UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 FORM
10-K
 
 Q   
Annual Report Pursuant To
Section 13 or 15(d) of the Securities Exchange Act of
1934
 For
the fiscal year ended: December 31, 2009
 
 £Transition Report Under
Section 13 or 15(d) of the Securities Exchange Act of
1934
 For the transition period from ______
to_______
 Commission
File No. 000-49470
 
 HOME SYSTEM
GROUP
 (Name
of small business issuer in its charter)
 
 Nevada
                43-1954776(State
      or other jurisdiction of incorporation or organization)
                (I.R.S.
      Employer Identification No.)Oceanic
      Industry Park, Sha Gang Highway, Gang Kou Town
                  Zhongshan
      City, Guangdong
                  People's
      Republic of China, 528447(Address
      of Principal Executive Offices)347-624-5699(Registrant’s
      Telephone Number, Including Area
Code)
 
 Securities registered pursuant to Section 12(b) of
the Act: None
 
 Securities registered pursuant to Section 12(g) of
the Act: Common Stock,
par value $0.001
 
 Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 
Yes £      
 No  Q
 
 Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 Yes £      
 No  Q
 
 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 past 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  Q             
No £
 
 
 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.  Q
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
 See the definitions of “large accelerated filer,” “accelerated filer,” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check
one):
 
 Large Accelerated Filer £
         Non-Accelerated Filer £
         Accelerated Filer £
         Smaller Reporting Company
 Q
 
 Indicate by check mark whether registrant is a shell
company (as defined in Rule 12b-2 of the Act). Yes £      
 No  Q
 
 The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold as of the last business day of the registrant’s most recently
completed second fiscal quarter ended June 30, 2009 was
$48,165,539.
 
 There
were a total of 62,477,949 shares of the registrant’s common stock outstanding
as of March 19, 2010.
  
  HOME
SYSTEM GROUP
 FORM 10-K
 For
the Fiscal Year Ended December 31, 2009
 
 PagePART
      IItem 1.
              Business
              
              1Item 1A.
              Risk Factors
              
              7Item 2.
              Properties
              
              16Item 3.
              Legal Proceedings
              
              16Item 4.
              Submission of Matters to a Vote of Security
      Holders
              
              16PART
      IIItem 5.
              Market for Registrant’s Common Equity, Related
      Stockholder Matters and Issuer Purchases of Equity
      Securities
              
              17Item 6.
              Selected Financial Data
              
              18Item 7.
              Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
              
              18Item 8.
              Financial Statements and Supplementary
      Data
              
              26Item 9.
              Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosure
              
              26Item 9A(T).
              Controls and Procedures
              
              26Item 9B.
              Other Information
              
              27PART
      IIIItem 10.
              Directors, Executive Officers and Corporate
      Governance
              
              28Item 11.
              Executive Compensation
              
              30Item 12.
              Security Ownership of Certain Beneficial Owners
      and Management and Related Stockholder Matters
              
              33Item 13.
              Certain Relationships and Related
      Transactions
              
              34Item 14.
              Principal Accountant Fees and
      Services
              
              34Item
      15.
              Exhibits
      and Financial Statements Schedule
              
              35Index
      to Consolidated Financial Statements
              
              F-1
 
 
 
 SPECIAL
NOTES REGARDING FORWARD-LOOKING STATEMENTS
 
 This
report contains forward-looking statements.  The forward-looking statements
are contained principally in the section entitled “Management’s Discussion and
Analysis or of Financial Condition and Results of Operations.” These
statements involve known and unknown risks, uncertainties and other factors
which may cause our actual results, performance or achievements to be materially
different from any future results, performances or achievements expressed or
implied by the forward-looking statements.  These risks and uncertainties
include, but are not limited to, the factors described in the Item 1A captioned
“Risk Related to Our Business” elsewhere in this report.  In some cases,
you can identify forward-looking statements by terms such as “anticipates,”
“believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,”
“potential,” “predicts,” “projects,” “should,” “would” and similar expressions
intended to identify forward-looking statements.  Forward-looking
statements reflect our current views with respect to future events and are based
on assumptions and subject to risks and uncertainties.  Given these
uncertainties, you should not place undue reliance on these forward-looking
statements.  These forward-looking statements include, among other things,
statements relating to:
 
 lour
      expectations regarding the market for household appliances, fans and gas
      grills;lour
      expectations regarding the continued growth of the household appliance,
      fans and grills industry;
 lour beliefs
      regarding the competitiveness of our products;lour
      expectations regarding the expansion of our manufacturing
      capacity;
 lour
      expectations with respect to increased revenue growth and our ability to
      achieve profitability resulting from increases in our production
      volumes;lour future
      business development, results of operations and financial condition;
      and
 lcompetition
      from other manufacturers of small household appliance
      products.
 
 Also,
forward-looking statements represent our estimates and assumptions only as of
the date of this report. You should read this report and the documents that we
reference in this report, or that we filed as exhibits to this report,
completely and with the understanding that our actual future results may be
materially different from what we expect.
 
 Except as
required by law, we assume no obligation to update any forward-looking
statements publicly, or to update the reasons actual results could differ
materially from those anticipated in any forward-looking statements, even if new
information becomes available in the future.
 
 USE
OF CERTAIN DEFINED TERMS
 
 Except as
otherwise indicated by the context, references in this report to:
 
 ·           “Home
System,” “we,” “us,” “group” or “our,” are references to the combined business
of Home System Group and its direct and indirect subsidiaries: Home System
Group, Inc., a BVI company, or HSG; Holy (HK) Limited, a Hong Kong holding
company, or Holy HK; Oceanic International (Hong Kong), Ltd., a Hong Kong
company, or OCIL; Oceanic Well Profit, Inc., a Chinese operating company, or
Well Profit; Asia Forever Investment Limited, a Hong Kong holding company, or
Asia Forever;and Zhongshan City Weihe Appliances Co., Ltd., a Chinese operating
company, or Weihe.
 ·           “BVI”
are to the British Virgin Islands;
 ·           “China”
and “PRC” are to the People’s Republic of China;
 ·           “RMB”
are to Renminbi, the legal currency of China;
 ·           “U.S.
dollar,” “$” and “US$” are to the legal currency of the United
States;
 ·          
 the “SEC” are to the United States Securities and Exchange
Commission;
 ·           
the “Securities Act” are to Securities Act of 1933, as amended; and the
“Exchange Act” are to the Securities Exchange Act of 1934, as
amended.
 
 PART
I
 ITEM
1. OUR BUSINESS
 
 Overview
 
 Home
System Group (the “Company”) is a Nevada holding company which has its
operations based exclusively in China.  These operations are primarily
engaged in the production of a variety of household appliances, including
stainless steel gas grills and ovens, ceiling and table fans and decorative
lamps. Our products are sold through distributors to retailers in America,
Europe, Australia and Asia.
 
 We have
three operating subsidiaries: Oceanic International (HK) Limited (“OCIL”),
Oceanic Well Profit, Inc. (“Well Profit”) and Zhongshan City Weihe Appliances
Co., Ltd (“Weihe”) as of December 31, 2009. Our products are mainly manufactured
through Well Profit and Weihe which have several different facilities located in
Zhongshan City, Guangdong Province, China.
  Well
Profit was incorporated in the People’s Republic of China (“PRC”) on April 5,
2006 for the purpose of manufacturing gas grills and home electronic appliances
such as coffee pots. It is located on over 376,869 square feet of land in
Oceanic Industry Park, Zhongshan, China and currently operates five barbeque
production lines, with a maximum annual production capacity of approximately
650,000 such units and two skateboard production lines, with a total annual
production capacity of approximately 1,000,000 such units. Manufacturing
facilities operate efficiency while maintaining high workplace safety and
environmental compliance standards. There are 459 employees as of December 31,
2009.
 
 Weihe was
established in October 1998, and is engaged in the manufacture, processing and
export of home appliance products, which including European style decorative
ceiling fans, decorative lamps and energy-saving lamps.  Weihe is an
export oriented manufacturer. The total combined square footage of Weihe’s eight
manufacturing plants is approximately 427,000 square feet and its shares plants
with other manufacturers with a combined square footage of approximately 323,000
square feet. Weihe is equipped with inspection equipment, several electrostatic
spraying production lines, semi-automatic pipelines and high-speedy punching
machines. There are 699 employees including engineers and administrative staff
as of December 31, 2009.
 
 Our sales
revenue and net income was $61,828,792 and $9,326,032, respectively, during the
fiscal year ended December 31, 2009, and $51,926,205 and $4,067,665,
respectively, during the same period in 2008.
  
 Our
Corporate History
  The
Company, formerly named Supreme Realty Investments, Inc. (“Supreme”), is
incorporated in the State of Nevada.   On August 4, 2006, Supreme
was a public shell company and acquired Home System Group, Inc.
(“HSGI”). HSGI was incorporated as a limited liability company in the
British Virgin Islands on February 28, 2003.  HSGI was inactive until
June 30, 2006 when HSGI acquired all the outstanding stock of
OCIL.  OCIL is an operating company, organized under the laws of Hong
Kong on June 23, 2004 for the purpose of distributing gas grills, home
electronic appliances and bin racks. Since the ownership of HSGI and OCIL was
the same, the merger was accounted for as a transaction between entities under
common control, whereby HSGI recognized OCIL’s assets and liabilities
transferred at their carrying amounts. Under the terms of the merger
agreement, the stockholders of HSGI received 8,000,000 (post reverse stock
split) shares of Supreme’s common stock for 100% of HSGI’s outstanding common
stock.  Following the merger, Supreme changed its name to Home System
Group.  Under accounting principles generally accepted in the United
States, the share exchange is considered to be a capital transaction in
substance, rather than a business combination.  That is, the share
exchange is equivalent to the issuance of stock by HSGI for the net monetary
assets of Supreme, accompanied by a recapitalization, and is accounted for as a
change in capital structure.  Accordingly, the accounting for the
share exchange is identical to that resulting from a reverse acquisition, except
no goodwill was recorded.  Under reverse takeover accounting, the post
reverse acquisition comparative historical financial statements of the legal
acquirer, Supreme, are those of the legal acquiree which is considered to be the
accounting acquirer, HSGI.  Shares and per share amounts stated have
been adjusted to reflect the merger.
  1
 
 On
January 31, 2007, the Company acquired Holy and its wholly-owned subsidiary,
Well Profit.  Holy (HK) Limited (“Holy”) was incorporated in Hong Kong
on September 26, 2006 for the purpose of being a holding
company.  Holy was inactive until October 26, 2006 when Holy acquired
all the issued and outstanding stock of Well Profit. Since the stockholders of
Holy and Well Profit were related, and the control of the merged entity remained
with the management of Well Profit, the merger was accounted for as a
transaction between entities under common control, whereby Holy recognized Well
Profit’s assets and liabilities transferred at their carrying
amounts.  The consolidated financial statements combine the historical
financial statements of Holy and Well Profit as if the merger occurred at the
beginning of the periods presented. Under the terms of the merger agreement, the
stockholders of Holy received $3,000,000 and 42,500,000 shares of voting common
stock of the Company in exchange for 100% of Holy’s outstanding common stock.
For accounting purposes, the acquisition has been treated as an acquisition of
HSGI by Holy and as a recapitalization of Holy. The historical financial
statements prior to January 31, 2007 are those of Holy. Share and per share
amounts have been retroactively adjusted to reflect the
acquisition.
 
 On
October 1, 2008, the Company purchased from the shareholders of Asia Forever
Investment Limited (“Asia Forever”) all of Asia Forever’s outstanding stock for
approximately $39.5 million.  Asia Forever had been incorporated as a
limited liability company on April 1, 2008 in the Hong Kong Special
Administrative Region, and it has 100% ownership interest of Weihe.
 
 The
following chart reflects our organizational structure as of the date of this
Report.
  2
 Our
Products
 
 We are
primarily engaged in the production and distribution of a variety of household
appliances, stainless steel gas grills and ovens, ceiling fans, lamps and
skateboards to distributors, who channel them to large retailers in United
States, Europe and Australia.
 
 Our
barbeque grills are made of stainless steel and other durable material and use
either natural gas as fuel. Our barbeque grills are sold to distributors who
sell them mainly to retailers in the United States. We design the burners in
order to have safe combustion and save gas. We believe that our grills are
stylish, elegant and are convenient to use. For the fiscal years ended December
31, 2009 and 2008, 23.6% and 17.6% of our sales revenue, respectively, came from
this product.
 
 Decorative
ceiling fans and lamps also became our feature products, when we acquired Weihe
in Octorber, 2008, which is an exported-oriented manufacture and distributor of
small household appliances. We can produce up to four million units of
decorative ceiling fans and six million units of lamps per year. In 2009, the
sales from fans and lamps were $37,543,116, it contributing 60.7% of our sales
revenue.
 
 Manufacturing
 
 Our
products are manufactured in a total 742,000 square feet of plant facilities in
Guangdong Province, China.  Our plant has eight departments, including
purchasing, technology, quality control and production, and three workshops for
assembling, welding and stamping.  Our production facilities have over 300
units of imported and domestic advanced production and testing equipment,
including the more advanced electrostatic spraying production line and the
semi-automatic routine assembly line.  We currently operate five barbeque
production lines, with a total annual production capacity of approximately
650,000 such units; two skateboard production lines, with a total annual
production capacity of approximately 1,000,000 such units;   our
manufacturing facilities are designed to operate efficiently while maintaining
workplace safety and environmental compliance standards.
 
 We
closely monitor and test the quality of our raw materials.  We have
established inspection points at key production stages to identify product
defects during the production process and our finished products are inspected
and tested according to standardized procedures. We provide regular training and
specific guidelines to our operators to ensure that our internal production
processes meet quality standards.
 
 Our
distributors also require that our products carry a UL Mark (Underwriters
Laboratory) or a CE (mandatory conformity) Mark, respectively.
  Underwriters Laboratories, Inc. evaluates products, components,
materials and systems for compliance to specific requirements, and permits
acceptable products to carry the UL (certification) Mark, as long as they remain
compliant with such standards.  All our products are UL or CE
certified.
 
 Our
Suppliers of Raw Materials
  The
primary raw materials used in our products include stainless steel, iron,
plastic, metal and glass.  The prices of these raw materials are determined
based upon prevailing market conditions including supply and demand.
  We
utilize local suppliers in close proximity to us, typically within 20 kilometers
of our manufacturing facilities, in order to closely supervise their activities,
monitor quality, provide technical training and collaborate on technical
improvements.  If geographically proximate suppliers continue to be able to
provide high quality raw materials to us, we intend to continue source our raw
materials from them in order to take advantage of lower shipping costs, time to
transport and favorable quality control capabilities.
 
 3
 
 Our top
five major suppliers are:
 
 Name
                  Raw
      Material
                  %
      of Annual Total Raw
                    Material
      Purchased1
                  Oceanic
      International (Zhongshan) Company Limited
                  Metal
      plate
                  13%2
                  Hubei
      Xin Cheng Industry & Trade Company Limited
                  Metal
      plate
                  11%3
                  Waiyi
      (HK) Company Limited
                  Copper
      wire
                  10.8%4
                  Heshan
      Zhongsheng Plastic & Hardware Company
                  Hardware
      & Plastic
                  3.7%5
                  Foshan
      Nanhai Jiujiang Jinlingfeng Appliance Co. Ltd.
                  Appliance
      accessories
                  3.1%
 
 Our
Major Customers
 
  We sell
products to consumer products distributors who in turn sell the products to
worldwide large retailers such as Home Depot, Lowe’s, and Costco. Two of our
largest customers, Zhongshan City Heng Bao Trading Co., Ltd and Waiyi (HK)
Limited accounted for approximately 62% and 32% of our annual sales,
respectively, during 2009.
  Our
Major Competitors
 
 We are an
exported-oriented manufacture, which focuses on North America and Europe
markets. Since our main products do not have significant entry barriers, we have
experienced increased competition from other original equipment manufacturers
which are mostly located in China. Competition is based on price and quality, as
well as access to retail shelf space, product design, brand names, new product
introductions, marketing support and distribution strategies.  We compete
with various domestic and international manufacturers, some of which have
substantially greater financial and other resources than we currently have.
 
 Weihe’s
major competitors:
 
 Name
                  Product
                  Annual
      Output
                    (Estimated)1
                  Zhongshan
      Kong Luen Wah Hoi Electrical Appliance Co., Ltd
                  Fans
                  2,000,000
      units2
                  Zhongshan
      Jianlun Electrical Appliance Co., Ltd
                  Fans
                  1,500,000
      units3
                  Shunde
      Xianhua Fan Manufacturer Company
                  Fans
                  1,200,000
      units4
                  Zhongshan
      Xinfeng Electrical Appliance Co.,Ltd
                  Fans
                  1,000,000
      units
 
 4
 
 Well
Profit’s major competitors:
 
 Name
                  Product
                  Annual
      Output
                    (Estimated)1
                  Taishan
      Guanrong Metal Products Co., Ltd
                  Grills
                  400,0002
                  Yangjiang
      Xinli Company Limited
                  Grills
                  300,0003
                  Shunde
      Kangbao Company Limited
                  Grills
                  150,000
 
 We
believe that our future success will depend upon our ability to develop and
distribute reliable products that incorporate developments in technology and
satisfy customer tastes with respect to style and design. It will also depend on
our ability to market a broad and innovative offering of products in each
category at competitive prices.
 
 We plan
to broaden our product offerings perhaps by acquiring new companies and product
lines that are complementary to our existing products, or related to
technologies and know-how developed and used in our existing core product
family.
 
 Our
Competitive Strengths
 
 We
believe that the following competitive strengths enable us to compete
effectively:
 
 ·           Low Cost Manufacturing. We
focus on executing manufacturing programs involving large volumes produced
efficiently, at low cost and with high quality.  We organize the production
runs in our business segments’ product lines to minimize the number of
manufacturing functions and the frequency of material handling. We also utilize,
where practical, a flexible process which uses cellular manufacturing to allow a
continuous flow of parts with minimal set up time. We believe that our efficient
and automated manufacturing operations enable us to provide products for retail
distribution with reduced labor costs.  We also utilize an efficient
outsourced manufacturing network of suppliers for certain of our products. Many
of these relationships are long-term, affording us increased flexibility and
stability in our operations. This diverse network allows us to maintain multiple
sources of quality products while keeping our price points competitive.  We
continuously implement cost-saving initiatives that have rationalized operating
and manufacturing facilities for products, as well as increased outsourcing of
certain of our products where it is most cost effective.
 
 ·           Established Distributor
Relationships with Major Retailers. Our customer are trusted distributors
who sell our high quality products to major retailors.  As a result, our
products are sold in well-known international manufacturers and retailers such
as Wal-Mart, Home Depot, Lowe’s, Whalen Storage, Lightdecor, Costco,
Street-Surfing,Target
and Leroy Merlin.  Due to our close relationships with our distributors, we
expect our arrangements with our distributors to continue for the foreseeable
future.
 
 ·         Distinctive Location
Advantage. Our production facilities are located in Zhongshan, an
important manufacturing base in China with stable regional policies and a
healthy economic environment. It also provides us with a stable and high quality
labor pool which enables the Company to grow and expand without concerns of
increasing labor cost and shortage of qualified personel.
 
 Environmental
Matters
 
 China’s
environmental laws require all manufacturing enterprises to submit an
environmental impact report to the relevant environmental protection authority
before starting production operations. In addition, manufacturing enterprises
must engage professional environmental organizations to monitor and report on
pollutants emission regularly. We do not believe that our facilities are
impacted by the various pollution control regulations with respect to noise and
air pollution and the disposal of waste and hazardous materials because our
production process does not generate industrial pollutants.  Our production
process primarily involves the forming of steel and assembly of product.
 We are not currently subject to any pending actions alleging any
violations of applicable PRC environmental laws.
 
 5
 
 Regulation
 
 Because
our operating subsidiaries are located in the PRC, we are regulated by its
national and local laws.  We do not currently face any significant
government regulation in connection with the production of our products and we
do not require any special government permits to produce our products other than
those permits that are required of all corporations in China.
 
 We are
subject to PRC’s foreign currency regulations.  The PRC government has
controlled Renminbi reserves primarily through direct regulation of the
conversion of Renminbi into other foreign currencies.  Although foreign
currencies, which are required for “current account” transactions, can be bought
freely at authorized PRC banks, the proper procedural requirements prescribed by
PRC law must be met.  At the same time, PRC companies are also required to
sell their foreign exchange earnings to authorized PRC banks and the purchase of
foreign currencies for capital account transactions still requires prior
approval of the PRC government.
 
 Home
System is a Foreign Invested Enterprise (“FIE”). Under current PRC laws and
regulations, FIE may pay dividends only out of their accumulated after-tax
profits, if any, determined in accordance with PRC accounting standards and
regulations.  In addition, FIEs in China are required to set aside at least
10% of their after-tax profit based on PRC accounting standards each year to a
general reserve until the cumulative amount of such reserve reaches 50% of its
registered capital. These reserves are not distributable as cash dividends. The
board of directors of a FIE has the discretion to allocate a portion of its
after-tax profits to staff welfare and bonus funds, which may not be distributed
to equity owners except in the event of liquidation.
 
 As a
manufacturer of consumer products that are distributed to consumers located in
the United States, we are also subject to the US Consumer Products Safety Act,
which empowers the Consumer Products Safety Commission to exclude from the
market products that are found to be unsafe or hazardous. Under certain
circumstances, the Consumer Products Safety Commission could require us to
repurchase or recall one or more of our products.  To date our products
have not been subject to any product recalls initiated by the Consumer Products
Safety Commission.
 
 Throughout
the world, most federal, state, provincial and local authorities require safety
regulation certification prior to marketing electrical appliances in those
jurisdictions and as a result, our distributors require that our products carry
a UL or CE mark. We endeavor to have our products designed to meet the
certification requirements of, and to be certified in, each of the jurisdictions
in which they are sold.  Laws regulating certain consumer products also
exist in some cities and states, as well as in other countries in which we sell
our products. We believe that we are in material compliance with all of the laws
and regulations applicable to us.
 
 6
 
 Our
Employees
 
 As of
December 31, 2009, we have 1158 full-time employees.
  Departments
                  As
      of December 31, 2009Manufacturing
      and engineering
                  902General
      and administration
                  182Marketing
      and sales
                  26Research
      and development
                  48
 
 As
required by applicable PRC law, we have entered into employment contracts with
most of our officers, managers and employees to enable them to receive social
benefits from the State.  We are working towards entering employment
contracts with those employees who do not currently have employment contracts
with us. We believe that we maintain a satisfactory working relationship with
our employees and we have not experienced any significant labor disputes or any
difficulty in recruiting staff for our operations.
 
 Our
employees in China participate in a state pension scheme organized by PRC
municipal and provincial governments.  According to the regulation, the
Company contributes 20% of employee’s actual monthly salary to the employee’s
pension account if the salary is below three times of local average salary; if
the employee’s salary is over three times of the local average salary, the
Company contributes 20% of three times of local average salary to the employee’s
pension account.  In addition, we are required by PRC law to cover
employees in China with various types of social insurance and believe that we
are in material compliance with the relevant PRC laws.
 
 Home
System Group maintains strong ties with its employees and staff and retention is
stable. Employee contracts adhere to both State and Provincial employment
regulations and all social security regulations. All compensation including
social insurance is paid in a timely manner to authorities and employees. There
have been no disputes and there are no collective bargaining
agreements.
 
 ITEM
1A.  RISK FACTORS
 
 RISKS
RELATED TO OUR BUSINESS
 
 We
are susceptible to a material decrease in business if end-users of our products
decide not to utilize our distributors.
 
 The
customers of our distributors might utilize the services of a different
distributor or they might directly import the products themselves from other
manufacturers.  If our distributors were to lose one of their major
customers, our revenues will materially decrease.
 
 Our
business could be adversely affected by retailer inventory
management.
 
 Changes
in retailer inventory management strategies could adversely impact our sales and
our production schedules. As a result of the desire of retailers to more closely
manage inventory levels, there is a growing trend among retailers to make
purchases on a “just-in-time” basis. This requires us to shorten our lead time
for production in certain cases and more closely anticipate demand, which could
in the future require the carrying of additional inventories or require us to
incur additional expenses to expedite delivery.  If our customers
significantly change their inventory management strategies or if they or we fail
to forecast consumer demand accurately, we may encounter difficulties in filling
the orders placed by our distributors or need to liquidate excess inventories,
or may find that customers are canceling orders or returning products.
 Distribution difficulties may have an adverse effect on our business by
increasing the amount of inventory and the cost of warehousing inventory.
 Any of these results could have a material adverse effect on
us.
 
 7
 
 We
rely on only a few suppliers for the bulk of our raw materials and their
non-performance would adversely affect our operations.
 
 We obtain
a majority of our products from only a few suppliers whose nonperformance would
have a near-term severe impact on our operations.  During 2009, we purchase
13% of our raw material from Oceanic International (Zhongshan) Company Limited
and 11% of our raw material from Hubei Xin Cheng Industry & Trade Company
Limited. This concentration makes the Company vulnerable to a near-term severe
impact, should the relationships be terminated. Such failure could cause us
to experience serious delivery delays or failures caused by production issues or
could cause us to deliver non-conforming products.
 
 We
rely on two customers for the majority of our sales revenues and should their
orders decrease or their relationship with us be terminated, our business and
operations would be adversely affected.
 
 Well
Profit sells a majority of its products to Zhongshan Hengbao Trading Co., Ltd,
its exclusive distributor. Weihe sells a majority of its products to Waiyi (HK)
Company Limited. During the fiscal year ended December 31, 2009, these two
companies were responsible for 62% and 32% of our net sales,
respectively.
 
 Economic
slowdown in US & European markets
 
 In 2009,
the majority of the Company’s products were sold to consumers outside of China
with approximately 85% of these sales made in North American and European.
As such, any weakening economic conditions in these markets could
negatively impact the Company’s operating results.
 
 Consolidation
could have a material adverse impact on our success.
 
 Over the
past several years, the gas grills and fans industries have undergone
substantial consolidation, especially due to the 2008 financial crisis. Many
smaller manufacturers couldn’t survive due to shortage of cash flow and some
manufacturers who produce high-end/luxury series of fans and grills experienced
shrinking demand due to the global economic downturn. The gas grills and fans
industry could eventually largely consist of a limited number of manufacturers
and distributors.  To the extent that we do not continue to be a major
participant in the industries, our ability to survive or compete effectively
with these larger producers could be negatively impacted. As a result, our
results of operations could be materially adversely affected.
 
 Fluctuation
in exchange rate could adversely affect our business
 
 As the
majority of the Company’s products are currently sold to in North America and
European markets, fluctuations perhaps an increase in the RMB foreign exchange
rate could affect our business. In order to limit exposure to negative impact of
the fluctuation, the Company takes active measures. When we receive orders, we
usually enter into fixed exchange rate agreement with our clients, which lock
the currency rate on a level based on the expectation fluctuation of future
exchange rate in the coming three to six months. However, this activity is
effective only in the short term and may not be able to successfully hedge our
exposure at all in the future.
 
 8
 
 Our
profitability maybe affected by high inflation in China.
 
 Inflationary
factors, such as increases in the cost of our raw materials, labor and overhead
costs, could impair our operating results. Although we do not believe that
inflation has had a material impact on our financial position or results of
operations to date, a higher rate of inflation in the future may have an adverse
effect on our ability to maintain current levels of gross margin and selling,
general and administrative expenses as a percentage of sales revenue if the
selling prices of our products are not able to increase at the same rate as
these costs.
 
 Competition
may materially adversely affect our results of operations.
 
 The gas
grills, fans and lamps do not have significant entry barriers.  As a
result, we compete with a variety of manufacturers and distributors of household
products.  Additional competitors may also enter this market and cause
competition to intensify.  While we believe that our competition advantages
are based upon several factors, including product design and innovation,
quality, price, product features, merchandising, promotion and warranty, if we
fail to compete effectively with these manufacturers and distributors, our
results of operations could be materially adversely affected.
 
 We also
compete with established companies, a number of which have substantially greater
facilities, personnel, financial and other resources than we have.  In
addition, some of our retail customers use private label brands, obtained from
exporters and manufacturers of unbranded products.  Some competitors may be
willing to reduce prices and accept lower profit margins to compete with us.
 As a result of this competition, we could lose market share and sales, or
be forced to reduce our prices to meet competition.
 
 We
depend on consumer spending, which fluctuates for a variety of reasons,
including seasonality.
 
 Sales of
our products are related to consumer spending.  Any downturn in the general
economy or a shift in consumer spending away from some of our products such as
gas grills, decorative fans and lightings would adversely affect our business.
In addition, the market for small electric household appliances is highly
seasonal in nature. We often recognize a substantial portion of our sales during
the third and fourth quarters of the year due to increased demand by consumers
in late summer and fall for the Holiday season.  Any economic downturn,
decrease in consumer spending or a shift in consumer spending away from small
electric household appliances could materially adversely impact our results of
operations.
 
 The
failure of our business strategy could have a materially adverse effect on our
business.
 
 As part
of our business strategy, we plan to:
 
 l
                  continue
      cost reductions throughout the entire company and at our
      suppliers;
 l
                  maintain
      minimal product returns and improve the quality of our
      products;
 l
                  pursue
      innovation in our product categories through our ability to research,
      design and test new product
concepts;
 l
                  develop
      and sustain industry-leading sales, marketing and branding programs in our
      industry.
 
 Our
strategic objectives may not be realized or, if realized, may not result in
increased revenue, profitability or market presence. Executing our strategy may
also place a strain on our suppliers, information technology systems and other
resources. To manage growth effectively, we must maintain a high level of
quality, properly manage our third-party suppliers, continue to enhance our
operational, financial and management systems and thus reduce costs, and expand,
train and manage our employee base. We may not be able to effectively manage our
growth in any one or more of these areas, which could have a materially adverse
effect on our business.
 
 9
 Our
future success depends on our ability to develop new and innovative products on
a consistent basis in order to increase revenues.
 
 We
believe that our future success is heavily dependent upon our ability to
continue to make innovations in our existing products and to develop, source and
market new products, which generally carry higher margins. We may not be
successful in the introduction, marketing and sourcing of any new products or
product innovations and we may not be able to develop and introduce in a timely
manner innovations to our existing products that satisfy customer needs or
achieve market acceptance.
 
 Our
business can be adversely affected by problems associated with newly acquired
businesses or product lines.
 
 We expect
to continue to acquire partial or full ownership in businesses and may acquire
rights to market and distribute particular products or lines of products.
 The acquisition of a business or of the rights to market specific products
or use specific product names usually involve a financial commitment by us,
either in the form of cash or stock consideration.  In the case of a new
license, such commitments are usually in the form of prepaid royalties and
future minimum royalty payments.  We may not be able to acquire businesses
and develop products that will contribute positively to our earnings.
 Anticipated synergies may not materialize, cost savings may be less than
expected, sales of products may not meet expectations and acquired businesses
may carry unexpected liabilities.
 
 Government
regulations and our ability to comply with them could adversely impact our
operations.
 
 Throughout
the world, electrical appliances are subject to various mandatory and voluntary
safety standards, including requirements in certain jurisdictions that products
be listed by Underwriters Laboratories, Inc. or other such recognized
laboratories. Many foreign, federal, state and local governments also have
enacted laws and regulations that govern the labeling and packaging of products
and limit the sale of product containing certain materials deemed to be
environmentally sensitive. Our products may be found to be noncompliant. A
determination that we are not in compliance with such rules, regulations or
standards could result in the imposition of fines or an award of damages to
private litigants.
 
 Environmental
regulations impose substantial costs and limitations on our
operations.
 
 We maybe
subject to various national and local environmental laws and regulations in
China concerning air emissions, wastewater discharges, and solid waste
management and disposal.  These laws and regulations can restrict or limit
our operations and expose us to liability and penalties for non-compliance.
 While we believe that our facilities are in material compliance with all
applicable environmental laws and regulations, the risks of substantial
unanticipated costs and liabilities related to compliance with these laws and
regulations are an inherent part of our business.  It is possible that
future conditions or future revisions to these regulations may develop, arise or
be discovered that create new environmental compliance or remediation
liabilities and costs.
 
 Our
business involves the potential for product recalls and product liability
claims.
 
 As
distributors of consumer products to consumers in the United States, we are
subject to the Consumer Products Safety Act, which empowers the U.S. Consumer
Products Safety Commission to exclude from the market products that are found to
be unsafe or hazardous. Under certain circumstances, the U.S. Consumer Products
Safety Commission could require us to repair, replace or refund the purchase
price of one or more of our products, or we may voluntarily do so.  If we
were required to remove, or we voluntarily remove, our products from the market,
our reputation or brands could be tarnished and we might have large quantities
of finished products that could not be sold.  Furthermore, failure to
timely notify the U.S. Consumer Product Safety Commission of a potential safety
hazard can result in fines being assessed against us.  Additionally, laws
regulating certain consumer products exist in some states, as well as in other
countries in which we sell our products, and more restrictive laws and
regulations may be adopted in the future. We also face exposure to product
liability claims if one of our products is alleged to have caused property
damage, bodily injury or other adverse effects.
 
 10
 Our
results of operations are also susceptible to adverse publicity regarding the
quality and safety of our products. In particular, product recalls or product
liability claims challenging the safety of our products may result in a decline
in sales for a particular product. This could be true even if the claims
themselves are ultimately settled for immaterial amounts. This type of adverse
publicity could occur and product liability claims could be made in the
future.
 
 RISKS
RELATED TO DOING BUSINESS IN CHINA
 
 Adverse
changes in political and economic policies of the PRC government could impact
our operations, reduce the demand for our products and damage our
business.
 
 We
conduct substantially all of our operations in China. Accordingly, our business,
financial condition, results of operations and prospects are affected
significantly by economic, political and legal developments in China. The PRC
economy differs from the economies of most developed countries in many respects,
including:
 
 ·           the
higher level of government involvement;
 ·           the
early stage of development of the market-oriented sector of the
economy;
 ·           the
rapid growth rate;
 ·           the
higher level of control over foreign exchange; and
 ·           the
process by which resources are allocated.
 
 As the
PRC economy has been transitioning from a planned economy to a more
market-oriented economy, the PRC government has implemented various measures to
encourage economic growth and guide the allocation of resources. While these
measures may benefit the overall PRC economy, they may also have a negative
effect on us.
 
 Although
the PRC government has in recent years implemented measures emphasizing the
utilization of market forces for economic reform, the PRC government continues
to exercise significant control over economic growth in China through the
allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and imposing policies that impact
particular industries or companies in different ways.
 
 Any
adverse change in the economic conditions or government policies in China could
have a material adverse effect on the overall economic growth and consequently
may have a material adverse effect on our operations.
 
 Uncertainties
with respect to the PRC legal system could limit the legal protections available
to you and us.
 
 We
conduct substantially all of our business through our operating subsidiaries in
the PRC. Our operating subsidiaries are generally subject to laws and
regulations applicable to foreign investments in China and, in particular, laws
applicable to foreign-invested enterprises. The PRC legal system is based on
written statutes, and prior court decisions may be cited for reference but have
limited precedential value. Since 1979, a series of new PRC laws and regulations
have significantly enhanced the protections afforded to various forms of foreign
investments in China. However, since the PRC legal system continues to rapidly
evolve, the interpretations of many laws, regulations and rules are not always
uniform and enforcement of these laws, regulations and rules involve
uncertainties, which may limit legal protections available to you and us. In
addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention.  In addition,
all of our executive officers and directors are residents of China and not of
the United States, and substantially all the assets of these persons are located
outside the United States.  As a result, it could be difficult for
investors to affect service of process in the United States or to enforce a
judgment obtained in the United States against our Chinese operations and
subsidiaries.
 
 11
 
 The
PRC government exerts substantial influence over the manner in which we must
conduct our business activities.
 
 The PRC
government has exercised and continues to exercise substantial control over
virtually every sector of the Chinese economy through regulation and state
ownership.  Our ability to operate in China may be harmed by changes in its
laws and regulations, including those relating to taxation, import and export
tariffs, environmental regulations, land use rights, property and other matters.
 We believe that our operations in China are in material compliance with
all applicable legal and regulatory requirements.  However, the central or
local governments of the jurisdictions in which we operate may impose new,
stricter regulations or interpretations of existing regulations that would
require additional expenditures and efforts on our part to ensure our compliance
with such regulations or interpretations.
 
 Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reform, a return to a more centrally planned economy, or
regional or local variations in the implementation of economic policies, could
have a significant effect on economic conditions in China or particular regions
thereof and could require us to divest ourselves of any interest we then hold in
Chinese properties or joint ventures.
 
 Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively.
 
 Most of
our revenues and expenses are denominated in RMB, although most of our products
are eventually purchased by customers in dollars. Under PRC law, the RMB is
currently convertible under the “current account,” which includes dividends and
trade and service-related foreign exchange transactions, but not under the
“capital account,” which includes foreign direct investment and loans.
Currently, our PRC operating subsidiaries may purchase foreign currencies for
settlement of current account transactions, including payments of dividends to
us, without the approval of the State Administration of Foreign Exchange,
(“SAFE”), by complying with certain procedural requirements. However, the
relevant PRC government authorities may limit or eliminate our ability to
purchase foreign currencies in the future.
 
 Foreign
exchange transactions by PRC operating subsidiaries under the capital account
continue to be subject to significant foreign exchange controls and require the
approval of or need to register with PRC government authorities, including SAFE.
In particular, if our PRC operating subsidiaries borrow foreign currency funds,
these loans must be registered with SAFE, and if we finance the subsidiaries by
means of additional dollar capital contributions, these capital contributions
must be approved by certain government authorities, including the Ministry of
Commerce, or MOFCOM, or their respective local counterparts. These limitations
could affect their ability to obtain foreign exchange through debt or equity
financing.
 
 12
 Failure
to comply with PRC regulations relating to the establishment of offshore special
purpose companies by PRC residents may subject our PRC resident stockholders to
personal liability, limit our ability to acquire PRC companies or to inject
capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to
distribute profits to us or otherwise materially adversely affect
us.
 
 In
October 2005, SAFE issued the Notice on Relevant Issues in the Foreign Exchange
Control over Financing and Return Investment Through Special Purpose Companies
by Residents Inside China, generally referred to as Circular 75, which required
PRC residents to register with the competent local SAFE branch before
establishing or acquiring control over an offshore special purpose company, or
SPV, for the purpose of engaging in an equity financing outside of China on the
strength of domestic PRC assets originally held by those residents. Internal
implementing guidelines issued by SAFE, which became public in June 2007 (known
as Notice 106), expanded the reach of Circular 75 by (i) purporting to cover the
establishment or acquisition of control by PRC residents of offshore entities
which merely acquire “control” over domestic companies or assets, even in the
absence of legal ownership; (ii) adding requirements relating to the source of
the PRC resident’s funds used to establish or acquire the offshore entity; (iii)
covering the use of existing offshore entities for offshore financings; (iv)
purporting to cover situations in which an offshore SPV establishes a new
subsidiary in China or acquires an unrelated company or unrelated assets in
China; and (v) making the domestic affiliate of the SPV responsible for the
accuracy of certain documents which must be filed in connection with any such
registration, notably, the business plan which describes the overseas financing
and the use of proceeds. Amendments to registrations made under Circular 75 are
required in connection with any increase or decrease of capital, transfer of
shares, mergers and acquisitions, equity investment or creation of any security
interest in any assets located in China to guarantee offshore obligations, and
Notice 106 makes the offshore SPV jointly responsible for these filings. In the
case of an SPV which was established, and which acquired a related domestic
company or assets, before the implementation date of Circular 75, a retroactive
SAFE registration was required to have been completed before March 31, 2006;
this date was subsequently extended indefinitely by Notice 106, which also
required that the registrant establish that all foreign exchange transactions
undertaken by the SPV and its affiliates were in compliance with applicable laws
and regulations. Failure to comply with the requirements of Circular 75, as
applied by SAFE in accordance with Notice 106, may result in fines and other
penalties under PRC laws for evasion of applicable foreign exchange
restrictions. Any such failure could also result in the SPV’s affiliates being
impeded or prevented from distributing their profits and the proceeds from any
reduction in capital, share transfer or liquidation to the SPV, or from engaging
in other transfers of funds into or out of China.
 
 We
believe our stockholders who are PRC residents as defined in Circular 75 have
registered with the relevant branch of SAFE, as currently required, in
connection with their equity interests in us and our acquisitions of equity
interests in our PRC subsidiaries. However, we cannot
provide any assurances that their existing registrations have fully complied
with, and they have made all necessary amendments to their registration to fully
comply with, all applicable registrations or approvals required by Circular 75.
 Moreover, because of uncertainty over how Circular 75 will be interpreted
and implemented, and how or whether SAFE will apply it to us, we cannot predict
how it will affect our business operations or future strategies.  For
example, our present and prospective PRC subsidiaries’ ability to conduct
foreign exchange activities, such as the remittance of dividends and foreign
currency-denominated borrowings, may be subject to compliance with Circular 75
by our PRC resident beneficial holders.  In addition, such PRC residents
may not always be able to complete the necessary registration procedures
required by Circular 75.  We also have little control over either our
present or prospective direct or indirect stockholders or the outcome of such
registration procedures.  A failure by our PRC resident beneficial holders
or future PRC resident stockholders to comply with Circular 75, if SAFE requires
it, could subject these PRC resident beneficial holders to fines or legal
sanctions, restrict our overseas or cross-border investment activities, limit
our subsidiaries’ ability to make distributions or pay dividends or affect our
ownership structure, which could adversely affect our business and
prospects.
 
 13
 We
may be unable to complete a business combination transaction efficiently or on
favorable terms due to complicated merger and acquisition regulations which
became effective on September 8, 2006.
 
 On August
8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the
Regulation on Mergers and Acquisitions of Domestic Companies by Foreign
Investors, which became effective on September 8, 2006.  This new
regulation, among other things, governs the approval process by which a PRC
company may participate in an acquisition of assets or equity interests.
 Depending on the structure of the transaction, the new regulation will
require the PRC parties to make a series of applications and supplemental
applications to the government agencies.  In some instances, the
application process may require the presentation of economic data concerning a
transaction, including appraisals of the target business and evaluations of the
acquirer, which are designed to allow the government to assess the transaction.
 Government approvals will have expiration dates by which a transaction
must be completed and reported to the government agencies.  Compliance with
the new regulations is likely to be more time consuming and expensive than in
the past and the government can now exert more control over the combination of
two businesses.  Accordingly, due to the new regulation, our ability to
engage in business combination transactions has become significantly more
complicated, time consuming and expensive, and we may not be able to negotiate a
transaction that is acceptable to our stockholders or sufficiently protect their
interests in a transaction.
 
 The new
regulation allows PRC government agencies to assess the economic terms of a
business combination transaction.  Parties to a business combination
transaction may have to submit to the Ministry of Commerce and other relevant
government agencies an appraisal report, an evaluation report and the
acquisition agreement, all of which form part of the application for approval,
depending on the structure of the transaction.  The regulations also
prohibit a transaction at an acquisition price obviously lower than the
appraised value of the PRC business or assets and in certain transaction
structures, require that consideration must be paid within defined periods,
generally not in excess of a year.  The regulation also limits our ability
to negotiate various terms of the acquisition, including aspects of the initial
consideration, contingent consideration, holdback provisions, indemnification
provisions and provisions relating to the assumption and allocation of assets
and liabilities.  Transaction structures involving trusts, nominees and
similar entities are prohibited.  Therefore, such regulation may impede our
ability to negotiate and complete a business combination transaction on
financial terms that satisfy our investors and protect our stockholders’
economic interests.
 
 Fluctuations
in exchange rates could adversely affect our business and the value of our
securities.
 
 The value
of our common stock could be indirectly affected by the foreign exchange rate
between the U.S. dollar and RMB and between those currencies and other
currencies in which our sales may be denominated. Because substantially all of
our earnings and cash assets are denominated in RMB, appreciation or
depreciation in the value of the RMB relative to the U.S. dollar would affect
our financial results reported in U.S. dollar terms, before giving effect to any
underlying change in our business or results of operations. Also as most of our
products are eventually sold to customers in US dollars and most of our costs
are based on RMB, currency fluctuations may adversely affect our profitability.
Fluctuations in the exchange rate will also affect the relative value of any
dividend we issue as it is exchanged into U.S. dollars and earnings from, and
the value of, any U.S. dollar-denominated investments we make in the
future.
 
 Currently,
most of our cost is based in RMB.  In the event that the RMB appreciates
against the US dollar, our costs as measured in dollars will increase. If
we cannot pass the resulting cost increases on to the ultimate consumers of our
products, most of who are in the United States, our profitability and operating
results will suffer.
 
 Since
July 2005, the RMB has no longer been officially pegged to the U.S. dollar.
Although the People’s Bank of China regularly intervenes in the foreign exchange
market to prevent significant short-term fluctuations in the exchange rate, the
RMB may appreciate or depreciate significantly in value against the U.S. dollar
in the medium to long term. Moreover, it is possible that in the future PRC
authorities may lift restrictions on fluctuations in the RMB exchange rate and
lessen intervention in the foreign exchange market.
 
 Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. 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 enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert RMB into foreign currencies.
 
 14
 
 RISKS
RELATED TO THE MARKET FOR OUR STOCK GENERALLY
 
 The
market price of our common stock is volatile, leading to the possibility of its
value being depressed at a time when you want to sell your
holdings.
 
 The
market price of our common stock has been volatile, and this volatility may
continue.Numerous
factors, many of which are beyond our control, may cause the market price of our
common stock to fluctuate significantly.  These factors
include:
 
 ·
                  our
      earnings releases, actual or anticipated changes in our earnings,
      fluctuations in our operating results or our failure to meet the
      expectations of financial market analysts and
investors;·
                  changes
      in financial estimates by us or by any securities analyst who might cover
      our stock;
 ·
                  speculation
      about our business in the press or the investment
    community;·
                  significant
      developments relating to our relationships with our customers or
      suppliers;
 ·
                  stock
      market price and volume fluctuations of other publicly traded companies
      and, in particular, those that are in the small household appliance
      industry;·
                  customer
      demand for our products;
 ·
                  investor
      perceptions of the household appliance industry in general and our company
      in particular;·
                  the
      operating and stock performance of comparable
  companies;
 ·
                  general
      economic conditions and trends;·
                  announcements
      by us or our competitors of new products, significant acquisitions,
      strategic partnerships or
divestitures;
 ·
                  changes
      in accounting standards, policies, guidance, interpretation or
      principles;·
                  loss
      of external funding sources;
 ·
                  sales
      of our common stock, including sales by our directors, officers or
      significant stockholders; and·
                  additions
      or departures of key personnel.
 
 Securities
class action litigation is often instituted against companies following periods
of volatility in their stock price. This type of litigation could result in
substantial costs to us and divert our management’s attention and
resources.
 
 We
do not intend to pay dividends on shares of our common stock for the foreseeable
future, but if we intend to do so our holding company structure may limit the
payment of dividends to our stockholders.
 
 While we
have no current intention of paying dividends, should we decide in the future to
do so, as a holding company, our ability to pay dividends and meet other
obligations depends upon the receipt of dividends or other payments from our
operating subsidiaries and other holdings and investments.  In addition,
our operating subsidiaries, from time to time, may be subject to restrictions on
their ability to make distributions to us, including as a result of restrictive
covenants in loan agreements, restrictions on the conversion of local currency
into U.S. dollars or other hard currency and other regulatory restrictions as
discussed below.  If future dividends are paid in RMB, fluctuations in the
exchange rate for the conversion of RMB into U.S. dollars may reduce the amount
received by U.S. stockholders upon conversion of the dividend payment into U.S.
dollars.
 
 Chinese
regulations currently permit the payment of dividends only out of accumulated
profits as determined in accordance with Chinese accounting standards and
regulations.  Our subsidiaries in China are also required to set aside a
portion of their after tax profits according to Chinese accounting standards and
regulations to fund certain reserve funds.  Currently, our subsidiaries in
China are the only sources of revenues or investment holdings for the payment of
dividends.  If they do not accumulate sufficient profits under Chinese
accounting standards and regulations to first fund certain reserve funds as
required by Chinese accounting standards, we will be unable to pay any
dividends.
  15
 ITEM
2.  PROPERTIES.
 
 There is
no private ownership of land in China and all land ownership is held by the
government of the PRC, its agencies and collectives.  Individuals and
companies are permitted to acquire land use rights for specific purposes.
 Upon payment of a land grant fee, land use rights can be obtained from the
government for a period up to 50 years in the case of industrial land, and are
typically renewable. Our manufacturing facilities are located in Guangdong
Province, PRC.
 
 Our
production facilities of Well Profit are located in five leased buildings
totaling 376,869 square feet, in Zhongshan Gang Kou Town Oceanic Industrial
Area, China for $51,258 per month, subject to a five-year scheduled to expire on
June 30, 2011. We also lease an additional 71,182 square meters of production
space in the Zhongshan Gang Kou Town Oceanic Industrial Area, for $9,682 per
month, subject to a five-year lease that will expire on May 31,
2012.
 
 We also
lease 23,034 square feet of facilities for employees to use as living quarters,
for a monthly payment of $1,825. These facilities are offered as an added free
benefit to our employees, many of whom would have to travel great distances to
come to work each day.
 
 As a
result of transfer of our property to former shareholders of Asia Forever in
return for the reduction of the Company’s debt to them, we entered into an
operating lease started at July 1, 2009 for three years. We pay $34,091 for
442,045 square feet of buildings and plants.
 
 We
believe that all our properties have been adequately maintained, are generally
in good condition, and are suitable and adequate for our business.
 
 ITEM
3. LEGAL PROCEEDINGS
 
 From time
to time, we may become involved in various lawsuits and legal proceedings in the
ordinary course of our business.  We are currently not aware of any legal
proceedings the ultimate outcome of which, in our judgment based on information
currently available, would have a material adverse affect on our business,
financial condition or operating results.
 
 ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
 
 There
were no matters that were submitted during the fourth quarter of 2009 to a vote
of security holders.
 
 16
 PART
II
 
 ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
 
 Market
Information
 
 Our
common stock is quoted under the symbol “HSYT.OB” on the Electronic Bulletin
Board maintained by the Financial Industry Regulatory Authority. The CUSIP
number is 43737T106.
 
 The
following table sets forth, for the periods indicated, the high and low bid
prices of our common stock.  These prices reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.
 
 Closing
      Prices (1)High
                  LowYear
      Ended December 31, 20091st
      Quarter
                  $0.85
                  $0.102nd
      Quarter
                  $1.50
                  $0.253rd
      Quarter
                  $2.96
                  $0.494th
      Quarter
                  $4.08
                  $1.01
 
 
 Year
      Ended December 31, 20081st
      Quarter
                  $1.05
                  $0.222nd
      Quarter
                  $0.45
                  $0.173rd
      Quarter
                  $0.30
                  $0.104th
      Quarter
                  $0.30
                  $0.06
 
 
 (1)   
The above tables set forth the range of high and low closing prices per share of
our common stock as reported by finance.google.com
for the periods indicated.
 
 Holders
 
 On
December 31, 2009, there were approximately 417 stockholders of record of our
common stock.  The number of record holders does not include persons who
held our common stock in nominee or “street name” accounts through
brokers.
 
 Dividend
Policy
 
 We have
never declared dividends or paid cash dividends.  Our board of directors
will make any future decisions regarding dividends.  We currently intend to
retain and use any future earnings for the development and expansion of our
business and do not anticipate paying any cash dividends in the near
future.
 
 Our board
of directors has complete discretion on whether to pay dividends, subject to the
approval of our shareholders.  Even if our board of directors decides to
pay dividends, the form, frequency and amount will depend upon our future
operations and earnings, capital requirements and surplus, general financial
condition, contractual restrictions and other factors that the board of
directors may deem relevant.
 
 17
 
 Securities
Authorized for Issuance Under Equity Compensation Plans
 
 None.
 
 Recent
Sales of Unregistered Securities; Use of Proceeds from Registered
Securities
 
 None.
 
 Purchases
of Our Equity Securities
 
 No
repurchases of our common stock were made during the fourth quarter of our
fiscal year ended December 31, 2009.
 
 ITEM
6.  SELECTED FINANCIAL DATA
 
 Not
required.
 
 ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 The
following discussion should be read in conjunction with the Financial Statements
and Notes thereto appearing elsewhere in this Form 10-K.
 
 Safe Harbor Regarding
Forward-Looking Statements
 
 The
following discussion contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 relating to future events or our future performance. Actual
results may materially differ from those projected in the forward-looking
statements as a result of certain risks and uncertainties set forth in this
December 31, 2009 Form 10-K . Although management believes that the assumptions
made and expectations reflected in the forward-looking statements are
reasonable, there is no assurance that the underlying assumptions will, in fact,
prove to be correct or that actual results will not be different from
expectations expressed in this report.
 
 Overview
 
 Home
System Group is a Nevada holding company which has its operations based
exclusively in China.  These operations are primarily engaged in the
production of a variety of household appliances, stainless steel gas grills and
ovens, ceiling and table fans and decorative lamps. Our products are sold
through distributors to retailers in America, Europe, Australia and
Asia.
 
 18
 Results
of Operation
 
 All
amounts, other than percentages, in U.S. dollars
 
 
 Year
      ended
                    December
      31, 2009
                  
                  
                  Year
      ended
                    December
      31, 2008
                  
                  
                  Increase
                    (Decrease)
                  
                  
                  Percentage
                    Increase
                    (Decrease)Net
      sales
                  
                  $
                  61,828,792
                  
                  
                  $
                  51,926,205
                  
                  
                  $
                  9,902,587
                  
                  
                  
                  19.1%Costs
      of sales
                  
                  
                  45,875,295
                  
                  
                  
                  43,491,550
                  
                  
                  
                  2,383,745
                  
                  
                  
                  5.5%Gross
      profit
                  
                  
                  15,953,497
                  
                  
                  
                  8,434,655
                  
                  
                  
                  7,518,842
                  
                  
                  
                  89.1%General
      selling and administrative expenses
                  
                  
                  5,437,139
                  
                  
                  
                  3,645,135
                  
                  
                  
                  1,792,004
                  
                  
                  
                  49.2%Income
      from operations
                  
                  
                  10,176,978
                  
                  
                  
                  4,704,675
                  
                  
                  
                  5,472,303
                  
                  
                  
                  116%Other
      income
                  
                  
                  4,369,287
                  
                  
                  
                  69,880
                  
                  
                  
                  4,299,407
                  
                  
                  
                  N/AInterest
      income (expense), net
                  
                  
                  (2,242,517)
                  
                  
                  
                  12,692
                  
                  
                  
                  (2,255,609)
                  
                  
                  
                  N/AIncome
      before  taxes
                  
                  
                  12,303,748
                  
                  
                  
                  4,788,421
                  
                  
                  
                  7,515,327
                  
                  
                  
                  157%Income
      taxes
                  
                  
                  (2,977,716)
                  
                  
                  
                  (720,756)
                  
                  
                  
                  (2,256,960)
                  
                  
                  
                  N/ANet
      income (loss)
                  
                  $
                  9,326,032
                  
                  
                  $
                  4,067,665
                  
                  
                  $
                  5,258,367
                  
                  
                  
                  129.3%
 
 Sales
Revenue
 
 Total
consolidated sales for the year ended December 31, 2009 increased by $9,902,587
as compared to year ended December 31, 2008. The increase was driven by the
higher sales of fans and lamps of $25,347,020 over the comparable period of 2008
due to the acquisition of Weihe, which occured in October, 2008. These increased
sales are partially offset by a decrease of $18,178,897 of Well Profit’s revenue
which was due to approximately $10 million of sales in 2008 of raw material
recorded in 2008 which did not repeated in 2009 and an decrease of $5,556,149 in
the sales of skateboards.
  Net
      revenue by SegmentYear
      ended
                    December
      31, 2009
                  
                  Year
      ended
                    December
      31, 2008Segment
                  
                  
                  
                  Percent
      of total
                  
                  
                  
                  Percent
      of totalBarbeque
      sets
                  
                  $
                  14,566,946
                  
                  23.6%
                  
                  $
                  9,150,319
                  
                  17.6%Skateboards
                  
                  
                  3,098,987
                  
                  5%
                  
                  
                  8,655,136
                  
                  16.7%Other
      home appliances
                  
                  
                  44,162,859
                  
                  71.4%
                  
                  
                  34,120,749
                  
                  65.7%Total
                  
                  $
                  61,828,792
                  
                  100%
                  
                  $
                  51,926,204
                  
                  100%
 
 19
 
 Year
      ended December 31,
                    2009
      vs. 2008Segment
                  
                  Percent
      increase of net revenueBarbeque
      sets
                  
                  
                  60%Skateboards
                  
                  
                  (64)%Other
      home appliances
                  
                  
                  29%
 
 The
reasons for revenue for each segment is as follows:
 
 Barbeque
sets –In 2008, due to the downturn of international economy, the orders from
international customers for barbeques grills decreased dramatically. Also, as a
result of the high raw material price level, production of barbeque grills
experienced operating losses and the sales were deemphasized.  In
response the Company increased the sales of other products, such as skateboards,
in order to offset the adverse impact of the lower sales of barbeques. In 2009,
with the recovery of global economy and decrease costs of raw material,
production of barbeque grills regained profitability and the Company’s
management decided to refocused on the production of barbeque
grills.
 
 Skateboards
–As per above, in 2008, the Company promoted orders of skateboards.
 
 Other
home appliances – the revenue is from small home appliances, lightings and lamps
which are produced by Weihe. In 2009, this segment benefited from the full year
effect of Weihe, which was acquired in October, 2008. This resulted in higher
sales of Weihe of $25,347,020 over the comparable period 2008, partially offset
by the approximately $10 million sales of raw material in 2008 but not repeated
in 2009 and other general weakness in the sales of some home
appliances.
 
 Costs
of Sales and Gross Profit
 
 Year
      ended December 31,2009
                  
                  %
      of Sales
                    Revenue
                  
                  
                  2008
                  
                  %
      of Sales
                    RevenueCost
      of Sales
                  
                  $
                  45,875,295
                  
                  74.2%
                  
                  $
                  43,491,550
                  
                  83.8%Gross
      Profit
                  
                  $
                  15,953,497
                  
                  25.8%
                  
                  $
                  8,434,655
                  
                  16.3%
 
 The
Company reported cost of sales of $45,875,295 for the year ended December 31,
2009, an increase of $2,383,745 from the corresponding 2008
level.  This increase was primarily the result of the full year effect
of the October, 2008 acquisition of Weihe, which had $26,683,729 cost of sales
in the year of 2009 compared to $8,637,783 in 2008, offset by lower cost of
sales of skateboards and raw materials of $ 18,393,490 due to its lowerrevenue
over the comparable 2008 period and lower cost of sales, as a percentage of
revenue. Cost of sales as a percentage of revenue for the year ended December
31, 2009 decreased to 74.2% from the 83.8% in the prior fiscal year, largely as
a result of the full year benefit of Weihe’s lower cost of sales as a percentage
of revenue, which was 71.1% in 2009. The Company’s other operations, had a lower
cost of sales as percentage of revenue for the year of 2009 of 78.1%, compared
to 88.2% during the prior year. This improvement was largely due to decreased
cost of raw materials, such as steel, in part due to increased volumes purchased
due to the Weihe acquisition and the increasing efficiency in our production
scheduling and material handling.
 
 20
 General
Selling and Administrative Expenses
 
 The
Company’sgenerals
selling and administrative expenses increased by $1,792,004 for the year ended
December 31, 2009, as compared to the prior year 2008. This amount higher was
primarily due to the full year effect of Weihe’s selling and administrative
costs, which were $1,670,523 higher than in 2008 due to its acquisition in
October, 2008.
 
 Income from
Operations
 
 Income
from operations increased by $5,472,303 for the year ended December 31, 2009, as
compared to year ended December 31, 2008, largely due to the increased revenue
and operating profit resulted from the Weihe acquisition, and the lower cost of
raw materials and increasing efficiency in our production operation which
benefited the Company’s gross profit.
 
 Other
Income
  Other
income increased by $4,299,467 for the year ended December 31, 2009 as compared
the comparable periods in 2008, largely due to the $2,356,327 of gain on
transfer of fixed assets that reduced the level of debt incurred by the Company
due to Weihe acquisition in 2008. In August 2009, the Company transferred
certain building assets and land use right to former shareholders of Asia
Forever, the previous owner of Weihe. These assets were valued at the time of
their transfer at $6,087,312, and the outstanding balance of the Notes due was
reduced by this amount. There also was a gain of $1,372,121due to a reduction in
the Company’s rent expense accrual resulting from the Chinese government’s
stimulus plan, in which the landlord Oceanic International (Zhongshan) received
free land use right from the government and tax rebate to stimulate regional
economic development.
 
 Interest
Expense, Net
  Net
interest expense increased by $2,255,209 for the year ended December 31, 2009 as
compared to the prior year 2008, reflected the costs of the amortization of
deferred finance cost pertaining to the Weihe acquisition and the higher bank
borrowings, which supported the Company’s increased level of business
operations resulting from that acquisiton.
 
 Net
Income before Income Taxes
 
 The
Company reported net income before taxes of $12,303,748 for the year of 2009,
representing an increase of $7,515,327 from the pre-tax gain of $4,788,421
recorded during year of 2008. These increases were primarily driven by the
higher operating profits resulting from the Weihe acquisition, improved gross
profit and other income as discussed above.
 
 21
 Net Income before
    TaxesYear
      ended
                    December
      31, 2009
                  
                  Year
      ended
                    December
      31, 2008Segment
                  
                  
                  Percent
      of total
                    net
      income
                    before
      taxes
                  
                  
                  
                  Percent
      of total
                    net
      income
                    before
      taxesBarbeque
      sets
                  
                  $
                  1,145,992
                  9.3%
                  
                  $
                  (1,605,649)
                  
                  (33.5)%Skateboards
                  
                  
                  563,917
                  4.6%
                  
                  
                  744,543
                  
                  15.5%Other
      home appliances
                  
                  
                  8,878,445
                  72.2%
                  
                  
                  6,546,162
                  
                  136.7%Corporate
                  
                  
                  1,715,394
                  13.9%
                  
                  
                  (896,635)
                  
                  (18.7)%Total
                  
                  $
                  12,303,748
                  100%
                  
                  $
                  4,788,421
                  
                  100%
 
 Net
income before taxes of barbeque grills improved to $1,145,992 in 2009 from the
net loss in 2008, primarily from the higher revenue of $5.4 million and improved
gross profit margin due to lower raw material cost improved production
efficiency as discussed above.
 
 Net
income before taxes of skateboards decreased to $563,917 in 2009 resulted from
the lower revenue as discussed above.
 
 Net
income before taxes of other home appliances was $8,878,445 in 2009, an increase
of $1,082,366 as compared to the same period of 2008. This primarily resulted
from the net increase in revenue of $10 million as discussed above.
 
 Net
income before taxes of Corporate segment was $1,715,394, an increased of
$2,612,029 from the loss in 2008 due to the other income including gain of
transfer of the building $2,356,237 and income on reversal of the rent of
$1,372,121 as discussed above, partially offset by the expense for professional
services rendered in United States as well as the deferred interest expense of
$1,249,917 recognnized on the Notes payable pertaining to the acquisition of
Weihe.
 
 Taxes
 
 The
Company recorded a tax provision of $2,997,716, representing 24.2% of its
pre-tax income.  This is an increase over the 2008 tax provision of
$720,756, or 15.1% of pre-tax income, due to the $7,515,327 increase in the 2009
pre-tax income, and the effect of the amortization deferred finance cost not
being deductible of $331,422 pertain to Weihe’s acquisition.
 
 Net
Income
 
 As a
result of the increased level of net income before taxes, the Company realized
net income of $9,326,032 for the year ended December 31, 2009, an increase of
$5,258,367 from the prior year. This improvement reflects the increased revenue
and improved gross margin discussed above, plus the gains realized on the
transfer of assets and the rent reversal.
 
 22
 
 Liquidity and Capital
Resources
 
 As of
December 31, 2009, cash and cash equivalents were $3,985,782 as compared to
$1,609,540 as of December 31, 2008. The components of this increase of
$2,376,242 are reflected below.
 
 Cash
Flow
 
 Year
      Ended December 31,2009
                  
                  
                  2008Net
      cash provided by (used in) operating activities
                  
                  $
                  12,605,750
                  
                  
                  $
                  (17,406,207)Net
      cash used in investing activities
                  
                  
                  (1,682,718)
                  
                  
                  
                  (936,978)Net
      cash provided by (used in) financing activities
                  
                  
                  (8,582,967)
                  
                  
                  
                  19,107,419Exchange
      rate effect on cash
                  
                  
                  36,177
                  
                  
                  
                  24,232Net
      cash inflow (outflow)
                  
                  $
                  2,376,242
                  
                  
                  $
                  788,466
 
 Net
cash provided by operating activities
 
 Cash has
historically been generated from operations and short-term borrowings. The
positive cash flows from operating activities were principally attributed to the
net income generated during the year ended December 31, 2009, which was
$9,326,032, and also the decrease of $9,004,749 in receivables because there was
a large order shipped in fourth quarter of 2008 was not repeated in
corresponding 2009 period. These benefits were partially offset by reduced
levels of bills payable, accounts payable and restricted cash, totaling
$6,746,486.
 
 Net
cash used in investing activities
 
 In the
fourth quarter of 2009, the Company spent $2,416,218 on the purchase of metal
fabrication machines for manufacture purpose. Combined with the refund of
acquisition deposit of $733,500, net cash used in investing activities was
$1,682,718.
 
 23
 Net
cash used in financing activities
 
 As of
December 31, 2009, the net cash used in financing activities was 8,582,967,
primarily due to the $15,419,051 for repayment of notes payable, partially
offset by the net increases in bank loans of $2,688,108 and advances from
stockholder of $3,174,756.
 
 Working
capital at December 31, 2009 was approximately $(1,242,215) as compared to
$(10,028,127) at December 31, 2008, reflecting the reduced level of receivables
of $9,004,749, and notes payable current portion of $14,961,763 partially offset
by lower accounts and bills payables of $8,416,439.
 
 We
believe that our available funds and cash flows generated from operations and
short term borrowings will be sufficient to meet our anticipated ongoing
operating needs for the next twelve months. However it is possible that the
Company might need to raise additional capital in order to fund the Company’s
debt schedule and/or expansion. There can be no guarantee that we will be able
to obtain such funding, whether through the issuance of debt or equity, on terms
satisfactory to management and our Board of Directors.
 
 Off-Balance
Sheet Arrangements
 
 There
were no off-balance sheet arrangements during the year ended December 31, 2009
that have, or are reasonably likely to have, a current or future affect on our
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to our
interests.
 
 Recent
Accounting Pronouncements
 
 In
February 2007, the FASB issued ASC Topic 825, “Financial Instruments” which
permits entities to choose to measure many financial instruments and certain
other items at fair value. The objective of this standard is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The Company adopted this standard on January 1, 2008, and the
implementation of this standard did not have a significant impact on the
Company’s financial position or results of operations.
 
 In
December 2007, the FASB issued ASC Topic 805, “Business Combinations”, to
establish principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree and the
goodwill acquired. The standard also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination. This statement was effective for the Company beginning
January 1, 2009.
 
 In
December 2007, the FASB issued ASC Topic 810, “Consolidation”, to establish
accounting and reporting standards for ownership interests in subsidiaries held
by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest, and the valuation of retained noncontrolling equity
investments when a subsidiary is deconsolidated. It also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. This
standard  is effective for the Company beginning January 1, 2009.
The Company adopted the new standard on January 1, 2009, and the implementation
of the new standard did not have a significant impact on the Company’s financial
position or results of operations.
 
 24
 In April
2008, the FASB issued  ASC Topic 350, “Intangibles-Goodwill and Other”,
which amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset. This Staff Position is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. Early adoption is prohibited. Application of this
standard did not have a significant impact on the Company’s financial
statements.
 
 In May
2008, the FASB issued ASC Topic 470, “Debt”, which is effective for financial
statements issued for fiscal years beginning after December 15, 2008. This
standard includes guidance that convertible debt instruments that may be settled
in cash upon conversion should be separated between the liability and equity
components, with each component being accounted for in a manner that will
reflect the entity’s nonconvertible debt borrowing rate when interest costs are
recognized in subsequent periods. This standard is not currently applicable to
the Company since the Company does not have convertible debt.
 
 In June
2008, the FASB issued ASC Topic 260, “Earnings per Share”, regarding determining
whether instruments granted in share-based payment transactions are
participating securities. This provides that unvested share-based payment awards
that contain nonforfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and shall be included in the
computation of earnings per share pursuant to the two-class method. The Company
does not currently have any share-based awards that would qualify as
participating securities. Therefore, application of this is not expected to have
an effect on the Company’s financial reporting.
 
 In
April 2009, the FASB issued ASC Topic 820, “Fair Value Measurements and
Disclosures”, which provides additional guidance for estimating fair value when
the volume and level of activity for the asset or liability have significantly
decreased and re-emphasizes that regardless of market conditions the fair value
measurement is an exit price concept as defined in the standard. The scope of
this standard does not include assets and liabilities measured under Level 1
inputs (quoted prices in active markets for identical assets). The standard is
applied prospectively to all fair value measurements where appropriate and is
effective for the Company’s interim and annual periods beginning in the second
quarter of fiscal year 2009. The Company’s adoption of this above standard did
not have a material impact on the Consolidated Financial
Statements.
 
 In May
2009, the FASB issued ASC Topic 855, “Subsequent Events”, that established
general standards for accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued and shall be applied to subsequent events not addressed
in other applicable generally accepted accounting principles.  This
standard, among other things, sets forth the period after the balance sheet date
during which management should evaluate events or transactions that may occur
for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and the
disclosures an entity should make about events or transactions that occurred
after the balance sheet date. The Company adopted this standard effective with
the fiscal quarter ending June 30, 2009.
 
 In July
2009, the FASB issued standards that established the ASC Accounting Standards
Codification as the single source of authoritative US GAAP for nongovernmental
entities. The ASC supersedes all non-SEC accounting and reporting standards that
existed at the ASC’s effective date, including FASB, American Institute of
Certified Public Accountants, Emerging Issues Task Force and related literature.
The FASB uses Accounting Standards Updates (“ASU”) to amend the ASC. The
Codification was effective for interim and annual periods ending after September
15, 2009 (i.e., the year ended December 31, 2009 for the Company).
 
 25
 
 ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
 
 Consolidated
Financial Statements
 
 The
financial statements required by this item begin on page F-1
hereof.
 
 ITEM
9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
 None.
 
 ITEM
9A(T). CONTROLS AND PROCEDURES
 
 Evaluation of Disclosure
Controls and Procedures
 
 An
evaluation was conducted under the supervision and with the participation of the
Company’s management, including the Chief Executive Officer (“CEO”), its
principal executive officer, and Chief Financial Officer (“CFO”), its principal
financial officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and
Rule 15d-15(e) of the Exchange Act) as of December 31, 2009. Based on that
evaluation, the CEO and CFO concluded that there had been substantial
improvements of the Company’s disclosure controls and procedures and the manner
in which information that is required to be disclosed in Exchange Act report is
reported within the time period specified in the SEC’s rule and forms. CEO has
concluded that our disclosure controls and procedures were effective as of
December 31, 2009.
 
 Management’s Report on
Internal Control over Financial Reporting
 
 Section 404
of the Sarbanes-Oxley Act of 2002 requires that management document and test the
Company’s internal control over financial reporting and include in this Annual
Report on Form 10-K a report on management’s assessment of the
effectiveness of our internal control over financial reporting.
 
 Management
is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. Internal control over financial reporting
refers to the process designed by, or under the supervision of Lei Yu, our Chief
Executive Officer, and Jianming Xu, our Chief Financial Officer, and effected by
our Board of Directors, management and other personnel, to provide reasonable
assurance regarding the reliability of our financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. GAAP, and 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 our assets;
 
 (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. GAAP, and
that our receipts and expenditures are being made only in accordance with the
authorization of our management and directors; and
 
 (3)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on the financial statements.
 
 26
 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.
 
 The
management designed an evaluation process that meets the needs of its company
and that provides reasonable assurance for its assessment based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
 
 In
connection with their review of our internal controls over financial reporting
for the fiscal year ended December 31, 2009, our management concluded that in
2009, there are substantial improvements on our internal control over financial
reporting:
 
 ·           We
have accounting personnel with direct oversight responsibility to document and
review of financial information, who analyze and reconciliate of certain
accounts on a periodic basis, and set up accounting system to provide
information related to expenditures on a project-by-project basis;
 ·           We
finished interview, documentation and provided risk control matrix for improving
financial system for timely identification, research and resolution of
accounting issues and documentation of consideration of recent accounting
pronouncements;
 ·           We
hired technical accounting expertise among senior financial staff regarding US
GAAP and the requirements of the PCAOB, and regarding the preparation of draft
financial statements.
 
 As a
result of these improvements, our management concluded that, as of December 31,
2009, our internal control over financial reporting was effective.
 
 This
Annual Report on Form 10-K does not, nor is required to, include an attestation
report of the Company’s independent registered public accounting firm regarding
internal control over financial reporting. Management’s report was not subject
to attestation by the Company’s independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in this annual
report.
 
 Change
in Internal Control over Financial Reporting
  In order
to further enhance our disclosure and internal controls, the Company has hired
financial consultants to assist management in evaluating complex accounting
issues on an as-needed basis, and the implementation of systems to improve
control and review procedures over all financial statement and account
balances.
  
 ITEM
9B. OTHER INFORMATION
 
 There is
no information required to be disclosed in a report on Form 8-K during the
fourth quarter of the year covered by this Form 10-K but not
reported.
 
 27
 
 PART
III
 
 ITEM
10. DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE COMPLIANCE WITH SECTION
16(A) OF THE ACT
 
 Directors
and Executive Officers
 
 The
following table sets forth our directors and executive officers, and their ages
and titles as of December 31, 2009.
 
 Name
                  Age
                  PositionLei
      Yu
                  46
                  Chief
      Executive OfficerJianming
      Xu
                  35
                  Chief
      Financial OfficerJing
      Liu
                  37
                  SecretaryWeiqiu
      Li
                  50
                  Chairman
      of Board of DirectorsKinwai
      Cheung
                  47
                  DirectorYiming
      Zhu
                  47
                  Independent
      DirectorHuafeng
      Chen
                  35
                  Independent
      DirectorYidong
      Xiao
                  34
                  Independent
      Director
 
 Lei Yu  Mr. Yu, age
46, graduated from Zhejiang University of Technology with a B.S. degree in
Mechanical Engineering in 1983. In 2002, he received a MBA degree from Xiamen
University. From September, 2007 to August, 2008, he was the Vice President of
China Wallink Investment Group (“Wallink”), where he oversaw the operational and
financial activities of Wallink’s portfolio companies, and subsequently was
pursuing completing a Doctorate thesis at Wuhan University Law School . From
October, 2005 to August, 2007, Mr. Yu was a Senior Vice President of Ever
Fortune International Holding Limited (“Ever Fortune”) where he directed its
transition to an infrastructure construction company including road, harbor, and
bridge construction. He also restructured Ever Fortune’s capital
structure.  From January, 2001 to September, 2005, Mr. Yu was the
director of the investment bank department of China Taisheng Investment
Holding Limited (“Taisheng”), where he managed Taisheng’s merger and acquisition
activities. During the period from July, 2002 to June, 2003, he was appointed by
Taisheng to be the Chief Executive Officer of one of Taisheng’s portfolio
companies-Hebei Huda Technology & Education Development Co.,
Ltd.
 
 Jianming XuMr. Xu,
age 35, graduated from Hangzhou Dianzi Unniversity with a M.S. degree in
Accounting in 1996. Mr. Yu was appointed as
our Chief Financial Officer on September 24, 2008. Before that, Mr. Xu has
served as Assistant to the CEO of the Company. Previously Mr. Xu also served as
Chief Director of Audit of Stone Investment Group from October, 2002 to July,
2007.  Prior to that, he was an Audit department manager at an
international accounting firm (BDO member) from October, 1998 to September,
2002.  From September, 1996 to September, 1998, he was the Finance
Manager at China's Shaoxing City Textile Group.
 
 Jing Liuwas appointed as our
Secretary on August 17, 2006.  Ms. Liu has also served as the Secretary of
our subsidiary, Oceanic International Company Limited, since March 2004.
 Prior to this, Ms. Liu served as the Manager in the International Business
Department of Zhong Shan Hua Jie Steel Pipe Group, Ltd. from July, 1991 to
January, 2004, where she assisted in the financial management of its
subsidiaries.  Ms. Liu received a Bachelor degree in International Trade
from the Guangdong Foreign Language Institute.
 
 Weiqiu Li was appointed Chief
Executive Officer of the Company on August 17, 2006 and resigned as our CEO on
September 24, 2008.  He was appointed Chairman of Board of Directors
on November 30, 2009. Now he is serving as Vice President for Zhong Shan West
District Chamber of Commerce.  Mr. Li received a Bachelor degree in
Economic Management from Guangdong Radio & TV University, and studied
Automation Control at the South China University of Technology from 1993 to
1995. Mr. Li has more than 20 years’ experience in product design, research and
development, production, management and international trade
negotiations.
 
 28
 
 Kinwai Cheung was appointed as
our Chief Financial Officer on August 17, 2006 and resigned as our CFO on
September 24, 2008. He is now serving the company as the director on the board.
Since June, 2004, Mr. Cheung has also served as the Administrative Manager of
one of our subsidiaries, Oceanic International Company Limited.  Prior
to this time, Mr. Cheung served as the Chairman and Chief Executive Officer of
Kang Teng Trading Company Limited in Zhongshan City, China, from May, 1998 to
May, 2004.  Mr. Cheung received a Bachelor degree in Business
Administration from the Zhongshan City Shunwen College in 1989.
 
 Yiming Zhu, 47, is a Chinese
Certified Accountant-Senior Level.  He graduated from Hangzhou Dianzi
University with a degree in Economics in July, 1986 and in 1996, he received a
Master degree in Construction Management from the same school.  Since
1988, he has been working in China Electronic Corporation
(“CEC”).  CEC is the largest state-owned information technology
company in China, with over 60 subsidiaries around the world.  In
September, 2008, he was appointed to be the President of Amoi Electronics Co.,
Ltd., one of the CEC’s subsidiaries, where he provides executive leadership for
the company’s strategy and operations with full income
responsibility.  From April, 2007 to September, 2008, he was the Vice
President of Panda Electronics Group Co., Ltd, one of the subsidiaries of CEC,
where he oversaw the company’s accounting department and streamlined the
accounting and billing activities, improving efficiency and
profitability.  From 1988 to 2007, Mr. Zhu worked in various financial
roles of increasing responsibility with CEC.
 
 Huafeng Chen, 35, is a Chinese
Certified Accountant-Medium Level.  He graduated from Hunan University
with a degree in Accounting in July 1997.  Since September, 2004, he
has been the director of Internal Control department in China Nepstar Chain
Drugstore Ltd., which is listed on NYSE.  He is in charge of the
management of overall accounting operations and internal control system set up
over the financial system.  From June, 2002 to February, 2004, he was
the director of Internal Control department and also the financial manager in
accounting department in China Resources Vanguard Co., Ltd, where he provided
leadership in internal control system and financial system
management.  From April, 2000 to May, 2002, he was a project manager
in Huatian Hotel Co., Ltd, where he oversaw projects’ cost management and
analysis.
 
 Yidong Xiao, 34, is a Chinese
Certified Public Accountant and Certified Tax Agent.  He graduated
from Hunan University with a degree in Accounting in July,
1996.  Since November, 2006, he has been the director of the audit
department in Shenzhen Yuanfeng Co., Ltd., a public accounting firm, where he
works as an auditor responsible for audits and verification of client companies’
financial statements.  Shenzhen Yuanfeng Co., Ltd. does not provide
any services to Home System Group.  From November, 2000 to November,
2006, Mr. Xiao was a senior manager in accounting department of Hunan Yixin
Chuanghui Co., Ltd.  From September, 1997 to October, 2000, he worked
as a staff accountant in Guangzhou Xinda Industrial Co., Ltd., where he was in
charge of general accounting.  From July, 1996 to September, 1997, he
was an accountant in Hunan Hengyang Secondary Construction Engineering Company
Limited.
 
 Except as
noted above, there are no other agreements or understandings for any of our
executive officers or directors pursuant to which any of them was to be selected
as a director or officer (other than with persons acting solely in their
capacities as our directors or officers) or to resign at the request of another
person and no officer or director is acting on behalf of nor will any of them
act at the direction of any other person.  Our current directors hold no
directorships in any other reporting companies.
 
 29
 
 Family
Relationships
 
 There are
no family relationships among our directors or officers.
 
 Audit
Committee
  On
November 30, 2009, the Board established an audit committee and adopted a
charter for the governance of the Audit Committee of the Board.  The
audit committee is responsible for (i) recommending independent accountants to
the Board, (ii) reviewing our financial statements with management and the
independent accountants, (iii) making an appraisal of our audit effort and the
effectiveness of our financial policies and practices and (iv)consulting with
management and our independent accountants with regard to the adequacy of
internal accounting controls.  The Committee is composed of directors
from the Board who are “independent” of management of the Company as provided by
applicable law and regulations.  The members of the Audit Committee
are Messrs. Yidong Xiao, Yiming Zhu and Huafeng Chen. Mr. Xiao has been
appointed as the Chairman of the Audit Committee.
 
 Compensation
Committee
 
 We
established a compensation committee of the board of directors and adopted a
charter for creation and governance of the Compensation Committee on November
30, 2009. The charter requires that at least two members must be
“non-employee directors” and “outside directors” within the meaning of the
Exchange Act and the Internal Revenue Code.  Employee directors are
eligible to serve, in addition to the outside directors.  The Board
selected two independent directors from to serve on the Compensation
Committee.  Mr. Weiqiu Li serves as the Chairman of the Compensation
Committee and Messrs. Yidong Xiao and Huafeng Chen serves as members of the
Compensation Committee. The compensation committee reviews and approves our
salary and benefits policies, including compensation of executive
officers.
 
 Nominating
and Corporate Governance Committee
 
 On
November 30, 2009, the Board established its Nominating Committee and adopted a
charter for the governance of the Nominating and Corporate Governance Committee
of the Board.  Mr. Kinwai Cheung serves as the Chairman of the
Nominating and Corporate Governance Committee and Messrs. Yidong Xiao and
Huafeng Chen serve as members of the Nominating and Corporate Governance
Committee.
 
 Director
Compensation
 
 We
currently compensate our independent directors Mr. Xiao and Mr. Chen $30,000 per
year and Mr. Zhu $50,000 per year. We reimburse our directors for reasonable
expenses incurred in connection with their service as
directors.
  Compliance
With Section 16(a) of the Exchange Act
 
 Section 16(a)
of the Exchange Act requires our executive officers and directors and person who
own more than 10% of our common stock to file reports regarding ownership of and
transactions in our securities with the Commission and to provide us with copies
of those filings.  Based solely on our review of the copies received
by or a written representation from certain reporting persons we believe that
during fiscal year ended December 31, 2009, we believe that all eligible
persons are in compliance with the requirements of Section 16(a).
 
 30
 
 ITEM
11. EXECUTIVE COMPENSATION
 
 Summary
Compensation Table
 
 The
following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to the following persons for services
rendered in all capacities during the noted periods: Mr. Weiqiu Li, our former
Chief Executive Officers, Kinwai Cheung, our former Chief Financial Officer and
Fuying Wang, our former Chief Executive Officer, Lei Yu, Jianming Xu and Jing
Liu, our current Chief Executive Officer, Chief Financial Officer and Secretary,
respectively, on December 31, 2009.  No executive officers received total
annual salary and bonus compensation in excess of $100,000.
 
 Name
      and Principal Position
                  
                  Fiscal
      Year
                  
                  Annual
      Salary
                  
                  Bonus
                  
                  Stock
      Awards
                  
                  Option
      Awards
                  
                  
                  TotalWeiqiu
      Li
                    Former
      Chief Exectutive Officer
                  
                  2009
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  02008
                  
                  $
                  30,000
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  30,000Kinwai
      Cheung
                    Former
      Chief Financial Officer
                  
                  2009
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  02008
                  
                  $
                  30,000
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  30,000Fuying
      Wang
                    Former
      Chief Executive Officer
                  
                  2009
                  
                  $
                  100,000
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  100,0002008
                  
                  $
                  100,000
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  100,000Lei
      Yu
                    Chief
      Executive Officer
                  
                  2009
                  
                  $
                  100,000
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  100,0002008
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  0Jianming
      Xu
                    Chief
      Financial Officer
                  
                  2009
                  
                  $
                  80,000
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  80,0002008
                  
                  $
                  80,000
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  80,000Jing
      Liu
                    Secretary
      of Board
                  
                  2009
                  
                  $
                  15,000
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  15,0002008
                  
                  $
                  8,800
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  8,800
 
 Weiqiu
Li resigned as our Chief Executive Officer on September 24, 2008.
 Kinwai
Cheung resigned as our Chief Financial Officer on September 24,
2008.
 Fuying
Wang was appointed as our Chief Executive Officer on September 24, 2008 and
terminated on October 13, 2009.
 Lei
Yu was appointed as our Chief Executive Officer on October 13,
2009.
 Jianming
Xu was appointed as our Chief Financial Officer on September 24,
2008.
 
 Outstanding Equity Awards at Fiscal
Year End
 
 As of
December 31, 2009, there were no outstanding equity awards held by executive
officers of our company.
 
 Stock
Incentive Plans
 
 We had no
stock incentive plan grants during 2009.
 
 31
 On August
7, 2007, we granted Mr. Randall, our audit committee chair at that time, a
ten-year option to purchase 100,000 shares of our common stock, at an exercise
price of $6.00 per share.  One-third of the option vested immediately, with
the remaining portion vesting as follows: one-third on July 7, 2008 and
one-third on July 7, 2009. The vesting of the option was contingent on continued
participation as a member of our Board of Directors.  By a resolution of
all directors dated April 29 2008, the service agreement with Mr. Randall was
terminated.  Accordingly, 66,667 option shares not yet vested and were
cancelled.
 
 Compensation
of Directors
 
 The
following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to our directors for services
rendered during our last completed fiscal year.
 
 Name
                  Positions
                  Fees
      Earned or
                    Paid in
      Cash($)
                  OptionAwards
                    ($)
                  Total
      ($)Weiqiu
      Li
                  Chairman
                  -
                  -
                  -Kinwai
      Cheung
                  Director
                  -
                  -
                  -Yiming
      Zhu (1)
                  Independent
      Director
                  $4,166
                  -
                  $4,166Huafeng
      Chen (1)
                  Independent
      Director
                  $2,500
                  -
                  $2,500Yidong
      Xiao (1)
                  Independent
      Director
                  $2,500
                  -
                  $2,500Yongzheng
      Xiao (2)
                  Former
      Director
                  -
                  -
                  -Xinfang
      Lou (3)
                  Former
      Director
                  -
                  -
                  -Fuying
      Wang (4)
                  Former
      Director
                  -
                  -
                  -Jianming
      Xu (5)
                  Former
      Director
                  -
                  -
                  -Jiang
      Zhang (6)
                  Former
      Director
                  -
                  -
                  -
 
 (1)
Elected to our Board of Directors on November 30, 2009.
 (2)
Elected to our Board of Directors on August 31, 2009 and resigned from our Board
of Directors on November 30, 2009.
 (3)
Elected to our Board of Directors on August 31, 2009 and resigned from our Board
of Directors on October 30, 2009.
 (4)
Resigned from our Board of Director on August 31, 2009.
 (5)
Resigned from our Board of Directors on August 31, 2009.
 (6)
Resigned from our Board of Directors on November 30, 2009.
 
 Narrative to Director
Compensation Table
 
 We
entered into independent director’s contracts and indemnification agreements
with each of our independent directors. Under the terms of the independent
director’s contracts, Mr. Yiming Zhu is entitled to an annual fee of $50,000,
and Messrs. Huafeng Chen and Yidong Xiao are each entitled to annual fee of
$30,000 for the services to be provided by them as independent directors, and as
chairpersons of various board committees, as applicable. Under the terms of the
indemnification agreements, we agreed to indemnify the independent directors
against expenses, judgments, fines, penalties or other amounts actually and
reasonably incurred by the independent directors in connection with any
proceeding if the independent director acted in good faith and in our best
interests. It is our practice to reimburse our directors for reasonable travel
expenses related to attendance at board of directors and committee
meetings.
 
 32
 
 Other
than as set forth herein, there have been no fees earned or paid in cash for
services to our directors.  No stock or stock options or other equity
incentives were awarded to our directors for their services as directors during
the fiscal year ended December 31, 2009.
 
 ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
 Security
Ownership of Certain Beneficial Owners and Management
 
 The
following table sets forth information regarding beneficial ownership of our
common stock as of March 19, 2010 (i) by each person who is known by us to
beneficially own more than 5% of our common stock; (ii) by each of our officers
and directors; and (iii) by all of our officers and directors as a
group.
 
 Unless
otherwise specified, the address of each of the persons set forth below is in
care of Home System Group, Oceanic Industry Park, Shang Gang Highway, Gang Kou
Town, Zhongshan City, Guangdong Province, P.R. China.
 
 Name
      and Address
                    Beneficial
      Owner(1)
                  Office,
      If Any
                  Title
      of Class
                  Number
      and Nature of
                    Beneficial
      Ownership
                  Percentage
      of
                    ClassDirectors
      and OfficersWeiqiu
      Li,
                  Chairman
                  Common
      Stock
                  12,080,000
                  19.33%Kinwai
      Cheung,
                  Director
                  Common
      Stock
                  10,260,000
                  16.42%All
      officers and directors as a group
                    (2
      persons named above)
                  
                  
                  22,340,000
                  35.75%5%
      Securities HoldersTotal
      Shine Group Ltd.
                  
                  Common
      Stock
                  5,117,277
                  8.19%Arjuno
      Investment Ltd.
                  
                  Common
      Stock
                  3,349,794
                  5.36%
 
 (1)
Unless otherwise specified, the address of each of the persons set forth below
is in care of Home System Group, Oceanic Industry Park, Shang Gang Highway, Gang
Kou Town, Zhongshan City, Guangdong Province, P.R. China.
 
 Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities.  Each of
the beneficial owners listed above has direct ownership of and sole voting power
and investment power with respect to the shares of our common
stock.
 
 33
 A total
of 62,447,949 shares of our common stock as of March 17, 2010 are considered to
be outstanding pursuant to SEC Rule 13d-3(d)(1).  For each beneficial owner
above, any options or warrants exercisable within 60 days have been included in
the denominator.
 
 Changes in
Control
 
 There are
no arrangements known to us, including any pledge by any person of our
securities, the operation of which may at a subsequent date result in a change
in control of the Company.
 
 ITEM
13. CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
 Transactions
with Related Persons
 
 Under Item 404 of SEC
Regulation S-K, a related person transaction is any actual or proposed
transaction, arrangement or relationship or series of similar transactions,
arrangements or relationships, including those involving indebtedness not in the
ordinary course of business, since the beginning of our last fiscal year, to
which we or our subsidiaries were or are a party, or in which we or our
subsidiaries were or are a participant, in which the amount involved exceeded or
exceeds $120,000 and in which any of our directors, nominees for director,
executive officers, beneficial owners of more than 5% of any class of our voting
securities, or any member of the immediate family of any of the foregoing
persons, had or will have a direct or indirect material interest.
 
 There
were no transactions with any related persons (as that term is defined in Item
404 in Regulation SK) during the fiscal year ended 2009, or any currently
proposed transaction, in which we were or are to be a participant and the amount
involved was in excess of $120,000 and in which any related person had a direct
or indirect material interest.
 
 ITEM
14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
 
 Fees
Paid to Independent Public Accountants
 
 The firm
of Acqavella, Chiarelli, Shuster, Berkower & Co., LLP (“ACSB”) has been
selected by the board of directors as the independent registered certified
public accounting firm to audit the books and accounts of our company and its
subsidiaries for the fiscal year ending December 31, 2009. On June 30, 2009,
Home System Group (the "Company") appointed the firm of Acqavella, Chiarelli,
Shuster, Berkower & Co., LLP ("New Auditor") as the Company's independent
registered public accounting firm upon the resignation of the firm Morgenstern,
Svoboda & Baer CPAs, P.C ("Former Auditor"), which had served as the
Company's independent registered public accounting firm through that date. The
public audit section of the Former Auditor, which was responsible for overseeing
its audit of the Company's financial statements, has merged with the New
Auditor. The reports of the Former Auditor on the Company's financial statements
for the fiscal years ended December 31, 2008 did not contain an adverse opinion,
a disclaimer of opinion or any qualifications or modifications related to
uncertainty, limitation of audit scope or application of accounting principles.
During the fiscal years ending December 31, 2008 and the period from December
31, 2008 to June 30, 2009, the Company did not have any disagreements (within
the meaning of Instruction 4 of Item 304 of Regulation S-K) with the Former
Auditor as to any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure and there have been no
reportable events (as defined in Item 304 of Regulation S-K).
 
 34
 The
aggregate fees billed by Acquavella, for professional services rendered for the
audit of our annual financial statements for the year ended December 31, 2009
was $67,000 and for the reviews of the financial statements included in our
Quarterly Reports on Form 10-Q during the fiscal year 2009 were
$21,000.
 
 The
aggregate fees billed by MS&B for the reviews of the financial statements
included in our Quarterly Reports on Form 10-Q during the fiscal year 2009 were
$40,000.
 
 Policy
on Pre-Approval of Audit and Non-Audit Services of Independent
Auditor
 
 Under the
Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our
auditors must be approved in advance by our audit committee to assure that such
services do not impair the auditors’ independence from us.  As our audit
committee was formed on November 30, 2009, there was no such pre-approval by our
audit committee before ACSB was appointed as our auditor for fiscal
2009.
 
 
 PART
IV
 
 ITEM
15.  EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
 
 Exhibit
                    Number
                  Exhibit
      Title2.1
                  Agreement
      and Plan of Exchange and Reorganization, dated as of March 31, 2003, by
      and among the registrant and Supreme Property, Inc. (Incorporated by
      reference to Exhibit 2.1 to the registrant’s registration statement on
      Form S-4/A filed December 8, 2003)2.2
                  Amending
      Agreement, by and among the registrant and Supreme Property, Inc. dated as
      of July 26, 2004. (Incorporated by reference to Exhibit 2.2 to the
      registrant’s registration statement on Form S-4/A filed July 30,
      2004)2.3
                  Agreement
      and Plan of Merger, dated as of August 4, 2006, among the registrant, XY
      Acquisition Corporation, Home System Group, Inc., Kinwai Cheung, Weiqiu
      Li, Ye Bo Quan, Li Shu Bo, Value Global International Limited, Simple
      (Hong Kong) Investment & Management Company Limited, First Capital
      Limited, Shenzhen Dingyi Investment & Consulting Limited and China US
      Bridge Capital Limited. (Incorporated by reference to Exhibit 10.1 to the
      registrant’s current report on Form 8-K filed August 4,
    2006)2.4
                  Share
      Exchange Agreement, dated as of December 11, 2006, among the registrant,
      Holy (H.K.) Limited, Oceanic Well Profit Inc. and the shareholders of Holy
      (H.K.) Limited. (Incorporated by reference to Exhibit 10.3 to the
      registrant’s current report on Form 8-K filed December 12,
      2006)2.5
                  Share
      Exchange Agreement, dated as of April 20, 2007, by and among the
      registrant, Holy (HK) Limited, Oceanic Well Profit Inc., Zhongshan City
      Juxian Gas Oven Co., Ltd., and the shareholders of Zhongshan City Juxian
      Gas Oven Co., Ltd. (Incorporated by reference to Exhibit 10.1 to the
      registrant’s current report on Form 8-K, filed on April 23,
      2007)
 
 35
 2.6
                  Share
      Exchange Agreement dated as of June 26, 2007, by and among the registrant,
      Holy (HK) Limited, Oceanic Well Profit Inc, Zhongshan City Weihe
      Appliances Co., Ltd., and the shareholders of Zhongshan City Weihe
      Appliances Co., Ltd. (Incorporated by reference to the Current Report on
      Form 8-K of the Company, filed on June 26, 2007)2.7
                  Letter
      Amendment to Share Exchange Agreement, dated June 29, 2007. (Incorporated
      by reference to Exhibit 10.2 to the registrant’s current report on Form
      8-K, filed July 2, 200)3.1
                  Amended
      and Restated Articles of Incorporation of the registrant, as filed with
      the Secretary of State of Nevada on July 20, 2006 (Incorporated by
      reference to Exhibit 3.1 of the registrant’s Annual Report on Form 10-K,
      filed on April 7, 2008)3.2
                  Certificate
      of Amendment to Articles of Incorporation of the registrant, as filed with
      the Secretary of State of Nevada on September 29, 2006 (Incorporated by
      reference to Exhibit 3.2 of the registrant’s Annual Report on Form 10-K,
      filed on April 7, 2008)3.3
                  Amended
      and Restated Bylaws, adopted July 31, 2007 by the registrant.
      (Incorporated by reference to Exhibit 3.1 to the registrant’s current
      report on Form 8-K, filed August 6, 2007)4.1
                  Home
      System Group 2006 Equity Incentive Plan (Incorporated by reference to
      Exhibit 4.1 to the registrant’s registration statement on Form S-8, filed
      on October 11, 2006)10.1
                  Subscription
      Agreement, dated as of May 4, 2006, among the registrant, Yujiao Xiong,
      Youming Xiong, Chaohui Wu, Pingxin Liu, Bo Chen, Wei Liu, Juhua Wang,
      Shaoke Chen, Hanping Lee and Mingtung Chen (Incorporated by reference to
      Exhibit 10.1 to the registrant’s current report on Form 8-K filed May 4,
      2006)10.2
                  Subscription
      Agreement, dated as of May 23, 2007, among Total Giant Group Limited,
      Total Shine Group Limited, Victory High Investments Limited and Think Big
      Trading Limited.  (Incorporated by reference to Exhibit 10.1 to the
      registrant’s current report on Form 8-K filed May 30,
  2007)10.3
                  English
      Translation of Asset Purchase Agreement, dated June 15, 2007, between
      Oceanic Well Profit, Inc. and  Ms. Huiping Cheng. (Incorporated by
      reference to Exhibit 2.1 to the registrant’s current report on Form 8-K
      filed June 18, 2007)10.4
                  Termination
      Agreement, dated February 7, 2008, by and among the registrant, Holy (HK)
      Limited, Oceanic Well Profit Inc., Zhongshan City Juxian Gas Oven Co.,
      Ltd., and the shareholders of Zhongshan City Juxian Gas Oven Co., Ltd.
      (Incorporated by reference to Exhibit 10.4 of the registrant’s Annual
      Report on Form 10-K, filed on April 7, 2008)10.5
                  Termination
      Agreement, dated February 7, 2008, by and among the registrant, Holy (HK)
      Limited, Oceanic Well Profit Inc, Zhongshan City Weihe Appliances Co.,
      Ltd., and the shareholders of Zhongshan City Weihe Appliances Co., Ltd.
      (Incorporated by reference to Exhibit 10.5 of the registrant’s Annual
      Report on Form 10-K, filed on April 7, 2008)10.6
                  Termination
      and Release Agreement, dated as of February 7, 2008, by and among the
      Registrant, Total Giant Group Limited, Total Shine Group Limited, Victory
      High Investments Limited, and Think Big Trading Limited (Incorporated by
      reference to Exhibit 10.6 of the registrant’s Annual Report on Form 10-K,
      filed on April 7, 2008)10.7
                  Share
      Purchase Agreement dated as of September 23, 2008, is entered into by and
      among Home System Group, Holy (HK) Limited, Asia Forever Limited and the
      shareholders of Asia Forever Limited. (Incorporated by reference to
      Exhibit 10.1 of the registrant’s current report on From 8-K filed on
      September 25, 2008)
 
 36
 10.8
                  Form
      of Promissory Note dated as of October 1, 2008 (Incorporated by reference
      to Exhibit 10.1 of the registrant’s current report on Form 8-K, filed on
      October 2, 2008)14
                  Business
      Ethics Policy and Code of Conduct, adopted July 31, 2007. (Incorporated by
      reference to Exhibit 14 to the registrant’s current report on Form 8-K
      filed August 6, 2007)21.1*
                  List
      of Subsidiaries31.1*
                  Certification
      of the Chief Executive Officer pursuant to Rule 13a-14(a) under the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2*
                  Certification
      of the Chief Financial Officer pursuant to Rule 13a-14(a) under the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1*
                  Certification
      of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
 
 32.2*
                  Certification
      of the Chief Financial Officer and the Chief Financial Officer pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
 
 * Filed
with this Report.
 37
 SIGNATURES
 
 In
accordance with Section 13 or Section 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
 
 HOME
      SYSTEM GROUPDate:
      March 29, 2010/s/ Lei YuLei
      YuChief
      Executive Officer
 
 In
accordance with the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
indicated, as of March 29, 2010.
 
 SIGNATURE
                    
                    TITLE/s/
      Weiqiu Li
                    
                    ChairmanWeiqiu
      Li/s/
      Kinwai Cheung
                    
                    DirectorKinwai
      Cheung
                      
                      /s/
      Yiming ZhuIndependent
      DirectorYiming
      Zhu
                      
                      /s/
      Yidong XiaoIndependent
      DirectorYidong
      Xiao
                      
                      /s/
      Huafeng ChenIndependent
      DirectorHuafeng
      Chen
 
 38
  
 
 
 
 
 
 HOME
SYSTEM GROUP
 
 CONSOLIDATED
FINANCIAL STATEMENTS
 
 FOR THE
YEARS ENDED
 
 DECEMBER
31, 2009 AND 2008
 
 
 
 
 
 
 
 C ON TE N T S
 
 
 
 
 PAGEREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM
                    F-1CONSOLIDATED BALANCE
      SHEETS
                    F-3CONSOLIDATED STATEMENTS OF INCOME
      AND COMPREHENSIVE INCOME
                    F-4CONSOLIDATED STATEMENT OF
      STOCKHOLDERS' EQUITY
                    F-5CONSOLIDATED STATEMENTS OF CASH
      FLOWS
                    F-6NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTS
                    F-7
 
 
 
 
 
 ACSBAcquavella, Chiarelli,
Shuster, Berkower & Co., LLP
 517
Route one
 1
Penn Plaza
 Iselin,
New Jersey, 08830
 36the
Floor
 732.855.9600
 New
York, NY 10119
 
 
 
 Report of Independent
Registered Public Accounting Firm
 
 
 
 Board of
Directors and Stockholders of
 Home
system group
 
 We have
audited the accompanying consolidated balance sheets of Home system group as of
December 31, 2009 and 2008, and the related consolidated statements of income,
stockholders’ equity and comprehensive income, and cash flows for each of the
years in the two-year period ended December 31, 2009.  Home system
group’s management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that out audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Home system
group as of December 31, 2009 and 2008, and the consolidated results of its
operations and its cash flows for each of the years in the two-year period ended
December 31, 2009 in conformity with accounting principles generally accepted in
the United States of America.
 
 
 
 
 
 Acquavella,
Chiarelli, Shuster, Berkower & Co., LLP
 
 Certified
Public Accountants
 
 New York,
N.Y.
 
 March 18,
2010
 
 F-1
 
 MORGENSTERN,SVOBODA & BAER, CPA’s,
P.C.
 CERTIFIED
PUBLIC ACCOUNTANTS
 40
Exchange Place, Suite 1820
 New York,
NY 10005
 TEL:
(212) 925-9490
 FAX:
(212) 226-9134
 E-Mail:
msbcpas@gmail.com
 
 
 Report of Independent
Registered Public Accounting Firm
 
 
 
 Board of
Directors and Stockholders of
 Home
System Group
 
 We have
audited the accompanying consolidated balance sheet of Home System Group as of
December 31, 2008, and the related consolidated statements of income,
shareholders’ equity and comprehensive income, and cash flows for the year then
ended. Home System Group’s management is responsible for these financial
statements.  Our responsibility is to express an opinion on these
financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  The company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting.  Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company’s internal control
over financial reporting.  Accordingly, we express no such
opinion.  An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our
opinions.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Home System Group as of December
31, 2008 and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
 
 
 
 Morgenstern,
Svoboda & Baer, CPA’s PC
 Certified
Public Accountants
 
 
 New York,
NY
 April 6,
2009
  F-2
 HOME
SYSTEM GROUP
 CONSOLIDATED
BALANCE SHEETS
 AS OF
DECEMBER 31, 2009 AND 2008
 
 December
      31,2009
                    
                    
                    2008ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                    
                    $
                    3,985,782
                    
                    
                    $
                    1,609,540Restricted
      cash
                    
                    
                    -
                    
                    
                    
                    1,617,000Accounts
      receivable - trade
                    
                    
                    23,909,114
                    
                    
                    
                    31,737,873Notes
      receivables-short term
                    
                    
                    3,704,137
                    
                    
                    
                    4,880,122Deposit
      and advances
                    
                    
                    989,377
                    
                    
                    
                    4,632,544Inventories
                    
                    
                    18,304,015
                    
                    
                    
                    15,613,175Other
      assets
                    
                    
                    1,515,750
                    
                    
                    
                    2,326,563TOTAL
      CURRENT ASSETS
                    
                    
                    52,408,175
                    
                    
                    
                    62,416,817Notes
      receivable-long term
                    
                    
                    236,334
                    
                    
                    
                    -Property,
      plant and equipment - net
                    
                    
                    9,027,828
                    
                    
                    
                    9,518,826Deferred
      finance cost-long term portion
                    
                    
                    -
                    
                    
                    
                    255,
      230Acquisition
      deposits
                    
                    
                    -
                    
                    
                    
                    733,500Land
      use rights - net
                    
                    
                    -
                    
                    
                    
                    1,291,852Intangible
      assets
                    
                    
                    1,751,567
                    
                    
                    
                    2,090,947Goodwill
                    
                    
                    25,025,292
                    
                    
                    
                    25,025,292TOTAL
      ASSETS
                    
                    $
                    88,449,196
                    
                    
                    $
                    101,332,464LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable-trade
                    
                    $
                    18,870,277
                    
                    
                    $
                    21,166,318Bills
      payable
                    
                    
                    3,478,223
                    
                    
                    
                    9,598,621Accrued
      expenses and other payables
                    
                    
                    7,109,157
                    
                    
                    
                    6,096,820Banks
      loans
                    
                    
                    12,548,441
                    
                    
                    
                    11,324,848Income
      taxes payable and other tax payable
                    
                    
                    1,028,403
                    
                    
                    
                    1,147,001Notes
      payable-current
      portion
                    
                    
                    6,575,000
                    
                    
                    
                    21,536,763Due
      to stockholder - current portion
                    
                    
                    4,040,896
                    
                    
                    
                    1,574,573TOTAL
      CURRENT LIABILITIES
                    
                    
                    53,650,390
                    
                    
                    
                    72,444,944NON-CURRENT
      LIABILITIESDue
      to stockholder
                    
                    
                    1,308,433
                    
                    
                    
                    600,000Long
      term bank loan
                    
                    
                    1,464,515
                    
                    
                    
                    -Notes
      payable - long term portion
                    
                    
                    9,868,421
                    
                    
                    
                    16,443,421TOTAL
      LIABILITIES
                    
                    
                    66,291,759
                    
                    
                    
                    89,488,365STOCKHOLDERS'
      EQUITYCOMMON
      STOCK - $0.001 par value; 200,000,000 sharesauthorized,
      62,477,949 shares issued and outstanding atDecember
      31, 2009 and 2008
                    
                    
                    62,478
                    
                    
                    
                    62,478Additional
      paid in capital
                    
                    
                    6,581,717
                    
                    
                    
                    6,581,717Note
      receivable on stock issuance
                    
                    
                    -
                    
                    
                    
                    (900,000
                    )Statutory
      reserves
                    
                    
                    681,914
                    
                    
                    
                    29,616Retained
      earnings
                    
                    
                    12,891,560
                    
                    
                    
                    4,217,826Other
      comprehensive income
                    
                    
                    1,939,768
                    
                    
                    
                    1,852,462TOTAL
      STOCKHOLDERS' EQUITY
                    
                    
                    22,157,437
                    
                    
                    
                    11,844,099TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                    
                    $
                    88,449,196
                    
                    
                    $
                    101,332,464
 
 The
accompanying notes are an integral part of these consolidated financial
statements
 
 F-3
 
 HOME
SYSTEM GROUP
 CONSOLIDATED
STATEMENTS OF INCOME
 AND
COMPREHENSIVE INCOME
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 2009
                    
                    
                    2008NET
      SALES
                    
                    $
                    61,828,792
                    
                    
                    $
                    51,926,205Cost
      of sales
                    
                    
                    45,875,295
                    
                    
                    
                    43,491,550GROSS
      PROFIT
                    
                    
                    15,953,497
                    
                    
                    
                    8,434,655OPERATING
      EXPENSESGeneral
      selling and administrative expenses
                    
                    
                    5,437,139
                    
                    
                    
                    3,645,135Amortization
      of intangible assets
                    
                    
                    339,380
                    
                    
                    
                    84,8455,776,519
                    
                    
                    
                    3,729,980INCOME
      FROM OPERATIONS
                    
                    
                    10,176,978
                    
                    
                    
                    4,704,675OTHER
      INCOME(EXPENSE)Gain
      on the transfer of the building
                    
                    
                    2,356,327
                    
                    
                    
                    -Income
      on the reversal of rent
                    
                    
                    1,372,121
                    
                    
                    
                    -Other
      income, net
                    
                    
                    640,839
                    
                    
                    
                    69,880Interest
      expenses
                    
                    
                    (2,270,374)
                    
                    
                    
                    (115,859
                    )Interest
      income
                    
                    
                    27,857
                    
                    
                    
                    128,551INCOME
      BEFORE INCOME TAXES
                    
                    
                    12,303,748
                    
                    
                    
                    4,788,421INCOME
      TAXES
                    
                    
                    (2,977,716)
                    
                    
                    
                    (720,756
                    )NET
      INCOME
                    
                    $
                    9,326,032
                    
                    
                    $
                    4,067,665Basic
      & Diluted Weighted Average Shares
                    
                    
                    62,477,949
                    
                    
                    
                    62,477,949Basic
      & Diluted Earnings Per Share
                    
                    $
                    0.15
                    
                    
                    $
                    0.07COMPREHENSIVE
      INCOMENet
      Income
                    
                    $
                    9,326,032
                    
                    
                    $
                    4,067,665Other
      Comprehensive IncomeForeign
      currency translation adjustment
                    
                    
                    87,306
                    
                    
                    
                    1,103,451TOTAL
      COMPREHENSIVE INCOME
                    
                    $
                    9,413,338
                    
                    
                    $
                    5,171,116
  The accompanying notes are an integral
part of these consolidated financial statements
 
 F-4
 
 HOME
SYSTEM GROUP
 CONSOLIDATED
STATEMENT OF STOCKHOLDERS’
EQUITY
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 Number
      ofShares of
                        
                        
                        
                        
                        
                        
                        
                        
                        Notes
                          Receivable
                        
                        
                        
                        
                        
                        OtherCommon
                          Stock
                        
                        
                        Common
                          Stock
                        
                        
                        Paid-in
                          Capital
                        
                        
                        For
      Stock Issuance
                        
                        
                        Statutory
      Reserve
                        
                        
                        Comprehensive
      Income
                        
                        
                        Retained
      Earnings
                        
                        
                        TotalBALANCE
      AT
                          DECEMBER
      31, 2007
                        
                        62,477,949
                        
                        $
                        62,478
                        
                        $
                        6,615,726
                        
                        $
                        (900,000)
                        
                        $
                        29,616
                        
                        $
                        741,511
                        
                        $
                        150,161
                        
                        $
                        6,699,492Stock
      based compensation
                        
                        -
                        
                        
                        -
                        
                        
                        (34,009)
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        (34,009)Cumulative
      translation adjustment
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        1,110,951
                        
                        
                        -
                        
                        
                        1,110,951Net
      income for 2008
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        4,067,665
                        
                        
                        4,067,665BALANCE
      AT
                          DECEMBER
      31, 2008
                        
                        62,477,949
                        
                        $
                        62,478
                        
                        $
                        6,581,717
                        
                        $
                        (900,000)
                        
                        $
                        29,616
                        
                        $
                        1,852,462
                        
                        $
                        4,
      217, 826
                        
                        $
                        11,844,099Cumulative
      translation adjustment
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        87,306
                        
                        
                        -
                        
                        
                        87,306Net
      income for 2009
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        9,326,032
                        
                        
                        9,326,032Satisfaction
      of subscription
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        900,000
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        900,000Appropriation
      to staff welfare
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        25,220
                        
                        
                        -
                        
                        
                        (25,220)
                        
                        
                        -Appropriation
      to reserve  fund
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        627,078
                        
                        
                        -
                        
                        
                        (627,078)
                        
                        
                        -BALANCE
      AT
                          DECEMBER
      31, 2009
                        
                        62,477,949
                        
                        $
                        62,478
                        
                        $
                        6,581,717
                        
                        $
                        -
                        
                        $
                        681,914
                        
                        $
                        1,939,768
                        
                        $
                        12,891,560
                        
                        $
                        22,157,437
 
 The
accompanying notes are an integral part of these consolidated financial
statements
  F-5
 HOME
SYSTEM GROUP
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 Year
      Ended
                        December
      31,2009
                      
                      
                      2008CASH
      FLOWS PROVIDED BY(USED IN) OPERATING ACTIVITIESNet
      income
                      
                      $
                      9,326,032
                      
                      
                      $
                      4,067,665Adjustments
      to reconcile net incometo
      net cash provided by (used in) operating activitiesGain
      on transfer of property, after transfer of taxes
                      
                      
                      (2,356,327)
                      
                      
                      
                      -Income
      benefit due to reversal of rent accrual
                      
                      
                      (1,372,121)
                      
                      
                      
                      -Depreciation
                      
                      
                      1,981,673
                      
                      
                      
                      617,940Amortization
      of intangible assets
                      
                      
                      339,380
                      
                      
                      
                      92,271Deferred
      finance costs amortized
                      
                      
                      1,249,916
                      
                      
                      
                      -Provision
      for stock option costs written back
                      
                      
                      -
                      
                      
                      
                      (34,009
                      )Change
      in assets and liabilities:(Increase)
      decrease in assetsRestricted
      cash
                      
                      
                      1,613,410
                      
                      
                      
                      (1,614,355)Accounts
      receivable
                      
                      
                      7,820,883
                      
                      
                      
                      (15,084,087
                      )Deposit
      and advances
                      
                      
                      3,392,753
                      
                      
                      
                      (4,961,559
                      )Inventories
                      
                      
                      (2,715,859)
                      
                      
                      
                      2,178,743Trade
      deposits
                      
                      
                      (354,693)
                      
                      
                      
                      434,734Other
      taxes refundable
                      
                      
                      168,907
                      
                      
                      
                      (1,074,885
                      )Increase
      (decrease) in liabilities:Bills
      payable per bank acceptance agreement
                      
                      
                      (6,100,921)
                      
                      
                      
                      -Accounts
      payable
                      
                      
                      (2,258,975)
                      
                      
                      
                      (2,664,009
                      )Other
      payables and accrued expenses
                      
                      
                      2,393,953
                      
                      
                      
                      (746,154
                      )Income
      taxes payable
                      
                      
                      (259,714)
                      
                      
                      
                      1,703,235Other
      taxes payable
                      
                      
                      (262,547)
                      
                      (321,737
                      )Net
      cash provided by (used in) operating activities
                      
                      
                      12,605,750
                      
                      
                      
                      (17,406,207
                      )CASH
      FLOWS USED IN INVESTING ACTIVITIESRefund
      (payment) of acquisition deposit
                      
                      
                      733,500
                      
                      
                      
                      (732,300
                      )Purchase
      of equipments
                      
                      
                      (2,416,218)
                      
                      
                      
                      (204,678
                      )Net
      cash used in investing activities
                      
                      
                      (1,682,718)
                      
                      
                      
                      (936,978
                      )CASH
      FLOWS PROVIDED (USED IN) BY FINANCING ACTIVITIESCash
      acquired in acquisition
                      
                      
                      -
                      
                      
                      
                      3,085,833Proceeds
      of bank loans
                      
                      
                      30,122,620
                      
                      
                      
                      5,094,820Repayment
      of bank loans
                      
                      
                      (27,434,512)
                      
                      
                      
                      (225,869
                      )Proceeds
      from notes payable
                      
                      
                      -
                      
                      
                      
                      9,582,918Repayment
      of notes payable
                      
                      
                      (15,419,051)
                      
                      
                      
                      -Decrease
      in notes receivables
                      
                      
                      973,220
                      
                      
                      
                      -Advance
      from stockholder
                      
                      
                      3,174,756
                      
                      
                      
                      1,569,717Net
      cash provided (used in) by financing activities
                      
                      
                      (8,582,967)
                      
                      
                      
                      19,107,419Exchange
      rate effect on cash
                      
                      
                      36,177
                      
                      
                      
                      24,232Net
      increase in cash
                      
                      
                      2,376,242
                      
                      
                      
                      788,466Cash
      – beginning of the year
                      
                      
                      1,609,540
                      
                      
                      
                      821,074Cash
      – end of the year
                      
                      $
                      3,985,782
                      
                      
                      $
                      1,609,540SUPPLEMENTAL
      DISCLOSURE OF CASH FLOWINFORMATIONCash
      paid during the period for:Interest
                      
                      $
                      847,540
                      
                      
                      $
                      115,859Income
      taxes
                      
                      $
                      2,812,452
                      
                      
                      $
                      226,984
  NONCASH
      INVESTING AND FINANCING ACTIVITIES:Asser
      transfer value
                      
                      $
                      6,087,312
                      
                      
                      $
                      
                      -Cost
      of investment paid by issuance of promissory note
                      
                      $
                      
                      
                      
                      $
                      (37,968,536
                      )Issuance
      of promissory note for settlement of cost of investment
                      
                      $
                      
                      
                      
                      $
                      39,473,683Satisfaction
      of subscription
                      
                      
                      900,000
                      
                      
                      
                      -Deferred
      finance cost for acquisition of the subsidiaries
                      
                      $
                      -
                      
                      
                      $
                      (1,505,147
                      ) 
 The
accompanying notes are an integral part of these consolidated financial
statements
 F-6
 HOME
SYSTEM GROUP
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
31, 2009
 NOTE 1 –
ORGANIZATION AND NATURE OF
BUSINESS
 
 Home
System Group (“HSG” or the “Company”) (formerly named Supreme Realty
Investments, Inc. (“Supreme”)), is incorporated in the State of
Nevada.   The Company has three operating subsidiaries as of
December 31, 2009.
 
 On August
4, 2006, Supreme was a public shell company and acquired Home System Group, Inc.
(“HSGI”).  HSGI was incorporated as a limited liability company in the
British Virgin Islands on February 28, 2003.  HSGI was inactive until
June 30, 2006 when HSGI acquired all the outstanding stock of Oceanic
International (HK) Limited (“Oceanic”).  Oceanic is an operating
company, organized under the laws of Hong Kong on June 23, 2004 for the purpose
of distributing gas grills, home electronic appliances and bin racks. Since the
ownership of HSGI and Oceanic was the same, the merger was accounted for as a
transaction between entities under common control, whereby HSGI recognized
Oceanic’s assets and liabilities as being transferred at their carrying
amounts. Under the terms of the merger agreement with Supreme, the
stockholders of HSGI received 8,000,000 shares of Supreme’s common stock for
100% of HSGI’s outstanding common stock.  Following the merger,
Supreme changed its name to Home System Group.  Under accounting
principles generally accepted in the United States, the share exchange is
considered to be a capital transaction in substance, rather than a business
combination.  That is, the share exchange is equivalent to the
issuance of stock by HSGI for the net monetary assets of Supreme, accompanied by
a recapitalization, and is accounted for as a change in capital
structure.  Accordingly, the accounting for the share exchange is
identical to that resulting from a reverse acquisition, except no goodwill was
recorded.  Under reverse takeover accounting, the post reverse
acquisition comparative historical financial statements of the legal acquirer,
Supreme, are those of the legal acquiree which is considered to be the
accounting acquirer, HSGI.  Shares and per share amounts stated have
been adjusted to reflect the merger.
 
 Holy (HK)
Limited (“Holy”) was incorporated in Hong Kong on September 26, 2006 for the
purpose of being a holding company.  Oceanic Well Profit, Inc. (“Well
Profit”), a wholly-owned subsidiary of Holy, was incorporated in the People’s
Republic of China (“PRC”) on April 5, 2006 for the purpose of manufacturing gas
grills, home electrical appliances and bin racks.
 
 Holy was
inactive until October 26, 2006 when Holy acquired all the issued and
outstanding stock of Well Profit for approximately $3,750,000, the net book
value of Well Profit. Since the stockholders of Holy and Well Profit were
related, and the control of the merged entity remained with the management of
Well Profit, the merger was accounted for as a transaction between entities
under common control, whereby Holy recognized Well Profit’s assets and
liabilities transferred at their carrying amounts.  The consolidated
financial statements combine the historical financial statements of Holy and
Well Profit as if the merger occurred at the beginning of the periods
presented.
 
 On
January 31, 2007, HSG acquired Holy and its wholly-owned subsidiary, Well
Profit.  Under the terms of the merger agreement, the stockholders of
Holy received $3,000,000 and 42,500,000 shares of voting common stock of HSG in
exchange for 100% of Holy’s outstanding common stock. For accounting purposes,
the acquisition has been treated as an acquisition of Holy by HSG and as a
recapitalization of Holy. The historical financial statements prior to January
31, 2007 are those of Holy. Share and per share amounts have been retroactively
adjusted to reflect the acquisition.
 
 On
October 1, 2008, the Company purchased from the shareholders of Asia Forever
Investment Limited (“Asia Forever”) all of Asia Forever’s outstanding stock for
approximately $39.5 million.  Asia Forever had been incorporated as a
limited liability company on April 1, 2008 in the Hong Kong Special
Administrative Region, and it has 100% ownership interest of Zhongshan City
Weihe Appliances Co., Ltd (“Weihe”). Weihe had been incorporated as a limited
liability company on August 3, 1998 in the PRC, and it manufactures ceiling fans
and residential lighting to be sold to the international consumer market through
various distributors. See Note 13 for further information regarding the purchase
of Asia Forever. The operations of Asia Forever are included in the consolidated
financial statements since October 1, 2008.
 
 
 NOTE 2 –
BASIS OF PREPARATION
AND CONSOLIDATION
 
 The
accompanying financial statements of the Company have been prepared in
accordance with generally accepted accounting principles (“GAAP”) in the United
States of America. The consolidated financial statements include the accounts of
the Company and its subsidiaries.  All significant inter-company
accounts and transactions have been eliminated in consolidation. In the opinion
of management, the accompanying consolidated financial statements reflect the
adjustments considered necessary for a fair presentation of the Company’s
results as of December 31, 2009 and December 31, 2008, and for the periods then
ended.
 
 F-7
 HOME
SYSTEM GROUP
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
31, 2009
 
 
 NOTE 3 –
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
 
 Basic and diluted earnings
per share
 
 The
Company reports earnings per share in accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 260
“Earnings per share”. The Company’s basic earning per share is computed using
the weighted average number of shares outstanding for the periods
presented.
 
 Diluted
earnings per share is based on the assumption that all dilutive options or
warrants were converted or exercised. Dilution is computed by applying the
treasury stock method. Under this method, the Company’s outstanding stock
options are assumed to be exercised, and as if funds obtained thereby were used
to purchase common stock at the average market price during the period. The
options outstanding as of December 31, 2009 and December 31, 2008 were
anti-dilutive and thus were not included in the computation of the Company’s
earnings per share.
 
 Cash and cash
equivalents
 
 Cash and
cash equivalents include cash on hand, cash accounts, interest bearing savings
accounts and time certificates of deposit with a maturity of three months or
less when purchased.
 
 Accounts receivable -
trade
 
 Accounts
receivable-trade is stated net of allowance for doubtful accounts. 
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves.  Reserves are recorded primarily on a specific
identification basis.  The bad debt allowance was $ 16,182 and $0 as of
December 31, 2009 and December 31, 2008 respectively.
 
 Inventory
 
 Inventory is
stated at the lower of cost or market value. Raw material cost is
determined by the weighted average method.  The cost of
work-in-progress and finished goods inventories consist of raw materials, direct
labor and overhead associated with the manufacturing process. Most of our
inventory are raw materials such as stainless steel plate, metal plate or
plastics.
 
 Deferred finance
costs
 
 Deferred
finance costs are being amortized over the term of the non-interest bearing
promissory notes payable issued regarding a related business acquisition, using
the effective interest method.
 
 The
amounts amortized for the year ended December 31, 2009 and 2008 were $1,249,916
and $0, respectively.
 
 Property, plant and
equipment
 
 The
Company accounts for property, plant and equipment in accordance with the FASB
ASC Topic 360, “Property, plant and equipment”. Property, plant and equipment is
stated at cost including the cost of improvements.  Maintenance and
repairs are charged to expense as incurred.  Assets under construction
are not depreciated until construction is completed and the assets are ready for
their intended use. Depreciation and amortization are provided on the
straight-line method based on the estimated useful lives of the
assets.
 
 F-8
 HOME
SYSTEM GROUP
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
31, 2009
 
 
 Long-lived
assets
 
 Long-lived
assets, other than Goodwill, are reviewed for impairment at least once a year or
whenever events or changes in circumstances indicate that the carrying amount of
the assets might not be recoverable. Conditions that would necessitate an
impairment assessment include a significant decline in the observable market
value of an asset, a significant change in the extent or manner in which an
asset is used, or any other significant adverse change that would indicate that
the carrying amount of an asset or group of assets is not
recoverable.
 
 For
long-lived assets used in operations, impairment losses are only recorded if the
asset’s carrying amount is not recoverable through its undiscounted,
probability-weighted cash flows. We measure the impairment loss based on the
difference between the carrying amount and estimated fair value.
 
 Long-lived
assets are considered held for sale when certain criteria are met, including:
management’s commitment to a plan to sell the asset, the asset is available for
sale in its immediate condition, and the sale is probable within one year of the
reporting date. Assets held for sale are reported at the lower of cost or fair
value less costs to sell. There was no impairment of Long-lived assets at
December 31, 2009.
 
 Goodwill
 
 The
Company accounts for Goodwill in accordance with the FASB ASC Topic 350,
“Intangible-Goodwill and Other”. We evaluate Goodwill, at a minimum, on an
annual basis and whenever events and changes in circumstances suggest that the
carrying amount may not be recoverable. Impairment of Goodwill is tested at the
reporting unit level by comparing the reporting unit’s carrying amount,
including Goodwill, to the fair value of the reporting unit. The fair values of
the reporting units are estimated using discounted projected cash flows. If the
carrying amount of the reporting unit exceeds its fair value, Goodwill is
considered impaired and a second step is performed to measure the amount of
impairment loss, if any. We conduct our annual impairment test as of December 31
of each year, and determine if there is any impairment. The goodwill was $25,025,292 as of December 31 of 2009
and 2008 respectively andthere was no impairment of Goodwill at December
31, 2009 and 2008 respectively.
 
 Revenue
recognition
 
 The
Company’s revenue recognition policies are in compliance with FASB ASC Topic
605, “Revenue Recognition”.  Revenue from sales of the Company’s
products is recognized when the significant risks and rewards of ownership have
been transferred to the buyer at the time when the products are shipped to
customers, the price is fixed or determinable as stated on the sales contract,
and collectability is reasonably assured.  Customers do not have a
general right of return on products shipped. Product returns to the Company were
insignificant during past years.  There are no post-shipment
obligations, price protection or bill and hold arrangements.
 
 Income
taxes
 
 The
Company accounts for income taxes in accordance with FASB ASC Topic 740, “Income
Taxes”, which requires recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the
financial statements or tax returns.  Under this method, deferred tax
liabilities and assets are determined based on the temporary differences between
the financial statement and tax bases of assets and liabilities using the tax
rates presently in effect.  Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be
realized.  Income taxes are provided on an asset and liability
approach for financial accounting and reporting of income
taxes.  Current tax is based on the profit or loss from ordinary
activities adjusted for items that are non-assessable or disallowable for income
tax purposes and is calculated using tax rates that have been enacted or
substantively enacted at the balance sheet date. There were no deferred tax
assets and liabilities as of December 31, 2009 or December 31, 2008 as there
were no differences between the financial statement and the tax base of the
Company’s assets or liabilities.
  Reclassifications
 
 Certain
prior year amounts in the accompanying consolidated financial statements have
been reclassified to conform to the current year presentations.
 
 F-9
 
 HOME
SYSTEM GROUP
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
31, 2009
 Related
parties
 
 Parties
are considered to be related if one party has the ability, directly or
indirectly, to control the other party or exercise significant influence over
the other party in making financial and operational decisions. Parties are also
considered to be related if they are subject to common control or common
significant influence. Related parties may be individuals or corporate
entities.
 
 Foreign currency
translation
 
 The
Company operations are based in the People’s Republic of China (“PRC”) with its
currency, the Renminbi (“RMB”), as the functional currency. In
consolidation, the Company’s accounts are translated from RMB into US dollars in
accordance with FASB ASC Topic 830, “Foreign Currency
Matters”.  Accordingly, all assets and liabilities are translated at
the exchange rates prevailing at the balance sheet dates and all income and
expenditure items are translated at the average rates for each of the years.
Adjustments to translate foreign exchange differences into US dollars are
recorded in the Company’s comprehensive income.
 
 All
foreign exchange transactions involving RMB must take place either through the
People’s Bank of China (the “PBOC”) or other institutions authorized to buy and
sell foreign exchange. The exchange rates adopted for the foreign exchange
transactions are the rates of exchange quoted by the PBOC. Translation of
amounts from RMB into US dollars has been made at the following exchange
rates:
 
 For
      the period ended December  31, 2009:Balance
      sheet
                      
                      
                      
                      RMB
      6.83 to US$ 1.00Statement
      of operations
                      
                      
                      
                      RMB
      6.83 to US$ 1.00For
      the period ended December 31, 2008:Balance
      sheet
                      
                      
                      
                      RMB
      6.84 to US$ 1.00Statement
      of operations
                      
                      
                      
                      RMB
      6.83 to US$ 1.00
 
 Commencing
from July 21, 2005, China has adopted a managed floating exchange rate regime
based on market demand and supply with reference to a basket of
currencies.   Since then, the PBOC administers and regulates the
exchange rate of US$ against RMB taking into account demand and supply of RMB,
as well as domestic and foreign economic and financial conditions.
 
 Use of
estimates
 
 The
preparation of the financial statements, in conformity with GAAP, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Several areas require management’s
estimates relating to uncertainties for which it is reasonably possible that
there will be a material change in the near term. Actual results could differ
from those estimates.
 
 Recently issued accounting
pronouncements
 
 In
February 2007, the FASB issued ASC Topic 825, “Financial Instruments” which
permits entities to choose to measure many financial instruments and certain
other items at fair value. The objective of this standard is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The Company adopted this standard on January 1, 2008, and the
implementation of this standard did not have a significant impact on the
Company’s financial position or results of operations.
 
 In
December 2007, the FASB issued ASC Topic 805, “Business Combinations”, to
establish principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree and the
goodwill acquired. The standard also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination. This statement was effective for the Company beginning
January 1, 2009.
 
 F-10
 
 HOME
SYSTEM GROUP
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
31, 2009
 In
December 2007, the FASB issued ASC Topic 810, “Consolidation”, to establish
accounting and reporting standards for ownership interests in subsidiaries held
by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest, and the valuation of retained noncontrolling equity
investments when a subsidiary is deconsolidated. It also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. This
standard  is effective for the Company beginning January 1, 2009.
The Company adopted the new standard on January 1, 2009, and the implementation
of the new standard did not have a significant impact on the Company’s financial
position or results of operations.
 
 In April
2008, the FASB issued  ASC Topic 350, “Intangibles-Goodwill and Other”,
which amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset. This Staff Position is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. Early adoption is prohibited. Application of this
standard did not have a significant impact on the Company’s financial
statements.
 
 In May
2008, the FASB issued ASC Topic 470, “Debt”, which is effective for financial
statements issued for fiscal years beginning after December 15, 2008. This
standard includes guidance that convertible debt instruments that may be settled
in cash upon conversion should be separated between the liability and equity
components, with each component being accounted for in a manner that will
reflect the entity’s nonconvertible debt borrowing rate when interest costs are
recognized in subsequent periods. This standard is not currently applicable to
the Company since the Company does not have convertible debt.
 
 In June
2008, the FASB issued ASC Topic 260, “Earnings per Share”, regarding determining
whether instruments granted in share-based payment transactions are
participating securities. This provides that unvested share-based payment awards
that contain nonforfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and shall be included in the
computation of earnings per share pursuant to the two-class method. The Company
does not currently have any share-based awards that would qualify as
participating securities. Therefore, application of this is not expected to have
an effect on the Company’s financial reporting.
 
 In
April 2009, the FASB issued ASC Topic 820, “Fair Value Measurements and
Disclosures”, which provides additional guidance for estimating fair value when
the volume and level of activity for the asset or liability have significantly
decreased and re-emphasizes that regardless of market conditions the fair value
measurement is an exit price concept as defined in the standard. The scope of
this standard does not include assets and liabilities measured under Level 1
inputs (quoted prices in active markets for identical assets). The standard is
applied prospectively to all fair value measurements where appropriate and is
effective for the Company’s interim and annual periods beginning in the second
quarter of fiscal year 2009. The Company’s adoption of this above standard did
not have a material impact on the Consolidated Financial
Statements.
 
 In May
2009, the FASB issued ASC Topic 855, “Subsequent Events”, that established
general standards for accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued and shall be applied to subsequent events not addressed
in other applicable generally accepted accounting principles.  This
standard, among other things, sets forth the period after the balance sheet date
during which management should evaluate events or transactions that may occur
for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and the
disclosures an entity should make about events or transactions that occurred
after the balance sheet date. The Company adopted this standard effective with
the fiscal quarter ending June 30, 2009.
 
 In July
2009, the FASB issued standards that established the ASC Accounting Standards
Codification as the single source of authoritative US GAAP for nongovernmental
entities. The ASC supersedes all non-SEC accounting and reporting standards that
existed at the ASC’s effective date, including FASB, American Institute of
Certified Public Accountants, Emerging Issues Task Force and related literature.
The FASB uses Accounting Standards Updates (“ASU”) to amend the ASC. The
Codification was effective for interim and annual periods ending after September
15, 2009 (i.e., the year ended December 31, 2009 for the Company).
 
 F-11
 HOME
SYSTEM GROUP
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
31, 2009
 NOTE 4 –
RESTRICTED CASH AND
BILLS PAYABLE
 
 As of
December 31, 2009 and December 31, 2008, Restricted cash was $0 and $1,617,000,
respectively. This cash was restricted as it is held on deposit as to provide
collateral for the bills issued by banks to vendors, the Company is periodically
requested by certain of its suppliers to settle amounts owed by the issuance of
bills through banks for which the banks undertake to guarantee the Company’s
settlement of these amounts at maturity. These bills are interest-free with
maturity dates of six months from the date of issuance. In order to provide such
guarantees for the bills, the Company has entered into bank acceptance
agreements with certain banks.  Pursuant to a bank’s acceptance
agreement, the bank guarantees payment of certain of the Company’s payables. As
security for the banks’ undertakings, the Company may be required to pay the
banks’ charges as well as deposit with such banks amounts equal to 10% to 50% of
the payables being guaranteed at the time of such issuance.
 
 
 NOTE 5 –
NOTES
RECEIVABLES
 
 The
Company has an arrangement with Oceanic International (Zhongshan) (“Zhongshan”),
a Chinese company that provides raw material to Home System, whereby both
companies have agreed to jointly obtain financing from certain financial
institutions.  Under this arrangement, the Company enters into a loan
agreement with the financial institution, under which Home System, Zhongshan and
the financial institutions agree that certain assets of both companies will be
used as collateral to secure the loan.  These assets consist of Home
System’s receivables and certain property and buildings in
Zhongshan.
 
 Once the
Company receives the funding, it then enters into an agreement with the
Zhongshan under which a portion of the funds will be forwarded to Zhongshan
under the terms of a note from Zhongshan that is payable to Home
System.  These are classified as Notes receivable and include interest
and maturity dates that coincide with the underlying financing agreement. As of
December 31, 2009, these Notes receivable amounted to $3,704,137, with interest
rates that ranged from 2.49% to 5.4%, and include maturities less than one year
and more than one year.
 
 A group
of shareholders (" The Shareholders") had owed an aggregate of $900,000 to Home
System Group for the shares previously issued in accordance with the
Subscription Agreement signed on May 4, 2006. The Shareholders were able to
satisfied this obligation in the fourth quarter of 2009 by arranging with Simple
Hong Kong Limited ("Simple"), a shareholder of the Company, to offset this
obligation against what the Company owes to Simple.
 
 NOTE 6 –
INVENTORIES
 
 Inventories
consist of the following:
 
 December
      31,
                        2009
                      
                      
                      December
      31,
                        2008Finished
      goods
                      
                      $
                      587,864
                      
                      
                      $
                      1,017,904Work
      in process
                      
                      
                      3,548,298
                      
                      
                      
                      5,352,141Raw
      materials
                      
                      
                      14,167,853
                      
                      
                      
                      9,243,130Total
                      
                      $
                      18,304,015
                      
                      
                      $
                      15,613,175
 
 F-12
 
 HOME
SYSTEM GROUP
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
31, 2009
 NOTE 7
–PROPERTY, PLANT AND
EQUIPMENT, NET
  Property,
plant and equipment consist of the following:
 
 Useful
      Lives
                      
                      December
      31,
                        2009
                      
                      
                      December
      31,
                        2008Plant
      and machinery
                      5
      to 10 years
                      
                      $
                      10,616,935
                      
                      
                      $
                      8,253,436Buildings
                      20
      years
                      
                      
                      312,028
                      
                      
                      
                      2,145,009Furniture,
      fixtures and equipment
                      5
      to 10 years
                      
                      
                      200,622
                      
                      
                      
                      142,525Motor
      vehicles
                      8
      to 10 years
                      
                      
                      12,405
                      
                      
                      
                      12,405Total
                      
                      
                      
                      10,861,990
                      
                      
                      
                      10,553,375Less:
      accumulated depreciation
                      
                      
                      
                      (1,834,162)
                      
                      
                      
                      (1,034,549
                      )Net
      book value
                      
                      
                      $
                      9,027,828
                      
                      
                      $
                      9,518,826
 
 During
the year ended December 31, 2009, depreciation expense amounted to $1,981,673,
among which $1,914,556 and $67,117 were recorded as cost of sales and
administrative expense, respectively. During the year ended December 31, 2008,
depreciation expense amounted to $617,940, among which $560,497 and $57,443 were
recorded as cost of sales and administrative expense, respectively.
  NOTE 8 –
ACQUISITION
DEPOSIT
 
 The
acquisition deposit was $733,500 as of December 31, 2008 and represented the
partial payment the Company made for the cash portion of the consideration for
the acquisition of Juxian in September, 2007. However, the delivery of the
Company’s stock, which is traded on the OTCBB, was not recognized as a share
exchange consideration by the relevant PRC government authority for the purposes
of approval of the ownership transfer of Juxian. Thus on February 7, 2008, the
acquisition of Juxian was cancelled. The shareholders of Juxian refunded the
deposit to the Company in August, 2009.
 
 NOTE 9 –
LAND USE RIGHT,
NET
 
 Land use
right consist of the following:
 December
      31,
                        2009
                      
                      
                      December
      31,
                        2008Land
      use right
                      
                      $
                      -
                      
                      
                      $
                      1,299,
      172Less:
      accumulated amortization
                      
                      
                      -
                      
                      
                      
                      (7,320
                      )Land
      use right, net
                      
                      $
                      -
                      
                      
                      $
                      1,291,852
 
 The
Company obtained the right from the relevant PRC land authority for periods of
50 years to use the lands on which the production facilities and warehouses of
the Company are situated.
 
 During
year ended December 31, 2009 and 2008, amortization expense amounted to $15,034
and $7,426, respectively. These land use right were transferred to the former
shareholders of Asia Forever as part of the Supplemental Agreement discussed in
Note 13 and thus are no longer recorded as an asset of the Company.
 
 F-13
 
 HOME
SYSTEM GROUP
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
31, 2009
 NOTE 10 –
INTANGIBLE ASSETS,
NET
 
 Intangible
assets consist of the following:
 
 December
      31,
                        2009
                      
                      
                      December
      31,
                        2008Customer
      relationships
                      
                      $
                      2,030,000
                      
                      
                      $
                      2,030,000Brand
      name
                      
                      
                      145,792
                      
                      
                      
                      145,792Total
                      
                      
                      2,175,792
                      
                      
                      
                      2,175,792Less:
      accumulated amortization
                      
                      
                      (424,225)
                      
                      
                      
                      (84,845
                      )Total
      Intangible assets, net
                      
                      $
                      1,751,567
                      
                      
                      $
                      2,090,947
 
 During
the year ended December 31, 2009 and 2008, amortization expenses of intangible
assets amounted to $339,380 and $84,845, respectively.
 
 The
intangible assets are carried at cost and are amortized over the expected useful
lives. Customer relationships is being amortized over its expected useful life
of 6.25 years. Brand name is being amortized over its expected useful life of 10
years.
 
 The
estimated aggregate amortization expenses for the brand name and customer
relationships for the five succeeding years are as follows:
 
 Year2010
                      
                      $
                      339,3802011
                      
                      
                      339,3802012
                      
                      
                      339,3802013
                      
                      
                      339,3802014
                      
                      
                      339,380
  F-14
 
 HOME
SYSTEM GROUP
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
31, 2009
 NOTE 11 –
SHORT TERM BANK
LOANS
 
 The Short
term bank loans that are denominated in Chinese RMB and are presented in US
dollars are as follows:
 
 December
      31, 2009
                      
                      
                      December
      31, 2008Loan
      from Standard Chartered Bank, interest rate at 7.74% (LIBOR+2%), due
      within 120 days, secured by accounts receivable held by a major
      customer.
                      
                      $
                      96,942
                      
                      
                      $
                      -Loan
      from China Construction Bank Zhongshan Branch, interest rate at 7.74% (
      LIBOR+2%), due within 120 days, secured by accounts receivable held by a
      major customer
                      
                      
                      1,966,759
                      
                      
                      
                      -Loan
      from China Construction Bank Zhongshan Branch, interest rate at 2.49%, due
      from July 3, 2009 to July 2,2010, secured by accounts receivable held by a
      major customer
                      
                      
                      2,896,517
                      
                      
                      
                      -Loan
      from Industrial and Commercial Bank of China, interest rate at 7.74%
      (LIBOR+2%), due within 120 days, secured by the Company’s accounts
      receivables.
                      
                      
                      3,194,680
                      
                      
                      
                      -Loan
      from CITIC Bank, interest rate at 5.84%, due from September 11, 2009 to
      September 10, 2010, guaranteed by Li Weiqiu, a related
    party.
                      
                      
                      2,929,030
                      
                      
                      
                      -Loan
      from CITIC Bank, interest rate at 5.84%, due from September 9, 2009 to
      June 9, 2010 guaranteed by Li Weiqiu, a related party.
                      
                      
                      1,464,513
                      
                      
                      
                      -Loan
      from CITIC Bank, interest rate at 7.62%, due from October 10, 2008 to
      October 9, 2009, guaranteed by Li Weiqiu, a related party.
                      
                      
                      -
                      
                      
                      
                      2,934,000Loan
      from Bank of Communication, interest rate at 10.34% (LIBOR+4.6%), due
      within 90 days, secured by the Company’s accounts
    receivable.
                      
                      
                      -
                      
                      
                      
                      676,710Loan
      from Guangdong Development Bank (Zhongshan Branch), interest rate at
      10.34% (LIBOR+4.6%), due within 90 days, secured by accounts receivable
      held by a major customer.
                      
                      
                      -
                      
                      
                      
                      2,312,593Loan
      from Standard Chartered Bank, interest rate at 10.74% (LIBOR+5%), due
      within 90 days, secured by accounts receivable held by a major
      customer.
                      
                      
                      -
                      
                      
                      
                      267,045Loans
      from Industrial and Commercial Bank of China, interest rate at 6.21%, due
      byJanuary 22, 2009, secured by the Company’s accounts
      receivables.
                      
                      
                      -
                      
                      
                      
                      3,667,500Loans
      from Industrial and Commercial Bank of China, interest rate at 6.21%, due
      byJanuary 16, 2009, secured by the Company’s accounts
      receivables.
                      
                      
                      -
                      
                      
                      
                      1,467,000Total
      Short term bank loans
                      
                      $
                      12,548,441
                      
                      
                      $
                      11,324,848
 
 F-15
 
 HOME
SYSTEM GROUP
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
31, 2009
 NOTE
12– LONG TERM
BANK LOANS
 
 The Long
term bank loans as of December 31, 2009 are denominated in Chinese RMB and are
presented in US dollars as follows:
 
 Loan
      from Industrial and Commercial Bank of China, interest rate at 5.40%, due
      on March 9, 2012, secured bythe
      Company’s assets.
                      
                      $
                      1,464,515
 
 There
were no Long term bank loans outstanding as of December 31, 2008.
 
 NOTE 13 –
NOTES PAYABLE AND
DEFERRED FINANCE COST
 
 On May
23, 2007, the Company entered into a Fixed Price Standby Equity Distribution
Agreement (the “Agreement”) with four investors (the “Investors”) who were
related parties.  Pursuant to the Agreement, the Company could, at its
discretion, periodically sell to the Investors up to 10 million shares of the
Company’s common stock for a total purchase price of up to $40 million (a per
share purchase price of $4.00 per share). The Investors’ obligation to purchase
shares of common stock under the Agreement was subject to certain conditions,
including the Company obtaining an effective registration statement for the
resale of the common stock sold under the Agreement.  The Investors
paid 16.5% of the purchase price ($6,575,000) to the Company. Also, the
Investors were to deliver to the Company an executed promissory note for the
payment of the remaining 83.5% of the remaining commitment under this
Agreement.
 
 On
February 7, 2008, the Company cancelled the Agreement with the Investors, and
the amount of $6,575,000 that had been received by the Company has been
reflected as a non-interest bearing Notes payable recorded under current
liabilities and non-current liabilities at the end of December 31, 2009 and
December 31, 2008, respectively.
 
 On
October 1, 2008, the Company issued promissory notes (“Notes”) in the amount
equivalent to the purchase price of approximately $39.4 million to the former
shareholders of Asia Forever for the Company’s acquisition of Asia Forever. The
net present value of these Notes payable at October 1, 2008, after a payment of
$8 million, was $29,900,000 and the deferred finance cost of $1,505,147 was
recorded based on the Company’s 5.3% borrowing rate, to be amortized using the
effective interest rate method. The Notes bear no interest, and principal was to
be repaid as follows: 25% of the purchase price ($9.9 million) was payable on or
before December 31, 2008, with the remaining principal amount to be repaid in
three equal semi-annual installments beginning on June 30, 2009.
 
 On June
30, 2009, the Company entered into a Supplement Agreement to the Notes
(“Supplement Agreement”) with the former shareholders of Asia Forever which
amended the payment terms as set forth in the original promissory notes.
Pursuant to the Supplement Agreement, the cash payments of  $1.8
million, which was past due from December 31, 2008, and $9.9 million which was
due on June 30, 2009 were to be satisfied in total by: (i) $4.4 million in cash
which was paid by the Company as of June 30, 2009; (ii) $1,464,000 in cash to be
paid by the Company in two equal installments of $732,000 by July 31, 2009 and
December 31, 2009; (iii) the transfer of buildings held by the Company including
offices and production facilities totaling 41,067 square metersand the related land
use rights, together valued at $6.1 million (the “Fixed Assets”). Such revised
payment terms when fully completed would satisfy all payments due under the
Notes for the December 31, 2008 and June 30, 2009 installments. The cash
payments were made and on September 18, 2009, the Company completed the transfer
of the Fixed Assets to former shareholders of Asia Forever. See Note 22 for
further discussion in the gain recorded on this Transfer.
 
 On
December 18, 2009, the Company executed an amendment to the Notes (the “Amended
Note”) to defer the final installment of the payment of the Purchase Price due
on June 30, 2010 under the Notes that the Shareholders received in the Company’s
acquisition of Asia Forever.  Pursuant to the Amended Note, the
Shareholders agreed that the Company could defer the payment $9.9 million that
was originally due on June 30, 2010 to June 30, 2011.
 
 F-16
 HOME
SYSTEM GROUP
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
31, 2009
 Notes
payable consist of the following:
 
 December
      31,
                        2009
                      
                      
                      December
      31,
                        2008Notes
      payable related to the fixed price standby equity distribution
      agreement
                      
                      $
                      6,575,000
                      
                      
                      $
                      6,575,000Notes
      payable related to acquisition of subsidiary
                      
                      
                      9,868,421
                      
                      
                      
                      31,405,184Total  Notes
      Payable
                      
                      
                      16,443,421
                      
                      
                      
                      37,980,184Less:
      Current portion
                      
                      
                      6,575,000
                      
                      
                      
                      21,536,763Notes
      payable – long term portion
                      
                      $
                      9,868,421
                      
                      
                      
                      16,443,421
 
 Deferred
finance cost consists of the following:
 
 December
      31,
                        2009
                      
                      
                      December
      31,
                        2008Deferred
      interest cost
                      
                      $
                      255,230
                      
                      
                      $
                      1,505,147Less:
      Current portion
                      
                      
                      255,230
                      
                      
                      
                      1,249,917Deferred
      finance cost-long term portion
                      
                      $
                      -
                      
                      
                      $
                      255,230
 
 F-17
 
 HOME
SYSTEM GROUP
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
31, 2009
 NOTE 14 –
DUE TO
STOCKHOLDER
 
 The
Company owed $3,979,971 to a stockholder as of December 31,
2009.  This is unsecured, bears no interest, and is due before June
30, 2010. See Note 24 for further discussion on this debt.
 
 As
discussion in Note 11, various bank loans made to the Company have been secured
or guaranteed by a related party, a shareholder and the Chairman of the
Company.
 
 On May
14, 2009, The Company received a loan from a related party, a shareholder
and director of the Company, with an interest rate 7.844%, due on May 14, 2014.
The Company is required to make monthly payments of approximately $29,280 for
principal amount interest. As of December 31, 2009, the amount due was
$1,369,358, with a principal amount of $248,049 due within twelve
months.
 
 December
      31,
                        2009
                      
                      
                      December
      31,
                        2008Due
      to stockholder unsecured and non interest bearing
                      
                      $
                      3,979,971
                      
                      
                      $
                      2,174,573Due
      to stockholder with interest 7.844%
                      
                      
                      1,369,358
                      
                      
                      
                      -5,349,329
                      
                      
                      
                      2,174,573Less:
      Current portion
                      
                      
                      4,040,896
                      
                      
                      
                      1,574,573Due
      to stockholder under non-current liabilities
                      
                      $
                      1,308,433
                      
                      
                      $
                      600,000
 
 The
payment of the principal amount for two obligations over the five succeeding
years are as follows:
 
 Year2010
                      
                      $
                      4,040,8962011
                      
                      
                      268,2092012
                      
                      
                      290,0212013
                      
                      
                      313,6062014
                      
                      
                      436,597$
                      5,349,329
 
 
 NOTE 15 –
SHIPPING AND HANDLING
FEES AND COSTS
 
 The
Company does not charge its customers for shipping and handling.  The
Company classifies shipping and handling costs as part of the Cost of sales, and
these were $538,374 and $510,495 for the year ended 2009 and 2008,
respectively.
 
 NOTE 16 –
WARRANTY
 
 The
Company evaluates its exposure to warranty claims based on both current and
historical product sales data and warranty costs incurred.  The
Company assesses the adequacy of its recorded warranty liability annually and
adjusts the amount as necessary.  As of December 31, 2009 the Company
was not aware of any material warranty claims. As an original equipment
manufacturer (“OEM”), the Company does not usually have an obligation for
warranty liability.
 
 NOTE 17–
INCOME
TAXES
 
 The
Company is subject to the Income Tax Laws of PRC. All of the tax provisions for
the year ended December 31, 2009 and 2008 pertain to PRC taxes. Effective on
January 1, 2008, the PRC Enterprise Income Tax (“EIT”) Law, and Implementing
Rules impose a unified enterprise income tax rate of 25% on all
domestic-invested enterprises and foreign investment enterprises in China,
unless they qualify under certain limited exception. Most of the Company’s
operating units are subject to this tax.
 
 F-18
 
 HOME
SYSTEM GROUP
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
31, 2009
 The
Company is incorporated in the U.S. and is subject to U.S. tax law. No
provisions for U.S. income taxes have been made as the Company has no taxable
income for reporting periods. HSGI is incorporated in the British Virgin Islands
(“BVI”) and, under the current laws of the BVI, is not subject to income
taxes.
 
 Well
Profit has been classified as a foreign venture enterprise within the PRC and
thus is entitled to, starting from the first profitable year, a two-year
exemption from the EIT followed by a three-year 50% reduction in its EIT tax
rate (“Tax Holiday”). As such, after the application by Well Profit and approval
by the relevant tax authority in 2007, Well Profit was fully exempted from EIT
for the fiscal years 2007 and 2008.  For the following three fiscal
years from 2009 to 2011, Well Profit will be subject to enterprise income tax at
rate of 12.5%.
 
 For the
fiscal years ended December 31, 2009 and December 31, 2008, the benefit that the
Company received from this Tax Holiday was $535,582 and $656,164,
respectively.
 
 Due to
the uncertainty surrounding the realization of the favorable U.S. tax attributes
in future tax returns, we continue to record a full
 valuation
allowance against our otherwise recognizable U.S. net deferred tax assets as of
December 31, 2009 and December 31, 2008.
 
 The
Company is present in more than one taxable jurisdiction at a time. The
management evaluates the tax positions and establish liabilities for uncertain
tax positions that may be challenged by local tax authorities and may not be
fully sustained, despite the believe that the underlying tax positions are fully
supportable. At December 31, 2009, the Company is unable to make a reasonable
estimate of the range of impact on unsustainable positions. Accordingly no
estimated provision for estimate liability has been made at December 31,
2009.
 
 The
income taxes provided represents the following:
 
 2009
                      
                      
                      2008PRC
      Enterprise Income TaxCurrent
                      
                      $
                      2,977,716
                      
                      
                      
                      720,756Deferred
      tax provision
                      
                      
                      -
                      
                      
                      
                      -Income
      tax expense
                      
                      $
                      2,977,716
                      
                      
                      
                      720,756
 
 The
effective income tax expenses differ from that computed by applying the PRC
statutory income tax rate of 25%  as follows:
 
 2009
                      
                      
                      2008Provision
      for Income taxes at the Statutory income taxrate
      – 25% in 2009 and 25% in 2008
                      
                      $
                      3,075,937
                      
                      
                      $
                      1,197,105Tax
      holiday
                      
                      
                      (535,582)
                      
                      
                      
                      (656,164
                      )Income
      not subject to tax
                      
                      
                      -
                      
                      
                      
                      (44,333
                      )Effect
      of losses from the subsidiaries not being utilized
                      
                      
                      105,939
                      
                      
                      
                      224,148Effect
      of amortization of deferred financing cost not being
    utilized
                      
                      
                      331,422
                      
                      
                      
                      -Income
      tax expense
                      
                      $
                      2,977,716
                      
                      
                      $
                      720,756
 
 F-19
 
 HOME
SYSTEM GROUP
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
31, 2009
 NOTE 18 –
SEGMENT
REPORTING
 
 Accounting
Standards Codification (“ASC”) Topic 280, “Segment Reporting”, requires use of
the “management approach” model for segment reporting. Under this model, segment
reporting is consistent with how the Company’s management organizes segments
within the Company for making operating decisions and assessing performance.
Reportable segments can be based on products and services, geography, legal
structure, management structure, or any other manner in which management
disaggregates a company. Reportable segments are components of an enterprise
about which separate financial information is available, that is evaluated
regularly by the chief operating decision-maker in deciding how to allocate
resources and in assessing performance. The Company’s chief executive officer
and chief financial officer have been identified as the chief decision makers.
The Company evaluates performance based on several factors, of which the primary
financial measure is business segment income before taxes.
 
 The
Company has four reportable segments: (1) Barbeque sets, (2) Skateboards, (3)
Other home appliances, and (4) Unallocated Corporate Expenses based on the above
criteria. Overhead items that are specifically identifiable to a particular
segment are applied to such a segment.
 
 F-20
 HOME
SYSTEM GROUP
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
31, 2009
 Barbeque
      sets
                        
                        
                        
                        Skateboards
                        
                        
                        
                        Other
      home appliances
                        
                        
                        
                        Corporate
                        
                        
                        
                        TotalFor
      the year ended
                          12/31/09
                        
                        
                        
                        For
      the year ended
                          12/31/09
                        
                        
                        
                        For
      the year ended
                          12/31/09
                        
                        
                        
                        For
      the year ended
                          12/31/09
                        
                        
                        
                        For
      the year ended
                          12/31/09Net
      sales
                        
                        $
                        14,566,946
                        
                        
                        $
                        3,098,987
                        
                        
                        $
                        44,162,859
                        
                        
                        $
                        -
                        
                        
                        $
                        61,828,792Depreciation
      and amortization
                        
                        $
                        861,209
                        
                        
                        $
                        192,787
                        
                        
                        $
                        927,677
                        
                        
                        $
                        -
                        
                        
                        $
                        1,981,673Segment
      Income before income taxes *
                        
                        $
                        1,145,992
                        
                        
                        $
                        563,917
                        
                        
                        $
                        8,878,445
                        
                        
                        $
                        1,715,394
                        
                        
                        $
                        12,303,748Capital
      expenditures
                        
                        $
                        1,413,826
                        
                        
                        $
                        316,494
                        
                        
                        $
                        685,898
                        
                        
                        $
                        -
                        
                        
                        $
                        2,416,218Segment
      assets
                        
                        $
                        24,950,512
                        
                        
                        $
                        4,891,847
                        
                        
                        $
                        45,218,256
                        
                        
                        $
                        13,388,581
                        
                        
                        $
                        88,449,196
  * The
Corporate segment income before income taxes includes gain on the transfer of
the building of $ 2,356,327 and income on the reversal of rent of $
1,372,121.
 Barbeque
      sets
                        
                        
                        
                        Skateboards
                        
                        
                        
                        Other
      home appliances
                        
                        
                        
                        Corporate
                        
                        
                        
                        TotalFor
      the year ended
                          12/31/0
                        
                        
                        
                        For
      the year ended
                          12/31/08
                        
                        
                        
                        For
      the year ended
                          12/31/08
                        
                        
                        
                        For
      the year ended
                          12/31/08
                        
                        
                        
                        For
      the year ended
                          12/31/08Net
      sales
                        
                        $
                        9,150,319
                        
                        
                        $
                        8,655,136
                        
                        
                        $
                        34,120,749
                        
                        
                        $
                        -
                        
                        
                        $
                        51,926,204Depreciation
      and amortization
                        
                        $
                        141,418
                        
                        
                        $
                        56,344
                        
                        
                        $
                        370,306
                        
                        
                        $
                        57,297
                        
                        
                        $
                        625,365Segment
      Income (loss)  before income taxes
                        
                        $
                        (1,605,649)
                        
                        
                        $
                        744,543
                        
                        
                        $
                        6,546,162
                        
                        
                        $
                        (896,635
                        )
                        
                        $
                        4,788,421Capital
      expenditures
                        
                        $
                        204,677
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        204,677Segment
      assets
                        
                        $
                        8,425,680
                        
                        
                        $
                        7,953,810
                        
                        
                        $
                        54,630,189
                        
                        
                        $
                        30,322,785
                        
                        
                        $
                        101,332,464
  F-21
 
 HOME
SYSTEM GROUP
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
31, 2009
 NOTE 19 –
STOCK
OPTIONS
 
 The
following table summarizes all Company stock option transactions between January
1, 2008 and December 31, 2009
 
 Share
      options
                        under
      option planBalance,
      January 1, 2008
                      
                      
                      100,000Cancelled
      on termination of services
                      
                      
                      (66,667
                      )Balance,
      December 31, 2008 and December 31, 2009
                      
                      
                      33,333
 
 The
remaining options are fully vested with an exercise price of $6.00 and a
remaining term of 7.5 years.
 
 NOTE 20–
CONCENTRATIONS, RISK
AND UNCERTAINTIES
 
 The
Company has the following concentrations of business with each customer
constituting greater than 10% of the Company’s sales:
 
 2009
                      
                      2008Zhongshan
      City Heng Bao Trading Co., Ltd
                      
                      62%
                      
                      70%WaiYi
      (HK) Limited
                      
                      32%
                      
                      21%
 
 The
Company has the following concentrations of accounts receivable constituting
greater than 10% of the Company’s accounts receivable as of year
end:
 
 2009
                      
                      2008Zhongshan
      City Heng Bao Trading Co., Ltd
                      
                      70%
                      
                      65%WaiYi
      (HK) Limited
                      
                      23%
                      
                      34%
 
 This
concentration makes the Company vulnerable to a near-term severe impact should
the relationships be terminated.
 
 The
Company has the following concentrations of business with each supplier
constituting greater than 10% of the Company’s purchases:
 
 2009
                      
                      2008Zhongshan
      City Oceanic International Company Limited
                      
                      13%
                      
                      13%Hubei
      Xin Cheng Industry & Trade Company Limited
                      
                      11%
                      
                      13%
  F-22
 HOME
SYSTEM GROUP
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
31, 2009
 
 NOTE 21 –
COMMITMENTS AND
CONTINGENCIES
 
 Operating
Leases
 
 In the
normal course of business, the Company leases office and factory space under
operating lease agreements. The operating lease agreements generally contain
renewal options that may be exercised at the Company’s discretion after the
completion of the base rental terms. In addition, many of the lease agreements
provide for regular increases to the base lease rate at specified intervals,
which usually occur on an annual basis. The Company was obligated under
operating leases requiring minimum payments as follows:
 
 Year2010
                      
                      $
                      769,1242011
                      
                      
                      769,1242012
                      
                      
                      666,8492013
                      
                      
                      360,0272014
                      
                      
                      60,005$
                      2,625,129
 
 Rental
expenses were $765,514 and $683,943 for the years ended December 31, 2009 and
2008, respectively.
 
  NOTE 22 -
GAIN ON THE TRANSFER
OF ASSET
 
 In August
2009, the Company transferred certain building assets and land use rights to the
former shareholders of Asia Forever in accordance with the Supplemental
Agreement discussed in Note 13.  These assets were valued at the time
of the transfer at $6,087,312, and the Notes due were reduced in value by this
amount.  The gain resulting from this transfer of the building assets
and land use right is $2,356,327 after business and land appreciation taxes of
$405,660. Concurrent with this transfer, the Company and former shareholders
entered into a lease agreement, which has a term that expires on June 30, 2012,
with a renewal option, under which the Company continues to utilize these
production facilities.
 
  F-23
 HOME
SYSTEM GROUP
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
31, 2009
 Note 23 –
INCOME ON REVERSAL OF
RENT
  
 On
December 8, 2009, the Company recorded the reversal of a rent accrual in the
amount of $1,372,121 pertaining our landlord Oceanic International (Zhongshan)
Company Limited for the period from April, 2007 to December, 2008 due to the
government stimulus payment received by Oceanic International (Zhongshan)
Company Limited.
 
 NOTE 24 –
SUBSEQUENT
EVENTS
 
 The
Company has evaluated subsequent events through March 19, 2010, and has
determined that there were no subsequent events to recognize or disclose in
these financial statements.