UNITED
        STATES
 SECURITIES
        AND EXCHANGE COMMISSION
 WASHINGTON,
        DC 20549
  
  **FORM
        10-K**
 
 FOR
        ANNUAL AND TRANSITION REPORTS
 PURSUANT
        TO SECTIONS 13 OR 15(D) OF THE
 SECURITIES
        EXCHANGE ACT OF 1934
 
 (Mark
        One)
  xANNUAL
          REPORT PURSUANT
          TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For
          the
          fiscal year ended **September
          30, 2005**
 OR
 
 oTRANSITION
          REPORT PURSUANT TO SECTION 13
          OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
        the
        transition period from __________________ to _____________________
 
 Commission
        file number 0-31049
 
 **CHINA
        ENERGY SAVINGS TECHNOLOGY, INC.**
 (Exact
        name of registrant as specified in its charter)
 Nevada
                86-0995730(State
                    or other jurisdiction of incorporation or organization)
                (I.R.S.
                    Employer Identification No.)
  Central
        Plaza, 18 Harbour Road, Suite 3203A, 32nd Floor
 Hong
        Kong, China
 (Address
        of principal executive offices) (Zip Code)
 
 852-2588-1228
 (Issuer's
        telephone number)
 
 All
        Correspondence to:
 
 Kevin
        K.
        Leung, Esq.
 Richardson
        & Patel, LLP
 10900
        Wilshire Blvd. Suite 500
 Los
        Angeles, CA 90024
 (310)
        208-1182
 
 Securities
        registered pursuant to Section 12(b) of the Act:
 Title
                    of each class
                
                Name
                    of each exchange on which registeredNone
                
                None
 Securities
        registered pursuant to Section 12(g) of the Act:
 
 Common
        stock, no par value
 (Title
        of
        Class)
 
 Indicate
        by check mark if the registrant is a well-known seasoned issue, as defined
        in
        Rule 405 of the Securities Act. Yes o No x
 
 Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 14(d) of the Act. Yes o No x
  Indicate
        by check mark whether the registrant: (1) has filed all reports required
        to be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days. Yes x No o
 
 Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K is not contained herein, and will not be contained, to the
        best
        of registrant's knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-K or any amendment
        to this
        Form 10-K. o
 
 Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in Rule
        12b-2 of the Act). Yes xNo o
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Act). Yes o No x
 
 The
        aggregate market value of the voting and non-voting common equity held by
        nonaffiliates computed by reference to the price at which the common equity
        was
        last sold as of the last business day of the registrant's most recently
        completed second fiscal quarter (March 31, 2005) is $84,606,471*, based
        upon the closing sale price of $9.00 per share on March 31,
        2005.
  *
                Without
                    asserting that any of the issuer's directors or executive officers
                    or the
                    entities that own 16,018,134 of common stock are affiliates,
                    the shares of
                    which they are beneficial owners have been deemed to be owned
                    by
                    affiliates solely for this
                    calculation.
 As
        of
        December 19, 2005, there were 24,699,753 shares of our common stock
        issued
        and outstanding.
  
  TABLE
        OF
        CONTENTS
 TO
        ANNUAL
        REPORT ON FORM 10-K
 FOR
        YEAR
        ENDED SEPTEMBER 30, 2005
 
 
 
 PART
                  I
              
              PageItem
                  1.
              Description
                  of Business
              4Item
                  1A.
              Risk
                  Factors
              13Item
                  1B.
              Unresolved
                  Staff Comments
              15Item
                  2.
              Description
                  of Property
              15Item
                  3.
              Legal
                  Proceedings
              15Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              15
  PART
                  IIItem
                  5.
              Market
                  for Registrant's Common Equity, Related StockholderMatters
                  and Issuer Purchases of Equity Securities
              15Item
                  6.
              Selected
                  Financial Data
              17Item
                  7.
              Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operation
              18Item
                  7A.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              24Item
                  8.
              Financial
                  Statements and Supplementary Data
              24Item
                  9.
              Changes
                  in and Disagreements on Accounting and Financial
                  Disclosure
              24Item
                  9A.
              Controls
                  and Procedures
              24Item
                  9B.
              Other
                  Information
              26
  PART
                  IIIItem
                  10.
              Directors
                  and Executive Officers of the Registrant
              26Item
                  11.
              Executive
                  Compensation
              29Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and Management
              30Item
                  13.
              Certain
                  Relationships and Related Transactions
              31Item
                  14.
              Principle
                  Accounting Fees and Services
              31
 
 PART
                  IVItem
                  15.
              Exhibits,
                  Financial Statement Schedules
              32Signatures
              
              33Exhibits
  (REMAINDER
        OF PAGE INTENTIONALLY LEFT BLANK)
  2
  CAUTION
        REGARDING FORWARD-LOOKING INFORMATION
 
 All
        statements contained in this Form 10-K, other than statements of historical
        facts, that address future activities, events or developments are
        forward-looking statements, including, but not limited to, statements containing
        the words "believe," "anticipate," "expect" and words of similar import.
        These
        statements are based on certain assumptions and analyses made by us in light
        of
        our experience and our assessment of historical trends, current conditions
        and
        expected future developments as well as other factors we believe are appropriate
        under the circumstances. However, whether actual results will conform to
        the
        expectations and predictions of management is subject to a number of risks
        and
        uncertainties that may cause actual results to differ materially.
 
 Such
        risks include, among others, the following: international, national and local
        general economic and market conditions: our ability to sustain, manage or
        forecast our growth; raw material costs and availability; new product
        development and introduction; existing government regulations and changes
        in, or
        the failure to comply with, government regulations; adverse publicity;
        competition; the loss of significant customers or suppliers; fluctuations
        and
        difficulty in forecasting operating results; changes in business strategy
        or
        development plans; business disruptions; the ability to attract and retain
        qualified personnel; the ability to protect technology; and other factors
        referenced in this and previous filings.
 
 Consequently,
        all of the forward-looking statements made in this Form 10-K are qualified
        by
        these cautionary statements and there can be no assurance that the actual
        results anticipated by management will be realized or, even if substantially
        realized, that they will have the expected consequences to or effects on
        our
        business operations.
 
 As
        used
        in this Form 10-K, unless the context requires otherwise, "we" or "us" or
        the
        "Company" means China Energy Savings Technology, Inc. and its
        subsidiaries.
 
 
 3
  PART
        I
 
 **ITEM
        1.**  **DESCRIPTION
        OF BUSINESS**
 
 INTRODUCTION
 
 We
        are a
        Nevada corporation headquartered in Hong Kong, China that invests in, develops,
        markets, distributes and manufactures energy saving products for use in
        commercial and industrial settings. As of September 30, 2004, we owned a
        50%
        interest in Starway Management Limited, a British Virgin Islands corporation
        (“Starway”) which owns all of the equity interests in Shenzhen Dicken Industrial
        Development Limited, a company incorporated in the Republic of China on November
        20, 1996 ("SDID")  which
        in
        turns owns all of the equity interest in Shenzhen Dicken Technology Development
        Limited, a company incorporated in the Republic of China on November 9, 1999
        (“SDID”). SDID and SDID develops, markets distributes and manufactures energy
        saving products for use in commercial and industrial settings in China.
        Subsequently, on November 17, 2004, the Company completed on acquisition
        of an
        additional 15% interest in Starway. Prior to the acquisition, the Company
        owned
        50% of the outstanding shares of capital stock of Starway. After the
        acquisition, the Company owned a total of 65% of the outstanding shares of
        Starway capital stock. The Company acquired the additional 15% interest in
        Starway from Eurofaith Holdings, Inc., a British Virgin Islands Corporation
        (“Eurofaith”). The sole director of Eurofaith is also a director and Corporate
        Secretary of the Company.
 
 The
        Company acquired the remaining 35% interest (the “Acquisition”) in Starway
        Management Limited (“Starway”) from Sky Beyond Investments Limited (“Sky
        Beyond”) on February 1, 2005 by issuing a total of 7,807,569 shares of common
        stock of the Company. Sky Beyond had acquired the 35% interest in Starway
        from
        Golden Resorts Group Limited (formerly known as “Meditech Group Company
        Limited”). The amount of consideration given by the Company for the Acquisition
        was determined with reference to the acquisitions of the 50% and subsequently
        the 15% interest in Starway as reported in the Company’s Form 8-K filed on June
        30, 2004 and November 18, 2004, respectively. The closing of the Acquisition
        (the “closing”) occurred on February 1, 2005 and as a result of the Acquisition,
        the Company owns 100% of Starway.
 
 Public
        information concerning the Company is also made available through our website
        at: www.cesv-inc.com.
 
 CORPORATE
        HISTORY
 
 We
        were
        originally incorporated under the laws of the State of Nevada on February
        14,
        2000 as "Rim.com, Inc." On April 6, 2000, we closed our acquisition of Rimmer
        Computer Inc., an Arizona corporation which had been in business in Phoenix,
        Arizona for over 13 years ("Rimmer").
 
 Rimmer
        is
        an approved technical service provider for computer hardware and software
        system
        manufacturers such as Novell, Microsoft, IBM, Compaq, Hewlett Packard, Cisco
        and
        others. Rimmer employed five people and the individual technicians have received
        certifications such as Microsoft Certified System Engineer and Certified
        NetWare
        Engineer. All of Rimmer's customers were located in the Phoenix, Arizona
        area.
        Rimmer, however, did not generate a profit for the Company was only a marginal
        operating entity without expenditure of substantial marketing capital. On
        June
        6, 2002, we amended our Articles of Incorporation to change our corporate
        name
        to Rim Holdings Inc.
 
 On
        June
        18, 2004, three of our stockholders namely Christina M. Strauch, Michael
        K.
        Hair, P.C. and Robert H. Korndorffer (collectively, the "Selling Shareholders")
        sold 8,888,224 shares of the common stock of the Company for $225,000 (the
        "Sale") to Best Development Company, Ltd., a British Virgin Islands corporation
        ("Best Development") and Jie Zhu, an individual ("Zhu"). In connection with
        this
        transaction, we also redeemed 1,000,000 shares of our common stock held by
        Ms.
        Strauch and transferred all of our interest in Rimmer to Ms. Strauch. The
        sale
        of the 8,888,224 shares represented approximately 50.1% of the total outstanding
        stock of the Company. In connection with this transaction, Ms. Strauch resigned
        as our Chairman, Chief Executive Officer, Treasurer and Chief Financial Officer
        and Mr. Korndorffer resigned from our Board of Directors effective as of
        June
        22, 2004. Mr. Lee Kam Man was appointed as our CEO as of June 22, 2004 and
        Mr.
        Lee Kam Man and Mr. Li Shilong were appointed as directors of the
        Company.
 
 The
        proceeds from the Sale were then loaned to the Company by the Selling
        Shareholders. We used such proceeds to pay off our current liabilities. Both
        Christina M. Strauch and Robert Korndorffer were issued convertible promissory
        notes as consideration for the loans which were convertible into 3,993,700
        and
        1,126,300 shares, respectively, of the Company's restricted common stock.
        Michael K. Hair, P.C. assigned his convertible promissory note to Nimish
        Patel,
        counsel for the Company, as partial payment for legal services provided to
        the
        Company. This promissory note is convertible into 833,320 shares of the
        Company's restricted common stock. All such convertible promissory notes
        were
        converted into our common stock on August 25, 2004.
  4
 On
        June
        30, 2004, we acquired 50% of the outstanding shares of Starway from Eurofaith
        Holdings, Inc., a British Virgin Islands Corporation ("EuroFaith") by issuing
        to
        EuroFaith a convertible promissory note which may be convertible into
        223,073,380 shares of our common stock. This convertible promissory note
        was
        also converted into our common stock on August 26, 2004.
 
 On
        August
        24, 2004, we changed our name from Rim Holdings Inc. to China Energy Savings
        Technology, Inc. On August 25, 2004, we effected a 20 to 1 reverse stock
        split
        of our common stock.
 
 As
        described above, the Company acquired the remaining 35% of Starway as of
        February 1, 2005. Thus, the Company owns 100% of Starway Management Limited.
 
 As
        a
        result, our corporate structure is illustrated as follows:
  
 
 DESCRIPTION
        OF STARWAY'S BUSINESS
 
 Starway
        was incorporated in the British Virgin Islands on September 15, 1998. Starway
        owns all of the equity interests in Shenzhen Dicken Industrial Development
        Limited, a company incorporated in the Republic of China on November 20,
        1996
        ("SDID") which in turns owns all of the equity interest in Shenzhen Dicken
        Technology Development Limited, a company incorporated in the Republic of
        China
        on November 9, 1999 ("SDID"). In 2003, Eurofaith, the former shareholder
        of SDID
        exchanged 100% of the common shares of SDID for 100 shares of
        Starway.
 
 Starway,
        through its two subsidiaries SDID and SDID is a People's Republic of China
        based
        marketer, distributor and manufacturer of energy saving products for use
        in
        commercial and industrial settings. SDID is a foreign-owned enterprise 100%
        owned by Starway under the laws of the People's Republic of China ("PRC")
        and
        responsible for the operation and sales of its products. SDID is a wholly-owned
        subsidiary of SDID and is a limited company incorporated in the PRC and holds
        the patent on technology used by SDID to manufacture and sell its products
        and
        is responsible for the development of energy saving projects of Shenzhen
        Dicken
        Group.
 
 5
 
 PRINCIPAL
        PRODUCTS
 
 OVERVIEW
        OF ENERGY SAVER PRODUCTS
 
 The
        basic
        technology behind the Company's energy saver products is a soft switching
        system
        (the "Switching System") comprised of microprocessors, transformers and timing
        circuits which are designed to work together to regulate and monitor the
        flow of
        electricity from main electricity delivery units to the device using such
        electricity (e.g., lighting devices, sewing devices, etc.). This regulation
        and
        monitoring is designed to lower the use of electricity by such devices, but
        still maintain the performance of such devices. The energy saver products
        are
        designed to be easily installed, with no wiring alterations or circuit
        modifications, and fully automated upon installation.
 
 LIGHT
        SAVER PRODUCTS
 
 The
        Company's Light Saver products include the street light saver, fluorescent
        light
        saver and the electricity saving lamp light saver and are the flagship products
        using the Company's Switching System. All of these products use the Switching
        System to reduce the amount of electricity used by lighting systems. In many
        street light and fluorescent lighting systems, the supply voltage is only
        required to allow the lights to turn on; thereafter the operating voltage
        can be
        reduced. The Company's Light Saver products automatically switch from normal
        to
        economy voltage after the start up period and the products' transformer
        automatically switches to the reduced voltage and monitors use of such voltage.
        The drop in current is dependent on the age and type of light fittings. When
        additional lights are turned on, the Switching System "senses" the change
        and
        switches to allow additional electricity to flow to power on such additional
        lights. In addition, the Switching System monitors the main voltage and
        automatically switch out of economy mode when the main voltage drop could
        induce
        a brownout.
 
 The
        Company's Light Saver products are designed for retrofitting into existing
        installations. No modification is required to existing light fittings.
        Installations are relatively quick and simple. The Company's Light Saver
        products are wired into the lighting circuit, before and after the light
        switches and can be mounted vertically, horizontally or hung. The Company's
        Light Saver's products are fully automated once they are installed. Once
        the
        Company's Light Saver products are installed, they generally reduce the amount
        of electricity used by the lighting system, extend the life of the lights,
        and
        reduces the operating temperature of the lights. As a result, consumers of
        the
        Company's Light Saver's may save on their electricity bills and cost of
        purchasing replacement light tubes.
 
 SDID
        warrants the original purchaser of its Light Saver products for a period
        of 3
        years from the date of installation, to be free from defects in and arising
        from
        the design, assembly, manufacturer, material or workmanship of the products
        and
        will replace the defective products without any charge to the original
        purchaser.
 
 SEWING
        MACHINE ELECTRICITY SAVER
 
 SDID
        has
        also introduced the Sewing Machine Electricity Saver using the Switching
        System.
        In general, the sewing machine is used to sew in interval processes. In between
        the sewing intervals the sewing machine's motor runs on a constant pace,
        drawing
        electricity without actually sewing. The Company's Sewing Machine Electricity
        Saver product uses to the Switching System to reduce the amount of electricity
        used in between actual use of the sewing machine. As with the Light Saver
        products, once the Sewing Machine Electricity Saver products are installed,
        they
        are fully automated.
 
 Once
        the
        Company's Sewing Machine Electricity Saver products are installed, they
        generally reduce the amount of electricity used by such machines, may extend
        the
        life of such machines, reduces the operating temperature and noise of the
        sewing
        machine. As a result, consumers of the Company's Sewing Machine Electricity
        Saver may save on their electricity bills and cost of purchasing replacement
        sewing machines.
 
 ADDITIONAL
        ENERGY SAVER PRODUCTS
 
 SDID
        has
        also developed and now sells other products that use the Switching System
        to
        create more energy efficient devices. Such products include: the Injection
        Molding Machine Saver, the Central Air Condition Electricity Saver, the Oil
        Bleed Set Electricity Saver and the Multi User Electricity Saver. ******
 
 SALES
        AND
        DISTRIBUTION
 
 SDID
        sells and distributes its products all over China, with offices and sales
        agents
        in the cities of Beijing, Shanghai, Chendu, Xi'An and in the provinces of
        Wu-Han, Guangzhou, Hu-Nan and Ah-Hui. In addition, SDID offers distributorships
        at city levels to distributors who want to sell SDID's products. Each such
        distributor is required to pass qualification inspections by SDID and pay
        a one
        time upfront fee to SSDID for the right to distribute SDID's products.
        Currently, SDID only sells to customers in China.
  6
 SDID
        has
        installed the Light Saver Products in the building, offices, supermarkets,
        shopping malls, restaurants, buildings, factories, oil fields and residential
        premises of approximately 400 customers in over 12 provinces and cities in
        China. The Light Saver Products have also been installed on street lamps
        for
        cities in China.
 
 SDID
        sells its products by offering two types of contracts: Savings Sharing or
        Equipment Sale.
 
 Under
        the
        Equipment Sale contract, the customer pays upfront for the equipment and
        installation cost.
 
 Under
        the
        Savings Sharing contract, the customer is not required to pay any cost up
        front
        for the equipment and installation of SDID's products. Such customer, however,
        enters into a 5 to 7 year contract with SDID whereby from the date SDID's
        products are installed, the customer shall pay to SDID 70% of the total savings
        from the reduced electrical bill. SDID has entered into these Savings Sharing
        contracts since July of 2002. As of September 30, 2005, SDID has entered
        into 15
        Savings Sharing contracts with:
 
 Shenzhen
        Deqin Jilin Branch
 Zhuzhou
        Municipal Street Light Bureau
 Anqing
        Kuntai Decoration Co., Ltd
 Shenzhen
        E-store Market Co., Ltd
 Nanjing
        Langchi Group Co., Ltd
 Shenzhen
        Deqin Shenyang Branch
 Nanjing
        Giant Economic Co., Ltd
 Chongqing
        Baifuda Technology Development Co., Ltd
 Hunan
        Xuhua Economic trade Co., Ltd
 Wuhu
        United Technology Co., Ltd
 Kelamayi
        Jingying Co., Ltd
 Chong
        Qing Environmental Protection Energy Savings Development Co., Ltd
 Hangzhou
        Energy Savings Technology Co. Ltd
 Xin
        Jiang
        Technology Co., Ltd
 Shanghai
        Da Xiyi Electrical Appliances Co., Ltd
 
 CONCENTRATION
        OF CUSTOMERS
 SDID
          has
          approximately 600 customers. However, as of September 30, 2005, approximately
          $23,000,000 or approximately 48% of our sales revenue was generated from
          energy
          savings contracts from four customers: Chongqing Dicken (approximately
          12%),
          Hangzhou Dicken (approximately 13%), Xinjiang Dicken (approximately 13%)
          and
          Shanghai Daxiyi Electronics (approximately 10%). The loss of any and/or
          all of
          these customers may have a material adverse effect on our business. All
          of our
          sales revenue was from companies or government entities located in
          China.
 
 BACKLOG
 
 The
        Company has no backlog orders.
 
 MANUFACTURING
        AND SUPPLIERS
 
 SDID
        designs, prototypes and manufactures the chipset component of its products
        at
        its manufacturing facilities located at Shenzhen Hi-Tech Zone Center Road,
        Shenzhen City, Guangdong Province, China. SDID's manufacturing facilities
        are
        ISO9001 certified. SDID contracts out the manufacturing and assembling of
        all
        other components to subcontractors. Our current annual manufacturing capacity
        is
        approximately 11,000 units. The principal components to the Company's products
        are computer chips, circuit boards, transformers and semiconductors. The
        prices
        for these components are subject to market forces largely beyond the Company's
        control, including energy costs, market demand, and freight costs. The prices
        for these components have varied significantly in the past and may vary
        significantly in the future.
 
 Our
        primary suppliers of materials which are used to manufacture our products
        are
        located within an approximately 30 mile radius. There are approximately ten
        similar supplier companies are located in the same area as the above suppliers.
        Consequently, we do not believe that we would have any difficulty in locating
        alternative suppliers.
 
 INTELLECTUAL
        PROPERTY ****** ****
 
 Mr.
        Ian
        Cheng Yi Feng first explored energy savings software in 1999 for a Canadian
        company called Imperial Canadian Overseas Capital Corporation ("ICOC"). ICOC
        then sold and transferred the initial software technology it had to Shenzhen
        Baobo Industrial (now SDID) pursuant to a Technology Transfer Agreement dated
        December 2001 for consideration of RMB$2 million. This is a transfer of
        technology, not a patent. This agreement provided for a termination of the
        agreement in December, 2011. This agreement was subsequently amended on January
        3, 2003 to eliminate the termination date and changed the term to be permanently
        effective. This agreement also provides that SDID has the right to further
        develop this technology to create its own intellectual properties and SDID
        has
        the right to transfer, trade, use and make it SDID's patent. ICOC further
        declared and agreed to undertake in this agreement that it has never applied
        and
        will never apply for any patent covering the initial software technology
        in any
        countries.
 
 7
  With
        this
        technology, SDID put together the technicians and programmers and developed
        the
        chip set that is the heart of the intelligence control circuit board Switching
        System used in Starway's products. Subsequently, Mr. Cheng Ming, a former
        shareholder and director of SDID, applied for a patent in China covering
        this
        technology in April, 2003 and was granted preliminary approval of the patent
        by
        the Chinese intellectual property agency on September 19, 2003. All rights
        under
        such patent were then transferred to SDID by Mr. Cheng Ming on December 19,
        2003.
 
 The
        Company has also licensed the exclusive use of several patents from its founder
        for a period of ten years. The licenses expire in July 2012.
 
 COMPETITION
 
 There
        are
        approximately 50 companies that do business in the PRC that engage in the
        production and sales of energy saving products. SDID is able to compete with
        such competitors because the energy saving products of such competitors
        generally use transformer hardware to stabilize the voltage in order to reduce
        electricity use. SDID's products, on the other hand, uses the Soft Switching
        System, which consists of intelligent control circuit boards made of chipset
        (software), and which works with the transformer (hardware) in stabilizing
        the
        voltage.
 
 On
        December 11, 2003, the China National Scientific Technology Products Committee
        issued a "Certificate of Approval" for SDID's products stating that SDID's
        products have an average energy savings range of between 28% to 34% as compared
        to the average energy savings range of other energy savings products which
        range
        from 8-25%. The Guangdong Research Center for Scientific and Technical
        Information, in its recent report on intelligent control circuit board concluded
        that, "there are so far no other similar device in the market that can
        compete."
 
 The
        management of Starway is not currently aware of any competitors doing business
        in China that are marketing or manufacturing energy saving products using
        an
        intelligent control circuit board. However, competitors may be in the process
        of
        developing similar technology.
 
 SDID's
        products have been approved by the Shenzhen Energy Saving Association and
        its
        quality certified by the China National Authority.
 
 GOVERNMENTAL
        REGULATION
 
 Our
        Company operates from facilities that are located in the People's Republic
        of
        China. Accordingly, we must conform to the governmental regulations and rules
        of
        China. The sale of SDID's products are generally not subject to governmental
        approvals or regulations. When SDID sells its products to governmental entities
        (e.g., for street lamps, etc.), such governmental entities' approval of the
        products are required for such specific use ***.***
 
 DOING
        BUSINESS IN CHINA AND GOVERNMENT REGULATIONS IN CHINA
 
 GOVERNMENTAL
        REGULATION OF OUR OPERATIONS IN CHINA
 
 Our
        subsidiary companies operate from facilities that are located in the People's
        Republic of China. Accordingly, our subsidiaries’ operations must conform to the
        governmental regulations and rules of China.
 
 SINO-FOREIGN
        INVESTED ENTERPRISE LAWS: FIE LAWS
 
 Our
        wholly owned subsidiaries exist in accordance with the People's Republic
        of
        China Wholly Foreign-Owned Enterprise Law, or WFOE Law. Article 8 of the
        WFOE
        Law provides that an enterprise with foreign capital meets the conditions
        for
        being considered a legal person under Chinese law and shall acquire the status
        of a Chinese legal person, in accordance with the law.
 
 Further,
        the WFOE Law provides in Article 4 that the investments of a foreign investor
        in
        China, the profits it earns and its other lawful rights and interests are
        protected by Chinese law. Furthermore, Article 5 of the WFOE Law states that
        the
        state cannot nationalize or requisition any enterprise with foreign capital.
        Under special circumstances, when public interest requires, enterprises with
        foreign capital may be requisitioned by legal procedures and appropriate
        compensation shall be made.
   8
 The
        first
        two provisions set forth above reflect the principle that the State must
        protect
        the interest of the foreign investor based upon approved Articles of
        Association. The third statement reflects the power of all national governments,
        including the United States, that are reserved to them.
 
 Accordingly,
        as the above laws indicate, the only realistic method by which the Chinese
        Government can effect the operation of these Foreign Invested Enterprises
        is
        provided by their respective Articles of Association. Those Articles, combined
        with the Foreign Invested Enterprise laws, provide that the Chinese Government
        does not and cannot have an intrusive role in the affairs of a
        Foreign
        Invested Enterprise company. To the contrary, those laws place a continuing
        duty
        on the government to ensure that the rights of foreign investors in Foreign
        Invested Enterprise companies, as expressed in the approved provisions of
        Articles of Association, are protected and preserved.
 
 FOREIGN
        COMPANIES DOING BUSINESS IN CHINA
 
 There
        are
        three standard investment vehicles for foreigners doing business in
        China:
 
 ·
              Equity
                  Joint Venture;
 
 ·
              Cooperative
                  or contract Joint Venture; and
 
 ·
              Wholly
                  Foreign-Owned Enterprise.
 
 Each
        of
        these investment vehicles is known as a Foreign Invested Enterprise. The
        applicable legal framework for the establishment and continuation of Foreign
        Invested Enterprise laws is as follows:
  GENERAL
                People's
                    Republic of China Foreign Economic Contract LawACCOUNTING
                People's
                    Republic of China Accounting Law Laws Concerning Enterprises
                    with Foreign
                    Investments The General Accounting Standard for Enterprises The
                    Specific
                    Accounting StandardsEQUITY
                    JOINT VENTURE
                People's
                    Republic of China Sino-Foreign Equity Joint Venture Law People's
                    Republic
                    of China Sino-Foreign Equity Joint Venture Law Implementing
                    RegulationsCOOPERATIVE
                    VENTURE
                People's
                    Republic of China Sino-Foreign Cooperative Joint Venture Law
                    Detailed
                    Rules for the Implementation of the People's Republic of China
                    Sino-Foreign Cooperative Joint Venture Law RegulationsWHOLLY
                    FOREIGN-OWNED ENTERPRISE
                People's
                    Republic of China Wholly Foreign-Owned Enterprise Law Implementing
                    Rules
                    of the Wholly Foreign-Owned Enterprise Law Interpretations on
                    Various
                    Provisions Concerning the Implementing Rules of the Wholly Foreign-Owned
                    Enterprise Law
  The
        Foreign Invested Enterprise laws specifically referenced herein are the People's
        Republic of China Wholly Foreign-Owned Enterprise Law, the People's Republic
        of
        China Foreign Economic Contract Law, and the Accounting Laws.
 
 THE
        CHINESE LEGAL SYSTEM
 
 The
        practical effect of the People’s Republic of China legal system on our business
        operations in China can be viewed from two separate but intertwined
        considerations.
 
 9
  First,
        as
        a matter of substantive law, the Foreign Invested Enterprise laws provide
        significant protection from government interference. In addition, these laws
        guarantee the full enjoyment of the benefits of corporate Articles and contracts
        to Foreign Invested Enterprise participants. These laws, however, do impose
        standards concerning corporate formation and governance, which are not
        qualitatively different from the General Corporation Laws of the several
        states.
        Therefore, as a practical matter, a Foreign Invested Enterprise needs to
        retain
        or have ready access to a local Chinese law firm for routine compliance
        purposes.
 
 Similarly,
        the People’s Republic of China accounting laws mandate accounting practices,
        which are not co-existent with U.S. Generally Accepted Accounting Principles.
        The China accounting laws require that an annual "statutory audit" be performed
        in accordance with People's Republic of China accounting standards and that
        the
        books of account of Foreign Invested Enterprises are maintained in accordance
        with Chinese accounting laws. Article 14 of the People's Republic of China
        Wholly Foreign-Owned Enterprise Law requires a Wholly Foreign-Owned Enterprise
        to submit certain periodic fiscal reports and statements to designate Financial
        and tax authorities, at the risk of business license revocation. As a practical
        matter, a Foreign Invested Enterprise must retain a local Chinese accounting
        firm that has experience with both the Chinese standards and U.S. Generally
        Accepted Accounting Principles. This type of accounting firm can serve the
        dual
        function of performing the annual Chinese statutory audit and preparing the
        Foreign Invested Enterprise’s financial statements in a form acceptable for an
        independent U.S. certified public accountant to issue an audit report in
        accordance with Generally Accepted Accounting Auditing Standards.
 
 Second,
        while the enforcement of substantive rights may appear less clear than United
        States procedures, the Foreign Invested Enterprises and Wholly Foreign-Owned
        Enterprises are Chinese registered companies which enjoy the same status
        as
        other Chinese registered companies in business-to-business dispute resolution.
        All business disputes pertaining to Foreign Invested Enterprises are to be
        resolved by the Arbitration Institute of the Stockholm Chamber of Commerce
        in
        Stockholm, Sweden applying Chinese substantive law. Any award rendered by
        this
        arbitration tribunal is, by the express terms of the respective Articles
        of
        Association, enforceable in accordance with the "United Nations Convention
        on
        the Recognition and Enforcement of Foreign Arbitral Awards (1958)." Therefore,
        as a practical matter, although no assurances can be given, the Chinese legal
        infrastructure, while different in operation from its United States counterpart,
        should not present any significant impediment to the operation of Foreign
        Invested Enterprises.
 
 EARNINGS
        AND DISTRIBUTIONS OF THE FIE'S
 
 Wholly
        Foreign-Owned Enterprise laws provide for and guarantee the distribution
        of
        profits to foreign investors in Chinese Foreign Invested Enterprises. Article
        19
        of the People’s Republic of China Wholly Foreign Owned Enterprise Law provides
        that a foreign investor may remit abroad profits that are earned by a Foreign
        Invested Enterprise, as well as other funds remaining after the enterprise
        is
        liquidated.
 
 Because
        our Chinese businesses are controlled foreign corporations, for U.S. federal
        income tax purposes, we may be required to include in our gross income for
        U.S.
        tax purposes:
 
 ·
              Those
                  companies' "Subpart F" income, which includes certain passive income
                  and
                  income from certain transactions with related persons, whether
                  or not this
                  income is distributed to it; and
 
 ·
              Increases
                  in those companies' earnings invested in certain U.S.
                  property.
 
 Based
        on
        the current and expected income, assets, and operations of Chinese businesses,
        we believe that it will not have significant U.S. federal income tax
        consequences under the controlled foreign corporation rules.
 
 POLITICAL
        AND TRADE RELATIONS WITH THE UNITED STATES
 
 Political
        and trade relations between the United States and Chinese governments within
        the
        past five years have been volatile and may continue to be in the future.
        Major
        causes of volatility, the United States' considered revocation of China's
        Most
        Favored Nation trade status, illegal transshipments of textiles from China
        to
        the United States, issues surrounding the sovereignty of Taiwan, and the
        United
        States' bombing of the Chinese embassy in Yugoslavia, have had no direct
        connection to our operations; however, other on-going causes of volatility,
        including the protection of intellectual property rights within China and
        sensitive technology transfer from the United States to China have closer
        potential connection to our operations. There can be no assurance that the
        political and trade ramifications of these causes of volatility or the emergence
        of new causes of volatility will not cause difficulties in our operations
        in the
        China marketplace.
  10
 ECONOMIC
        REFORM ISSUES
 
 Although
        the majority of productive assets in China are owned by the Chinese government,
        in the past several years the government has implemented economic reform
        measures that emphasize decentralization and encourage private economic
        activity. Because these economic reform measures may be inconsistent or
        ineffectual, there are no assurances that:
 
 ·
              We
                  will be able to capitalize on economic
                  reforms;
 
 ·
              The
                  Chinese government will continue its pursuit of economic reform
                  policies;
 
 ·
              The
                  economic policies, even if pursued, will be
                  successful;
 
 ·
              Economic
                  policies will not be significantly altered from time to time;
                  and
 
 ·
              Business
                  operations in China will not become subject to the risk of
                  nationalization.
 
 Negative
        impact upon economic reform policies or nationalization could result in a
        total
        investment loss in our common stock.
 
 Since
        1978, the Chinese government has reformed its economic systems. Because many
        reforms are unprecedented or experimental, they are expected to be refined
        and
        improved. Other political, economic and social factors, such as political
        changes, changes in the rates of economic growth, unemployment or inflation,
        or
        in the disparities in per capita wealth between regions within China, could
        lead
        to further readjustment of the reform measures. This refining and readjustment
        process may negatively affect our operations.
 
 Over
        the
        last few years, China's economy has registered a high growth rate. Recently,
        there have been indications that rates of inflation have increased. In response,
        the Chinese government recently has taken measures to curb this excessively
        expansive economy. These measures have included devaluations of the Chinese
        currency, the Renminbi, restrictions on the availability of domestic credit,
        reducing the purchasing capability of certain of its customers, and limited
        re-centralization of the approval process for purchases of some foreign
        products. These austerity measures alone may not succeed in slowing down
        the
        economy’s excessive expansion or control inflation, and may result in severe
        dislocations in the Chinese economy. The Chinese government may adopt additional
        measures to further combat inflation, including the establishment of freezes
        or
        restraints on certain projects or markets. These measures may adversely affect
        our manufacturing company's operations.
 
 To
        date,
        reforms to China's economic system have not adversely impacted our manufacturing
        company's operations and are not expected to adversely impact operations
        in the
        foreseeable future; however, there can be no assurance that the reforms to
        China’s economic system will continue or that we will not be adversely affected
        by changes in China's political, economic, and social conditions and by changes
        in policies of the Chinese government, such as changes in laws and regulations,
        measures which may be introduced to control inflation, changes in the rate
        or
        method of taxation, imposition of additional restrictions on currency conversion
        and remittance abroad, and reduction in tariff protection and other import
        restrictions.
 
 CURRENCY
        CONVERSION AND EXCHANGE
 
 The
        currency in China is designated as the Renminbi. Although the Renminbi/United
        States dollar exchange rate has been relatively stable in the past five years
        there can be no assurance that the exchange rate will not become volatile
        or
        that the Renminbi will not be officially devalued against the United States
        dollar by direction of the Chinese government.
 
 Exchange
        rate fluctuations may adversely affect our financial performance because
        of our
        foreign currency denominated assets and liabilities, and may reduce the value,
        translated or converted, as applicable into United States dollars, of our
        net
        fixed assets, our earnings and our declared dividends. We do not engage in
        any
        hedging activities in order to minimize the effect of exchange rate
        risks.
 
 ENVIRONMENTAL
        COMPLIANCE
 
 Our
        Company is subject to the People's Republic of China's National Environmental
        Protection Law, which was enacted on December 26, 1989, as well as a number
        of
        other national and local laws and regulations regulating air, water, and
        noise
        pollution and setting pollutant discharge standards. Violation of such laws
        and
        regulations could result in warnings, fines, orders to cease operations,
        and
        even criminal penalties, depending on the circumstances of such violation.
        We
        believe that our manufacturing and other operations are in compliance with
        all
        applicable environmental laws, including those laws relating to air, water,
        and
        noise pollution. The Company believes that the cost of compliance with the
        applicable environmental laws does not have a material effect on the company’s
        capital expenditures, earnings or the Company’s competitive
        position.
 11
 
 RESEARCH
        AND DEVELOPMENT
 
 We
        believe that we will continue to refine and develop new energy savings products.
        For fiscal years 2005 through 2010, the Company expects to spend approximately
        $2,000,000 or an average of approximately $330,000 per year on research and
        development activities.
 
 EMPLOYEES
 
 As
        of the
        date of this filing, China Energy Savings, Inc. (the parent entity) has no
        full
        time employees, 11 part time employees and no long term consultants. We have
        3
        corporate officers, the Chief Executive Officer, Chief Financial Officer
        and the
        Corporate Secretary.
 
 Starway
        has no full time employees, 4 part time employees and no long term
        consultants.
 
 In
        addition, SDID employs approximately 230 full time employees and approximately
        2,300 part-time sales consultants and 7 long-term consultants. SDID does
        not
        bear the costs of such part-time sales consultants because they are compensated
        by commission on sales and distribution of the Company's products.
 
 The
        management of SDID is as follows:
 
 LIU
        TIAN
        FU
 
 Age
        40
        C.F.O. (CHIEF FINANCIAL OFFICER) is an economist who received his Master
        degree
        from University of Xiang Tan, Hunan Province. Prior to joining Dicken Hi-Tech
        Development, he worked as a financial analyst and advisor for International
        Financial Venture Capital Committee.
 
 YANG
        AN
        YONG
 
 Age
        42
        C.T.O. (CHIEF TECHNICAL OFFICER) is a professional engineer, graduated from
        Electronics Science University of Chang Du, Si-Chuang province. He has over
        12
        years R&D experience in high technology and in the energy saving industries.
        He joined Dicken Hi-Tech Development in September, 2002 as a Senior Software
        Engineering Manager.
 
 HUANG
        ZHI
 
 Age
        47
        (OFFICE MANAGER) has over 20 years experience in Public Relations and Human
        Resources. Graduated from University of Lao-ning Province, worked as a
        professional TV reporter. She has successfully worked over 6 years for HR
        department of Shenzhen City Government.
 
 IGOR
        SIZYKH
 
 Age
        44
        C.M.O. (CHIEF MARKETING OFFICER) is a highly motivated team player with 13
        years
        experience in management and supervision for automotive, international sales
        and
        franchise industries in Europe and Canada. He has proven ability to increase
        profitability through contract negotiations, developing new partnerships,
        strategic planning, and innovative marketing strategies. Mr. Sizykh has a
        Bachelor of Arts Degree in Economics and Commerce.
 
 None
        of
        our employees are under employment agreements.
  12
 AVAILABLE
        INFORMATION
 
 We
        are
        subject to the informational requirements of the Securities Exchange Act
        of
        1934. Accordingly, we file annual, quarterly and other reports and information
        with the Securities and Exchange Commission. You may read and copy these
        reports
        and other information we file at the Securities and Exchange Commission's
        public
        reference rooms in Washington, D.C., New York, New York, and Chicago, Illinois.
        You may obtain information on the operation of the Public Reference Room
        by
        calling the SEC at 1-800-SEC-0330. Our filings are also available to the
        public
        from commercial document retrieval services and the Internet worldwide website
        maintained by the Securities and Exchange Commission at www.sec.gov .
        Public
        information (including reports we file with the SEC pursuant to Section 13(a)
        or
        15(d) of the Exchange Act) concerning the Company is also made available
        through
        our website at: www.cesv-inc.com.
 
 **ITEM
        1A.**  **RISK
        FACTORS**
 
 A
        DROP IN
        THE RETAIL PRICE OF ELECTRICAL ENERGY MAY HAVE A NEGATIVE AFFECT ON THE
        COMPANY'S BUSINESS.
 
 A
        customer's decision to purchase the Company's products is primarily driven
        by
        the payback on the investment resulting from the increased energy savings.
        Although management believes that current retail energy prices support an
        attractive return on investment for the Company's products, there can be
        no
        assurances that future retail pricing of electrical energy will remain at
        such
        levels.
 
 THERE
        CAN
        BE NO ASSURANCE THAT THE COMPANY CAN KEEP UP WITH THE RAPID TECHNOLOGICAL
        CHANGE
        IN THE ENERGY SAVING PRODUCTION INDUSTRY.
 
 Although
        the Company is developing and marketing its products with what it believes
        is
        state-of-the art technology, there can be no assurance that new technologies
        that supersede the Company's technologies will not be developed. As new
        technologies are developed, the Company may need to adapt and change its
        products and services, its method of marketing or delivery or alter its current
        business in ways that may adversely affect revenue and its ability to achieve
        its proposed business goals.
 
 THE
        COMPANY MUST CONTINUALLY RESEARCH AND DEVELOP NEW TECHNOLOGIES AND PRODUCTS
        TO
        REMAIN COMPETITIVE.
 
 To
        achieve its strategy and obtain market share, the Company will need to
        continually research, develop and refine new technologies and offer new
        products. Many factors may limit the Company's ability to develop and refine
        new
        products, including access to new products and technologies, as well as
        marketplace resistance to new products and technology.
 
 THE
        COMPANY MUST ATTRACT AND RETAIN HIGHLY SKILLED AND MOTIVATED EMPLOYEES TO
        SUCCESSFULLY MANAGE ITS GROWTH AND COMPETE IN THE MARKETPLACE.
 
 The
        Company's ability to manage its growth and operations going forward will
        depend
        on, among other things: expanding, training and managing its employee base,
        including attracting, retaining and motivating highly skilled personnel;
        developing or outsourcing its customer interface, operations, administration
        and
        maintenance systems; and controlling its expenses. The Company cannot assure
        that it will succeed in developing all or any of these
        capabilities.
 
 THE
        COMPANY'S CURRENT STOCKHOLDERS EXERCISE SUBSTANTIAL CONTROL AND MAY MAKE
        DECISIONS THAT YOU DO NOT CONSIDER TO BE IN YOUR BEST INTERESTS.
 
 Currently,
        the Company's executive officers and one shareholder beneficially own in
        the
        aggregate approximately 63% of the outstanding Common Stock. It is expected
        that
        these individuals will maintain a majority control of the Company. As a result,
        these stockholders, acting together, will be able to exercise control over
        all
        matters requiring approval of the stockholders of the Company.
 
 OUR
        STOCK
        PRICE IS HIGHLY VOLATILE
  The
        trading price of our common stock has fluctuated significantly. Our stock
        price
        could be subject to wide fluctuations in the future in response to many events
        or factors, including those discussed in the preceding risk factors relating
        to
        our operations, as well as:
 ·
                actual
                    or anticipated fluctuations in operating results, actual or anticipated
                    gross profit as a percentage of net sales, levels of inventory,
                    our actual
                    or anticipated rate of growth and our actual or anticipated earnings
                    per
                    share;
 
 ·
                changes
                    in expectations as to future financial performance or changes
                    in financial
                    estimates or buy/sell recommendations of securities analysts;
 
 ·
                changes
                    in governmental regulations or policies in China;
   13
  
 ·
                our,
                    or a competitor’s, announcement of new products, services or technological
                    innovations;
 
 ·
                the
                    operating and stock price performance of other comparable companies;
                    and
 
 ·
                news
                    and commentary emanating from the media, securities analysts
                    or government
                    bodies in China relating to us and to the industry in general.
  General
        market conditions and domestic or international macroeconomic factors unrelated
        to our performance may also affect our stock price. For these reasons, investors
        should not rely on recent trends to predict future stock prices or financial
        results. In addition, following periods of volatility in a company’s securities,
        securities class action litigation against a company is sometimes instituted.
        This type of litigation could result in substantial costs and the diversion
        of
        management’s time and resources.
 
 PAST
        ACTIVITIES OF THE COMPANY AND ITS AFFILIATES MAY LEAD TO FUTURE LIABILITY
        FOR
        THE COMPANY.
 
 Prior
        to
        the acquisition of Starway, the Company engaged in businesses unrelated to
        its
        current operations. Although the major shareholders of the Company prior
        to the
        acquisition of Starway indemnified Rim Holdings against any loss, liability,
        claim, damage or expense arising out of or based on any breach of or inaccuracy
        in any of their representations and warranties made regarding such acquisition,
        any liabilities relating to such prior business against which the Company
        is not
        completely indemnified may have a material adverse effect on the
        Company.
 
 RISKS
        RELATED TO DOING BUSINESS IN THE PRC
 
 ADVERSE
        CHANGES IN ECONOMIC AND POLITICAL POLICIES OF THE PRC GOVERNMENT COULD HAVE
        A
        MATERIAL ADVERSE EFFECT ON THE OVERALL ECONOMIC GROWTH OF CHINA, WHICH COULD
        ADVERSELY AFFECT OUR BUSINESS.
  All
        of
        our business operations are conducted in China. Accordingly, our results
        of
        operations, financial condition and prospects are subject to a significant
        degree to economic, political and legal developments in China. China’s economy
        differs from the economies of most developed countries in many respects,
        including with respect to the amount of government involvement, level of
        development, growth rate, control of foreign exchange and allocation of
        resources. While the PRC economy has experienced significant growth in the
        past
        20 years, growth has been uneven across different regions and among various
        economic sectors of China. The PRC government has implemented various measures
        to encourage economic development and guide the allocation of resources.
        Some of
        these measures benefit the overall PRC economy, but may also have a negative
        effect on us. For example, our financial condition and results of operations
        may
        be adversely affected by government control over capital investments or changes
        in tax regulations that are applicable to us. Since early 2004, the PRC
        government has implemented certain measures to control the pace of economic
        growth. Such measures may cause a decrease in the level of economic activity
        in
        China, which in turn could adversely affect our results of operations and
        financial condition.
 
 FUTURE
        FLUCTUATION IN THE VALUE OF THE RENMINBI MAY NEGATIVELY AFFECT THE COMPANY'S
        ABILITY TO CONVERT ITS RETURN ON OPERATIONS TO U.S. DOLLARS IN A PROFITABLE
        MANNER AND ITS SALES GLOBALLY.
 
 Until
        1994, the Renminbi experienced a gradual but significant devaluation against
        most major currencies, including U.S. dollars, and there was a significant
        devaluation of the Renminbi on January 1, 1994 in connection with the
        replacement of the dual exchange rate system with a unified managed floating
        rate foreign exchange system. Since 1994, the value of the Renminbi relative
        to
        the U.S. Dollar has remained stable and has appreciated slightly against
        the
        U.S. dollar. On July 21, 2005, the PRC government changed its decade-old
        policy
        of pegging the value of the RMB to the U.S. dollar. Under the new policy,
        the
        RMB is permitted to fluctuate within a narrow and managed band against a
        basket
        of certain foreign currencies. This change in policy has resulted in an
        approximately 2.0% appreciation of the RMB against the U.S. dollar. While
        the
        international reaction to the RMB revaluation has generally been positive,
        there
        remains significant international pressure on the PRC government to adopt
        an
        even more flexible currency policy, which could result in a further and more
        significant revaluation of the RMB against the U.S. dollar. Any significant
        revaluation of RMB may be attributable to adjustments resulting from the
        translation of the Company’s financial statements, which will be recorded as
        part of accumulated comprehensive income in shareholders’ equity.
 
 If
        any
        devaluation of the Renminbi were to occur in the future, the Company's returns
        on its operations in China, which are expected to be in the form of Renminbi,
        will be negatively affected upon conversion to U.S. dollars. The Company
        attempts to have most future payments, mainly repayments of loans and capital
        contributions, denominated in U.S. dollars. If any increase in the value
        of the
        Renminbi were to occur in the future, the sales of the Company's products
        in
        China and in other countries may be negatively affected.
  14
 **ITEM
        1B.**  **UNRESOLVED
        STAFF COMMENTS**
 
 None.
 
 **ITEM
        2.**  **DESCRIPTION
        OF PROPERTY**
 
 During
        the last quarter of fiscal year 2005, we rented office space in Hong Kong
        at a
        rate of $7,800 per month. Our lease expires in September 2006.
 
 SDID
        owns
        an old factory that is currently leased to an unrelated third party. This
        was
        SDID's old manufacturing factory which it has outgrown. The old factory is
        approximately 405.27 square meters and is located at Baoan District, Shenzhen
        City, Guangdong Province, China. SDID also owns two residential units, one
        is
        approximately 179 square meters located at Nanshan District, Shenzhen City,
        Guangdong Province, China and the other one is approximately 139 square meters
        located at Futian District, Shenzhen City, Guangdong Province, China). These
        residential units are used by Mr. Cheng, SDID's President and to house certain
        expatriate technicians.
 
 SDID's
        operates out of leased office and factory space that is approximately 2,200
        square meters and is located at Block 3, 30 Shenzhen Hi-Tech Zone Centre
        Road,
        Shenzhen City, Guangdong Province, China. SDID pays approximately US$58,000
        per
        year in rent for such space. The lease for such space is for a term of 5
        years.
 
 We
        do not
        anticipate investing in real estate or interests in real estate, real estate
        mortgages, or securities of or interests in persons primarily engaged in
        real
        estate activities. We currently have no formal investment policy, and we
        do not
        intend to undertake investments in real estate as a part of our normal
        operations.
 
 **ITEM
        3.**  **LEGAL
        PROCEEDINGS**
 
 We
        are
        not aware of any material pending legal proceedings involving us, Starway
        or its
        subsidiaries.
 
 **ITEM
        4.**  **SUBMISSION
        OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 No
        matters were submitted to a vote of our security holders during the last
        quarter
        of the fiscal year ended September 30, 2005.
 
 
 **PART
        II**
 
 **ITEM
        5.**  **MARKET
        FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
        MATTERS**
 
 The
        Common Stock was quoted on Nasdaq National Market as of April 21, 2005. The
        following table sets forth the high and low bid information for the Common
        Stock
        for each quarter within the last two fiscal years.
 
 QUARTERLY
        COMMON STOCK PRICE RANGES
 
 QUARTER
                  ENDED
              HIGH
              LOW2003/2004December
                  31, 2003
              $3.60
              $1.00March
                  31, 2004
              $5.40
              $0.80June
                  30, 2004
              $5.80
              $1.40September
                  30, 2004
              $20.00
              $4.202004/2005December
                  31, 2004
              $
                  28.28
              $
                  11.00March
                  31, 2005
              $
                  17.00
              $
                  8.00June
                  30, 2005
              $
                  15.70
              $
                  8.40September
                  30, 2005
              $
                  10.13
              $
                  6.01
 
 **
        Note:
        All prices adjusted to take into account of the 1 for 20 reverse stock split
        that took effect on August 25, 2004.
  15
 These
        quotations reflect inter-dealer prices, without retail mark-up, mark-down
        or
        commission and may not represent actual transactions. As of December 14,
        2005,
        there were approximately 568 stockholders of record of our Common Stock and
        no
        stockholders of record of our Preferred Stock.
 
 DIVIDEND
        POLICY
 
 We
        have
        never paid any dividends on the Common Stock. We currently anticipate that
        any
        future earnings will be retained for the development of our business and
        do not
        anticipate paying any dividends on the Common Stock in the foreseeable
        future.
 
 On
        September 8, 2004, we established the 2004 Equity Incentive Plan ("2004 Plan")
        with 1,200,000 shares approved and subject to the 2004 Plan. The purpose
        of the
        Plan is to grant stock and stock options to purchase our common stock to
        our
        employees and key consultants. On September 17, 2004, we filed a registration
        statement on Form S-8 registering all 1,200,000 shares.
 
 SECURITIES
        AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
  Equity
        Compensation Plan Information
 
 Plan
                  Category
              
              Number
                  of securities to be issued upon exercise of outstanding options,
                  warrants
                  and rights
              
              Weighted-average
                  exercise price of outstanding options, warrants and rights
              
              Number
                  of securities remaining available for future issuance under equity
                  compensation plansEquity
                  compensation plans approved by security holders
              
              None
              
              -
                  -
                  -
              
              NoneEquity
                  compensation plans not approved by security holders
              
              1,200,000
                  (1)
              
              -
                  -
                  -
              
              0
                  (1)Total
              
              1,200,000
              
              -
                  -
                  -
              
              0
  
 (1)
              In
                  September 2004, we established the 2004 Equity Incentive Plan ("2004
                  Plan") with 1,200,000 shares approved and subject to the 2004 Plan.
                  The
                  Board of Directors or a Committee comprised of a member or members
                  of the
                  Board has full authority to administer the 2004 Plan, including
                  but not
                  limited to, the authority to designate eligible persons, grant
                  awards,
                  interpret the Plan and delegate to one or more executive officers
                  of the
                  Company the authority to grant an Award under this Plan to Participants
                  who are not Insiders of the Company. The maximum number of shares
                  that may
                  be issued under the Plan is 1,200,000 shares of our common stock.
                  On
                  September 16, 2004, the Company issued 620,000 shares to a certain
                  qualifying employees and 10,000 shares to non-employee consultants
                  for
                  services rendered under the Plan. In October and November 2004,
                  the
                  Company issued 470,000 shares to non-employee consultants of its
                  common
                  stock at $11.00 and $13.15 per share. The total shares were valued
                  at
                  $5,256,000, the closing price of the stock at the date the shares
                  were
                  issued. On April 15, 2005, the Company issued 100,000 shares to
                  non-employee consultants and an employee of its common stock at
                  10.00 a
                  share for services performed. The total shares were valued at $996,697.
 
 SALES
        OF
        UNREGISTERED SECURITIES
  In
        February 2004 we issued 2,500,000 restricted common stock shares to our legal
        counsel in conversion of $50,000 of accrued legal services and future legal
        services in connection with our acquisition of Starway. In February 2004
        we also
        issued 4,000,000 restricted common stock shares to our Chairman in conversion
        of
        $80,000 of accrued salary. We relied upon the exemption from registration
        as set
        forth in Section 4(2) of the Securities Act of 1933 for the issuance of these
        shares. The investors took their shares for investment purposes without a
        view
        to distribution and had access to information concerning the Company and
        our
        business prospects, as required by the Securities Act. In addition, there
        was no
        general solicitation or advertising for the purchase of our shares. All
        certificates for our shares contain a restrictive legend.
 
 On
        August
        25, 2004, the Company issued 11,451,336 shares of common stock, in the
        aggregate, to EuroFaith Holdings, Inc.'s assignees and 3 individuals pursuant
        to
        a conversion of outstanding convertible notes held by EuroFaith Holdings,
        Inc.
        and the 3 individuals. We relied upon the exemption from registration as
        set
        forth in Section 4(2) of the Securities Act of 1933 for the issuance of these
        shares. The investors took their shares for investment purposes without a
        view
        to distribution and had access to information concerning the Company and
        our
        business prospects, as required by the Securities Act. In addition, there
        was no
        general solicitation or advertising for the purchase of our shares. All
        certificates for our shares contain a restrictive legend.
  16
 In
        November, 2004, the Company issued 4,683 shares of common stock to our legal
        counsel in conversion of $29,740 of accrued legal services. We relied upon
        the
        exemption from registration as set forth in Section 4(2) of the Securities
        Act
        of 1933 for the issuance of these shares. The investors took their shares
        for
        investment purposes without a view to distribution and had access to information
        concerning the Company and our business prospects, as required by the Securities
        Act. In addition, there was no general solicitation or advertising for the
        purchase of our shares. All certificates for our shares contain a restrictive
        legend.
 
 In
        November, 2004, the Company issued 3,346,100 shares of common stock, in the
        aggregate, to EuroFaith Holdings, Inc., which represented that it is an
        accredited investors as part of the acquisition of a 15% interest in Starway.
        We
        relied upon the exemption from registration as set forth in Section 4(2)
        of the
        Securities Act of 1933, as amended for the issuance of these shares. The
        investors took their shares for investment purposes without a view to
        distribution and had access to information concerning the Company and our
        business prospects, as required by the Securities Act. In addition, there
        was no
        general solicitation or advertising for the purchase of our shares. All
        certificates for our shares contain a restrictive legend.
 
 In
        February, 2005, the Company issued 7,807,569 shares of common stock to Sky
        Beyond, which represented that it is an accredited investors as part of the
        acquisition of the remaining 35% interest in Starway. This transaction was
        effected under an exemption to registration pursuant to Section 4(2) of the
        Securities Act of 1933, as amended. The recipients of the securities in the
        above-described transaction represented their intention to acquire the
        securities for investment only and not with a view to or for sale in connection
        with any distribution thereof and appropriate legends were affixed to the
        share
        certificate and other instruments issued in such transaction.
  **ITEM
        6.**  **SELECTED
        FINANCIAL DATA**
 
 Prior
        to
        the acquisition, the Company’s subsidiaries reporting year end was December 31.
        However Rim Holdings, Inc.’s reporting year ended was September 30. In order to
        be consistent with Rim’s reporting year end, the Company’s Board of Directors
        approved all of their subsidiaries’ fiscal year end change from December 31 to
        September 30. Effective September 30, 2004, we changed our subsidiaries’ fiscal
        years from December 31 to September 30.
 
 The
        following tables summarize data from the Company’s financial statements for the
        fiscal years 2002 through 2003 and reflects the transition and comparative
        periods and notes thereto. The Company’s complete annual financial statements
        and notes thereto for the current fiscal year appear in item 8 herein. See
        Management’s Discussion and Analysis for discussion of non-recurring items that
        affect the comparability of results between periods.
  Year
                    Ended December 31Year
                    Ended September 30, 2005
                
                Nine
                    Month Period Ended September 30, 2004
                
                2004
                
                2003
                
                2002
                
                Nine
                    Months Ended September 30, 2003Audited
                
                Audited
                
                Unaudited
                
                Audited
                
                Audited
                
                UnauditedConsolidated
                    Statement of Operations Data:Total
                    revenue
                
                $
                48,388,076
                
                $
                30,997,070
                
                $
                42,705,760
                
                $
                31,057,877
                
                $
                7,914,658
                
                $
                19,556,412Gross
                    margin
                
                
                28,459,369
                
                
                19,356,097
                
                
                26,173,379
                
                
                11,309,614
                
                
                2,924,861
                
                
                7,255,895Income
                    from operations
                
                
                23,575,240
                
                
                8,969,430
                
                
                14,202,173
                
                
                9,170,586
                
                
                1,800,765
                
                
                5,983,814Income
                    before income taxes and minority interest
                
                
                25,674,662
                
                
                11,196,652
                
                
                16,774,783
                
                
                10,787,761
                
                
                2,188,967
                
                
                6,817,929Credit
                    (provision) for income taxes
                
                
                –
                
                
                4,853,332
                
                
                –
                
                
                (1,879,896
                )
                
                (401,086
                )
                
                (1,200,925
                )Minority
                    interest
                
                
                3,258,783
                
                
                12,025,492
                
                
                14,745,345
                
                
                4,453,933
                
                
                893,940
                
                
                2,808,502Net
                    Income
                
                $
                22,415,879
                
                $
                4,024,492
                
                $
                2,029,438
                
                $
                4,453,932
                
                $
                893,941
                
                $
                2,808,502Net
                    Income per share:basic
                    and diluted
                
                $
                1.04
                
                $
                0.36
                
                $
                0.40
                
                $
                0.4
                
                $
                0.08
                
                $
                0.41Weighted
                    average common shares outstanding:basic
                    and diluted
                
                
                21,524,371
                
                
                11,327,720
                
                
                5,016,195
                
                
                11,153,669
                
                
                11,153,669
                
                
                6,920,660
  As
                      of September 30,
                  
                  As
                      of December 31,Consolidated
                      Balance Sheet Data:
                  
                  2005
                  
                  2004
                  
                  2004
                  
                  2003
                  
                  2002Cash,
                      cash equivalents and short and long-term investments
                  
                  $
                  30,926,619
                  
                  $
                  18,442,862
                  
                  $
                  26,826,870
                  
                  $
                  21,165
                  
                  $
                  48,961Working
                      capital
                  
                  
                  42,377,400
                  
                  
                  28,938,792
                  
                  
                  35,889,769
                  
                  
                  (704,180
                  )
                  
                  344,207Total
                      assets
                  
                  
                  74,705,974
                  
                  
                  44,262,480
                  
                  
                  52,039,738
                  
                  
                  21,106,000
                  
                  
                  7,820,156Long
                      term debt
                  
                  
                  –
                  
                  
                  7,895
                  
                  
                  12,975
                  
                  
                  17,440
                  
                  
                  –Total
                      stockholders equity
                  
                  
                  66,341,777
                  
                  
                  18,662,907
                  
                  
                  28,389,880
                  
                  
                  6,619,087
                  
                  
                  1,874,188
 
 17
  **ITEM
          7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
          OPERATION**
 
 The
        following discussion of our financial condition and results of operations
        of
        should be read in conjunction with the financial statements and related notes
        thereto. The following discussion contains certain forward-looking statements
        that involve risks and uncertainties. Our actual results could differ materially
        from those discussed herein. We undertake no obligation publicly to release
        the
        results of any revisions to these forward-looking statements that may be
        made to
        reflect any future events or circumstances.
 
 OVERVIEW
 
 We
        are a
        holding company that invests in, develops, markets, distributes and manufactures
        energy saving products for use in commercial and industrial settings. All
        of our
        revenues are derived from our ownership interest in Starway which owns all
        of
        the equity interests in SDID which in turns owns all of the equity interest
        in
        SDID. The holding company itself does not independently generate any
        revenues.
 
 Our
        financial statements are consolidated with those of Starway and its
        subsidiaries. Starway's subsidiaries, SDID and SDID develops, markets
        distributes and manufactures energy saving products for use in commercial
        and
        industrial settings in China.
 
 CRITICAL
        ACCOUNTING POLICIES
 
 Our
        management's discussion and analysis of its financial condition and results
        of
        operations are based upon our consolidated financial statements, which have
        been
        prepared in accordance with accounting principles generally accepted in the
        United States. Our financial statements reflect the selection and application
        of
        accounting policies which require management to make significant estimates
        and
        judgments. See note 1 to the Company's consolidated financial statements,
        "Summary of Significant Accounting Policies." Our management bases their
        estimates on historical experience and on various other assumptions that
        are
        believed to be reasonable under the circumstances. Actual results may differ
        substantially from these estimates under different assumptions or conditions.
        We
        believe that the following reflect the more critical accounting policies
        that
        currently affect our financial condition and results of operations.
 
 Revenue
        and Deferred Revenue Recognition
 
 We
        recognize product sales under the following two types of contracts:
 
 1)
              Equipment
                  sale contract - Under the Equipment sale contract, we recognize
                  revenue
                  when persuasive evidence of an arrangement exists, the sales price
                  to the
                  buyer is fixed or determinable, collectability is reasonably assured,
                  delivery has occurred and accepted by the
                  buyers.
 
 2)
              Energy
                  savings Sharing contract - Under this contract, we grant customers
                  extended payment terms under contracts of sale. These contracts
                  are
                  generally for a period of one to five years at prevailing interest
                  rates
                  and are collateralized by the related equipment, which if repossessed,
                  may
                  be less than the receivable balance outstanding. We recognize revenue
                  under profit sharing agreements when the amounts are fixed and
                  determinable and collectability is reasonably assured. Amounts
                  received by
                  us in excess of the original estimated cost savings on the contract
                  is
                  recorded as interest income.
 
 NOTES
        RECEIVABLE
 
 We
        carry
        our notes receivable at the net present value of the notes, net of allowance
        for
        doubtful accounts.
 
 FISCAL
        YEAR END
 
 The
        Company changed its fiscal year end from December 31 to September
        30
        effective September 30, 2004; and, therefore, the Company reported a nine-month
        Transition Period ended September 30, 2004. The following table describes
        the
        periods presented in the Management's Discussion and Analysis of Financial
        Condition and Results of Operations and in the condensed consolidated financial
        statements and related notes thereto:
 Period
                
                Referred
                    to as:Audited
                    results from October 1, 2004 through September 30,
                    2005
                
                Fiscal
                    Year 2005Unaudited
                    results from October 1, 2003 Through September 30,
                    2004
                
                Twelve
                    month comparative periodAudited
                    results from January 1, 2004 through September 30,
                    2004
                
                Transition
                    PeriodUnaudited
                    results from January 1, 2003 through September 30,
                    2003
                
                Nine
                    Month Comparative periodAudited
                    results from January 1, 2003 through December 31, 2003
                
                Year
                    2003Audited
                    results from January 1, 2002 through December 31, 2002
                
                Year
                    2002
 
 
 18
 
 RESULTS
            OF OPERATIONS
 
 General
            Results of Operations for the Twelve Months Ended September 30, 2005
            and the
            Twelve Months Ended September 30, 2004:
  TWELVE
                      MONTHS ENDED SEPTEMBER 30
                  
                  2005
                  
                  2004
                  
                  CHANGERevenues
                  
                  
                  48,388,076
                  
                  
                  42,498,535
                  
                  
                  14
                  %Cost
                      of goods sold
                  
                  
                  19,928,707
                  
                  
                  19,088,719
                  
                  
                  4
                  %Gross
                      profit
                  
                  
                  28,459,369
                  
                  
                  23,409,816
                  
                  
                  22
                  %Gross
                      profit margin
                  
                  
                  59
                  %
                  
                  55
                  %Operating
                      expenses
                  
                  
                  4,884,129
                  
                  
                  11,253,614
                  
                  
                  (57
                  %)Other
                      income
                  
                  
                  2,099,422
                  
                  
                  3,010,282
                  
                  
                  (30
                  %)Net
                      income before income tax and minority interest
                  
                  
                  25,674,662
                  
                  
                  15,166,484
                  
                  
                  69
                  %Net
                    Income
                  
                  
                  22,415,879
                  
                  
                  5,669,922
                  
                  
                  295
                  %
 
 
 19
 General
            Results of Operations of Starway for the Twelve Months Ended December
            31, 2003
            and Twelve Months Ended December 31, 2002:
 
 TWELVE
                      MONTHSENDED
                      DECEMBER 31
                  
                  Audited2003
                  
                  Audited2002
                  
                  CHANGERevenues
                  
                  
                  31,057,877
                  
                  
                  7,914,658
                  
                  
                  292
                  %Cost
                      of goods sold
                  
                  
                  19,748,263
                  
                  
                  4,989,797
                  
                  
                  296
                  %Gross
                      profit
                  
                  
                  11,309,614
                  
                  
                  2,924,861
                  
                  
                  287
                  %Gross
                      profit margin
                  
                  
                  36
                  %
                  
                  37
                  %Operating
                      expenses
                  
                  
                  2,139,028
                  
                  
                  1,124,096
                  
                  
                  90
                  %Other
                      income
                  
                  
                  1,617,175
                  
                  
                  388,202
                  
                  
                  317
                  %Income
                        before minority interest
                  
                  
                  8,907,865
                  
                  
                  1,787,881
                  
                  
                  398
                  %Net
                      Income
                  
                  
                  4,453,932
                  
                  
                  893,941
                  
                  
                  398
                  %
 
 General
            Results of Operations for the Nine Months Ended September 30, 2004 and
            Nine
            Months Ended September 30, 2003:
  NINE
                      MONTHSENDED
                      SEPTEMBER 30
                  
                  Audited2004
                  
                  Unaudited2003
                  
                  CHANGERevenues
                  
                  
                  30,997,070
                  
                  
                  19,556,412
                  
                  
                  59
                  %Cost
                      of goods sold
                  
                  
                  11,640,973
                  
                  
                  12,300,517
                  
                  
                  (5
                  %)Gross
                      profit
                  
                  
                  19,356,097
                  
                  
                  7,255,895
                  
                  
                  167
                  %Gross
                      profit margin
                  
                  
                  62
                  %
                  
                  37
                  %Operating
                      expenses
                  
                  
                  10,386,667
                  
                  
                  1,272,081
                  
                  
                  717
                  %Other
                      income
                  
                  
                  2,227,222
                  
                  
                  834,115
                  
                  
                  167
                  %Net
                      income
                  
                  
                  4,024,492
                  
                  
                  2,808,502
                  
                  
                  43
                  %
 
 NET
            INCOME
 
 Our
            net
            income for the twelve months ended September 30, 2005 and twelve months
            ended
            September 30, 2004 was $22,415,879 and $5,669,922, respectively. Our
            net income
            for the twelve months ended December 31, 2003 and December 31, 2002 was
            $4,453,932 and $893,941 respectively. Our net income for the nine months
            ended
            September 30, 2004 and September 30, 2003 was $4,024,492 and $2,808,502,
            respectively. Our net income for the twelve months ended September 30,
            2005
            increased by approximately 295% when compared to our net income for the
            twelve
            months ended September 30, 2004. Our net income for the twelve months
            ended
            December 31, 2003 increased by approximately 398% when compared to our
            net
            income for the twelve months ended December 31, 2002. Our net income
            for the
            nine months ended September 30, 2004 increased by approximately 43% when
            compared to our net income for the nine months ended September 30, 2003.
            Such
            significant increases in net income were due to a significant increase
            in
            revenues and gross profit during such periods as further discussed below.
            The
            net income for the year ended September 30, 2005 in the consolidated
            financial
            statements of the Company is $22,415,879. During the quarter of December
            31,
            2004, 35% of the minority group was acquired while the Company was holding
            65%
            of Starway. Since in September 30, 2005, the Company holds 100% interest
            in
            Starway, hence the total net income for the year ended September 30,
            2005 should
            be $25,674,662, from the point of view of the group earning power as
            a whole
            inclusive the minority interest.
   20
 REVENUES
 
 Our
            revenues are derived primarily from SDID's sales of its energy savings
            products
            and entering into energy savings sharing contracts. Revenues for the
            twelve
            months ended September 30, 2005 were $48,388,076, a net increase of
            approximately 14% compared with revenues of $42,498,535 for the twelve
            months
            ended September 30, 2004. During the year ended December 31, 2003, we
            had
            revenues of $31,057,877 as compared to revenues of $7,914,658 during
            the year
            ended December 31, 2002, an increase of approximately 292%. Revenues
            for the
            nine months ended September 30, 2004 were $30,997,070, a net increase
            of
            approximately 59% compared with revenues of $19,556,412 for the nine
            months
            ended September 30, 2003. The increase in revenues reflects strong sales
            growth
            in SDID's energy savings products, and was the result of increased unit
            sales
            and the Company entering into more energy savings sharing contracts.
            We note
            that SDID’s energy savings products were first introduced to the market only in
            July 2002. Since there were only 6 months of sales in 2002 and many of
            the
            products that were sold in 2002 were on a trial basis, revenue for 2002
            was
            substantially lower than for 2003 and 2004. Our management expects that
            revenue
            will continue to grow in 2006 because of our continuing marketing and
            sales
            efforts, high fuel price and strong demand for our products due to electricity
            shortages in many parts of China. Further, our management believes that
            we will
            be able to maintain our price levels due to strong demand and a lack
            of strong
            competitive products. While our products may be used internationally,
            we
            currently have focused our sales efforts in China, targeting large businesses
            and local governments. Management hopes to continue to increase our market
            share
            in China.
  GROSS
            PROFIT
 
 We
            had a
            gross profit of $28,459,369 and $23,409,816 for the twelve months ended
            September 30, 2005 and 2004, respectively, achieving a 22% increase.
            Gross
            profit was $11,309,614 for the year ended December 31, 2003 as compared
            to
            $2,924,861 for the year ended December 31, 2002, achieving a 287% increase.
            We
            had a gross profit of $19,356,097 and $7,255,895 for the nine months
            ended
            September 30, 2004 and September 30, 2003, respectively, achieving a
            167%
            increase.  For
            twelve months ended September 30, 2005 and 2004, our gross profit margin
            increased from approximately 55% to 59% . 
            The
            Company was selling their products through one time direct sales with
            an
            average gross profit of 75% last year. In 2005, it shifted
            its
            business model from direct sales to savings sharing contracts
            on a 5-7
            yearly basis with the average gross profit down to a
            range of 50%
            - 60%. Yet in the long run, the Company has 5 to 7 years of income receivable
            from savings sharing contracts.
   OPERATING
            EXPENSES
 
 Below
            is
            a breakdown comparison of the operating expenses for the twelve months
            ended
            September 30, 2005 and twelve months ended September 30, 2004:
 
 
 TWELVE
                      MONTHSENDED
                      SEPTEMBER 30
                  
                  Audited2005
                  
                  Unaudited2004
                  
                  CHANGEOperating
                      expenses
                  
                  
                  1,996,375
                  
                  
                  1,593,044
                  
                  
                  25
                  %Sales
                        and marketing expenses
                  
                  
                  164,219
                  
                  
                  602,850
                  
                  
                  (73
                  %)General
                      administrative expenses
                  
                  
                  2,723,535
                  
                  
                  9,057,690
                  
                  
                  (70
                  %)Total
                      operating expenses
                  
                  
                  4,884,129
                  
                  
                  11,253,614
                  
                  
                  (57
                  %)
 
 There
            was
            a 57% decrease of total operating expenses from $11,253,614 to $4,884,129
            for
            the twelve months ended September 30, 2004 and September 30, 2005, respectively.
            The large decrease in total operating expense for the year ended September
            30,
            2005 was substantially due to our adoption of our Equity Incentive Plan
            in the
            twelve months ended September 30, 2004, and our issuance of 620,000 shares
            of
            our common stock in accordance with the plan to our employees and consultants
            with a value of $8,001,000 ($12.70 per share) which was included in the
            general
            administrative expenses in the twelve months ended September 30, 2004
            and as an
            increase in paid-in capital in our financial statements. Such stock was
            used to
            compensate many of our employees and consultants who have helped us in
            our early
            development stage but were not fairly compensated due to our lack of
            resources
            at the time. However, this stock issuance was a special one-time event
            in 2004,
            which did not occur in 2005, and thus there was a significant decrease
            in total
            operating expenses for 2005.
 
 
 21
 OTHER
            INCOME
 
 We
            had
            other income of $2,099,422 for the twelve months ended September 30,
            2005, as
            compared to $3,010,282 for the twelve months ended September 30, 2004.
            The
            decrease of approximately 30% was due to the decrease in interest income
            earned
            during the year.
 LIQUIDITY
              AND CAPITAL RESOURCES
 TWELVE
                      MONTHSENDED
                      SEPTEMBER 30
                  
                  Audited2005
                  
                  Unaudited2004
                  
                  CHANGENet
                      cash provided by (used in)
                      operating activities
                  
                  
                  12,975,555
                  
                  
                  18,311,000
                  
                  
                  (5,335,445
                  )Net
                        cash provided by (used in) investing
                        activities
                  
                  
                  (1,879,047
                  )
                  
                  104,934
                  
                  
                  (1,983,981
                  )Net
                        cash (used in) providedby financing activities
                  
                  
                  (8,820
                  )
                  
                  (72,986
                  )
                  
                  (81,806
                  )
  The
            decrease of $5,335,445 in net cash provided by operating activities primarily
            reflects an increase in long-term notes receivable for the twelve months
            ended
            September 30, 2005.
 
 The
            increase of $1,983,981 in net cash used in investing activities was due
            to the
            increase in long-term loan receivable during the year.
 
 The
            decrease of $81,806 in net cash used in financing activities was due
            to less
            repayment for loans during the twelve months ending September 30,
            2005.
 
 We
            believe that we have adequate capital resources to continue our operations
            and
            will not need to raise capital in the near future. We believe that our
            current
            cash balance and the revenues that will be generated will cover anticipated
            operating expenses for a period of at least one year without supplementing
            our
            cash reserves.
 
 
 MANAGEMENT
            ASSUMPTIONS
 
 Management
            anticipates, based on internal forecasts and assumptions relating to
            our current
            operations that existing cash and funds generated from operations will
            be
            sufficient to meet working capital for at least the next 12 months. In
            the event
            that plans change, our assumptions change or prove inaccurate or if other
            capital resources and projected cash flow otherwise prove to be insufficient
            to
            fund operations (due to unanticipated expense, technical difficulties,
            or
            otherwise), we could be required to seek additional financing. There
            can be no
            assurance that we will be able to obtain additional financing on terms
            acceptable to it, or at all.
 
 EFFECTS
            OF INFLATION
 
 We
            are
            subject to commodity price risks arising from price fluctuations in the
            market
            prices of the various raw materials that comprise our products. Price
            risks are
            managed by each business unit through productivity improvements and
            cost-containment measures. For the time being, the management does not
            believe
            that inflation risk is material to our business or our consolidated financial
            position, results of operations or cash flows.
 
 EFFECT
            OF
            FLUCTUATION IN FOREIGN EXCHANGE RATES
 
 Our
            operating subsidiaries are located in China, and our Company buys all
            raw
            materials in China and sells all our products in China using Chinese
            Renminbi as
            the functional currency. Based on China government regulation, all foreign
            currencies under the category of current accounts are allowed to be freely
            exchanged with hard currencies. During the past three years of operation,
            there
            were no significant changes in exchange rates; however, unforeseen developments
            may cause a significant change in exchange rates.
 
 22
 INVESTMENT
            IN SUBSIDIARIES
 
 As
            of
            September 30, 2005, we owned a 100% interest in Starway Management Limited
            ("Starway") which became a wholly owned subsidiary of CESV.
 
 Starway
            holds 100% interest in Shenzhen Dicken Industrial Development Limited
            ("SDID"),
            which subsequently holds 100% interest in the energy savings project,
            Shenzhen
            Dicken Technology Development Limited ("SDID") as well as owns the intellectual
            property of their energy savings products in China.
 
 FORECAST
            FOR THE YEAR 2006
 
 1.
            The
            Market
 
 We
            are a
            developer and manufacturer of energy savings products in China. We believe
            that
            the shortage of power in China and present high fuel price are expected
            to
            continue for years to come, the most immediate and effective solution
            is to
            conserve energy use. We believe that demand for our products will be
            strong in
            the next few years and we will strive to increase our capabilities to
            meet such
            demand.
 
 2.
            Government Support
 
 We
            have
            established a sales network of over 2,300 people in over 12 major provinces
            and
            cities in China. Our energy savings products are well received by the
            Chinese
            government, which is advocating the importance of energy savings to relieve
            the
            stress of power shortage
 
 3.
            Customer Support
 
 SDID's
            products are well accepted by our customers including business enterprises
            such
            as shopping malls, supermarkets and particularly factory owners who have
            been
            suffering from rolling blackouts. SDID's products have helped them lower
            their
            cost and increase their revenues.
 
 4.
            Technology Advancement and Research and Development
 
 We
            will
            continue to actively conduct research in the field of energy savings
            technology
            and to develop and commercialize new products.
 **
 5.
            Other
            Investments
 
 CESV
            is
            seeking other energy saving investment opportunities.
 
 OFF-BALANCE
            SHEET ARRANGEMENTS
 
 We
            do not
            have any off-balance sheet arrangements.
 
 CONTRACTUAL
            OBLIGATIONS AND COMMITMENTS
 
 The
            following table summarizes our contractual obligations (including interest
            expense) and commitments as of September 30, 2005:
 
 Contractual
                      Obligations
                  Total
                  Less
                      than 1 Year
                  1-3
                      Years
                  3-5
                      Years
                  More
                      than 5 YearsLong-Term
                      Debt Obligations
                  N/A
                  N/A
                  N/A
                  N/A
                  N/ACapital
                      Lease Obligations
                  N/A
                  N/A
                  N/A
                  N/A
                  N/AOperating
                      Lease Obligations
                  $301,688
                  $144,236
                  $58,436
                  $58,436
                  $40,580Purchase
                      Obligations
                  N/A
                  N/A
                  N/A
                  N/A
                  N/AOther
                      Long-Term Liabilities Reflected on the Registrant's Balance
                      Sheet under
                      GAAP
                  N/A
                  N/A
                  N/A
                  N/A
                  N/A
 
 
 23
 **ITEM
            7A.**  **QUANTITATIVE
            AND QUALITATIVE DISCLOSURES OF MARKET RISK**
 
 While
            our
            reporting currency is the U.S. dollar, to date virtually all of our revenues
            and
            costs are denominated in Renminbi and a significant portion of our assets
            and
            liabilities are denominated in Renminbi. As a result, we are exposed
            to foreign
            exchange risk as our revenues and results of operations may be impacted
            by
            fluctuations in the exchange rate between U.S. Dollars and Renminbi.
            If the
            Renminbi depreciates against the U.S. Dollar, the value of our Renminbi
            revenues
            and assets as expressed in our U.S. Dollar financial statements will
            decline. We
            do not hold any derivative or other financial instruments that expose
            us to
            substantial market risk.
  The
            Renminbi is currently freely convertible under the “current account”, which
            includes dividends, trade and service-related foreign exchange transactions,
            but
            not under the “capital account”, which includes foreign direct investment. To
            date, we have not entered into any hedging transactions in an effort
            to reduce
            our exposure to foreign currency exchange risk. While we may decide to
            enter
            into hedging transactions in the future, the effectiveness of these hedges
            may
            be limited and we may not be able to successfully hedge our exposure
            at all.
            Accordingly, we may incur economic losses in the future due to foreign
            exchange
            rate fluctuations, which could have a negative impact on our financial
            condition
            and results of operations.
 
 **ITEM
            8.**  **FINANCIAL
            STATEMENTS**
 
 Our
            financial statements appear at the end of this report beginning with
            the Index
            to Financial Statements on page F-1 of this report.
 
 **ITEM
            9.**  **CHANGES
            IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
            DISCLOSURES**
 
 None.
  **ITEM
            9A.**  **CONTROLS
            AND PROCEDURES**
 
 **Management’s
            Report on Assessment of Internal Control Over Financial Reporting**
 
 Evaluation
            of Disclosure Controls and Procedures
 
 The
            Company maintains disclosure controls and procedures that are designed
            to ensure
            that information required to be disclosed in the Company’s reports that it files
            or submits under the Securities Exchange Act of 1934 is recorded, processed,
            summarized and reported within the time periods specified in the Securities
            and
            Exchange Commission’s rules and forms, and that such information is accumulated
            and communicated to the Company’s management, including its Chief Executive
            Officer and Chief Financial Officer, as appropriate to allow timely decisions
            regarding required disclosure.
 
 As
            of the
            end of the period covered by this report, the Company carried out an
            evaluation,
            with the participation of management, including its Chief Executive Officer
            and
            Chief Financial Officer, of the effectiveness of the disclosure controls
            and
            procedures pursuant to the Exchange Act Rule 13a-15(b). Based
            upon this
            evaluation, the Chief Executive Officer and Chief Financial Officer concluded
            that our disclosure controls and procedures were not effective as of
            September
            30, 2005 because of the material weaknesses disclosed below in “Management’s
            Report on Internal Control over Financial Reporting.”
 
 In
            light
            of these material weaknesses, the Company performs additional analyses
            and other
            pre and post-closing procedures to ensure that our consolidated financial
            statements are presented fairly in all material respects in accordance
            with
            generally accepted accounting principles in the United States. These
            procedures
            include monthly business reviews led by our Chief Executive Officer and
            monthly
            operating and financial statement reviews by various levels of our management
            team, including our executive officers. Accordingly, management believes
            that
            the consolidated financial statements and schedules included in this
            Form 10-K
            fairly present in all material respects our financial position, results
            of
            operations and cash flows for the periods presented.
 
 24
 Management’s
            Report on Internal Control over Financial Reporting
 
 Management
            is responsible for establishing and maintaining adequate internal control
            over
            financial reporting as defined in Exchange Act Rule 13a-15(f).
            The
            Company’s internal controls over financial reporting are designed to provide
            reasonable assurance concerning the reliability of financial data used
            in the
            preparation of our financial statements. All internal control systems,
            no matter
            how well designed, have inherent limitations and may not prevent or detect
            misstatements. Controls considered to be operating effectively in one
            period may
            become inadequate in future periods because of changes in conditions
            or
            deterioration in the degree of compliance with policies or procedures.
 
 Management
            assessed the effectiveness of the Company’s internal control over financial
            reporting as of September 30, 2005 using the criteria described in *Internal Control—Integrated
            Framework* issued
            by the Committee of Sponsoring Organizations of the Treadway Commission.
            As a
            result of our assessment, Management has identified two material weaknesses,
            as
            described below, and therefore has concluded that our internal controls
            over
            financial reporting were not effective as of September 30, 2005.
 
 A
            material weakness is defined within the Public Company Accounting Oversight
            Board’s Auditing Standard No. 2 as a control deficiency or combination
            of
            control deficiencies that results in a more than remote likelihood that
            a
            material misstatement of the annual or interim financial statements will
            not be
            prevented or detected.
 
 In
            the
            process of its assessment, our management identified the following material
            weaknesses in our internal control over financial reporting:
 
 1.
                  *Accounting
                      and Finance Personnel Weaknesses -*The
                      operation of the Chinese subsidiaries is in China, hence the
                      presentation
                      of their financial statements does not really comply with the
                      USGAAP. The
                      Company had insufficient resources to perform the accounting
                      and financial
                      reporting functions and such resources lacked the appropriate
                      level of
                      accounting knowledge, experience and training in the application
                      of
                      accounting principles generally accepted in the United States
                      of America
                      and were inadequately supervised. The lack of sufficient and
                      adequately
                      trained accounting and finance personnel resulted in an ineffective
                      segregation of duties relative to key financial reporting
                      functions.
 
 2.
                  *Accounting
                      Policies and Procedures Weaknesses*-
                      The company had inadequate documentation regarding the appropriate
                      application of accounting principles generally accepted in
                      the United
                      States of America, as well inadequate written documentation
                      regarding the
                      Company's accounting policies and procedures and application
                      of those
                      policies and procedures.
 
 3.
                  *Lack
                      of Internal Audit System*-
                      The company lacked of internal audit department, which was
                      ineffective in
                      preventing and detecting control lapses and errors in the accounting
                      of
                      certain key areas like revenue recognition, purchase approvals,
                      inter-company transactions, cash receipt and cash disbursement
                      authorizations, inventory safeguard and proper accumulation
                      for cost of
                      products, in accordance with the appropriate costing method
                      used by the
                      company.
 
 The
            Company has tested the internal control structure and has identified
            several controls, including those controls listed above as material weaknesses
            that require further remediation. The Company will continue the implementation
            of policies, processes and procedures regarding the review of complex,
            non-routine transactions and the hiring of additional accounting
            personnel.
 
 Management
            believes that the controls and procedures will continue to improve
            as a
            result of the further implementation of these measures.
 
 The
            Company’s management has identified the steps necessary to address the material
            weaknesses existing in 2005 described above, as follows:
 
 1.
                  Hiring
                      additional accounting and operations personnel and engaging
                      outside
                      contractors with technical accounting expertise, as needed,
                      and
                      reorganizing the accounting and finance department to ensure
                      that
                      accounting personnel with adequate experience, skills and knowledge
                      relating to complex, non-routine transactions are directly
                      involved in the
                      review and accounting evaluation of our complex, non-routine
                      transactions;
 
 2.
                  Involving
                      both internal accounting and operations personnel and outside
                      contractors
                      with technical accounting expertise, as needed, early in the
                      evaluation of
                      a complex, non-routine transaction to obtain additional guidance
                      as to the
                      application of generally accepted accounting principles to
                      such a proposed
                      transaction;
  25
 3.
                  Documenting
                      to standards established by senior accounting personnel and
                      the principal
                      accounting officer the review, analysis and related conclusions
                      with
                      respect to complex, non-routine transactions;
                      and
 
 4.
                  Requiring
                      senior accounting personnel and the principal accounting officer
                      to review
                      complex, non-routine transactions to evaluate and approve the
                      accounting
                      treatment for such transactions.
 
 5.
                  Interviewing
                      prospective new Directors for our Board including a member
                      who is
                      appropriately credentialed as a financial expert with a goal
                      to establish
                      both an Audit and Compensation committee as well as sufficient
                      independent
                      Directors.
 
 6.
                  Evaluating
                      the internal audit function in relation to the Company’s financial
                      resources and requirements.
 
 
 The
            Company will begin to execute the remediation plans identified
            above
            in the first fiscal quarter of 2006.
 
 There
            was
            no change in our internal control over financial reporting during the
            year ended
            September 30, 2005 that has materially affected, or is reasonably likely
            to
            materially affect, our internal control over financial reporting, other
            than the
            remediation measures which are described above.
 
 Moore
            Stephens Wurth Frazer and Torbet, LLP (MSFT), our independent registered
            public
            accounting firm, has audited management’s assessment of the effectiveness of the
            Company’s internal control over financial reporting as of September 30, 2005
            as
            stated in their report which appears in this Annual Report on Form 10-K.
            Since
            we were unable to complete our assessment of internal control, MSFT has
            disclaimed an opinion on the effectiveness of our controls.
 
  **ITEM
            9B.**  **OTHER
            INFORMATION**
 
 None.
 
 
 **PART
            III**
 
 **ITEM
            10.**  **OFFICERS
            AND DIRECTORS**
 
 The
            following table sets forth the names, ages, and positions of our directors
            and
            officers.
 
 
 **Name**
                  **Age**
                  **Position
                      Held**
                  **Officer
                      Since**
                  **Director
                      Since**Sun
                      Li
                  35
                  Chief
                      Executive Officer, Director
                  2004
                  2004Lawrence
                      Yuen-Ming Lok
                  45
                  Chief
                      Financial Officer, Director
                  2005
                  2005Lai
                      Fun Sim
                  37
                  Corporate
                      Secretary, Director
                  2004
                  2004Paul
                      Risberg
                  43
                  Director
                  N/A
                  2004Pang
                      Jing-Wen
                  43
                  Director
                  N/A
                  2005Wing
                      Sze Yau
                  31
                  Director
                  N/A
                  2004Shao
                      Guang Tan
                  44
                  Director
                  N/A
                  2004
 
 The
            directors named above will serve until the next annual meeting of our
            stockholders or until their successors are duly elected and have qualified.
            Directors will be elected for one-year terms at the annual stockholders
            meeting.
            Officers will hold their positions at the pleasure of the board of directors,
            absent any employment agreement. There is no arrangement or understanding
            between any of our directors or officers and any other person pursuant
            to which
            any director or officer was or is to be selected as a director or officer,
            and
            there is no arrangement, plan or understanding as to whether non-management
            stockholders will exercise their voting rights to continue to elect the
            current
            board of directors. There are also no arrangements, agreements or understandings
            between non-management stockholders that may directly or indirectly participate
            in or influence the management of our affairs.
  26
 There
            are
            no family relationships among the foregoing directors and executive officers.
            None of the directors or executive officers has, during the past five
            years: (a)
            Had any bankruptcy petition filed by or against any business of which
            such
            person was a general partner or executive officer either at the time
            of the
            bankruptcy or within two years prior to that time; (b) Been convicted
            in a
            criminal proceeding or subject to a pending criminal proceeding; (c)
            been
            subject to any order, judgment, or decree, not subsequently reversed,
            suspended
            or vacated, of any court of competent jurisdiction, permanently or temporarily
            enjoining, barring, suspending or otherwise limiting his involvement
            in any type
            of business, securities, futures, commodities or banking activities;
            and (d)
            been found by a court of competent jurisdiction (in a civil action),
            the
            Securities and Exchange Commission or the Commodity Futures Trading Commission
            to have violated a Federal or state securities or commodities law, and
            the
            judgment has not been reversed, suspended, or vacated.
 
 BIOGRAPHICAL
            INFORMATION
 
 SUN
            LI,
            age 35, is the Chairman of the Board and the Chief Executive Officer.
            Mr. Sun
            has been engaged in retail business, motors, real property, internet
            development, sales and marketing in Beijing, Xing Tai (in Hebei Province),
            Shanghai and Shenzhen for years. In addition, he has 10 years of experience
            in
            China marketing and financial investment in the stock markets of Hong
            Kong and
            China. Mr. Sun is the investing shareholder of Shenzhen Dicken Industrial
            Development Limited. He is recently elected Chairman of the Board and
            appointed
            as the Chief Executive Officer ("CEO") of the Company. Since 1999, Mr.
            Sun has
            served as the shareholder and Chief Executive Officer of Beijing Heng
            Fu Plaza
            Development, Inc. ("Heng Fu"), which is devoted to the construction of
            a 100,000
            m2 multi-purpose commercial plaza in Chao Yang District,
            Beijing.
 
 LAWRENCE
            YUEN-MING LOK, age 45, is the Chief Financial Officer of China Energy
            Savings
            Technology, Inc. Mr. Lok received his Master’s Degree in Economics (major in
            Professional Accounting) from Macquarie University, Sydney NSW Australia
            in
            1989. Mr. Lok is an Australian chartered accountant and has over 20 years
            experience in professional accounting and finance. He has served as a
            director
            in Australia and Hong Kong publicly listed companies. Since 2000, Mr.
            Lok has
            been the Chief Executive Officer and an Executive Director of CSI Investment
            Management Limited, a Hong Kong Securities and Futures Commission registered
            investment advisor.
 
 LAI-FUN
            SIM, age 37, is the Executive Director and Corporate Secretary. Ms. Sim
            has
            completed the Higher Diploma in Translation and Interpretation at the
            City
            University. She has over 13 years experience in administration. She has
            obtained the
            qualification of Stock Broker and Stock Broker Representative in Hong
            Kong. She
            worked for China Convergent Corporation Limited listed on the Nasdaq
            Stock
            Market, the Australian Stock Exchange and Frankfurt Stock Exchange, and
            its
            subsidiary listed on the Stock Exchange of Hong Kong as Assistant to
            Chairman
            for from 1999 through 2001. From 2002 through 2003, she joined China
            Cable and
            Communications, Inc. listed on the Nasdaq OTCBB as Assistant to
            Chairman.
 
 PAUL
            RISBERG, age 43, is the Non-executive Director. He has over 10 years
            experience
            in investment banking and securities market expertise. He currently provides
            consulting service to numerous small to medium size companies in regards
            to
            growth strategies and capital expansion opportunities. From 1998 until
            2002, Mr.
            Risberg served as Divisional Vice President of Fahnestock & Co. (now known
            as Oppenheimer & Co.), one of oldest New York Stock Exchange firms. Mr.
            Risberg supervised operations at Fahnestock's Atlanta, Minneapolis, Richmond
            and
            Cincinnati offices including compliance, trading, investment banking,
            new equity
            issue distribution, branch manager supervision and reporting. Prior to
            that, Mr.
            Risberg served as Senior Vice President and Branch Manager of Josephthal
&
            Co., and was instrumental in establishing the firm's Atlanta office in
            1995.
            Since 1995, Mr. Risberg has also conducted extensive research on alternative
            energy processes including energy audit, photovoltaic array design and
            construction, wind and hydro energy services.
 
 JING-WEN
            PANG, age 41, is an Assistant Certified Public Accountant in China. She
            earned
            her bachelors degree from the Renmin University of China, majoring in
            Statistics. She has over 10 years experience in financial management.
            For the
            past three years she has been working with Win’s Technology Development Limited
            (“Win’s) as its Treasurer in Beijing. Prior to joining Win’s, Ms. Pang worked
            with the Beijing office of Asia Trading Ltd. of Japan as an accounting
            manager
            from 1999 to 2002.
 
 WING
            SZE
            YAU, age 31, earned her bachelors degree from the Lingnan University
            majoring in
            Asia Pacific Studies of Social Science. She has been working as corporate
            secretary in various companies with over 7 years of experience in business
            administration. For the past five years she has worked with various Chinese
            non-profit educational organizations.
 
 SHAO-GUANG
            TAN, age 44, is a qualified accountant in China. He holds a bachelors
            degree in
            foreign trade and economic management. Currently he is the deputy general
            manager and chief financial officer of Jia Sheng International Consultant
            (HK)
            Co., Limited. Prior to this position, and since 1999, he was the general
            manager
            and financial controller of Xinhui Auction Limited in Jiangmen City,
            Guangdong
            Province. Mr. Tan has over 20 years experience in banking and financial
            management and has worked with the Guangdong Development Bank.
 
 27
 SECTION
            16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
 Section
            16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") requires
            our
            directors and executive officers, and persons who beneficially own more
            than ten
            percent of a registered class of our equity securities, to file with
            the
            Securities and Exchange Commission (the "Commission") initial reports
            of
            beneficial ownership and reports of changes in beneficial ownership of
            our
            Common Stock. The rules promulgated by the Commission under Section 16(a)
            of the
            Exchange Act require those persons to furnish us with copies of all reports
            filed with the Commission pursuant to Section 16(a). The information
            in this
            section is based solely upon a review of Forms 3, Forms 4, and Forms
            5 received
            by us. Our Chief Executive Officer Sun Li was not able to timely file
            his Form
            5. In addition, the following persons were not able to file their Form
            3 within
            10 days after he/she was elected an officer or director of the Company
            or became
            a more than 10% shareholder of the Company:
 
 **NAME**
                  **POSITION/SHAREHOLDER**
                  **FORM
                      3 FILED**Sun
                      Li
                  Chief
                      Executive Officer / Director
                  November
                      22, 2005Lawrence
                      Yuen-Ming Lok
                  Chief
                      Financial Officer Director
                  October
                      13, 2005Lai
                      Fun Sim
                  Corporate
                      Secretary, Director
                  November
                      14, 2005Paul
                      Risberg
                  Director
                  November
                      14, 2005Jing-Wen
                      Pang
                  Director
                  October
                      13, 2005Shao
                      Guang Tan
                  Director
                  November
                      14, 2005Wing
                      Sze Yau
                  Director
                  October
                      13, 2005New
                      Solomon Consultants Ltd.
                  10%
                      Shareholder
                  October
                      20, 2004
 
 CODE
            OF
            ETHICS
 
 We
            have
            adopted a code of ethics that applies to our principal executive officer,
            principal financial officer, principal accounting officer or controller,
            or
            persons performing similar functions. Such code of ethics will be provided
            to
            any person without charge, upon request. You may request a copy of this
            code of
            ethics to be sent as a pdf file to an e-mail address; if you do not have
            an
            e-mail address you may request a copy by sending such request to us at
            our
            principal office.
 
 AUDIT
            COMMITTEE FINANCIAL EXPERT
 
 Mr.
            Shao
            Guang Tan is the Audit Committee Financial Expert that serves on the
            Company's
            audit committee. Mr. Tan is independent, as that term is used in Item
            7(d)(3)(iv) of Schedule 14A under the Exchange Act.
 
 AUDIT
            COMMITTEE
 
 Our
            Audit
            Committee is composed of directors Shao Guang Tan, Wing Sze Yau and Jing-Wen
            Pang.
 
 PROCEDURES
            FOR NOMINATING DIRECTORS
 
 The
            Board
            has created a Nominating Committee and adopted a Nominating Committee
            Charter.
            Such charter was filed as an exhibit to our previously filed Annual Report
            on
            Form 10-KSB for the fiscal year ended September 30, 2004.
 
 
 28
 **ITEM
            11.**  **EXECUTIVE
            COMPENSATION**
 
 The
            following executive compensation disclosure reflects all compensation
            awarded
            to, earned by or paid to the executive officers below, for the fiscal
            years
            ended September 30, 2005, 2004, and 2003. None of our executive officers
            received compensation in excess of $100,000 for the fiscal year ended
            September
            30, 2005, and no officer received compensation in excess of $100,000
            for the
            fiscal years 2005, 2004 or 2003, respectively. The following table summarizes
            all compensation received by our Chief Executive Officer, Chief Financial
            Officer (former) and Corporate Secretary in fiscal years 2005, 2004 and
            2003.
 
 
 Annual
                      Compensation
                  
                  Long-Term
                      CompensationAwards
                  
                  PayoutsName
                      and Principal Position
                  
                  Fiscal
                      Year
                  
                  Salary
                      ($)
                  
                  Bonus
                      ($)
                  
                  Other
                      Annual Compensation ($)
                  
                  Stock
                      Award(s) ($)
                  
                  Underlying
                      Options/SARs ($)
                  
                  LTIP
                      Payouts ($)
                  
                  All
                      Other Compensation($)Sun
                      Li (1)
                  
                  2005
                  
                  *
                  
                  --
                  
                  --
                  
                  --
                  
                  --
                  
                  --
                  
                  --Chief
                      Executive
                  
                  2004
                  
                  **
                  
                  --
                  
                  --
                  
                  --
                  
                  --
                  
                  --
                  
                  --Officer
                  
                  2003
                  
                  --
                  
                  --
                  
                  --
                  
                  --
                  
                  --
                  
                  --
                  
                  --Lawrence
                      Lok (2)
                  
                  2005
                  
                  *
                  
                  --
                  
                  --
                  
                  --
                  
                  --
                  
                  --
                  
                  --Chief
                      Financial
                  
                  2004
                  
                  --
                  
                  --
                  
                  --
                  
                  --
                  
                  --
                  
                  --
                  
                  --Officer
                  
                  2003
                  
                  --
                  
                  --
                  
                  --
                  
                  --
                  
                  --
                  
                  --
                  
                  --Stella
                      Lai Fun Sim (3)
                  
                  2005
                  
                  *
                  
                  --
                  
                  --
                  
                  --
                  
                  --
                  
                  --
                  
                  --Secretary
                  
                  2004
                  
                  **
                  
                  --
                  
                  --
                  
                  --
                  
                  --
                  
                  --
                  
                  --2003
                  
                  --
                  
                  --
                  
                  --
                  
                  --
                  
                  --
                  
                  --
                  
                  --
 
 ---------------------------------------
 *None
            paid as of September 30, 2005.
 **
            None
            paid as of September 30, 2004.
   OPTIONS/SAR
            GRANTS IN FISCAL YEAR ENDED SEPTEMBER 30, 2005
  We
            have
            not granted any options/stock appreciation rights during the fiscal year
            ended
            September 30, 2005.
 
 LONG-TERM
            INCENTIVE PLAN ("LTIP") AWARDS TABLE
 
 We
            do not
            currently have a long term incentive plan.
 
 COMPENSATION
            OF DIRECTORS
 
 We
            issued
            3,000 shares to Mr. Risberg as compensation for serving on our Board.
            All other
            board members were not paid any compensation for serving on our Board.
            We may,
            at our discretion, reimburse Board members for expenses.
 
 EMPLOYMENT
            AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
 ARRANGEMENTS
 
 We
            currently have no employment agreements with any of our executive officers,
            nor
            any compensatory plans or arrangements resulting from the resignation,
            retirement or any other termination of any of our executive officers,
            from a
            change-in-control, or from a change in any executive officer's responsibilities
            following a change-in-control.
 
 COMPENSATION
            COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
 Our
            directors Mr. Shao Guang Tan and Ms. Wing-Sze Yau acted as our compensation
            committee during our 2005 fiscal year. We have seven Directors, Sun Li,
            Lawrence
            Yuen-Ming Lok, Lai Fun Sim, Paul Risberg, Jing-Wen Pang, Shao Guang Tan
            and Wing
            Sze Yau. Our directors Sun Li, Lawrence Yuen-Ming Lok and Lai Fun Sim
            are also
            Company officers. During the 2005 fiscal year, our compensation committee
            took
            no actions regarding the compensation of our Company officers. The Company
            has
            no executive or officer incentive compensation programs in either cash,
            stock,
            or equity derivatives.
 
 29
 **ITEM
            12.**  **SECURITY
            OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**
 
 SECURITIES
            AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
 
 Equity
            Compensation Plan Information
 
 Plan
                      Category
                  Number
                      of securities to be issued upon exercise of outstanding options,
                      warrants
                      and rights
                  Weighted-average
                      exercise price of outstanding options, warrants and rights
                  Number
                      of securities remaining available for future issuance under
                      equity
                      compensation plansEquity
                      compensation plans approved by security holders
                  None
                  -
                      -
                      -
                  NoneEquity
                      compensation plans not approved by security holders
                  1,200,000(1)
                  -
                      -
                      -
                  0(1)Total
                  1,200,000
                  -
                      -
                      -
                  0
 
 (1)
                  In
                      September 2004, we established the 2004 Equity Incentive Plan
                      ("2004
                      Plan") with 1,200,000 shares approved and subject to the 2004
                      Plan. The
                      Board of Directors or a Committee comprised of a member or
                      members of the
                      Board has full authority to administer the 2004 Plan, including
                      but not
                      limited to, the authority to designate eligible persons, grant
                      awards,
                      interpret the Plan and delegate to one or more executive officers
                      of the
                      Company the authority to grant an Award under this Plan to
                      Participants
                      who are not Insiders of the Company. The maximum number of
                      shares that may
                      be issued under the Plan is 1,200,000 shares of our common
                      stock. On
                      September 16, 2004, the Company issued 620,000 shares to a
                      certain
                      qualifying employees and 10,000 shares to non-employee consultants
                      for
                      services rendered under the Plan. In October and November 2004,
                      the
                      Company issued 470,000 shares to non-employee consultants of
                      its common
                      stock at $11.00 and $13.15 per share. The total shares were
                      valued at
                      $5,256,000, the closing price of the stock at the date the
                      shares were
                      issued. On April 15, 2005, the Company issued 100,000 shares
                      to
                      non-employee consultants and an employee of its common stock
                      at 10.00 a
                      share for services performed. The total shares were valued
                      at
                      $996,697.
 
 
 The
            following table sets forth certain information regarding beneficial ownership
            of
            our common stock as of December 14, 2005, determined in accordance with
            Rule
            13d-3 and 13d-5 of the Exchange Act by (i) each person who is known by
            us to own
            beneficially more than five percent (5%) of the outstanding shares of
            our voting
            securities, (ii) each of our directors and officers, and (iii) all of
            our
            directors and executive officers as a group. Unless otherwise indicated
            below,
            to our knowledge, all persons listed below have sole voting and investing
            power
            with respect to their shares of common stock, except to the extent authority
            is
            shared by spouses under applicable community property laws.
 
 Title
                      of Class
                  
                  Name
                      and addressof beneficial owner (1)
                  
                  Amount
                      and nature
                    of
                      beneficial ownership
                  
                  Percent
                      of classCommon
                  
                  Sun
                      Li
                  
                  16,005,134
                  
                  62.96
                  %CEO
                      and DirectorCommon
                  
                  Lawrence
                      Yuen-Ming Lok
                  
                  0
                  
                  0
                  %CFOCommon
                  
                  Lai
                      Fun Sim
                  
                  10,000
                  
                  *
                  %Corporate
                      Secretary andDirectorCommon
                  
                  Jing-Wen
                      Pang
                  
                  0
                  
                  0
                  %DirectorCommon
                  
                  Paul
                      Risberg
                  
                  3,000
                  
                  *
                  %DirectorCommon
                  
                  Wing
                      Sze Yau
                  
                  0
                  
                  0
                  %DirectorCommon
                  
                  Shao
                      Guang Tan
                  
                  0
                  
                  0
                  %DirectorCommon
                  
                  New
                      Solomon Consultants Ltd.
                  
                  16,005,134
                  
                  62.96
                  %All
                      officers anddirectors
                      as a group
                  
                  16,018,134
                  
                  63.02
                  %
 ________________________
 *
            less
            than 1%.
 
 30
 (1)
                  The
                      address for all officers and directors is Central Plaza, 18
                      Harbour Road,
                      Suite 3203A, 32ndFloor, Hong Kong, China, unless otherwise indicated.
 
 (2)
                  Sun
                      Li indirectly owns 16,005,134 shares through sole ownership
                      of Able Stars
                      Enterprises Ltd., which owns 55% of New Solomon Consultants
                      Limited, which
                      owns 16,005,134 shares.
   **ITEM
            13.**  **CERTAIN
            RELATIONSHIPS AND RELATED TRANSACTIONS**
 
 
 As
            of
            September 30, 2005, the due from related a party amounted to US$123,602.
            A
            majority of this amount was generated from making cash advances to the
            shareholders for ordinary business expenses. In addition, certain shareholders
            had collected the payments on receivables on the Company's behalf from
            the
            customers and those payments had not been repaid to the Company by September
            30,
            2005 timely. Those amounts are unsecured, interest free and have no fixed
            terms
            of repayment.
 
 **ITEM
            14.**  **PRINCIPAL
            ACCOUNTANT FEES AND SERVICES**
 
 AUDIT
            FEES
 
 The
            aggregate fees billed for each of Fiscal Year 2004 and Fiscal Year 2005
            for
            professional services rendered by our principal accountants for the audit
            of our
            annual financial statements, review of financial statements included
            in our Form 10-QSBs
            and other services provided by the accountant in connection with statutory
            and
            regulatory filings are as follows:
 
 Fiscal
            Year 2004: $150,000;
 Fiscal
            Year 2005: $138,000
 
 
 AUDIT
            RELATED FEES
 
 The
            aggregate fees billed for each of Fiscal Year 2003 and Fiscal Year 2004
            for
            assurance and related services by our principal accountant that are reasonably
            related to the performance of the audit or review of our financials statements are
            as
            follows:
 
 Fiscal
            Year 2004: $0;
 Fiscal
            Year 2005: $32,862
 
 31
 TAX
            FEES
 
 The
            aggregate fees billed for each of Fiscal Year 2003 and Fiscal Year 2004
            for
            professional services rendered by our principal accountants for tax compliance,
            tax advice and tax planning are as follows:
 
 Fiscal
            Year 2004: $0; $7,000
 Fiscal
            Year 2005: $0; $7,000
 
 ALL
            OTHER
            ACCOUNTANT FEES
 
 The
            aggregate fees billed for each of Fiscal Year 2003 and Fiscal Year 2004
            for
            other professional services rendered by our principal accountants are
            as
            follows:
 
 Fiscal
            Year 2004: $0;
 Fiscal
            Year 2005: $0.
 
 
 **PART
            IV**
 
 **ITEM
            15.**  **EXHIBITS,
            FINANCIAL STATEMENTS SCHEDULES**
 
 The
            following documents are filed as part of this report:
  (1)  Financial
            Statements - See Index to Consolidated Financial Statements on page 34
            of this
            report.
 
 (2)  Exhibits
            - See Index to Exhibits.
 
 **Index
            of Exhibits**
 
 **Exhibit**
                    **Number**
                  
                  **Description**3.1
                  
                  Certificate
                      of Incorporation (2)3.2
                  
                  Bylaws
                      (2)10.1
                  
                  Agreement
                      and Plan of Share Exchange dated November 16, 2004 by and between
                      Eurofaith Holdings, Inc. and China Energy Savings Technology,
                      Inc.
                      (1)10.2
                  
                  Agreement
                      and Plan of Share Exchange dated February 1, 2005 by and between
                      Sky
                      Beyond Investments Limited and China Energy Savings Technology,
                      Inc.
                      (3)10.3
                  
                  China
                      Energy Savings Technology, Inc. 2004 Equity Incentive Plan
                      (4)14
                  
                  Code
                      of Business Ethics (5)21
                  
                  Subsidiaries
                      of Registrant (5)23.1
                  
                  Consent
                      of Moore Stephens LLP(6)31.1
                  
                  Certification
                      of Chief Executive Officer Pursuant to 302 of the Sarbanes-Oxley
                      Act of
                      2002 (6)31.2
                  
                  Certification
                      of Chief Financial Officer Pursuant to 302 of the Sarbanes-Oxley
                      Act of
                      2002 (6)32.1
                  
                  Certification
                      of Chief Executive Officer Pursuant to 906 of the Sarbanes-Oxley
                      Act of
                      2002 (6)32.2
                  
                  Certification
                      of Chief Financial Officer Pursuant to 906 of the Sarbanes-Oxley
                      Act of
                      2002 (6)
 ___________
 
 (1)
                  Previously
                      filed with the Securities and Exchange Commission as Exhibit
                      10.1 to the
                      Company's Current Report on Form 8K filed on November 18, 2004
                      and
                      incorporated herein by reference.
 (2)
                  Previously
                      filed with the Securities and Exchange Commission as an exhibit
                      to the
                      Registration Statement on Form 10 filed on July 11, 2000 and
                      incorporated
                      herein by reference.
 (3)
                  Previously
                      filed with the Securities and Exchange Commission as Exhibit
                      10.1 to the
                      Company's Current Report on Form 8K filed on February 4, 2005
                      and
                      incorporated herein by reference.
 (4)
                  Previously
                      filed with the Securities and Exchange Commission as an exhibit
                      to the
                      Form S-8 filed with the U.S. Securities and Exchange Commission
                      on
                      September 17, 2004.
 (5)
                  Previously
                      filed with the Securities and Exchange Commission as an exhibit
                      to the
                      Form 10-KSB filed with the U.S. Securities and Exchange Commission
                      on
                      January 13, 2005.
 (6)
                  Filed
                      herewith.
 
 [SIGNATURES
            PAGE FOLLOWS]
 
 32
 **SIGNATURES**
 
 In
            accordance with Section 13 or 15(d) of the Securities Exchange Act of
            1934, as
            amended, the registrant caused this report to be signed on its behalf
            by the
            undersigned, thereunto duly authorized.
  **CHINA
                      ENERGY SAVINGS TECHNOLOGY, INC.**
                    (Registrant)Date: 
                      December 20, 2005
                  By:
                  /s/
                    Sun LiSun
                      Li
                    Chief
                      Executive Officer
  Date: 
                      December 20, 2005
                  By:
                  /s/ Lawrence
                    Lok Yuen-MingLawrence
                      Lok Yuen-Ming
                    Chief
                      Financial Officer
 
 In
            accordance with the Securities Exchange Act of 1934, as amended, this
            report has
            been signed below by the following persons on behalf of the registrant
            and in
            the capacities and on the dates indicated:
  
 Name
                  
                  Title
                  Date/s/
                    Sun LiSun
                      Li
                  
                  Chief
                      Executive Officer / Director
                  December
                      20, 2005/s/
                    Lawrence Yuen-Ming LokLawrence
                      Yuen-Ming Lok
                  
                  Chief
                      Financial Officer / Director
                  December
                      20, 2005/s/
                    Lai Fun SimLai
                      Fun Sim
                  
                  Corporate
                      Secretary / Director
                  December
                      20, 2005/s/
                      Jing-Wen PangJing-Wen
                      Pang
                  
                  Director
                  December
                      20, 2005/s/
                    Shao Guang TanShao
                      Guang Tan
                  
                  Director
                  December
                      20, 2005/s/
                    Wing Sze YauWing
                      Sze Yau
                  
                  Director
                  December
                      20, 2005
  
 33
 
 
 
 INDEX
            TO
            FINANCIAL STATEMENTS
 
 
 
 PAGEREPORT
                      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                  
                  F-2CONSOLIDATED
                      BALANCE SHEETSAS
                      OF SEPTEMBER 30, 2005 AND 2004 AND DECEMBER 31, 2003
                  
                  F-6CONSOLIDATED
                      STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME(LOSS)
                      FOR THE YEAR ENDED SEPTEMBER 30, 2005 AND NINE MONTHS
                      ENDEDSEPTEMBER
                      30, 2004 AND THE YEARS ENDED DECEMBER 31, 2003 AND 2002
                  
                  F-7CONSOLIDATED
                      STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEAR ENDEDSEPTEMBER
                      30, 2005 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2004 ANDTHE
                      YEARS ENDED DECEMBER 31,2003 AND 2002
                  
                  F-8CONSOLIDATED
                      STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED SEPTEMBER 30,2005
                      AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND THE YEARS
                      ENDEDDECEMBER
                      31, 2003 AND 2002
                  
                  F-9NOTES
                      TO CONSOLIDATED FINANCIAL STATEMENTS
                  
                  F-10
 
 
 
 
 
 
 F-1
 
  **REPORT
              OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
              the
              Board of Directors of China Energy Savings Technology, Inc
 
 We
              have
              audited the accompanying consolidated balance sheets of China Energy
              Saving
              Technology, Inc. and Subsidiaries (the Company) as of September 30,
              2005 and
              2004, and the related consolidated statements of income and other comprehensive
              income (loss), shareholders’ equity and cash flows for the year ended September
              30, 2005 and the nine months ended September 30, 2004. These consolidated
              financial statements are the responsibility of the Company’s management. Our
              responsibility is to express an opinion on these consolidated financial
              statements based on our audits. The financial statements of Starway
              Management
              Limited as of December 31, 2003 and 2002, the acquirer of China Energy
              Savings
              Technology, Inc., as explained in note 1 in the accompanying financial
              statements were audited by other auditors whose report dated January
              29, 2004
              expressed an unqualified opinion on those statements.
 
 We
              conducted our audits in accordance with 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
              consolidated financial statements are free of material misstatement.
              An audit
              includes examining, on a test basis, evidence supporting the amounts
              and
              disclosures in the consolidated financial statements. An audit also
              includes
              assessing the accounting principles used and significant estimates
              made by
              management, as well as evaluating the overall financial statement presentation.
              We believe that our audits provide a reasonable basis for our opinion.
 
 In
              our
              opinion, the consolidated financial statements referred to above present
              fairly,
              in all material respects, the financial position of China Energy Saving
              Technology, Inc. and subsidiaries as of September 30, 2005 and 2004,
              and the
              results of their operations and cash flows for the year ended September
              30, 2005
              and the nine months ended September 30, 2004 in conformity with accounting
              principles generally accepted in the United States of America.
 
 We
              were
              engaged to audit, in accordance with the standards of the Public Company
              Accounting Oversight Board (United States), the effectiveness of the
              Company's
              internal control over financial reporting as of September 30, 2005,
              and our
              report dated December 14, 2005 disclaimed an opinion on both management's
              assessment of the effectiveness of the Company's internal control over
              financial
              reporting and on the effectiveness of the Company's internal control
              over
              financial reporting because of the effects of a scope limitation.
   /s/
              Moore Stephens Wurth Frazer and Torbet,
              LLP
 Walnut,
              California
 December
              14, 2005
 F-2
 **REPORT
                  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
                  the
                  Board of Directors of
 China
                  Energy Savings Technology, Inc
 
 We
                  were
                  engaged to audit management's assessment regarding the effectiveness
                  of internal
                  control over financial reporting of China Energy Savings Technology,
                  Inc. and
                  Subsidiaries (the Company) as of September 30, 2005, based on the
                  criteria
                  established in Internal Control - Integrated Framework issued by
                  the Committee
                  of Sponsoring Organizations of the Treadway Commission ("COSO").
                  The Company's
                  management is responsible for maintaining effective internal control
                  over
                  financial reporting and assessing the effectiveness of internal
                  control over
                  financial reporting.
 
 Management
                  of the Company was unable to complete their assessment of internal
                  control over
                  financial reporting as of September 30, 2005 and due to that scope
                  limitation we
                  were unable to perform any procedures required in an audit of internal
                  control
                  over financial reporting or an audit of management's assessment
                  of the
                  effectiveness of internal control over financial reporting.
 
 A
                  company's internal control over financial reporting is a process
                  designed to
                  provide reasonable assurance regarding the reliability of financial
                  reporting
                  and the preparation of financial statements for external purposes
                  in accordance
                  with accounting principles generally accepted in the United States
                  of America. A
                  company's internal control over financial reporting includes those
                  policies and
                  procedures that (1) pertain to the maintenance of records that,
                  in reasonable
                  detail, accurately and fairly reflect the transactions and dispositions
                  of the
                  assets the company; (2) provide reasonable assurance that transactions
                  are
                  recorded as necessary to permit preparation of financial statements
                  in
                  accordance with accounting principles generally accepted in the
                  United States of
                  America, and receipts and expenditures of the company are being
                  made only in
                  accordance with authorizations of management and directors of the
                  company; and
                  (3) provide reasonable assurance regarding prevention or timely
                  detection of
                  unauthorized acquisition, use or disposition of the company's assets
                  that could
                  have a material effect on the financial statements.
 
 Because
                  of inherent limitations, internal control over financial reporting
                  may not
                  prevent or detect misstatements. Also, projections of any evaluation
                  of
                  effectiveness to future periods are subject to the risk that controls
                  may become
                  inadequate because of changes in conditions, or that the degree
                  of compliance
                  with the policies or procedures may deteriorate.
 
 F-3
 
 
 A
                  material weakness is a significant deficiency, or combination of
                  significant
                  deficiencies, that results in more than a remote likelihood that
                  a material
                  misstatement of the annual or interim financial statements will
                  not be prevented
                  or detected. The following material weaknesses in internal control
                  have been
                  identified by management and are discussed in Management's Report
                  on Internal
                  Control over Financial Reporting.
 
 -
                        *Accounting
                            and Finance Personnel Weaknesses -*The
                            Company had insufficient resources to perform the accounting
                            and financial
                            reporting functions and such resources lacked the appropriate
                            level of
                            accounting knowledge, experience and training in the
                            application of
                            accounting principles generally accepted in the United
                            States of America
                            and were inadequately supervised. The lack of sufficient
                            and adequately
                            trained accounting and finance personnel resulted in
                            an ineffective
                            segregation of duties relative to key financial reporting
                            functions.
 
 -
                        *Accounting
                            Policies and Procedures Weaknesses -*The company had inadequate documentation regarding the
                            appropriate
                            application of accounting principles generally accepted
                            in the United
                            States of America, as well inadequate written documentation
                            regarding the
                            Company's accounting policies and procedures and application
                            of those
                            policies and procedures.
 
 -
                        *Lack
                            of Internal Audit System -*The company lacked of internal audit department, which
                            was ineffective in
                            preventing and detecting control lapses and errors in
                            the accounting of
                            certain key areas like revenue recognition, purchase
                            approvals,
                            inter-company transactions, cash receipt and cash disbursement
                            authorizations, inventory safeguard and proper accumulation
                            for cost of
                            products, in accordance with the appropriate costing
                            method used by the
                            company.
 
 Since
                  management was unable to complete their assessment of internal
                  control over
                  financial reporting, we are unable to express, and we do not express,
                  an opinion
                  either on management's assessment or on the effectiveness of the
                  Company's
                  internal control over financial reporting.
 
 We
                  have
                  audited, in accordance with the standards of the Public Company
                  Accounting
                  Oversight Board (United States), the consolidated balance sheets
                  of the Company
                  as of September 30, 2005 and 2004, and the related consolidated
                  statements of
                  income and comprehensive income (loss), changes in shareholders'
                  equity and cash
                  flows for the year ended September 30, 2005 and the nine months
                  ended September
                  30, 2004 and our report dated December 14, 2005 expressed an unqualified
                  opinion
                  on those statements. The fact that management was unable to complete
                  their
                  assessment of internal control over financial reporting was considered
                  in
                  determining the nature, timing and extent of audit tests applied
                  in our audit of
                  the consolidated financial statements, and this report does not
                  affect our
                  report on those financial statements.
 
  
 /s/
                  Moore
                  Stephens Wurth Frazer and Torbet, LLP
 Walnut,
                  California
 December
                  14, 2005
  F-4
   **REPORT
                    OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 To
                    the
                    Board of Directors of:
 China
                    Energy Savings Technology, Inc.
 
 
 We
                    have
                    audited the accompanying consolidated balance sheet of Starway
                    Management
                    Limited and subsidiaries as of December 31, 2003 and the related
                    consolidated
                    statements of operations and comprehensive loss, changes in stockholders’ equity
                    and cash flows for the two years ended December 31, 2003 and
                    2002. These
                    financial statements are the responsibility of the Company’s management. Our
                    responsibility is to express an opinion on these financial statements
                    based on
                    our audit.
 
 We
                    conducted our audit in accordance with the standards of the Public
                    Company
                    Accounting Oversight Board (United States). Those standards require
                    that we plan
                    and perform the audits to obtain reasonable assurance about whether
                    the
                    financial statements are free of material misstatement. As audit
                    includes
                    examining, on a test basis, evidence supporting the amounts and
                    disclosures in
                    the financial statements. An audit also includes assessing the
                    accounting
                    principles used and significant estimates made by management,
                    as well as
                    evaluating the overall financial statement presentation. We believe
                    that our
                    audit provides a reasonable basis for our opinion.
 
 In
                    our
                    opinion, the consolidated financial statements referred to above
                    present fairly
                    in all material respects, the financial position of Starway Management
                    Limited
                    and subsidiaries as of December 31, 2003 and the results of its
                    operations and
                    its cash flows for the two years ended December 31, 2003 and
                    2002 in conformity
                    with accounting principles generally accepted in the United States
                    of
                    America.
 
 
 
 
 /s/
                    WEBB
& COMPANY, P.A.
 
 Boynton
                    Beach, Florida
 January
                    29, 2004
 F-5
  CHINA
                          ENERGY SAVINGS TECHNOLOGY, INC. AND SUBSIDIARIES(FORMERLY
                          KNOWN AS RIM HOLDINGS, INC.)CONSOLIDATED
                          BALANCE SHEETSAS
                          OF SEPTEMBER 30, 2005 AND 2004 AND DECEMBER 31, 2003A
                          S S E T SSeptember
                          30
                      
                      December
                          312005
                      
                      2004
                      
                      2003Audited
                      
                      Audited
                      
                      AuditedCURRENT
                          ASSETS:Cash
                      
                      $
                      30,926,619
                      
                      $
                      18,442,862
                      
                      $
                      21,165Accounts
                          receivable, trade, net of allowance for doubtful
                      
                      
                      6,471,689
                      
                      
                      6,580,525
                      
                      
                      4,304,134accounts
                          of $768,151 and $768,151 as of September 30, 2005 and2004,
                          respecitvely, and $766,710 as of December 31, 2003Current
                          maturities of notes receivable, net
                      
                      
                      9,744,786
                      
                      
                      3,727,540
                      
                      
                      2,201,523Inventories
                      
                      
                      1,584,213
                      
                      
                      4,329,552
                      
                      
                      533,453Prepaid
                          expenses
                      
                      
                      1,890,688
                      
                      
                      1,529,955
                      
                      
                      71,582Due
                          from related party
                      
                      
                      123,602
                      
                      
                      1,257,130
                      
                      
                      —Total
                          current assets
                      
                      
                      50,741,597
                      
                      
                      35,867,564
                      
                      
                      7,131,857PLANT
                          AND EQUIPMENT, net
                      
                      
                      443,600
                      
                      
                      528,344
                      
                      
                      750,266OTHER
                          ASSETS:Long-term
                          loan receivable
                      
                      
                      1,857,000
                      
                      
                      —
                      
                      
                      —Long-term
                          notes receivable, net
                      
                      
                      21,166,175
                      
                      
                      7,087,692
                      
                      
                      12,743,550Other
                          receivables
                      
                      
                      419,859
                      
                      
                      778,880
                      
                      
                      252,700Intangible
                          asset, net
                      
                      
                      —
                      
                      
                      —
                      
                      
                      227,627Other
                          assets
                      
                      
                      77,743
                      
                      
                      —
                      
                      
                      —Total
                          other assets
                      
                      
                      23,520,777
                      
                      
                      7,866,572
                      
                      
                      13,223,877Total
                          assets
                      
                      $
                      74,705,974
                      
                      $
                      44,262,480
                      
                      $
                      21,106,000L
                          I A B I L I T I E S    A N D  
                           S H A R E H
                          O L D E R S'    E Q U I T YCURRENT
                          LIABILITIES:Accounts
                          payable and accrued expenses
                      
                      $
                      1,442,931
                      
                      $
                      2,719,554
                      
                      $
                      2,789,735Current
                          portion note payable
                      
                      
                      11,874
                      
                      
                      12,799
                      
                      
                      12,536Other
                          payables
                      
                      
                      201,391
                      
                      
                      551,528
                      
                      
                      —Loans
                          payable - related parties
                      
                      
                      —
                      
                      
                      —
                      
                      
                      95,578Customer
                          deposits
                      
                      
                      1,858,452
                      
                      
                      1,752,216
                      
                      
                      83,967Taxes
                          payable
                      
                      
                      4,849,550
                      
                      
                      1,892,676
                      
                      
                      4,854,221Total
                          current liabilities
                      
                      
                      8,364,198
                      
                      
                      6,928,773
                      
                      
                      7,836,037LONG-TERM
                          LIABILITIES:Note
                          payable, net
                      
                      
                      —
                      
                      
                      7,895
                      
                      
                      17,440Total
                          liabilities
                      
                      
                      8,364,198
                      
                      
                      6,936,668
                      
                      
                      7,853,477MINORITY
                          INTEREST
                      
                      
                      —
                      
                      
                      18,662,906
                      
                      
                      6,633,436SHAREHOLDERS'
                          EQUITY:Common
                          stock, $0.001 par value, 50,000,000 shares authorized,24,699,753
                          (2005), 12,968,401(2004) and 12,338,401(2003) shares
                          issued and
                          outstanding
                      
                      
                      24,700
                      
                      
                      12,968
                      
                      
                      12,338Additional
                          paid-in capital
                      
                      
                      36,889,732
                      
                      
                      8,655,339
                      
                      
                      654,339Statutory
                          reserves
                      
                      
                      324,583
                      
                      
                      324,583
                      
                      
                      324,583Retained
                          earnings
                      
                      
                      32,082,555
                      
                      
                      9,666,676
                      
                      
                      5,642,184Deferred
                          compensation
                      
                      
                      (4,379,203
                      )
                      
                      —
                      
                      
                      —Accumulated
                          other comprehensive income (loss)
                      
                      
                      1,399,409
                      
                      
                      3,340
                      
                      
                      (14,357
                      )Total
                          shareholders' equity
                      
                      
                      66,341,776
                      
                      
                      18,662,906
                      
                      
                      6,619,087Total
                          liabilities and shareholders' equity
                      
                      $
                      74,705,974
                      
                      $
                      44,262,480
                      
                      $
                      21,106,000
   The
                  accompanying notes are integral part of this statement.
 F-6
  CHINA
                          ENERGY SAVINGS TECHNOLOGY, INC. AND SUBSIDIARIES(FORMERLY
                          KNOWN AS RIM HOLDINGS, INC.)CONSOLIDATED
                          STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
                          (LOSS)FOR
                          THE YEAR ENDED SEPTEMBER 30, 2005, NINE MONTHS ENDED SEPTEMBER
                          30, 2004AND
                          THE YEARS ENDED DECEMBER 31, 2003 AND 2002Year
                          ended
                      
                      Nine
                          months ended
                      
                      Year
                          ended December 319/30/2005
                      
                      9/30/2004
                      
                      2003
                      
                      2002Audited
                      
                      Audited
                      
                      Audited
                      
                      AuditedRestated
                      
                      Restated
                      
                      RestatedREVENUES
                      
                      $
                      48,388,076
                      
                      $
                      30,997,070
                      
                      $
                      31,057,877
                      
                      $
                      7,914,658COST
                          OF GOOD SOLD
                      
                      
                      19,928,707
                      
                      
                      11,640,973
                      
                      
                      19,748,263
                      
                      
                      4,989,797GROSS
                          PROFIT
                      
                      
                      28,459,369
                      
                      
                      19,356,097
                      
                      
                      11,309,614
                      
                      
                      2,924,861OPERATING
                          EXPENSESOperating
                          expense
                      
                      
                      1,996,375
                      
                      
                      1,538,220
                      
                      
                      155,780
                      
                      
                      225,589Selling,
                          general and administrative expenses
                      
                      
                      2,887,754
                      
                      
                      8,848,447
                      
                      
                      1,983,248
                      
                      
                      898,507Total
                          Operating Expenses
                      
                      
                      4,884,129
                      
                      
                      10,386,667
                      
                      
                      2,139,028
                      
                      
                      1,124,096INCOME
                          FROM OPERATIONS
                      
                      
                      23,575,240
                      
                      
                      8,969,430
                      
                      
                      9,170,586
                      
                      
                      1,800,765OTHER
                          INCOME (EXPENSE)Interest
                          income
                      
                      
                      1,839,409
                      
                      
                      2,202,122
                      
                      
                      1,607,373
                      
                      
                      389,253Interest
                          expense
                      
                      
                      (6,496
                      )
                      
                      (3,086
                      )
                      
                      (573
                      )
                      
                      (118
                      )Other
                          income (expense)
                      
                      
                      6,320
                      
                      
                      25,506
                      
                      
                      —
                      
                      
                      (933
                      )Other
                          income
                      
                      
                      260,189
                      
                      
                      2,680
                      
                      
                      10,375
                      
                      
                      —Total
                          Other Income
                      
                      
                      2,099,422
                      
                      
                      2,227,222
                      
                      
                      1,617,175
                      
                      
                      388,202INCOME
                          BEFORE INCOME TAXES AND MINORITY INTEREST
                      
                      
                      25,674,662
                      
                      
                      11,196,652
                      
                      
                      10,787,761
                      
                      
                      2,188,967CREDIT
                          (PROVISION) FOR INCOME TAXES
                      
                      
                      —
                      
                      
                      4,853,332
                      
                      
                      (1,879,896
                      )
                      
                      (401,086
                      )INCOME
                          BEFORE MINORITY INTEREST
                      
                      
                      25,674,662
                      
                      
                      16,049,984
                      
                      
                      8,907,865
                      
                      
                      1,787,881MINORITY
                          INTEREST
                      
                      
                      3,258,783
                      
                      
                      12,025,492
                      
                      
                      4,453,933
                      
                      
                      893,940NET
                          INCOME
                      
                      
                      22,415,879
                      
                      
                      4,024,492
                      
                      
                      4,453,932
                      
                      
                      893,941OTHER
                          COMPREHENSIVE INCOME (LOSS):Foreign
                          currency translation adjustment
                      
                      
                      1,396,069
                      
                      
                      17,697
                      
                      
                      (12,074
                      )
                      
                      1,544COMPREHENSIVE
                          INCOME
                      
                      $
                      23,811,948
                      
                      $
                      4,042,189
                      
                      $
                      4,441,858
                      
                      $
                      895,485Net
                          income per share - basic and diluted
                      
                      $
                      1.04
                      
                      $
                      0.36
                      
                      $
                      0.40
                      
                      $
                      0.08Weighted
                          average number of shares outstanding - basic and diluted
                      
                      
                      21,524,371
                      
                      
                      11,327,720
                      
                      
                      11,153,669
                      
                      
                      11,153,669
  The
                  accompanying notes are integral part of this statement.
 F-7
  CHINA
                              ENERGY SAVINGS TECHNOLOGY, INC. AND SUBSIDIARIES(FORMERLY
                              KNOWN AS RIM HOLDINGS, INC.)CONSOLIDATED
                              STATEMENTS OF SHAREHOLDERS' EQUITYFOR
                              THE YEAR ENDED SEPTEMBER 30,2005, NINE MONTHS ENDED
                              SEPTEMBER 30, 2004 ANDAND
                              THE YEAR ENDED DECEMBER 31, 2003
  AccumulatedAdditional
                              
                              
                              
                              
                              
                              otherNumber
                              
                              Common
                              
                              Paid-in
                              
                              Retained
                              
                              Statutory
                              
                              comprehensive
                              
                              Subscription
                              
                              Deferredof
                                  shares
                              
                              stock
                              
                              capital
                              
                              Earnings
                              
                              Reserves
                              
                              income
                                  (loss)
                              
                              Receivable
                              
                              Compensation
                              
                              TotalsBALANCE,
                                  December 31, 2002
                              
                              
                              12,338,401
                              
                              $
                              12,338
                              
                              $
                              654,328
                              
                              $
                              1,183,347
                              
                              $
                              329,488
                              
                              $
                              (2,283
                              )
                              $
                              (303,030
                              )
                              $
                              -
                              
                              $
                              1,874,188Cash
                                  received from subscription receivable
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              303,030
                              
                              
                              
                              
                              
                              303,030Contributed
                                  capital by stockholders
                              
                              
                              
                              
                              
                              
                              
                              
                              11
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              11Foreign
                                  currency translation adjustments
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (12,074
                              )
                              
                              
                              
                              
                              
                              
                              
                              (12,074
                              )Net
                                  income
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              4,453,932
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              4,453,932Statutory
                                  reserves
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              4,905
                              
                              
                              (4,905
                              )
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              -BALANCE,
                                  December 31, 2003
                              
                              
                              12,338,401
                              
                              
                              12,338
                              
                              
                              654,339
                              
                              
                              5,642,184
                              
                              
                              324,583
                              
                              
                              (14,357
                              )
                              
                              -
                              
                              
                              
                              
                              
                              6,619,087Foreign
                                  currency translation adjustments
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              17,697
                              
                              
                              
                              
                              
                              
                              
                              
                              17,697Issued
                                  S-8 stock of 630,000 shares
                              
                              
                              630,000
                              
                              
                              630
                              
                              
                              8,001,000
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              8,001,630Net
                                  income
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              4,024,492
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              4,024,492BALANCE,
                                  September 30, 2004
                              
                              
                              12,968,401
                              
                              
                              12,968
                              
                              
                              8,655,339
                              
                              
                              9,666,676
                              
                              
                              324,583
                              
                              
                              3,340
                              
                              
                              -
                              
                              
                              
                              
                              
                              18,662,906Stock
                                      issued for the acquisition of additional 15%
                                      investment in Starway
                                      Management Limited
                              
                              
                              3,346,100
                              
                              
                              3,346
                              
                              
                              6,102,341
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              6,105,687Stock
                                      issued for the acquisition of additional 35%
                                      investment in Starway
                                      Management Limited
                              
                              
                              7,807,569
                              
                              
                              7,808
                              
                              
                              15,808,193
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              15,816,001Stock
                                  issued for services
                              
                              
                              577,683
                              
                              
                              578
                              
                              
                              6,323,859
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (4,379,203
                              )
                              
                              1,945,234Foreign
                                  currency translation adjustments
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              1,396,069
                              
                              
                              
                              
                              
                              
                              
                              
                              1,396,069Net
                                  income
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              22,415,879
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              22,415,879BALANCE,
                                  September 30, 2005
                              
                              
                              24,699,753
                              
                              $
                              24,700
                              
                              $
                              36,889,732
                              
                              $
                              32,082,555
                              
                              $
                              324,583
                              
                              $
                              1,399,409
                              
                              $
                              -
                              
                              $
                              (4,379,203
                              )
                              $
                              66,341,776
 The
                  accompanying notes are integral part of this statement.
 F-8
  CHINA
                          ENERGY SAVINGS TECHNOLOGY, INC. AND SUBSIDIARIES(FORMERLY
                          KNOWN AS RIM HOLDINGS, INC.)CONSOLIDATED
                          STATEMENTS OF CASH FLOWSFOR
                          THE YEAR ENDED SEPTEMBER 30,2005, NINE MONTHS ENDED SEPTEMBER
                          30, 2004 ANDAND
                          THE YEARS ENDED DECEMBER 31, 2003 AND 2002Year
                          ended
                      
                      Nine
                          months ended
                      
                      Year
                          Ended December 31,9/30/2005
                      
                      9/30/2004
                      
                      2003
                      
                      2002Audited
                      
                      Audited
                      
                      Audited
                      
                      AuditedCASH
                          FLOWS FROM OPERATING ACTIVITIES:Net
                          income
                      
                      $
                      22,415,879
                      
                      $
                      4,024,492
                      
                      $
                      4,453,932
                      
                      $
                      893,941Adjustments
                          to reconcile net income to cashprovided
                          by (used in) operating activities:Minority
                          interest
                      
                      
                      3,258,783
                      
                      
                      12,025,492
                      
                      
                      4,453,933
                      
                      
                      893,940Depreciation
                          and amortization
                      
                      
                      106,789
                      
                      
                      59,601
                      
                      
                      104,306
                      
                      
                      91,042Stock
                          issued for services
                      
                      
                      1,945,234
                      
                      
                      8,001,630
                      
                      
                      —
                      
                      
                      —Allowance
                          for doubtful accounts
                      
                      
                      —
                      
                      
                      —
                      
                      
                      465,422
                      
                      
                      301,288Change
                          in operating assets and liabilities:(Increase)
                          decrease in assets:Accounts
                          receivable
                      
                      
                      108,836
                      
                      
                      (2,276,391
                      )
                      
                      (15,193,852
                      )
                      
                      (3,693,119
                      )Notes
                          receivable, net
                      
                      
                      (20,095,729
                      )
                      
                      4,129,841
                      
                      
                      —
                      
                      
                      —Inventories
                      
                      
                      2,745,339
                      
                      
                      (3,796,099
                      )
                      
                      1,121,391
                      
                      
                      (1,235,177
                      )Prepaid
                          expenses
                      
                      
                      (360,733
                      )
                      
                      (1,458,373
                      )
                      
                      166,113
                      
                      
                      (237,694
                      )Amount
                          due from related parties
                      
                      
                      1,133,528
                      
                      
                      (1,257,130
                      )
                      
                      —
                      
                      
                      —Other
                          receivables
                      
                      
                      359,021
                      
                      
                      (526,180
                      )
                      
                      100,851
                      
                      
                      57,809Intangible
                          assets
                      
                      
                      —
                      
                      
                      227,627
                      
                      
                      —
                      
                      
                      —Other
                          assets
                      
                      
                      (77,743
                      )
                      
                      —
                      
                      
                      9,614
                      
                      
                      —Increase
                          (decrease) in liabilities:Accounts
                          payable & accrued expenses
                      
                      
                      (1,276,622
                      )
                      
                      (70,180
                      )
                      
                      538,886
                      
                      
                      1,534,109Other
                          payables
                      
                      
                      (350,137
                      )
                      
                      551,528
                      
                      
                      —
                      
                      
                      —Customer
                          deposits
                      
                      
                      106,236
                      
                      
                      1,668,249
                      
                      
                      (526,822
                      )
                      
                      152,073Taxes
                          payable
                      
                      
                      2,956,874
                      
                      
                      (2,961,545
                      )
                      
                      3,950,365
                      
                      
                      874,971Net
                          cash provided by (used in) operating activities
                      
                      
                      12,975,555
                      
                      
                      18,342,562
                      
                      
                      (355,861
                      )
                      
                      (366,817
                      )CASH
                          FLOWS FROM INVESTING ACTIVITIES:Increase
                          in Long-term loan receivable
                      
                      
                      (1,857,000
                      )
                      
                      —
                      
                      
                      —
                      
                      
                      —Purchase
                          of intangible asset
                      
                      
                      —
                      
                      
                      —
                      
                      
                      —
                      
                      
                      (40,459
                      )Proceeds
                          from sale of fixed assets
                      
                      
                      —
                      
                      
                      173,123
                      
                      
                      —
                      
                      
                      —Purchase
                          of plant and equipment
                      
                      
                      (22,047
                      )
                      
                      (6,825
                      )
                      
                      (49,544
                      )
                      
                      (16,213
                      )Net
                          cash (used in) provided by investing activities
                      
                      
                      (1,879,047
                      )
                      
                      166,298
                      
                      
                      (49,544
                      )
                      
                      (56,672
                      )CASH
                          FLOWS FROM FINANCING ACTIVITIES:Proceeds
                          (payments) on loans payable - related parties
                      
                      
                      —
                      
                      
                      (95,578
                      )
                      
                      (208,426
                      )
                      
                      347,179Payments
                          on notes payable
                      
                      
                      (8,820
                      )
                      
                      (9,282
                      )
                      
                      (7,963
                      )
                      
                      —Increase
                          in minority interest
                      
                      
                      —
                      
                      
                      —
                      
                      
                      303,031
                      
                      
                      —Proceeds
                          from issuance of common stock
                      
                      
                      —
                      
                      
                      —
                      
                      
                      303,041
                      
                      
                      121,211Net
                          cash (used in) provided by financing activities
                      
                      
                      (8,820
                      )
                      
                      (104,860
                      )
                      
                      389,683
                      
                      
                      468,390EFFECT
                          OF EXCHANGE RATE ON CASH
                      
                      
                      1,396,069
                      
                      
                      17,697
                      
                      
                      (12,074
                      )
                      
                      1,544INCREASE
                          (DECREASE) IN CASH
                      
                      
                      12,483,757
                      
                      
                      18,421,697
                      
                      
                      (27,796
                      )
                      
                      46,445CASH,
                          beginning of period
                      
                      
                      18,442,862
                      
                      
                      21,165
                      
                      
                      48,961
                      
                      
                      2,516CASH,
                          end of period
                      
                      $
                      30,926,619
                      
                      $
                      18,442,862
                      
                      
                      21,165
                      
                      
                      48,961SUPPLEMENTAL
                          DISCLOSURE OF CASH FLOW INFORMATION:Cash
                          paid for interest expense
                      
                      $
                      6,496
                      
                      $
                      3,086
                      
                      $
                      573
                      
                      $
                      118NON-CASH
                          TRANACTIONS:Stock
                          issued for services
                      
                      $
                      6,324,437
                      
                      $
                      $
                          8,001,630
                      
                      $
                      —
                      
                      $
                      —
  The
                  accompanying notes are integral part of this statement.
 F-9
 CHINA
                ENERGY SAVINGS TECHNOLOGY, INC.
 AND
                SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
  **Note
                  1 - Organization**
  Organization
 
 On
                  August
                  23, 2004, China Energy Savings Technology, Inc. (the Company) formally
                  changed
                  its name from Rim Holdings Inc. to China Energy Savings Technology,
                  Inc.
 
 On
                  June
                  30, 2004 (“the Closing Date”) Rim Holdings Inc., a Nevada corporation (Rim) and
                  Eurofaith Holdings, Inc., a British Virgin Islands Corporation
                  (“Eurofaith),
                  entered a Stock Purchase Agreement (the Eurofaith Stock Purchase
                  Agreement).
                  Pursuant to the Stock purchase agreement, Rim acquired 50% of the
                  outstanding
                  shares of Starway Management Ltd., a British Virgin Islands company
                  (“Starway”)
                  from Eurofaith (the “Acquisition”). The purchase price for such stock was
                  $120,000,000 payable by Rim’s issuance of a convertible promissory note on the
                  Closing Date. The note may be convertible into 223,073,380 shares
                  of the Rim’s
                  common stock upon maturity at the discretion of Rim. Eurofaith
                  may also convert
                  at any time prior to the maturity. On June 30, 2004, the fair value
                  of the
                  convertible note payable was discounted to the fair value of the
                  equity interest
                  acquired of $6,633,440 which is 50% of the net book value of Starway
                  as December
                  31, 2003. On August 26, 2004 this note was converted into 11,153,669
                  shares
                  post-split of 20 to 1 (223,073,380 pre split). New Solomon Consultants
                  Limited
                  acquired 6.9 million shares of common stock from Eurofaith Holdings
                  upon
                  conversion.
 
 Immediately
                  after the closing of this transaction, Rim redeemed 1,000,000 shares
                  pre-split
                  shares (50,000 shares post-split) of its common stock from Christina
                  M. Strauch
                  in exchange for all of the shares of Rimmer Computer, Inc., an
                  Arizona
                  corporation (“Rimmer”). The following is a summary of the shares issued due to
                  the recapitalization:
  No.
                              of SharesIssuedShares
                              issued to current stock holdersin
                              connection with recapitalization
                          
                          
                          1,234,632Shares
                              issued to Eurofaith due to note conversion
                          
                          
                          11,153,669Shares
                              redeemed from Christina Strauch
                          
                          
                          (50,000
                          )Net
                              shares issued due to recapitalization
                          
                          
                          12,338,301
 Prior
                  to
                  the transaction, Rim was a holding company holding all of the shares
                  of Rimmer.
                  Rimmer was an approved technical service provider for computer
                  hardware and
                  software system manufacturers. All of Rimmer’s customers were located in the
                  Phoenix, Arizona area. Since the closing, Rim’s primary operations consist of
                  the operations of Starway.
 
 As
                  a
                  result, the transaction was treated for accounting purposes as
                  a
                  recapitalization by the accounting acquirer Starway Management
                  Limited. The
                  stock issuance represented 50% of the issued and outstanding stock
                  of Starway
                  Management Limited at the time of issuance. The acquisition of
                  Starway
                  Management Limited by the Company was accounted for as a recapitalization
                  of
                  Starway Management Limited, pursuant to which the accounting basis
                  of Starway
                  Management Limited continued unchanged subsequent to the transaction
                  date.
  See
                      report of independent registered public accounting firm
 F-10
 CHINA
                      ENERGY SAVINGS TECHNOLOGY, INC.
 AND
                      SUBSIDIARIES
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 **Note
                  1 - Organization, (continued)**
 
 Organization,
                  (continued)
 
 Starway
                  Management Limited will be the historical financial statements
                  of the Company
                  and its subsidiaries Shenzhen Dicken Industrial Development Limited
                  and Shenzhen
                  Dicken Technology Development Limited. The financial statements
                  have been
                  restated to reflect the recapitalization as if the transaction
                  happened as of
                  January 1, 2002.
 
 On
                  November 17, 2004, the Company acquired an additional 15% of Starway
                  Management
                  Limited to bring its stock ownership to 65% as of December 31,
                  2004, as further
                  described in note 16. On February 1, 2005, the Company acquired
                  the remaining
                  35% of Starway Management Limited, as described in note 17, and
                  Starway
                  Management Limited became a wholly owned subsidiary of the Company
                  at that
                  time.
 
 Starway
                  was incorporated in the British Virgin Islands on September 15,
                  1998. Starway
                  owns all of the equity interest in Shenzhen Dicken Industrial Development
                  Limited, a company incorporated in the People’s Republic of China on November
                  20, 1996 (SDID), which in turn owns all of the equity interest
                  in Shenzhen
                  Dicken Technology Development Limited, a company incorporated in
                  the People’s
                  Republic of China on November 9, 1999 (SDID). In 2003, Eurofaith,
                  the
                  shareholder of SDID exchanged 100% of the common shares of SDID
                  for 100 shares
                  of Starway.
 
 Activities
 
 Starway
                  through its two subsidiaries SDID and SDID is a People’s Republic of China based
                  marketer, distributor and manufacturer of energy saving products
                  for use in
                  commercial and industrial settings. SDID is a foreign-owned enterprise
                  and
                  responsible for the operation and sales of its products. SDID is
                  a wholly-owned
                  subsidiary of SDID and is a limited liability company incorporated
                  in the PRC
                  and is responsible for the development of energy saving projects
                  of Shenzhen
                  Dicken Group. The Company through its subsidiaries mainly sells
                  their products
                  within the People’s Republic of China.
 
 **Note
                  2 - Summary of significant accounting policies**
 
 Basis
                  of preparation
 
 The
                  accompanying financial statements have been prepared in accordance
                  with
                  accounting principles generally accepted in the United States of
                  America. The
                  Accompany consolidated financial statements include the accounts
                  of Starway
                  Management Limited, Shenzhen Dicken Technology Development Limited
                  and Shenzhen
                  Dicken Industrial Development Limited, (collectively the "Company").
                  All
                  material intercompany transactions and balances have been eliminated
                  in the
                  consolidation.
  See
                      report of independent registered public accounting firm
 F-11
 CHINA
                      ENERGY SAVINGS TECHNOLOGY, INC.
 AND
                      SUBSIDIARIES
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 **Note
                  2 - Summary of significant accounting polices, (continued)**
 
 Change
                  of Year End
 
 Prior
                  to
                  the acquisition, the Company’s subsidiaries reporting year end was December 31.
                  However, Rim Holdings, Inc.’s reporting year ended was September 30. In order to
                  be consistent with Rim’s reporting year end, the Company’s Board of Directors
                  approved all of their subsidiaries’ fiscal year end change from December 31, to
                  September 30. Effective September 30, 2004, the Company's subsidiaries
                  changed
                  fiscal year from December 31 to September 30. The table below summarizes
                  the
                  selected data for the nine months ended September 30, 2004 and
                  2003 (unaudited),
                  respectively:
 
 Nine
                              Months EndedSeptember
                              30,2004
                          
                          2003Audited
                          
                          UnauditedRevenue
                          
                          $
                          30,997,070
                          
                          $
                          19,556,412Cost
                              of good sold
                          
                          
                          11,640,973
                          
                          
                          12,300,517Gross
                              profit
                          
                          
                          19,356,097
                          
                          
                          7,255,895Operating
                              expense
                          
                          
                          1,538,220
                          
                          
                          100,926Selling,
                              general and administrative expense
                          
                          
                          8,848,447
                          
                          
                          1,171,155Income
                              From Operations
                          
                          
                          8,969,430
                          
                          
                          5,983,814Interest
                              income
                          
                          
                          2,202,122
                          
                          
                          829,681Interest
                              expense
                          
                          
                          (3,086
                          )
                          
                          (404
                          )Other
                              income
                          
                          
                          25,506
                          
                          
                          169Other
                              expense
                          
                          
                          2,680
                          
                          
                          4,669Income
                              before income taxes and minority interest
                          
                          
                          11,196,652
                          
                          
                          6,817,929Credit
                              (Provision) for income taxes
                          
                          
                          4,853,332
                          
                          
                          (1,200,925
                          )Income
                              before minority interest
                          
                          
                          16,049,984
                          
                          
                          5,617,004Minority
                              interest
                          
                          
                          12,025,492
                          
                          
                          2,808,502Net
                              income
                          
                          
                          4,024,492
                          
                          
                          2,808,502Foreign
                              currency translation adjustment
                          
                          
                          17,697
                          
                          
                          (12,074
                          )Comprehensive
                              income
                          
                          $
                          4,042,189
                          
                          $
                          2,796,428Net
                              income per share - basic and diluted
                          
                          $
                          0.36
                          
                          $
                          0.25Weighted
                              average number of shares outstanding -basic
                              and diluted
                          
                          
                          11,327,720
                          
                          
                          11,153,669
  See
                      report of independent registered public accounting firm
 F-12
 CHINA
                      ENERGY SAVINGS TECHNOLOGY, INC.
 AND
                      SUBSIDIARIES
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 **Note
                  2 - Summary of significant accounting polices, (continued)**
 
 Use
                  of
                  Estimates
 
 In
                  preparing financial statements in conformity with generally accepted
                  accounting
                  principles, management is required to make estimates and assumptions
                  that affect
                  the reported amounts of assets and liabilities and the disclosure
                  of contingent
                  assets and liabilities at the date of the financial statements
                  and revenues and
                  expenses during the reported period. Actual results could differ
                  from those
                  estimates.
 
 Cash
                  and Cash Equivalents
 
 For
                  purposes of the cash flow statements, the Company considers all
                  highly liquid
                  investments with original maturities of three months or less at
                  the time of
                  purchase to be cash equivalents.
 
 Notes
                  Receivable
 
 The
                  Company carries its notes receivable at the net present value of
                  the notes, net
                  of allowance for doubtful accounts. The Company uses the best lending
                  rate in
                  China as of the quarter ending in determining the net present value
                  of notes
                  receivable outstanding on energy savings sharing contracts at the
                  time the
                  contract was entered into. In accordance with APBO 21, Interest
                  on Receivables
                  and Payables, the Company believes that using this rate reflects
                  what a company
                  would be charged on this type of transaction if the funds were
                  borrowed from an
                  independent lender. The interest rates used to discount the notes
                  receivable are
                  reviewed on a monthly basis compared to the current market rates
                  to determine if
                  the rates used are still applicable. The interest rates used in
                  determining this
                  discount may change if the Company determines that a permanent
                  decline in
                  interest rates has occurred.
 
 Allowance
                  for doubtful accounts
 
 The
                  Company reviews its accounts and notes receivable on a monthly
                  basis to
                  determine if the allowance for bad debts is sufficient. As of September
                  30, 2005
                  and September 30, 2004 the allowance for doubtful accounts amounted
                  to $768,151
                  and $768,151, respectively.
 
 Inventory
 
 Inventory
                  is stated at the lower of cost or market value, cost being determined
                  on a
                  first-in, first-out (FIFO) method.
 
 Plant
                  and Equipment
 
 The
                  Company's plant and equipment are stated at cost. Depreciation
                  is provided over
                  the estimated useful lives of the respective assets on a straight-line
                  basis
                  from five to fifteen years.
  See
                      report of independent registered public accounting firm
 F-13
 CHINA
                      ENERGY SAVINGS TECHNOLOGY, INC.
 AND
                      SUBSIDIARIES
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 **Note
                  2 - Summary of significant accounting polices, (continued)**
 
 Intangibles
 
 Under
                  the
                  Statement of Accounting Standards ("SFAS") No. 142,"Goodwill and
                  Other
                  Intangible Assets", all goodwill and certain intangible assets
                  determined to
                  have indefinite lives will not be amortized but will be tested
                  for impairment at
                  least annually. Intangible assets other than goodwill will be amortized
                  over
                  their useful lives of 10 years and reviewed for impairment in accordance
                  with
                  SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived
                  Assets".
 
 Impairment
                  of Long-Live Assets
 
 Per
                  SFAS
                  No. 144, long-lived assets will be analyzed annually for indications
                  of
                  impairment. Impairment of long-lived assets is assessed by the
                  Company whenever
                  there is an indication that the carrying amount of the asset may
                  not be
                  recovered. Recoverability if these assets are determined by comparing
                  the
                  forecasted undiscounted cash flows generated by those assets to
                  the assets' net
                  carrying value. The amount of impairment loss, if any, is measured
                  as the
                  difference between the net book value of the assets and the estimated
                  fair value
                  of the related assets.
 
 The
                  Company evaluates the recoverability of long-lived assets by measuring
                  the
                  carrying amount of the assets against the estimated undiscounted
                  future cash
                  flows associated with them. At the time such flows of certain long-lived
                  assets
                  are not sufficient to recover the carrying value of such assets,
                  the assets are
                  adjusted to their fair values.
 
 Revenue
                  and Deferred Revenue Recognition
 
 The
                  Company recognizes revenue when all four of the following criteria
                  are met: (1)
                  persuasive evidence has been received that an arrangement exists;
                  (2) delivery
                  of the products and/or services has occurred; (3) the selling price
                  is fixed or
                  determinable; and (4) collectibility is reasonably assured. The
                  Company follows
                  the provisions of SAB No. 104 which sets forth guidelines in the
                  timing of
                  revenue recognition based upon factors such as passage of title,
                  installation,
                  payments and customer acceptance. Any amounts received prior to
                  satisfying the
                  Company’s revenue recognition criteria is recorded as deferred
                  revenue.
 
 The
                  Company has two types of contracts for its product sales: energy
                  savings sharing
                  contracts and equipment sales contracts.
 
 (a)
                        Energy
                            savings sharing
 
 Under
                  this arrangement, the customers do not need to bear the initial
                  cost of the
                  energy saving equipments. They have to make energy savings sharing
                  contracts
                  with the Company which is entitled to receive a share of the aggregated
                  amount
                  of estimated energy saving within a specified period of the arrangement.
  See
                      report of independent registered public accounting firm
 F-14
 CHINA
                      ENERGY SAVINGS TECHNOLOGY, INC.
 AND
                      SUBSIDIARIES
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 **Note
                  2 - Summary of significant accounting polices, (continued)**
 
 Revenue
                  and Deferred Revenue Recognition, (continued)
 
 (a)
                        Energy
                            savings sharing, (continued)
 
 The
                  Company’s revenue arising from sales of energy savings equipments and notes
                  receivable under this arrangement is recognized when:
 
 1.
                        the
                            agreement of energy savings sharing is signed by both
                            parties;
 2.
                        the
                            original estimated cost savings can be ascertained; and
 3.
                        the
                            equipment is installed and tested for an average rate
                            of energy
                            savings.
 
 The
                  receipt of each installment made by the customer during the period
                  of the
                  contract will be recognized as the repayments of the outstanding
                  notes
                  receivable when the amount of energy savings can be quantified
                  and agreed by
                  both parties. The excess amount received of the original estimated
                  savings
                  stated in the contract will be recognized as interest income by
                  the
                  Company.
 
 In
                  April
                  2005 the Company has changed the terms of their energy saving contracts
                  to
                  include a minimum interest rate that will be earned on their contracts.
                  If the
                  amount of energy savings does not meet this minimum rate of return,
                  the customer
                  is required to pay the minimum rate of return stated in the contract.
 
 (b)
                        Outright
                            equipment sales
 
 Under
                  this arrangement, the Company’s customer has to pay the cost of the energy
                  saving equipments and they can keep all benefits of energy saving
                  to
                  them.
 
 Revenue
                  arising from the sales of the energy saving equipment to customers
                  is recognized
                  when the goods are taken and accepted by the customer and the customer
                  assumes
                  all the related risks and rewards of ownership. Revenue represents
                  the sales
                  value of goods to customers after allowances for goods returned , excludes
                  value added tax (“VAT”) and is after deduction of any trade
                  discounts.
 
 Product
                  Development Costs
 
 Product
                  development costs incurred in the process of developing product
                  improvements and
                  enhancements or new products are charged to expense as incurred.
                  Statement of
                  Financial Accounting Standards ("SFAS") No.86, Accounting for the
                  Costs of
                  Computer Software to be Sold, Leased or Otherwise Marketed, requires
                  capitalization of certain software development costs subsequent
                  to the
                  establishment of technological feasibility. Based on the Company's
                  product
                  development process, technological feasibility is established upon
                  the
                  completion of a working model. Costs incurred by the Company between
                  the
                  completion of the working model and the point at which the product
                  is ready for
                  general release has been insignificant.
 
 See
                      report of independent registered public accounting firm
 F-15
 CHINA
                      ENERGY SAVINGS TECHNOLOGY, INC.
 AND
                      SUBSIDIARIES
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 **Note
                  2 - Summary of significant accounting polices, (continued)**
 
 Foreign
                  Currency Translation
 
 The
                  functional currency of the Company is the Chinese Renminbi. The
                  financial
                  statements of the Company are translated to United Stated dollars
                  using year-end
                  exchange rates as to assets and liabilities and average exchange
                  rates as to
                  revenues and expenses. Capital accounts are translated at their
                  historical
                  exchange rates when the capital transaction occurred. Net gains
                  and losses
                  resulting from foreign exchange translations are included in the
                  statements of
                  operations and stockholders' equity as other comprehensive income.
 
 This
                  quotation of the exchange rates does not imply free convertibility
                  of RMB to
                  other foreign currencies. All foreign exchange transactions continue
                  to take
                  place either through the People’s Bank of China or other banks authorized to buy
                  and sell foreign currencies at the exchange rate quoted by the
                  People’s Bank of
                  China.
 
 Approval
                  of foreign currency payments by the Bank of China or other institutions
                  requires
                  submitting a payment application form together with invoices, shipping
                  documents
                  and signed contracts.
  Translation
                  adjustments resulting from this process are included in accumulated
                  other
                  comprehensive income in the consolidated statement of shareholders'
                  equity and
                  amounted to $1,399,409 and $3,340 as of September 30, 2005 and
                  2004,
                  respectively. The balance sheet amounts with the exception of equity
                  at
                  September 30, 2005 were translated at 8.07 RMB to $1.00 USD as
                  compared to 8.26
                  RMB at September 30, 2004. The equity accounts were stated at their
                  historical
                  rate. The average translation rate of 8.22 RMB for the twelve months
                  ended
                  September 30, 2005 was applied to income statement accounts.
 
 Comprehensive
                  Income (Loss)
 
 The
                  foreign currency translation gain or loss resulting from the translation
                  of the
                  financial statements expressed in Chinese Renminbi to United States
                  dollars is
                  reported as other comprehensive income (loss) in the statement
                  of income and
                  stockholders' equity.
  See
                      report of independent registered public accounting firm
 F-16
 CHINA
                      ENERGY SAVINGS TECHNOLOGY, INC.
 AND
                      SUBSIDIARIES
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 **Note
                  2 - Summary of significant accounting polices, (continued)**
 
 Income
                  Taxes
 
 The
                  Company accounts for income taxes under the Statement of Financial
                  Accounting
                  Standards No. 109, "Accounting for Income Taxes" ("Statement 109").
 
 Under
                  Statement 109, deferred tax assets and liabilities are recognized
                  for the future
                  tax consequences attributable to differences between the financial
                  statement
                  carrying amounts of existing assets and liabilities and their respective
                  tax
                  bases. Deferred tax assets and liabilities are measured using enacted
                  tax rates
                  expected to apply to taxable income in the years in which those
                  temporary
                  differences are expected to be recovered or settled. Under Statement
                  109, the
                  effect on deferred tax assets and liabilities of a change in tax
                  rates is
                  recognized in income in the period that includes the enactment
                  date. The Company
                  is organized in the British Virgin Islands and the People's Republic
                  of China
                  and no tax benefit is expected from the tax credits in the future.
                  The Company
                  located its factories in a special economic region in China. This
                  economic
                  region allows foreign enterprises a two-year income tax exemption
                  and a 50%
                  income tax reduction for the following three years. The Company
                  was approved as
                  a wholly owned foreign enterprise in 2004. The Company has income
                  tax exemption
                  for 2004 and 2005 and 50% income tax reduction for 2006, 2007 and
                  2008.
 
 Fair
                  Value of Financial Instruments
 
 The
                  carrying amounts of the Company's financial instruments (including
                  accounts
                  receivable, stockholder loans and notes payable) approximate fair
                  value due to
                  the relatively short period to maturity of these instruments.
 
 The
                  fair
                  value of short-term and long-term notes receivable was determined
                  using a
                  discounted cash flow analysis based on the Company's borrowing
                  rate. At
                  September 30, 2005 and 2004 and December 31, 2003, the carrying
                  value of these
                  notes approximated their fair value.
 
 Earnings
                  Per Share
 
 The
                  Company reports earnings per share in accordance with the provisions
                  of SFAS No.
                  128, "Earnings Per Share." SFAS No. 128 requires presentation of
                  basic and
                  diluted earnings per share in conjunction with the disclosure of
                  the methodology
                  used in computing such earnings per share. Basic earnings per share
                  excludes
                  dilution and is computed by dividing income available to common
                  stockholders by
                  the weighted average common shares outstanding during the period.
                  Diluted
                  earnings per share takes into account the potential dilution that
                  could occur if
                  securities or other contracts to issue common stock were exercised
                  and converted
                  into common stock. There are no differences between Basic and Diluted
                  EPS for
                  the periods ended September 30, 2005 and 2004 and December 31,
                  2003 and
                  2002.
  See
                      report of independent registered public accounting firm
 F-17
 CHINA
                      ENERGY SAVINGS TECHNOLOGY, INC.
 AND
                      SUBSIDIARIES
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 **Note
                  2 - Summary of significant accounting polices, (continued)**
 
 Earnings
                  Per Share, (continued)
 
 On
                  February 1, 2005, the Company acquired the remaining 35% interest
                  (the”
                  Acquisition") in Starway Management Limited ("Starway) from Sky
                  Beyond
                  Investments Limited ("Sky Beyond") by issuing a total of 7,807,569
                  shares of
                  common stock of the Company. Sky Beyond had acquired the 35% interest
                  in Starway
                  from Golden Resorts Group Limited (formerly known as "Meditech
                  Group Company
                  Limited"). However management of the Company then learned that
                  the stock sale
                  between Sky Beyond and Golden Resorts Group Limited was subject
                  to approval by
                  the shareholders of Golden Resorts. On July 28, 2005, the shareholders
                  of Golden
                  Resorts approved the sale of the Starway interest to Sky Beyond.
                  In the
                  financial statements of the Company as of March 31, 2005, the Company
                  took a
                  conservative approach in reflecting the acquisition of Starway
                  and did not
                  record the additional earnings and additional paid in capital attributed
                  to the
                  acquisition. Since the transaction has been approved, the Company
                  has reflected
                  the earnings and additional paid in capital from February 1, 2005
                  in the
                  financial statements of September 30, 2005. The financial statements
                  contained
                  in the 10QSB for the quarter ending March 31, 2005 will be amended
                  to reflect
                  the acquisition as being completed.
  Concentrations
                  and Credit Risks
 
 For
                  the
                  period ended September 30, 2005 and 2004, 100% of the Company’s sales were to
                  companies located in the PRC. For the year ended September 30,
                  2005,
                  approximately $23 million of the total sales revenue were generated
                  from energy
                  savings sharing contracts with four customers. There was no revenue
                  generated
                  from energy savings sharing contract for the nine months ended
                  September, 2004.
                  For the year ended December 2003 and 2002, approximately $17 million
                  and $3
                  million of the total sales revenue were generated from energy savings
                  sharing
                  contracts with nine and four customers, respectively. At September
                  30, 2005, the
                  total outstanding balance of notes receivable related to energy
                  savings sharing
                  contracts is approximately $30 million and due from eleven customers.
                  Apart from
                  energy savings sharing contract sales, the concentration of credit
                  risk with
                  respect to accounts receivable is limited due to the wide variety
                  of customers
                  as well as their dispersion across many geographic areas in China.
 
 At
                  September 30, 2005 and September 30, 2004, all of the Company’s assets were
                  located in the PRC.
 
 The
                  Company’s operations may be adversely affected by significant political,
                  economic and social uncertainties in China. Although the Chinese
                  government has
                  pursued economic reform policies in the past, there is no assurance
                  that the
                  Chinese government will continue to pursue such policies or that
                  such policies
                  may not be significantly altered, especially in the event of a
                  change in
                  leadership, social or political disruption or unforeseen circumstances
                  affect
                  China’s political, economic and social conditions. There is also no guarantee
                  that the Chinese government’s pursuit of economic reforms will be consistent or
                  effective.
  See
                      report of independent registered public accounting firm
 F-18
 CHINA
                      ENERGY SAVINGS TECHNOLOGY, INC.
 AND
                      SUBSIDIARIES
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 **Note
                  2 - Summary of significant accounting polices, (continued)**
 
 Cash
                  in Bank accounts
 
 Cash
                  includes cash on hand and demand deposits in accounts maintained
                  with
                  state-owned banks within the People’s Republic of China. Total cash in
                  state-owned banks at September 30, 2005 and 2004 and December 31,
                  2003 amounted
                  to $30,896,309, $18,269,919 and $175,024, respectively of which
                  no deposits are
                  covered by insurance. The Company has not experienced any losses
                  in such
                  accounts and believes it is not exposed to any risks on its cash
                  in bank
                  accounts.
 
 Recently
                  issued accounting pronouncements
 
 In
                  March
                  2004, the FASB issued EITF Issue No. 03-1, The Meaning of Other-Than-Temporary
                  Impairment and Its Application to Certain Investments. EITF 03-1
                  includes new
                  guidance for evaluating and recording impairment losses on debt
                  and equity
                  investments, as well as new disclosure requirements for investments
                  that are
                  deemed to be temporarily impaired. In September 2004, the FASB
                  issued Staff
                  Position EITF 03-1-1, which delays the effective date until additional
                  guidance
                  is issued for the application of the recognition and measurement
                  provisions of
                  EITF 03-1 to investments in securities that are impaired; however,
                  the
                  disclosure requirements are effective for annual periods ending
                  after June 15,
                  2004. Management does not currently believe adoption will have
                  a material impact
                  on the Company’s financial position or results of operations.
 
 In
                  November 2004, the FASB issued SFAS No. 151, *Inventory
                  Costs*,
                  an amendment of ARB No. 43, Chapter 4.This
                  statement amends the guidance in ARB No. 43, Chapter 4,
                  Inventory
                  Pricing, to clarify the accounting for abnormal amounts of idle
                  facility
                  expense, freight, handling costs, and wasted material (spoilage).
                  Paragraph 5 of ARB No. 43, Chapter 4, previously
                  stated that
“...under some circumstances, items such as idle facility expense,
                  excessive
                  spoilage, double freight, and re-handling costs may be so abnormal
                  as to require
                  treatment as current period charges...” SFAS No. 151 requires that those items
                  be recognized as current-period charges regardless of whether they
                  meet the
                  criterion of “so abnormal.” In addition, this requires that allocation of fixed
                  production overhead to the costs of conversion be based on the
                  normal capacity
                  of the production facilities.
 
 The
                  provisions of SFAS 151 shall be applied prospectively and are effective
                  for
                  inventory costs incurred during fiscal years beginning after June 15,
                  2005,
                  with earlier application permitted for inventory costs incurred
                  during fiscal
                  years beginning after the date this Statement was issued. The Company’s adoption
                  of SFAS No. 151 is not currently expected to have a material
                  impact on the
                  Company’s financial position or results of operations.
  See
                      report of independent registered public accounting firm
 F-19
 CHINA
                      ENERGY SAVINGS TECHNOLOGY, INC.
 AND
                      SUBSIDIARIES
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 **Note
                  2 - Summary of significant accounting policies,
                  (continued)**
 
 Recently
                  issued accounting pronouncements, (continued)
 
 In
                  December 2004, the FASB issued SFAS No. 123(R) (revised
                  2004), “Share-Based
                  Payment”, which amends FASB Statement No. 123 and will be effective for
                  public
                  companies for interim or annual periods beginning after June 15,
                  2005. The
                  revised standard requires, among other things that compensation
                  cost for
                  employee stock options be measured at fair value on the grant date
                  and charged
                  to expense over the employee’s requisite service period for the option. Due to
                  the absence of observable market prices for employee stock options,
                  the standard
                  indicates that the fair value of most stock options will be determined
                  using an
                  option-pricing model. The Company’s adoption of SFAS No. 123(R) is not currently
                  expected to have a material impact on the Company’s financial position or
                  results of operations.
 
 In
                  December 2004, the FASB issued SFAS No. 153, *Exchanges
                  of Nonmonetary Assets, an amendment of APB Opinion No. 29* .
                  The
                  guidance in APB Opinion No. 29, *Accounting
                  for Nonmonetary Transactions* ,
                  is
                  based on the principle that exchanges of nonmonetary assets should
                  be measured
                  based on the fair value of assets exchanged. The guidance in that
                  Opinion,
                  however, included certain exceptions to that principle.
 
 This
                  Statement amends Opinion 29 to eliminate the exception for nonmonetary
                  exchanges
                  of similar productive assets that do not have commercial substance.
                  A
                  nonmonetary exchange has commercial substance if the future cash
                  flows of the
                  entity are expected to change significantly as a result of the
                  exchange. SFAS
                  No. 153 is effective for nonmonetary exchanges occurring
                  in fiscal periods
                  beginning after June 15, 2005. The Company’s adoption of SFAS No. 153
                  is not expected to have a material impact on the Company’s financial position or
                  results of operations.
 
 In
                  March 2005, the FASB published FASB Interpretation No. 47,
“Accounting for
                  Conditional Asset Retirement Obligations,” which clarifies that the term,
                  conditional asset retirement obligations, as used in SFAS No. 143,
                  “Accounting for Asset Retirement Obligations,” refers to a legal obligation to
                  perform an asset retirement activity in which the timing and (or) method
                  of
                  settlement are conditional on a future event that may or may not
                  be within the
                  control of the entity. The uncertainty about the timing and (or) method
                  of
                  settlement of a conditional asset retirement obligation should
                  be factored into
                  the measurement of the liability when sufficient information exists.
                  The
                  interpretation also clarifies when an entity would have sufficient
                  information
                  to reasonably estimate the fair value of an asset retirement obligation.
                  This
                  interpretation is effective no later than the end of the Company’s fiscal 2006.
                  The adoption of this Interpretation is not expected to have a material
                  effect on
                  the Company’s consolidated financial position or results of operations.
 
 See
                      report of independent registered public accounting firm
 F-20
 CHINA
                      ENERGY SAVINGS TECHNOLOGY, INC.
 AND
                      SUBSIDIARIES
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 **Note
                  2 - Summary of significant accounting policies,
                  (continued)**
 
 Recently
                  issued accounting pronouncements, (continued)
 
 In
                  June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
                  Corrections” (“SFAS No. 154”). SFAS No. 154 replaces APB No. 20
                  (“APB 20”) and SFAS No. 3, “Reporting Accounting Changes in
                  Interim Financial Statements,” and applies to all voluntary changes in
                  accounting principle, and changes the requirements for accounting
                  for and
                  reporting of a change in accounting principle. APB 20 previously
                  required
                  that most voluntary changes in accounting principle be recognized
                  by including
                  in net income of the period of change a cumulative effect of changing
                  to the new
                  accounting principle whereas SFAS No. 154 requires retrospective
                  application to prior periods’ financial statements of a voluntary change in
                  accounting principle, unless it is impracticable. SFAS No. 154
                  enhances the
                  consistency of financial information between periods. SFAS No. 154
                  will be
                  effective beginning with the Company’s first quarter of fiscal year 2006. The
                  Company does not expect that the adoption of SFAS No. 154
                  will have a
                  material impact on its results of operations, financial position
                  or cash flows.
 
 In
                  June
                  2005, the EITF reached a consensus on Issue No. 05-06, "Determining
                  the
                  Amortization Period for Leasehold Improvements" (EITF 05-06). EITF
                  05-06
                  provides guidance for determining the amortization period used
                  for leasehold
                  improvements acquired in a business combination or purchased after
                  the inception
                  of a lease, collectively referred to as subsequently acquired leasehold
                  improvements). EITF 05-06 provides that the amortization period
                  used for the
                  subsequently acquired leasehold improvements to be the lesser of
                  (a) the
                  subsequently acquired leasehold improvements' useful lives, or
                  (b) a period that
                  reflects renewals that are reasonably assured upon the acquisition
                  or the
                  purchase. EITF 05-06 is effective on a prospective basis for subsequently
                  acquired leasehold improvements purchased or acquired in periods
                  beginning after
                  the date of the FASB's ratification, which was on June 29, 2005.
                  The Company
                  does not anticipate that EITF 05-06 will have a material impact
                  on its
                  consolidated results of operations.
 
 In
                  July
                  2005, the Financial Accounting Standards Board (FASB) issued an
                  Exposure Draft
                  of a proposed Interpretation “Accounting for Uncertain Tax Positions—an
                  interpretation of FASB Statement No. 109.” Under the proposed
                  Interpretation, a company would recognize in its financial statements
                  its best
                  estimate of the benefit of a tax position, only if the tax position
                  is
                  considered probable of being sustained on audit based solely on
                  the technical
                  merits of the tax position. In evaluating whether the probable
                  recognition
                  threshold has been met, the proposed Interpretation would require
                  the
                  presumption that the tax position will be evaluated during an audit
                  by taxing
                  authorities. The proposed Interpretation would be effective as
                  of the end of the
                  first fiscal year ending after December 15, 2005, with a
                  cumulative effect
                  of a change in accounting principle to be recorded upon the initial
                  adoption.
                  The proposed Interpretation would apply to all tax positions and
                  only benefits
                  from tax positions that meet the probable recognition threshold
                  at or after the
                  effective date would be recognized. The Company is currently analyzing
                  the
                  proposed Interpretation and has not determined its potential impact
                  on our
                  Consolidated Financial Statements. While we cannot predict with
                  certainty the
                  rules in the final Interpretation, there is risk that the final
                  Interpretation
                  could result in a cumulative effect charge to earnings upon adoption,
                  increases
                  in future effective tax rates, and/or increases in future interperiod
                  effective
                  tax rate volatility.
  See
                      report of independent registered public accounting firm
 F-21
 CHINA
                      ENERGY SAVINGS TECHNOLOGY, INC.
 AND
                      SUBSIDIARIES
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 **Note
                  3 - Accounts receivable**
 
 Accounts
                  receivable as of September 30, 2005 and 2004 and December 31, 2003
                  consisted of
                  the following:
  September
                              30,
                          
                          September
                              30,
                          
                          December
                              31,2005
                          
                          2004
                          
                          2003Accounts
                              receivable
                          
                          $
                          7,239,840
                          
                          $
                          7,348,676
                          
                          $
                          5,070,844Less:
                                allowance fordoubtful accounts
                          
                          
                          768,151
                          
                          
                          768,151
                          
                          
                          766,710Totals
                          
                          $
                          6,471,689
                          
                          $
                          6,580,525
                          
                          $
                          4,304,134
  **Note
                  4 - Notes receivable**
 
 The
                  notes
                  receivable represent amounts due on Energy Savings Sharing contracts.
                  The
                  Company carries its notes receivable at the net present value of
                  the notes. The
                  notes receivable are secured by the related equipment. The notes
                  receivable
                  amounted to the following:
  September
                              30,
                          
                          September
                              30,
                          
                          December
                              31,2005
                          
                          2004
                          
                          2003Notes
                              receivable
                          
                          $
                          30,910,961
                          
                          $
                          10,815,232
                          
                          $
                          14,945,073Less
                              current portion
                          
                          
                          9,744,786
                          
                          
                          3,727,540
                          
                          
                          2,201,523Totals
                          
                          $
                          21,166,175
                          
                          $
                          7,087,692
                          
                          $
                          12,743,550
  The
                  following table represents as of September 30, 2005 the estimated
                  principal
                  collections on notes receivable for the next five years:
  Year
                              EndingSeptember
                              30,
                          
                          Amount2006
                          
                          $
                          8,808,9692007
                          
                          
                          8,629,0322008
                          
                          
                          6,604,7672009
                          
                          
                          5,743,9352010
                          
                          
                          3,972,307
 See
                      report of independent registered public accounting firm
 F-22
 CHINA
                      ENERGY SAVINGS TECHNOLOGY, INC.
 AND
                      SUBSIDIARIES
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 **Note
                  5 - Inventories**
 
 Inventories
                  consisted of the following:
  September
                              30,
                          
                          September
                              30,
                          
                          December
                              31,2005
                          
                          2004
                          
                          2003Raw
                              materials
                          
                          $
                          719,530
                          
                          $
                          1,013,976
                          
                          $
                          25,531Work
                              in progress
                          
                          
                          1,937
                          
                          
                          869,059
                          
                          
                          60,604Finished
                              goods
                          
                          
                          862,746
                          
                          
                          2,446,517
                          
                          
                          447,318Totals
                          
                          $
                          1,584,213
                          
                          $
                          4,329,552
                          
                          $
                          533,453
  **Note
                  6 - Prepaid expenses**
 
 Prepaid
                  expenses at September 30, 2005 and 2004 and December 31, 2003 amounted
                  to
                  $1,890,688, $1,529,955 and $71,582 respectively. They represent
                  advances to
                  suppliers on inventory purchases.
 
 **Note
                  7 - Plant and equipment**
 
 Plant
                  and
                  equipment is summarized as follows:
  September
                              30,
                          
                          September
                              30,
                          
                          December
                              31,2005
                          
                          2004
                          
                          2003Building
                          
                          $
                          419,373
                          
                          $
                          409,888
                          
                          $
                          627,680Office
                              equipment
                          
                          
                          86,613
                          
                          
                          80,100
                          
                          
                          68,405Furniture
                              and Fixtures
                          
                          
                          42,328
                          
                          
                          41,574
                          
                          
                          41,649Plant,
                              machinery and equipment
                          
                          
                          81,981
                          
                          
                          80,126
                          
                          
                          80,267Vehicle
                          
                          
                          152,024
                          
                          
                          148,586
                          
                          
                          148,846782,319
                          
                          
                          760,274
                          
                          
                          966,847Less:
                                Accumulateddepreciation
                          
                          
                          338,719
                          
                          
                          231,930
                          
                          
                          216,581Plant
                              and equipment, net
                          
                          $
                          443,600
                          
                          $
                          528,344
                          
                          $
                          750,266
  Depreciation
                  expense for the periods ending September 30, 2005 and 2004 and
                  December 31, 2003
                  amounted to $106,789, $59,601 and $76,106, respectively.
  **Note
                  8 - Intangibles**
 
 The
                  Company has licensed the use of several patents from its founder
                  for a period of
                  ten years. The licenses expire in July 2012. The licenses are being
                  amortized
                  over the license period of ten years using the straight-line method.
                  During the
                  period ending September 30, 2004, the Company had evaluated these
                  intangible
                  assets which the useful life became unforeseeable and decided to
                  write off the
                  remaining balance of US$ 206,335 as of September 30, 2004.
  See
                      report of independent registered public accounting firm
 F-23
 CHINA
                      ENERGY SAVINGS TECHNOLOGY, INC.
 AND
                      SUBSIDIARIES
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 **Note
                  9 - Related party transactions**
 
 As
                  of
                  September 30, 2005 and 2004, the due from related party amounted
                  to $123,602 and
                  $1,257,130, respectively. A majority of this amount was generated
                  from making
                  cash advances to the shareholders for ordinary business expenses.
                  In addition,
                  certain shareholders had collected payments on receivables on the
                  Company's
                  behalf from the customers and those payments had not been fully
                  repaid to the
                  Company by September 30, 2005. These amounts are unsecured, interest
                  free and
                  have no fixed terms of repayment.
 
 **Note
                  10 - Customer deposits**
 
 The
                  Company requires their customers to deposit monies with the Company
                  when they
                  place an order for their products. The Company does not pay interest
                  on these
                  amounts. Customer deposits amounted to $1,858,451, $1,752,216 and
                  $83,967 as of
                  September 30, 2005 and 2004 and December 31, 2003, respectively.
 
 **Note
                  11 - Taxes payable**
 
 Taxes
                  Payable
 
 Taxes
                  payable consisted of the following:
  September
                              30,
                          
                          September
                              30,
                          
                          December
                              31,2005
                          
                          2004
                          
                          2003Urban
                              maintenance andconstruction
                              tax
                          
                          $
                          43,925
                          
                          $
                          21,104
                          
                          $
                          21,584Educaiton
                              tax
                          
                          
                          5,523
                          
                          
                          1,058
                          
                          
                          74,108Enterprise
                              income tax
                          
                          
                          
                          
                          
                          
                          
                          
                          2,281,467Value
                              added tax
                          
                          
                          4,800,102
                          
                          
                          1,870,514
                          
                          
                          2,477,062Totals
                          
                          $
                          4,849,550
                          
                          $
                          1,892,676
                          
                          $
                          4,854,221
  Provision
                  for Income taxes
 
 On
                  July
                  22, 2004, the local Chinese tax authority waived the previously
                  accrued tax
                  accumulated prior to January 1, 2004 in the amount of $4,853,332
                  which was
                  recorded as a credit during 2004 for previously accrued income
                  taxes. The
                  Company has elected to record the entire credit for Chinese income
                  taxes in
                  2004.
  See
                      report of independent registered public accounting firm
 F-24
 CHINA
                      ENERGY SAVINGS TECHNOLOGY, INC.
 AND
                      SUBSIDIARIES
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 **Note
                  11 - Taxes payable, (continued)**
 
 Provision
                  for Income taxes, (continued)
 
 The
                  credit (provision) for income taxes consisted of the following:
  Year
                              ended
                          
                          Nine
                              Months ended
                          
                          Year
                              endedSeptember
                              30,
                          
                          September
                              30,
                          
                          December
                              31,2005
                          
                          2004
                          
                          2003Credit
                              (Provision) for ChinaIncome
                              taxes
                          
                          $
                          -
                          
                          $
                          4,853,332
                          
                          $
                          (1,879,896
                          )Total
                              provision for income taxes
                          
                          $
                          -
                          
                          $
                          4,853,332
                          
                          $
                          (1,879,896
                          )
  The
                  following table reconciles the U.S. Statutory rates to the Company's
                  effective
                  tax rate:
  September
                              30
                          
                          December
                              31,2005
                          
                          2004
                          
                          2003U.S.
                              Statutory Rates
                          
                          
                          34.0
                          %
                          
                          34.0
                          %
                          
                          34.0
                          %Foreign
                              income not recognized in USA
                          
                          
                          (34.0
                          )
                          
                          (34.0
                          )
                          
                          (34.0
                          )China
                              income taxes
                          
                          
                          
                          
                          
                          
                          
                          
                          17.0Totals
                          
                          
                          -
                          %
                          
                          -
                          %
                          
                          17.0
                          %
  The
                  Company located its factories in a special economic region in China.
                  This
                  economic region allows foreign enterprises a two-year income tax
                  exemption and a
                  50% income tax reduction for the following three years. The Company
                  was approved
                  as a wholly owned foreign enterprise in 2004. The Company has income
                  tax
                  exemption for years ending September 30, 2004 and 2005 and 50%
                  income tax
                  reduction for the years ending September 30, 2006, 2007 and 2008.
 
 The
                  estimated tax savings for the year ending September 30, 2005 amounted
                  to
                  $4,696,708. The net effect on earnings per share if the income
                  tax had been
                  applied would decrease earnings per share from $1.04 to $0.85.
 
 The
                  Company has a net operating loss carry forward of $9,946,234 for
                  US income tax
                  purposes that will expire during the year 2025. The Company has
                  recorded a
                  valuation allowance for the entire amount of the loss carry forward.
                  Since the
                  Company’s main operations are located in the PRC and any income subject
                  to US
                  income taxes will be dependent upon the Company having operations
                  in the US or
                  other US taxable events will have to occur. Since the Company is
                  not sure at
                  this time that the Company will be able utilize the tax benefits
                  of this
                  operating loss management has decided to record a valuation allowance
                  for the
                  entire amount of the operating loss.
 
 See
                      report of independent registered public accounting firm
 F-25
 CHINA
                      ENERGY SAVINGS TECHNOLOGY, INC.
 AND
                      SUBSIDIARIES
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 **Note
                  11 - Taxes payable, (continued)**
 
 Income
                  Tax Refund
 
 In
                  the
                  beginning of 2004, Shenzhen Dicken Industrial Development Limited
                  became a
                  wholly owned foreign enterprise. This economic region allows foreign
                  enterprises
                  a two-year income tax exemption and a 50% income tax reduction
                  for the following
                  three years. The Company was approved as a wholly owned foreign
                  enterprise in
                  2004. The Company has income tax exemption for years ending September
                  30, 2004
                  and 2005 and 50% income tax reduction for the years ending September
                  30, 2006,
                  2007 and 2008.
 
 In
                  addition, the Company is doing business in a special economic zone,
                  in order to
                  encourage the companies doing business in this high technology
                  economic zone,
                  the local Chinese tax authority granted a one-time waiver to wave
                  the previously
                  accrued tax accumulated prior to January 1, 2004 in the amount
                  of $4,854,221
                  which consisted of the following :
  AmountUrban
                              Maintenance and construction tax
                          
                          $
                          21,584Education
                              tax
                          
                          
                          74,108Enterprise
                              income tax
                          
                          
                          2,281,467Value
                              added tax
                          
                          
                          2,477,062Total
                          
                          $
                          4,854,221
  The
                  Company has treated the waiver of the VAT tax as a reduction of
                  income tax
                  expense since this was a unique situation as the local Chinese
                  tax authority
                  granted a one-time waiver for all accrued accumulated taxes prior
                  to January 1,
                  2004. The Company believes that the presentation of this transaction
                  in the
                  financial statements was the most conservative approach. The Company
                  believes
                  that by recording the refund of the VAT tax of $2,477,062 as an
                  addition to
                  gross revenues would distort the Company’s gross profit and thus be misleading
                  as to the actual results of the Company.
 
 **Note
                  12 - Commitments and contingencies**
 
 Operating
                  Lease
 
 The
                  Company leases its facilities under long term, non-cancelable operating
                  lease
                  agreements expiring through June 2009. The non-cancelable operating
                  lease
                  agreements provide that the Company pays certain operating expenses
                  applicable
                  to the leased premises. The Company leased a new office space in
                  Hong Kong
                  during the last quarter of 2005. The lease is for twelve months
                  expiring in
                  September 2006 at a monthly rate of $7,800.
 
 Total
                  rent expense for the year ended September 30, 2005 and nine months
                  ended 2004
                  and for the year ended December 31, 2003 amounted to $69,589, $102,689
                  and
                  $35,929, respectively.
  See
                      report of independent registered public accounting firm
 F-26
 CHINA
                      ENERGY SAVINGS TECHNOLOGY, INC.
 AND
                      SUBSIDIARIES
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 **Note
                  12 - Commitments and contingencies, (continued)**
 
 Operating
                  Lease, (continued)
 
 As
                  of
                  September 30, 2005, the future minimum annual lease payments required
                  are as
                  follows:
  Year
                              Ending September 30,
                          
                          Amount2006
                          
                          $
                          144,2362007
                          
                          
                          58,4362008
                          
                          
                          58,4362009
                          
                          
                          40,580
  **Note
                  13 - Equity incentive plan**
 
 On
                  September 8, 2004, the Company adopted an Equity Incentive Plan.
                  The purpose of
                  this plan is to attract, retain and motivate eligible persons whose
                  current and
                  potential contributions are important to the success of the Company
                  by offering
                  them an opportunity to participate in the Company’s future performance through
                  awards of Options, the right to purchase common stock and stock
                  bonuses. A total
                  of 1,200,000 shares of common stock have been registered with the
                  Securities and
                  Exchange Commission under this plan.
 
 On
                  September 16, 2004, the Company issued 10,000 shares to non-employee
                  consultants
                  and 620,000 shares of its common stock to certain qualifying employees
                  at $12.70
                  per share. The total shares were valued at $8,001,000 ($12.70 per
                  share), the
                  closing price of the stock at the date the shares were issued.
                  The stock is
                  fully vested.
 
 The
                  Company accounts for its employee stock option grants in accordance
                  with the fair
                  value provisions of Statement of Financial Accounting Standards
                  No. 123,
                  "Accounting for Stock-Based Compensation” (SFAS 123). SFAS 123 established a
                  fair-value-based method of accounting for stock-based compensation
                  plans. Pursuant to the transition provisions of SFAS 148, "Accounting
                  for Stock-Based
                  Compensation - Transition and Disclosure" (SFAS 148), the Company has elected
                  the prospective
                  method and will apply the fair value method of accounting to all
                  equity
                  instruments issued to employees. As of September 30, 2004, total
                  stock based
                  compensation expense recorded in the accompanying income statement
                  amounted to
                  $7,874,000.
  Compensation
                  expense related to stock options granted to non-employees is accounted
                  for under
                  Statement of Financial Accounting Standards No. (SFAS) 123, “Accounting for
                  Stock-Based Compensation” and Emerging Issues Task Force (EITF)
                  96-18 ,
                  “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in conjunction with Selling, Goods,
                  or Services,”
                  which require entities to recognize an expense, based on the fair
                  value of the
                  related awards.  As of September 30, 2005 and 2004, total
                  stock
                  compensation to non-employees amounted to $996,697 and $127,000,
                  respectively.
 
 During
                  October and November 2004, the Company issued 470,000 shares to
                  non-employee
                  consultants of its common stock at $11.00 and $13.15 per share.
                  The total shares
                  were valued at $5,256,000, the closing price of the stock at the
                  date the shares
                  were issued.
 
 See
                      report of independent registered public accounting firm
 F-27
 CHINA
                      ENERGY SAVINGS TECHNOLOGY, INC.
 AND
                      SUBSIDIARIES
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 **Note
                  13 - Equity incentive plan, (continued)**
 
 On
                  April
                  15, 2005, the Company issued 100,000 shares to non-employee consultants
                  and an
                  employee of its common stock at $10.00 a share for services performed.
                  The total
                  shares were valued at $996,697.
 
 **Note
                  14 - Shareholders’ equity**
 
 Stock
                  Issuances
 
 On
                  November 17, 2004, the Company completed an acquisition of an additional
                  15%
                  interest in Starway. Prior to the acquisition, the Company owned
                  50% of the
                  outstanding shares of capital stock of Starway. After the acquisition,
                  the
                  Company will own a total of 65% of the outstanding shares of Starway
                  capital
                  stock. The Company acquired the additional 15% interest in Starway
                  from
                  Eurofaith. The sole director of Eurofaith is also a director and
                  Corporate
                  Secretary of the Company.
 
 The
                  Company acquired the 15% interest in Starway by issuing a total
                  of 3,346,100
                  shares of common stock of the Company. The amount of consideration
                  given by the
                  Company for the acquisition was determined with reference to the
                  acquisition of
                  shares of Starway capital stock as reported in the Company's Current
                  Report on
                  Form 8-K filed on June 30, 2004. The closing of the Acquisition
                  (the "Closing")
                  occurred on November 17, 2004 (the "Closing Date"). The sole consideration
                  for
                  the Acquisition is common stock of the Company.
 
 In
                  accordance with SFAS 141, the Company is required to record the
                  acquisition of
                  the minority interest in accordance with purchase accounting. However
                  entities
                  that are under common control are required to record the acquisition
                  of the
                  assets and liabilities transferred at their carrying amounts. Due
                  to the common
                  majority ownership in the Company and Eurofaith, the Company and
                  Eurofaith are
                  deemed to be under common control in accordance with SAB No. 47.
                  Due to the
                  common control element in accordance with SFAS 141 the Company
                  has recorded the
                  15% acquisition from Eurofaith at historical cost value of
                  $6,095,901.
 
 During
                  November and December 2004, the Company issued 7,683 shares of
                  common stock for
                  legal services and director fees. The total shares were valued
                  at
                  $71,740.
 
 The
                  Company acquired the remaining 35% interest (the” Acquisition") in Starway
                  Management Limited ("Starway) from Sky Beyond Investments Limited
                  ("Sky Beyond")
                  on February 1, 2005 by issuing a total of 7,807,569 shares of common
                  stock of
                  the Company. Sky Beyond had acquired the 35% interest in Starway
                  from Golden
                  Resorts Group Limited (formerly known as "Meditech Group Company
                  Limited"). The
                  amount of consideration given by the Company for the Acquisition
                  was determined
                  with reference to the acquisitions of the 50% and subsequently
                  the 15% interest
                  in Starway as reported in the Company's Form 8-K filed on June
                  30, 2004 and
                  November 18, 2004, respectively. The closing of the Acquisition
                  (the "closing")
                  occurred on February 1, 2005 and the Company owns 100% of Starway
                  after the
                  Acquisition, see note 15.
 
 See
                      report of independent registered public accounting firm
 F-28
 CHINA
                      ENERGY SAVINGS TECHNOLOGY, INC.
 AND
                      SUBSIDIARIES
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 **Note
                  14 - Shareholders’ equity, (continued)**
 
 Preferred
                  Stock
 
 The
                  Company has 10,000,000 shares of $0.001 par value preferred stock
                  that is
                  authorized. As of September 30, 2005, there is no preferred stock
                  issued and
                  outstanding.
 
 Statutory
                  Reserves and Restricted Retained earnings
 
 The
                  Company is required to make appropriations to reserve funds, comprising
                  the
                  statutory surplus reserve, statutory public welfare fund and discretionary
                  surplus reserve, based on after-tax net income determined in accordance
                  with
                  generally accepted accounting principles of the People’s Republic of China (the
“PRC GAAP”). Appropriation to the statutory surplus reserve should be at
                  least
                  10% of the after tax net income determined in accordance with the
                  PRC GAAP until
                  the reserve is equal to 50% of the entities’ registered capital. Appropriations
                  to the statutory public welfare fund are at 5% to 10% of the after
                  tax net
                  income determined in accordance with the PRC GAAP.
 
 The
                  statutory public welfare fund is established for the purpose of
                  providing
                  employee facilities and other collective benefits to the employees
                  and is
                  non-distributable other than in liquidation. Appropriations to
                  the discretionary
                  surplus reserve are made at the discretion of the Board of
                  Directors.
 
 **Note
                  15 - Acquisition of minority interest**
 
 At
                  September 30, 2004, minority interest represented the outside shareholder’s 50%
                  ownership of the common stock of Starway Management Limited. Due
                  to common
                  control over the entities the financial statements of the Company
                  have been
                  restated to reflect the minority’s shareholder’s interest as if the transaction
                  was effective January 1, 2003. In November 2004, the Company acquired
                  an
                  additional 15% in Starway.
 
 On
                  February 1, 2005, The Company acquired the remaining 35% interest
                  (the”
                  Acquisition") in Starway Management Limited ("Starway) from Sky
                  Beyond
                  Investments Limited ("Sky Beyond") by issuing a total of 7,807,569
                  shares of
                  common stock of the Company. On February 2, 2005, the Company was
                  instructed by
                  Sky Beyond to reissue the 7,807,569 shares to New Solomon Consultants
                  Limited
                  (6,050,000 shares) and Sky Beyond (1,757,569 shares).
 
 As
                  of
                  February 2, 2005, New Solomon was holding 16,005,134 shares representing
                  approximately 65% of the outstanding shares of CESV.
 
 Since
                  New
                  Solomon Consultants Limited ultimately gained control over an additional
                  6,050,000 shares, the Company has recorded this acquisition, in
                  accordance with
                  SFAS No. 141 “Business Combinations”, as entities under common control and a
                  transfer of net assets and not as a purchase recorded at fair value.
                  As a
                  result, no goodwill has been recorded on the financial statements
                  of the
                  Company. The Company believes that this is a conservative approach
                  and better
                  reflects the substance of the acquisition.
 
 See
                      report of independent registered public accounting firm
 F-29
 CHINA
                      ENERGY SAVINGS TECHNOLOGY, INC.
 AND
                      SUBSIDIARIES
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 **Note
                  15 - Acquisition of minority interest, (continued)**
 
 The
                  following unaudited pro forma financial information was prepared
                  in accordance
                  with SFAS No. 141 which assumes the acquisition had occurred at
                  the beginning of
                  the periods presented. The unaudited pro forma information is provided
                  for
                  informational purposes only. These pro forma results are based
                  upon the
                  respective historical financial statements. The pro forma combined
                  results of
                  operations for year ended September 30, 2005, nine months ended
                  September 30,
                  2004 and year ended December 31, 2003 are as follows:
  Year
                              ended
                          
                          9
                              Months Ended
                          
                          Year
                              endedSeptember
                              30,
                          
                          September
                              30,
                          
                          December
                              31,2005
                          
                          2004
                          
                          2003Revenues
                          
                          $
                          48,388,076
                          
                          $
                          30,997,070
                          
                          $
                          31,057,877Net
                              income before incometax
                              & minority interest
                          
                          $
                          25,674,662
                          
                          $
                          11,196,652
                          
                          $
                          10,787,761Net
                              income per share - basicand
                              diluted
                          
                          $
                          1.04
                          
                          $
                          0.54
                          
                          $
                          0.52Weighted
                              average number ofshares
                              - basic and diluted
                          
                          
                          24,604,617
                          
                          
                          20,724,458
                          
                          
                          20,549,770
   F-30