacities of 350 cubic meters per
hour.  This range of vessel types and sizes gives us the flexibility to bid on different types of projects and, we believe,
additional opportunities to increase our profit margins.  Notwithstanding our diverse fleet and capability to handle
various project types, our business has tended to focus increasingly on reclamation projects. For the years ended December 31,
2011, 2010 and 2009, reclamation dredging projects represented approximately 60.0%, 72.8%, and 80.5% of our total revenues, respectively.  We
believe that our high concentration of reclamation projects will continue because our fleet is well suited to handle reclamation
work and we expect the growth of such projects in the PRC to continue to outpace capital or maintenance dredging.  Nevertheless,
shifts in our service mix are not likely to significantly impact future profitability because, in our experience, we have achieved
similar operating margins across categories of dredging projects.



Because our fleet has been utilized at or near what we believe
to be full capacity since early in 2008 and we perceive opportunities to be awarded future business in excess of our current capacity,
we are seeking to further expand our fleet.  To this end, we are exploring options for acquiring and leasing at least
two additional dredgers that can be integrated into our operations during each of 2012 and 2013.  However, our experience
is that there is a limited availability of high-quality dredgers in the PRC. Therefore, there is considerable uncertainty about
whether or when we will be able to obtain additional dredgers and whether such acquisitions can be made in a cost-effective manner.
If we are unable to expand our capacity through the addition of new dredgers, our revenue growth will be constrained.  If
we are able to obtain additional dredgers, we will likely be required to expend capital in excess of our cash on hand or cash generated
from operations.  However, we are presently unable to quantify such amounts.



Dredging projects awarded in the PRC are highly
concentrated among a small number of general contractors, some of whom share a common parent company.  Accordingly,
as a sub-contractor, our customer concentration is high and we have little ability to negotiate differentiated terms for
contracts comprising the substantial majority of our revenue.  To balance this, we are striving to diversify our
customer base to the extent practicable, but the opportunities to do so are limited. In 2009, all of our revenues were
derived from four customers, two of which shared a common parent company and represented, in the aggregate, 48.8% of our
revenue.  In 2010, three customers shared a common control parent and represented, in the aggregate, 67.5% of our
revenue.  In 2011, four customers shared a common control parent and represented approximately 60.8% of our
revenue. Our concentration of revenue with our largest customer, without aggregating revenues from customers sharing a common
control parent, was 33.5% in 2011, 36.4% in 2010, and 40.3% in 2009. We expect our total revenues to remain heavily
concentrated among a small group of customers for the foreseeable future.



Factors and Trends Affecting our Results of Operations



We believe that the following primary factors affect our revenues
and operating margins:



| | · | Governmental policies and availability of sub-contract opportunities. Our
                                                                                                            opportunities to bid on dredging subcontracts depends significantly upon the PRC government’s public spending on port
                                                                                                            and navigable waterway projects and for land reclamation.  The nature, extent and timing of these projects,
                                                                                                            however, is affected by the interplay of a variety of factors, including the PRC government’s spending commitments to
                                                                                                            improve and maintain marine transportation infrastructure industry and the general conditions and prospects of the PRC
                                                                                                            economy.  The pattern of PRC government spending and economic activity has been robust and growing since the
                                                                                                            inception of Fujian Service and we expect this trend to continue for the foreseeable future, with the result that we believe
                                                                                                            the demand for dredging exceeds the immediate industry capacity and will continue to do so for the foreseeable
                                                                                                            future.  These constrained conditions permit dredging contractors, and sub-contractors such as us, to keep their
                                                                                                            fleet utilization at high levels and give them a limited degree of positive pricing power.  We expect this
                                                                                                            favorable dynamic to continue, and it is the basis of and is evidenced by the positive trend of unit prices that we have
                                                                                                            experienced since 2008.  The intent expressed in the long-term cooperation agreements executed by China
                                                                                                            Communications (through two subsidiaries) and Changjiang Waterway to grow their business with us at rates of 20% per annum or more
                                                                                                            through                                                                                                             2014 is a
                                                                                                            further
                                                                                                            indication of the favorable nature of current market conditions.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



36







| | · | Our dredging fleet capacity to undertake contracts.   Since inception,
we have had more dredging work contracted than we could immediately perform.  We own or lease three trailer suction hopper
dredgers, eight non-self-propelling cutter suction dredgers, and two grab dredgers, and we have entered into agreements to purchase
two new non-self-propelling cutter suction dredgers.  Notwithstanding our current backlog, future revenue growth largely
depends on the addition of new vessels to our fleet.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Our ability to manage our costs under fixed-price contracts.   Substantially
all of our revenue-generating contracts are fixed-price contracts under which we are paid a specified price for our performance
of the entire contract.  Fixed-price contracts carry inherent risks, including risks of losses from underestimating costs
of materials, operational difficulties and other changes that may occur during the contract period.  As a result, we
can only realize profits on these contracts if we successfully estimate project costs and avoid cost overruns.  To limit
our exposures to fixed contract prices, we strive to keep contract durations short (less than one year) and we endeavor to rigorously
manage each individual project.  Short contract periods also limit our exposure to uncertainties in determining final
contract values.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Provision of key supplies and operational support by customers.
                                                                                                              By contract our customers  generally provide key operating supplies (most notably fuel) and support services (such
                                                                                                            as supply ships and tug services for repositioning non-self-propelling dredgers) for our operations.  We believe these arrangements are typical of dredging subcontractors in the PRC, but may not
                                                                                                            reflect the standard market practice of dredging service companies operating outside of the PRC.  Consequently, it
                                                                                                            may be difficult to compare our results of operations with dredging service companies operating elsewhere or which do not
                                                                                                            enjoy similar arrangements.  In our experience, the availability of customer-provided supplies and services has
                                                                                                            lowered our revenues, capital and working capital requirements, and reported costs relative to operations without
                                                                                                            customer-provided supplies and services. We believe that such arrangements have also materially lowered our exposure under
                                                                                                            fixed-price contracts as we do not bear the risk of fluctuations in price or errors in estimating the costs of such
                                                                                                            items.  The historical pattern of customer-provided supplies and support may not continue into the future, though
                                                                                                            each contract included in our backlog provides for such arrangements.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Our ability to operate our dredgers at or above nameplate rates and at high levels of utilization.
  We strive to keep our dredgers in operation 24 hours per day, 7 days per week, the theoretical maximum, and to reduce
downtime for maintenance and redeployment to new dredging sites.  However, as a practical matter, we believe that sustaining
dredger operations in the range of 50 – 60% of the theoretical maximum constitutes full utilization of our dredger
capacity, which we estimate we have achieved since the inception of Fujian Service in 2008.  In general, we accomplish
full utilization by concentrating our business on projects clustered in a single region or geographic area and deploying multiple
dredgers to such areas.  As a result, we work in fewer locations and on fewer individual projects than the number of
dredgers in our fleet, thereby ensuring prompt provisioning of spare parts and reduced downtime for vessel repositioning.  In
addition, we strive to operate and maintain our dredgers and related capital equipment so that they achieve or exceed the manufacturers’
performance specifications.  Our success in implementing these operating strategies directly affects our effective capacity,
dredging volumes and revenues.  These strategies also allow us to reduce unit costs and increase operating margins by
spreading fixed costs over a large  revenue base.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The increased significance of lease expense in our operating costs.   In
2009, we owned three dredgers and leased two dredgers. Our number of leased dredgers increased to six in June 2010.  The
additional leases increased the percentage of leased vessels from 40% in 2009 to more than 60% after June 2010. In January 2011,
that percentage declined to 56% after we purchased one of our previously-leased dredgers.  Subsequent leases of four
dredgers (net of two lease terminations) have increased our percentage of leased vessels to approximately 69%.  The increased
percentage of lease expense in our operating costs has the effect of lowering our reported margins because lease costs tend to
be higher than the depreciation we report on vessels we own.  This change in the mix of our vessel ownership should be
considered when making direct comparisons of expenses and margins for current and historical periods.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Backlog and business development pipeline.   Because contracts begin
in one fiscal year or reporting period and are typically completed in a subsequent fiscal year or reporting period, we believe
that the revenue recognized in a particular year or period is not, by itself, the best indicator that our business is expanding.  We
believe that the prospects for future project work should also be considered.  We measure this important metric and related
trends by calculating our project backlog, which comprises only unrealized revenue on executed contracts with specific schedules
for commencement and firm pricing and includes as-yet-uncompleted work on in-progress dredging projects.  We only began
to track this important metric in 2009, so the availability of trend information is limited.  Our backlog as of December
31, 2011 was $55.7 million, an amount consistent with our objective of maintaining firm contract levels that will keep our dredging
fleet fully utilized for at least three to four months, taking into account prospective increases in our fleet size.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



37







The following schedule summarizes changes in backlog on contracts
during the year ended December 31, 2011.



|Backlog balance at December 31, 2010                                  |  | $ | 62,310,751   |  
|--------------------------------------------------------------------- |  | - | ------------ | -
|New contracts entered during the year ended December 31, 2011         |  |   | 220,006,390  |  
|Add: Adjustment of contracts due to change of orders during the year  |  |   | 331,734      |  
|Adjusted contract amount at December 31, 2011                         |  |   | 282,648,875  |  
|Less: Contract revenue earned during the year ended December 31, 2011 |  |   | (226,953,070 | )
|Backlog balance at December 31, 2011                                  |  | $ | 55,695,805   |  



For two contracts included in backlog as of December 31, 2010,
customers requested that we work on other projects. To accommodate these requests, we replaced both customers’ one-year contracts
with shorter-term contracts in 2011. Notwithstanding these changes, both customers have made non-binding commitments to provide
the same amount of work under the revised contracts as contemplated under the original agreements. Accordingly, we did not reduce
backlog as of December 31, 2010 for the replaced amounts or include the shorter-term contracts in our backlog.



We maintain an active dialogue with our two largest customers
about the allocation of upcoming projects under our cooperation agreements.  The contract proposal or bidding process
is ongoing for us and results in regular additions to our contract backlog, the balance of which is also continuously reduced by
work performed and further adjusted for contract change orders.  We believe that our backlog, pipeline of contracts in
the bid or negotiation stages, and communications with customers with whom we have signed long-term cooperation agreements provide
us with significant revenue visibility through 2012 and into 2013 and gives us a basis for confidence that our dredging fleet can
remain fully utilized through at least the first quarter of 2012 and that our targeted objectives to add to our fleet and capacity
are prudent.



Segment and Business Cycle Information



Since the inception of Fujian Service, the only line of business
we have operated is sub-contract dredging and we have operated only in the PRC.  Accordingly, no geographic or segment
information is presented.  Based on the contracts we have performed and those reflected in our backlog, we believe that
our operations and business cycle are not strongly seasonal or subject to major fluctuations over time.  However, our
ability to operate is influenced by weather.  We tend to achieve lower fleet utilization in the winter for our vessels
working in areas subject to freezing conditions and we generally lose several days of operations in southern regions during monsoon
season because we cannot operate during severe storms or when wave or wind conditions are extreme.



Our largest customers are state-owned enterprises and they often,
but do not always, structure sub-contracts to conclude at, or shortly prior to, the end of their own fiscal years, which coincide
with our own fiscal year ending December 31.  As a result, we tend to have a lower amount of carryover project work at
fiscal-year end than at other times. In addition, because our final project settlement period is short, our costs and estimated
earnings in excess of billings, our project receivables, and our inventories tend to be lower at our fiscal year end than at the
end of other periods.



Primary Components of Revenue and Expense



Contract Revenue



We generate revenue primarily from dredging services.  Substantially
all of our revenue-generating contracts are fixed-price contracts under which we are paid a specified price for our performance
of the entire contract.  We recognize contract revenues under the percentage-of-completion method to determine the appropriate
amount to be recognized in a given period.  Our customers are PRC state-owned enterprises.  There are no credit
terms and customers settle balances according to the percentage of completion of contracts, and the date of settlement is specified
in our contracts.  We believe that we have developed a favorable reputation among local governments, suppliers and contractors,
which positions us to continue to obtain quality dredging projects.



Cost of Revenue



Our cost of revenue includes wages, leasing fees, crew hire
charge, consumable parts, and depreciation.  We expect our cost of revenue to increase in connection with our expansion
plans, including our acquisition of additional dredgers.  The following table presents information regarding our cost
of revenues for the periods indicated:



38











|                         |  | For the Years Ended December
    31, |           
|------------------------ |  | ------------------------------------ | ----------
|                         |  | 2011                                 |           
|                         |  | (China Dredging)                     |           
|                         |  | Amount                               |           
|Wages                    |  | $                                    | 1,384,195 
|Leasing fees             |  |                                      | 15,501,030
|Crew hire charge         |  |                                      | 4,395,906 
|Consumable parts         |  |                                      | 70,465,713
|Depreciation             |  |                                      | 7,160,142 
|Cost of contract revenue |  | $                                    | 98,906,986



Operating Expenses



Our operating expenses include professional fees and general
and administrative expenses.  We expect our operating expenses to increase in connection with our expansion plans.  We
also anticipate incurring higher expenses in connection with our financing strategies and as a public company, primarily including
additional legal and corporate governance expenses, including salary and payroll-related costs for additional accounting staff.



Critical Accounting Policies and Estimates



General



Our financial statements have been prepared in accordance with
U.S. GAAP.  The preparation of our financial statements in conformity with U.S. GAAP requires our management to make
a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods.  Significant
items subject to such estimates and assumptions include the recoverability of the carrying amount and the estimated useful lives
of long-lived assets; valuation allowances for receivables; percentage of completion of contracts; and realizable values for inventories.  Actual
results could differ from those estimates.



Consolidation



Fujian WangGang entered into contractual arrangements with Wonder
Dredging, Fujian Service, and shareholders of Wonder Dredging, the VIE Agreements.  Based on the VIE Agreements, Fujian
WangGang provides management services to Fujian Service and is entitled to (1) receive all of the economic benefits from Fujian
Service, (2) exercise effective control over Fujian Service and Wonder Dredging, and (3) has an exclusive option to purchase all
or part of the equity interests in Fujian Service.  Accordingly, by virtue of the VIE Agreements, Fujian WangGang is
the primary beneficiary of Fujian Service as defined by ASC 810 “Consolidation of Variable Interest Entities.” Therefore,
we consolidate Fujian Service and Wonder Dredging as VIEs.



Revenue Recognition



We recognize contract revenues under
the percentage-of-completion method to determine the appropriate amount to be recognized in a given
period.  Depending on the nature of contracts, the stage of completion is measured by reference to (a) the
proportion of contract costs incurred for work performed to date to estimated total contract costs; (b) the amount of work
certified by a site engineer; or (c) the completion of a physical proportion of the contract work.  The difference
between amounts billed and recognized as revenue is reflected in the balance sheet as either contract revenues in excess of
billings or billings in excess of contract revenues.  Provisions for estimated losses on contracts in progress are
made in the period in which they are identified.  In the event that contract revenue cannot be estimated reliably,
contract revenue is recognized only to the extent of contract costs incurred that are likely to be recoverable.



Because we are sub-contractors, almost all pre-contract costs
such as site investigation and preparation are incurred by our customers.  Our pre-contract costs are mainly site visit
expenses, such as travel and accommodation, and the total amount of such travel and accommodation expense has been insignificant.  As
of the dates of the balance sheets included herein, no expenditures related to anticipated contracts had been incurred and therefore
no deferred expenses are recorded.  Approved and unapproved change orders are considered a change in the scope of the
original contracts to which they relate.  Upon approval by the customer and the contractor of both scope and price, contract
revenue and costs are adjusted for the change order.  Claims for additional revenue due to us are not recognized in contract
revenues until such claims are settled.  An amount equal to contract costs attributable to claims is included in revenue
when realization is probable and the amount can be reliably estimated.



Accounts Receivable, Net



Accounts receivable represent amounts billed under the terms
of contracts with our customers.  The timing of when we bill our customers is generally based on advance billing terms
or contingent upon completion of certain phases of the work, as stipulated in the contract.  No amount constitutes a
retainer.  We anticipate collection of all outstanding balances within 7 to 180 days after completion reports of the
contracts are issued.  The allowance for doubtful accounts is our best estimate of the amount of probable credit losses
in our existing receivables.  We provide an allowance for estimated uncollectible receivables when events or conditions
indicate that amounts outstanding are not recoverable.  Outstanding account balances are reviewed individually for collectability.  Based
on our assessment of collectability, there was no allowance for doubtful accounts recognized as of December 31, 2011, 2010, and
2009.



39







Cost and Estimated Earnings in Excess of Billings on Contracts
in Progress



Cost and estimated earnings in excess of billings represent
amounts of cost incurred and revenue earned under contracts in progress but not billed at the balance sheet date.  These
amounts become billable according to the contract terms, which usually consider passage of time, and/or completion of the project.
As of December 31, 2011 and 2010, cost and estimated earnings in excess of billings on contracts in
progress were approximately $14.0 million and $0.8 million, respectively.



Impairment of Long-Lived Assets



We test long-lived assets or asset groups for recoverability
when events or changes in circumstances indicate that their carrying amount may not be recoverable.  Circumstances which
could trigger a review include, but are not limited to:  significant decreases in the market price of the asset; significant
adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history
of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will
more likely than not be sold or disposed significantly before the end of its estimated useful life.  Recoverability is
assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted
cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances.  An
impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.  As individual dredgers
generate their own cash flow, each individual dredger is separately reviewed for impairment.  If long-lived assets are
to be disposed, depreciation is discontinued, if applicable, and the assets are reclassified as held for sale at the lower of their
carrying amounts or fair values less costs to sell.  Based on our assessment, no triggering events were identified as
of December 31, 2011 or 2010.



Income Taxes



We are incorporated in the BVI, the laws of which do not require
us to pay any income taxes or other taxes based on revenue, business activity or assets.  Our subsidiaries domiciled
and operating in other countries file separate tax returns in the respective jurisdictions in which they are domiciled or operate.  Pursuant
to authoritative accounting guidance regarding income taxes, deferred income tax assets and liabilities are determined based upon
differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be effective when the differences are expected to reverse.  Deferred tax assets are reduced by a valuation
allowance to the extent management concludes it is more likely than not that the assets will not be realized.  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 the statements of income in the period that includes the enactment date.  Authoritative
accounting guidance prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position
taken in the tax return.  This guidance also addresses de-recognition of income tax assets and liabilities, accounting
for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.



The PRC tax system is subject to substantial
uncertainties and has been subject to recently enacted changes, the interpretation and enforcement of which are also uncertain.  Changes
in PRC tax laws or their interpretation or application may subject us to substantial PRC taxes in future.  No deferred
tax liability has been provided as the amount involved is immaterial.  Fujian Service has analyzed the tax positions
taken or expected to be taken in its tax filings and has concluded it has no material liability related to uncertain tax positions.  For
the years ended December 31, 2011, 2010 and 2009, we had no unrecognized tax benefit.  We do not anticipate any potential
future adjustments in the next twelve months that would result in a material change to our financial tax position.



Other Comprehensive Income



Pursuant to authoritative accounting guidance regarding comprehensive
income, our comprehensive income consists of net income and foreign currency translation adjustments.  We translate our
assets and liabilities of foreign operation at the rate of exchange in effect on the balance sheet date.  We translate
income and expenses at the average rate of exchange prevailing during the year.  The year-end rates for December 31,
2011, 2010 and 2009 of RMB into one U.S. dollar were 6.2939, 6.6000 and 6.8270, respectively.  Average
rates for the years ended December 31, 2011, 2010 and 2009 were 6.4475, 6.7604 and 6.8303, respectively.  The
related translation adjustments are reflected in “Accumulated other comprehensive income” in the equity section of
our consolidated balance sheets.  Foreign currency gains and losses resulting from transactions are included in earnings.  As
of December 31, 2011, 2010, 2009, the accumulated foreign currency translation gain was approximately $15.8 million, $4.9 million,
and $0.7 million, respectively.



40







Business Combination and Recapitalization



Mr. Qing Lin holds a 91% equity interest of Wonder Dredging
and Mr. Panxing Zhuo holds the other 9% equity interest of Wonder Dredging.  They are the brother-in-law and father,
respectively, of Mr. Xinrong Zhuo, our Chairman and Chief Executive Officer and sole shareholder of Mars Harvest Co., Ltd. which
effectively holds approximately 64.3% of our shares (or 54.0% if all preferred shares are converted).  Mr. Qing Lin and
Mr. Panxing Zhuo, pursuant to an agreement, hold their interests in Fujian Service indirectly as the representatives of the family.  Through
the agreement, Mr. Xinrong Zhuo has had the exclusive right to make executive decisions and manage Fujian Service since its inception
(January 8, 2008).  Half of the equity interest of Fujian Service is held by Fujian WangGang and the other half is held
by Wonder Dredging.  Mr. Qing Lin, Mr. Panxing Zhuo, and Mr. Xinrong Zhuo constitute a common control group holding
more than 50% of the equity interest of Fujian Service.  Our consolidated financial statements have been prepared as
if the existing corporate structure had been in existence throughout the periods presented and as if the reorganization had occurred
as of the beginning of the earliest period presented.



In October 2010, we merged with CAC, a public reporting, non-trading
shell company domiciled in the BVI.  The terms of the Merger were set forth in the Merger Agreement, which provided that
China Dredging would continue as the surviving company following the Merger.  We have accounted for the Merger as a recapitalization,
with China Dredging being treated as the accounting acquirer.  Immediately prior to, and in contemplation of, the consummation
of the Merger, we redesignated our shares to retroactively adjust our legal capital.  At the time of the Merger, all
of the issued shares of CAC were exchanged for 500,000, or 0.95%, of our issued and then outstanding ordinary shares, while our
shareholders immediately prior to the Merger retained 52,177,323, or 99.05%, of our issued and then outstanding ordinary shares.  As
a result of the Merger, we became a public reporting company.  CAC, being the non-surviving company, ceased its corporate
existence.



Escrow Shares, Embedded Derivative
and Preferred Share Discount



On October 29, 2010, our controlling shareholder, a company
controlled by Mr. Xinrong Zhuo, our Chairman of the Board of Directors and Chief Executive Officer, placed 15,000,000 of our ordinary
shares into the Make-Good Escrow, pursuant to a securities escrow agreement, for the purpose of providing protection to the investors
in our 2010 Private Placement in the event we did not achieve certain net income thresholds for the years ended 2010 and 2011.  If
we had not achieved the thresholds set forth below, holders of our preferred shares would have received additional shares from
the Make-Good Escrow, up to the full number of shares held in the Make-Good Escrow.  The number of additional shares
that could have been released to investors in our 2010 Private Placement was equal to:  (Original Invested Shares * (Target
EPS/Actual EPS)) — Original Invested Shares.  “Actual EPS” means the Adjusted Net Income
for fiscal year 2010 or 2011, as applicable, divided by the number of our fully diluted outstanding shares.  “Target
EPS” means the performance threshold for the applicable year divided by the number of our fully diluted outstanding shares.  Adjusted
Net Income means after-tax net income based on U.S. GAAP, adjusted to exclude (i) non-cash charges associated with the Merger,
our 2010 Private Placement and any public offering or other financing by us, (ii) expenses related to the release of the escrow
shares, and (iii) expenses related to implementation of any of the agreements related to our 2010 Private Placement.  Adjusted
Net Income for 2010 is calculated by adding the Adjusted Net Income of Fujian Service for the six months ended June 30, 2010 and
our Adjusted Net Income on a consolidated basis for the six months ended December 31, 2010.  The pro-rata right to receive
shares issuable pursuant to the Make-Good Escrow was based upon the initial preferred shares issued to investors.  Shares
not distributed from the Make-Good Escrow were to be returned to the shareholder that contributed them.  The Adjusted
Net Income targets for the 2010 and 2011 fiscal years were $48.1 million and $87.0 million, respectively.



We achieved the Target EPS for 2010 and 2011, and all of the
escrow shares were released back to the shareholder that contributed them.  We do not believe the fair value of the escrow
shares should be recognized as compensation or an expense.  According to relevant guidance, to overcome the presumption
that the release of shares are compensatory, we have considered the substance of the arrangement, including whether the arrangement
was entered into for purposes unrelated to, and not contingent upon, continued employment.



The Make-Good Escrow was not entered into for purposes related
to, or contingent upon, continued employment of the key executive.  The sole reason for us and Mr. Zhuo’s company
to enter into the escrow arrangement was to induce investors to close our 2010 Private Placement.  In accordance with
authoritative accounting guidance, we believe the proceeds of our 2010 Private Placement should be treated as being received for
a combination of our preferred shares issued to the investors and the contingent right to a variable number of ordinary shares
under the Make-Good Escrow.  We further believe this requires that our 2010 Private Placement proceeds be allocated first
to the contingent right to a variable number of shares based on the estimated fair value of that right, with the remaining proceeds
allocated to our preferred shares.  In effect, Mr. Zhuo’s company would be treated as having contributed to us
a contingent right to a variable number of shares while we are treated as having sold an identical right to our 2010 Private Placement
investors.  In accordance with authoritative accounting guidance, our contingent obligation to deliver a variable number
of shares sold to the investors was recorded as a liability.  It was initially recorded at its $14,101,247 estimated
fair value as of December 31, 2010.   The effective right to receive an equal number of shares from Mr. Zhuo’s
company was not an asset but instead represented a potential future capital contribution. As of December
31, 2011, we achieved sufficient Actual EPS that theMr. Zhuo’s company was entitled to
have all shares released from escrow. As a result the liability was reduced to zero.



Prospectively from the initial issuance, we adjusted the liability
for the contingent obligation to deliver a variable number of shares to its estimated fair value at each balance sheet date. Changes
to the liability were recorded as gains or losses in the determination of net income.  Upon settlement of the escrow,
the liability would have been adjusted to the fair value of the shares actually delivered to investors in the 2010 Private Placement
(had the 2011 Target EPS not been met), with any difference between such amount and the amount previously recorded reflected as
a gain or loss in the determination of net income. The remaining liability was eliminated with a corresponding increase in additional
paid-in capital reflecting the fact that Mr. Zhuo’s company would have provided the shares to the investors for settlement.



41







The holders of our preferred shares have
the right to receive 20% of the $5.00 purchase price on the second anniversary of issuance if not yet converted. Substantially,
this is the right to $1.00 per share if we fail to have the ordinary shares underlying our preferred shares both successfully registered
with the SEC and listed on a suitable exchange by October 2012. We have determined that this contingent right of the holders of
our preferred shares is an embedded derivative financial instrument which must, for financial reporting purposes, be separated
from the host instrument (i.e., from our preferred shares) and treated as a separate instrument. Proceeds of our 2010 Private Placement
were allocated to the derivative liability in an amount equal to its estimated fair value. Prospectively, the derivative liability
is adjusted to its estimated fair value at each balance sheet date with changes in its fair value recorded in our statements of income.



There were no readily ascertainable market prices for the ordinary
shares or the rights that investors hold under the Make-Good Escrow. We estimated the fair value of obligation under the Make-Good
Escrow by using a Monte Carlo valuation model, using variables:  1) gross margin on dredgers within the range of historical
experience, 2) the addition of new dredgers within a range bounded by new lease opportunities known at the time of the 2010 Private
Placement and our resources available at the time of the 2010 Private Placement to secure additional leased vessels during 2011,
3) revenue for both existing dredgers and potential new dredgers within a range bounded by historical experience and existing backlog,
4) RMB/USD exchange rates within a range consistent with PRC government guidance available at the time of the 2010 Private Placement,
and 5) sales, general and administrative expenses as a percentage of revenue within parameters known at the time of our 2010
Private Placement. The result was an expected escrow share issuance of 3,234,231 shares. That number of expected shares was then
multiplied by the $4.36 estimated fair value of each share, determined as discussed below, to produce the estimated $14,101,247
fair value of Make-Good Escrow obligation. There was only a short period of time from the final closing of our 2010 Private Placement
(December 21, 2010) until December 31, 2010, and our 2010 Private Placement closed on various dates in the fourth quarter of 2010
all at the same price. We believe that no material information was available at December 31, 2010 that was not available throughout
our 2010 Private Placement. Accordingly, we do not believe the value of the Make-Good Escrow obligation changed materially during
the period. The estimation of the fair value of the Make-Good Escrow obligation is based on level 3 inputs, meaning unobservable
inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.



We had estimated the value of the embedded derivative based
on the $10,012,987 proceeds that would be paid, discounted at an interest rate of 9.0% and multiplied by 18%, representing the
probability, viewed from the time of our 2010 Private Placement, that the underlying ordinary shares would not be registered and
listed.  We believe the 9.0% interest rate, which is consistent with then-effective high-yield rates in U.S. markets,
is appropriate for debt in such amount at the parent-company level that is unsecured, illiquid and structurally subordinated to
creditor claims at the operating companies (the locus of substantially all of our assets).  We estimated the probability
of our not being registered and listed by October 2012 to be the same as the actual percentage of all Form F-1 filers in 2009 and
2010 failing to achieve effectiveness of their registration statements.  However, our actual probability of success could
differ from that of companies who filed registration statements during the reference period, or an actual market participant could
take a different view. We believe that, in our case, based on circumstances in the fourth quarter of 2010, once our registration
statement became effective, all other requirements to achieve a national exchange listing would be satisfied or within our control,
which would be sufficient to extinguish the embedded derivative.  While listing requirements relating to market capitalization
are not directly in our control, we expected to have sufficient market capitalization based on our cash alone to meet requisite
listing standards.  Even under the lowest 1% tail scenario of the Monte Carlo valuation model discussed above, we would
have positive net income which should not detract from the value of the cash in determining market capitalization.



As of December 31, 2011, we estimated the fair value of the
derivative using a revised estimated probability of 90% as of that date of not being listed on a qualifying securities exchange.
The revised estimate is based on new listing requirements at large U.S. securities exchanges applicable to “reverse merger”
companies, which now include a “seasoning” requirement that such companies trade on the over-the-counter markets or
another national or foreign exchange for one year and complete SEC filings during this time, with a limited exception for listings
in connection with firmly underwritten public offering of at least $40 million. There are no data upon which to base an estimate
of the likelihood of fulfilling the new requirements or successfully closing an offering before the October 2012 deadline. We,
in consultation with our financial advisors, determined to use 90% as the probability of being unable to avoid the obligation to
make the redemption payments to investors. In addition, the discount rate used was decreased to 8.5% reflecting the closer maturity
date of the potential obligation. The December 31, 2011 present value of the full required payment multiplied by 90% resulted in
an $8,279,827 estimated fair value of the derivative. Adjusting the value of the derivative to this amount resulted in a $6,762,079
charge to net income for the year ended December 31, 2011.



The embedded derivative is part of our preferred shares and
was entered into as an inducement to our 2010 Private Placement investors to purchase our preferred shares. It is not used for
hedging purposes. The estimate of the embedded derivative’s fair value is based on Level 3 inputs.



42







The embedded derivative and the obligation under the Make-Good
Escrow are the only instruments held by us that are carried at fair value estimated using Level 3 inputs. The changes in the carrying
value of the level 3 instruments during the years ended December 31, 2011 and 2010 were as follows:



|                                             |  | 2011 |            |   | 2010 |  
|-------------------------------------------- |  | ---- | ---------- | - | ---- | -
|                                             |  |      |            |   |      |  
|Liability balance b/f                        |  | $    | 15,618,995 |   |      | $
|Additional liabilities entered into the year |  |      | -          |   |      |  
|(Decrease)/increase in liability fair value  |  |      | (7,339,168 | ) |      |  
|Liability balance c/f                        |  | $    | 8,279,827  |   |      | $



Reducing the gross proceeds of our 2010 Private Placement by
the $14,101,247 allocated to the contingent right to shares pursuant to the Make-Good Escrow and $1,506,450 to the embedded derivative
resulted in $34,457,238 being initially allocated to the 10,012,987 preferred shares. This amount was reduced by the $3,621,649
of offering costs relating to our 2010 Private Placement resulting in $30,835,589 initially allocated to our preferred shares.  At
December 31, 2010, the derivative liability was increased by an additional $11,298 to our estimated fair value of $1,517,748. This
resulted in a total derivative loss of $11,298 for the year ended December 31, 2010 as shown on our statements of income. The
10,012,987 preferred shares are convertible into an equal number of ordinary shares which for which a fair value was estimated
to determine if our preferred shares contained a beneficial conversion feature.



We calculated an estimated fair value of our ordinary shares
at the time of the 2010 Private Placementby applying to our trailing earnings the price-earnings
ratio equal to the average price-earnings ratio of the only two other public companies (as of fourth quarter 2010) in the dredging
industry, or the peer companies, after making the adjustments described below. The peer companies, whose trailing price-earnings
ratios averaged 10.5 at December 31, 2010, are domiciled in developed countries, specifically the Netherlands and the United States,
no single shareholder or group controls the peer companies and their shares are liquid and actively traded.  To adjust
the price-earnings ratio for the peer companies for differences in our circumstances, we applied two discount factors.  The
first was a 24.5% discount to reflect the market discount applicable to Chinese companies of a scale consistent with ours. We determined
this discount by calculating the average price-earnings ratio of the 34 U.S.-listed Chinese companies with market capitalizations
between $100 million and $400 million and positive 1-year trailing earnings and comparing it with the average price-earnings ratio
of the S&P 500 over the time period when our 2010 Private Placement occurred.  We then applied an additional 40%
discount to reflect the lack of marketability and control of us as compared with public companies generally. The lack of marketability
was based on the fact that none of our shares were registered and there was no ready market for the shares.  The size
of the discount needed for lack of marketability was limited by the fact that we were a public company through our reverse merger
with Chardan Acquisition Corp. and had plans and a clear intention to register our shares and list on an exchange. The control
element of the discount was necessary because a majority of our voting shares are controlled by Mr. Xingrong Zhuo and would continue
to be controlled by him based on the Monte Carlo simulation of the shares to be transferred from the Make-Good Escrow.



The result of applying these two discounts in sequence to the
10.5 average for the peer companies was to lower the price-earnings ratio used to compute our per share value to 4.8.  Noting
that we had no debt, we multiplied the 4.8 price-earnings ratio to our projected 2010 net income of $48.4 million disclosed to
investors in our 2010 Private Placement to calculate an equity value of $229.8 million. This calculated equity value was divided
by the number of outstanding ordinary shares, before giving effect to our 2010 Private Placement, and yielded a value per ordinary
share of $4.36. This estimate is subject to considerable uncertainty and it is likely that if ordinary shares had been sold separately
at the time of the 2010 Private Placement they would have sold for amounts different than $4.36, and such differences could have
been material. There were only two peer companies, and our determination to use a 40% discount for lack of marketability and control
is subjective and potentially at the higher end of ranges that may be regarded as typical for such discounts.



We updated our value estimate at the end of each interim quarter
during the year ended December 31, 2011 by reference to the same two dredging companies. These two companies had a trailing price-earnings
ratio for the 12 months ended June 30, 2011 of 12.2. We lowered this ratio by first applying a 41% discount applicable to Chinese
companies based on the ratio at June 30, 2011 between the price-earnings ratio of the 34 Chinese companies to the S&P 500.
It was further lowered by the same 40% lack of marketability and control discount used in the fourth quarter 2010 valuation. The
result of applying these discounts was a price-earnings ratio of 4.3. The market capitalization was increased by what was estimated
to be excess cash at June 30, 2011 as compared to the reference companies and then decreased by the value of the derivative liability.
The resulting overall value was divided by the outstanding shares on a fully diluted basis, assuming conversion of all preferred
shares. Through this method we estimated a fair value of each ordinary share as $6.20 at June 30, 2011.



The estimated $62,080,519 fair value at June 30, 2011 of
the ordinary shares into which the preferred shares would convert exceeded the $50,064,935 redemption value of the preferred
shares, should the holders of preferred shares elect to redeem them after October 2012. Consequently, the entire $6,135,012
discount that existed at December 31, 2010 was accreted in the six months ended June 30, 2011 as an allocation of net income.
There was no remaining discount to be accreted after June 30, 2011.



43







A condition of the 2010 Private Placement was that we
register the underlying shares with the SEC. During 2011, we incurred general and administrative expenses of $784,202 related
to the registration process. These costs were considered costs of the planned initial public offering.



Earnings per Ordinary Share



Earnings per ordinary share (basic and diluted) is based on
the net income attributable to ordinary shareholders divided by the weighted average number of ordinary shares outstanding during
each period.  Ordinary share equivalents are not included in the calculation of diluted earnings per ordinary share if
their effect would be anti-dilutive.  As of December 31, 2011, the weighted average outstanding ordinary share equivalents
totaled 10,012,987, consisting of our preferred shares, all of which were used in the calculation
of diluted earnings per ordinary share.



Internal Control over Financial Reporting



Historically, we have been a company with limited accounting
personnel and other resources to address our internal control over financial reporting.  In connection with the audit
of our financial statements included in this Report, we identified what we believe would constitute a “material weakness”
in our internal control over financial reporting.  As defined in the standards established by the PCAOB, a “material
weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there
is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or
detected on a timely basis by the company’s internal controls.  The material weakness we identified was that none
of our employees had any formal training in U.S. GAAP and SEC rules and regulations.  Our Chief Financial Officer also
does not have such training, and we may not be able to remediate this material weakness without significant expense, if at all.  We
have identified similar material weaknesses in the past, and we may also face additional material weaknesses in the future.  Therefore,
there is a risk that our current or future financial statements may not be properly prepared in accordance with U.S. GAAP or that
our current or future disclosures are not in compliance with SEC rules and regulations.



We have begun to undertake steps to remediate the
material weakness described above and to improve our internal control over financial reporting.  We have engaged a
PCAOB registered and inspected public accounting firm in the United States to provide consulting services to us in matters
involving U.S. GAAP and SEC rules and regulations.  We also plan to take other important steps, including training
our accounting, internal audit and finance staff, engaging consultants to assist with these functions, and implementing
additional financial and management controls, reporting systems and procedures.  Although we do not expect the
costs of our remediation efforts to be material, we expect these efforts to take time.  We expect to continue to
implement these measures through the course of 2011, and plan to continue monitoring our internal controls with a view toward
whether additional financial and management controls, reporting systems and procedures are appropriate.  We do not
expect that our plan will fully remediate the material weakness described above until at least December 31, 2012, and it may
not ensure the adequacy of our internal controls over our financial reporting and processes in the future.



However, if we fail to timely achieve and maintain the
adequacy of our internal controls, we may not be able to conclude that we have effective internal control over financial
reporting.  As a result, our failure to achieve and maintain effective internal control over financial reporting
could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our
business and negatively impact the value of our securities.



Results of Operations



Year Ended December 31, 2011 Compared to Year Ended December
31, 2010



The following table presents our operating results for the year
ended December 31, 2011 compared to the year ended December 31, 2010.



|                                        |  | Year Ended December 31,   |             |   |                           |  |       |          |  |   | Percent            |  
|--------------------------------------- |  | ------------------------- | ----------- | - | ------------------------- |  | ----- | -------- |  | - | ------------------ | -
|                                        |  | 2011
    (China Dredging) |             |   | 2010
    (China Dredging) |  |       | Increase |  |   | Percent
    Change |  
|Contract revenue                        |  | $                         | 226,953,070 |   |                           |  | 100.0 | %        |  | $ | 131,405,665        |  
|Cost
    of contract revenue            |  |                           | (98,906,986 | ) |                           |  | (43.6 | )%       |  |   | (58,723,528        | )
|Gross profit                            |  |                           | 128,046,084 |   |                           |  | 56.4  | %        |  |   | 72,682,137         |  
|General
    and administrative expenses |  |                           | (9,444,718  | ) |                           |  | (4.2  | )%       |  |   | (7,159,793         | )
|Income
    from operations              |  |                           | 118,601,366 |   |                           |  | 52.3  | %        |  |   | 65,522,344         |  
|Other
    income (expense)              |  |                           | 7,897,965   |   |                           |  | 3.5   | %        |  |   | (731,668           | )
|Income before income taxes              |  |                           | 126,499,331 |   |                           |  | 55.7  | %        |  |   | 64,790,676         |  
|Income
    tax expense                  |  |                           | (30,107,070 | ) |                           |  | (13.3 | )%       |  |   | (16,556,396        | )
|Net
    income                          |  | $                         | 96,392,261  |   |                           |  | 42.5  | %        |  | $ | 48,234,280         |  



44







The following table summarizes changes in backlog on contracts
during the year ended December 31, 2011.  Backlog represents the amount of revenue we expect to realize from work to
be performed on contracts in progress at year end and from contractual agreements on which work has not yet begun.



|Backlog balance at December 31, 2010                                   |  | $ | 62,310,751   |  
|---------------------------------------------------------------------- |  | - | ------------ | -
|New contracts entered during the year ended December 31, 2011          |  |   | 220,006,390  |  
|Add:  Adjustment of contracts due to change of orders during the year  |  |   | 331,734      |  
|Adjusted contract amount at December 31, 2011                          |  |   | 282,648,875  |  
|Less:  Contract revenue earned during the year ended December 31, 2011 |  |   | (226,953,070 | )
|Backlog balance at December 31, 2011                                   |  | $ | 55,695,805   |  



The decrease of $6.6 million in our backlog at December
31, 2011 compared to December 31, 2010 was mainly due to three contracts included in our backlog at December 31, 2010 that
were entered into near the year-end date. Our backlog at December 31, 2010 reflected our increased availability to enter into
larger contract commitments as a result of adding vessels to our dredging fleet in the second half of 2010. We also added
vessels to our dredging fleet in 2011 and, despite the $6.6 million decrease in our backlog at December 31, 2011 compared to
December 31, 2010, we perceive additional opportunities to be awarded future business.



Dredger Downtime for Redeployment/Repositioning



|     |  | Q1 |     |   | Q2 |  |     | Q3 |  |  | Q4   |   |  | Year Average |     
|---- |  | -- | --- | - | -- |  | --- | -- |  |  | ---- | - |  | ------------ | ----
|2011 |  |    | 6.5 | % |    |  | 2.8 | %  |  |  | 3.9  | % |  |              | 0.6 
|2010 |  |    | 2.9 | % |    |  | 4.4 | %  |  |  | 10.9 | % |  |              | 17.8



The impact of redeployments and repositioning on our overall
fleet utilization was slightly lower in 2011 than in 2010, reflecting a decrease in average downtime of 7.3%.  We believe
this volatility is common in the dredging business and reflects changes in contract arrangements from time to time.



Effect of Exchange Rates



Substantially all of our operations are conducted in the PRC
and RMB which is our functional currency.  The average exchange rate used in translating the results of operations and
cash flows for the years ended December 31, 2011 and 2010 was 6.4475 and 6.7604, respectively, which represented a 4.6% increase
from 2010 to 2011 in the value of the RMB against the U.S. dollar.



Revenue



Contract revenue increased by $95.5 million, or 72.7% (64.7%
without foreign exchange effect), to $227.0 million in 2011, compared to $131.4 million in 2010.  The increase primarily
reflects the increase of our dredging volume and unit construction price.  The projects we performed varied in size and
span of time.  Accordingly, we measure our business volume by cubic meters we dredged rather than by numbers of projects
we performed in a specific period.  Applying the metric to our contract revenue allows us to track trends in unit construction
price per cubic meter dredged.  The unit construction price for each contract varies and reflects the negotiated price
with the contractor for each specific project, depending on the nature of sediments in the river bed, difficulties in the dredging,
and other factors specific to the project.  With six leased dredgers joining the fleet in 2011, we were able to deliver
larger business volume and execute more projects with various field conditions.  We completed 126.6 million cubic meters
of dredging volume in 2011 as compared to 78.6 million cubic meters in 2010, a 61.1% increase in dredging volume.  In
addition, the unit construction price per cubic meter increased by $0.12, or 7.2% (2.2% without foreign exchange effect), to $1.79
in 2011 from $1.67 in 2010 due to increased demand for our dredging services and improved market conditions.



Cost of Revenue



Cost of revenue increased by $40.2 million, or 68.4% (60.7%
without foreign exchange effect), from $58.7 million in 2010 to $98.9 million in 2011, primarily due to our increased revenue.  Unit
construction cost per cubic meter is $0.78 and $0.74 in 2011 and 2010, respectively.  Unit construction cost is the metric
we use to measure our direct cost per cubic meter dredged.  The unit construction cost is dependent on the combination
of prices of consumable parts, wages, leasing fees, crew hire charge and depreciation.



45







|                         |  | For the Years Ended December 31, |           
|------------------------ |  | -------------------------------- | ----------
|                         |  | 2011 (China Dredging)            |           
|                         |  | Amount                           |           
|Wages                    |  | $                                | 1,384,195 
|Leasing fees             |  |                                  | 15,501,030
|Crew hire charge         |  |                                  | 4,395,906 
|Consumable parts         |  |                                  | 70,465,713
|Depreciation             |  |                                  | 7,160,142 
|Cost of contract revenue |  | $                                | 98,906,986



The cost of consumable parts increased from $43.0 million in
2010 to $70.5 million in 2011, while the percentage to revenue declined from 32.7% to 31.0%, primarily due to improved cost control
and operations management.  This decrease resulted in the decrease of average unit construction cost of $0.01.  Leasing
fees increased by $8.4 million, primarily due to our six leased vessels being put into operation in 2011, accounting for 6.9% of
our revenue in 2011 as compared to 5.4% in 2010.  This increase resulted in the increase of average unit construction
cost of $0.03.  The crew hire charge associated with leased vessels increased by $1.7 million in 2011 compared to 2010,
also due to the addition to our new leased vessels.  The increase in crew hire charge did not significantly impact our
unit construction cost.  The amount of wages and depreciation remained relatively flat in 2011 compared to 2010.  Wages
accounted for 0.6% and 0.7% of our revenue in 2011 and 2010, respectively.  Depreciation accounted for 3.2% and 3.8%
of our revenue in 2011 and 2010, respectively.  The decrease of wages and depreciation in percentage of revenue was due
to the increase in leased vessels.



Gross Profit



Gross profit increased by $55.4 million, or 76.2% (68.0% without
foreign exchange effect), to $128.0 million in 2011, compared to $72.7 million in 2010, primarily due to our increased revenue.  Since
our average unit construction price in 2011 increased by 7.2% (2.2% without foreign exchange effect) compared to 2010 while our
average unit construction cost remained substantially the same in these two years, our gross profit margin increased from 55.3%
to 56.4%, or a 2.0% percentage increase, primarily reflecting the increase of our average unit construction price.



General and Administrative Expenses



General and administrative expenses are comprised of revenue
taxes and fees, salaries and benefits, business insurance and other daily expenses.  Revenue taxes and fees include primarily
business tax, city maintenance and educational fees.  Salaries and benefits include salaries and allowances, staff welfare
for education, staff social welfare insurance and health insurance.  Other expenses include depreciation of office equipment,
rent, travel and others.  The following table sets forth certain information regarding the main components of our general
and administrative expenses for the years indicated:



|                                     |  | For the Years Ended December 31, |          
|------------------------------------ |  | -------------------------------- | ---------
|                                     |  | 2011 (China Dredging)            |          
|                                     |  | Amount                           |          
|Revenue tax expenses*                |  | $                                | 7,398,387
|Salary and benefits                  |  |                                  | 420,999  
|Operating insurance                  |  |                                  | 205,343  
|Other expenses                       |  |                                  | 426,225  
|Financing and restructuring expenses |  |                                  | 993,764  
|Total G&A                            |  | $                                | 9,444,718



| | * | In the PRC, provincial and local governments levy certain taxes based on revenue and we record this tax expense as a general and administrative expense.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------



General and administrative expense increased from $7.2
million, or 5.4% of revenues in 2010, to $9.4 million, or 4.2% of revenues in 2011.  The increase in general and
administrative expense was primarily attributable to an increase in revenue taxes of $2.3 million.  For the
services we provide, business tax should be paid as 3% of revenue and does not fluctuate in a consistent manner with contract
revenue. The increases in salary and benefits expense and other expenses in 2011 as compared with 2010 ($0.2 million and
$0.1 million, respectively) were primarily attributable to maintenance of our company and our subsidiaries other than Fujian
Service.  We had an aggregate of $0.9 million of non-recurring restructuring expenses in
2011, which mainly reflect auditor and legal fees relating to the Merger.



46







Operating Income



As a result of the foregoing, our operating income increased
by $53.1 million, or 81.0% (72.6% without foreign exchange effect), to $118.6 million in 2011, from $65.5 million in 2010.



Income Tax



Income tax expense increased by $13.5 million, or 81.8% (73.4%
without foreign exchange effect), from $16.6 million in 2010 to $30.1 million in 2011, primarily due to the increase in our taxable
income.  The applicable income tax rate was 25%, which was effective on January 1, 2008 in the PRC.  Income
tax expense increased by a greater percentage than did operating income because of approximately $2.1 million of non-tax deductible
expenses incurred in 2011.  These non-deductible expenses consisted primarily of organizational and administrative expenses
of our BVI company.



Net Income



As a result of the foregoing, our net income increased by $48.2
million, or 99.8% (90.3% without foreign exchange effect), to $96.4 million, compared to $48.2 million in 2010.



Year Ended December 31, 2010 Compared to Year Ended December
31, 2009



The following table presents our operating results for the year
ended December 31, 2010 compared to the year ended December 31, 2009.  The 2009 amounts include only Fujian Service as
the other companies in our consolidated group did not exist until 2010.



|                                    |  | For the Years Ended December 31, |             |   |                           |  |       |          |  |   | Percent            |  
|----------------------------------- |  | -------------------------------- | ----------- | - | ------------------------- |  | ----- | -------- |  | - | ------------------ | -
|                                    |  | 2010
    (China Dredging)        |             |   | 2009
    (Fujian Service) |  |       | Increase |  |   | Percent
    Change |  
|Contract revenue                    |  | $                                | 131,405,665 |   |                           |  | 100.0 | %        |  | $ | 80,333,891         |  
|Cost of contract revenue            |  |                                  | (58,723,528 | ) |                           |  | (44.7 | )%       |  |   | (38,715,490        | )
|Gross profit                        |  |                                  | 72,682,137  |   |                           |  | 55.3  | %        |  |   | 41,618,401         |  
|General and administrative expenses |  |                                  | (7,159,793  | ) |                           |  | (5.4  | )%       |  |   | (2,531,132         | )
|Income from operations              |  |                                  | 65,522,344  |   |                           |  | 49.9  | %        |  |   | 39,087,269         |  
|Other income (expense)              |  |                                  | (731,668    | ) |                           |  | (0.6  | )%       |  |   | (726,020           | )
|Income before income taxes          |  |                                  | 64,790,676  |   |                           |  | 49.3  | %        |  |   | 38,361,249         |  
|Income tax expense                  |  |                                  | (16,556,396 | ) |                           |  | (12.6 | )%       |  |   | (9,596,651         | )
|Net income                          |  | $                                | 48,234,280  |   |                           |  | 36.7  | %        |  | $ | 28,764,598         |  



The following table summarizes changes in backlog on contracts
during the year ended December 31, 2010.  Backlog represents the amount of revenue we expect to realize from work to
be performed on contracts in progress at year end and from contractual agreements on which work has not yet begun.



|Backlog balance at December 31, 2009                                   |  | $ | 8,139,422    |  
|---------------------------------------------------------------------- |  | - | ------------ | -
|New contracts entered during the year ended December 31, 2010          |  |   | 184,386,368  |  
|Add:  Adjustment of contracts due to change of orders during the year  |  |   | 1,190,626    |  
|Adjusted contract amount at December 31, 2010                          |  |   | 193,716,416  |  
|Less:  Contract revenue earned during the year ended December 31, 2010 |  |   | (131,405,665 | )
|Backlog balance at December 31, 2010                                   |  | $ | 62,310,751   |  



The significant growth in backlog during 2010
was primarily attributable to the formalization of contracts that permitted reporting of firm backlog statistics and,
to a lesser degree, our increased availability to enter into larger contract commitments as a result
of adding four vessels to our dredging fleet in the second half of 2010.



Dredger Downtime for Redeployment/Repositioning



|     |  | Q1 |      |   | Q2 |  |     | Q3 |  |  | Q4   |   |  | Year Average |     
|---- |  | -- | ---- | - | -- |  | --- | -- |  |  | ---- | - |  | ------------ | ----
|2010 |  |    | 2.9  | % |    |  | 4.4 | %  |  |  | 10.9 | % |  |              | 17.8
|2009 |  |    | 18.0 | % |    |  | 2.4 | %  |  |  | 10.0 | % |  |              | 3.5 



47







The impact of redeployments and repositioning on our overall
fleet utilization was slightly higher in 2010 than in 2009, reflecting an increase in average downtime of 2.1%.  However,
while the year average was similar from 2009 to 2010, dredger downtime showed great volatility quarter-to-quarter, both when comparing
sequential periods and when comparing the first and fourth fiscal quarters of 2010 to 2009.  We believe this volatility
is common in the dredging business and reflects changes in contract arrangements from time to time.



Effect of Exchange Rates



Substantially all of our operations are conducted in the PRC
and RMB which is our functional currency.  The average exchange rate used in translating the results of operations and
cash flows for the years ended December 31, 2010 and 2009 was 6.7604 and 6.8303, respectively, which represented a 1.0% increase
from 2009 to 2010 in the value of the RMB against the U.S. dollar.



Revenue



Contract revenue increased by $51.1 million, or 63.6% (61.9%
without foreign exchange effect), to $131.4 million in 2010, compared to $80.3 million in 2009.  The increase primarily
reflects the increase of our dredging volume and unit construction price.  With four leased dredgers joining the fleet in 2010, we were able to deliver
larger business volume and execute more projects with various field conditions.  We completed 78.6 million cubic meters
of dredging volume in 2010 as compared to 52 million cubic meters in 2009, a 51.2% increase in dredging volume.  In addition,
the unit construction price per cubic meter increased by $0.12, or 7.7% (7.1% without foreign exchange effect), to $1.67 in 2010
from $1.55 in 2009 due to increase of demand for our dredging services and general market conditions providing us with stronger
negotiation power.



Cost of Revenue



Cost of revenue increased by $20.0 million, or 51.7% (50.2%
without foreign exchange effect), from $38.7 million in 2009 to $58.7 million in 2010, primarily due to our increased revenue.  Unit
construction cost per cubic meter is $0.74 and $0.75 in 2010 and 2009, respectively.



|                         |  | For the Years Ended December 31, |           
|------------------------ |  | -------------------------------- | ----------
|                         |  | 2010 (China Dredging)            |           
|                         |  | Amount                           |           
|Wages                    |  | $                                | 885,561   
|Leasing fees             |  |                                  | 7,150,238 
|Crew hire charge         |  |                                  | 2,685,442 
|Consumable parts         |  |                                  | 42,964,969
|Depreciation             |  |                                  | 5,037,318 
|Cost of contract revenue |  | $                                | 58,723,528



The cost of consumable parts increased from $29.7 million in
2009 to $43.0 million in 2010, while the percentage to revenue declined from 37.0% to 32.7%, primarily due to improved cost control
and operation management.  This decrease resulted in the decrease of average unit construction cost of $0.02.  Leasing
fees increased by $5.4 million, primarily due to our four leased vessels being put into operation in June 2010, accounting for
5.4% of our revenue in 2010 as compared to 2.1% in 2009.  This increase resulted in the increase of average unit construction
cost of $0.06.  The crew hire charge associated with leased vessels increased by $1.2 million in 2010 compared to 2009,
also due to the addition to our four leased vessels.  The crew hire charge change had insignificant impact on our unit
construction cost.  The amount of wages and depreciation remained relatively flat in 2010 compared to 2009, primarily
reflecting our ownership and operation of the same three dredgers in our fleet.  Wages accounted for 0.7% and 1.1% of
our revenue in 2010 and 2009, respectively, which decrease resulted in the decrease of average unit construction cost of $0.01.  Depreciation
accounted for 3.8% and 6.2% of our revenue in 2010 and 2009, respectively, which decrease resulted in the decrease of average unit
construction cost of $0.04.  The decrease of wages and depreciation in percentage of revenue was due to increase in leased
vessels.



48







Gross Profit



Gross profit increased by $31.1 million, or 74.6% (72.8% without
foreign exchange effect), to $72.7 million in 2010, compared to $41.6 million in 2009, primarily due to our increased revenue.  Since
our average unit construction price in 2010 increased by 7.7% (7.1% without foreign exchange effect) compared to 2009 while our
average unit construction cost remained substantially the same in these two years, our gross profit margin increased from 51.8%
to 55.3%, or a 6.8% percentage increase, primarily reflecting the increase of our average unit construction price.



General and Administrative Expenses



The following table sets forth certain information regarding the main components of our general
and administrative expenses for the years indicated:



|                                     |  | For the Years Ended December 31, |          
|------------------------------------ |  | -------------------------------- | ---------
|                                     |  | 2010 (China Dredging)            |          
|                                     |  | Amount                           |          
|Revenue tax expenses*                |  | $                                | 5,111,870
|Salary and benefits                  |  |                                  | 239,916  
|Operating insurance                  |  |                                  | 191,153  
|Other expenses                       |  |                                  | 312,633  
|Financing and restructuring expenses |  |                                  | 1,304,221
|Total G&A                            |  | $                                | 7,159,793



| | * | In the PRC, provincial and local governments levy certain taxes based on revenue and we record this tax expense as a general and administrative expense.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------



General and administrative expense increased from $2.5
million, or 3.2% of revenues in 2009 to $7.2 million, or 5.4% of revenues in 2010.  The increase in general and
administrative expense was primarily attributable to an increase in revenue taxes of $3.1 million.  For the
services we provide, business tax should be paid as 3% of revenue and does not fluctuate in a consistent manner with contract
revenue. The increases in salary and benefits expense and other expenses in 2010 as compared with 2009 ($0.1 million and
$0.1 million, respectively) were primarily attributable to maintenance of our company and our subsidiaries other than Fujian
Services following their formation.  We had an aggregate of $1.3 million of non-recurring restructuring expenses in
2010, which mainly reflect auditor and legal fees relating to the Merger.



Operating Income



As a result of the foregoing, our operating income increased
by $26.4 million, or 67.6% (65.7% without foreign exchange effect), to $65.5 million in 2010, from $39.1 million in 2009.



Income Tax



Income tax expense increased by $7.0 million, or 72.5% (70.8%
without foreign exchange effect), from $9.6 million in 2009 to $16.6 million in 2010, primarily due to the increase in our taxable
income.  The applicable income tax rate was 25%, which was effective on January 1, 2008 in the PRC.  Income
tax expense increased by a greater percentage than did operating income because of approximately $0.3 million of non-tax deductible
expenses incurred in 2010.  These non-deductible expenses consisted primarily of organizational and administrative expenses
of our BVI company.



Net Income



As a result of the foregoing, our net income increased by $19.5
million, or 67.7% (65.7% without foreign exchange effect), to $48.2 million, compared to $28.8 million in 2009.



49







Liquidity and Capital Resources



As of December 31, 2011 we had cash of $112.4 million, an increase
of $23.9 million from December 31, 2010. Our current assets totaled $160.3 million as of December 31, 2011 while our current liabilities
totaled $24.3 million. We have financed our activities to date primarily through cash generated from operating activities and private
placements of our securities.  Between October 2010 to December 2010, we completed multiple closings of our 2010 Private
Placement and received net proceeds of approximately $46.4 million, which substantially increased our cash balance and strengthened
our liquidity position.  We believe that our available working capital will be sufficient to maintain our operations
at the current level for at least the next 12 months.



As part of our efforts to expand our dredging capacity,
we are continuing to actively explore opportunities to expand our fleet.  Our capital expenditures have
historically related to the acquisition of dredgers.  As of December 31, 2011 and 2010, we had acquired dredgers
for $71.9 million and $54.2 million, respectively.  As of December 31, 2011 and 2010, we had capital commitments of
$50.0 million and $29.1 million, respectively, payable until May 2013 for the acquisition of two new
dredgers.  In January 2011, we acquired a non-self-propelling cutter suction dredger that we had previously leased
for a purchase price of $13.6 million.  The aggregate rental deposit of $5.2 million we previously paid was
deducted from the vessel purchase price when we acquired the vessel, and we paid the balance of $8.4 million with a portion
of the proceeds from our 2010 Private Placement.  $7.3 million of this balance had been paid as a deposit prior to
December 31, 2010 and had already been removed from cash and current assets.  The remaining $1.1 million was paid
from cash generated from Fujian Service’s operations.  In May 2011, we entered into an agreement to purchase a new,
non-self-propelling cutter suction dredger for approximately $41.3 million (RMB260 million).  We paid approximately
$20.7 million of the construction price with proceeds from our 2010 Private Placement and cash generated from
operations.  The remaining $20.6 million is payable upon the completion of certain construction milestones, which
we expect will be fully achieved by December 2012. In addition, approximately $0.1 million of the purchase price will be
withheld as quality earnest money payable after a one-year warranty period.



We intend to use the remaining proceeds from our 2010 Private
Placement to finance further expansion our fleet.  In the event that we are unable to fund our planned fleet expansion
in a timely manner, we intend to use cash generated from operating activities and pursue alternative sources of financing, such
as loan facilities from financial institutions.  As of the date of this Report, we have no arrangements in place for
such alternative sources of financing, which may not be available to us on reasonable terms, if at all.



The following table presents a comparison of our cash flows
and beginning and ending cash balances during the year ended December 31, 2011, 2010 and 2009.  The amounts in the three
categories of cash flows do not equal to the total changes for the years because of exchange rate effects:



|                                                      |  | For the Years Ended
December 31, |            
|----------------------------------------------------- |  | -------------------------------- | -----------
|                                                      |  | 2011                             |            
|                                                      |  | (China Dredging)                 |            
|Cash flows provided by operating activities           |  | $                                | 67,151,092 
|Cash flows used in investing activities               |  |                                  | (47,811,882
|Cash flows provided by/(used in) financing activities |  |                                  | 12,408     
|Net increase in cash                                  |  |                                  | 19,351,618 
|Cash at beginning of year                             |  |                                  | 88,532,472 
|Cash at end of year                                   |  | $                                | 112,409,544



Under our current corporate structure, Fujian WangGang is obligated
to pay Fujian Service a management fee of RMB 1 million and in return is entitled to 100% of the net profits (i.e., after all taxes
and expenses) of Fujian Service, as determined under PRC accounting rules.



We or our subsidiaries will be providing capital to Fujian Service
with proceeds from our equity transactions.  We may decide to provide some or all of this capital in the form of intercompany
loans.



In the future, cash generated by Fujian Service will be moved
to the other companies by a combination of the repayment of intercompany loans owed to us or other subsidiaries, or by payment
to Fujian WangGang of all or part of the 100% of net profits (i.e., after all taxes and expenses) of Fujian Service determined
under PRC accounting rules to which Fujian WangGang is entitled under the Contracted Management Agreement.  Under PRC
laws and regulations, Fujian Service is also required to set aside each year 10% of its net profits, based on PRC accounting standards,
in order to fund a statutory surplus reserve until the accumulated amount of such reserve reaches 50% of its registered capital.  This
reserve is not distributable as dividends except in the event of liquidation of Fujian Service. Consequently, distribution of the
net profits to which Fujian WangGang is entitled are subject to the 10% PRC statutory surplus reserve requirements each year, which
must remain invested in Fujian Service indefinitely unless Fujian Service is liquidated.



When Fujian WangGang receives profit distributions and proceeds
from the repayment of loans to Fujian Service, Fujian WangGang can make intercompany loans to other group members within the PRC
or declare and pay dividends to China Dredging HK.  Similarly, China Dredging HK can make loans to other group members
or declare and pay dividends to us.



50







We intend to retain most, if not all, of our available funds
and earnings to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the
foreseeable future. We have never declared or paid any cash dividends on our ordinary shares or preferred shares. Our board of
directors has significant discretion as to whether to distribute dividends. Even if our board of directors decides to declare and
pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results
of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our
subsidiaries, our financial position, contractual restrictions, BVI and PRC laws, and other factors deemed relevant by our board
of directors.



Cash Flow Provided by Operating Activities



The following table sets forth information regarding our cash
provided by operating activities for the years indicated:



|                                                                           |  | For the Years Ended December 31, |            
|-------------------------------------------------------------------------- |  | -------------------------------- | -----------
|                                                                           |  | 2011 (China Dredging)            |            
|Net income                                                                 |  | $                                | 96,392,261 
|Adjustments to reconcile net income to net cash                            |  |                                  |            
|Add:  depreciation expense                                                 |  |                                  | 7,161,602  
|Gain on obligation under "Make-Good Escrow"                                |  |                                  | (14,101,247
|Loss on derivative                                                         |  |                                  | 6,762,079  
|Changes in operating assets and liabilities:                               |  |                                  |            
|Accounts receivable, net                                                   |  |                                  | (13,231,643
|Cost and estimated earnings in excess of billings on contracts in progress |  |                                  | (12,820,576
|Other receivables                                                          |  |                                  | (2,013     
|Prepaid expenses                                                           |  |                                  | (4,653,504 
|Inventories                                                                |  |                                  | (1,792,368 
|Accounts payable                                                           |  |                                  | (1,027,530 
|Income taxes payable                                                       |  |                                  | 3,150,401  
|Accrued liabilities and other payables                                     |  |                                  | 1,313,630  
|Net cash provided by operating activities                                  |  | $                                | 67,151,092 



Our net cash provided by operating activities was
$67.2 million in 2011 (2010: $51.8 million, 2009: $31.0 million).  The net cash provided from operating activities
in 2011 was provided primarily by net income of $96.4 million (2010: $48.2 million, 2009: $28.8
million).  Adjustments for non-cash charges from depreciation expense were $7.2 million (2010: $5.0 million, 2009:
$5.0 million), mainly reflecting the fact that we added a new dredger in 2011, Xinggangjun #9 (2010 & 2009: nil), which
increased the number of our owned dredgers to 4 (2010 & 2009: 3).  We record depreciation on a straight-line
basis. Other adjustments for non-cash gain or charges were gain on obligation under the Make-Good Escrow in the amount of
$14.1 million (2010 & 2009: nil) and loss on derivative in the amount of $6.8 million (2010: 0.01 million, 2009: nil).
The gain on obligation under the Make-Good Escrow relates to our meeting earnings targets resulting in release of the
contingent liability and a resulting gain. The loss on derivative relates to the fair value adjustment to the embedded
derivatives in our preferred shares issued in our 2010 Private Placement.



Net income after non-cash gains or charges equaled $96.2 million
(2010: $53.3 million, 2009: $33.7 million).



In 2011, we collected $186.8 million (2010: $117.7 million,
2009: $78.1 million) from customers even though revenue was $227.0 million (2010: $131.4 million, 2009: $80.3 million).  This
primarily reflected an increase in accounts receivable, net of $13.2 million (2010: $12.5 million, 2009: nil), primarily due to
the completion and final settlement of several projects immediately prior to December 31, 2011.  This also reflected
an increase in cost and estimated earnings in excess of billings on contracts in progress of $12.8 million (2010: decrease of $1.4
million, 2009: increase of $2.2 million).  The reduction in 2010 occurred despite the fact that our revenue run rate
was higher during 2010 than in 2009 and primarily reflects variations in the timing of progress payments for contracts in progress
and the completion and final settlement of several projects immediately prior to December 31, 2010.



In 2011, we paid $102.1 million (2010: $54.7 million,
2009: $37.3 million) for expenses (net of interest income and sundry income) other than income taxes even though those
expenses totaled $107.8 million (2010: $66.6 million, 2009: $42.0 million), which included cost of contract revenue and
general and administrative expenses.  This primarily reflected the following factors:



| | · | depreciation of $7.2 million (2010: $5.0 million, 2009: $5.0 million).
| | - | ----------------------------------------------------------------------



51







| | · | a decrease in our accounts
payable of $1.0 million (2010: increase of $4.4 million, 2009: nil). This change was attributable primarily to accruals for
the use of consumable parts by our dredgers and payables in accordance with the leases.  Pursuant to certain lease agreements,
the lessors purchase certain components needed for dredging projects, which costs we are obligated repay.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | an increase in our inventories
of $1.8 million (2010: decrease of $0.2 million, 2009: increase of $0.4 million).  This increase occurred primarily
due to our increased need of inventory largely passed on to dredger lessors and accounted for as accounts payable.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | an increase in accrued liabilities
and other payables of $1.3 million ( 2010: increase of $2.3 million, 2009: increase of $0.1 million).  This increase
was attributable primarily to the accrual of leasing fees and crew hire charges in 2011.  The payment terms of two of
the four dredgers leased during June 2010 and new contracts entered in 2011 permit payment of lease fees and crew hire charge
in arrears.  This differs from the terms of our other dredger leases, which require us to pay lease fees and crew hire
charges prior to the end of each month or quarterly of operation.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In 2011, we paid $27.0
million (2010: $13.9 million, 2009: $9.8 million) in income tax while our income tax expense was $30.1 million (2010: $16.6 million,
2009: $9.6 million).  This primarily reflected an increase of $3.2 million (2010: increase of $2.7 million, 2009: decrease
of $0.2 million) in income taxes payable. Since our income tax expense increased in 2011 compared to 2010, we did not have to settle
a portion of the increase until after year end.



Cash Flow Used in Investing Activities



|                                                      |  | For the Years Ended December 31, |            
|----------------------------------------------------- |  | -------------------------------- | -----------
|                                                      |  | 2011
(China Dredging)            |            
|Deposits paid for dredgers                            |  | $                                | (20,162,854
|Changes in security deposits                          |  |                                  | (25,746,413
|Payment of purchases of property, plant and equipment |  |                                  | (1,902,615 
|Net cash used in investing activities                 |  | $                                | (47,811,882



In 2011, net cash used in investing activities was $47.8 million
(2010: $25.0 million, 2009: $2.2 million). In 2011, we paid $20.2 million as a deposit for the building of a dredger and a net
payment of $25.7 million as security deposits for leasing additional dredgers ($37.6 million paid for 6 newly leased dredgers and
$11.9 million refunded for termination of 2 leased dredgers). Also in 2011, $1.1 million was used to purchase a previously-leased
dredger, Xinggangjun #9 (paid by cash of $1.1 million and offset by dredger deposit of $12.8 million), and $0.8 million was used
to purchase a pump for Xinggangjun #66.



In 2010, the $25.0 million paid in 2010 included a $12.2 million
deposit for the dredger purchased in January 2011, as discussed above.  An additional $12.4 million was paid for new
security deposits on leased dredgers as we leased more dredgers to expand our business.  Another $0.3 million was spent
for property plant and equipment.



We anticipate significant future uses of cash for the acquisition
of additional dredgers, as we replace leased dredgers with our own dredgers and we expand our operations.  We plan meet
these cash needs using our cash on hand and cash generated by operations.



Cash Flow Provided by/(Used in) Financing Activities



|                                                    |  | For the Years Ended December 31, |       
|--------------------------------------------------- |  | -------------------------------- | ------
|                                                    |  | 2011 (China Dredging)            |       
|Repayment of term loans                             |  |                                  | -     
|Proceeds from term loans                            |  |                                  | -     
|Repayment of dredger payable                        |  |                                  | -     
|Proceeds from share issue                           |  |                                  | -     
|Capital contributions from owners                   |  |                                  |       
|Advance from related companies                      |  |                                  | 12,408
|Net cash provided by/(used in) financing activities |  | $                                | 12,408



52







Net cash provided by financing activities increased by $43.7
million to $36.9 million in 2010, from net cash used in financing activities $6.8 million in 2009.  The increase was
primarily attributable to an increase in proceeds from the sale of our securities in our 2010 Private Placement of $46.4 million.  We
effectively used $10.4 million of the proceeds, plus amounts to offset new borrowings during the year in anticipation of our 2010
Private Placement, to retire all of our outstanding loans and debt.  We also received an additional $0.9 million in capital
contributions during the year.



With the retirement of debt in 2010, we have no plans to incur
new debt.  We may do so in the future if we conclude it is necessary or appropriate in executing our business plan.



Off-Balance Sheet Arrangements



We have not entered into any financial guarantees or other commitments
to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that
are indexed to our own shares and classified as shareholder’s equity, or that are not reflected in our consolidated financial
statements with the exception of our major shareholder, Mr. Xinrong Zhuo providing to investors in our 2010 Private Placement the
contingent right to receive escrow shares. This was done to enable us to sell our preferred shares at the price obtained and is
accounted for as a contribution of the contingent right to us and as a sale of those rights to the private placement investors
for a portion of the proceeds received. 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. Moreover, 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



The following table sets forth information
regarding our contractual payment obligations as of December 31, 2011:



|                                     |  | Payments due by period |            
|------------------------------------ |  | ---------------------- | -----------
|Contractual Obligations              |  | Total                  |            
|Operating lease obligations          |  |                        |            
|- related party transactions         |  | $                      | 50,068     
|- non-related party transactions     |  |                        | 34,704,372 
|Purchase obligations (1)             |  |                        |            
|- non-related party transactions     |  |                        | 63,171,180 
|Capital commitments                  |  |                        |            
|- related party transactions (2)     |  |                        | -          
|- non-related party transactions (3) |  |                        | 50,048,460 
|Total                                |  | $                      | 147,974,080



| | (1) | Purchase obligations reflect our obligations to purchase consumable parts.
| | --- | --------------------------------------------------------------------------



| | (2) | Capital commitments to related party transactions reflect the commitment to purchase dredger Xinggangjun #9 from Fujian Lutong for $13.6 million.  We paid $12.5 million (including a reclassification of $5.2 million of a lease deposit) to Fujian Lutong as a deposit for the purchase of the dredger in 2010.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Capital commitments to non-related party transactions reflect the commitment to purchase two new non-self-propelling cutter suction dredgers for $50.0 million.  We previously paid $23.0 million as deposits for the purchase of the dredgers.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



53







Recent Accounting Pronouncements



In June 2011, the Financial Accounting Standards Board,
or the FASB, issued guidance regarding comprehensive income. The guidance (1) eliminates the option to present the components
of other comprehensive income as part of the statement of changes in stockholders’ equity, (2) requires the consecutive
presentation of statement of net income and other comprehensive income, and (3) requires an entity to present
reclassification adjustment on the face of the financial statements from other comprehensive income to net income. The
guidance does not change the items that must be reported in other comprehensive income or when an item of other comprehensive
income must be reclassified to net income. The guidance should be applied retrospectively and, for public entities, is
effective for fiscal years and interim periods within those years beginning after December 15, 2011, or January 1, 2012 for
us. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated
financial statements.



ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES



|A. | Directors and Senior Management
|-- | -------------------------------



Information regarding our directors
and executive officers is as follows:



|Name             |  | Age |  | Position in China Dredging                                    
|---------------- |  | --- |  | --------------------------------------------------------------
|Mr. Xinrong Zhuo |  | 47  |  | Chairman of the Board of Directors and Chief Executive Officer
|Mr. Alfred Ho    |  | 55  |  | Chief Financial Officer                                       
|Mr. Fangjie Gu   |  | 33  |  | Chief Operating Officer and Director                          
|Mr. Bin Lin      |  | 53  |  | Senior Vice President                                         
|Mr. Kit Chan     |  | 65  |  | Independent director                                          
|Mr. Yeliang Zhou |  | 62  |  | Independent director                                          
|Mr. Zengbiao Zhu |  | 62  |  | Independent director                                          



54







Mr. Xinrong Zhuo  has served as chairman
of our board and chief executive officer since August 2010, has served as director of Fujian Road & Bridge Construction Co.,
Ltd., an infrastructure construction company, since December 2008, has served as the sole director of Tian Yuan Co., Ltd., a real
estate investment company, since September 2007, has served as the chairman and legal representative of Fuzhou Dongxing Longju
Real Estate Development Co., Ltd., a real estate development company, since March 2007, has served as the vice general manager
of Fujian Huashang Real Estate Development Co., Ltd., a real estate development company, since December 2006, and has served as
the supervisor of Fuzhou Haiyiyongyu Import & Export Co., Ltd., a trading company, since June 1995. From November 2005 to December
2008, Mr. Zhuo served as the legal representative and the chairman of Fujian Road & Bridge Construction Co., Ltd. From June
2005 to September 2007, Mr. Zhuo served as vice general manager of Tian Yuan Co. Ltd. From February 2002 to September 2009, Mr.
Zhuo served as the legal representative and executive director of Fuzhou Baojie Haiyi Ocean Fishing Co., Ltd., an aquatic products
company. From June 1995 to September 2006, Mr. Zhuo served as the supervisor at Fuzhou Hong Long Ocean Fishery Co., Ltd., a marine
fishery.



Mr. Alfred Ho  has served as our chief financial
officer since November 2010. Mr. Ho has been the sole proprietor of Alfred Ho & Co., a certified public accounting firm in
Hong Kong, since January 2001 and has served as an independent non-executive director of New Universe International Group Limited,
an environmental company listed in Hong Kong, since October 2004. From October 2007 to April 2009, he served as the finance director
of Sinosoft Technology plc, a software company listed in the United Kingdom, from 1997 to 1999 he served as Tax Manager at PricewaterhouseCoopers
in Hong Kong, and from 1993 to 1995 he served as a Senior Appeals Officer with Revenue Canada, Taxation. Mr. Ho received his bachelor’s
degree in Science from the University of Toronto in 1980. He is a member of the Canadian Institute of Chartered Accountants, the
Hong Kong Institute of Certified Public Accountants, and the Taxation Institute of Hong Kong, and he serves on the Examination
& Accreditation Committee of Hong Kong Institute of Accredited Accounting Technicians and as an External Examiner of Hong Kong
Institute of Vocational Education.



Mr. Fangjie Gu  has served as our chief operating
officer and one of our directors since August 2010 and as the general manager of Fujian Service since June 2010. Mr. Gu has served
as the legal representative and chairman of Shenzhen West Coast Fisherman’s Wharf Business Co., Ltd., an aquatic products
company, since August 2010, has served as the supervisor of Fujian Lutong Highway Engineering Construction Co. Ltd., or Fujian
Lutong, a construction materials company, since October 2006, and has served as the vice general manager of Fujian Yihai Investment
Co., Ltd., an infrastructure projects investment company, since March 2005. From January 2004 to June 2007, Mr. Gu served as vice
general manager in Fuzhou Honglong Ocean Fishery Co., Ltd., a marine fishery. From September 2001 to August 2004, he served as
the project manager of China Overseas Engineering Group Co., Ltd., an architecture firm. Mr. Gu earned his BA degree in English
from Beijing Language and Culture University in 2001.



Mr. Bin Lin  has served as our senior vice
president since August 2010. From January 2007 to August 2010, Mr. Lin served as vice general manager of Tianyuan Co., Ltd., an
investment company. From May 2003 to March 2007, he served as vice chairman of Fujian Tianxiang Group Co., Ltd, an agricultural
company listed on the China Shanghai Stock Exchange. From November 2003 to October 2006, he served as a member of the board of
directors of Industrial Securities Co., Ltd., a financial services company. Mr. Lin received his BS degree in Pharmacy from Shanghai
Medical College of Fudan University (formerly Shanghai Number One School of Medicine) in 1982.



Mr. Kit Chan  has served as a director since
August 2010, and has been appointed as an independent director since April 2011. Mr. Chan has served as a director of Haifeng Dafu
Enterprise Company Limited, a Hong Kong shipping company, since April 2010, as a director of Hai Yi Shipping Ltd., a shipping company
in Hong Kong, since May 2009, as a manager at Hua Shang Resources Group Ltd., a Hong Kong real estate investment firm, since October
2007, and as a director of Ee Hing Resources Company Ltd., a Hong Kong chemical trading company, since February 1991. Mr. Chan
received his BA degree in Chinese Language and Literature from Huaqiao University in 1967.



Mr. Yeliang Zhou  has served as an
independent director since April 2011. Mr. Zhou has served as an advisor to the PBOC and as the deputy director of Zhejiang Province
People’s Political Consultative Conference, economic committee, since January 2009, and has served as the president of Zhejiang
Province Venture Capital and Private Equity Association since May 2010. Mr. Zhou has served as a supervisor of Industrial Bank,
a commercial bank listed in the Shanghai stock exchange in China, since November 2010, and has served as an independent director
of Union Trust Limited in China, since November 2009. From 2004 to September 2009, he served as the president of the PBOC, Zhejiang
sub-branch and the director of SAFE Zhejiang sub-branch, and from 1993 to 2004, he first served as the vice-president and then
president of PBOC Fujian sub-branch and the director of SAFE Fujian sub-branch. Mr. Zhou received his bachelor’s degree in
Finance from Xiamen University in 1974.



Mr. Zengbiao Zhu  has served as an independent
director since April 2011. Mr. Zhu has been a member of the National People’s Congress, or NPC, Standing Committee of Fujian
Province and a member of the NPC Financial and Economic Committee of Fujian Province since January 2008. From 2004 to December
2009 he served as the director of the China Insurance Regulatory Commission Fujian Bureau, from 2000 to 2004 he first served as
the deputy director and then the director of the China Insurance Regulatory Commission Fujian Bureau Fuzhou Office, and from 1995
to 2000 he served as the president of PBOC Fuzhou sub-branch. Mr. Zhu received his bachelor’s degree in Finance from Xiamen
University in 1974.





55











|B. | Compensation
|-- | ------------



Compensation of Directors and Executive Officers



The following table sets forth compensation information for
our executive officers for the fiscal year ended December 31, 2011:



Summary Compensation Table for Fiscal Year Ended December
31, 2011



|Name and Principal Position                                                      |  | Salary ($) |        |  | Bonus ($) |  |   | Total ($) | 
|-------------------------------------------------------------------------------- |  | ---------- | ------ |  | --------- |  | - | --------- | 
|Mr. Xinrong Zhuo, Chairman of the Board of Directors and Chief Executive Officer |  |            | 40,106 |  |           |  | - |           | 
|Mr. Fangjie Gu, Chief Operating Officer and Director                             |  |            | 15,076 |  |           |  | - |           | 
|Mr. Alfred Ho, Chief Financial Officer                                           |  |            | 77,127 |  |           |  | - |           | 
|Mr. Bin Lin, Senior Vice President                                               |  |            | 35,478 |  |           |  | - |           | 



We have not granted any options or other equity compensation
to directors or executive officers. Other than statutory severance payments to executive officers who are employees, which are
required under PRC law, we do not provide benefits for directors or executive officers upon termination of service.



In April 2011, our board of directors determined that our independent
directors would receive annual compensation of HK$100,000 (or the equivalent currency) for service as independent directors, which
is paid on the first month of each year during the term in which they are serving as independent directors.



Employment Agreements



In August 2010, we entered into three-year employment agreements
with three of our executive officers, Mr. Zhuo, Mr. Lin and Mr. Gu, pursuant to which they each receive aggregate annual compensation
of approximately $116,000. In November 2010, we entered into a three-year employment agreement with Alfred Ho, pursuant to which
he receives aggregate annual compensation of approximately $77,000. In January 2011, Fujian Service entered into a three-year employment
agreement with Mr. Gu, which collectively amended and restated our prior employment agreement with him. Pursuant to the agreements,
in addition to serving as our executive officer, Mr. Gu also serves as Fujian Service’s general manager, Fujian Service agreed
to pay his salary payable from China Dredging, including bonuses, and Mr. Gu receives aggregate annual compensation from Fujian
Service aggregating approximately $14,000. Pursuant to the agreements, each executive is eligible to receive our standard employee
benefits and has agreed to devote all of his working time to his respective duties to us, not to become employed in any competitive
business while employed by us or for two years following the termination of his employment with us, and not to solicit the services
of any of our employees for two years following the termination of his employment with us. We may terminate the executive for cause
at any time without notice, or without cause upon one month prior written notice to the executive. In the event of termination
without cause, we have agreed to pay to the executive a cash severance payment equal to three months of the executive’s then
current base salary. In the event of a material and substantial reduction in the executive’s existing authority and responsibilities,
the executive may resign upon one-month prior written notice to us.



|C. | Board Practices
|-- | ---------------



Term of Service



Our board of directors consists of five directors. Our directors
are elected for a one-year term to hold office until the next annual meeting of our shareholders and until their successors have
been duly elected and qualified, or until their earlier resignation or removal. Our officers are appointed by our board of directors
and hold office until removed by the board. We are not aware of any agreements with respect to the election of directors.



Corporate Governance



Our board of directors has an audit committee, a compensation
committee, and a nomination committee, each of which is composed entirely of independent directors. Each committee conducts its
business pursuant to a written charter approved by our board of directors. The following table sets forth the membership of each
of these committees:



|Audit Committee |  | Compensation Committee |  | Nomination Committee
|--------------- |  | ---------------------- |  | --------------------
|Yeliang Zhou*   |  | Zengbiao Zhu*          |  | Kit Chan*           
|Kit Chan        |  | Kit Chan               |  | Yeliang Zhou        
|Zengbiao Zhu    |  | Yeliang Zhou           |  | Zengbiao Zhu        



| | * | Chairman of the committee
| | - | -------------------------



56









Audit Committee



Our audit committee consists of Yeliang Zhou (Chair), Kit Chan
and Zengbiao Zhu, each of whom is an independent director as defined in Nasdaq listing rules and SEC rules. Based upon past employment
experience in finance and other business experience requiring accounting knowledge and financial sophistication, our board of directors
has determined that Mr. Zhou is an “audit committee financial expert,” as defined in Item 407(d)(5) of Regulation S-K,
and that each member of our audit committee is able to read and understand fundamental financial statements. Pursuant to its written
charter, our audit committee is responsible for:





| | · | appointing, compensating, retaining, overseeing and terminating our independent auditors and pre-approving all audit and non-audit services permitted to be performed by the independent auditors;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | discussing with management and the independent auditors our annual audited financial statements, our internal control over financial reporting, and related matters;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | reviewing and approving any related party transactions, after reviewing each such transaction for potential conflicts of interest and other improprieties;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | assisting with the administration of our code of conduct;
| | - | ---------------------------------------------------------



| | · | meeting separately, periodically, with management, the internal auditors and the independent auditors;
| | - | ------------------------------------------------------------------------------------------------------



| | · | annually reviewing and reassessing the adequacy of our audit committee charter;
| | - | -------------------------------------------------------------------------------



| | · | such other matters that are specifically delegated to our audit committee by our board of directors from time to time; and
| | - | --------------------------------------------------------------------------------------------------------------------------



| | · | reporting regularly to the board of directors.
| | - | ----------------------------------------------



Compensation Committee



Our compensation committee consists of Zengbiao
Zhu (Chair), Kit Chan and Yeliang Zhou, each of whom is an independent director as defined in Nasdaq listing rules,
a “non-employee director” under Rule 16b-3 promulgated under the Exchange Act, and an
“outside director” for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code.
Pursuant to its written charter, our compensation committee is responsible for:



| | · | reviewing and making recommendations to the board regarding our compensation policies and forms of compensation provided to our directors and officers;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | reviewing and making recommendations to the board regarding bonuses for our officers and other employees;
| | - | ---------------------------------------------------------------------------------------------------------



| | · | reviewing and making recommendations to the board regarding share-based compensation for our directors and officers;
| | - | --------------------------------------------------------------------------------------------------------------------



| | · | administering our share option plans in accordance with the terms thereof; and
| | - | ------------------------------------------------------------------------------



| | · | such other matters that are specifically delegated to the compensation committee by our board of directors after the business combination from time to time.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------



Nomination Committee



Our nomination committee consists of Kit Chan (Chair), Yeliang
Zhou and Zengbiao Zhu, each of whom is an independent director as defined in Nasdaq listing rules. Pursuant to its written charter,
our nomination committee is responsible for:



| | · | Overseeing the process by which individuals may be nominated to our board of directors after the business combination;
| | - | ----------------------------------------------------------------------------------------------------------------------



| | · | identifying potential directors and making recommendations as to the size, functions and composition of our board of directors after the business combination and its committees;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | considering nominees proposed by our shareholders;
| | - | --------------------------------------------------



| | · | establishing and periodically assessing the criteria for the selection of potential directors; and
| | - | --------------------------------------------------------------------------------------------------



| | · | making recommendations to the board of directors on new candidates for board membership.
| | - | ----------------------------------------------------------------------------------------



In making nominations, the nominating committee intends to submit
candidates who have high personal and professional integrity, who have demonstrated exceptional ability and judgment and who are
effective, in conjunction with the other nominees to the board, in collectively serving the long-term interests of the shareholders.
In evaluating nominees, the nominating committee intends to take into consideration attributes such as leadership, independence,
interpersonal skills, financial acumen, business experiences, industry knowledge, and diversity of viewpoints.



57







Duties of Directors



Under BVI law, our directors have a statutory duty to act honestly
in good faith with a view to our best interests. Our directors also have a duty to exercise care, skill, and diligence that a reasonable
person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance
with our Articles of Association. A shareholder has the right to seek damages if a duty owed by our directors is breached.



|D. | Employees
|-- | ---------



We had 106, 81 and 70 full-time employees as of December 31,
2011, 2010, and 2009, respectively. However, as of December 31, 2011, we utilized 377 people in our day-to-day operations, of which
106 persons were directly employed by us, 228 persons were hired by owners of our leased vessels and 43 persons were supplied by
a labor service company.



Approximately 28 crew members are staffed on each dredger,
with one captain, three vice captains, four engineers, nine machinists, ten sailors and one cook. Our policy is to appoint employees
(as opposed to outsourced staff) to important positions in our three company-owned dredgers, such as captain and chief engineer.
We believe this enables us to build an effective personnel training system and establish a professional team.



We generally sign engagement contracts of five years with our
employees working on our vessels. These agreements are at competitive salaries and generally provide for social and medical insurance.
We believe that the use of long-term employment contracts helps to maintain a stable work force. In accordance with applicable
PRC regulations, the insurance encompasses pension contributions and medical, unemployment, maternity and personal injury insurance.
The amount of contributions is based on the specified percentages of a particular employee’s aggregate salary as provided
for by relevant PRC law.



The crew for our leased dredgers are hired by the dredger owners
and the labor costs are included in the vessel lease contracts. As of December 31, 2011, a total of 228 crew members worked on
the leased dredgers. Welfare and benefit payments for the crew are paid by the lessors. The labor supply contracts for the leased
dredgers coincide with the termination of the respective boat leases. We pay a fixed quarterly payment to each lessor, as shown
in the table below.



|Dredger            |  | Quarterly Payment |           |  | Expiration Time | 
|------------------ |  | ----------------- | --------- |  | --------------- | 
|Hengshengjun #88   |  | $                 | 139,589   |  |                 | 
|Xiechang #18       |  |                   | 148,895   |  |                 | 
|Liya #10           |  |                   | 144,242   |  |                 | 
|Honglinjun #19     |  |                   | 162,854   |  |                 | 
|Fuyuan #5          |  |                   | 158,201   |  |                 | 
|Fuyuan #7          |  |                   | 162,854   |  |                 | 
|Hengshunda #1      |  |                   | 69,794    |  |                 | 
|Liya #2            |  |                   | 69,794    |  |                 | 
|Minningdejun #0099 |  |                   | 158,201   |  |                 | 
|TOTAL              |  | $                 | 1,214,424 |  |                 | 



We also outsource labor from one labor supply company to meet
our changing requirements for personnel. As of December 31, 2011, 43 crew members were outsourced under three agreements for our
dredgers, for which the total monthly payments were approximately $37,000 during 2011. Welfare and benefit payments for such personnel
are covered by the company supplying the laborers.



We have not experienced any significant labor disputes and we
believe that we maintain satisfactory relationships with our employees. We invest in continuing education and training programs
for staff with a view to constantly upgrading their skills and knowledge. Individual employment contracts with employees to cover
matters such as wages, employee benefits, training programs, safety and sanitary conditions in the workplace, confidentiality of
our proprietary information and grounds for termination.



|E. | Share Ownership
|-- | ---------------



See “ Major Shareholders ” set forth in Item 7.



58











ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS



|A. | Major Shareholders
|-- | ------------------



Except as specifically noted in the table, the following table
sets forth information with respect to the beneficial ownership of our ordinary shares as of the date of this Report by:



| | · | each of our directors and executive officers;
| | - | ---------------------------------------------



| | · | our directors and executive officers as a group; and
| | - | ----------------------------------------------------



| | · | each person known to us to own beneficially 5% or more of our ordinary shares.
| | - | ------------------------------------------------------------------------------



Beneficial ownership is determined in accordance with SEC rules
and generally includes the power to direct the voting or the disposition of the securities or to receive the economic benefits
of ownership of the securities. Unless otherwise indicated, the shareholders listed in the table have sole voting and investment
power with respect to the ordinary shares indicated. Unless otherwise noted, the principal address of each of the shareholders,
directors and officers listed below is c/o China Dredging Group Co., Ltd., 18th Floor, Tower A, Zhongshan Building, No. 154, Hudong
Road, Fuzhou, Fujian Province, PRC.



All share ownership figures include securities convertible or
exchangeable into our ordinary shares within sixty (60) days of the date of this Report, which are deemed outstanding
and beneficially owned by such person for purposes of computing his or her percentage ownership, but not for purposes of computing
the percentage ownership of any other person.



As of the date of this Report, 52,677,323 ordinary shares were
issued and outstanding, 365,000 of which were held of record in the United States by seven shareholders, and 10,012,987 preferred
shares were issued and outstanding, 3,588,000 of which were held of record in the United States by 40 shareholders. Pursuant to
our Articles of Association, holders of preferred shares do not have the right to vote on any resolutions of shareholders.



|                                                            |  | Shares Beneficially Owned |           
|----------------------------------------------------------- |  | ------------------------- | ----------
|                                                            |  | Ordinary Shares           |           
|                                                            |  | Number                    |           
|Directors and Executive Officers:                           |  |                           |           
|Mr. Xinrong Zhuo (1)                                        |  |                           | 33,852,703
|Mr. Kit Chan (2)                                            |  |                           | 2,608,866 
|Mr. Fangjie Gu                                              |  |                           | 0         
|Mr. Bin Lin (3)                                             |  |                           | 2,608,866 
|Mr. Alfred Ho                                               |  |                           | 0         
|Mr. Yeliang Zhou                                            |  |                           | 0         
|Mr. Zengbiao Zhu                                            |  |                           | 0         
|All directors and executive officers as a group (7 persons) |  |                           | 39,070,435
|Principal Shareholders:                                     |  |                           |           
|SCGC Capital Holding Company Limited (4)                    |  |                           | 3,440,000 



| | (1) | Shares are held of record by Mars Harvest Co. Ltd, Building 26, Mingyang Tianxia, No. 1 Yuquan Road, Fuzhou, Fujian Province, PRC. Mr. Zhuo is the sole director of Mars Harvest and has the power to vote and dispose of all of our ordinary shares that it holds.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Shares are held of record by Venus Seed Co., Ltd, Flat B, 27/F, Ko On Mansion, Taikoo Shing, Quarry Bay, Hong Kong. Mr. Chan is the sole director of Venus Seed and has the sole power to vote and dispose of all of our ordinary shares that it holds.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Shares are held of record by Saturn Glory Co., Ltd., Room 1402, Building 8, D District, Rongqiao Jinjiang, No. 66, Jiangbin West Road, Fuzhou, Fujian Province, PRC. Mr. Lin is the sole director of Saturn Glory and has the sole power to vote and dispose of all of our ordinary shares that it holds.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | SCGC Capital Holding Company Limited acquired 3,440,000 preferred shares through our 2010 Private Placement, each of which is convertible into one of our ordinary shares.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------





59









|B. | Related Party Transactions
|-- | --------------------------



In January 2008, we entered into an office lease with Ping Lin,
a relative of Qing Lin, one of the shareholders of Wonder Dredging, which holds a 50% interest in Fujian Service. This agreement
expired in December 2009 and was renewed and extended from January 1, 2010 to December 31, 2015. Annual lease payments to Ping
Lin were approximately $12,000, $12,000 and $9,000 in 2011, 2010 and 2009, respectively.



In May 2008, we entered into two three-year agreements with
Fujian Lutong, a related party, to lease a dredger and crew. In April 2010, the dredger leasing agreement was extended through
May 31, 2016. In May 2010, the crew leasing agreement was extended to May 31, 2016. Fujian Lutong owned 70% of Fujian Service from
September 2009 to March 2010. From September 2009 to October 2009 Lutong was owned by Fangjie Gu, our Chief Operating Officer,
and Panxing Zhuo, father of Mr. Xinrong Zhuo. In October 2009 Fangjie Gu and Panxing Zhuo transferred part of their equity interest
in Lutong to Fujian Yihai Investment Co., Ltd., or Fujian Yihai, and Lutong has been owned by Fujian Yihai, Fangjie Gu and Pangxing
Zhuo since then. Lease payments on the dredger for the years ended December 31, 2010 and 2009 were approximately $1.0 million,
and $1.0 million, respectively. Lease payments for the crew for the years ended December 31, 2010 and 2009 were $0.5 million, and
$0.5 million, respectively. In January 2011, we acquired this dredger for a purchase price of $13.6 million, all of which has been
paid, and payments pursuant to the dredging lease agreement and crew leasing agreement were suspended at the acquisition date.



In September 2008 and February 2010, we entered into loan agreements
which aggregate to approximately $14.8 million. These loans are secured by one of our dredgers, Xinggangjun #66. One of these loans
is guaranteed by Xinrong Zhuo, our Chairman and Chief Executive Officer, and the son of Panxing Zhuo, one of the shareholders of
Wonder Dredging. The other loan is guaranteed by Xinrong Zhuo and Qing Lin, one of the shareholders of Wonder Dredging. There are
no restrictive financial covenants associated with the loans, which are all non-recourse to us. We repaid these loans in December
2010 and the title of Xinggangjun #66 was released by the bank in January 2011.



In March 2009, we pledged one of our dredgers, Xinggangjun #6,
to secure an approximately $7.9 million credit facility granted to a related party, Fujian Province Pingtan County Ocean Fishery
Holdings Limited. Principal and interest on the loan was due in full by September 1, 2010. The related company was indirectly under
the control of Fuzhou Honglong Ocean Fishery Co., Ltd., which is controlled by Ping Lin, a relative of Panxing Zhuo and Qing Lin,
the collective owners of Wonder Dredging. The loan underlying the pledge was repaid in full and the pledge terminated in August
2010.



In May and June 2010, Wonder Dredging and Fujian WangGang entered
into one-year office leases with Ping Lin, respectively. Pursuant to the lease agreements, Wonder Dredging is obligated to make
annual lease payments of approximately $6,000 and Fujian WangGang is obligated to make annual lease payments of approximately $7,300.



In April and June 2011, Wonder Dredging and Fujian WangGang
entered into one-year office leases with Ping Lin, respectively. Pursuant to the lease agreements, Wonder Dredging is obligated
to make annual lease payments of approximately $6,000 and Fujian WangGang is obligated to make annual lease payments of approximately
$7,300.



In June 2010, Fujian WangGang entered into an equity
investment agreement with Wonder Dredging pursuant to which it invested approximately $23.6 million in Fujian Service in
exchange for a 50% equity interest in Fujian Service. In connection therewith, Fujian Service, Wonder Dredging, Fujian
WangGang, Mr. Qing Lin and Mr. Panxing Zhuo have entered into a series of contractual arrangements that allow Fujian WangGang
to, among other things, fully control Fujian Service’s business operations, policies and management, approve all
matters requiring shareholder approval, and receive 100% of the annual net income earned by Fujian Service. These contractual
arrangements include the Exclusive Option Agreement, Management Agreement, Equity Interest Pledge Agreement and irrevocable
power of attorney described in detail under the heading “Our Corporate Structure.”



|C. | Interests of Experts and Counsel
|-- | --------------------------------



Not applicable.



ITEM 8. FINANCIAL INFORMATION



|A. | Consolidated Statements and Other Financial Information.
|-- | --------------------------------------------------------



Our consolidated financial statements are set forth beginning
on page F-1 of this Report.



Legal Proceedings



Fujian Service was sued in four related lawsuits brought by
several individuals in Wenzhou, China, in May 2010. The lawsuits related to a traffic accident that allegedly caused the deaths
of two people and injuries to two other people. The plaintiffs alleged that a truck was hired for the Lingkun Construction Project,
and that the owner, the general contractor and Fujian Service as the subcontractor of the Lingkun Construction Project, all of
whom were named as co-defendants in these lawsuits, were responsible for the damages. The plaintiffs claimed total damages of approximately
$0.6 million. The court in the first instance for these four lawsuits held in 2011 that Fujian Service was not responsible for
any of the claims by the plaintiffs. Such court decisions are legally effective as they were not appealed. From time to time, we
may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject
to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.



60







Policy on Dividend Distributions



We have never declared or paid any cash dividends on our ordinary
shares or preferred shares.  We do not anticipate paying any cash dividends on our ordinary shares in the foreseeable
future and plan to retain earnings, if any, for use in the development of our business.  Any future determination to
pay cash dividends will be at the discretion of our board of directors and will depend upon our financial condition, operating
results, capital requirements, BVI and PRC laws, and other factors that our board of directors deems relevant.  The terms
of our preferred shares also limit our ability to pay dividends.



We are a BVI holding company and substantially all of our operations
are conducted through our PRC subsidiaries.  We rely principally on dividends paid to us by our PRC subsidiary for our
cash requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders, service any
debt we may incur and pay our operating expenses.  Under applicable PRC regulations, foreign-invested enterprises in
China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and
regulations.  In addition, a foreign-invested enterprise in China is required to set aside at least 10% of its after-tax
profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reach
50% of its registered capital.  These reserves are not distributable as cash dividends.  The board of directors
in the case of a Chinese-foreign joint venture company, or the shareholders at a meeting, in the case of a WFOE, has the discretion
to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners
except in the event of liquidation.



|B. | Significant Changes
|-- | -------------------



Except for changes described elsewhere in this Report, no significant
changes have occurred since the date of the of the annual financial statements.



ITEM 9. THE OFFER AND LISTING



|A. | Offer and Listing Details
|-- | -------------------------



Historical market price information for our shares is not available.  No
public market has existed for our shares.



|C. | Markets
|-- | -------



No public market currently exists for our shares.  We
may in the future pursue a trading market for our shares (or ADSs), although we may not do so, we may be unable to maintain any
such a trading market, and any such trading market may never be active.



ITEM 10. ADDITIONAL INFORMATION



|A. | Share Capital
|-- | -------------



Ordinary Shares



As of December 31, 2011 we were, and the date of this Report
we are, authorized to issue a maximum of 225,000,000 ordinary shares, no par value per share. As of December 31, 2011 there were,
and the date of this Report there are, 52,677,323 ordinary shares issued, fully paid and outstanding.



Information regarding changes in our capital structure is set
forth under the heading “Our Corporate Structure.”



Preferred Shares



We are authorized to issue 25,000,000 preferred shares, no par
value per share. Our preferred shares have no right to vote on any resolution of members. As of December 31, 2011 there were 10,012,987
preferred shares issued, fully paid, and outstanding. No preferred shares were issued or outstanding prior to our 2010 Private
Placement.



Upon (i) registration with the SEC of the ordinary shares underlying
our preferred shares for resale, or such ordinary shares being freely tradable in the U.S. pursuant to any available exemption,
and (ii) listing of the ordinary shares underlying our preferred shares on a U.S. national securities exchange (or on any other
recognized international exchange approved by a majority of the holders of our preferred shares), our preferred shares shall automatically
covert into ordinary shares, or an Automatic Conversion, at a ratio of one to one, subject to proportional adjustment for share
splits, divisions, share dividends, recapitalizations and similar transactions, at any time prior to an Automatic Conversion.



61







Each preferred share has the right to a preference over the
holders of ordinary shares in the distribution of any surplus of our assets in the event of any winding up, merger, acquisition
or sale of substantially all of our assets in which our shareholders do not own a majority of the issued shares of the surviving
entity.



If an Automatic Conversion does not occur by the second anniversary
of the closing of our 2010 Private Placement, holders of our preferred shares shall have the right to receive a payment equal to
20% of $5.00 per preferred share. If such payment is due and remains unpaid at the time of an Automatic Conversion, the holders
may choose to receive this payment in ordinary shares, in lieu of cash, at a purchase price of $5.00 per share.



As long as more than 2,500,000 preferred shares remain issued
and outstanding, holders of our preferred shares shall have the right to purchase, on a pro rata basis based upon their original
respective subscription amounts, in any equity financing of ours (a) ordinary shares or (b) equity securities convertible, exercisable
or exchangeable into ordinary shares; except that this right shall not apply to any underwritten public offering of ours. Any such
purchase by the holders of our preferred shares shall be on the same terms and conditions and at the same price such securities
are offered to a third party in the financing.



In the event of a change in control of us or we file for bankruptcy,
are judged insolvent, initiate liquidation or other analogous proceedings, or undergo a fundamental change, holders of our preferred
shares may elect, at their sole option, to request the redemption of some or all of their preferred shares at any time prior to
Automatic Conversion. Subject to applicable law, the holders of our preferred shares may request the redemption of some or all
of their preferred shares at any time after the second and prior to the third anniversary of the initial issuance of preferred
shares if Automatic Conversion has not occurred. Our preferred shares may be redeemed in whole or in part by us in our sole option
in the event that we undergo a fundamental change, provided that the holders of our preferred shares are first notified of the
fundamental change and have not less than seven days to convert their preferred shares into ordinary shares.



|B. | Memorandum and Articles of Association
|-- | --------------------------------------



The following is a summary description of our shares and certain
provisions of our Articles of Association, copies of which have been filed as exhibits to this Report.



General



We are a BVI company incorporated with limited liability and
our affairs are governed by the provisions of our Articles of Association, each as amended and restated from time to time, and
by the provisions of applicable BVI law.



As of the date of this Report, we are authorized to issue a
maximum of 225,000,000 ordinary shares, no par value per share, and 25,000,000 preferred shares, no par value per share. As of
the date of this Report, 52,677,323 ordinary shares were issued and outstanding and 10,012,987 preferred shares were issued and
outstanding.



No public market exists for our shares. We may in the future
pursue a trading market for our shares, although we may not do so, we may be unable to maintain any such a trading market, and
any such trading market may never be active.



The following is a summary of the material provisions of our
ordinary shares, our Articles of Association and the Companies Act.



Ordinary Shares



General. All of our outstanding
ordinary shares are fully paid and non-assessable. Ordinary shares are issued in registered form. Our shareholders who are nonresidents
of the BVI may freely hold and vote their ordinary shares.



Dividends. The holders of
our ordinary shares are entitled to such dividends as may be declared by our board of directors in accordance with the Companies
Act and other applicable BVI law.



Voting Rights. All of our
shareholders have the right to receive notice of shareholders’ meetings and to attend, speak and vote at such meetings. With
respect to matters requiring a shareholder vote, each ordinary share is entitled to one vote. A shareholder may participate at
a shareholders’ meeting in person, by proxy or by telephone conference or other electronic means by which all the shareholders
participating in the meeting can communicate with each other. A poll may be demanded by our Chairman or any shareholder holding
at least 10% of the voting power of ordinary shares with the right to vote at the meeting, present in person or by proxy.



62







A quorum for a shareholders’ meeting
consists of holders of at least half of the voting rights of the total ordinary shares entitled to vote thereat present in person
or by proxy or, if a corporation or other non-natural person, by its duly authorized representative. Shareholders’ meetings
may be convened by our board of directors on its own initiative or by the holders of at least 30% of the voting power attaching
to the ordinary shares. Advance notice of at least ten days is required for the convening of our annual general meeting and other
shareholders’ meetings.



A resolution to be passed by the shareholders
requires the affirmative vote of a simple majority of the votes attaching to the shares entitled to vote and voting on the resolution.



Transfer of Ordinary Shares.
Subject to the restrictions of our Articles of Association, as more fully described below, any of our shareholders may transfer
all or any of his or her ordinary shares by an instrument of transfer signed by the transferor and containing the name and address
of the transferee.



There is currently no legal requirement
under BVI law for instruments of transfer for our ordinary shares to be stamped. In addition, our board of directors has no present
intention to charge any fee in connection with the registration of a transfer of our ordinary shares.



Liquidation. Under our Articles
of Association, the liquidator may, in accordance with a resolution of the shareholders, divide among the shareholders in specie
or in kind the whole or any part of our assets and may for such purposes set such value as he deems fair upon any such property
to be divided as aforesaid and may determine how such division is to be carried out as between the shareholders or different classes
of shareholders.



Redemption of Shares. Subject
to the provisions of the Companies Act, the stock market rules, our Articles of Association and to any special rights conferred
on the holders of any shares or class of shares, we may issue shares on terms that they are subject to redemption at our option
or at the option of the holders, on such terms and in such manner as may be determined by a resolution of shareholders or resolution
of directors amending and restating our Articles of Association to create the rights and obligations attaching to such new redeemable
shares. Our currently outstanding ordinary shares are not subject to redemption at the option of the holders.



Variations of Rights of Shares.
All or any of the special rights attached to any class of shares may, subject to the provisions of the Companies Act be varied
with the sanction of a board resolution with the consent in writing of the holders of not less than a majority of the issued shares
of that class and the holders of not less than a majority of the issued shares of any other class of shares which may be adversely
affected by such variation. The rights conferred upon the holders of the shares of any class issued with preferred or other rights
shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the
creation or issue of further shares ranking pari passu with such previously existing class of shares.



Inspection of Books and Records.
Holders of our ordinary shares will have no general right under BVI law to inspect or obtain copies of our list of shareholders
or our corporate records.



Notices of Call . While all
of our ordinary shares are fully paid and non-assessable, under our Articles of Association we may, at any time after the due date
for payment, serve on a member who has not paid in full for shares registered in the name if that member, a written notice of call
specifying a date for payment to be made. The notice of call must name a further date not earlier than the expiration of 14 days
from the date of service of the notice of call on or before which the payment required by the notice of call is to be made, and
it must contain a statement that in the event of non-payment at or before such time the shares in respect of which payment is not
made will be liable to be forfeited. Where a written notice of call has been issued and the requirements of the notice of call
have not been complied with, the directors may, at any time before tender of payment, forfeit and cancel the shares to which the
notice of calls relates.



Differences in Corporate Law



We were incorporated under, and are governed
by, the laws of the BVI. The corporate statutes of the State of Delaware and the BVI are similar, and the flexibility available
under BVI law has enabled us to adopt Articles of Association that will provide shareholders with rights that are similar in many
respects with those they would enjoy under the Delaware General Corporation Law, or Delaware corporate law. Set forth below is
a summary of some of the differences between provisions of the Companies Act applicable to us and the laws applicable to companies
incorporated in Delaware and their stockholders.



63







Director’s Fiduciary Duties



Under Delaware corporate law, a director
of a Delaware corporation has a fiduciary duty to the corporation and its stockholders. This duty has two components: the duty
of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily
prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to
stockholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that
a director act in a manner he reasonably believes to be in the best interests of the corporation. He must not use his corporate
position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of
the corporation and its stockholders take precedence over any interest possessed by a director, officer or controlling stockholder
and not shared by the stockholders generally. In general, actions of a director are presumed to have been made on an informed basis,
in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption
may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction
by a director, a director must prove the procedural fairness of the transaction, and that the transaction was of fair value to
the corporation.



BVI law provides that every director of
the company in exercising his power or performing his duties, shall act honestly and in good faith and in what the director believes
to be in the best interests of the company. Additionally, the director shall exercise the same care, diligence, and skill that
a reasonable director would exercise in the same circumstances taking into account the nature of the company, and the nature of
the decision and the position of the director and his responsibilities. In addition, BVI law provides that a director shall exercise
his powers as a director for a proper purpose and shall not act, or agree to the company acting, in a manner that contravenes BVI
law or memorandum or articles of association of the company.



Under the Companies Act and common law in the BVI, directors’
duties are owed to the company, not to individual shareholders.



Amendment of Governing Documents



Under Delaware corporate law, with very
limited exceptions, a vote of the stockholders is required to amend the certificate of incorporation. Under BVI law, our board
of directors can have broad authority to amend our Articles of Association. Our board of directors may amend our Articles of Association
by a resolution of directors so long as the amendment does not:



| | · | restrict the rights or powers of the shareholders to amend our Articles of Association;
| | - | ---------------------------------------------------------------------------------------



| | · | change the percentage of shareholders required to pass a resolution of shareholders to amend our Articles of Association;
| | - | -------------------------------------------------------------------------------------------------------------------------



| | · | amend our Articles of Association in circumstances where our Articles of Association can only be amended by the shareholders; or
| | - | --------------------------------------------------------------------------------------------------------------------------------



Holders of our preferred shares do not
have the right to vote on any resolutions of the shareholders; provided, however, that we may not issue any shares that have a
liquidation preference that is senior to that of our preferred shares without the consent of the holders of at least two-thirds
of our preferred shares the issued and outstanding. In addition, pursuant to the terms of the Purchase Agreement, approval of holders
of our preferred shares is required before we take certain actions, including, among other things:



| | · | change the maximum number of authorized shares or change the rights attached to any class of ordinary or preferred shares, or capitalize any debenture; or
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | issue any new shares or options (including warrants, options or other rights to acquire shares) which issuance would exceed 5% of our issued shares on a fully diluted basis.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Written Consent of Directors



Under Delaware corporate law, directors
may act by written consent only on the basis of a unanimous vote. Under BVI law, directors’ consents need only a majority
of directors signing to take effect unless otherwise provided in our Articles of Association.



Written Consent of Shareholders



Under Delaware corporate law, unless otherwise
provided in the certificate of incorporation, any action to be taken at any annual or special meeting of stockholders of a corporation,
may be taken by written consent of the holders of outstanding stock having not less than the minimum number of votes that would
be necessary to take such action at a meeting. Under BVI law, provided a company’s memorandum and articles of association
so allow, shareholders’ consents need only a majority of shareholders signing to take effect.



Shareholder Proposals



Under Delaware corporate law, a stockholder
has the right to put any proposal before the annual meeting of stockholders, provided it complies with the notice provisions in
the governing documents. A special meeting may be called by the board of directors or any other person authorized to do so in the
governing documents, but stockholders may be precluded from calling special meetings. BVI law and our Articles of Association provide
that our directors shall call a meeting of the shareholders if requested in writing to do so by shareholders entitled to exercise
at least 30% of the voting rights in respect of the matter for which the meeting is requested.



64







Sale of Assets



Under Delaware corporate law, a vote of
the stockholders is required to approve the sale of assets only when all or substantially all assets are being sold. Under BVI
corporate law, shareholder approval is required when more than 50% of the company’s assets by value are being sold or otherwise
disposed of, unless such requirement is excluded by the company’s memorandum and articles.



Dissolution; Winding Up



Under Delaware corporate law, unless the
board of directors approves the proposal to dissolve, dissolution must be approved by stockholders holding 100% of the total voting
power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple majority
of the corporation’s outstanding shares. Delaware corporate law allows a Delaware corporation to include in its certificate
of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board of directors. As permitted
by BVI law and our Articles of Association, we may be voluntarily liquidated under Part XII of the Companies Act if we have no
liabilities and we are able to pay our debts as they fall due. A liquidator may, subject to the Companies Act, be appointed by
a resolution of directors or by a resolution of shareholders.



Redemption of Shares



Under Delaware corporate law, any stock
may be made subject to redemption by the corporation at its option or at the option of the holders of such stock provided there
remains outstanding shares with full voting power. Such stock may be made redeemable for cash, property or rights, as specified
in the certificate of incorporation or in the resolution of the board of directors providing for the issue of such stock. As permitted
by BVI law, subject to the requirements set out in the Companies Act and our Articles of Association, shares may be repurchased,
redeemed or otherwise acquired by us. Generally, our directors must be able to determine that immediately following any such redemption
or repurchase that we will be able to satisfy our debts as they fall due and the value of our assets will exceed our liabilities.



Removal of Directors



Under Delaware corporate law, a director
of a corporation with a classified board of directors may be removed only for cause with the approval of a majority of the outstanding
shares entitled to vote, unless the certificate provides otherwise. As permitted by BVI law, directors may, subject to the memorandum
and articles of association of a BVI company, be removed by resolution of shareholders. Where permitted by the memorandum and articles
of incorporation of a BVI company, a director may be removed by a resolution of directors.



Mergers



Under the Companies Act, two or more companies
may merge or consolidate in accordance with the statutory provisions. A merger means the merging of two or more constituent companies
into one of the constituent companies, and a consolidation means the uniting of two or more constituent companies into a new company.
In order to merge or consolidate, the directors of each constituent company must approve a written plan of merger or consolidation
which, unless the merger is between a parent company and one or more subsidiaries, must be authorized by a resolution of shareholders.



Shareholders not otherwise entitled to
vote on the merger or consolidation may still acquire the right to vote if the plan of merger or consolidation contains any provision
which, if proposed as an amendment to the memorandum or articles of association, would entitle them to vote as a class on the proposed
amendment. In any event, all shareholders must be given a copy of the plan of merger or consolidation irrespective of whether they
are entitled to vote at the meeting or consent to the written resolution to approve the plan of merger or consolidation.



Under Delaware corporate law, any two or
more corporations existing under Delaware law may merge into a single corporation, which may be any one of the constituent corporations
or may consolidate into a new corporation formed by the consolidation, pursuant to an agreement of merger or consolidation, as
the case may be, complying and approved in accordance with Delaware corporate law.



Inspection of Books and Records



Under Delaware corporate law, any stockholder
of a corporation may for any proper purpose inspect or make copies of the corporation’s stock ledger, list of stockholders
and other books and records. Under the Companies Act, a shareholder is generally entitled, on giving written notice to the company,
to inspect the memorandum and articles of association, the shareholders register, the directors register and minutes of meetings
and resolutions of shareholders and those classes of members of which he is a member. However, the directors may, if they are satisfied
that it would be contrary to the company’s interests to allow a member to inspect any such document (other than the memorandum
and articles of association), refuse to permit the member to inspect the document or limit the inspection of the document, including
limiting the making of copies or taking of extracts from the records. We will provide holders of our shares with annual audited
financial statements. See “Documents on Display.”



65







Conflict of Interest



The Companies Act provides that a director
shall, after becoming aware that he is interested in a transaction entered into by the company, disclose that interest to the board
of directors of the company. Failure of a director to disclose that interest does not affect the validity of a transaction entered
into by the director or the company, so long as the director’s interest was disclosed to the board of directors prior to
the company’s entry into the transaction or is not required to be disclosed (for example where the transaction is between
the company and the director himself or is otherwise in the ordinary course of business and on usual terms and conditions). As
permitted by BVI law and our Articles of Association, a director interested in a particular transaction may vote on it, attend
meetings at which it is considered, and sign documents on our behalf which relate to the transaction.



Transactions with Interested Shareholders



Delaware corporate law contains a business
combination statute applicable to Delaware public corporations whereby, unless the corporation has specifically elected not to
be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business
combinations with an “interested stockholder” for three years following the date that such person becomes an interested
stockholder. An interested stockholder generally is a person or group who or that owns or owned 15% or more of the target’s
outstanding voting stock within the past three years. This has the effect of limiting the ability of a potential acquirer to make
a two-tiered bid for the target in which all stockholders would not be treated equally. The statute does not apply if, among other
things, prior to the date on which such stockholder becomes an interested stockholder, the board of directors approves either the
business combination or the transaction that resulted in the person becoming an interested stockholder. This encourages any potential
acquirer of a Delaware public corporation to negotiate the terms of any acquisition transaction with the target’s board of
directors.



BVI law has no comparable statute. As a
result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However, although
BVI law does not regulate transactions between a company and its significant shareholders, the directors in deciding whether the
company should enter into any such transaction are subject to the fiduciary duties referred to under “Director’s Fiduciary
Duties” above. Additionally, there are certain statutory minority shareholder actions under BVI law which may be available
to protect the interests of minority shareholders depending on the circumstances and the particular transaction with the interested
shareholder.



Independent Directors



There are no provisions under Delaware
corporate law or under the Companies Act that require a majority of our directors to be independent.



Cumulative Voting



Under Delaware corporate law, cumulative
voting for elections of directors is not permitted unless the company’s certificate of incorporation specifically provides
for it. Cumulative voting potentially facilitates the representation of minority stockholders on a board of directors since it
permits the minority stockholder to cast all the votes to which the stockholder is entitled on a single director, which increases
the stockholder’s voting power with respect to electing such director. There are no prohibitions to cumulative voting under
the laws of the BVI, but our Articles of Association do not provide for cumulative voting.



Anti-Takeover Provisions in Our Articles of Association



Some provisions of our Articles of Association
may discourage, delay or prevent a change in control of our company or management that a shareholder might deem to be in his, her
or its best interest. For instance, our board of directors may issue preference shares in one or more series and designate the
price, rights, preferences, privileges and restrictions of such preference shares, including the right to approve or not approve
an acquisition or other change in control. In addition, our Articles of Association do not provide for cumulative voting, which
may make it more difficult for minority shareholders owning less than a majority of our ordinary shares to elect members of our
board of directors. Our board of directors has broad authority to amend our Articles of Association, and such future amendments
could discourage, delay or prevent a change in control.





66







|C. | Material Contracts
|-- | ------------------



All material contracts entered into other than during the ordinary
course of our business and for the three years preceding the date hereof are described elsewhere in this Report or in the information
incorporated by reference herein.



|D. | Exchange Controls
|-- | -----------------



Regulations on Foreign Currency Exchange



Under BVI law, there is no exchange control legislation and
accordingly there are no exchange control regulations imposed under BVI law, including foreign exchange controls or restrictions,
that affect the remittance of dividends, interest or other payments to BVI nonresident holders of our shares.



Foreign currency exchange in the PRC is governed by a series
of regulations. One of the key regulations governing foreign currency exchange in China is the Foreign Exchange Administration
Regulation, most recently amended on August 5, 2008. Under this regulation, Renminbi is freely convertible only to the extent of
current account items, such as trade-related receipts and payments, interest and dividends. Capital account items, such as direct
equity investments, loans and repatriation of investment, require the prior approval from SAFE or its local branch for conversion
of Renminbi into a foreign currency, such as U.S. dollars. Payments for transactions that take place within the PRC must be made
in Renminbi. Domestic companies or individuals can repatriate foreign currency payments received from abroad, or deposit these
payments abroad subject to the requirement that such payments by repatriated within a certain period of time. Foreign-invested
enterprises may retain foreign exchange in accounts with designated foreign exchange banks. Foreign currencies received for current
account items can be either retained or sold to financial institutions that have foreign exchange settlement or sales business
without prior approval from SAFE, subject to certain regulations. Foreign exchange income under capital account can be retained
or sold to financial institutions that have foreign exchange settlement and sales business, with prior approval from SAFE, unless
otherwise provided.



On March 3, 2003, SAFE issued the Notice on the Relevant Issues
concerning the Improvement of Foreign Exchange Administration of Direct Investments by Foreign Investors which provides that the
capital contributions by foreign investors in a foreign-invested enterprise should be reviewed and approved by SAFE or its local
counterpart.



On August 29, 2008, SAFE issued another circular, or Circular
142, which regulates the conversion by foreign-invested enterprises of foreign currency into Renminbi by restricting how the converted
Renminbi may be used. Circular 142 requires that Renminbi converted from the foreign currency-dominated capital of a foreign-invested
enterprise may only be used for purposes within the business scope approved by the relevant government authority and may not be
used to make equity investments in PRC, unless specifically provided otherwise. SAFE further strengthened its oversight over the
flow and use of Renminbi funds converted from the foreign currency-dominated capital of a foreign-invested enterprise. The use
of such Renminbi may not be changed without approval from SAFE, and may not be used to repay Renminbi loans if the proceeds of
such loans have not yet been used. Any violation of Circular 142 may result in severe penalties, including substantial fines.



In addition, under the Regulations of Settlement, Sale and Payment
of Foreign Exchange issued by the PBOC, foreign invested enterprises are required to comply with certain procedural requirements
to settle foreign currencies, such as providing valid commercial documents and, in the case of capital account item transactions,
obtaining approval from SAFE or its local counterpart. Furthermore, the PRC entity cannot settle foreign currencies, including
loans or direct investments, from offshore entity or natural persons without the prior approval by SAFE or its local counterpart.



We have historically received substantially all of our revenues
in Renminbi and we expect that to continue to be the case in the foreseeable future. Our inability to obtain the requisite approvals
or any future restrictions on currency exchanges could limit our liability to utilize revenue generated in Renminbi to fund our
business activities outside the PRC, or to repay foreign currency obligations. See “Risk Factors — Risk Relating
to Doing Business in the PRC — Currency fluctuations and restrictions on currency exchange may adversely affect our business,
including limiting our ability to convert Renminbi into foreign currencies and, if Renminbi were to decline in value, reducing
our revenue in U.S. dollar terms.”



Furthermore, any loans or direct investments by us in our PRC
entities are subject to the applicable regulations on foreign currency exchange. We may not be able to obtain the required registration
on a timely basis.



Regulations on Dividend Distribution



The principal regulation governing distribution of dividends
paid by WFOEs is the Company Law of the PRC (2006), the Wholly-Foreign Owned Enterprise Law (1986), as amended, and the Wholly-Foreign
Owned Enterprise Law Implementing Rules (1990), as amended. Under these regulations, foreign-invested enterprises in China may
pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations.
In addition, a foreign-invested enterprise in China is required to set aside at least 10% of its after-tax profit based on PRC
accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50% of its registered
capital. These reserves are not distributable as cash dividends except upon liquidation. The board of directors, in the case of
a foreign-invested enterprise, or the shareholders at a meeting, in the case of WFOEs, has the discretion to allocate a portion
of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of
liquidation.





67









|E. | Taxation
|-- | --------



BVI Taxation



Under the law of the BVI as currently in effect, a holder of
our securities or ordinary shares who is not a resident of the BVI is not liable for BVI income tax on dividends paid with respect
to the securities or ordinary shares, and all holders of the securities or ordinary shares are not liable to the BVI for income
tax on gains realized on the sale or disposal of such securities or ordinary shares. The BVI does not impose a withholding tax
on dividends paid by a company incorporated or re-registered under the Companies Act.



There are no capital gains, gift or inheritance taxes levied
by the BVI on companies incorporated or re-registered under the Companies Act. In addition, ordinary shares of companies incorporated
or re-registered under the Companies Act are not subject to transfer taxes, stamp duties or similar charges.



There is no income tax treaty or convention currently in effect
between the United States and the BVI, although a Tax Information Exchange Agreement is in force.



PRC Taxation



Resident Enterprise Treatment



In March 2007, the Fifth Session of the Tenth National People’s
Congress passed the EIT Law, which became effective on January 1, 2008. Under the EIT Law, enterprises are classified as “resident
enterprises” and “non-resident enterprises.” Pursuant to the EIT Law and its implementing rules, enterprises
established outside the PRC whose “de facto management bodies” are located in the PRC are considered “resident
enterprises” and subject to the uniform 25% enterprise income tax rate on their worldwide taxable income. In addition, dividends
from a PRC subsidiary to its foreign parent company would be subject to a withholding tax at the rate of 10%, unless such foreign
parent company’s jurisdiction of incorporation has a tax treaty with the PRC that provides for a reduced rate of withholding
tax, or the tax is otherwise exempted or reduced pursuant to the PRC tax laws. According to the implementing rules of the EIT Law,
“de facto management body” refers to a managing body that in practice exercises overall management control over the
production and business, personnel, accounting and assets of an enterprise.



In April 2009, the State Administration of Taxation, or SAT,
issued the Notice on the Issues Regarding Recognition of Overseas Incorporated Enterprises that are Domestically Controlled as
PRC Resident Enterprises Based on the De Facto Management Body Criteria, or Circular 82, which was retroactively effective as of
January 2008. Circular 82 provides that an overseas incorporated enterprise that is controlled by a PRC company or a PRC company
group will be recognized as a “tax-resident enterprise” if it satisfies all of the following conditions: (i) the senior
management responsible for daily production/business operations are primarily located in the PRC, and the location(s) where such
senior management execute their responsibilities are primarily in the PRC; (ii) strategic financial and personnel decisions are
made or approved by organizations or personnel located in the PRC; (iii) major properties, accounting ledgers, company seals and
minutes of board meetings and shareholder meetings are maintained in the PRC; and (iv) 50% or more of the board members with voting
rights or senior management habitually reside in the PRC. Our PRC counsel has advised us that the criteria set forth in Circular
82 do not apply to us directly because our BVI holding company was incorporated and has been controlled by Mr. Xinrong Zhuo, an
individual, and therefore is not a “foreign enterprise controlled by a PRC company or a PRC company group.”



Given the short history of the EIT Law and lack of applicable
legal precedent, it remains unclear how the PRC tax authorities will determine the resident enterprise status of a company organized
under the laws of a foreign, or non-PRC, jurisdiction and controlled by individuals. If the PRC tax authorities determine that
we are a “resident enterprise” under the EIT Law, a number of tax consequences should follow. First, we should be subject
to the enterprise income tax at a rate of 25% on our worldwide taxable income, as well as PRC enterprise income tax reporting obligations.
Second, our shareholders who are not Chinese residents will be subject to 10% withholding tax upon dividends payable by us. Third,
the EIT Law provides that dividend income between resident enterprises is exempted from enterprise income tax. As a result, if
we and China Dredging (HK) are treated as a “resident enterprise,” all dividends paid from Fujian WangGang to us (through
China Dredging (HK)) should be exempted from the PRC enterprise income tax. See “Risk Factors — Risks Relating
to Doing Business in the PRC — The dividends we receive from our Chinese subsidiaries and our global income may
be subject to Chinese enterprise income tax, which would have a material adverse effect on our results of operations; our foreign
securities holders will be subject to a Chinese withholding tax upon the dividends payable by us and subject to the income tax
on the gains on the sale of securities, if we are classified as a Chinese ‘resident enterprise.’”





68









As of the date of this Report, there has not been a definitive
determination as to the “resident enterprise” or “non-resident enterprise” status of us. However, because
it is not anticipated that we would receive dividends or generate other income in the near future, we are not expected to have
any income that would be subject to the 25% enterprise income tax on worldwide taxable income in the near future. We will make
any necessary tax payment if we (based on future clarifying guidance issued by the PRC) or the PRC tax authorities determine that
we are a resident enterprise under the EIT Law, and if we were to have income in the future.



Dividends From Fujian WangGang



If China Dredging (HK) is not treated as a resident enterprise
under the EIT Law, then dividends that China Dredging (HK) receives from Fujian WangGang may be subject to PRC withholding tax.
The EIT Law and the implementing rules of the EIT Law provide that (A) an income tax rate of 25% normally will be applicable to
“non-resident enterprises” that (i) have an establishment or place of business inside the PRC, and (ii) have income
in connection with their establishment or place of business that is sourced from the PRC or is earned outside the PRC but has an
actual connection with their establishment or place of business inside the PRC, and (B) a PRC withholding tax at a rate of 10%
will normally be applicable to dividends payable to non-resident enterprises that (i) do not have an establishment or place of
business in the PRC or (ii) have an establishment or place of business in the PRC, but the relevant income is not effectively connected
with such establishment or place of business, to the extent such dividends are derived from sources within the PRC.



As described above, the PRC tax authorities may determine the
resident enterprise status of entities organized under the laws of foreign jurisdictions on a case-by-case basis. China Dredging
(HK) is a holding company and substantially all of its income may be derived from dividends. Thus, if China Dredging (HK) is considered
a “non-resident enterprise” under the EIT Law and the dividends paid to China Dredging (HK) are considered income sourced
within the PRC, such dividends received may be subject to PRC withholding tax as described in the foregoing paragraph.



The State Council of the PRC or a tax treaty between China and
the jurisdiction in which the non-resident enterprise resides may reduce such income or withholding tax, with respect to such non-resident
enterprise. Pursuant to the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance
of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income, or the PRC-Hong Kong Tax Treaty, and relevant
circulars issued by the SAT, if the Hong Kong resident enterprise that is not deemed to be a conduit by the PRC tax authorities
owns more than 25% of the equity interests in a PRC resident enterprise, the 10% PRC withholding tax on the dividends the Hong
Kong resident enterprise receives from the PRC resident enterprise is reduced to 5%.



China Dredging is a BVI holding company, has a subsidiary in
Hong Kong, China Dredging (HK), which in turns owns a 100% equity interest in Fujian WangGang, a 50% indirect ownership of Fujian
Service, and variable interest entity arrangements with Wonder Dredging, which are PRC companies. As a result, if China Dredging
(HK) were treated as a “non-resident enterprise” under the EIT Law, then dividends that it receives from Fujian WangGang
and Fujian Service (assuming such dividends were considered sourced within the PRC) (i) may be subject to a 5% PRC withholding
tax, if the PRC-Hong Kong Tax Treaty were applicable, or (ii) if such treaty does not apply (i.e., because the PRC tax authorities
may deem China Dredging (HK) to be a conduit not entitled to treaty benefits), may be subject to a 10% PRC withholding tax. Similarly,
if we were treated as a “non-resident enterprise” under the EIT Law, and China Dredging (HK) were treated as a “resident
enterprise” under the EIT Law, then dividends that we receive from China Dredging (HK) (assuming such dividends were considered
sourced within the PRC) may be subject to a 10% PRC withholding tax. Any such taxes on dividends could materially reduce the amount
of dividends, if any, we could pay to our shareholders.



As of the date of this Report, there has not been a definitive
determination as to the “resident enterprise” or “non-resident enterprise” status of us or China Dredging
(HK). As indicated above, however, none of Fujian WangGang, Fujian Service and China Dredging (HK) are expected to pay any dividends
in the near future. Fujian WangGang, Fujian Service and China Dredging (HK) will make any necessary tax withholding if, in the
future, they were to pay any dividends and, based on future clarifying guidance issued by the PRC determine that China Dredging
(HK) is or we are a non-resident enterprise under the EIT Law.



Dividends that Non-PRC Resident Investors Receive From
Us; Gain on the Sale or Transfer of Our Ordinary Shares



If we are determined to be a resident enterprise under the EIT
Law and dividends payable to (or gains realized by) our investors that are not tax residents of the PRC, or non-resident investors,
are treated as income derived from sources within the PRC, then the dividends that the non-resident investors receive from us and
any such gain derived by such investors on the sale or transfer of our ordinary shares may be subject to income tax under the PRC
tax laws. As indicated below, under the PRC tax laws, we would not have an obligation to withhold PRC income tax in respect of
gains that non-resident investors may realize from the sale or transfer of our ordinary shares (regardless of whether such gains
would be regarded as income from sources within the PRC), but we would have an obligation to withhold PRC income tax at the applicable
rate described below (subject to reduction by applicable tax treaties) on dividends that non-resident investors receive from us
if such dividends are regarded as income derived from sources within the PRC.





69









Under the EIT Law and its implementing rules, PRC withholding
tax at the rate of 10% is applicable to dividends payable to non-resident investors that are enterprises (but not individuals)
and that (i) do not have an establishment or place of business in the PRC or (ii) have an establishment or place of business in
the PRC but the relevant income is not effectively connected with the establishment or place of business, to the extent that such
dividends are deemed to be sourced within the PRC. Similarly, any gain realized on the transfer of our ordinary shares by such
investors also is subject to 10% PRC income tax if such gain is regarded as income derived from sources within the PRC.



Under the PRC Individual Income Tax Law and its implementing
rules, a potential 20% PRC withholding tax may be applicable to dividends payable to non-resident investors who are individuals
and who (i) are not domiciled in the PRC and do not reside in the PRC or (ii) are not domiciled in the PRC and have resided in
the PRC for less than one year, to the extent that such dividends are deemed to be sourced within the PRC. Similarly, any gain
realized on the transfer of our ordinary shares by such investors may be subject to a 20% PRC income tax if such gain is regarded
as income derived from sources within the PRC.



The dividends paid by us to non-resident investors in respect
to ordinary shares, or the gain non-resident investors may realize from the sale or transfer of our ordinary shares, may be treated
as PRC-sourced income and, as a result, may be subject to PRC income tax. In such event, we may be required to withhold the applicable
PRC income tax on any dividends paid to non-resident investors. In addition, non-resident investors in ordinary shares may be responsible
for paying the applicable PRC income tax on any gain realized from the sale or transfer of our ordinary shares if such non-resident
investors and the gain satisfy the requirements under the PRC tax laws. However, under the PRC tax laws, we would not have an obligation
to withhold PRC income tax in respect of the gains that non-resident investors (including U.S. investors) may realize from the
sale or transfer of our ordinary shares.



If we were to pay any dividends in the future, and if we (based
on future clarifying guidance issued by the PRC), or the PRC tax authorities, determine that we must withhold PRC tax on any dividends
payable by us under the PRC tax laws, we will make any necessary tax withholding on dividends payable to our non-resident investors.
If non-resident investors as described under the PRC tax laws (including U.S. investors) realize any gain from the sale or transfer
of our ordinary shares, and if such gain were considered as PRC-sourced income, such non-resident investors would be responsible
for paying the applicable PRC income tax on the gain from the sale or transfer of our ordinary shares. As indicated above, under
the PRC tax laws, we would not have an obligation to withhold PRC income tax in respect of the gains that non-resident investors
(including U.S. investors) may realize from the sale or transfer of our ordinary shares.



Penalties for Failure to Pay Applicable PRC Income Tax



A non-resident investor in us may be responsible for paying
PRC income tax on any gain realized from the sale or transfer of our ordinary shares, if such non-resident investor and the gain
satisfy the requirements under the PRC tax laws, as described above. In addition, the penalties for failure to pay applicable PRC
income taxes will not be affected by the Agreement between the Government of the United States of America and the Government of
the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes
on Income.



According to the EIT Law and its implementing rules, the PRC
Tax Administration Law, or Tax Administration Law, and its implementing rules, the Provisional Measures for the Administration
of Withholding of Enterprise Income Tax for Non-Resident Enterprises, or Administration Measures, and other applicable PRC laws
or regulations, collectively, the Tax Related Laws, where any gain derived by a non-resident investor from the sale or transfer
of our ordinary shares, is subject to any income tax in the PRC, and such non-resident investor fails to file any tax return or
pay tax in this regard pursuant to the Tax Related Laws, such investor may be subject to certain fines, penalties or punishments,
including without limitation: (1) if the non-resident investor fails to file a tax return and present the relevant information
in connection with tax payments, the competent PRC tax authorities may order it to do so within the prescribed time limit and may
impose a fine up to RMB 2,000, and in egregious cases, may impose a fine ranging from RMB 2,000 to RMB 10,000; (2) if the non-resident
investor fails to pay all or part of the amount of tax payable, the non-resident investor may be required to pay the unpaid tax
amount payable, a surcharge on overdue tax payments (the daily surcharge is 0.05% of the overdue amount, beginning from the day
the deferral begins) and a fine ranging from 50% to 500% of the unpaid amount of the tax payable; (3) if the non-resident investor
fails to file a tax return and to pay the tax within the prescribed time limit according to the order by the PRC tax authorities,
the PRC tax authorities may collect and check information about the income receivable by the non-resident investor in the PRC from
other payers, or Other Payers, who will pay amounts to such non-resident investor, and send a “Notice of Tax Issues”
to the Other Payers to collect and recover the tax payable and overdue fines imposed on such non-resident investor from the amounts
otherwise payable to such non-resident investor by the Other Payers; (4) if the non-resident investor fails to pay the tax payable
within the prescribed time limit as ordered by the PRC tax authorities, a fine may be imposed on the non-resident investor ranging
from 50% to 500% of the unpaid tax payable, and the PRC tax authorities may, upon approval by the director of the tax bureau (or
sub-bureau) of, or higher than, the county level, take the following compulsory measures: (i) notify in writing the non-resident
investor’s bank or other financial institution to withhold from the account thereof for payment of the amount of tax payable,
and (ii) detain, seal off, or sell by auction or on the market the non-resident investor’s commodities, goods or other property
in a value equivalent to the amount of tax payable; or (5) if the non-resident investor fails to pay all or part of the amount
of tax payable or the surcharge for the overdue tax payment, and cannot provide a guarantee to the PRC tax authorities, the tax
authorities may notify the frontier authorities to prevent the non-resident investor or its legal representative from leaving the
PRC.





70









United States Federal Income Taxation



General



The following are the material U.S. federal income tax consequences
of the acquisition, ownership and disposition of our ordinary shares covered by this Report. The discussion below of the U.S. federal
income tax consequences to “U.S. Holders” will apply to a beneficial owner of our ordinary shares:



(a) who is, for U.S. federal income tax purposes, one of the
following:



| | · | an individual citizen or resident of the United States;
| | - | -------------------------------------------------------



| | · | a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized) in or under the laws of the United States, any state thereof or the District of Columbia; or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | an estate or trust whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or
| | - | -------------------------------------------------------------------------------------------------------------------------------



(b) who holds the shares as capital assets for U.S. federal
income tax purposes; and



(c) who owns, directly, indirectly or by attribution, less than
10% of the total combined voting power of our voting share.



This discussion does not address all of the tax considerations
that may apply to holders that are subject to special tax rules, such as U.S. expatriates, insurance companies, tax-exempt organizations,
certain financial institutions, persons subject to the alternative minimum tax, dealers and certain traders in securities, persons
holding shares as part of a straddle, hedging, conversion or other integrated transaction, persons who acquired their shares pursuant
to the exercise of employee stock options or otherwise as compensation, partnerships or other entities classified as partnerships
for U.S. federal income tax purposes or persons whose functional currency is not the U.S. dollar. Such holders may be subject to
U.S. federal income tax consequences different from those set forth below.



If a partnership holds shares, the tax treatment of a partner
generally will depend upon the status of the partner and the activities of the partnership. A partner in a partnership that holds
shares is urged to consult its own tax advisor regarding the specific tax consequences of owning and disposing of the shares.



This discussion is based on the Code, its legislative history,
regulations promulgated thereunder, published rulings and court decisions, all as currently in effect. These authorities are subject
to change or differing interpretations, possibly on a retroactive basis.



The U.S. Treasury Department has expressed concerns that parties
to whom shares are pre-released may be taking actions that are inconsistent with the claiming, by U.S. Holders of shares of foreign
tax credits for U.S. federal income tax purposes. Such actions also would be inconsistent with the claiming of the reduced rate
of tax applicable to dividends received by certain non-corporate U.S. Holders, as described below. Accordingly, the availability
of foreign tax credits or the reduced tax rate for dividends received by certain non-corporate U.S. Holders could be affected by
actions that may be taken by parties to whom shares are pre-released, or by future actions of the U.S. Treasury Department.



If a beneficial owner of our ordinary shares is not described
as a U.S. Holder, such owner will be considered a “Non-U.S. Holder.” The material U.S. federal income tax consequences
applicable specifically to Non-U.S. Holders are described below under the heading “Non-U.S. Holders.”



We have not sought, and do not intend to seek, a ruling from
the Internal Revenue Service, or the IRS, as to any U.S. federal income tax consequence described herein. The IRS may disagree
with the description herein, and its determination may be upheld by a court. Moreover, future legislation, regulations, administrative
rulings or court decisions may adversely affect the accuracy of the statements in this discussion.



U.S. Holders



Taxation of Dividends



Subject to the PFIC rules discussed below, distributions received
by a U.S. Holder on our ordinary shares, other than certain  pro rata  distributions of shares to all shareholders,
will constitute foreign source dividend income to the extent paid out of our current or accumulated earnings and profits (as determined
for U.S. federal income tax purposes). Because we do not intend to maintain calculations of our earnings and profits under U.S.
federal income tax principles it is expected that distributions generally will be reported to U.S. Holders as dividends. Corporate
U.S. Holders will not be entitled to claim the dividends-received deduction with respect to dividends paid by on our ordinary shares.
Subject to applicable limitations and the discussion above regarding concerns expressed by the U.S. Treasury Department, dividends
received by certain non-corporate U.S. Holders in taxable years beginning before January 1, 2013, will be taxable at a maximum
rate of 15%, provided that (a) ordinary shares become readily tradable on an established securities market in the United States
or, in the event we are deemed to be a PRC “resident enterprise” under the EIT Law, we are eligible for the benefits
of the Agreement between the Government of the United States of America and the Government of the People’s Republic of China
for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income, or the U.S.-PRC Tax Treaty,
and (b) we are not a PFIC, as discussed below, for either the taxable year in which the dividend was paid or the preceding taxable
year. Under published IRS authority, shares are considered for purposes of clause (a) above to be readily tradable on an established
securities market in the United States only if they are listed on certain exchanges. We may never have our securities listed on
a qualifying exchange and, if listed, we may be unable to maintain such listing.





71







Certain pro rata distributions of shares to all shareholders
are not generally subject to tax.



If PRC income taxes are withheld from dividends on ordinary
shares, such taxes will be creditable against a U.S. Holder’s U.S. federal income tax liability, subject to applicable restrictions
and limitations that may vary depending upon the U.S. Holder’s circumstances and the discussion above regarding concerns
expressed by the U.S. Treasury Department. Instead of claiming a credit, a U.S. Holder may elect to deduct foreign taxes (including
the PRC taxes) in computing its taxable income, subject to generally applicable limitations. An election to deduct foreign taxes
(instead of claiming foreign tax credits) applies to all taxes paid or accrued in the taxable year to foreign countries and possessions
o the United States. The limitations on foreign taxes eligible for credit is calculated separately with respect to specific classes
of income. The rules governing foreign tax credits are complex. Therefore, U.S. Holders should consult their own tax advisors regarding
the availability of foreign tax credits in their particular circumstances.



Taxation on the Sale or Other Disposition of Ordinary Shares



Subject to the PFIC rules discussed below, a U.S. Holder will
generally recognize U.S. source capital gain or loss on the sale or other disposition of shares, which will be long-term capital
gain or loss if the U.S. Holder has held such shares for more than one year. The amount of the U.S. Holder’s gain or loss
will be equal to the difference between the amount realized and the U.S. Holder’s adjusted tax basis in the ordinary shares.



The regular U.S. federal income tax rate on capital gains recognized
by U.S. Holders generally is the same as the regular U.S. federal income tax rate on ordinary income, except that long term capital
gains recognized by non-corporate U.S. Holders generally are subject to U.S. federal income tax at a maximum regular rate of 15%
for taxable years beginning before January 1, 2013. The deductibility of capital losses is subject to various limitations. Any
such gain or loss generally will be U.S. source income or loss for U.S. foreign tax credit limitation purposes.



If a PRC income tax applies to any gain from the disposition
of our ordinary shares by a U.S. Holder, such tax should be treated as a foreign tax eligible for a deduction from such holder’s
U.S. federal taxable income or a foreign tax credit against such holder’s U.S. federal income tax liability (subject to applicable
conditions and limitations). In addition, if such PRC tax applies to any gain, such U.S. Holder may be entitled to treat such gain
as PRC source for foreign tax credit purposes under the U.S.-PRC Tax Treaty if such holder is considered a resident of the United
States for purposes of the U.S.-PRC Tax Treaty. If such gain is not treated as PRC source gain, however, a U.S. Holder will not
be able to obtain a United States foreign tax credit for any PRC tax withheld or imposed unless such U.S. Holder has other foreign
source income in the appropriate category for the applicable tax year. U.S. Holders should consult their own tax advisors regarding
the deduction or credit for any such PRC tax and their eligibility for the benefits of the U.S.-PRC Tax Treaty.



Passive Foreign Investment Company Rules



A foreign (i.e., non-U.S.) corporation will be a PFIC if either
(a) at least 75% of its gross income in a taxable year of the foreign corporation, including its pro rata share of the gross income
of any corporation in which it is considered to own at least 25% of the shares by value, is passive income, or (b) at least 50%
of its assets in a taxable year of the foreign corporation, ordinarily determined based on fair market value and averaged quarterly
over the year, including its pro rata share of the assets of any corporation in which it is considered to own at least 25% of the
shares by value, are held for the production of, or produce, passive income. Passive income generally includes dividends, interest,
rents and royalties (other than certain rents or royalties derived from the active conduct of a trade or business), and gains from
the disposition of passive assets.



Based on the composition of our assets and income and (and the
assets and income of our subsidiaries) and our current plans of operation, we do not expect to be treated as a PFIC for the current
taxable year or in the near future. Our expectation is based on our direct ownership of 50% of the equity interests of Fujian Service
and, through the VIE Agreements with Wonder Dredging and the shareholders of Wonder Dredging, our total control and 100% beneficial
ownership of the 50% of Fujian Service that we do not directly own. For U.S. federal income tax purposes, we treat Fujian Service
as wholly-owned by us. Fujian Service operates an active dredging contracting services business in the PRC. Accordingly, we believe
that we primarily operate an active dredging contracting services business in the PRC. Our expectation is also based on assumptions
as to our projections for the use of cash that we will hold and generate in the ordinary course of our business throughout the
current taxable year. Despite our expectation, there can be no assurance that we will not be a PFIC for the current taxable year
and/or later taxable years, as PFIC status is retested each year and depends on the actual facts in such year. We could be a PFIC,
for example, if our business and assets evolve in ways that are different from what we anticipate, or if we are required to restructure
our VIE Agreements with Wonder Dredging and the shareholders of Wonder Dredging in a manner that causes us to be classified as
a PFIC. In addition, although we believe that a majority of our assets (by value) and the income derived from such assets do not
constitute passive assets and income under the PFIC rules, there is no assurance that the United States Internal Revenue Service
will agree with us.





72









If we are treated as a PFIC for any taxable year (or portion
thereof) that is included in the holding period of a U.S. Holder of our ordinary shares, gain recognized by a U.S. Holder on a
sale or other disposition of a share would be allocated ratably over the U.S. Holder’s holding period for the share. The
amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as
ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals
or corporations, as appropriate, and an interest charge would be imposed on the resulting tax liability. The same treatment would
apply to any distribution in respect of shares to the extent it exceeds 125% of the average of the annual distributions on shares
received by the U.S. Holder during the preceding three years or the U.S. Holder’s holding period, whichever is shorter. In
addition, if we were treated as a PFIC in a taxable year in which we pays a dividend or in the prior taxable year, the favorable
dividend rate discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply.



If we are a PFIC for any taxable year during which a U.S. Holder
holds ordinary shares and any of our non-United States subsidiaries is also a PFIC, such U.S. Holder would be treated as owning
a proportionate amount (by value) of the shares of the lower-tier PFIC and would be subject to the rules described above on certain
distributions by a lower-tier PFIC and a disposition of shares of a lower-tier PFIC even though such U.S. Holder would not receive
the proceeds of those distributions or dispositions. U.S. Holders are urged to consult their tax advisors regarding the application
of the PFIC rules to any of our subsidiaries.



Under the Code, if it were available, a qualified electing fund
election, or a “QEF election,” could also ameliorate certain of the tax consequences referred to above. Pursuant to
a QEF election with respect to ordinary shares and any subsidiary of the company that is treated as PFIC, an electing U.S. Holder
would report for U.S. federal income tax purposes the U.S. Holder’s pro rata share of each PFIC’s ordinary earnings
and net capital gain, if any, for each taxable year for which it is a PFIC that ends with or within his or her taxable year, regardless
of whether or not the U.S. Holder’s received any distributions on their ordinary shares. However, because we do not expect
to make available the information necessary for U.S. Holders to report income and gain in a manner consistent with the requirements
for the QEF election, U.S. Holders will not be able to make a valid QEF election with respect to us or our subsidiaries.



Under newly enacted legislation, unless otherwise provided by
the U.S. Treasury, each U.S. Holder of a PFIC is required to file an annual report containing such information as the U.S. Treasury
may require. Prior to such legislation, a U.S. Holder of a PFIC was required to file U.S. Internal Revenue Service Form 8621 only
for each taxable year in which such shareholder received distributions from the PFIC, recognized gain on a disposition of the PFIC
stock, or made a “reportable election.” If we are or become a PFIC, U.S. Holders are urged to consult their tax advisors
regarding any reporting requirements that may apply to them.



The rules dealing with PFICs are very complex and are affected
by various factors in addition to those described above. Accordingly, U.S. Holders of our ordinary shares should consult their
own tax advisors concerning the application of the PFIC rules to ordinary shares under their particular circumstances.



Additional Taxes After 2012



For taxable years beginning after December 31, 2012, U.S. Holders
that are individuals, estates or trusts and whose income exceeds certain thresholds generally will be subject to a 3.8% Medicare
contribution tax on unearned income, including, among other things, cash dividends on, and capital gains from the sale or other
taxable disposition of, ordinary shares, subject to certain limitations and exceptions. U.S. Holders should consult their own tax
advisors regarding the effect, if any, of such tax on their ownership and disposition of our ordinary shares.



Non-U.S. Holders



Dividends paid to a Non-U.S. Holder in respect to ordinary shares
generally will not be subject to U.S. federal income tax unless such dividends are effectively connected with the Non-U.S. Holder’s
conduct of a trade or business within the United States (or, if an income tax treaty is applicable, are attributable to a permanent
establishment or fixed base that such holder maintains in the United States).



In addition, a Non-U.S. Holder generally will not be subject
to U.S. federal income tax on any gain attributable to a sale or other taxable disposition of our ordinary shares unless such gain
is effectively connected with its conduct of a trade or business in the United States (or, if an income tax treaty is applicable,
is attributable to a permanent establishment or fixed base that such holder maintains in the United States), or the Non-U.S. Holder
is an individual who is present in the United States for 183 days or more in the taxable year of sale or other taxable disposition
and certain other conditions are met (in which case, such gain from United States sources generally is subject to U.S. federal
income tax at a 30% rate or a lower applicable tax treaty rate).





73







Dividends and gains that are effectively connected with the
Non-U.S. Holder’s conduct of a trade or business in the United States (or if an income tax treaty is applicable, are attributable
to a permanent establishment or fixed base in the United States) generally will be subject to U.S. federal income tax (but not
the Medicare contribution tax) at the same regular U.S. federal income tax rates as applicable to a comparable U.S. Holder and,
in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, may also be subject to an additional
branch profits tax at a 30% rate or a lower applicable tax treaty rate.



Backup Withholding and Information Reporting



In general, information reporting for U.S. federal income tax
purposes should apply to distributions made on ordinary shares within the United States to a U.S. Holder (other than an exempt
recipient) and to the proceeds from sales and other dispositions of our ordinary shares by a U.S. Holder (other than an exempt
recipient) to or through a U.S. office of a broker. Payments made (and sales and other dispositions effected at an office) outside
the United States will be subject to information reporting in limited circumstances.



In addition, backup withholding of U.S. federal income tax,
at a rate of 28% for taxable years beginning before January 1, 2011 and 31% for taxable years beginning
on or after January 1, 2011, generally will apply to dividends paid on ordinary shares to a U.S. Holder (other than an exempt
recipient) and the proceeds from sales and other dispositions of our ordinary shares by a U.S. Holder (other than an exempt recipient),
in each case who:



| | · | fails to provide an accurate taxpayer identification number;
| | - | ------------------------------------------------------------



| | · | is notified by the IRS that backup withholding is required; or
| | - | --------------------------------------------------------------



| | · | in certain circumstances, fails to comply with applicable certification requirements.
| | - | -------------------------------------------------------------------------------------



Non-U.S. Holders generally are not subject to information reporting
or backup withholding with respect to dividends paid on shares, or the proceeds from the sale, exchange or other disposition of
shares or warrants, unless the payments are made by or through a U.S. person or a U.S. office of a non-U.S. person (as defined
in Regulation S under the Securities Act). If the payments are made by or through a U.S. person or a U.S. office of a non-U.S.
person (as defined in Regulation S under the Securities Act), information reporting and backup withholding will apply, unless each
such Non-U.S. Holder certifies as to its foreign status on the applicable duly executed IRS Form W-8 or otherwise establishes an
exemption.



Backup withholding is not an additional tax. Rather, the amount
of any backup withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S. Holder’s U.S. federal income
tax liability and may entitle such holder to a refund, provided that certain required information is timely furnished to the IRS.
Holders are urged to consult their own tax advisors regarding the application of backup withholding and the availability of and
procedures for obtaining an exemption from backup withholding in their particular circumstances.



|F. | Dividends and Paying Agents
|-- | ---------------------------



Not applicable.



|G. | Statement by Experts
|-- | --------------------



Not applicable.



|H. | Documents on Display
|-- | --------------------



Documents concerning us that are referred to in this document
may be inspected at our principal executive offices at 18th Floor, Tower A, Zhongshan Building, No. 154, Hudong Road, Fuzhou, Fujian
Province, PRC.



Following the Merger, we have been subject to
periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers.
Accordingly, we are required to file reports with the SEC, including an annual report on Form 20-F, which is due within four
months after the end of our fiscal year. All information filed with the SEC can be inspected and copied at the public
reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can request copies of these
documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. You may also obtain additional information over the Internet at
the SEC’s website at www.sec.gov.



As a foreign private issuer, we are exempt from the proxy requirements
of Section 14 of the Exchange Act and our officers, directors and principal shareholders will be exempt from the insider short-swing
disclosure and profit recovery rules of Section 16 of the Exchange Act. In addition, we will not be required under the
Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose
securities are registered under the Exchange Act.





74









|I. | Subsidiary Information
|-- | ----------------------



Not applicable.



ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK



Foreign Exchange Risk



Our reporting currency is the U.S. dollar and our operations
in the PRC use their local currency as their functional currencies. Transactions in other currencies are recorded in Renminbi at
the rates of exchange prevailing when the transactions occur. Monetary assets and liabilities denominated in other currencies are
remeasured into Renminbi at rates of exchange in effect at the balance sheet dates. Exchange gains and losses are recorded in our
statements of income as a component of current period earnings.



SAFE, under the authority of the PBOC, controls the conversion
of Renminbi into foreign currencies. The principal regulation governing foreign currency exchange in China is the Foreign Currency
Administration Rules (1996), as amended, or the Rules. Under the Rules, once various procedural requirements are met, Renminbi
is convertible for current account transactions, including trade and service-related foreign exchange transactions and dividend
payments, but not for capital account transactions, including direct investment, loans or investments in securities outside the
PRC, without prior approval of the SAFE of the PRC, or its local counterparts.



Since July 2005, the Renminbi is no longer pegged to the U.S.
dollar. Although the Renminbi exchange rate versus the U.S. dollar is restricted to a rise or fall of no more than 0.3% per day
and the PBOC regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange
rate, the Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover,
it is possible that in the future, the PRC authorities may lift restrictions on fluctuations in the Renminbi exchange rate and
lessen intervention in the foreign exchange market. As of December 31, 2011, the exchange rate of RMB to $1 was RMB6.2939.



We conduct substantially all of our operations through our PRC
operating companies in the PRC, and we earn substantially all of our revenues and incur substantially all of our cost of sales
in Renminbi. Therefore, we have substantially no impact on revenue and cost of sales regarding exchange rate fluctuation.  In
addition, we do not have any derivative financial instruments on foreign exchange.



Any devaluation of the Renminbi against the U.S. dollar would
consequently have an adverse effect on our financial performance and asset values when measured in terms of U.S. dollars.  On
the other hand, any appreciation of the Renminbi against the U.S. dollar would have a favorable effect on our financial performance
and asset values when measured in U.S. dollars.  In addition, as of December 31, 2011 and 2010, we had cash denominated
in Renminbi amounting to approximately $111.6 million and $61.5 million, respectively, and cash denominated in Hong Kong dollars
amounting to approximately $0.02 million and $0.03 million, respectively.  Also, from time to time we may have U.S. dollar
denominated borrowings.  Accordingly, a decoupling of the Renminbi may affect our financial performance in the future.



We recognized a gain on foreign currency translation adjustment
of approximately $10.9 million and $4.2 million, respectively, in the years ended December 31, 2011 and 2010 and a loss on foreign
currency translation adjustment of approximately $0.003 million in the year ended December 31, 2009.  We do not
engage in hedging activities and as such, we may in the future experience economic loss as a result of any foreign currency exchange
rate fluctuations.



Interest Rate Risk



We do not have any derivative financial instruments and believe
our exposure to interest rate risk and other relevant market risks is not material.   We had no bank borrowing as of
December 31, 2011 or 2010.



Inflation



Inflation in China has not materially impacted our results of
operations. According to the National Bureau of Statistics of China, the consumer price index in China rose 4.8% and 5.9% in 2007
and 2008, respectively, decreased by 0.7% in 2009, rose 3.3% in 2010, and rose 4.1% in 2011. Although we have not in the past been
materially affected by inflation, we may be affected in the future by higher rates of inflation in China. For example, certain
operating costs and expenses, such as personnel expenses, vessel leasing expenses, travel expenses and office operating expenses
may increase as a result of higher inflation. Additionally, because a substantial portion of our assets consists of cash and cash
equivalents, high inflation could significantly reduce the value and purchasing power of these assets. We are not able to hedge
our exposures to higher inflation in China.





75









ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES



Not applicable.



PART II



|ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
|-------- | -----------------------------------------------



None.



ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS



See “Preferred Shares” set forth under Item 10A.



ITEM 15.  CONTROLS AND PROCEDURES.



Evaluation of Disclosure Controls and Procedures



Our management, with the participation of our chief executive
officer and chief financial officer, conducted an evaluation of our disclosure controls and procedures, as such term is defined
in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, our chief executive officer and chief financial officer
concluded that, as of December 31, 2011, our disclosure controls and procedures were not effective to give a reasonable assurance
that information required to be disclosed by us in our Exchange Act reports 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 our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding
required disclosure. This determination was primarily due to the identification of the material weakness in our internal control
over financial reporting as discussed below and in “Risk Factors,” which we regard as an integral part of our disclosure
controls and procedures.



Management’s Annual Report on Internal Control over
Financial Reporting



Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our
management evaluates the effectiveness of our internal control over financial reporting based on the framework in Internal Control
— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
our management concluded that our internal control over financial reporting was not effective as of December 31, 2011 due to the
identification of a material weakness. A “material weakness” is a deficiency, or a combination of deficiencies, in
internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s
annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.
The material weakness we identified was that none of our employees had any formal training in U.S. GAAP and SEC rules and regulations.
Our Chief Financial Officer also does not have such training, and we may not be able to remediate this material weakness without
significant expense, if at all. We have identified similar material weaknesses in the past, and we may also face additional material
weaknesses in the future. Therefore, there is a risk that our current or future financial statements may not be properly prepared
in accordance with U.S. GAAP or that our current or future disclosures are not in compliance with SEC rules and regulations.



Remediation Plan



We have begun to undertake steps to remediate the material weakness
described above and to improve our internal control over financial reporting. We have engaged a PCAOB registered and inspected
public accounting firm in the United States to provide consulting services to us in matters involving U.S. GAAP and SEC rules and
regulations. We also plan to take other important steps, including training our accounting, internal audit and finance staff, engaging
consultants to assist with these functions, and implementing additional financial and management controls, reporting systems and
procedures. Although we do not expect the costs of our remediation efforts to be material, we expect these efforts to take time.
We have begun to implement these measures, expect to continue to implement them through the course of 2012, and plan to continue
monitoring our internal controls with a view toward whether additional financial and management controls, reporting systems and
procedures are appropriate. We do not expect that our plan will fully remediate the material weakness described above until at
least December 31, 2012, and it may not ensure the adequacy of our internal controls over our financial reporting and processes
in the future.



However, if we fail to timely achieve and maintain the adequacy
of our internal controls, we may not be able to conclude that we have effective internal control over financial reporting. As a
result, our failure to achieve and maintain effective internal control over financial reporting could result in the loss of investor
confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the value of our securities.





76









Changes in Internal Control over Financial Reporting



The material weakness described above was also identified in
connection with the audit of our financial statements as of and for the years ended December 31, 2009 and 2010, and we began to
undertake steps to remediate it in 2010. Except for these remediation steps, there have not been any changes in our internal control
over financial reporting in the year ended December 31, 2011 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.



ITEM 16A.  AUDIT COMMITTEE FINANCIAL EXPERT



Our board of directors has determined, based upon past employment
experience in finance and other business experience requiring accounting knowledge and financial sophistication, that we have at
least one audit committee financial expert, Yeliang Zhou, serving on our audit committee.  Our board of directors has determined
that Mr. Zhou is an independent director as defined in Nasdaq listing rules and SEC rules.



ITEM 16B.  CODE OF ETHICS



Our board of directors has adopted a Code of Business Conduct
and Ethics that sets forth legal and ethical standards of conduct for our directors and employees, including our principal executive
officer, principal financial and accounting officer and other executive officers, our subsidiaries and other business entities
controlled by us worldwide.  Our Code of Ethics and Business Conduct is available on our website at www.chinadredgingco.com. 
The information contained on our website is not a part of this Report.



ITEM 16C.  PRINCIPAL ACCOUNTANT FEES AND SERVICES



UHY Vocation HK CPA Limited, or UHY, serves as our independent
registered public accounting firm.



Audit Fees



UHY billed us $132,926, $132,000 and $61,000 for audit services
for our fiscal years ended December 31, 2011, 2010, and 2009, respectively.  Audit fees principally include fees associated
with the annual audit and reviews of our interim financial results, consultations on various accounting issues and performance
of local statutory audits.



Audit-Related Fees



UHY billed us $25,000 for audit-related services for our fiscal
year ended December 31, 2011 and $15,000 for fiscal year ended December 31, 2010. Audit-related services principally include internal
control report issuances and due diligence examinations.



Tax Fees



UHY did not bill us any fees for tax advice in 2011, 2010 or
2009.



All Other Fees



Except as set forth above in this Item 16C, UHY did not bill
us any other fees for products or services for our fiscal years ended December 31, 2011, 2010 or 2009.



Pre-Approval Policies for Non-Audit Services



Our audit committee has adopted policies and procedures relating
to the approval of all audit and non-audit services that are to be performed by our independent registered public accounting firm.
These policies generally provide that we will not engage our independent registered public accounting firm to render audit or non-audit
services unless the service is specifically approved in advance by our audit committee or the engagement is entered into pursuant
to the pre-approval procedure described below.



From time to time, our audit committee may pre-approve specified
types of services that are expected to be provided to us by our independent registered public accounting firm during the next 12 months.
Any such pre-approval is detailed as to the particular service or type of services to be provided and is also generally subject
to a maximum dollar amount. In fiscal 2011, our audit committee approved all of the services provided by UHY.





77









ITEM 16D.  EXEMPTIONS FROM THE LISTING STANDARDS
FOR AUDIT COMMITTEES



Not applicable.



ITEM 16E.  PURCHASES OF EQUITY SECURITIES BY THE
ISSUER AND AFFILIATED PURCHASERS



Not applicable.



ITEM 16F.  CHANGE IN REGISTRANT’S CERTIFYING
ACCOUNTANT



In connection with the Merger, Webb & Company, P.A., or
Webb & Company, resigned as our independent registered public accounting firm as of October 27, 2010, the date of consummation
of the Merger. Upon consummation of the Merger, our operations were substantially all in the PRC, and Webb & Company was not
positioned to audit a Chinese company. The decision to change accountants upon Webb & Company’s resignation was discussed
and recommended by our board of directors.



Webb & Company’s reports on our consolidated financial
statements as of and for the fiscal year ended January 31, 2010 and the period ended September 30, 2009 did not contain any adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles,
except that the report on such financial statements included the following explanatory paragraph:



The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note 5 to the financial statements, the Company has
no operations and has a net loss of $47,682 from Inception, a working capital and stockholders’ deficiency of $20,935 at
January 31, 2010 and used cash in operations from $18,781 from Inception. These factors raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 5. The financial
statements do not include any adjustments that might result from the outcome of this uncertainty.



During the fiscal year ended January 31, 2010, the period ended
September 30, 2009, and the subsequent period through the date of its resignation, we had (i) no disagreements with Webb &
Company on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Webb & Company, would have caused it to make reference to the subject
matter of the disagreements in connection with its report for such periods, and (ii) no “reportable events” within
the meaning of Item 16F(a)(1)(v) of Form 20-F.



In connection with the Merger, we appointed UHY, as our independent
registered public accounting firm as of October 27, 2010, the date of consummation of the Merger. During the fiscal year ended
January 31, 2010, the period ended September 30, 2009, and the subsequent period through the date of the dismissal, neither we
nor anyone acting on our behalf consulted with UHY regarding any of the matters or events described in Item 16F(a)(2) of Form 20-F.



We provided a copy of the foregoing disclosures to Webb &
Company and requested that Webb & Company furnish us with a letter addressed to the SEC stating whether or not Webb & Company
agrees with the foregoing disclosures and, if not, stating the respects in which it does not agree. A copy of Webb & Company’s
letter to the SEC is attached as an exhibit to this Form 20-F.



ITEM 16G.  CORPORATE GOVERNANCE



Not applicable.



ITEM 16H. MINE SAFETY DISCLOSURE



Not applicable.



78







PART III



|ITEM 17. | FINANCIAL STATEMENTS
|-------- | --------------------



See Item 18.



|ITEM 18. | FINANCIAL STATEMENTS
|-------- | --------------------



The
audited financial statements of China Dredging Group Co., Ltd. and subsidiaries as of December 31, 2011 and 2010, and for the
years ended December 31, 2011, 2010, and 2009 are contained on pages F-1 through F-54.



|ITEM 19. | EXHIBITS
|-------- | --------



|Exhibit No. |  | Description                                                                                                                                                                                                              
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1 (1)     |  | Amended and Restated Memorandum of Association of China Dredging Group Co., Ltd.                                                                                                                                         
|1.2 (1)     |  | Articles of Association of China Dredging Group Co., Ltd.                                                                                                                                                                
|2.1 (2)     |  | Specimen Ordinary Share Certificate.                                                                                                                                                                                     
|4.1 (1)     |  | Employment Agreement of Xinrong Zhuo.                                                                                                                                                                                    
|4.2 (1)     |  | Employment Agreement of Bin Lin.                                                                                                                                                                                         
|4.3 (1)     |  | Employment Agreement of Fangjie Gu.                                                                                                                                                                                      
|4.4 (1)     |  | Agreement and Plan of Merger by and among Chardan Acquisition Corp., Shareholders of Chardan Acquisition Corp., China Dredging Group Co., Ltd. and Shareholders Of China Dredging Group Co., Ltd. dated October 27, 2010.
|4.5 (1)     |  | Securities Purchase Agreement by and among China Dredging Group Co., Ltd. and the Purchasers Listed on Exhibit A thereto, dated October 29, 2010.                                                                        
|4.6 (1)     |  | Registration Rights Agreement dated October 29, 2010.                                                                                                                                                                    
|4.7 (1)     |  | Securities Escrow Agreement dated October 29, 2010.                                                                                                                                                                      
|4.8 (3)     |  | Contracted Management Agreement by and among Fujian WangGang Dredging Construction Co., Ltd., Wonder Dredging LLC and  Fujian Xing Gang Port Service Ltd., dated June 30, 2010.                                          
|4.9 (3)     |  | Equity Interest Pledge Agreement by and among Qing Lin, Panxing Zhuo, Fujian WangGang Dredging Construction Co., Ltd. and Wonder Dredging LLC, dated June 30, 2010.                                                      
|4.10 (3)    |  | Contract Relating to the Exclusive Purchase Right of Equity Interest by and among Fujian WangGang Dredging Construction Co., Ltd., Wonder Dredging LLC and  Fujian Xing Gang Port Service Ltd., dated June 30, 2010.     
|4.11 (1)    |  | Power of Attorney by and among Qing Lin, Panxing Zhuo and Fujian WangGang Dredging Construction Co., Ltd., dated June 30, 2010.                                                                                          
|4.12 (1)    |  | Power of Attorney by and between Wonder Dredging LLC and Fujian WangGang Dredging Construction Co., Ltd., dated June 30, 2010.                                                                                           
|4.13 (1)    |  | Engineering Boat Purchase and Sale Contract for Xinggangjun #3 by and between Yiyang Zhonghai Boats and Ships Limited Liability Company and Fujian Xing Gang Shipping Service Co., Ltd., January 13, 2008.               
|4.14 (1)    |  | “Hongtaihai” Engineering Boat Purchase and Sale Contract for Xinggangjun #66
by and between Taizhou Hongtaihai Port Engineering Co., Ltd. and Fujian Xing Gang Shipping Service Co., Ltd., March 23, 2008.               
|4.15 (1)    |  | Engineering Boat Purchase and Sale Contract for Xinggangjun #6 by and between Yiyang Zhonghai Boats and Ships Limited Liability Company and Fujian Xing Gang Shipping Service Co., Ltd., dated January 18, 2008.         
|4.16 (1)    |  | Engineering Boat Purchase and Sale Contract by and between Yiyang Zhonghai Boats and Ships Limited Liability Company and Fujian Xing Gang Shipping Service Co., Ltd., dated May 20, 2009.                                
|4.17        |  | Crewmen Dispatch Contract for Xinggangjun #3 by and between Fujian Haiyi International
    Shipping Service Agency Co., Ltd. and Fujian Xing Gang Shipping Service Co., Ltd., dated April 18, 2011.                      
|4.18        |  | Crewmen Dispatch Contract for Xinggangjun #66 by and between Fujian Haiyi International
    Shipping Service Agency Co., Ltd. and Fujian Xing Gang Shipping Service Co., Ltd., dated February 25, 2011.                  
|4.19        |  | Crewmen Dispatch Contract for Xinggangjun #6 by and between Fujian Haiyi International Shipping Service Agency Co., Ltd. and Fujian Xinggang Shipping Service Co., Ltd., dated April 18, 2011.                           
|4.20 (1)    |  | Ship Lease Contract for Hengshengjun #88 by and between Lianyungang Hengrong Shipping Service Co., Ltd. and Fujian Xing Gang Shipping Service Co., Ltd., dated January 8, 2008.                                          
|4.21 (1)    |  | Crewmen Assignment Agreement for Hengshengjun #88 by and between Lianyungang Hengrong Shipping Service Co., Ltd. and Fujian Xing Gang Shipping Service Co., Ltd., dated January 8, 2008.                                 
|4.22 (1)    |  | Ship Lease Supplemental Agreement for Hengshengjun #88 by and between Lianyungang Hengrong Shipping Service Co., Ltd. and Fujian Xing Gang Shipping Service Co., Ltd., dated April 13, 2010.                             
|4.23 (1)    |  | Crewmen Assignment Supplemental Agreement for Hengshengjun #88 by and between Lianyungang Hengrong Shipping Service Co., Ltd. and Fujian Xing Gang Shipping Service Co., Ltd., dated May 21, 2010.                       





79







|4.24 (1) |  | Ship Lease Contract for Xinggangjun #9 by and between Fujian Lutong Highway Engineering
Construction Co., Ltd. and Fujian Xing Gang Shipping Service Co., Ltd., dated May 20, 2008.                                   
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.25 (1) |  | Crewmen Assignment Agreement for Xinggangjun #9 by and between Fujian Lutong Highway Engineering
Construction Co., Ltd. and Fujian Xing Gang Shipping Service Co., Ltd., dated May 20, 2008.                          
|4.26 (1) |  | Ship Lease Supplemental Agreement Contract for Xinggangjun #9 by and between Fujian Lutong Highway Engineering Construction Co., Ltd. and Fujian Xing Gang Shipping Service Co., Ltd., dated April 11, 2010.          
|4.27 (1) |  | Crewmen Assignment Supplemental Agreement for Xinggangjun #9 by and between Fujian Lutong Highway Engineering Construction Co., Ltd. and Fujian Xing Gang Shipping Service Co., Ltd., dated May 21, 2010.             
|4.28 (1) |  | Ship Lease Contract for Liya #10 by and between Beihai Shunda Liya Shipping Service Co., Ltd. and Fujian Xing Gang Port Service Co., Ltd., dated June 14, 2010.                                                       
|4.29 (1) |  | Crewmen Assignment Agreement for Liya #10 by and between Beihai Shunda Liya Shipping Service Co., Ltd. and Fujian Xing Gang Port Service Co., Ltd., dated June 14, 2010.                                              
|4.30 (1) |  | Ship Leasing Contract for Honglinjun #9 by and between Zhejiang Honglin Ship Engineering Co., Ltd. and Fujian Xing Gang Port Service Co., Ltd., dated June 19, 2010.                                                  
|4.31 (1) |  | Crewmen Assignment Agreement for Honglinjun #9 by and between Zhejiang Honglin Ship Engineering Co., Ltd. and Fujian Xing Gang Port Service Co., Ltd., dated June 19, 2010.                                           
|4.32 (1) |  | Ship Lease Contract for Honglinjun #18 by and between Zhejiang Honglin Ship Engineering Co., Ltd. and Fujian Xing Gang Port Service Co., Ltd., dated June 18, 2010.                                                   
|4.33 (1) |  | Crewmen Assignment Agreement for Honglinjun #18 by and between Zhejiang Honglin Ship Engineering Co., Ltd. and Fujian Xing Gang Port Service Co., Ltd., dated June 18, 2010.                                          
|4.34 (1) |  | Ship Lease Contract for Xiechang #18 by and between Zhonghai Engineering Construction General Bureau Dalian Engineering Construction Bureau and Fujian Xing Gang Port Service Co., Ltd., dated June 24, 2010.         
|4.35 (1) |  | Crewmen Assignment Agreement for Xiechang #18 by and between Zhonghai Engineering Construction General Bureau Dalian Engineering Construction Bureau and Fujian Xing Gang Port Service Co., Ltd., dated June 24, 2010.
|4.36 (1) |  | Office Lease Agreement by and between LIN Ping and Fujian Xing Gang Port Service Co., Ltd., dated January 1, 2010.                                                                                                    
|4.37 (1) |  | Office Lease Supplemental Agreement by and between LIN Ping and Fujian Xing Gang Port Service Co., Ltd., dated March 30, 2010.                                                                                        
|4.38 (4) |  | Employment Agreement by and between Fangjie Gu and Fujian Xing Gang Port Service Co., Ltd. dated January 24, 2011.                                                                                                    
|4.39 (4) |  | Supplemental Employment Agreement by and between Fangjie Gu and China Dredging Group Co., Ltd.                                                                                                                        
|4.40 (2) |  | Employment Agreement of Alfred Ho.                                                                                                                                                                                    
|8.1 (1)  |  | List of Subsidiaries.                                                                                                                                                                                                 
|12.1     |  | Certification of Principal Executive Officer required by Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                  
|12.2     |  | Certification of Principal Financial Officer required by Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                  
|13.1     |  | Certification of Principal Executive Officer pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                               
|13.2     |  | Certification of Principal Financial Officer pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                               
|15.1 (2) |  | Letter from Webb & Company                                                                                                                                                                                            



(1)  Previously filed as an Exhibit to Form 20-F filed
on November 2, 2010 (File # 000-53465).

(2)  Previously filed as an Exhibit to Amendment No.
1 to Form 20-F filed on December 15, 2011 (File # 000-53465).

(3)  Previously filed as an Exhibit to Amendment No.
2 to Form F-1 filed on March 29, 2011 (File # 333-171484).

(4)  Previously filed as an Exhibit to Amendment No.
1 to Form F-1 filed on February 15, 2011 (File # 333-171484).







80







The Registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Report on its behalf.



|CHINA DREDGING GROUP CO., LTD.
|------------------------------
|                              
|By:                           
|                              
|Name: Xinrong Zhuo            
|Title: Chief Executive Officer
|Date: April 27, 2012          





81







CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010





|CONTENTS                                                   |  |            
|---------------------------------------------------------- |  | -----------
|                                                           |  |            
|                                                           |  |            
|                                                           |  | Pages      
|                                                           |  |            
|Report of Independent Registered Public Accounting Firm    |  | F-2        
|Consolidated Balance Sheets                                |  | F-3        
|Consolidated Statements of Income                          |  | F-4        
|Consolidated Statements of Comprehensive Income            |  | F-5        
|Consolidated Statements of Changes in Shareholders' Equity |  | F-6        
|Consolidated Statements of Cash Flows                      |  | F-7 to F-8 
|Notes to the Consolidated Financial Statements             |  | F-9 to F-54



F-1







REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF

CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIES



We have audited the accompanying consolidated balance
sheets of China Dredging Group Co., Ltd. and its  Subsidiaries (collectively the “Company”) as of December
31, 2011 and 2010, and the related consolidated statements of income, comprehensive income, changes in shareholders’
equity and cash flows for each of the three years ended December 31, 2011, 2010 and 2009. These consolidated financial
statements are the responsibility of the Company’s management. 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 audits 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 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 consolidated financial position of China Dredging Group Co., Ltd. and Subsidiaries
as of December 31, 2011 and 2010, the consolidated results of its operations and its consolidated cash flows for the three years
ended December 31, 2011, 2010 and 2009 in conformity with accounting principles generally accepted in the United States of America.





/s/ UHY Vocation HK CPA Limited



UHY VOCATION HK CPA LIMITED

Certified Public Accountants

Hong Kong, the People’s Republic of China

April 27, 2012





F-2









CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

IN US DOLLARS



|                                                                                                                                                                                                                                    |  | December 31, |            
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -----------
|                                                                                                                                                                                                                                    |  | 2011         |            
|Assets                                                                                                                                                                                                                              |  |              |            
|Current assets                                                                                                                                                                                                                      |  |              |            
|Cash                                                                                                                                                                                                                                |  | $            | 112,409,544
|Accounts receivable, net                                                                                                                                                                                                            |  |              | 27,020,183 
|Cost and estimated earnings in excess of billings on contracts in progress                                                                                                                                                          |  |              | 14,008,972 
|Prepaid expenses                                                                                                                                                                                                                    |  |              | 4,767,072  
|Inventories                                                                                                                                                                                                                         |  |              | 2,048,158  
|Other receivables                                                                                                                                                                                                                   |  |              | 3,364      
|Total current assets                                                                                                                                                                                                                |  |              | 160,257,293
|Other assets                                                                                                                                                                                                                        |  |              |            
|Prepaid dredger deposits                                                                                                                                                                                                            |  |              | 23,038,180 
|Security deposits                                                                                                                                                                                                                   |  |              | 48,872,718 
|Property, plant and equipment, net                                                                                                                                                                                                  |  |              | 51,131,051 
|Total other assets                                                                                                                                                                                                                  |  |              | 123,041,949
|Total assets                                                                                                                                                                                                                        |  | $            | 283,299,242
|                                                                                                                                                                                                                                    |  |              |            
|Liabilities and equity                                                                                                                                                                                                              |  |              |            
|Liabilities                                                                                                                                                                                                                         |  |              |            
|Current liabilities                                                                                                                                                                                                                 |  |              |            
|Accounts payable                                                                                                                                                                                                                    |  | $            | 3,653,008  
|Advance from related companies                                                                                                                                                                                                      |  |              | 13,664     
|Income tax payable                                                                                                                                                                                                                  |  |              | 8,295,538  
|Accrued liabilities and other payables                                                                                                                                                                                              |  |              | 4,045,227  
|Derivative liability                                                                                                                                                                                                                |  |              | 8,279,827  
|Total current liabilities                                                                                                                                                                                                           |  |              | 24,287,264 
|Non-current liabilities                                                                                                                                                                                                             |  |              |            
|Contingent liability for a variable number of shares                                                                                                                                                                                |  |              | -          
|Derivative liability                                                                                                                                                                                                                |  |              | -          
|Total non-current liabilities                                                                                                                                                                                                       |  |              | -          
|Total liabilities                                                                                                                                                                                                                   |  |              | 24,287,264 
|                                                                                                                                                                                                                                    |  |              |            
|Class A Preferred Shares, no par value; 25,000,000 shares authorized; 10,012,987 shares issued and outstanding (liquidation preference $50,064,935, less $0 and $6,135,012 discount, respectively) as of December 31, 2011 and 2010 |  |              | 50,064,935 
|Shareholders' equity                                                                                                                                                                                                                |  |              |            
|Ordinary shares, 225,000,000 shares authorized with no par value; 52,677,323 shares issued and outstanding as of December 31, 2011 and 2010                                                                                         |  |              | -          
|Statutory reserves                                                                                                                                                                                                                  |  |              | 15,386,316 
|Additional paid-in capital                                                                                                                                                                                                          |  |              | 79,185,284 
|Retained earnings                                                                                                                                                                                                                   |  |              | 98,559,096 
|Accumulated other comprehensive income                                                                                                                                                                                              |  |              | 15,816,347 
|Total shareholders' equity                                                                                                                                                                                                          |  |              | 208,947,043
|Total liabilities and equity                                                                                                                                                                                                        |  | $            | 283,299,242



See accompanying notes to the consolidated
financial statements.



F-3







CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(IN US DOLLARS)



|                                                                                                                                                                    |  | For the Years Ended |            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | -----------
|                                                                                                                                                                    |  | December 31,        |            
|                                                                                                                                                                    |  | 2011                |            
|Contract revenue                                                                                                                                                    |  | $                   | 226,953,070
|                                                                                                                                                                    |  |                     |            
|Cost of contract revenue, includes depreciation of $7,160,142, $5,037,318 and
    $4,951,518 for the years ended December 31, 2011,     2010 and 2009, respectively |  |                     | (98,906,986
|Gross profit                                                                                                                                                        |  |                     | 128,046,084
|                                                                                                                                                                    |  |                     |            
|General and administrative expenses                                                                                                                                 |  |                     | (9,444,718 
|                                                                                                                                                                    |  |                     |            
|Income from operations                                                                                                                                              |  |                     | 118,601,366
|                                                                                                                                                                    |  |                     |            
|Other income (expense):                                                                                                                                             |  |                     |            
|Interest income                                                                                                                                                     |  |                     | 436,646    
|Interest expenses                                                                                                                                                   |  |                     | —          
|Sundry income                                                                                                                                                       |  |                     | 122,151    
|Gain on obligation under "Make-Good Escrow"                                                                                                                         |  |                     | 14,101,247 
|Loss on derivative                                                                                                                                                  |  |                     | (6,762,079 
|Total other income (expense)                                                                                                                                        |  |                     | 7,897,965  
|                                                                                                                                                                    |  |                     |            
|Income before income taxes                                                                                                                                          |  |                     | 126,499,331
|                                                                                                                                                                    |  |                     |            
|Income tax expense                                                                                                                                                  |  |                     | (30,107,070
|Net income                                                                                                                                                          |  |                     | 96,392,261 
|Accretion of discount on Class A Preferred Shares                                                                                                                   |  |                     | (6,135,012 
|                                                                                                                                                                    |  |                     |            
|Net income attributable to ordinary shareholders                                                                                                                    |  | $                   | 90,257,249 
|                                                                                                                                                                    |  |                     |            
|Earnings per ordinary share                                                                                                                                         |  |                     |            
|- Basic                                                                                                                                                             |  | $                   | 1.71       
|                                                                                                                                                                    |  |                     |            
|- Diluted                                                                                                                                                           |  | $                   | 1.54       
|                                                                                                                                                                    |  |                     |            
|Weighted average number of ordinary shares outstanding                                                                                                              |  |                     |            
|- Basic                                                                                                                                                             |  |                     | 52,677,323 
|                                                                                                                                                                    |  |                     |            
|- Diluted                                                                                                                                                           |  |                     | 62,690,310 



See accompanying notes to the consolidated
financial statements.



F-4















CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(IN US DOLLARS)



|                                                 |  | For the Years Ended |            
|------------------------------------------------ |  | ------------------- | -----------
|                                                 |  | December 31,        |            
|                                                 |  | 2011                |            
|                                                 |  |                     |            
|Net income attributable to ordinary shareholders |  | $                   | 90,257,249 
|                                                 |  |                     |            
|Other comprehensive income                       |  |                     |            
|Foreign currency translation gain/ (loss)        |  |                     | 10,913,437 
|Total comprehensive income                       |  | $                   | 101,170,686



See accompanying notes to the consolidated
financial statements.



F-5







CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND
2009

(IN US DOLLARS)



|                                                                                                                                                                                                                                                  |  | Ordinary
    Shares, with no Par Value |            |  |        |   |   | Additional             |  |   |                     |  |  |                       |            |  | Accumulated other           |   |             | Total                    | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------- | ---------- |  | ------ | - | - | ---------------------- |  | - | ------------------- |  |  | --------------------- | ---------- |  | --------------------------- | - | ----------- | ------------------------ | 
|                                                                                                                                                                                                                                                  |  | Number
    of Shares                   |            |  | Amount |   |   | Statutory
    reserves |  |   | paid-in
    capital |  |  | Retained
    earnings |            |  | Subscription
    receivable |   |             | Comprehensive
    income | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Balance as
    of December 31, 2008                                                                                                                                                                                                               |  |                                        | 52,177,323 |  |        | $ | - |                        |  | $ | 2,009,023           |  |  | $                     | 8,501,266  |  |                             | $ | 18,061,369  |                          | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Capital contributed by
    owners                                                                                                                                                                                                                 |  |                                        | -          |  |        |   | - |                        |  |   | -                   |  |  |                       | 20,501,105 |  |                             |   | -           |                          | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Subscription receivable                                                                                                                                                                                                                           |  |                                        | -          |  |        |   | - |                        |  |   | -                   |  |  |                       | -          |  |                             |   | -           |                          | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Net income                                                                                                                                                                                                                                        |  |                                        | -          |  |        |   | - |                        |  |   | -                   |  |  |                       | -          |  |                             |   | 28,764,598  |                          | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Transfer to statutory
    reserves                                                                                                                                                                                                                |  |                                        | -          |  |        |   | - |                        |  |   | 2,878,995           |  |  |                       | -          |  |                             |   | (2,878,995  | )                        | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Foreign
    currency translation loss                                                                                                                                                                                                             |  |                                        | -          |  |        |   | - |                        |  |   | -                   |  |  |                       | -          |  |                             |   | -           |                          | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Balance as of December
    31, 2009                                                                                                                                                                                                               |  |                                        | 52,177,323 |  |        | $ | - |                        |  | $ | 4,888,018           |  |  | $                     | 29,002,371 |  |                             | $ | 43,946,972  |                          | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Shares issued:                                                                                                                                                                                                                                    |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|October 27, 2010 (reverse merger)                                                                                                                                                                                                                 |  |                                        | 500,000    |  |        |   | - |                        |  |   | -                   |  |  |                       | -          |  |                             |   | -           |                          | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Contribution of dividends
    from Wonder Dredging's shareholders generated by Fujian Service through March 31, 2010. Applied first sas payment of subscription
    receivable, netted of the registered capital of Fujian Service of $29,002,371 |  |                                        | -          |  |        |   | - |                        |  |   | -                   |  |  |                       | 22,085,016 |  |                             |   | -           |                          | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Contribution of shareholders'
    loans and net assets into statutory reserves and equity upon acquisition of interest in Wonder Dredging                                                                                                         |  |                                        | -          |  |        |   | - |                        |  |   | -                   |  |  |                       | 18,019,636 |  |                             |   | -           |                          | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Capital contributed in
    Wonder Dredging                                                                                                                                                                                                        |  |                                        | -          |  |        |   | - |                        |  |   | -                   |  |  |                       | 878,876    |  |                             |   | -           |                          | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Subscription receivable                                                                                                                                                                                                                           |  |                                        | -          |  |        |   | - |                        |  |   | -                   |  |  |                       | -          |  |                             |   | -           |                          | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Net income                                                                                                                                                                                                                                        |  |                                        | -          |  |        |   | - |                        |  |   | -                   |  |  |                       | -          |  |                             |   | 48,234,280  |                          | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Transfer to statutory
    reserves                                                                                                                                                                                                                |  |                                        | -          |  |        |   | - |                        |  |   | 5,407,261           |  |  |                       | -          |  |                             |   | (5,407,261  | )                        | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Dividend - contributed
    back in a non-cash transaction (see above)                                                                                                                                                                             |  |                                        | -          |  |        |   | - |                        |  |   | -                   |  |  |                       | -          |  |                             |   | (51,087,387 | )                        | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Deemed dividend on Class A
    Preferred Shares - beneficial conversion feature                                                                                                                                                                   |  |                                        | -          |  |        |   | - |                        |  |   | -                   |  |  |                       | 9,199,385  |  |                             |   | -           |                          | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Accretion of Class A Preferred
    Shares discount                                                                                                                                                                                                |  |                                        | -          |  |        |   | - |                        |  |   | -                   |  |  |                       | -          |  |                             |   | (22,293,720 | )                        | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Foreign
    currency translation gain                                                                                                                                                                                                             |  |                                        | -          |  |        |   | - |                        |  |   | -                   |  |  |                       | -          |  |                             |   | -           |                          | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Balance as of December
    31, 2010                                                                                                                                                                                                               |  |                                        | 52,677,323 |  |        | $ | - |                        |  | $ | 10,295,279          |  |  | $                     | 79,185,284 |  |                             | $ | 13,392,884  |                          | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Net income                                                                                                                                                                                                                                        |  |                                        | -          |  |        |   | - |                        |  |   | -                   |  |  |                       | -          |  |                             |   | 96,392,261  |                          | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Transfer to statutory
    reserves                                                                                                                                                                                                                |  |                                        | -          |  |        |   | - |                        |  |   | 5,091,037           |  |  |                       | -          |  |                             |   | (5,091,037  | )                        | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Accretion of Class A Preferred
    Shares discount                                                                                                                                                                                                |  |                                        | -          |  |        |   | - |                        |  |   | -                   |  |  |                       | -          |  |                             |   | (6,135,012  | )                        | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Foreign
    currency translation gain                                                                                                                                                                                                             |  |                                        | -          |  |        |   | - |                        |  |   | -                   |  |  |                       | -          |  |                             |   | -           |                          | 
|                                                                                                                                                                                                                                                  |  |                                        |            |  |        |   |   |                        |  |   |                     |  |  |                       |            |  |                             |   |             |                          | 
|Balance
    as of December 31, 2011                                                                                                                                                                                                               |  |                                        | 52,677,323 |  |        | $ | - |                        |  | $ | 15,386,316          |  |  | $                     | 79,185,284 |  |                             | $ | 98,559,096  |                          | 



F-6







CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN US DOLLARS)



|                                                                                  |  | For the Years Ended |            
|--------------------------------------------------------------------------------- |  | ------------------- | -----------
|                                                                                  |  | December 31,        |            
|                                                                                  |  | 2011                |            
|Cash flows from operating activities:                                             |  |                     |            
|Net income                                                                        |  | $                   | 96,392,261 
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                     |            
|Depreciation of property, plant and equipment                                     |  |                     | 7,161,602  
|Gain on obligation under "Make-Good Escrow"                                       |  |                     | (14,101,247
|Loss on derivative                                                                |  |                     | 6,762,079  
|                                                                                  |  |                     |            
|Changes in operating assets and liabilities:                                      |  |                     |            
|Accounts receivable, net                                                          |  |                     | (13,231,643
|Cost and estimated earnings in excess of billings on contracts in progress        |  |                     | (12,820,576
|Other receivables                                                                 |  |                     | (2,013     
|Prepaid expenses                                                                  |  |                     | (4,653,504 
|Inventories                                                                       |  |                     | (1,792,368 
|Accounts payable                                                                  |  |                     | (1,027,530 
|Income tax payable                                                                |  |                     | 3,150,401  
|Accrued liabilities and other payables                                            |  |                     | 1,313,630  
|Net cash provided by operating activities                                         |  |                     | 67,151,092 
|                                                                                  |  |                     |            
|Cash flows from investing activities:                                             |  |                     |            
|Deposits paid for dredgers                                                        |  |                     | (20,162,854
|Changes in security deposits                                                      |  |                     | (25,746,413
|Purchase of property, plant and equipment                                         |  |                     | (1,902,615 
|Net cash used in investing activities                                             |  |                     | (47,811,882
|                                                                                  |  |                     |            
|Cash flows from financing activities:                                             |  |                     |            
|Repayment of term loans                                                           |  |                     | -          
|Proceeds from term loans                                                          |  |                     | -          
|Repayment of dredger payable                                                      |  |                     | -          
|Proceeds from share issue                                                         |  |                     | -          
|Capital contributions from capital issue toWonder Dredging/Fujian Service         |  |                     | -          
|Advance from related companies                                                    |  |                     | 12,408     
|Net cash provided by/(used in) financing activities                               |  |                     | 12,408     
|Net increase in cash                                                              |  |                     | 19,351,618 
|                                                                                  |  |                     |            
|Effect of exchange rate changes on cash                                           |  |                     | 4,525,454  
|                                                                                  |  |                     |            
|Cash as of January 1                                                              |  |                     | 88,532,472 
|Cash as of December 31                                                            |  | $                   | 112,409,544



F-7







CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN US DOLLARS)



|                                                                        |  | For the Years Ended |           
|----------------------------------------------------------------------- |  | ------------------- | ----------
|                                                                        |  | December 31,        |           
|                                                                        |  | 2011                |           
|Supplemental disclosures of cash flow information:                      |  |                     |           
|                                                                        |  |                     |           
|Cash paid:                                                              |  |                     |           
|Interest paid                                                           |  | $                   | -         
|                                                                        |  |                     |           
|Income tax paid                                                         |  | $                   | 26,956,670
|                                                                        |  |                     |           
|Supplemental disclosures of non-cash transactions:                      |  |                     |           
|                                                                        |  |                     |           
|Accretion of discount on Class A Preferred Shares                       |  | $                   | 6,135,012 
|                                                                        |  |                     |           
|Transfer of deposits paid for dredgers to property, plant and equipment |  | $                   | 12,786,799



See accompanying notes to the consolidated
financial statements.



F-8







CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN US DOLLARS)



| | 1. | DESCRIPTION OF BUSINESS AND ORGANIZATION
| | -- | ----------------------------------------



On April 14, 2010, China Dredging
Group Co., Ltd (“the Company”) was incorporated in the British Virgin Islands (“BVI”) as a limited liability
company by the three shareholders, Mars Harvest Co., Ltd. (“Mars”), Venus Seed Co., Ltd. (“Venus”) and
Saturn Glory Co., Ltd. (“Saturn”)(together, the “Shareholders”), by subscribing to 104,355 ordinary shares
(after giving effect of the recapitalization as described below). The proportionate ownership percentage of the Company was 90%,
5% and 5% held by Mars, Venus and Saturn, respectively. The principal activity of the Company is to hold its interests in its subsidiaries.
The Company, together with its wholly owned subsidiaries and variable interest entities (“VIEs”), of which one of the
Company’s subsidiaries is the primary beneficiary, (collectively referred as the “Group”) is engaged in performing
dredging services, specifically capital dredging, maintenance dredging and reclamation dredging throughout mainland China. The
Group provides its services directly to its customers in the People’s Republic of China (“PRC”).



On May 26, 2010, the Company
was recapitalized by increasing its number of authorized shares, changing its par value and by issuing 52,072,968 shares of ordinary
shares (after giving effect of the recapitalization as described below) to the three founding shareholders, Mars, Venus and Saturn,
and four new shareholders (collectively “New Shareholders”), Regent Fill Investment Group Limited (“Regent Fill”),
Poying Holdings Limited (“Poying”), Jianliang Yu and Nan Ding. At the time of recapitalization, the Company had not
commenced operations and had no assets.



F-9


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 1. | DESCRIPTION OF BUSINESS AND ORGANIZATION (.../Cont’d)
| | -- | ---------------------------------------------------



Pursuant to a unanimous resolution
of the Company’s board of directors, the Company’s Memorandum and Articles of Association (“M&A”) was
amended as of October 25, 2010 to increase its maximum number of authorised shares from 50,000 ordinary shares of one class with
a par value of $1.00 each to a maximum 250,000,000 shares of no par value divided into two classes of shares: (i) 225,000,000 ordinary
shares and 25,000,000 Class A Preferred Shares. The Company's recapitalization was consummated on October 25, 2010, however, retroactively
applied to reflect the recapitalized shares. On October 27, 2010, the Company entered into a merger with Chardan Acquisition Corp.
(‘‘CAC’’), a BVI company (the ‘‘Merger’’). The Company was the surviving entity
in the Merger. Pursuant to the Merger Agreement, the shareholders of CAC received 500,000 of the Company’s ordinary shares.
Following the recapitalization and reverse merger, the number and percentage of issued shares was distributed among shareholders
as follows:



|                                       |  | No. of          |            |  |   | 
|-------------------------------------- |  | --------------- | ---------- |  | - | 
|Name                                   |  | ordinary shares |            |  | % | 
|                                       |  |                 |            |  |   | 
|Mars Harvest Co., Ltd.                 |  |                 | 33,852,703 |  |   | 
|Venus Seed Co., Ltd.                   |  |                 | 2,608,866  |  |   | 
|Saturn Glory Co., Ltd.                 |  |                 | 2,608,866  |  |   | 
|Country Vitality Enterprises Limited   |  |                 | 2,600,000  |  |   | 
|Windham Investments Limited            |  |                 | 2,580,000  |  |   | 
|Partner One Holdings Limited           |  |                 | 2,550,000  |  |   | 
|NewMargin Growth Fund, L.P.            |  |                 | 1,600,000  |  |   | 
|Cadman Investments Ltd.                |  |                 | 1,593,555  |  |   | 
|Linkstate Global Investment Limited    |  |                 | 600,000    |  |   | 
|Newmargin Partners Ltd.                |  |                 | 400,000    |  |   | 
|Regent Fill Investment Group Limited   |  |                 | 325,000    |  |   | 
|Poying Holdings Limited                |  |                 | 325,000    |  |   | 
|Nan Ding                               |  |                 | 270,833    |  |   | 
|Jianliang Yu                           |  |                 | 162,500    |  |   | 
|Gala Fortune Limited                   |  |                 | 135,000    |  |   | 
|Steven A. Urbach                       |  |                 | 128,515    |  |   | 
|Fresh Reward Development Limited       |  |                 | 100,000    |  |   | 
|Delaware Charter FBO Kerry Propper IRA |  |                 | 91,755     |  |   | 
|Chardan Capital Markets, LLC           |  |                 | 74,620     |  |   | 
|Kerry Propper                          |  |                 | 36,760     |  |   | 
|George B. Kaufman                      |  |                 | 15,000     |  |   | 
|WHI, Inc. Retirement Savings Plan      |  |                 | 15,000     |  |   | 
|Todd A. Gold                           |  |                 | 3,350      |  |   | 
|                                       |  |                 | 52,677,323 |  |   | 



F-10


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 1. | DESCRIPTION OF BUSINESS AND ORGANIZATION (.../Cont’d)
| | -- | ---------------------------------------------------



All references in the accompanying
financial statements to the number of ordinary shares issued and earnings per share have been retroactively restated to reflect
the recapitalization.



During October through December,
2010, the Company completed multiple closings of a private placement of 10,012,987 shares of its Class A Preferred Shares (no par
value) for gross proceeds of $50.06 million. Under the terms of the Securities Purchase Agreement, up to a total of 15,000,000
Class A Preferred Shares may be sold by the Company (the ‘‘Offering’’). Net proceeds to the Company of
the Offering, after deducting offering expenses of $3.62 million were $46.44 million. For these proceeds, the investors also received
the right to up to 15,000,000 additional shares from the Company’s principal shareholder if the Company fails to meet certain
net income thresholds. See Note 18 for a description of the rights and privileges of the Class A Preferred Shares.



The Company’s holdings
are comprised of China Dredging (HK) Company Limited (“China Dredging HK”), a wholly owned subsidiary of the Company
(formed on April 26, 2010), Fujian WangGang Dredging Construction Co., Ltd (“Fujian WangGang”) (formed on June 12,
2010), a wholly foreign-owned enterprise of China Dredging HK, and a 50% controlling interest on Fujian Xing Gang Port Service
Co., Ltd (“Fujian Service”), an operating company incorporated and operating in PRC. Fujian WangGang acquired a 50%
direct ownership interest in Fujian Service on June 29, 2010 whereas the remaining 50% interest in Fujian Service is owned by Wonder
Dredging Engineering Limited Liability Company (“Wonder Dredging”). Wonder Dredging was formed on May 10, 2010 by the
same owners of Fujian Service at that time. Through various agreements (collectively the “VIE Agreements”), Fujian
WangGang has obtained irrevocable management control over both Wonder Dredging and Fujian Service. Through these agreements Fujian
WangGang 1) receives substantially all of the economic benefits of Fujian Service’s ongoing operations, 2) has the right
to purchase the other 50% interest in Fujian Service from Wonder Dredging for consideration which is equivalent to the net asset
value of the latest quarterly report of Fujian Service with the consideration then contributed back to Fujian Service and 3) has
the right to receive all other assets of Wonder Dredging with consideration which is equivalent to the net asset value of the latest
quarterly report of Fujian Service.



The VIE Agreements include:



| | 1) | Management Agreement - Fujian WangGang has the exclusive right to manage, operate and control the
business operations of Fujian Service, including, but not limited to, establishing and implementing policies for management, using
all of the assets of Fujian Service, appointing Fujian Service’s directors and senior management, directing Fujian Service
to enter into loan agreement, making administrative decisions regarding employee wages or hiring and firing employees and other
actions customarily associated with Fujian Service’s senior management. As consideration for its business management services,
Fujian WangGang has agreed to pay to Fujian Service an annual fee of approximately $149,000 (RMB1 million), and Fujian Service
will pay to Fujian WangGang 100% of the net profits of Fujian Service. The Management Agreement terminates upon the earlier of
(i) Fujian WangGang’s exercise in full of the option to purchase the equity interests of Fujian Service, pursuant to the
Exclusive Option Agreement, and Fujian WangGang and/or its designees individually or jointly own all of the equity interests in
Fujian Service, or (ii) June 30, 2030, subject to the right of Fujian WangGang to renew the term of the Management Agreement for
additional consecutive 20-year periods.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-11


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 1. | DESCRIPTION OF BUSINESS AND ORGANIZATION (.../Cont’d)
| | -- | ---------------------------------------------------



| | 2) | Exclusive Option Agreement - Fujian WangGang has the exclusive right to purchase up to all of the
equity interest in Fujian Service that is held by Wonder Dredging, to the extent allowed under the current PRC law. Accordingly,
if and when the current limitations on direct ownership of Fujian Service by Fujian WangGang are eased or ceased, Fujian WangGang
may exercise its option to purchase and directly own the equity interests of Fujian Service. The purchase price for the equity
interest in Fujian Service held by Wonder Dredging would be equivalent to the net asset value reflected in Fujian Service’s
then current quarterly report prepared according to U.S. GAAP. The term of the Exclusive Option Agreement is 20 years, which term
continuously renews unless the option is exercised in full or the agreement is otherwise terminated by the parties. The agreement
also provides that upon consummation of the exercise of the option, Wonder Dredging will contribute, without additional consideration,
any funds actually received by it from Fujian WangGang for the transfer of its equity interest in Fujian Service to Fujian WangGang.
The agreement further provides that, as of the date of the agreement, Fujian WangGang is entitled to all the future payments by
Fujian Service to Wonder Dredging, together with all the profits of Fujian Service.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3) | Equity Interest Pledge Agreement - To ensure that Fujian Service and its shareholders perform their
obligations under the Exclusive Option Agreement, the Management Agreement, and a letter of undertaking whereby Wonder Dredging
waived its right to receive a dividend of approximately $51.1 million declared by Fujian Service in May 2010, the owners of 100%
of the equity interests in Fujian Service, pledged their entire interest in Wonder Dredging to Fujian WangGang. The Equity Interest
Pledge Agreement terminates upon the earlier of (i) the purchase of the entire equity interest in Fujian Service by Fujian WangGang
or (ii) June 30, 2030, subject to the right of Fujian WangGang to renew the term of the Equity Interest Pledge Agreement for additional
consecutive 20 year periods.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4) | Powers of Attorney - Wonder Dredging executed irrevocable power of attorney granting to Fujian
WangGang or its designees the power to vote, pledge or dispose of all equity interests in Fujian Service that Wonder Dredging holds.
Additionally, the powers of attorney allow Fujian WangGang or its designees to sign and carry out the intentions of the Management
Agreement, the Equity Pledge Agreement and the Exclusive Option Agreement. At the same time, the owners of the equity interests
in Wonder Dredging executed powers of attorney granting to Fujian WangGang or its designees the power to vote, pledge, or dispose
of all equity interests in Wonder Dredging, and to appoint directors and senior management of Wonder Dredging.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-12


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 1. | DESCRIPTION OF BUSINESS AND ORGANIZATION (.../Cont’d)
| | -- | ---------------------------------------------------



Below is the organization
chart in existence as of December 31, 2011:







In management’s judgment
Fujian Service was and is a VIE and Fujian WangGang was and is its primary beneficiary. This judgment is based on the following:



Fujian Service is a VIE



| | 1) | There is no “equity investment at risk” as defined in ASC 810-10-15-14a.1 because no
equity holders participate in profits as holders of the legal and accounting equity. Fujian WangGang, in its capacity as holder
of the Management Agreement has the right to a fee equal to 100% of profits. With no equity investment at risk it cannot be said
that the equity investment at risk is sufficient to finance the activities of Fujian Service. Consequently, Fujian Service is defined
as a VIE under ASC 810-10-15-14a.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) | Even if management’s judgment concerning the lack of equity investment at risk were to be
determined inappropriate and the legal equity interests did represent equity investment at risk, the equity investors as a group
do not have the power to direct the activities of Fujian Service that most significantly affect its economic performance. All such
control rights rest with Fujian WangGang in its capacity as holder of the Management Agreement. Consequently, Fujian Service would
be defined as a VIE under ASC 810-10-15-14b.1.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-13


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 1. | DESCRIPTION OF BUSINESS AND ORGANIZATION (.../Cont’d)
| | -- | ---------------------------------------------------



| | 3) | Additionally, even if management’s judgment concerning the lack of equity investment at risk
were to be determined inappropriate and the legal equity interests did represent equity investment at risk, the equity investors
as a group do not have the right to receive the expected residual returns of Fujian Service. Fujian WangGang in its capacity as
holder of the Management Agreement has the right to a fee equal to 100% of profits leaving no residual returns of Fujian Service
for the equity investors. Consequently, Fujian Service would be defined as a VIE under ASC 810-10-15-14b.3.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Fujian WangGang
is the primary beneficiary of Fujian Service



Fujian WangGang has the controlling
financial interest, as defined in ASC 810-10-25-38, in Fujian Service because it 1) has the power to direct the activities of Fujian
Service that most significantly impact Fujian Service’s economic performance and 2) the obligation to absorb losses of Fujian
Service that could potentially be significant to Fujian Service or the right to receive benefits from Fujian Service that could
potentially be significant to the Fujian Service. Management’s judgment is based on the following:



| | 1) | Power to direct the activities of Fujian Service:
| | -- | -------------------------------------------------



| | a) | Fujian WangGang has the power to direct the activities of Fujian Service that most significantly
impact Fujian Service’s economic performance because the Management Agreement gives Fujian WangGang all power to control
the activities of Fujian Service.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) | Even if management’s judgment that the Management Agreement gives Fujian WangGang that power
were determined to be incorrect, Fujian WangGang would still have that power through i) its 50% legal voting interest and ii) its
sole right under the Powers of Attorney, to use the voting power of Wonder Dredging’s 50% voting interest.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) | Obligation to absorb losses of Fujian Service or the right to receive benefits from Fujian Service.
Each of the following would by itself suffice to meet this criterion:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) | Fujian WangGang has a direct 50% ownership interest in Fujian Service which has an obligation to
absorb losses.
| | -- | ---------------------------------------------------------------------------------------------------------------



| | b) | Fujian WangGang, in its capacity as holder of the Management Agreement has the right to 100% of
the profits of Fujian Service.
| | -- | ------------------------------------------------------------------------------------------------------------------------------



| | c) | Fujian WangGang through the Exclusive Option Agreement is the beneficial owner of Wonder Dredging’s
50% ownership interest in Fujian Service, which is an additional source of both the obligation to absorb losses and the right to
receive benefits that could potentially be significant to Fujian Service.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-14


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 1. | DESCRIPTION OF BUSINESS AND ORGANIZATION (.../Cont’d)
| | -- | ---------------------------------------------------



Also, in management’s
judgment Wonder Dredging was and is a VIE and Fujian WangGang was and is its primary beneficiary. This judgment was based on the
following:



Wonder Dredging is a VIE



| | 1) | There is no “equity investment at risk” as defined in ASC 810-10-15-14a.1 because no
equity holders participate in profits or losses as holders of the legal equity interests. Wonder Dredging’s only material
asset is its 50% ownership interest in Fujian Service. Fujian WangGang, in its capacity as holder of the Exclusive Option Agreement
receives all benefits and absorbs all losses of that asset, and therefore of Wonder Dredging. With no equity investment at risk
it cannot be said that the equity investment at risk is sufficient to finance the activities of Wonder Dredging. Consequently,
Wonder Dredging is defined as a VIE under ASC 810-10-15-14a.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) | Even if management’s judgment concerning the lack of equity investment at risk were to be
determined inappropriate and the legal equity interests did represent equity investment at risk, the equity investors as a group
do not have the power to direct the activities of Wonder Dredging that most significantly affect its economic performance. All
such control rights rest with Fujian WangGang, under the Powers of Attorney. Consequently, Wonder Dredging would be defined as
a VIE under ASC 810-10-15-14b.1.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3) | Additionally, even if management’s judgment concerning the lack of equity investment at risk
were to be determined inappropriate and the legal equity interests did represent equity investment at risk, the equity investors
as a group do not have the right to receive the expected residual returns of Fujian Service. Fujian WangGang in its capacity as
holder of the Exclusive Option Agreement has the right to all profits and gains on the Wonder Dredging’s only material asset,
the ownership interest in Fujian Service, leaving no residual returns of Wonder Dredging for the equity investors. Consequently,
Wonder Dredging would be defined as a VIE under ASC 810-10-15-14b.3.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Fujian WangGang
is the primary beneficiary of Wonder Dredging



Fujian WangGang has the controlling
financial interest, as defined in ASC 810-10-25-38, in Wonder Dredging because it 1) has the power to direct the activities of
Wonder Dredging that most significantly impact Wonder Dredging’s economic performance and 2) the obligation to absorb losses
of Wonder Dredging that could potentially be significant to Wonder Dredging or the right to receive benefits from Wonder Dredging
that could potentially be significant to the Wonder Dredging. Management’s judgment is based on the following:



| | 1) | Power to direct the activities of Wonder Dredging:
| | -- | --------------------------------------------------



| | a) | Fujian WangGang has the power to direct the activities of Wonder Dredging that most significantly
impact Wonder Dredging’s economic performance because the Powers of Attorney give Fujian WangGang all power to control the
activities of Wonder Dredging.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-15


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 1. | DESCRIPTION OF BUSINESS AND ORGANIZATION (.../Cont’d)
| | -- | ---------------------------------------------------



Fujian WangGang
is the primary beneficiary of Wonder Dredging (.../Cont’d)



| | 1) | Power to direct the activities of Wonder Dredging:
| | -- | --------------------------------------------------



| | b) | Even if management’s judgment that the Powers of Attorney give Fujian WangGang that power
were determined to be incorrect, Fujian WangGang would still have that power through its control of Wonder Dredging’s only
significant activity, its ownership of a 50% interest in Fujian Service. Such control is held by Fujian WangGang even without consideration
of the Powers of Attorney through i) Wonder Dredging’s inability to transfer the ownership interest in Fujian Service because
of the Exclusive Option Agreement and ii) Wonder Dredging’s inability to exercise control over Fujian Service because of
Fujian WangGang’s right under the Management Agreement to appoint all Directors of Fujian Service.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) | Obligation to absorb losses of Wonder Dredging or the right to receive benefits from Wonder Dredging.
In its capacity as holder of the Exclusive Option Agreement, Fujian WangGang receives all value of Wonder Dredging’s only
material asset, its ownership interest in Fujian Service. Consequently, Fujian WangGang absorbs all losses and receives all benefits
of this sole material asset.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Accordingly, the balance sheets
of Wonder Dredging and Fujian Service are included in the Group’s consolidated financial statements. Since the Company has
determined that the acquisition of Wonder Dredging and Fujian Service as VIE subsidiaries on June 29, 2010 was a combination of
entities under common control and only Fujian Service had substantive operations Fujian Service is considered to be the continuing
reporting entity that was reorganized into the current structure. The financial statements include the balance sheets, results
of operations and cash flows of Fujian Service for all periods presented and the other members in the Group from their respective
incorporation dates.



Fujian Service, which is the
operating entity with RMB200,000,000 ($29,002,371 at December 31, 2011) registered capital, was incorporated on January 8, 2008.
Fujian Service was originally owned by two individuals, Qing Lin and Panxing Zhuo, with holdings of 91% and 9%, respectively, of
the total ownership. Qing Lin and Panxing Zhuo held their ownership interests in Fujian Service as the representatives of the family
under an agreement that gave Xinrong Zhuo the exclusive right to make executive decisions and manage Fujian Service.



On May 20, 2010, Qing Lin and
Panxing Zhuo sold all of their ownership interests of Fujian Service to Wonder Dredging, which they also owned fully and in the
same percentages as their ownership interests in Fujian Service. Subsequent to this transaction Wonder Dredging owned 100% of Fujian
Service and owed a total of $18,019,636 to Mr. Lin and Mr. Zhuo. These former owners of Fujian Service agreed to contribute the
full purchase amount receivable to the capital of Wonder Dredging.



On June 29, 2010, Fujian WangGang
acquired a 50% ownership interest in Fujian Service from Wonder Dredging by committing to invest, as a capital contribution, $23,602,460
(RMB158,597,183) into Fujian Service. This reduced Wonder Dredging's ownership interest in Fujian Service to 50%.



F-16


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 1. | DESCRIPTION OF BUSINESS AND ORGANIZATION (.../Cont’d)
| | -- | ---------------------------------------------------



In conjunction with the effectiveness
of the VIE Agreements, Wonder Dredging and its shareholders became obligated to contribute to the capital of Fujian WangGang a
dividend receivable from Fujian Service together with all retained earnings of Fujian Service of which Wonder Dredging is the beneficiary
under the purchase agreement with Mr. Lin and Mr. Zhuo.



At the close of business on
June 30, 2010, various agreements became effective under which Fujian WangGang irrevocably obtained; 1) management control over
all of the business and activities of Fujian Service and Wonder Dredging, 2) a direct right to receive substantially all of the
economic benefits of Fujian Service, and 3) the right to acquire 50% equity interest in Fujian Service owned by Wonder Dredging.



According to the “Ordinance
of Ship Registration of People’s Republic of China’’ and other relevant regulations, the maximum shareholding
by foreign sources of capital in an entity operating in the PRC cannot exceed 50%. Also no operating entity’s vessels are
entitled to be registered as Chinese ships if foreign-owners hold more that 50% of the equity interest in the operating entity.
The Company’s management believes the corporate structure now in effect and set forth above permits Fujian Service to operate
in the PRC and conduct its dredging contracts operations in compliance with PRC law.



The acquisition of Wonder Dredging
and Fujian Service as VIE subsidiaries on June 29, 2010 was deemed to be a combination of entities under common control. Consequently,
these financial statements have been prepared as if the entities in the Group had always been consolidated. The financial statements
are principally those of Fujian Service with the other Group members included from their various dates of incorporation in 2010.
The financial statements reflect the capital structure adopted the Company.



Management determined that the
VIE Agreements constituted a combination of entities under common control, because the Company’s Chief Executive Officer,
Mr. Xinrong Zhuo, controlled China Dredging and its subsidiary Fujian WangGang, as the 90% owner of the Company when the Company
incepted, and then diluted to 88.27% after new shareholders acquired the Company’s ordinary shares in May 2010, and also
had the right to make all executive and management decisions for Wonder Dredging and its subsidiary Fujian Service through an agreement
with the legal owners, his brother-in-law and father, that predated the formation of Fujian Service. Under the agreement, Mr. Qing
Lin and Mr. Panxing Zhuo, who hold 100% equity interests in Wonder Dredging collectively and own 50% equity interests in Fujian
Service indirectly, hold those interests as representatives of the family.



F-17


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| | -- | ------------------------------------------



| | (a) | Basis of presentation
| | --- | ---------------------



The accompanying audited consolidated
financial statements and related notes have been prepared in conformity with accounting principles generally accepted in the United
States of America (US GAAP).



The consolidated financial statements
include the accounts of the Company, its wholly-owned subsidiaries and variable interest entities (“VIE”) in which
the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated.



| | (b) | Variable interest entity
| | --- | ------------------------



The consolidated financial statements
include the accounts of the Company, its wholly-owned subsidiaries and variable interest entities (“VIE”) in which
the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated. The consolidated
financial statements of the Company have been prepared as if the existing corporate structure had been in existence throughout
the periods presented and as if the reorganization had occurred as of the beginning of the earliest period presented.



F-18


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont’d)
| | -- | -----------------------------------------------------



| | (b) | Variable interest entity (.../Cont’d)
| | --- | -----------------------------------



The following table shows the
assets and liabilities of Wonder Dredging and Fujian Service after eliminating the intercompany balances as of December 31, 2011
and 2010:



|                                                      |  | December 31, 2011 |         |  | December 31, 2010 |  
|----------------------------------------------------- |  | ----------------- | ------- |  | ----------------- | -
|                                                      |  | Wonder Dredging   |         |  | Fujian Service    |  
|ASSETS                                                |  |                   |         |  |                   |  
|Cash and cash
    equivalents                         |  | $                 | 957,786 |  |                   | $
|Accounts receivable, net                              |  |                   | -       |  |                   |  
|Cost and estimated earnings
    in excess of billings |  |                   |         |  |                   |  
|on contracts in progress                              |  |                   | -       |  |                   |  
|Other current assets                                  |  |                   | -       |  |                   |  
|Property, plant and equipment,
    net                |  |                   | -       |  |                   |  
|Prepaid dredger deposits                              |  |                   | -       |  |                   |  
|Security
    deposits                                 |  |                   | -       |  |                   |  
|                                                      |  | $                 | 957,786 |  |                   | $
|                                                      |  |                   |         |  |                   |  
|LIABILITIES                                           |  |                   |         |  |                   |  
|Accounts payable                                      |  | $                 | -       |  |                   | $
|Income tax payable                                    |  |                   | -       |  |                   |  
|Accrued
    liabilities and other payables            |  |                   | 33      |  |                   |  
|                                                      |  | $                 | 33      |  |                   | $



The creditors of Wonder Dredging
and Fujian Service do not have recourse against the general creditors of its primary beneficiary or other Group members.



F-19


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont’d)
| | -- | -----------------------------------------------------



| | (b) | Variable interest entity (.../Cont’d)
| | --- | -----------------------------------



The following table shows the
contract revenue, cost of contract revenue, and net income/(loss) of Wonder Dredging and Fujian Service after eliminating the intercompany
balances for years ended December 31, 2011 and 2010. This was the only period during the years ended December 31, 2011 and 2010
for which the results of Wonder Dredging and Fujian Service were included in the consolidated Group.



|                                                  |  | For the Year Ended |        |   | For the Year Ended |  
|------------------------------------------------- |  | ------------------ | ------ | - | ------------------ | -
|                                                  |  | December 31, 2011  |        |   | December 31, 2010  |  
|                                                  |  | Wonder Dredging    |        |   | Fujian Service     |  
|                                                  |  |                    |        |   |                    |  
|Contract
    revenue                              |  | $                  | -      |   |                    | $
|                                                  |  |                    |        |   |                    |  
|Cost
    of contract revenue                      |  | $                  | -      |   |                    | $
|                                                  |  |                    |        |   |                    |  
|Net
    (loss)/income attributable to the Company |  | $                  | (2,128 | ) |                    | $



The following
table shows the condensed cash flow activities of Wonder Dredging and Fujian Service for the years ended December 31, 2011 and
2010:



|                                                        |  | For the Year Ended December 31,
    2011 |         |   | For the Year Ended December 31,
    2010 |  
|------------------------------------------------------- |  | ---------------------------------------- | ------- | - | ---------------------------------------- | -
|                                                        |  | Wonder Dredging                          |         |   | Fujian Service                           |  
|                                                        |  |                                          |         |   |                                          |  
|Net cash (used
    in)/provided by operating activities |  | $                                        | (8,146  | ) |                                          | $
|Net cash (used in)/provided
    by investing activities |  |                                          | -       |   |                                          |  
|Net
    cash provided by financing activities           |  |                                          | -       |   |                                          |  
|Net (decrease)/increase
    in cash                     |  |                                          | (8,146  | ) |                                          |  
|Effect on change of exchange
    rates                  |  |                                          | 56,579  |   |                                          |  
|Cash
    at the beginning of the year                   |  |                                          | 909,353 |   |                                          |  
|Cash
    at the end of the year                         |  | $                                        | 957,786 |   |                                          | $



F-20


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont’d)
| | -- | -----------------------------------------------------



| | (c) | Use of estimates
| | --- | ----------------



The Company’s consolidated
financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America
(the “U.S. GAAP”) which requires management of the Company to make a number of estimates and assumptions relating to
the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the years. Significant items subject to such estimates and
assumptions include the recoverability of the carrying amount and the estimated useful lives of long-lived assets; valuation allowances
for receivables, percentage of completion of contracts and realizable values for inventories. Accordingly, actual results could
differ from those estimates.



| | (d) | Foreign currency translation
| | --- | ----------------------------



The Company uses United States
dollars (“U.S. Dollar” or “US$” or “$”) for financial reporting purposes. The subsidiaries
within the Company maintain their books and records in their respective functional currency, Chinese Renminbi (“RMB”)
and Hong Kong dollars (“HK$”), being the lawful currency in the PRC and Hong Kong, respectively. Assets and liabilities
of foreign subsidiaries are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated
at the average rate of exchange prevailing during the period. The related transaction adjustments are reflected in “Accumulated
other comprehensive income/(loss)’’ in the equity section of the Company’s consolidated balance sheet. A summary
of exchange rate is as follows:



|Renminbi to one US dollar                         |  |  |        | 
|------------------------------------------------- |  |  | ------ | 
|                                                  |  |  |        | 
|Rate as of December 31, 2011                      |  |  | 6.2939 | 
|                                                  |  |  |        | 
|Average rate for the year ended December 31, 2011 |  |  | 6.4475 | 
|                                                  |  |  |        | 
|Rate as of December 31, 2010                      |  |  | 6.6000 | 
|                                                  |  |  |        | 
|Average rate for the year ended December 31, 2010 |  |  | 6.7604 | 
|                                                  |  |  |        | 
|Average rate for the year ended December 31, 2009 |  |  | 6.8303 | 
|                                                  |  |  |        | 
|Hong Kong dollar to one US dollar                 |  |  |        | 
|                                                  |  |  |        | 
|Rate as of December 31, 2011                      |  |  | 7.7663 | 
|                                                  |  |  |        | 
|Average rate for the year ended December 31, 2011 |  |  | 7.7793 | 
|                                                  |  |  |        | 
|Rate as of December 31, 2010                      |  |  | 7.7810 | 
|                                                  |  |  |        | 
|Average rate for the year ended December 31, 2010 |  |  | 7.7700 | 
|                                                  |  |  |        | 
|Average rate for the year ended December 31, 2009 |  |  | 7.7515 | 



F-21


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont’d)
| | -- | -----------------------------------------------------



| | (e) | Cash
| | --- | ----



Cash consists of cash on hand
and at banks.



| | (f) | Accounts receivable, net
| | --- | ------------------------



Accounts receivable represent
billed under the terms of contracts with customers. There is no amount related to retainage. The Group anticipates collection of
all the outstanding balances within 7 to 180 days after completion reports of the contracts are issued. The allowance for doubtful
accounts is the Group’s best estimate of the amount of probable credit losses in the Group’s existing receivable. The
Group provides an allowance for estimated uncollectible receivables when events or conditions indicate that amounts outstanding
are not recoverable. Outstanding account balances are reviewed individually for collectability. Based on the Group’s assessment
of collectability, there has been no allowance for doubtful accounts recognized for the years ended December 31, 2011, 2010 and
2009.



| | (g) | Revenue recognition and cost and estimated earnings in excess of billings on contracts in
                                                                        progress
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company recognizes contract revenues under the percentage-of-completion
method to determine the appropriate amount to be recognized in a given period. Depending on the nature of contracts, the stage
of completion is measured by reference to (a) the proportion of contract costs incurred for work performed to date to estimated
total contract costs; (b) the amount of work certified by a site engineer; or (c) the completion of a physical proportion of the
contract work. The difference between amounts billed and recognized as revenue is reflected in the balance sheet as either contract
revenues in excess of billings or billings in excess of contract revenues. Provisions for estimated losses on contracts in progress
are made in the period in which they are identified. In the event that contract revenue cannot be estimated reliably, contract
revenue is recognized only to the extent of contract costs incurred that are likely to be recoverable.



Cost and estimated earnings in
excess of billings represent amounts of revenue earned under contracts in progress but not billed at the balance sheet date. These
amounts become billable according to the contract terms, which usually consider passage of time, and/or completion of the project.
As of December 31, 2011 and 2010, cost and estimated earnings in excess of billings on contracts in progress were $14,008,972 and
$834,909, respectively.



| | (h) | Property, plant and equipment
| | --- | -----------------------------



Property, plant and equipment
are recorded at cost less accumulated depreciation. Expenditures for major additions and betterments are capitalized. Depreciation
of property, plant and equipment is computed by the straight-line method over the assets estimated useful lives ranging from five
to ten years. Building improvements, are amortized on a straight-line basis over the estimated useful life.



Upon sale or retirement of property,
plant and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected
in operations.



The estimated useful lives of the assets are as
follows:



|                 |  | Estimated lives
|---------------- |  | ---------------
|Dredgers         |  | 7.5-10         
|Machinery        |  | 5              
|Office equipment |  | 5              



Expenditures for repairs and maintenance, which
do not extend the useful life of the assets, are expensed as incurred.



F-22


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont’d)
| | -- | -----------------------------------------------------



| | (i) | Impairment of long-lived assets
| | --- | -------------------------------



Based on the Group’s assessment,
no triggering events for the testing of long-lived assets for impairment were identified as of December 31, 2011 and 2010.



| | (j) | Fair value measurements
| | --- | -----------------------



In April 2009, the FASB issued
ASC 820-10-65-4 (formerly FSP No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset and
Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”). This standard emphasizes that
even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains
the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
(that is, not a forced liquidation or distressed sale) between market participants. This standard provides a number of factors
to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability
in relation to normal market activity. In addition, when transactions or quoted prices are not considered orderly, adjustments
to those prices based on the weight of available information may be needed to determine the appropriate fair value. This standard
is effective for interim and annual reporting periods ending after June 15, 2009, and is applied prospectively. Early adoption
is permitted for periods ending after March 15, 2009. The adoption of this standard did not have a material effect on the consolidated
financial statements.



In January 2010, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update “ASU 2010-06” “Fair Value
Measurements and Disclosures”. The new guidance clarifies two existing disclosure requirements and requires two new disclosures
as follows: (1) a “gross” presentation of activities (purchases, sales, and settlements) within the Level 3 rollforward
reconciliation, which will replace the “net” presentation format; and (2) detailed disclosures about the transfers
in and out of Level 1 and 2 measurements. This guidance is effective for the first interim or annual reporting period beginning
after December 15, 2009, except for the gross presentation of the Level 3 rollforward information, which is required for annual
reporting periods beginning after December 15, 2010, and for interim reporting periods thereafter. The Company adopted the amended
fair value disclosures guidance on January 1, 2011.



The Group's financial instruments
consist principally of cash, accounts receivables, cost and estimated earnings in excess of billings on contracts in progress,
accounts payable and accrued liabilities. None of which are held for trading purposes. Pursuant to ASC 820, the fair value of the
Group's cash is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical
assets. The Group believes that the carrying amounts of all of the Group's other financial instruments approximate their current
fair values because of their nature and respective maturity dates or durations. Also included in the Group’s financial instruments
are the contingent liability for a variable number of shares and the derivative liability, both as described in Note 2(p) below.
Both of these are carried at the estimated fair value at the balance sheet date using Level 3 inputs. On December 31, 2011, the
contingent liability for a variable number of shares expired with no shares due. As a result no liability is included in the balance
sheet at that date.



F-23


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont’d)
| | -- | -----------------------------------------------------



| | (k) | Income taxes
| | --- | ------------



The Group recognizes interest
and penalty related to income tax matters as income tax expense. As of December 31, 2011 and 2010, there was no penalty or interest
recognized as income tax expenses.



| | (l) | Commitments and contingencies
| | --- | -----------------------------



In the normal course of business,
the Group is subject to contingencies, including legal proceedings and environmental claims arising out of the normal course of
businesses that relate to a wide range of matters, including among others, contracts breach liability. The Group records accruals
for such contingencies based upon the assessment of the probability of occurrence and, where determinable, an estimate of the liability.
Management may consider many factors in making these assessments including past history, scientific evidence and the specifics
of each matter.



The Group’s management
has evaluated all such proceedings and claims that existed as of December 31, 2011 and 2010. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on the Group’s financial position, liquidity
or results of operations.



| | (m) | Economic and political risks
| | --- | ----------------------------



The Group’s operations
are conducted in the PRC. Accordingly, the Group’s business, financial condition and results of operations may be influenced
by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.



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



F-24


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont’d)
| | -- | -----------------------------------------------------



| | (n) | Pension and employee benefits
| | --- | -----------------------------



Full time employees of the Group
participate in a government mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical
care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. PRC labor regulations
require the Group to accrue for these benefits based on certain percentages of the employees’ salaries. Cost for pension
and employee benefits of the Group was $78,888 and $39,888 and $34,618 for the years ended December 31, 2011, 2010 and 2009, respectively.



| | (o) | Segment information
| | --- | -------------------



ASC 280 “Segment reporting”
establishes standards for reporting information on operating segments in interim and annual financial statements. The Group has
only one segment, all of the Group’s operations and customers are in the PRC and all income are derived from the services
of dredging. Accordingly, no line of business or geographic information is presented.



| | (p) | Escrow shares and preferred shares discount
| | --- | -------------------------------------------



On October 29, 2010, the Company’s
controlling shareholder, a company controlled by Mr. Xinrong Zhuo, the Company’s Chairman of the Board of Directors and Chief
Executive Officer, placed into escrow 15,000,000 of the Company’s ordinary shares (the “Make-Good Escrow”), pursuant
to a securities escrow agreement, for the purpose of providing protection to the investors in the 2010 Private Placement in the
event the Company does not achieve certain net income thresholds for the years ended 2010 and 2011. If the Company were not to
achieve the thresholds set forth below, holders of the preferred shares would receive additional shares from the Make-Good Escrow,
up to the full number of shares held in the Make-Good Escrow. The number of additional shares that may be released to investors
in the 2010 Private Placement if the Company fails to meet the Adjusted Net Income targets set forth below is equal to: (Original
Invested Shares * (Target EPS/Actual EPS)) — Original Invested Shares. “Actual EPS” means the Adjusted Net Income
for fiscal year 2010 or 2011, as applicable, divided by the number of the Company’s fully diluted outstanding shares. “Target
EPS” means the performance threshold for the applicable year divided by the number of the Company’s fully diluted outstanding
shares. Adjusted Net Income means after-tax net income based on U.S. GAAP, adjusted to exclude (i) non-cash charges associated
with the Merger, the 2010 Private Placement and a public offering or other financing by the Company, (ii) expenses related to the
release of the escrow shares, and (iii) expenses related to implementation of any of the agreements related to the 2010 Private
Placement. Adjusted Net Income for 2010 is calculated by adding the Adjusted Net Income of Fujian Service for the six months ended
June 30, 2010 and the Company’s Adjusted Net Income on a consolidated basis for the six months ended December 31, 2010. The
pro-rata right to receive shares issuable pursuant to the Make-Good Escrow is based upon the initial preferred shares issued to
investors. Shares not distributed from the Make-Good Escrow will be returned to the shareholder that contributed them. The Adjusted
Net Income targets for the 2010 and 2011 fiscal years are $48.1 million and $87.0 million, respectively. Adjusted Net Income is
Net Income is net income excluding certain expenses including “any non-cash charges incurred as a result of the Financing
Transaction, including without limitation, as a result of the issuance and/or conversion of the Preferred Shares, or as a result
of the issuance of warrants to any placement agent and its designees in connection with another financing transaction,” For
the years ended December 31, 2011 and 2010, Adjusted Net Income was determined as follows:



F-25


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont’d)
| | -- | -----------------------------------------------------



| | (p) | Escrow shares and preferred shares discount (.../Cont’d)
| | --- | ------------------------------------------------------



|                                                |  | For the Years Ended |            
|----------------------------------------------- |  | ------------------- | -----------
|                                                |  | 2011                |            
|                                                |  |                     |            
|Net Income                                      |  | $                   | 96,392,261 
|Add: Loss on derivative                         |  |                     | 6,762,079  
|Less: Gain on obligation under Make-Good Escrow |  |                     | (14,101,247
|Adjusted Net Income                             |  | $                   | 89,053,093 



The Company had already achieved
the Target EPS for 2010 shortly after the 2010 Private Placement and, at the time believed that it would have sufficient Actual
EPS in 2011 such that a substantial majority of the escrow shares would be released back to the shareholder. If the Company had
not achieved sufficient Actual EPS for 2011 and had released the escrow shares back to the shareholder, the Company does not believe
the fair value of the escrow shares should be recognized as compensation or an expense. According to SEC Staff Announcement Topic
No. D-110 (ASC 718-10-S99-2), to overcome the presumption that the release of shares are compensatory, the Company is required
to “consider the substance of the arrangement, including whether the arrangement was entered into for purposes unrelated
to, and not contingent upon, continued employment. For example, as a condition of a financing transaction, investors may request
that specific significant shareholders, who also may be officers or directors, participate in an escrowed share arrangement. If
the escrowed shares will be released or canceled without regard to continued employment, specific facts and circumstances may indicate
that the arrangement is in substance an inducement made to facilitate the transaction on behalf of the Company, rather than as
compensatory. In such cases, the SEC staff generally believes that the arrangement should be recognized and measured according
to its nature and reflected as a reduction of the proceeds allocated to the newly-issued securities.”



The Make-Good Escrow was not
entered into for purposes related to, or contingent upon, continued employment of the key executive. The sole reason for the Company
and Mr. Zhuo’s company to enter into the escrow arrangement was to induce the 2010 Private Placement investors to close the
financing transaction. The Make-Good Escrow must still comply with ASC 225-10-S99-3 through S99-4 and reflect the rights granted
by Mr. Zhuo to the investors personally as being rights given to the investors by the Company. Therefore, the Company believes
the proceeds of the 2010 Private Placement should be treated as being received for a combination of the preferred shares issued
to the investors and the contingent right to a variable number of ordinary shares under the Make-Good Escrow. The Company further
believes this requires that the 2010 Private Placement proceeds be allocated first to the contingent right to a variable number
of shares based on the estimated fair value of that right, with the remaining proceeds allocated to the preferred shares. In effect,
Mr. Zhuo’s company would be treated as having contributed, to the Company, a contingent right to a variable number of shares
while the Company is treated as having sold an identical right to the 2010 Private Placement investors. Pursuant to ASC 480-10-25-14,
the Company’s contingent obligation to deliver a variable number shares sold to the investors is recorded as a liability.
It was initially recorded at its $14,101,247 estimated fair value as of December 31, 2010. The effective right to receive an equal
number of shares from Mr. Zhuo is not an asset but instead represents a potential future capital contribution. As of December 31,
2011, the Company achieved sufficient Actual EPS that the shareholder was entitled to have all shares released from escrow. As
a result the liability was reduced to zero.



F-26


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont’d)
| | -- | -----------------------------------------------------



| | (p) | Escrow shares and preferred shares discount (.../Cont’d)
| | --- | ------------------------------------------------------



Prospectively
from the initial issuance, the Company adjusted the liability for the contingent obligation to deliver a variable number of shares
to its estimated fair value at each balance sheet date. Changes to the liability were recorded as gains or losses in the determination
of net income. Upon settlement (or cancellation if, as turned out to be the case, the Company met the Target EPS for 2011) the
liability would first be adjusted to the fair value of the shares actually delivered. Any difference between that amount, and the
amount previously recorded, will be reflected as a gain or loss in the determination of net income. The liability would have then
been eliminated with a corresponding increase in additional paid-in capital reflecting the fact that Mr. Zhuo would have been providing
the shares to the investors for settlement.



As discussed
in Note 18, the holders of the Preferred Shares have the right to receive 20% of the $5.00 purchase price on the second anniversary
of issuance if not yet converted. Substantially this is the right to $1.00 per share if the Company fails to have the ordinary
shares underlying the preferred both successfully registered with the SEC and listed on a suitable exchange by October 2012. The
Company has determined that this contingent right of the holders of the preferred shares is an embedded derivative financial instrument
which must, for financial reporting purposes, be separated from the host instrument (i.e., from the preferred shares) and treated
as a separate instrument. Proceeds of the 2010 Private Placement were allocated to the derivative liability in an amount equal
to its estimated fair value. Prospectively, the derivative liability is adjusted to its estimated fair value at each balance sheet
date with changes in its fair value recorded in the Company’s statements of income.



There were
no readily ascertainable market prices for the ordinary shares or the rights that investors hold under the Make-Good Escrow. The
Company estimated the fair value of obligation under the Make-Good Escrow by using a Monte Carlo valuation model using as variables
1) gross margin on dredgers within the range of historical experience, 2) the addition of new dredgers within a range bounded by
new lease opportunities known at the time of the 2010 Private Placement and resources of the company available at the time of the
2010 Private Placement to secure additional leased vessels during 2011, 3) revenue for both existing dredgers and potential new
dredgers within a range bounded by historical experience and existing backlog, 4) RMB/USD exchange rates within a range consistent
with PRC government guidance available at the time of the 2010 Private Placement, 5) sales, general and administrative expenses
as a percentage of revenue within parameters known at the time of the 2010 Private Placement. The result was an expected escrow
share issuance of 3,234,231 shares. That number of expected shares was then multiplied by the $4.36 estimated fair value of each
share, determined as discussed below, to produce the estimated $14,101,247 fair value of Make-Good Escrow obligation. There was
only a short period of time from the final closing of the 2010 Private Placement (December 21, 2010) until December 31, 2010, and
the 2010 Private Placement closed on various dates in the fourth quarter of 2010 all at the same price. The Company believes that
no material information was available at December 31, 2010 that was not available throughout the 2010 Private Placement. Accordingly,
the Company does not believe the value of the Make-Good Escrow obligation changed materially during the period. The estimation
of the fair value of the Make-Good Escrow obligation is based on Level 3 inputs.



F-27


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont’d)
| | -- | -----------------------------------------------------



| | (p) | Escrow shares and preferred shares discount (.../Cont’d)
| | --- | ------------------------------------------------------



The Company had estimated the
value of the embedded derivative based on the $10,012,987 proceeds that would be paid, discounted at an interest rate of 9.0% and
multiplied by 18%, representing the probability, viewed from the time of the 2010 Private Placement, that the underlying ordinary
shares would not be registered and listed. The Company believes the 9.0% interest rate, which is consistent with then-effective
high-yield rates in US markets, is appropriate for debt in such amount at the parent-company level that is unsecured, illiquid
and structurally subordinated to creditor claims at the operating companies (the locus of substantially all of the Company’s
assets). The probability of the Company not being registered and listed by October 2012 was estimated to be the same as the actual
percentage of all Form F-1 filers in 2009 and 2010 failing to achieve effectiveness of their registration statements. However,
the Company’s actual probability of success could differ from that of companies who filed registration statements during
the reference period, or an actual market participant could take a different view. The Company believes that, in its case, based
on circumstances in the fourth quarter 2010, once its registration statement becomes effective, all other requirements to achieve
a national exchange listing would be satisfied or within its control, which would is sufficient to extinguish the embedded derivative.
While listing requirements relating to market capitalization are not directly in the Company’s control, the Company should
have sufficient market capitalization based on its cash alone to meet requisite listing standards. Even under the lowest 1% tail
scenario of the Monte Carlo valuation model discussed above, the Company would have positive net income which should not detract
from the value of the cash in determining market capitalization.



As of December 31, 2011, the Company
estimated the fair value of the derivative using a revised estimated probability of 90% as of that date of not meeting the listing
requirements, or as a permitted alternative, having a sufficiently large public offering. The revised estimate is based on new
restrictions placed by significant exchanges on the listing of “reverse merger” companies. They include a requirement
that a stock trade over-the-counter for at least one year before listing. There are no data upon which to base an estimate of
the likelihood of fulfilling the new requirements and determine the odds of a successful offering in the time frame. The Company,
in consultation with its investment banking advisors, has decided to use 90% as the probability of being unable to avoid the obligation
to make the payments. Also, discount rate used was decreased to 8.5% reflecting closer maturity date of the potential obligation.
The December 31, 2011 present value of the full required payment multiplied by 90% resulted in a $8,279,827 estimated fair value
of the derivative. Adjusting the value of the derivative to this amount resulted in a $6,762,079 charge to net income for the years
ended December 31, 2011.



F-28


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont’d)
| | -- | -----------------------------------------------------



| | (p) | Escrow shares and preferred shares discount (.../Cont’d)
| | --- | ------------------------------------------------------



The embedded derivative is part
of the preferred shares and was entered into as an inducement to the 2010 Private Placement investors to purchase the preferred
shares. It is not used for hedging purposes. The estimate of the embedded derivative’s fair value is based on “Level
3” inputs, meaning unobservable inputs that are supported by little or no market activity and that are significant to the
fair value of the assets or liabilities.



The embedded derivative, and
the obligation under the Make-Good Escrow are the only instruments held by the Company that is are carried at fair value estimated
using Level 3 inputs. The changes in the carrying value of the Level 3 instruments during years ended December 31, 2011 and 2010
was as follows:



|                                             |  | 2011 |            |   | 2010 |  
|-------------------------------------------- |  | ---- | ---------- | - | ---- | -
|                                             |  |      |            |   |      |  
|Liability balance b/f                        |  | $    | 15,618,995 |   |      | $
|Additional liabilities entered into the year |  |      | -          |   |      |  
|(Decrease)/increase in liability fair value  |  |      | (7,339,168 | ) |      |  
|Liability balance c/f                        |  | $    | 8,279,827  |   |      | $



Reducing the gross proceeds of
the 2010 Private Placement by the $14,101,247 allocated to the contingent right to shares pursuant to the Make-Good Escrow and
$1,506,450 to the embedded derivative resulted in $34,457,238 being initially allocated to the 10,012,987 preferred shares. This
amount was reduced by the $3,621,649 of offering costs relating to the 2010 Private Placement resulting in $30,835,589 initially
allocated to the preferred shares. At December 31, 2010, the derivative liability was increased by an additional $11,298 to its
estimated fair value of $1,517,748. This resulted in a total derivative loss of $11,298 for the year ended December 31, 2010 as
shown on the Company’s statements of income. The 10,012,987 preferred shares are convertible into an equal number of
ordinary shares which for which a fair value was estimated to determine if the preferred shares contained a beneficial conversion
feature.



F-29


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont’d)
| | -- | -----------------------------------------------------



| | (p) | Escrow shares and preferred shares discount (.../Cont’d)
| | --- | ------------------------------------------------------



The Company calculated an estimated
the fair value of its ordinary shares at the time of the 2010 Private Placement by applying to its trailing earnings the price-earnings
ratio equal to the average price-earnings ratio of the only two other public companies (as of fourth quarter 2010) in the dredging
industry, the peer companies, after making the adjustments described below. The peer companies, whose trailing price-earnings ratios
averaged 10.5, are domiciled in developed countries, specifically the Netherlands and the United States, no single shareholder
or group controls the peer companies and their shares are liquid and actively traded. To adjust the price-earnings ratio for the
peer companies for differences in the Company’s circumstances, the Company applied two discount factors. The first was a
24.5% discount to reflect the market discount applicable to Chinese companies of scale consistent with that of the Company. The
Company determined this discount by calculating the average price-earnings ratio of the 34 U.S.-listed Chinese companies with market
capitalizations between $100 million and $400 million and positive 1-year trailing earnings and comparing it with the average price-earnings ratio of the S&P 500 over the time period when the 2010 Private Placement occurred. The Company then applied an additional
40% discount to reflect the lack of marketability and control of the Company as compared with public companies generally. The lack
of marketability was based on the fact that none of the Company’s shares were registered and there was no ready market for
the shares. The size of the discount needed for lack of marketability was limited by the fact that the Company was a public company
through its reverse merger with Chardan Acquisition Corp. and had plans and a clear intention to register its shares and list on
an exchange. The control element of the discount was necessary because a majority of the Company’s voting shares are controlled
by Mr. Xingrong Zhuo and would continue to be controlled by him based on the Monte Carlo simulation of the shares to be transferred
from the Make-Good Escrow.



The result of applying these
two discounts in sequence to the 10.5 average for the peer companies was to lower the price-earnings ratio used to compute the
Company’s per share value to 4.8. Noting that the Company had no debt, the Company multiplied the 4.8 price-earnings ratio
to the projected 2010 net income of $48.4 million disclosed to investors in the 2010 Private Placement to calculate an equity value
of $229.8 million. This calculated equity value was divided by the number of outstanding ordinary shares, before giving effect
to the 2010 Private Placement, and yielded a value per ordinary share of $4.36. This estimate is subject to considerable uncertainty
and it is likely that if ordinary shares had been sold separately at the time of the 2010 Private Placement they would have sold
for amounts different than $4.36 and such differences could have been material. There were only two peer companies, and the Company’s
determination to use a 40% discount for lack of marketability and control is subjective and potentially at the higher end of ranges
that may be regarded as typical for such discounts.



F-30


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont’d)
| | -- | -----------------------------------------------------



| | (p) | Escrow shares and preferred shares discount (.../Cont’d)
| | --- | ------------------------------------------------------



The Company updated its value
estimate at the end of each interim quarter during the year ended December 31, 2011 by reference to the same two dredging companies.
These two companies had a trailing price-earnings ratio for twelve months ended June 30, 2011 of 12.2. The Company lowered this
ratio by first applying a 41% discount applicable to Chinese companies based on the ratio at June 30, 2011 between the price-earnings
ratio of the 34 Chinese companies to the S&P 500. It was further lowered by the same 40% lack of marketability and control
discount used in the fourth quarter 2010 valuation. The result of applying these discounts was a price-earnings ratio of 4.3. The
market capitalization was increased by what was estimated to be excess cash at June 30, 2011 as compared to the reference companies
and then decreased by the value of the derivative liability. The resulting overall value was divided by the outstanding shares
on a fully diluted basis, assuming conversion of all Preferred Shares. Through this method the Company has estimated a fair value
of each ordinary share as $6.20 at June 30, 2011.



The estimated $62,080,519 June
30, 2011 fair value of the ordinary shares into which the preferred shares would convert exceeded the redemption value of $50,064,935
redemption price of the preferred shares should the holders elect to redeem. Consequently, in accordance with ASC 470-25-35-7b,
the entire $6,135,012 discount that existed at December 31, 2010 was accreted in six months ended June 30, 2011 as an allocation
of net income. There was no remaining discount to be accreted after June 30, 2011.



| | (q) | Shares and Additional Paid-in Capital
| | --- | -------------------------------------



The Company’s shares have
no par value. The BVI law permits the Board of Directors to pay dividends if 1) in its judgment doing so is in the best interest
of the Company and 2) if the Company would remain solvent as defined under BVI law. The Company records the net amounts received
for the issuance of preferred shares, to the extent allocable to the preferred shares under U.S. GAAP, in the preferred share account
so that it properly reflects the discount from shares’ liquidation preference. The Company further adds any amounts that
are required under U.S. GAAP for accretion of the discount or other reasons. In the case of the preferred share issued in the private
placement, this required $21,626,203 to be initially recorded as preferred share, with the December 31, 2010 balance adjusted to
$43,929,923 and the June 30 and December 31, 2011 balance further adjusted to $50,064,935 its full redemption value. Other capital
contributions, irrespective of whether they are for the issuance of share, are recorded in the additional paid-in capital account.
The balance sheet account for no par ordinary shares is kept at zero.



| | (r) | Earnings per ordinary share
| | --- | ---------------------------

Earnings per ordinary share (basic
and diluted) is based on the net income attributable to ordinary shareholders divided by the weighted average number of ordinary
shares outstanding during each period. Ordinary share equivalents are not included in the calculation of diluted earnings per ordinary
share if their effect would be anti-dilutive. As of December 31, 2011, the weighted average outstanding ordinary share equivalents
outstanding totaled 10,012,987 consisting of Class A Preferred Shares, all Class A Preferred Shares were used in the calculation
of diluted earnings per ordinary share.



F-31


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont’d)
| | -- | -----------------------------------------------------



| | (s) | Recently issued accounting standards
| | --- | ------------------------------------



Set forth below are recent pronouncements
that have had or may have a significant effect on the Group’s consolidated financial statements. The Group does not discuss
recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations,
or disclosures.



In June 2011, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.2011-05, “Comprehensive Income
(Topic 220).” This newly issued accounting standard (1) eliminates the option to present the components of other comprehensive
income as part of the statement of changes in stockholders’ equity; (2) requires the consecutive presentation of the statement
of net income and other comprehensive income; and (3) requires an entity to present reclassification adjustments on the face of
the financial statements from other comprehensive income to net income. The amendments’ in this ASU do not change the items
that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income
not do the amendments affect how earnings per share is calculated or presented. This ASU applied retrospectively and is effective
for fiscal years and interim periods within years beginning after December 15, 2011, which for the Group means January 1, 2012.
As this accounting standard only requires enhanced disclosure, the adoption of this standard will not impact the Group’s
financial position or results of operations.



| | 3. | CASH
| | -- | ----



Cash represents cash in bank
and cash on hand. Cash as of December 31, 2011 and 2010 were $112,409,544 and $88,532,472, respectively. As of December 31, 2011
and 2010, cash of which $111,954,573 and $66,966,278, respectively, was held, in Renminbi and U.S. dollars on deposits with banks
located in the PRC. Renminbi is not a freely convertible currency and the remittance of funds out of the PRC is subject to the
exchange restrictions imposed by the PRC government.



Cash is classified by geographical areas is set out
as follows:



|                                |  | 2011 |             |  | 2010 |  
|------------------------------- |  | ---- | ----------- |  | ---- | -
|                                |  |      |             |  |      |  
|Hong Kong                       |  | $    | 454,971     |  |      | $
|The PRC                         |  |      | 111,954,573 |  |      |  
|                                |  | $    | 112,409,544 |  |      | $
|                                |  |      |             |  |      |  
|Maximum exposure to credit risk |  | $    | 112,409,544 |  |      | $



Cash is denominated in the following currencies:



|    |  | 2011 |             |  | 2010 |  
|--- |  | ---- | ----------- |  | ---- | -
|    |  |      |             |  |      |  
|USD |  | $    | 757,836     |  |      | $
|RMB |  |      | 111,629,193 |  |      |  
|HKD |  |      | 22,515      |  |      |  
|    |  | $    | 112,409,544 |  |      | $



In the PRC and Hong Kong there are currently no rules
or regulations mandated on obligatory insurance of bank accounts. Management believes these financial institutions are of high
credit quality.



F-32


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 4. | ACCOUNTS RECEIVABLE, NET
| | -- | ------------------------



As of December 31, 2011 and
2010, the balance of accounts receivable was $27,020,183 and $12,841,108, respectively, is set out as follows:





|December 31, 2011                                                    |  |  |   |  |                              |  |           |                         |  |  |                   |  |  |                     |           |  |                     | 
|-------------------------------------------------------------------- |  |  | - |  | ---------------------------- |  | --------- | ----------------------- |  |  | ----------------- |  |  | ------------------- | --------- |  | ------------------- | 
|                                                                     |  |  |   |  |                              |  |           | Total revenue           |  |  | Amount            |  |  |                     |           |  | Status of  contract | 
|Name of contract                                                     |  |  |   |  | Estimated contract
    value |  |           | recognized in 
    2011 |  |  | received in  2011 |  |  | Accounts receivable |           |  | (Completion  %)     | 
|                                                                     |  |  |   |  |                              |  |           |                         |  |  |                   |  |  |                     |           |  |                     | 
|1. Yantian
    Port Channel Dredging and Reclamation I               |  |  | 1 |  |                              |  | 1,958,589 |                         |  |  | 1,110,712         |  |  |                     | 1,925,812 |  |                     | 
|                                                                     |  |  |   |  |                              |  |           |                         |  |  |                   |  |  |                     |           |  |                     | 
|2. Yantian Port Channel
    Dredging and Reclamation II              |  |  |   |  |                              |  | 979,294   |                         |  |  | 1,009,728         |  |  |                     | 1,009,728 |  |                     | 
|                                                                     |  |  |   |  |                              |  |           |                         |  |  |                   |  |  |                     |           |  |                     | 
|3. Yantian Port Channel
    Dredging and Reclamation III             |  |  |   |  |                              |  | 1,566,871 |                         |  |  | 1,570,486         |  |  |                     | 1,570,486 |  |                     | 
|                                                                     |  |  |   |  |                              |  |           |                         |  |  |                   |  |  |                     |           |  |                     | 
|4. Yantian Port Channel
    Dredging and Reclamation IV              |  |  |   |  |                              |  | 1,566,871 |                         |  |  | 1,568,568         |  |  |                     | 1,568,568 |  |                     | 
|                                                                     |  |  |   |  |                              |  |           |                         |  |  |                   |  |  |                     |           |  |                     | 
|5. Yantian Port Channel
    Dredging and Reclamation V               |  |  |   |  |                              |  | 3,204,963 |                         |  |  | 3,210,676         |  |  |                     | 3,210,676 |  |                     | 
|                                                                     |  |  |   |  |                              |  |           |                         |  |  |                   |  |  |                     |           |  |                     | 
|6. Tangshan Caofeidian
    Port-Harbour Dredging and Reclamation XII |  |  | 2 |  |                              |  | 3,232,881 |                         |  |  | 3,234,625         |  |  |                     | 3,234,625 |  |                     | 
|                                                                     |  |  |   |  |                              |  |           |                         |  |  |                   |  |  |                     |           |  |                     | 
|7. Tangshan Caofeidian
    Port-Harbour Dredging and Reclamation XII |  |  | 2 |  |                              |  | 3,232,881 |                         |  |  | 3,245,364         |  |  |                     | 3,245,364 |  |                     | 
|                                                                     |  |  |   |  |                              |  |           |                         |  |  |                   |  |  |                     |           |  |                     | 
|8. Tangshan Caofeidian
    Port-Harbour Dredging and Reclamation XII |  |  | 2 |  |                              |  | 2,694,067 |                         |  |  | 2,839,559         |  |  |                     | 2,839,559 |  |                     | 
|                                                                     |  |  |   |  |                              |  |           |                         |  |  |                   |  |  |                     |           |  |                     | 
|9. Tangshan Caofeidian
    Port-Harbour Dredging & Reclamation XIII  |  |  | 3 |  |                              |  | 1,796,045 |                         |  |  | 1,814,410         |  |  |                     | 1,814,410 |  |                     | 
|                                                                     |  |  |   |  |                              |  |           |                         |  |  |                   |  |  |                     |           |  |                     | 
|10. Tangshan Caofeidian
    Port-Harbour Dredging & Reclamation XIII |  |  | 3 |  |                              |  | 1,796,045 |                         |  |  | 1,807,076         |  |  |                     | 1,807,076 |  |                     | 
|                                                                     |  |  |   |  |                              |  |           |                         |  |  |                   |  |  |                     |           |  |                     | 
|11. Tangshan Caofeidian
    Port-Harbour Dredging & Reclamation XIII |  |  | 3 |  |                              |  | 1,562,559 |                         |  |  | 1,573,760         |  |  |                     | 1,573,760 |  |                     | 
|                                                                     |  |  |   |  |                              |  |           |                         |  |  |                   |  |  |                     |           |  |                     | 
|12. Qinzhou Port Channel
     Dredging IV                            |  |  |   |  |                              |  | 6,080,186 |                         |  |  | 6,086,998         |  |  |                     | 6,086,998 |  |                     | 
|                                                                     |  |  |   |  |                              |  |           |                         |  |  |                   |  |  |                     |           |  |                     | 
|13. Qinzhou Port Channel
     Dredging VII                           |  |  |   |  |                              |  | 4,291,896 |                         |  |  | 4,316,942         |  |  |                     | 4,316,942 |  |                     | 
|                                                                     |  |  |   |  |                              |  |           |                         |  |  |                   |  |  |                     |           |  |                     | 
|14. Qinzhou Port Channel
     Dredging IX                            |  |  |   |  |                              |  | 1,967,119 |                         |  |  | 2,012,521         |  |  |                     | 2,012,521 |  |                     | 









F-33


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 4. | ACCOUNTS RECEIVABLE, NET (.../Cont’d)
| | -- | -----------------------------------



|December 31, 2011                                                     |  |                          |           |  |                        |  |           |                      |  |  |                     |  |  |                    |          
|--------------------------------------------------------------------- |  | ------------------------ | --------- |  | ---------------------- |  | --------- | -------------------- |  |  | ------------------- |  |  | ------------------ | ---------
|                                                                      |  |                          |           |  | Total revenue          |  |           | Amount               |  |  |                     |  |  | Status of contract |          
|Name of contract                                                      |  | Estimated contract value |           |  | recognized in
    2011 |  |           | received in
    2011 |  |  | Accounts receivable |  |  | (Completion %)     |          
|                                                                      |  |                          |           |  |                        |  |           |                      |  |  |                     |  |  |                    |          
|15. Qinzhou
    Port Channel  Dredging X                              |  |                          | 2,324,777 |  |                        |  | 2,334,319 |                      |  |  | 2,334,319           |  |  |                    | -        
|                                                                      |  |                          |           |  |                        |  |           |                      |  |  |                     |  |  |                    |          
|16. Zhanjiang Baoman Jizhuangxing
    port  - Reclamation I           |  |                          | 4,303,063 |  |                        |  | 4,391,306 |                      |  |  | 4,391,306           |  |  |                    | -        
|                                                                      |  |                          |           |  |                        |  |           |                      |  |  |                     |  |  |                    |          
|17. Zhanjiang Baoman Jizhuangxing
    port - Reclamation II           |  |                          | 7,769,678 |  |                        |  | 7,780,504 |                      |  |  | 7,780,504           |  |  |                    | -        
|                                                                      |  |                          |           |  |                        |  |           |                      |  |  |                     |  |  |                    |          
|18. Hainan Yangpu Port
     Dredging II                               |  |                          | 2,318,728 |  |                        |  | 2,361,550 |                      |  |  | 2,361,550           |  |  |                    | -        
|                                                                      |  |                          |           |  |                        |  |           |                      |  |  |                     |  |  |                    |          
|19. Yingkou Steel Harbour
    Reclamation I                           |  |                          | 3,447,848 |  |                        |  | 3,456,760 |                      |  |  | 3,456,760           |  |  |                    | -        
|                                                                      |  |                          |           |  |                        |  |           |                      |  |  |                     |  |  |                    |          
|20. Yingkou Steel Harbour
    Reclamation II                          |  |                          | 8,710,353 |  |                        |  | 8,730,322 |                      |  |  | 5,459,080           |  |  |                    | 3,271,242
|                                                                      |  |                          |           |  |                        |  |           |                      |  |  |                     |  |  |                    |          
|21. Qinzhou Port Channel
     Dredging V                              |  |                          | 5,505,235 |  |                        |  | 5,549,640 |                      |  |  | 5,549,640           |  |  |                    | -        
|                                                                      |  |                          |           |  |                        |  |           |                      |  |  |                     |  |  |                    |          
|22. Qinzhou Port Channel
     Dredging VI                             |  |                          | 1,953,470 |  |                        |  | 1,990,553 |                      |  |  | 1,990,553           |  |  |                    | -        
|                                                                      |  |                          |           |  |                        |  |           |                      |  |  |                     |  |  |                    |          
|23. Qinzhou Port Channel
     Dredging VIII                           |  |                          | 5,682,823 |  |                        |  | 5,825,009 |                      |  |  | 5,825,009           |  |  |                    | -        
|                                                                      |  |                          |           |  |                        |  |           |                      |  |  |                     |  |  |                    |          
|24. Qinzhou Port Channel
     Dredging XI                             |  |                          | 3,551,764 |  |                        |  | 3,677,551 |                      |  |  | 3,677,551           |  |  |                    | -        
|                                                                      |  |                          |           |  |                        |  |           |                      |  |  |                     |  |  |                    |          
|25. Qinzhou Port Channel
     Dredging XII                            |  |                          | 5,682,823 |  |                        |  | 5,711,424 |                      |  |  | 3,550,693           |  |  |                    | 2,160,731
|                                                                      |  |                          |           |  |                        |  |           |                      |  |  |                     |  |  |                    |          
|26. Tianjin South Port
     Industrial Zone Dredging & Reclamation IV |  |                          | 7,196,588 |  |                        |  | 7,302,739 |                      |  |  | 7,302,739           |  |  |                    | -        
|                                                                      |  |                          |           |  |                        |  |           |                      |  |  |                     |  |  |                    |          
|27. Tianjin South Port
    Industrial  Zone Dredging &  Reclamation V |  |                          | 9,355,564 |  |                        |  | 8,238,528 |                      |  |  | 8,238,528           |  |  |                    | -        
|                                                                      |  |                          |           |  |                        |  |           |                      |  |  |                     |  |  |                    |          
|28. Quanzhou Zhonghua
    New District Reclamation I                  |  |                          | 3,232,881 |  |                        |  | 3,276,131 |                      |  |  | 3,276,131           |  |  |                    | -        
|                                                                      |  |                          |           |  |                        |  |           |                      |  |  |                     |  |  |                    |          
|29. Quanzhou Zhonghua
    New District Reclamation II                 |  |                          | 4,669,717 |  |                        |  | 4,755,933 |                      |  |  | 4,755,933           |  |  |                    | -        



F-34


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 4. | ACCOUNTS RECEIVABLE, NET (.../Cont’d)
| | -- | -----------------------------------



|December 31, 2011                                                   |  |  |   |  |                              |   |             |                    |  |   |                  |  |  |                     |             |  |                    |  
|------------------------------------------------------------------- |  |  | - |  | ---------------------------- | - | ----------- | ------------------ |  | - | ---------------- |  |  | ------------------- | ----------- |  | ------------------ | -
|                                                                    |  |  |   |  |                              |   |             | Total revenue      |  |   | Amount           |  |  |                     |             |  | Status of contract |  
|Name of contract                                                    |  |  |   |  | Estimated contract
    value |   |             | recognized in 2011 |  |   | received in 2011 |  |  | Accounts receivable |             |  | (Completion %)     |  
|                                                                    |  |  |   |  |                              |   |             |                    |  |   |                  |  |  |                     |             |  |                    |  
|30. Quanzhou
    Zhonghua New District Reclamation III              |  |  |   |  |                              |   | 5,208,530   |                    |  |   | 5,161,031        |  |  |                     | 5,161,031   |  |                    |  
|                                                                    |  |  |   |  |                              |   |             |                    |  |   |                  |  |  |                     |             |  |                    |  
|31. Panjin Vessels Industrial
    Base Project II                   |  |  |   |  |                              |   | 10,516,014  |                    |  |   | 10,534,161       |  |  |                     | 10,534,161  |  |                    |  
|                                                                    |  |  |   |  |                              |   |             |                    |  |   |                  |  |  |                     |             |  |                    |  
|32. Panjin Vessels Industrial
    Base Project III                  |  |  |   |  |                              |   | 10,878,635  |                    |  |   | 10,879,358       |  |  |                     | 5,183,219   |  |                    |  
|                                                                    |  |  |   |  |                              |   |             |                    |  |   |                  |  |  |                     |             |  |                    |  
|33. Fujian Pantang Experimental
    Area Dredging I                 |  |  | 4 |  |                              |   | 982,706     |                    |  |   | 990,884          |  |  |                     | 990,884     |  |                    |  
|                                                                    |  |  |   |  |                              |   |             |                    |  |   |                  |  |  |                     |             |  |                    |  
|34. Fujian Pantang Experimental
    Area Dredging I                 |  |  | 4 |  |                              |   | 982,706     |                    |  |   | 987,781          |  |  |                     | 987,781     |  |                    |  
|                                                                    |  |  |   |  |                              |   |             |                    |  |   |                  |  |  |                     |             |  |                    |  
|35. Fujian Pantang Experimental
    Area Dredging II                |  |  | 5 |  |                              |   | 1,023,653   |                    |  |   | 1,024,921        |  |  |                     | 883,182     |  |                    |  
|                                                                    |  |  |   |  |                              |   |             |                    |  |   |                  |  |  |                     |             |  |                    |  
|36. Fujian Pantang Experimental
    Area Dredging II                |  |  | 5 |  |                              |   | 1,023,653   |                    |  |   | 1,025,198        |  |  |                     | 867,296     |  |                    |  
|                                                                    |  |  |   |  |                              |   |             |                    |  |   |                  |  |  |                     |             |  |                    |  
|37. Tangshan Caofeidian
    Port-Harbour Dredging & Reclamation XV  |  |  |   |  |                              |   | 4,306,786   |                    |  |   | 4,345,731        |  |  |                     | 1,807,137   |  |                    |  
|                                                                    |  |  |   |  |                              |   |             |                    |  |   |                  |  |  |                     |             |  |                    |  
|38. Tangshan Caofeidian
    Port-Harbour Dredging & Reclamation XVI |  |  |   |  |                              |   | 5,562,931   |                    |  |   | 5,609,697        |  |  |                     | 1,639,721   |  |                    |  
|                                                                    |  |  |   |  |                              |   |             |                    |  |   |                  |  |  |                     |             |  |                    |  
|39. Shandong Rizhaogang
    Lanshan Harbour Dredging I              |  |  |   |  |                              |   | 3,964,948   |                    |  |   | 4,107,506        |  |  |                     | 2,714,430   |  |                    |  
|                                                                    |  |  |   |  |                              |   |             |                    |  |   |                  |  |  |                     |             |  |                    |  
|40. Shandong Rizhaogang
    Lanshan Harbour Dredging II             |  |  |   |  |                              |   | 5,406,747   |                    |  |   | 5,444,776        |  |  |                     | 2,626,779   |  |                    |  
|                                                                    |  |  |   |  |                              |   |             |                    |  |   |                  |  |  |                     |             |  |                    |  
|41. Jiangsu Guohua Chenjiagang
    Dredging I                       |  |  |   |  |                              |   | 2,886,080   |                    |  |   | 2,911,342        |  |  |                     | 2,911,342   |  |                    |  
|                                                                    |  |  |   |  |                              |   |             |                    |  |   |                  |  |  |                     |             |  |                    |  
|42. Jiangsu Guohua Chenjiagang
    Dredging II                      |  |  |   |  |                              |   | 6,313,300   |                    |  |   | 6,359,582        |  |  |                     | 2,687,886   |  |                    |  
|                                                                    |  |  |   |  |                              |   |             |                    |  |   |                  |  |  |                     |             |  |                    |  
|43. Fuqing Yuanhong Pier
    Dredging I                             |  |  |   |  |                              |   | 2,330,826   |                    |  |   | 2,334,508        |  |  |                     | 1,133,417   |  |                    |  
|                                                                    |  |  |   |  |                              |   |             |                    |  |   |                  |  |  |                     |             |  |                    |  
|                                                                    |  |  |   |  |                              | $ | 173,023,094 |                    |  | $ | 172,500,170      |  |  | $                   | 146,295,087 |  |                    | $



Notes:








| | 1. | The contract was commenced in 2010 and completed in January 2011.
| | -- | -----------------------------------------------------------------

| | 2, 3. | Dredgers Xinggangjun #3, #6 and #9 together worked for one project with
                                                                                    same customer.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4, 5. | Dredgers Hengshunda #1 and Liya #2 together worked for one project with same customer.
| | ----- | --------------------------------------------------------------------------------------



F-35


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 4. | ACCOUNTS RECEIVABLE, NET (.../Cont’d)
| | -- | -----------------------------------



|December 31, 2010                                         |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|--------------------------------------------------------- |  |  | - |  | ----------------------------- | - | ---------- | ------------------ |  | - | --------------------- |  |  | ------------------- | ---------- |  | ------------------ | -
|                                                          |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|                                                          |  |  |   |  |                               |   |            | Total revenue      |  |   | Amount                |  |  |                     |            |  | Status of contract |  
|Name of contract                                          |  |  |   |  | Estimated  contract
    value |   |            | recognized in 2010 |  |   | Received  in
    2010 |  |  | Accounts receivable |            |  | (Completion %)     |  
|                                                          |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|1. Zhuhai
    Gaolan Port Dredging III                    |  |  | 1 |  |                               | $ | 1,686,291  |                    |  | $ | 522,002               |  |  | $                   | 522,002    |  |                    | $
|                                                          |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|2. Zhuhai Gaolan Port
    Dredging IV                     |  |  |   |  |                               |   | 2,107,863  |                    |  |   | 2,123,125             |  |  |                     | 2,123,125  |  |                    |  
|                                                          |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|3. Zhuhai Gaolan Port
    Dredging V                      |  |  |   |  |                               |   | 2,891,841  |                    |  |   | 3,022,060             |  |  |                     | 3,022,060  |  |                    |  
|                                                          |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|4. Zhuhai Gaolan Port
    Dredging VI                     |  |  |   |  |                               |   | 1,182,474  |                    |  |   | 1,199,883             |  |  |                     | 1,199,883  |  |                    |  
|                                                          |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|5. Oujiang Port Lantian
    Dredging II                   |  |  | 1 |  |                               |   | 7,188,924  |                    |  |   | 803,979               |  |  |                     | 803,979    |  |                    |  
|                                                          |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|6. Oujiang Port Lantian
    Dredging III                  |  |  |   |  |                               |   | 4,233,477  |                    |  |   | 4,282,649             |  |  |                     | 4,282,649  |  |                    |  
|                                                          |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|7. Tangshan Caofeidian
    Dredging and Reclamation I     |  |  | 1 |  |                               |   | 9,316,017  |                    |  |   | 3,269,800             |  |  |                     | 3,269,800  |  |                    |  
|                                                          |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|8. Tangshan Caofeidian
    Dredging and Reclamation II    |  |  | 1 |  |                               |   | 11,123,602 |                    |  |   | 3,723,230             |  |  |                     | 3,723,230  |  |                    |  
|                                                          |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|9. Tangshan Caofeidian
    Dredging and Reclamation III   |  |  |   |  |                               |   | 10,106,207 |                    |  |   | 10,138,730            |  |  |                     | 10,138,730 |  |                    |  
|                                                          |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|10. Tangshan Caofeidian
    Dredging and Reclamation IV   |  |  |   |  |                               |   | 8,907,165  |                    |  |   | 8,921,169             |  |  |                     | 8,921,169  |  |                    |  
|                                                          |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|11. Tangshan Caofeidian
    Dredging and Reclamation V    |  |  |   |  |                               |   | 7,965,061  |                    |  |   | 8,000,862             |  |  |                     | 8,000,862  |  |                    |  
|                                                          |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|12. Tangshan Caofeidian
    Dredging and Reclamation VI   |  |  |   |  |                               |   | 1,199,041  |                    |  |   | 1,265,383             |  |  |                     | 1,265,383  |  |                    |  
|                                                          |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|13. Tangshan Caofeidian
    Dredging and Reclamation VII  |  |  |   |  |                               |   | 1,370,333  |                    |  |   | 1,406,454             |  |  |                     | 1,406,454  |  |                    |  
|                                                          |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|14. Tangshan Caofeidian
    Dredging and Reclamation VIII |  |  |   |  |                               |   | 1,370,333  |                    |  |   | 1,385,751             |  |  |                     | 1,385,751  |  |                    |  
|                                                          |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|15. Tangshan Caofeidian
    Dredging and Reclamation IX   |  |  |   |  |                               |   | 1,884,208  |                    |  |   | 1,961,333             |  |  |                     | 1,370,836  |  |                    |  
|                                                          |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|16. Tangshan Caofeidian
    Dredging and Reclamation X    |  |  |   |  |                               |   | 2,226,791  |                    |  |   | 2,255,933             |  |  |                     | 1,619,452  |  |                    |  
|                                                          |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|17. Tangshan Caofeidian
    Dredging and Reclamation XI   |  |  |   |  |                               |   | 2,226,791  |                    |  |   | 2,269,310             |  |  |                     | 1,619,588  |  |                    |  
|                                                          |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|18. Qinzhou Port Channel
    Dredging I                   |  |  |   |  |                               |   | 1,354,949  |                    |  |   | 1,367,145             |  |  |                     | 1,367,145  |  |                    |  
|                                                          |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|19. Qinzhou Port Channel
    Dredging II                  |  |  |   |  |                               |   | 3,240,489  |                    |  |   | 3,278,074             |  |  |                     | 2,356,958  |  |                    |  
|                                                          |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|20. Qinzhou Port Channel
    Dredging III                 |  |  |   |  |                               |   | 2,864,180  |                    |  |   | 2,930,412             |  |  |                     | 1,203,453  |  |                    |  
|                                                          |  |  |   |  |                               |   |            |                    |  |   |                       |  |  |                     |            |  |                    |  
|21. Zhanjiang Steel Base
    Dredging and Reclamation I   |  |  |   |  |                               |   | 13,706,290 |                    |  |   | 13,766,653            |  |  |                     | 13,766,653 |  |                    |  



F-36


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 4. | ACCOUNTS RECEIVABLE, NET (.../Cont’d)
| | -- | -----------------------------------





|December 31, 2010                                                            |  |                          |             |  |                        |   |             |                      |  |   |                     |  |  |                    |           
|---------------------------------------------------------------------------- |  | ------------------------ | ----------- |  | ---------------------- | - | ----------- | -------------------- |  | - | ------------------- |  |  | ------------------ | ----------
|                                                                             |  |                          |             |  |                        |   |             |                      |  |   |                     |  |  |                    |           
|                                                                             |  |                          |             |  | Total revenue          |   |             | Amount               |  |   |                     |  |  | Status of contract |           
|Name of contract                                                             |  | Estimated contract value |             |  | recognized in
    2010 |   |             | received in
    2010 |  |   | Accounts receivable |  |  | (Completion %)     |           
|                                                                             |  |                          |             |  |                        |   |             |                      |  |   |                     |  |  |                    |           
|22. Zhanjiang
    Steel Base Dredging and Reclamation II                     |  |                          | 7,521,744   |  |                        |   | 7,562,211   |                      |  |   | 7,562,211           |  |  |                    | -         
|                                                                             |  |                          |             |  |                        |   |             |                      |  |   |                     |  |  |                    |           
|23. Guohua Taidian Coal
    Port Dredging I                                  |  |                          | 1,389,859   |  |                        |   | 1,400,272   |                      |  |   | 1,400,272           |  |  |                    | -         
|                                                                             |  |                          |             |  |                        |   |             |                      |  |   |                     |  |  |                    |           
|24. Hainan Yangpu Port
    Dredging I                                        |  |                          | 4,422,815   |  |                        |   | 4,442,077   |                      |  |   | 2,307,346           |  |  |                    | 2,134,731 
|                                                                             |  |                          |             |  |                        |   |             |                      |  |   |                     |  |  |                    |           
|25. Tianjin South Port
    Industrial Zone Dredging and Reclamation I        |  |                          | 6,427,075   |  |                        |   | 6,439,226   |                      |  |   | 6,439,226           |  |  |                    | -         
|                                                                             |  |                          |             |  |                        |   |             |                      |  |   |                     |  |  |                    |           
|26. Tianjin South Port
    Industrial Zone Dredging and Reclamation II       |  |                          | 2,591,563   |  |                        |   | 2,594,554   |                      |  |   | 2,594,554           |  |  |                    | -         
|                                                                             |  |                          |             |  |                        |   |             |                      |  |   |                     |  |  |                    |           
|27. Tianjin South Port
    Industrial Zone Dredging and Reclamation III      |  |                          | 4,804,449   |  |                        |   | 4,886,953   |                      |  |   | 1,770,347           |  |  |                    | 3,116,606 
|                                                                             |  |                          |             |  |                        |   |             |                      |  |   |                     |  |  |                    |           
|28. Jingtang Port Channel
    Dredging I                                     |  |                          | 4,771,315   |  |                        |   | 4,825,986   |                      |  |   | 4,825,986           |  |  |                    | -         
|                                                                             |  |                          |             |  |                        |   |             |                      |  |   |                     |  |  |                    |           
|29. Jingtang Port Channel
    Dredging II                                    |  |                          | 1,363,233   |  |                        |   | 1,375,678   |                      |  |   | 1,375,678           |  |  |                    | -         
|                                                                             |  |                          |             |  |                        |   |             |                      |  |   |                     |  |  |                    |           
|30. Jingtang Port Channel
    Dredging III                                   |  |                          | 1,704,041   |  |                        |   | 1,718,233   |                      |  |   | 1,718,233           |  |  |                    | -         
|                                                                             |  |                          |             |  |                        |   |             |                      |  |   |                     |  |  |                    |           
|31. Qingdao Port Channel
    Dredging I                                      |  |                          | 5,773,623   |  |                        |   | 5,775,020   |                      |  |   | 5,775,020           |  |  |                    | -         
|                                                                             |  |                          |             |  |                        |   |             |                      |  |   |                     |  |  |                    |           
|32. Panjin Vessels Industrial
    Base Project I                             |  |                          | 10,720,963  |  |                        |   | 10,739,467  |                      |  |   | 7,674,471           |  |  |                    | 3,064,996 
|                                                                             |  |                          |             |  |                        |   |             |                      |  |   |                     |  |  |                    |           
|33. Tonggu Channel, Shenzhen
    West Port Public Dredging and Reclamation I |  |                          | 932,341     |  |                        |   | 936,951     |                      |  |   | 936,951             |  |  |                    | -         
|                                                                             |  |                          |             |  |                        |   |             |                      |  |   |                     |  |  |                    |           
|                                                                             |  | $                        | 150,575,348 |  |                        | $ | 130,590,565 |                      |  | $ | 117,749,457         |  |  | $                  | 12,841,108







Note:








| | 1. | The contract was commenced in 2009 and completed in 2010.
| | -- | ---------------------------------------------------------



F-37


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 4. | ACCOUNTS RECEIVABLE, NET (.../Cont’d)
| | -- | -----------------------------------



Most of the Group’s customers
are state-owned companies of China. There is no credit term, customers settle the balances according to percentage of completion
of contracts and the date of settlement has been specified in the contracts. The Group believes all outstanding balances can be
fully collected within 7 to 180 days after the completion of contracts and project completed reports issued, therefore, no provision
on allowance for doubtful accounts was provided as of December 31, 2011 and 2010.



| | 5. | COST AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON CONTRACTS IN PROGRESS
| | -- | --------------------------------------------------------------------------



Cost and estimated earnings
in excess of billings on contracts in progress represent amounts of revenue earned under contracts in progress but not billed at
the balance sheet date. These amounts become billable according to the contract terms, which usually consider passage of time,
and/or completion of the project. As of December 31, 2011 and 2010, the balance of cost and estimated earnings in excess of billings
on contracts in progress was $14,008,972 and $834,909, respectively. Cost and estimated earnings in excess of billings on contracts
in progress include the following:



|December 31, 2011                                                  |  |  |   |  |                          |   |            |                                      |  |   |                             |  |  |                                    |            |  |                             |  
|------------------------------------------------------------------ |  |  | - |  | ------------------------ | - | ---------- | ------------------------------------ |  | - | --------------------------- |  |  | ---------------------------------- | ---------- |  | --------------------------- | -
|                                                                   |  |  |   |  |                          |   |            |                                      |  |   |                             |  |  |                                    |            |  | Status of                   |  
|Name of contract                                                   |  |  |   |  | Estimated contract value |   |            | Total revenue
    recognized in 2011 |  |   | Amount received in
    2011 |  |  | earnings in
    excess of billings |            |  | contract (Completion
    %) |  
|                                                                   |  |  |   |  |                          |   |            |                                      |  |   |                             |  |  |                                    |            |  |                             |  
|1. Yingkou
    Steel Harbour Reclamation III                       |  |  |   |  |                          | $ | 7,440,093  |                                      |  | $ | 2,534,537                   |  |  | $                                  | 1,462,478  |  |                             | $
|                                                                   |  |  |   |  |                          |   |            |                                      |  |   |                             |  |  |                                    |            |  |                             |  
|2. Tangshan Caofeidian
    Port-Harbour Dredging & Reclamation XIV |  |  | 1 |  |                          |   | 21,962,001 |                                      |  |   | 16,501,503                  |  |  |                                    | 13,096,072 |  |                             |  
|                                                                   |  |  |   |  |                          |   |            |                                      |  |   |                             |  |  |                                    |            |  |                             |  
|3. Tangshan Caofeidian
    Port-Harbour Dredging & Reclamation XIV |  |  | 1 |  |                          |   | 21,962,001 |                                      |  |   | 16,501,503                  |  |  |                                    | 13,096,072 |  |                             |  
|                                                                   |  |  |   |  |                          |   |            |                                      |  |   |                             |  |  |                                    |            |  |                             |  
|4. Tangshan Caofeidian
    Port-Harbour Dredging & Reclamation XIV |  |  | 1 |  |                          |   | 18,301,667 |                                      |  |   | 13,751,253                  |  |  |                                    | 10,913,394 |  |                             |  
|                                                                   |  |  |   |  |                          |   |            |                                      |  |   |                             |  |  |                                    |            |  |                             |  
|5. Zhuhai Gaolan Port
    Dredging VII                             |  |  |   |  |                          |   | 4,462,970  |                                      |  |   | 3,955,814                   |  |  |                                    | 1,905,398  |  |                             |  
|                                                                   |  |  |   |  |                          |   |            |                                      |  |   |                             |  |  |                                    |            |  |                             |  
|6. Fuqing Yuanhong Pier
    Dredging II                            |  |  |   |  |                          |   | 1,792,943  |                                      |  |   | 1,208,288                   |  |  |                                    | -          |  |                             |  
|                                                                   |  |  |   |  |                          |   |            |                                      |  |   |                             |  |  |                                    |            |  |                             |  
|                                                                   |  |  |   |  |                          | $ | 75,921,675 |                                      |  | $ | 54,452,898                  |  |  | $                                  | 40,473,414 |  |                             | $



Note:








| | 1. | Dredgers, Xinggangjun #3, #6 and #9 together worked for
one project with same customer.
| | -- | ---------------------------------------------------------------------------------------



F-38


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 5. | COST AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON CONTRACTS IN PROGRESS (.../Cont’d)
| | -- | -------------------------------------------------------------------------------------



|December 31, 2010                                   |  |                          |           |  |                                      |   |         |                             |  |   |                                                       |  |  |                                       |        
|--------------------------------------------------- |  | ------------------------ | --------- |  | ------------------------------------ | - | ------- | --------------------------- |  | - | ----------------------------------------------------- |  |  | ------------------------------------- | -------
|Name of contract                                    |  | Estimated
contract value |           |  | Total revenue
    recognized in 2010 |   |         | Amount received in
    2010 |  |   | Cost and
    estimated earnings in excess of billings |  |  | Status of
    contract (Completion %) |        
|                                                    |  |                          |           |  |                                      |   |         |                             |  |   |                                                       |  |  |                                       |        
|Yantian Port Channel Dredging
    and Reclamation I |  | $                        | 1,867,937 |  |                                      | $ | 815,100 |                             |  | $ | -                                                     |  |  | $                                     | 834,909



The following schedule summarizes
changes in backlog on contracts during the year ended December 31, 2011. Backlog represents the amount of revenue Fujian Service
expects to realize from work to be performed pursuant to contractual agreements on projects in progress and on projects for which
work has not yet begun.



|Backlog balance at December 31, 2010                                  |  | $ | 62,310,751   |  
|--------------------------------------------------------------------- |  | - | ------------ | -
|New contracts entered during the year ended December 31, 2011         |  |   | 220,006,390  |  
|Add: Adjustment of contracts due to change of orders during the year  |  |   | 331,734      |  
|Adjusted contract amount at December 31, 2011                         |  |   | 282,648,875  |  
|Less: Contract revenue earned during the year ended December 31, 2011 |  |   | (226,953,070 | )
|Backlog balance at December 31, 2011                                  |  | $ | 55,695,805   |  



There were two contracts included
in the backlog as of December 31, 2010, in March 2011, the customers of these two contracts requested the Group's subsidiary, Fujian
Service, to work on other projects which were on higher priority. Due to these requests, these two one-year contracts had been
replaced by shorter term contracts in 2011. However, the customers have promised the Group that they will provide the Group the
same level of work as the replaced contracts. Due to these promises, the backlog was not adjusted but would be reduced by completion
of the shorter term contracts as of December 31, 2010 and was not deducted from the backlog as of December 31, 2011.



| | 6. | PREPAID EXPENSES
| | -- | ----------------



Prepaid expenses as of December
31, 2011 and 2010 consisted of the following:



|                 |  | 2011 |           |  | 2010 |  
|---------------- |  | ---- | --------- |  | ---- | -
|                 |  |      |           |  |      |  
|Prepaid expenses |  | $    | 4,767,072 |  |      | $



Prepaid expenses represent amounts
prepaid to suppliers for the purchases of consumable parts.



F-39


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 7. | INVENTORIES
| | -- | -----------



The Group provides dredging
services for its customers in the PRC. Inventories consist of consumable parts which are used for dredging projects. As of December
31, 2011 and 2010, the balance of inventories was $2,048,158 and $202,213, respectively.



| | 8. | OTHER RECEIVABLES
| | -- | -----------------



Other receivables as of December
31, 2011 and 2010 consisted of the following:



|                                   |  | 2011 |       |  | 2010 |  
|---------------------------------- |  | ---- | ----- |  | ---- | -
|                                   |  |      |       |  |      |  
|Social insurance prepaid for staff |  | $    | 3,242 |  |      | $
|Deposits                           |  |      | 122   |  |      |  
|                                   |  | $    | 3,364 |  |      | $



Other receivables include social
insurance prepaid for staff's portion by the Group, this amount will be directly deducted from staff's salaries and it is interest
free.



F-40


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 9. | PREPAID DREDGER DEPOSITS AND CAPITAL COMMITMENTS
| | -- | ------------------------------------------------



| | (a) | Prepaid dredger deposits
| | --- | ------------------------



Prepaid dredgers deposits as of December 31, 2011 and 2010 consisted
of the following:



|                  |  | 2011 |            |  | 2010 |  
|----------------- |  | ---- | ---------- |  | ---- | -
|                  |  |      |            |  |      |  
|Non-related party |  | $    | 23,038,180 |  |      | $
|Related party     |  |      | -          |  |      |  
|                  |  | $    | 23,038,180 |  |      | $



Prepaid dredgers at December
31, 2011 represent deposits of two new dredgers before delivery. The Group paid deposits for the acquisition of two dredgers which
will be used for the expansion of dredging operations. The total expected cost of the two dredgers is approximately $31.8 million
and $41.3 million respectively, both of dredgers will be delivered on or before May 31, 2012 and before December 2012 respectively
(see below Note 9(b)).



| | (b) | Capital commitments
| | --- | -------------------



The Group had the following capital commitments as
of December 31, 2011:



|Contracted, but not provided for:-           |  |   |            | 
|-------------------------------------------- |  | - | ---------- | 
|Acquisition of dredgers, net of deposit paid |  | $ | 50,048,460 | 



On May 20, 2009, the Company's
subsidiary, Fujian Service, entered into a dredger purchase contract with Yiyang Zhonghai Vellel LLC (“Yiyang”), a
non-related party of the Group. According to the dredger purchase contract, the Group paid a deposit of 7.5%, or $2,383,260 (RMB15
million), of the total purchase price on June 2, 2009. The balance due on the dredger amounted to $29,393,540 (RMB185 million),
payable in 4 installments:



|Payment Due Date              |  |                |           
|----------------------------- |  | -------------- | ----------
|(end of month after delivery) |  | Payment Amount |           
|                              |  |                |           
|August 31, 2012               |  | $              | 8,818,062 
|November 30, 2012             |  |                | 7,348,385 
|February 28, 2013             |  |                | 7,348,385 
|May 31, 2013                  |  |                | 5,878,708 
|                              |  | $              | 29,393,540



The dredger is expected to be
delivered to the Group on or before May 31, 2012.



F-41


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 9. | PREPAID DREDGER DEPOSITS AND CAPITAL COMMITMENTS (.../Cont’d)
| | -- | -----------------------------------------------------------



On May 11, 2011, the Company’s
subsidiary, Fujian WangGang entered into another construction contract with Yiyang to build one 3,800 cubic meter per hour cutter
suction dredger. Construction is expected to take approximately 18 months. Delivery of the dredger is expected in or before December
2012. The contract price for building the dredger is approximately $41.3 million (RMB260 million), subject to certain conditions
including actual building cost incurred. According to the dredger purchase contract, the Company should pay a deposit of 50%, or
$20,654,920 (RMB130 million), of the total purchase price within one month after the contract signed. As of December 31, 2011,
the Company paid $20,654,920 (RMB130 million). The balance due on the dredger amounted to $20,654,920 (RMB130 million), payable
in  three installments:



|                                                                     |  | Percentage of      |    |   |                |  
|-------------------------------------------------------------------- |  | ------------------ | -- | - | -------------- | -
|Payment Due Date                                                     |  | total contract sum |    |   | Payment Amount |  
|                                                                     |  |                    |    |   |                |  
|Within 7 days after the completion of main hull of the dredger       |  |                    | 20 | % |                | $
|Within 7 days after the dredger launched                             |  |                    | 20 | % |                |  
|Before delivery of the dredger after the completion of mooring trial |  |                    | 10 | % |                |  
|                                                                     |  |                    |    |   |                | $



| | 10. | SECURITY DEPOSITS
| | --- | -----------------



The Group’s security deposits
represent amounts on deposit with the owners of dredgers leased by the Company’s subsidiary, Fujian Service. Such amounts
will be returned to Fujian Service when the corresponding leases end. Security deposits were $48,872,718 and $21,454,545 as of
December 31, 2011 and 2010, respectively.



F-42


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 11. | PROPERTY, PLANT AND EQUIPMENT
| | --- | -----------------------------



Property, plant and
equipment as of December 31, 2011 and 2010 consisted of the following:



|                               |  | 2011 |             |   | 2010 |  
|------------------------------ |  | ---- | ----------- | - | ---- | -
|                               |  |      |             |   |      |  
|Dredgers                       |  | $    | 71,921,019  |   |      | $
|Machinery                      |  |      | 40,817      |   |      |  
|Office equipment               |  |      | 7,870       |   |      |  
|                               |  |      | 71,969,706  |   |      |  
|Less: Accumulated depreciation |  |      | (20,838,655 | ) |      |  
|                               |  | $    | 51,131,051  |   |      | $



Total depreciation
expenses of the Group for the years ended December 31, 2011, 2010 and 2009 were $7,161,602, $5,038,074 and $4,952,236, respectively,
of which $7,160,142, $5,037,318 and $4,951,518, respectively, was included in cost of revenue.



As of December 31, 2011, the
Group owned four dredgers. As of December 31, 2011 and 2010, the total net book value of the dredgers was $51,100,311 and $40,567,273,
respectively.



| | 12. | ADVANCE FROM RELATED COMPANIES
| | --- | ------------------------------



Advance from related companies
as of December 31, 2011 and 2010 consisted of the following:



|                                     |  | 2011 |        |  | 2010 |  
|------------------------------------ |  | ---- | ------ |  | ---- | -
|Name of related company              |  |      |        |  |      |  
|Fujian Gangjun Construction Co., Ltd |  | $    | 953    |  |      | $
|Fujian Yihai Investment Co., Ltd     |  |      | 12,711 |  |      |  
|                                     |  |      |        |  |      |  
|                                     |  | $    | 13,664 |  |      | $



The legal representative, Kongliang
Chan, of Fujian Gangjun Construction Co., Ltd is also one of key management of Fujian Service. The balance is unsecured, non-interest-bearing
and has no repayment term.



One of the legal representatives,
Lifei Zeng, of Fujian Yihai Investment Co., Ltd, is a relative of Qing Lin who is one of owners of Wonder Dredging. The balance
is unsecured, non-interest-bearing and has no repayment term.



F-43


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 13. | INCOME TAXES
| | --- | ------------



The Company
is incorporated in the BVI, the laws of which do not require the Company to pay any income taxes or other taxes based on revenue,
business activity or assets. The Company has subsidiaries domiciled and operating in other countries and those entities file separate
tax returns in the respective jurisdictions in which they are domiciled or operate.



The Company’s subsidiary
China Dredging HK is domiciled in Hong Kong and would be subject to statutory profit tax in that jurisdiction of 16.5%. Two of
the Company’s subsidiaries, Fujian WangGang and Fujian Service, and Wonder Dredging operate in the PRC, where they are subject
to a 25% statutory profit tax. All of the Group’s main income is generated in the PRC.



A reconciliation of the expected
income tax expense to the actual income tax expense for the years ended December 31, 2011, 2010 and 2009 was as follows:



|                                                             |  | For the Years Ended December 31, |            
|------------------------------------------------------------ |  | -------------------------------- | -----------
|                                                             |  | 2011                             |            
|                                                             |  |                                  |            
|Income before tax                                            |  | $                                | 126,499,331
|                                                             |  |                                  |            
|Expected PRC income tax expense at statutory tax rate of 25% |  | $                                | 31,624,833 
|Add: Non tax deductible expenses                             |  |                                  | 2,061,017  
|Less: Non-taxable income                                     |  |                                  | (3,565,386 
|Effect of exchange rate                                      |  |                                  | (13,394    
|Actual income tax expense                                    |  | $                                | 30,107,070 



The PRC tax system is subject
to substantial uncertainties and has been subject to recently enacted changes, the interpretation and enforcement of which are
also uncertain. There can be no assurance that changes in PRC tax laws or their interpretation or their application will not subject
the Group to substantial PRC taxes in future.



No deferred tax liability has
been provided as the amount involved is estimated to be immaterial. Fujian Service has analyzed the tax positions taken or expected
to be taken in its tax filings and has concluded it has no material liability related to uncertain tax positions.



For the year ended December
31, 2011, 2010 and 2009, there was no unrecognized tax benefit. Management does not anticipate any potential future adjustments
in the next twelve months which would result in a material change to its financial tax position. As of December 31, 2011 and 2010,
the Group did not accrue any interest and penalties.

F-44


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 14. | ACCRUED EXPENSES AND OTHER PAYABLES
| | --- | -----------------------------------



Accrued expenses and other payables
as of December 31, 2011 and 2010 consisted of the following:



|                                              |  | 2011 |           |  | 2010 |  
|--------------------------------------------- |  | ---- | --------- |  | ---- | -
|                                              |  |      |           |  |      |  
|Accrued salaries and wages                    |  | $    | 127,140   |  |      | $
|Accrued staff benefits                        |  |      | 209,373   |  |      |  
|Other tax payables                            |  |      | 1,692,618 |  |      |  
|Accrued outsourced dredger services and labor |  |      | 1,548,722 |  |      |  
|Other payables                                |  |      | 467,374   |  |      |  
|                                              |  |      |           |  |      |  
|                                              |  | $    | 4,045,227 |  |      | $



Other tax payables represent
payables other than income tax which consist of business tax, individual salary tax, stamp duty, embankment tax and other small
local taxes. Business tax was 3% - 5% of revenue recognized, as of December 31, 2011 and 2010, and other tax payables included
$1,674,116 and $28,835 of business tax payable, respectively.



| | 15. | RELATED PARTY TRANSACTIONS
| | --- | --------------------------



Operating lease
commitments



The Company’s
VIE, Fujian Service, entered into an office rental agreement in 2008 with Ping Lin, a relative of one of the former owners, Qing
Lin, from January 1, 2008 to December 31, 2009. This agreement has been renewed and extended the period from January 1, 2010 to
December 31, 2015. Fujian WangGang and Wonder Dredging also entered into office rental agreements in 2010 with Ping Lin from June
10, 2010 to June 9, 2011 and May 1, 2010 to April 30, 2011, respectively. The office rental agreements between Fujian WangGang
and Ping Lin, and Wonder Dredging and Ping Lin have been renewed and extended the period from June 10, 2011 to June 9, 2012 and
May 1, 2011 to April 30, 2012, respectively. Office rental paid for the years ended December 31, 2011, 2010 and 2009 was as follows:



|                        |  |                                                             |  | For the Years Ended |       
|----------------------- |  | ----------------------------------------------------------- |  | ------------------- | ------
|Type                    |  | Name of related party                                       |  | 2011                |       
|Office rental           |  | Ping Lin                                                    |  | $                   | 25,527
|Hire charge of dredger  |  | Fujian Lutong Highway Engineering
    Construction Co., Ltd |  |                     | -     
|Hire
    charge of crew |  | Fujian Lutong Highway Engineering
    Construction Co., Ltd |  |                     | -     
|                        |  |                                                             |  | $                   | 25,527



Hire charges of dredger and
crew are included as part of the cost of revenue. Office rental is included in the general and administrative expenses.



F-45


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 15. | RELATED PARTY TRANSACTIONS (.../Cont’d)
| | --- | -------------------------------------



Operating lease
commitments (.../Cont’d)



The total
future minimum lease payments under non-cancellable operating leases with respect to office as of December 31, 2011 were payable
to the related party as follows:



|                                 |  | Office rental |       
|-------------------------------- |  | ------------- | ------
|For the years ended December 31, |  |               |       
|2012                             |  | $             | 12,517
|2013                             |  |               | 12,517
|2014                             |  |               | 12,517
|2015                             |  |               | 12,517
|2016                             |  |               | -     
|                                 |  | $             | 50,068



Operating lease commitments
for both related parties commitments and non-related parties commitments is summarized in Note 17.



| | 16. | CERTAIN RISKS AND CONCENTRATIONS
| | --- | --------------------------------



| | (a) | Credit risk
| | --- | -----------



As of December 31, 2011, a substantial
portion part of the Group’s cash included bank deposits in accounts maintained within the PRC where there is currently no
rule or regulation in place for obligatory insurance to cover bank deposits in the event of bank failure. However, the Group has
not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.



| | (b) | Major customers
| | --- | ---------------



Customers accounting for 10%
or more of the Group’s revenues were as follows:



|                      |  | For the Years Ended December 31, |     
|--------------------- |  | -------------------------------- | ----
|                      |  | 2011                             |     
|                      |  |                                  |     
|Customer A         *  |  |                                  | 33.5
|Customer B          * |  |                                  | 12.9
|Customer C            |  |                                  | 10.0
|Customer D            |  |                                  | -   
|Customer E          * |  |                                  | -   
|Customer F            |  |                                  | -   
|Customer G            |  |                                  | -   
|                      |  |                                  | 56.4










*Indicates customers under control of a common parent
company.



F-46


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 16. | CERTAIN RISKS AND CONCENTRATIONS (.../Cont’d)
| | --- | -------------------------------------------



| | (c) | Major suppliers
| | --- | ---------------



Suppliers accounting for 10%
or more of the Group’s total purchases were as follows:



|           |  | For the Years Ended |     
|---------- |  | ------------------- | ----
|           |  | December 31,        |     
|           |  | 2011                |     
|           |  |                     |     
|Supplier A |  |                     | 25.3
|Supplier B |  |                     | 18.6
|Supplier C |  |                     | 14.0
|Supplier D |  |                     | 11.4
|Supplier E |  |                     | -   
|           |  |                     | 69.3



The Group is dependent on third-party
consumable parts manufacturers for all of its supply of dredging consumable parts. For the years ended December 31, 201, 2010 and
2009, products purchased from the Group's three largest suppliers accounted for 57.9%, 65.0% and 100.0% of product purchases, respectively.
The Group is dependent on the ability of its suppliers to provide products on a timely basis and on favorable pricing terms. The
loss of certain principal suppliers or a significant reduction in product availability from principal suppliers could have a material
adverse effect on the Group. The Group believes that its relationships with its suppliers are satisfactory, and the Group has never
experienced inadequate supply from suppliers.



F-47


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 17. | OPERATING LEASE COMMITMENTS
| | --- | ---------------------------



The total
future minimum lease payments under non-cancellable operating leases with respect to dredgers, crew, consumable parts and office
as of December 31, 2011 were payable as follows:



|                                 |  | Hire charge of dredgers |            |  | Hire charge of crew |   |           | Consumable parts supply |  |   | Office rental |  |  | Total |       
|-------------------------------- |  | ----------------------- | ---------- |  | ------------------- | - | --------- | ----------------------- |  | - | ------------- |  |  | ----- | ------
|For the years ended December 31, |  |                         |            |  |                     |   |           |                         |  |   |               |  |  |       |       
|                                 |  |                         |            |  |                     |   |           |                         |  |   |               |  |  |       |       
|2012                             |  | $                       | 15,522,218 |  |                     | $ | 4,832,601 |                         |  | $ | 40,283,499    |  |  | $     | 12,517
|                                 |  |                         |            |  |                     |   |           |                         |  |   |               |  |  |       |       
|2013                             |  |                         | 7,432,527  |  |                     |   | 2,540,058 |                         |  |   | 18,942,062    |  |  |       | 12,517
|                                 |  |                         |            |  |                     |   |           |                         |  |   |               |  |  |       |       
|2014                             |  |                         | 2,131,694  |  |                     |   | 918,593   |                         |  |   | 3,945,619     |  |  |       | 12,517
|                                 |  |                         |            |  |                     |   |           |                         |  |   |               |  |  |       |       
|2015                             |  |                         | 754,699    |  |                     |   | 571,982   |                         |  |   | -             |  |  |       | 12,517
|                                 |  |                         |            |  |                     |   |           |                         |  |   |               |  |  |       |       
|2016                             |  |                         | -          |  |                     |   | -         |                         |  |   | -             |  |  |       | -     
|                                 |  | $                       | 25,841,138 |  |                     | $ | 8,863,234 |                         |  | $ | 63,171,180    |  |  | $     | 50,068



Rental expenses under non-cancellable
operating leases arrangements for the years ended December 31, 2011, 2010 and 2009 was $19,922,463, $9,847,333 and $3,186,476,
respectively. $25,527, $1,579,608 and $1,560,780 of the rental expenses was paid to the related parties for the years ended December
31, 2011, 2010 and 2009, respectively (see Note 15).



The operating lease commitments
below include both the related parties commitments and non-related parties commitments. The total future lease payments as of December
31, 2011 is summarized as follows:



|                                |  |      |    |  | Hire charge |   |            | Hire charge |  |   | Consumable   |  |  |               |            |  |       |  
|------------------------------- |  | ---- | -- |  | ----------- | - | ---------- | ----------- |  | - | ------------ |  |  | ------------- | ---------- |  | ----- | -
|                                |  | Note |    |  | of dredgers |   |            | of crew     |  |   | parts supply |  |  | Office rental |            |  | Total |  
|                                |  |      |    |  |             |   |            |             |  |   |              |  |  |               |            |  |       |  
|Related parties commitments     |  |      | 15 |  |             | $ | -          |             |  | $ | -            |  |  | $             | -          |  |       | $
|                                |  |      |    |  |             |   |            |             |  |   |              |  |  |               |            |  |       |  
|Non-related parties commitments |  |      |    |  |             |   | 25,841,138 |             |  |   | 8,863,234    |  |  |               | 63,171,180 |  |       |  
|                                |  |      |    |  |             |   |            |             |  |   |              |  |  |               |            |  |       |  
|                                |  |      |    |  |             | $ | 25,841,138 |             |  | $ | 8,863,234    |  |  | $             | 63,171,180 |  |       | $



F-48


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 18. | CLASS A PREFERRED SHARES
| | --- | ------------------------



Each Class
A Preferred Share is automatically convertible into one of the Company’s ordinary shares, which the Company calls the Conversion
Ratio, upon occurrence of both of the following: (a) the registration of the underlying ordinary shares is declared effective by
the SEC or other applicable regulatory authority designed by the holders of a majority of the preferred shares pursuant to the
terms of the registration rights agreement with such holders, or the underlying ordinary shares become freely tradable in the United
States or pursuant to any available exemption; and (b) the commencement of the trading of the Company’s ordinary shares on
a national U.S. stock exchange or such other recognized international exchange as the holders of a majority of preferred shares
may approve. The Conversion Ratio is subject to proportional adjustment for share splits, divisions, share dividends, recapitalization
and similar transactions. Each preferred share is also convertible into one of the Company’s ordinary shares at the opinion
of the holder at any time prior to automatic conversion.



Holders
of the preferred shares have no right to vote on any matters that requires shareholder approval; provided, however, the Company
may not issue any shares that have a liquidation preference that is senior to that of the preferred shares without their consent.
Class A Preferred Shares are entitled to a dividends equal to any that are declared on ordinary share. The Class A Preferred Shares
have a liquidation preference of $5.00 per share.



If an Automatic
Conversion does not occur by the second anniversary of the closing of the October 2010 Private Placement, holders of the Preferred
Shares shall have the right to receive a payment equal to 20% of $5.00 per Class A Preferred Share. If such payment is due and
remains unpaid at the time of an Automatic Conversion, the holders may, at the sole discretion of the Company , choose to receive
this payment in ordinary shares, in lieu of cash, at a purchase price of $5.00 per share. The holders also have the right, between
the second and third anniversary of the closing, if the shares have not been converted, to demand the redemption of their share
for $5.00 per share.



F-49


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 19. | SHAREHOLDERS' EQUITY
| | --- | --------------------



| | (a) | Contributed capital
| | --- | -------------------



In connection with the purchase
of the 50% interest of Fujian Service by Fujian WangGang, the shareholders of Wonder Dredging (being the same shareholders of Fujian
Service at the time) were entitled, pursuant to the purchase agreement, to declare and be paid all of the retained earnings of
Fujian Service from its inception through March 31, 2010, as a dividend, which amounted to $51,087,387. As described in the annual
financial statements, the shareholders, pursuant to an agreement, held their interests as the representatives of a family includes
the Company’s Chief Executive Officer, Mr. Xinrong Zhuo. Such shareholders also committed to contribute all such dividends
back into the Company as a capital contribution along with an allocation to its statutory reserves. Such contribution of dividends
has been recorded first as a payment of a $10,982,735 subscription receivable and the $40,104,652 balance as additional paid-in
capital.



Wonder Dredging was incorporated
on May 10, 2010 with capital of $878,876 (RMB6 million) having been paid by the Wonder Dredging shareholders. Upon Wonder Dredging
becoming a consolidated subsidiary of the Group on June 29, 2010, this amount was recorded as a capital contribution in the consolidated
financial statements. In connection with the acquisition of the Company’s 50% ownership of Fujian Service, Fujian WangGang
has met all of its related investment commitments to Fujian Service, having invested approximately $1.5 million in August 2010,
approximately $17.1 million in November 2010 and approximately $5.0 million in January 2011.



The Company’s shares have
no par value. The BVI permits the Board of Directors to pay dividends if 1) in its judgment doing so is in the best interest of
the Company and 2) if the Company would remain solvent as defined under BVI law. The Company records the net amounts received for
the issuance of preferred share, to the extent allocable to the preferred shares under U.S. GAAP, in the preferred shares account.
Other capital contributions, irrespective of whether they are for the issuance of shares, are recorded in the additional paid-in
account. The balance sheet account for no par ordinary shares is kept at zero.

F-50


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 19. | SHAREHOLDERS' EQUITY (.../Cont’d)
| | --- | -------------------------------



| | (b) | Retained earnings and statutory reserves
| | --- | ----------------------------------------



Retained earnings and statutory
reserves as of December 31, 2011 and 2010 consisted of the following:



|                   |  | 2011 |            |  | 2010 |  
|------------------ |  | ---- | ---------- |  | ---- | -
|                   |  |      |            |  |      |  
|Retained earnings  |  | $    | 98,559,096 |  |      | $
|                   |  |      |            |  |      |  
|Statutory reserves |  | $    | 15,386,316 |  |      | $



Fujian Service, Fujian WangGang
and Wonder Dredging, which are located and operate in the PRC, are required to transfer 10% of their net profits after income tax,
as determined in accordance with the PRC accounting rules and regulations. Appropriation to the statutory reserve by the Group
is based on profit arrived at under PRC accounting standards for business enterprises for each year. The statutory reserves of
the Group represent the statutory reserves of Fujian Service, Fujian WangGang and Wonder Dredging as required under the PRC law.



The profit arrived at must be
set off against any accumulated losses sustained by the Group in prior years, before allocation is made to the statutory reserve.
Appropriation to the statutory reserve must be made before distribution of dividends to shareholders. The appropriation is required
until the statutory reserve reaches 50% of the shareholders' equity. This statutory reserve is not distributable in the form of
cash dividends.



| | 20. | CONDENSED PARENT COMPANY FINANCIAL INFORMATION
| | --- | ----------------------------------------------



For the purpose of preparing these
supplemental condensed parent company (unconsolidated) financial statements, the Company records its investment in subsidiaries
under the equity method of accounting as prescribed in ASC Topic 323, “Investments - Equity Method and Joint Ventures”.
Such investment and long-term loans to subsidiaries are presented on the balance sheet as “Investments in subsidiaries”
and the income of the subsidiaries is presented as “Equity in income of subsidiaries” on the statements of income.



These supplemental condensed parent
company (unconsolidated) financial statements should be read in conjunction with the notes to the Company’s Consolidated
Financial Statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance
with U.S. GAAP have been condensed or omitted.



As of December 31, 2011, there
were no material contingencies, significant provisions for long-term obligations, or guarantees of the Company, except as separately
disclosed in the Company’s Consolidated Financial Statements, if any.



F-51


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 20. | CONDENSED PARENT COMPANY FINANCIAL INFORMATION (.../Cont’d)
| | --- | ---------------------------------------------------------



|CONDENSED BALANCE SHEETS                                                                                                                                                                                                            |  |                    |             |  |                    |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- |  | ------------------ | -
|                                                                                                                                                                                                                                    |  |                    |             |  |                    |  
|                                                                                                                                                                                                                                    |  | As of December 31, |             |  | As of December 31, |  
|                                                                                                                                                                                                                                    |  | 2011               |             |  | 2010               |  
|Assets                                                                                                                                                                                                                              |  |                    |             |  |                    |  
|Cash                                                                                                                                                                                                                                |  | $                  | 437,324     |  |                    | $
|Other receivables                                                                                                                                                                                                                   |  |                    | 122         |  |                    |  
|Investments in subsidiaries                                                                                                                                                                                                         |  |                    | 267,289,072 |  |                    |  
|Total assets                                                                                                                                                                                                                        |  | $                  | 267,726,518 |  |                    | $
|                                                                                                                                                                                                                                    |  |                    |             |  |                    |  
|Liabilities and equity                                                                                                                                                                                                              |  |                    |             |  |                    |  
|Current liabilities                                                                                                                                                                                                                 |  |                    |             |  |                    |  
|Accrued liabilities and other payables                                                                                                                                                                                              |  | $                  | 434,713     |  |                    | $
|Derivative liability                                                                                                                                                                                                                |  |                    | 8,279,827   |  |                    |  
|Total current liabilities                                                                                                                                                                                                           |  |                    | 8,714,540   |  |                    |  
|                                                                                                                                                                                                                                    |  |                    |             |  |                    |  
|Non-current liabilities                                                                                                                                                                                                             |  |                    |             |  |                    |  
|Contingent liability for a variable number of shares                                                                                                                                                                                |  |                    | -           |  |                    |  
|Derivative liability                                                                                                                                                                                                                |  |                    | -           |  |                    |  
|Total non-current liabilities                                                                                                                                                                                                       |  |                    | -           |  |                    |  
|Total liabilities                                                                                                                                                                                                                   |  |                    | 8,714,540   |  |                    |  
|                                                                                                                                                                                                                                    |  |                    |             |  |                    |  
|Class A Preferred Shares, no par value; 25,000,000 shares authorized; 10,012,987 shares issued and outstanding (liquidation preference $50,064,935, less $0 and $6,135,012 discount, respectively) as of December 31, 2011 and 2010 |  |                    | 50,064,935  |  |                    |  
|                                                                                                                                                                                                                                    |  |                    |             |  |                    |  
|Shareholders’ equity                                                                                                                                                                                                                |  |                    |             |  |                    |  
|Total shareholders’ equity                                                                                                                                                                                                          |  |                    | 208,947,043 |  |                    |  
|                                                                                                                                                                                                                                    |  |                    |             |  |                    |  
|Total liabilities and equity                                                                                                                                                                                                        |  | $                  | 267,726,518 |  |                    | $



F-52


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)




| | 20. | CONDENSED PARENT COMPANY FINANCIAL INFORMATION (.../Cont’d)
| | --- | ---------------------------------------------------------



|CONDENSED STATEMENTS OF INCOME            |  |                                  |                                  |   |      |  
|----------------------------------------- |  | -------------------------------- | -------------------------------- | - | ---- | -
|                                          |  |                                  |                                  |   |      |  
|                                          |  | For the Years Ended December 31, |                                 
|                                          |  | 2011                             |                                  |   | 2010 |  
|                                          |  |                                  |                                  |   |      |  
|General and administrative expenses       |  | $                                | (1,249,180                       | ) |      | $
|Other income                              |  |                                  | 7,339,168                        |   |      |  
|Equity income of subsidiaries             |  |                                  | 90,302,273                       |   |      |  
|Net income                                |  | $                                | 96,392,261                       |   |      | $
|                                          |  |                                  |                                  |   |      |  
|CONDENSED STATEMENTS OF CASH FLOWS        |  |                                  |                                  |   |      |  
|                                          |  |                                  |                                  |   |      |  
|                                          |  |                                  | For the Years Ended December 31, |  
|                                          |  | 2011                             |                                  |   | 2010 |  
|                                          |  |                                  |                                  |   |      |  
|Net cash used in operating activities     |  | $                                | (991,142                         | ) |      | $
|Net cash used in investing activities     |  |                                  | (20,140,000                      | ) |      |  
|Net cash provided by financing activities |  |                                  | 55,990                           |   |      |  
|Effect of exchange rate changes on cash   |  |                                  | 2,843                            |   |      |  
|Cash at the beginning of the year         |  |                                  | 21,509,633                       |   |      |  
|Cash at the end of the year               |  | $                                | 437,324                          |   |      | $





F-53


CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIESNOTESTO CONSOLIDATED FINANCIAL STATEMENTS(IN US DOLLARS)






| | 21. | CONTINGENCIES
| | --- | -------------







| |  | Registration rights agreement
| |  | -----------------------------



| |  | In connection with its private placement, the Company entered into a registration rights agreement
pursuant to which it agreed to use its best efforts to file within 60 days of the date after which the Company would no longer
accept funds for the purchase of preferred shares (such 60-day deadline, the "Filing Deadline") a registration statement
with the SEC to register the sale by the Company of its ordinary shares by means of a firm commitment underwritten offering and
to register for resale (i) the ordinary shares underlying the preferred shares issued in the private placement, (ii) the 15,000,000
shares held in the Make-Good Escrow, (iii) 37,177,323 ordinary shares held by certain of its founding shareholders which are not
part of the Make-Good Escrow and (iv) the 500,000 shares issued to its placement agent pursuant to the Merger Agreement. If the
registration statement covering these securities is not filed by the Filing Deadline or not declared effective by the SEC within
180 days of the Filing Deadline (such 180-day deadline, the ‘‘Effectiveness Deadline’’), subject to certain
exceptions, liquidated damages of 0.3% of the purchase price per month will accrue and will be payable in cash on a monthly basis,
provided that in no event shall the amount of liquidated damages payable at any time to any holder of preferred shares exceed 10%
of the amount of such holder’s initial investment in the private placement. According to this formula, the monthly liquidated
damages to be paid would amount to $150,195 per month and the maximum payments would total $5,006,494.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under the registration rights agreement, the Filing Deadline was February 21, 2011 and the Effectiveness
Deadline has been extended from August 22, 2011 to January 31, 2012. The registration was declared effective on February 2, 2012.
The investors have waived any claim for liquidated damages for the two-day delay. As of the date of issuance of these financial
statements, the Company knows that it has met the deadline and has assessed the likelihood of any liquidated damages becoming payable
under the registration rights agreement and believed that the likelihood was not probable. Consequently, no liability or expense
was recorded as of December 31, 2011 for liquidated damages under the registration rights agreement.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-54