UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K






QAnnual Report Pursuant To Section 13
or 15(d) of the Securities Exchange Act of 1934


For the
fiscal year ended: December 31, 2008




£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)+86-755-83570142(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.  £




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 definition for “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 shares of voting and non-voting common equity
stock held by non-affiliates of the registrant was $6,020,692 as of June 30,
2008, the last business day of registrant’s most recently completed second
fiscal quarter, based on the last sale price of the registrant’s common stock on
such date of $0.15 per share, as reported by finance.yahoo.com.




There
were a total of 62,477,949 shares of the registrant’s common stock outstanding
as of March 31, 2009.




Documents Incorporated by Reference:None












HOME
SYSTEM GROUP


FORM10-K


For
the Fiscal Year Ended December 31, 2007




PagePART
      IItem 1.
              Business
              
              2Item 1A.
              Risk Factors
              
              12Item 2.
              Properties
              
              22Item 3.
              Legal Proceedings
              
              22Item 4.
              Submission of Matters to a Vote of Security
      Holders
              
              22PART
      IIItem 5.
              Market for registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
              
              23Item 6.
              Selected Financial Data
              
              24Item 7.
              Management’s Discussion and Analysis of Financial
      Condition and Results of Operation
              
              24Item 8.
              Financial Statements and Supplementary Data
              
              32Item 9.
              Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
              
              32Item 9A(T).
              Controls and Procedures
              
              32Item 9B.
              Other Information
              
              34PART
      IIIItem 10.
              Directors, Executive Officers and Corporate
      Governance
              
              34Item 11.
              Executive Compensation
              
              38Item 12.
              Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
              
              41Item 13.
              Certain Relationships and Related
    Transactions
              
              42Item 14.
              Principal Accountant Fees and Services
              
              44PART
      IVItem 15.
              Exhibits and Financial Statement Schedules
              
              45Index
      to Consolidated Financial Statements
              
              F-1





Table of Contents




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 Plan of Operation.” 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 section captioned “Risk Factors Associated With Our
Business” in our Annual Report on Form 10-K for the year ended December 31,
2008.  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:




·
              our expectations regarding the market for small household
      appliances;
 ·
              our expectations regarding the continued growth of the
      small household appliance industry;
 ·
              our beliefs regarding the competitiveness of our
      products;
 ·
              our expectations regarding the expansion of our
      manufacturing capacity;
 ·
              our expectations with respect to increased revenue growth
      and our ability to achieve profitability resulting from increases in our
      production volumes;
 ·
              our future business development, results of operations
      and financial condition; and
 ·
              competition 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,” 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 HSGI; 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.


·           “Oceanic
PRC” are to Zhongshang Oceanic International Co. Ltd., a Chinese operating
company;


·           “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.




1
 Table of Contents




PART
I




ITEM
1. OUR BUSINESS




Overview




Home
System Group is a Nevada holding company whose China-based operating
subsidiaries, OCIL, Well Profit and Weihe, are primarily engaged in the
production of a variety of small household appliances, including stainless steel
gas grills and ovens, gas and electric heaters, residential water pumps, ceiling
and table fans, decorative lamps, LEDs and energy-saving lamps.  Our
products are sold through distributors to retailers in China, America, Europe,
Australia, Africa, and Southeast Asia




Our
products are primarily manufacturedin Well Profit and
Weihe’s facilities. There are about 1500 employees including over 250 engineers
and administrative staff.




Well
Profit are located on over 304,450 square feet of land in Oceanic Industry Park,
Sha Gang Highway, Gang Kou Town, Zhongshan, Guangdong Province, China.
 Well Profit currently has five (5) assembly lines of stainless steel BBQ
grills with a total annual production capacity of approximately 400,000 units of
BBQ grills, and two (2) skateboard production lines with a total annual
production capacity of approximately  1 million units.




Weihe is
an export oriented manufacturer. The total combined square footage of the
company’s 8 manufacturing plants is approximately 427,000 square feet and the
company shares plants with other manufacturers with a combined square footage of
approximately 323,000 square feet. The company is equipped with inspection
equipment, several outstanding electrostatic spraying production lines,
semi-automatic pipelines and high-speedy punching machines. The total annual
productivity for 2008 was approximately 5 million fans, and over 12 million
units of lamps including decoration lamps, table lamps and LEDs.




Our
current production output in 2008 is approximately 400,000 BBQ grills, 450,000
skateboard, 1,450,000 fans, 4,600,000 lamps and LEDs, 405,000 frying pans, and
77,000 coffee pots.,




Our sales
revenue and net income was $51,926,205 and $4,067,665, respectively, during the
fiscal year ended December 31, 2008, and $41,012,614 and $61,528, respectively,
during the same period in 2007.  During the fiscal year ended December 31,
2008, our sales revenue generated from sales of our grills and ovens was $
10,478,100, constituting 19.18% of our sales revenue.




Our
Corporate History




We were
organized February 9, 2000, under the laws of the State of Nevada with the name
of Coronation Acquisition Corp. (the “Company”). In March 31, 2003, the Company
entered into an Agreement and Plan of Exchange and Reorganization with Supreme
Property, Inc, an Illinois corporation, and began to operate under the name of
Supreme Realty Investment, Inc. (“Supreme”). On August 4, 2006, Supreme acquired
Home System Group, Inc. (“HSGI”) and its wholly owned operating subsidiary,
Oceanic International (HK) Limited (“Oceanic” or “OCIL”), a company organized
under the law of Hong Kong. On September 28, 2006, we filed a certificate of
amendment to our articles of incorporation with the Nevada Secretary of State to
Change our name from “Supreme Realty Investment, Inc.” to “Home System Group.”
 Through Oceanic, the Company distributes home appliance products such as
grills, home use water pumps, blenders, electric fans, heaters, laser printers
and other electronic products.




On April
11, 2006, Supreme entered into a stock purchase agreement (the “Stock Purchase
Agreement”) with Thomas Elliot, Jean LeRoy, Jimmy Harvey and Zujun Xu. Pursuant
to the terms and conditions of the Stock Purchase Agreement, Zujun Xu acquired
from Thomas Elliot, Jean LeRoy, and Jimmy Harvey approximately 70.6% of the
issued and outstanding shares of common stock of Supreme.




2
 Table of Contents




On
October 1, 2008, HSGI acquired Weihe through Asia Forever. 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.




Private
Placement Transaction




On May 4,
2006, we entered into a private placement transaction, pursuant to which we
issued and sold 55,000,000 shares of our common stock to certain accredited
investors for approximately $1 million in gross proceeds. As a result of the
private placement transaction, the investors became the controlling shareholders
of the Company and, immediately following the closing of the private placement,
(1) Zujun Xu, was appointed to the Board of Directors and (2) Thomas
Elliot tendered an undated resignation from the Board of Directors, with the
understanding that such resignation would be accepted at a future date, to be
determined by Zujun Xu, after the closing of the Transaction.




On July
26, 2006 we filed a certificate of amendment to our incorporation with the
Nevada Secretary of State to affect a one (1) for ten (10) reverse stock
split.




Reverse
Merger Transaction




On August
4, 2006, we completed a reverse acquisition transaction through a share exchange
with HSGI, whereby we issued to the shareholders of HSGI, 8,000,000 shares of
our common stock, in exchange for all of the issued and outstanding capital
stock of HSGI. HSGI thereby became our wholly owned subsidiary and HSGI’s
subsidiary, OCIL, became our indirect subsidiary.




HSGI was
incorporated as a holding company with limited liability in the British Virgin
Islands on February 28, 2003.  OCIL is a company that has been organized
under the laws of Hong Kong since June 23, 2004. OCIL is a distributor of home
appliance products, such as grills, home use water pumps, blenders, electric
fans, heaters, laser printers, and other electronics and environmental
protection products. Following the merger, we filed a certificate of amendment
to our articles of incorporation with the Nevada Secretary of State on September
28, 2006, to change our name from “Supreme Realty Investment, Inc.” to “Home
System Group.”




Acquisition
of Holy HK and Well Profit




On
January 31, 2007, we acquired Holy HK, a Hong Kong holding company, and its
wholly-owned subsidiary, Well Profit, pursuant to a share exchange agreement,
dated December 11, 2006, among the Company, Holy HK, Well Profit and Mr. Kaming
Yu, Holy HK’s sole shareholder at the time.  Under the terms of the share
exchange agreement, we issued 42,500,000 shares of our common stock  and
paid $3,000,000 in cash to Mr. Yu, in exchange for all the issued and
outstanding shares of Holy HK.  As a result of the share exchange, Holy HK
became our wholly owned subsidiary, Holy HK’s PRC subsidiary, Well Profit,
became our indirect subsidiary and Mr. Yu became our controlling
shareholder.




Holy HK
was organized under the laws of Hong Kong on September 26, 2006, for the purpose
of being a holding company.Well Profit is located in Zhongshan City, Guangdong Province, China
and specializes in producing domestic electronic appliances. The company has a
total area of 82.5 acres which includes a new 864,000-square-foot production
facility with advanced equipment and a staff of 1,200 people. The company
currently has five production lines which produce 450,000 grills, 3 million
water pumps, and 2 million sets of tools and hardware cabinets annually.
  Acquisition
of Asia Forever and Weihe
  On
October 1, 2007, we acquired Asia Forever, a Hong Kong holding company, and its
wholly-owned subsidiary, Weihe. The Company entered into a Share Purchase
Agreement on September 23, 2008 with Asia Forever and Asia Forever’s
shareholders, pursuant to which the Company agreed to acquire 100% of the
ownership interests in Asia Forever from the Shareholders for approximately
$39.5 million.


3
 Table of Contents




Asia
Forever was incorporated on April 1,2008
under laws of Hong Kong.  On September 1, 2008 Asia Forever completed
the stock purchase of all of the shares of Zhongshan City Weihe Appliances
Co.,Ltd. (“Weihe”). As a result of the transaction, Weihe became Asia Forever’s
wholly-owned subsidiary.


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 8
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 outstanding
electrostatic spraying production lines, semi-automatic pipelines and
high-speedy punching machines. There are over 740 employees including over 100
engineers and administrative staff.








The
following chart reflects our organizational structure as of the date of this
Report.









Our
Industry




The
global small household appliance market is served by a large number of companies
that are widely distributed geographically.  The manufacturing arm of the
industry is comprised of establishments primarily engaged in manufacturing
either small electrical appliances or major appliances.  Subsectors in
these categories are electric housewares and household fans, household vacuum
cleaners, household cooking appliances, household refrigerators and freezers,
household laundry equipment, and other major household appliances.  Since
most of the appliances now being produced have changed little in recent decades,
there is often relatively little to differentiate one manufacturer’s products
from another’s. The result has been intense price competition, as consumers have
tended to consider appliances more like commodities.




A recent
study by IMS Research concluded that around 405 million small kitchen
appliances, garment care appliances and floor care appliances were shipped
worldwide in 2005, worth more than $16.7 billion. The market is forecast to
reach 457 million units in 2010, with corresponding revenue forecast at $18.4
billion. Asia Pacific is forecast to be the major driver of growth. Within Asia
Pacific, China is the market with the greatest potential, due to its huge
household population and rising income levels.  While total retail market
sales of appliances in the United States in recent years have been aided by an
expanding economy, a high rate of housing construction, and low interest rates,
increasing imports continue to capture a greater share of the market at the
expense of domestic production.  According tochinasourcingreports.com,
China's exports of small household appliances worldwide are forecast to exceed
US$4 billion in 2005, a year-on-year increase of about 30%.




4
 Table of Contents




The
following chart shows China’s export statistics by origin, with Guangdong
province, where Well Profit and Weihe are located, showing the largest market
share.









China’s
small household appliance output has been growing at a rapid pace since 2005.
 With the improvement in urban quality of life in China and the gradual
change in living environment and lifestyle, the acquisition of small household
appliances that are practical and convenient has become more desirable to the
Chinese consumer.  Market researchers believe that over the next ten years,
33% of the Chinese population will be moving into new homes, which means more
than 26 million household appliances will be purchased each year.
  Due to the availability of low-cost production and improving
innovations, Chinese domestic enterprises, such as Home System Group, have won
consumer recognition of their brands and are in a position to capture higher
market shares, both at home and abroad.




Business
Strategy




Our
objective is to increase profitability, cash flow and revenue while developing
and enhancing our position as a leading manufacturer, marketer and distributor
of branded consumer products used in and around the home.  Our strategy for
achieving these objectives includes the following key elements:




Further Penetrate Existing
Distribution Channels. We seek to further penetrate existing distribution
channels to drive organic growth by leveraging our strong existing customer
relationships and attracting new customers. We intend to further penetrate
existing customers by continuing to:




·           provide
quality products;


·           fulfill
logistical requirements and volume demands efficiently and
consistently;


·           provide
comprehensive product support from design to after-market customer
service;


·           cross-sell
our brands across various business segments to our customers; and


·           leverage
strong established distribution channels.




Introduce New Products. To
drive organic growth from our existing businesses, we intend to continue to
leverage our customer relationships to develop or acquire new products and
product extensions in each of our major product categories.  For example in
June 2007, we expanded our product mix by acquiring patent technology and
equipment to launch our new stainless steel coffee pot production line. Also, we
will be focusing on environmental, energy saving gas and electronic home
appliance in the next year.




Further Expand
Internationally.  Our distributors sold almost all of our products
in international markets. We intend to expand our international sales primarily
by leveraging these distribution channel opportunities across product lines and
by pursuing strategic cross-selling or co-branding in our foreign businesses
with established complementary distribution channels.  We believe our
distribution network will continue to assist us in placing more products into
foreign channels and increase the rate at which our products assimilate
themselves into homes in the North American, European and Australian
markets.




5
 Table of Contents


Pursue Strategic
Acquisitions. We anticipate that the fragmented nature of the consumer
products market will continue to provide opportunities for growth through
strategic acquisitions of complementary businesses. Our acquisition strategy
will continue to focus on businesses or brands with product offerings that
provide expansion into related categories and can be marketed through our
existing distribution channels or provide us with new distribution channels for
our existing products, thereby increasing marketing and distribution
efficiencies. Furthermore, we seek acquisition candidates that demonstrate a
combination of attractive margins, strong cash flow characteristics, category
leading positions and products that generate recurring revenue.  We
anticipate that future acquisitions will be financed through a combination of
cash on hand, operating cash flow, availability under our existing credit
facilities and new capital market offerings.


Our
Products




We are
primarily engaged in the production and distribution of a variety of small
household appliances, including stainless steel gas grills and ovens,
residential water pumps and heaters and coffee pots to PRC distributors, who
channel them to retailers based in China, the United States, Europe and
Australia.  We also produce industrial racks and skateboards on a smaller
scale.




Our BBQ
grills are made of stainless steel and some new material and use either natural
gas or coal as fuel.  Our BBQ grills are sold to distributors who sell them
mainly to retailers in the United States (where according to lanmayi.net,
approximately 85% of households own a BBQ grill). We use advanced technology to
design the burners in order to have safe combustion and save gas.  Our
grills are stylish, elegant and are convenient to use.  For the fiscal
years ended December 31, 2008 and 2007, 19.18% and 76% of our sales revenue,
respectively, came from this product.




We
started our new skateboard production and coffee pot production lines during
2007.  As a result, revenue from the sale of our skateboard products was
$9,502,833 and $10,427,732 for the fiscal years ended December 2008 and 2007
respectively, and revenue from the sale of our coffee pot products was $321,508
and $79,044, respectively.




Frying
pans and fans (Domestic use) are quite popular in 2008. The revenue from the
sale of our frying pans and fans are $5,788,200 and $2,004,170,
respectively.




Weihe
became one of our subsidiaries since October 2, 2008. 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. The 2008 whole year revenue from
the sale of fans (Export use) and lamps are $32,611,450 and $15,049,886,
respectively.




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
sets 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
400,000 such units; two skateboard production lines, with a total annual
production capacity of approximately 1,000,000 such units;   Our
manufacturing facilities operate at peak efficiency while maintaining high
workplace safety and environmental compliance standards.    On June
15, 2007, we acquired our the stainless steel coffee production equipment and
patent technology for our new coffee pot production line, which has been
integrated into our current production facilities and has been operational since
August, 2007. We have obtained approval from Administration for Industry and
Commerce to expand the scope of our business permit to allow the addition of the
production of coffee pot equipment and have begun production of this new product
line in 2008.




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.




6
 Table of Contents




Our
distributors also require that our products carry a UL Mark (Underwriters
Laboratory) or a CE 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.
 A manufacturer of a UL certified product must demonstrate compliance with
the appropriate safety requirements, many of which are developed by UL and
demonstrate that it has a program in place to ensure that each copy of the
product complies with the appropriate requirements. If a product design is
modified, a representative example may need to be retested before a UL Mark can
be attached to the new product or its packaging.  The CE marking is a
mandatory European marking for certain product groups to indicate conformity
with the essential health and safety requirements set out in European
Directives.  To permit the use of a CE mark on a product, proof that the
item meets the relevant requirements must be documented.  Sometimes this is
achieved using an independent testing organization which evaluates the product
and its documentation.  Often it is achieved by a company-internal
self-certification process.  In either case, the responsible organization
(manufacturer, representative, importer) has to issue an EC-Declaration of Conformity
(EC-DoC) indicating its
identity, the list of European Directives he declares compliance with, a list of
standards the product complies with, and a legally binding signature on behalf
of the organization.  All our products are UL or CE certified.




Our
Suppliers of Raw Materials




The
primary raw materials used in our products are iron, stainless steel, plastic,
metal and glass.  The prices of these raw materials are determined based
upon prevailing market conditions, supply and demand.  Supply and demand
for these raw materials is generally affected by market price fluctuations.
 Our primary suppliers, Oceanic PRC and Yingyuan Ltd., account for 22% and
18% of our supplies of raw material respectively, of our raw material
expense.




The costs
of our primary our raw materials during fiscal years 2008 and  2007 are as
follows:




2008
                  (Both
      Well Profit & Weihe)
                2007Iron
                $5,452,020
                $4,180,303Stainless
      Steel
                $1,387,100
                $3,513,167Metal
                $21,207,183
                $6,091,893Glass
                $4,791,696
                $12,028,315Plastic
                $24,699,182
                -TOTAL
                $57,537,181
                $
      25,813,678








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 and
favorable quality control capabilities.




Well
Profit’s top 3 suppliers in 2008 are Hubei Xincheng Gongmao Co. Ltd, Zhongshan
Hongbao import and export Co. Ltd and Zhongshan Oceanic International Co,
Ltd.   During 2008, Well Profit purchased 22.32% of its products
from Zhongshan Oceanic International Co. Ltd, 21.61% from Hubei Xincheng Gongmao
Co. Ltd and 10.06% from Zhongshan Hongbao Import and Export Co. Ltd,
respectively.




Weihe has
more than 30 suppliers. Hong Kong Weier Industrial Co. Ltd, Xingning Jinyan
electronic Co. and Zhongshan Huahe Co. Ltd. are the top 3 suppliers of Weihe
with 15.26%, 5% and 3.76% of the total supplied materials.




7
 Table of Contents




We
typically purchase raw materials from our suppliers on credit, with terms
requiring payment within 90 - 180 days following the delivery of the raw
materials. When we purchase raw materials from PRC suppliers, we are able to pay
in Renminbi.  When we purchase raw materials from foreign suppliers, we
usually pay in U.S. dollars.  Our accounts payable above six months
accounted for none of our total account payables in both 2008 and
2007.




Our
Major Customers




Well
Profit sells 98.54% of its products to three customers: Zhongshan Hengbao Import
and Export Co. Ltd, or Hengbao, Shunde Weideli Electronic Appliance manufacture
Co,. Ltd. and Suzhou Baocheng Industrial Co. Ltd. who distribute our products to
retailers in China, the United States, Europe and Australia. These customers
accounted for approximately 97.70%,  0.44% and 0.40% Well Profit’s
sales revenue in 2008, respectively.  Our distributors export an increasing
amount of our products to the international market in a bid to further enhance
our brand and build our reputation as a provider of high quality household
appliances. During the fiscal year ended December 31, 2008, Hengbao accounted
for 36.11%, 34.46%, 7.27% and 20.34% of Well Profits’s sales revenue for grills,
skateboard, fans and frying pans, respectively. Hengbao is indirectly owned by
Oceanic PRC, which until March 2007, was indirectly owned and controlled by our
director Mr. Weiqiu Li .




Weihe
sells 48% of its products to the top 3 customers: L G Sourcing, Inc, Canadian
Tire Co, Ltd, and Lumicentro International, S.A. These 3 customers accounted for
approximately 25%, 7% and 16% of Weihe’s sales revenue in 2008,
respectively.




Sales,
Marketing and Distribution




Our
marketing department promotes our products mainly through our distribution
networks, trade fairs, import and export companies, and print advertising.
 In addition, we train and develop a strong sales force among our own
employees by means of various vocational skills training and qualification
examinations.  We have 20 employees in our marketing department. We have 3
outside sales representatives works for Weihe.




We sell
all our products to distributors who sell them to retailers, including mass
merchandisers, department stores, home improvement stores, warehouse clubs, drug
store chains, catalog stores and discount and variety stores in the United
States, Europe and Australia.  Our policy is to maintain an inventory base
to service the rapid delivery requirements of our distributors. Because of
manufacturing lead times and our seasonal sales, it is necessary that we
purchase materials and thereby increase inventories based on anticipated sales
and forecasts provided by our distributors and our sales personnel.  In
addition, since the acquisition of Well Profit and Weihe in early 2007 and late
2008, respectively, we now possess a large production base for our grills, lamps
and fans which will assist us in boosting inventory for such items by
internalizing some of the phases of production for this product.




Our
Research and Development Efforts




We spent
approximately, $74,571 and $23,542 on Company-sponsored research and
developmentactivities in fiscal
years 2008 and 2007, respectively. The expenses on research and development
include salary, cost of materials, depreciation and amortization, utilities and
other expenses.  In addition, we have not spent any money on
customer-sponsored research and development activities. We believe that the
development of new products and new technology is critical to our success. We
are continuously working to improve the quality, efficiency and
cost-effectiveness of our existing products and develop technology to expand the
range of specifications of our products.  For fiscal year 2008 we have not
yet allocated any funds for our research and development efforts.




Competition




Our
Competitors




The small
electric household and appliance industry does not have onerous entry barriers.
 As a result, we compete with many small manufacturers and distributors of
household products.  Additional competitors may also enter this market and
cause competition to intensify. 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 and distributors, some of
which have substantially greater financial and other resources than we currently
have.  We believe that our primary competitors in the production of
household appliance are Taishan City Guangrong Metal Products Co. Ltd. and
Yangjiang City Xinli Industrial Co. Ltd.




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The
following table ranks our output with the output of these
competitors:]




Ranking
                Manufacturer
                Annual
                  Production
                Product
                  Structure1
                Taishan
      City Guangrong
                1.2
      million units
                High,
      Mid, Low level2
                Yangjiang
      City Xinli
                0.8
      million units
                Mid,
      Low level3
                Well
      Profit
                0.4
      million units
                High,
      Mid level




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 offering of products in each category at
competitive prices.




We plan
to broaden our product offerings 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 with superior
efficiencies, low cost and high quality.  We organize the production runs
in many of 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. Our efficient and automated
manufacturing operations enable us to provide products that are ready for retail
distribution with minimal 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 price points competitive.  We
continuously implement cost-saving initiatives that have rationalized certain
operating and manufacturing facilities for products, as well as increased
outsourcing of certain of our products where it is most cost
effective.





·           Proven, Incentivized, and Effective
Management Team.Our management team has a proven track record of
successful management and has great experience in international trade and
management. Our executive corporate management team is led by Weiqiu Li, our
Chairman and Chief Executive Officer and  Kinwai Cheung, our Chief
Financial Officer. Our management team has about 10 years of experience combined
in the manufacturing and marketing of consumer household products.  Our
primary operating segments are led by executives with extensive experience in
the consumer products markets.





·           Established Distributor
Relationships with Major Retailers. Our distributors are trusted
suppliers and have attracted large US retailers with our high quality products.
 As a result, they have now become the main product supplier of some
well-known international manufacturers and retailers such as Nexgrill
Industries, Inc., Whalen Storage, Lightdecor, Costco Wholesale Corporation,
Street-Surfing,Wal-Mart
Stores, Inc., The Home Depot, Inc., Lowe’s Companies, Inc., Target Corporation
and Leroy Merlin.  Due to our close relationship with our distributors, we
expect our arrangements with our distributors to continue
indefinitely.




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·           Distinctive Location
Advantage. Our Chinese subsidiaries are located in Zhongshan, an
important manufacturing base in China with stable regional policies and a
healthy economic environment. The Catalog of Industrial Structure
Development of 2006 and 2007issued by the Zhongshan Government provides
that non-metal, metal processing, appliances manufacturing activities are
encouraged industries in Zhongshan.




Intellectual
Property




We do not
yet own any trademarks or patents in connection with our business.
 However, in connection with our purchase of our coffee pot production
equipment in July 2007, we also purchased an automatic insulation and vacuum
system as the base for producing energy-saving insulation products, such as
coffee pots, thermoses and other household insulation products.  Our
application for two state patents in connection with this technology were
submitted to the National Patent Office in August 2007 and is
pending.




Pursuant
to a verbal agreement, Oceanic PRC has allowed us to use its logo as a part of
our name, indefinitely.  Ocean PRC was a company indirectly owned and
controlled by our director, Weiqiu Li.  However, Mr. Li transferred his
ownership interests in this entity to Ye Shu Zhen in March 2007 and filed the
transfer with the Hong Kong registrar of companies in March 2008.




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.  Our facilities are not subject to 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 accessories and only electricity
is needed.  We are not currently subject to any pending actions alleging
any violations of applicable PRC environmental laws.




Regulation




Because
our operating subsidiaries are located in the PRC, we are regulated by the
national and local laws of the PRC.  We do not 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
also 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.




Under
current PRC laws and regulations, FIEs 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 its general reserves until the cumulative
amount of such reserves 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.




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As a
manufacturer of consumer products that are distributed to U.S. consumers, 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.




Our
Employees




As of
December 31, 2008, we employed 1,500 full-time employees.  The following
table sets forth the number of our full-time employees by function as of
December 31, 2008.




Functions
                As
      of
                  December
      31, 2008Well
      Profit
                WeiheManufacturing
      and engineering
                611
                642General
      and administration
                103
                80Marketing
      and sales
                12
                14Research
      and development
                24
                24




As
required by applicable PRC law, we have entered into employment contracts with
most of our officers, managers and employees.  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.




China
enacted a new Labor Contract Law, which became effective on January 1, 2008.
 The Company has updated its employment contracts and employee handbook and
is in compliance with the new law.  The Company will work with the
employees and the labor union to insure that the employees obtain the full
benefit of the law.  The Company does not anticipate that changes in the
law will materially impact the Company balance sheet and cash
flows.




Our
employees in China participate in a state pension scheme organized by PRC
municipal and provincial governments.  We are currently required to
contribute to the scheme at the rate of 20% of the average monthly salary.
 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.




Insurance




We have
third-party insurance for a number of types of insurance including property
insurance on our facilities, automobile insurance, and staff accident insurance.
 We are also self-insured to specified levels against product liability
insurance.




We
believe our insurance coverage is customary and standard of companies of
comparable size in comparable industries in China.  However, we cannot
ensure that our existing insurance policies are sufficient to insulate us from
all losses and liabilities that we may incur.  See “Risk Factors–Risks
Related to our Business”.  We have limited insurance coverage and do not
carry any business interruption insurance, third-party liability insurance for
our manufacturing facilities or insurance that covers the risk of loss of our
products in shipment.




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ITEM
1A.  RISKFACTORS




RISKS
RELATED TO OUR BUSINESS




The increasing
concentration of our small electric household appliance sales among a few
retailers and the trend toward private-label brands could negatively affect
sales levels or profits.




With the
growing trend towards the concentration of our small electric household
appliance sales among a few retailers, our distributors are increasingly
dependent upon fewer customers whose bargaining strength is growing as a result
of concentration.  Through our distributors a substantial quantity of our
products to mass merchandisers, national department stores, variety store
chains, drug store chains, specialty home retailers and other retail outlets.
 These retailers generally purchase a limited selection of small electric
household appliances.  As a result, we compete for retail shelf space with
our competitors.  In addition, certain of our larger customers are using
their own private label brands on household appliances that compete directly
with some of our products.  As the retailers in the small electric
household appliance industry become more concentrated, competition for sales to
these retailers may increase, which could adversely affect our results of
operations.




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 make inventory management more
difficult for us. 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 end 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 in liquidating 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.




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 2008, Well Profit
purchased 97% of its products from three suppliers and Weihe purchased 48% of
its products from three suppliers and during 2007. Weihe purchased 43% of our
products from only three suppliers. At December 31, 2008 and 2007, amounts due
to those suppliers included in accounts payable were $11,250,000 and $5,662,584
of Well Profit respectively. Amount due to suppliers in accounts payable of
Weihe were $9,877,000 at December 31, 2008. This concentration makes the Company
vulnerable to a near-term severe impact, should the relationships be
terminated. Such failure could cause us to experience delivery delays or
failures caused by production issues or could cause us to deliver of
non-conforming products.




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We
rely on three 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 Hengbao, its exclusive distributors,
through an unwritten commercial arrangement between Well Profit and each of
them.  Hengbao is indirectly owned by Oceanic PRC, which until March 2007,
was indirectly owned and controlled by Mr. Weiqiu Li, our director and previous
Chief Executive Officer.  During the fiscal year ended December 31, 2008,
Hengbao, was responsible for 20.62% of Well Profit’s revenues. Weihe sells a
majority of its products to LG Sourcing Inc., Lumicentrd International, S.A. and
Canadian Tire Corporation. During the fiscal year ended December 31, 2008, the
above three companies were responsible for 53.37%, 14.37% and 8.76% of Weihe’s
net sales, respectively.




The small
electric household and appliance industry is consolidating, which could have a
material adverse impact on our success.




Over the
past several years, the small electric household and appliance industry has
undergone substantial consolidation, and further consolidation is likely.
 As a result of this consolidation, the small electric household and
appliance industry could largely consist of a limited number of large
distributors.  To the extent that we do not continue to be a major
participant in the small electric household and appliance industry, our ability
to compete effectively with these larger distributors could be negatively
impacted. As a result, our results of operations could be materially adversely
affected.




Competition may
materially adversely affect our results of operations.




The small
electric household and appliance industry does not have onerous entry barriers.
 As a result, we compete with many small manufacturers and distributors of
household products.  Additional competitors may also enter this market and
cause competition to intensify.  We believe that competition is 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, we compete with our retail customers, who use their own private label
brands, and with exporters and foreign 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 small electric household
appliances 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 fiscal 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:




·           continue
cost reductions throughout the entire company and at our suppliers;


·           reduce
product returns and improve the quality of our products;




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·
            pursue
      innovation in our product categories through our ability to research,
      design and test new product concepts;
and


·
            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 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.




Our future
success depends on the development of new and innovative products on a
consistent basis in order to increase revenues and we may not be able to do
so.




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 newly acquired businesses or product
lines.




We will
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 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 are
subject to various national and local environmental laws and regulations in
China concerning issues such as 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 may develop, arise or be discovered that create new
environmental compliance or remediation liabilities and costs.  While we
believe that we can comply with existing environmental legislation and
regulatory requirements and that the costs of compliance have been included
within budgeted cost estimates, compliance may prove to be more limiting and
costly than anticipated.




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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. We are self-insured to specified
levels of those claims.




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.




If we
grow through acquisitions and fail to successfully integrate acquired companies,
our operations could be disrupted and management could become distracted by
integration issues.




As part
of our business strategy, we plan to grow in part by acquiring other product
lines, technologies or facilities that complement or expand our existing
business.  We may be unable to implement this part of our business strategy
and may not be able to continue making acquisitions to continue our growth.
 There is significant competition for acquisition targets in the small
household appliance industry.  We may not be able to identify suitable
acquisition candidates or negotiate attractive terms.  In addition, we may
have difficulty obtaining the financing necessary to complete transactions that
we pursue.  Future acquisitions may involve the issuance of our equity
securities as payment, in part or in full, for the businesses or assets
acquired.  Any future issuances of equity securities would dilute your
ownership interests.  In addition, future acquisitions might not increase,
and may even decrease, our earnings or earnings per share and the benefits
derived by us from an acquisition might not outweigh or might not exceed the
dilutive effect of the acquisition.  We also may incur additional debt or
suffer adverse tax and accounting consequences in connection with any future
acquisitions, although we currently do not have any identified future
acquisition targets.




Where we
are successful in completing acquisitions, we might experience difficulties in
integrating the acquired business or assets. Acquisitions might result in
unanticipated liabilities, unforeseen expenses and distraction of management’s
time and attention. We cannot assure you that our acquisition strategy will be
successful.




Expansion
of our business may put added pressure on our management and operational
infrastructure impeding our ability to meet any increased demand for our
products and possibly hurting our operating results.




Our
business plan is to significantly grow our operations to meet anticipated growth
in demand for existing products, and by the introduction of new product
offerings.  Our planned growth includes the construction of new production
lines to be put into operation over the next twelve months.  Growth in our
business may place a significant strain on our personnel, management, financial
systems and other resources.  The evolution of our business also presents
numerous risks and challenges, including:




·
            our
      ability to successfully and rapidly expand sales to potential customers in
      response to potentially increasing
demand;


·
            the
      costs associated with such growth, which are difficult to quantify, but
      could be significant; and


·
            rapid
      technological change.




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To
accommodate any such growth and compete effectively, we may need to obtain
additional funding to improve information systems, procedures and controls and
expand, train, motivate and manage our employees, and such funding may not be
available in sufficient quantities, if at all.  If we are not able to
manage these activities and implement these strategies successfully to expand to
meet any increased demand, our operating results could suffer.




We
depend heavily on key personnel, and turnover of key employees and senior
management could harm our business.




Our
future business and results of operations depend in significant part upon the
continued contributions of our key technical and senior management personnel,
particularly Jianming Xu, our Chief Financial Officer and Fuying Wang, our Chief
Executive Officer.  They also depend in significant part upon our ability
to attract and retain additional qualified management, technical, marketing and
sales and support personnel for our operations.  If we lose a key employee
or if a key employee fails to perform in his or her current position, or if we
are not able to attract and retain skilled employees as needed, our business
could suffer.  Significant turnover in our senior management could
significantly deplete our institutional knowledge held by our existing senior
management team.  We do not maintain key man life insurance on any of these
individuals.  We depend on the skills and abilities of these key employees
in managing the manufacturing, technical, marketing and sales aspects of our
business, any part of which could be harmed by further turnover.




We may be exposed
to potential risks relating to our internal controls over financial reporting
and our ability to have the operating
effectiveness of our internal controls attested to by our independent
auditors.




As
directed by Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404, the SEC
adopted rules requiring public companies to include a report of management on
the company’s internal controls over financial reporting in their annual reports
on Form 10-K.  We are subject to this requirement commencing with our
fiscal year ending December 31, 2007 and a report of our management is included
under Item 9A of this Annual Report on Form 10-K.  In addition, SOX 404
requires the independent registered public accounting firm auditing a company’s
financial statements to also attest to and report on the operating effectiveness
of such company’s internal controls.  However, this annual report does not
include an attestation report because under current law, we will not be subject
to these requirements until our annual report for the fiscal year ending
December 31, 2009.  We can provide no assurance that we will comply with
all of the requirements imposed thereby.  There can be no assurance that we
will receive a positive attestation from our independent registered public
accountants. In the event we identify significant deficiencies or material
weaknesses in our internal controls that we cannot remediate in a timely manner
or we are unable to receive a positive attestation from our independent
registered public accountants with respect to our internal controls, investors
and others may lose confidence in the reliability of our financial
statements.




Investor
confidence and market price of our shares may be adversely impacted if we are
unable to correct a material weakness in our internal controls over our
financial reporting identified by our independent registered public
accountants.




In
connection with their review of our internal controls over financial reporting
for the fiscal year ended December 31, 2008, our management concluded that there
were several significant deficiencies, that when combined, resulted in a
material weakness in our internal controls over our ability to produce financial
statements free from material misstatements.  This material weakness
resulted from the combination of the following significant deficiencies: (a)
lack of timely identification, research and resolution of accounting issues and
lack of  documentation of consideration of recent accounting
pronouncements; (b) lack of documentation and review of financial information by
our accounting personnel with direct oversight responsibility, and lack of
analysis and reconciliation of certain accounts on a periodic basis, and the
failure of the accounting system to provide information related to expenditures
on a project-by-project basis; (c) absence of documented controls over our
related party transactions; and (d) lack of technical accounting expertise among
senior financial staff regarding US GAAP and the requirements of the PCAOB, and
regarding the preparation of draft financial statements.  Our management
has recommended that we address these deficiencies by (1) restructuring of
our relationships with related parties to address our controls over related
party transactions, (2) hiring additional accounting personnel to assist us
in the timely identification, research and resolution of accounting issues and
with our documentation processes, (3)  hiring additional high-level
accounting personnel with experience in US GAAP to monitor all financial and
accounting affairs throughout the Company and (3) engaging a third-party
accounting firm to assist management in evaluating complex accounting issues on
an as-needed basis.  We believe that these steps will correct the material
weaknesses described above, however, our failure to fully remediate it could
result in an adverse reaction in the financial marketplace, which could
negatively impact the market price of our shares.




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RISKS
RELATED TO DOING BUSINESS IN CHINA




Adverse
changes in political and economic policies of the PRC government could impede
the overall economic growth of China, which could reduce the demand for our
products and damage our business.




We
conduct substantially all of our operations and generate most of our revenue 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
allocation of resources.




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 the level of
automotive investments and expenditures in China, which in turn could lead to a
reduction in demand for our products and consequently have a material adverse
effect on our business and prospects.




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 all but one of our 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.




17
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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 reforms and to 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 sales revenue
effectively.




Most of
our sales revenue and expenses are denominated in RMB. 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, or
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. Since a significant amount of our future
revenue will be denominated in RMB, any existing and future restrictions on
currency exchange may limit our ability to utilize revenue generated in RMB to
fund our business activities outside China that are denominated in foreign
currencies.




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 through
loans from us or other foreign lenders, these loans must be registered with
SAFE, and if we finance the subsidiaries by means of additional 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.




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, the PRC State Administration of Foreign Exchange, or 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.




18
 Table of Contents




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.




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.




19
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Fluctuations
in exchange rates could adversely affect our business and the value of our
securities.




The value
of our common stock will be indirectly affected by the foreign exchange rate
between U.S. dollars 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 without giving effect to any underlying change in
our business or results of operations. Fluctuations in the exchange rate will
also affect the relative value of any dividend we issue that will be exchanged
into U.S. dollars and earnings from, and the value of, any U.S.
dollar-denominated investments we make in the future.




Since
July 2005, the RMB has no longer been 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.




Currently,
some of our raw materials and major equipment are imported.  In the event
that the U.S. dollars appreciate against RMB, our costs will increase.  If
we cannot pass the resulting cost increases on to our customers, our
profitability and operating results will suffer.  In addition, since our
sales to international customers are growing rapidly, we are increasingly
subject to the risk of foreign currency depreciation.




New
corporate income tax law could adversely affect our business and our net
income.




On March
16, 2007, National People's Congress passed a new corporate income tax law,
which will be effective on January 1, 2008.  This new corporate income tax
unifies the corporate income tax rate, cost deductions and tax incentive
policies for both domestic and foreign-invested enterprises in China.
 According to the new corporate income tax law, the applicable corporate
income tax rate of our Chinese subsidiaries will incrementally increase to 25%
over a five-year period.  We are expecting that the rules for
implementation would be enacted by the Chinese government in the coming months.
 After the rules are enacted, we can better assess what the impact of the
new unified tax law would be over this period.  The discontinuation of any
special or preferential tax treatment or other incentives could adversely affect
our business and our net income.




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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 is volatile, and this volatility may continue.
 For instance, between December 15, 2006 and September 30, 2007, the bid
price of our common stock, as reported on the markets on which our securities
have traded, ranged between $0.50 and $4.75. 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 analysts 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 small 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.




Moreover,
securities markets may from time to time experience significant price and volume
fluctuations for reasons unrelated to operating performance of particular
companies.  For example, in late February 2007, the securities markets in
the United States, China and other jurisdictions experienced the largest decline
in share prices since September 2001.  These market fluctuations may
adversely affect the price of our common stock and other interests in our
company at a time when you want to sell your interest in us.




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.




We have
no direct business operations, other than our ownership of our subsidiaries.
 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.




21
 Table of Contents




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.




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. Those manufacturing facilities are located in Guangdong
Province, PRC.




Our
production facilities of Well Profit are located in five leased buildings
totaling 35,012.72 square meters, in Zhongshan Harbor Town Oceanic Industrial
Area, China for RMB350,127 per month, subject to a 5-year lease that will expire
in June 30, 2011.   Oceanic PRC owns the land use right to the
facility. We also rent from Oceanic PRC an additional 6,613.7 square meters of
production space in the Zhongshan Harbor Town Oceanic Industrial Area, for
RMB66,137 per month, subject to a 5-year lease that will expire on May 31,
2012.




We also
lease from Oceanic PRC, 2,140 square meters of facilities for employees to use
as living quarters, for a monthly payment of RMB12,800 per month (or
approximately $1,825). These facilities are offered as an added free benefit to
our employees, many of whom have to travel great distances to come to work each
day.




We rent
administrative offices, located at No. 264-298 Qingshan Road, Nanfeng Center
Suite 1905, Quanwan Xingjie, Hong Kong, from Secretary Service Co. Ltd, at a
monthly rate of HKD4,500 (approximately, $578), pursuant to a verbal agreement.
 In addition, Secretary Service Co. Ltd., receives and forwards our
correspondence




We also
rent 80 square feet of office space for our U.S. administrative offices located
at 1330 6th Ave,
Suite 2013, New York, NY 10019, for a monthly payment of $1,200 per
month.




We
believe that all our properties have been adequately maintained, are generally
in good condition, and are suitable and adequate for our business.




In
October, 2008, we acquired Weihe as one of our subsidiaries. Weihe totally owns
27,076 square meters of land use right. The production facilities are located in
Zhongshan Harbor Town Oceanic Industrial Area.




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 2008 to a vote
of security holders.




22
 Table of Contents




PART
II




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




Market
Information [Please update high low prices]




Our
common stock is quoted under the symbol “HSYT.OB” on the Electronic Bulletin
Board maintained by the National Association of Securities Dealers, Inc., but
had not been traded in the Over-The-Counter market except on a limited and
sporadic basis.  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, 20081st
      Quarter
                1.05
                0.222nd
      Quarter
                0.45
                0.173rd
      Quarter
                0.30
                0.104th
      Quarter
                0.30
                0.06







Year
      Ended December 31, 20071st
      Quarter
                $2.82
                $2.632nd
      Quarter
                $4.18
                $4.123rd
      Quarter
                $6.05
                $3.004th
      Quarter
                $4.06
                $1.05


______________________


(1)   
The above tables set forth the range of high and low closing prices per share of
our common stock as reported by finance.yahoo.com for
the periods indicated.




Holders




On March
31, 2008, there were approximately 448 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.




23
 Table of Contents




Securities
Authorized for Issuance Under Equity Compensation Plans




The
following table includes the information as of the end of the most recently
completed fiscal year for each category of equity compensation plan of the
Company:




Plan
      category
                    Number
      of securities to
                      be
      issued upon exercise
                      of
      outstanding options,
                      warrants
      and rights
                      (a)
                    Weighted-average
                      exercise
      price of
                      outstanding
      options,
                      warrants
      and rights
                      (b)
                    Number
      of securities
                      remaining
      available for
                      future
      issuance under
                      equity
      compensation
                      plans
      (excluding
                      securities
      reflected in
                      column
      (a))
                      (c)Equity
      compensation plans approved by security holders
                    5,000,000
      (1)
                    $0.25
                    0Equity
      compensation plans not approved by security holders
                    0
                    0
                    0Total
                    5,000,000
                    $0.25
                    0







(1)On September 29, 2006, our board of directors
authorized the establishment of the Home System Group 2006 Equity Incentive
Plan, or Plan, whereby we can issue shares of our common stock to certain
employees, consultants and directors.  At that time we reserved 5,000,000
shares of our common stock for issuance under the Plan.  On October 5,
2006, we issued 5,000,000 shares of our common stock under the Plan to eight
consultants, in lieu of $700,000 in fees due and payable to the consultants for
services rendered from January 2, 2006 through September 30, 2006.




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, 2008.




ITEM
6.  SELECTED FINANCIAL DATA




Not
required.




ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS




Overview




Home
System Group is a Nevada holding company whose China-based operating
subsidiaries, OCIL, Well Profit and Weihe, are primarily engaged in the
production of a variety of small household appliances, including stainless steel
gas grills and ovens, gas and electric heaters, residential water pumps, ceiling
and table fans, decorative lamps, LEDs and energy-saving lamps.  Our
products are sold through distributors to retailers in China, America, Europe,
Australia, Africa, and Southeast




24
 Table of Contents




Our
products are primarily manufacturedin Well Profit and
Weihe’s facilities. There are about 1500 employees including over 250 engineers
and administrative staff.




Well
Profit are located on over 304,450 square feet of land in Oceanic Industry Park,
Sha Gang Highway, Gang Kou Town, Zhongshan, Guangdong Province, China.
 Well Profit currently has five (5) assembly lines of stainless steel BBQ
grills with a total annual production capacity of approximately 400,000 units of
BBQ grills, and two (2) skateboard production lines with a total annual
production capacity of approximately  1 million units.




Weihe is
an export oriented manufacturer. The total combined square footage of the
company’s 8 manufacturing plants is approximately 427,000 square feet and the
company shares plants with other manufacturers with a combined square footage of
approximately 323,000 square feet. The company is equipped with inspection
equipment, several outstanding electrostatic spraying production lines,
semi-automatic pipelines and high-speedy punching machines. The total annual
productivity for 2008 was approximately 5 million fans, and over 12 million
units of lamps including decoration lamps, table lamps and LEDs.




Our
current production output in 2008 is approximately 400,000 BBQ grills, 450,000
skateboard, 1,450,000 fans, 4,600,000 lamps and LEDs, 405,000 frying pans, and
77,000 coffee pots.




Our sales
revenue in 2007 was $41,012,614, and net income in 2007 was $61,528.  Our
sales revenue and net income was $51,926,205 and $4,067,665, respectively,
during the year ended December 31, 2008.  In the year ended December 31,
2008. The chart below shows the percentage of revenue generated from our major
products.




Subsidiaries
                        Products
                        %Well
      Profit
                        BBQ
      Grill
                        13.2%Skateboard
                        12.6%Fans
      *
                        2.7%Frying
      Pans
                        7.7%Coffee
      Pots
                        0.4%Weihe
                        Lamp,
      and LEDs
                        20.0%Fans
      **
                        43.3%




Overview of Business Operations in the fiscal year of
2008




During
the fiscal year of 2008, we continued to see an increase in total sales in our
fans, frying Pans and coffee pots. Meanwhile our gross margin increased
from 8.4% in 2007 to 16.2% in 2008, due to a variety of factors including usage
of substitute new materials and decrease in the cost of raw materials in
2008.




We also
focused on developing new business for our Company by acquiring Weihe at the
beginning of the fourth quarter of 2008.  Through additional mergers and
acquisitions, we hope to achieve product diversification and enhance our
research and development capability and manufacturing, production and processing
capacity for our products.  Our long-term goal is to focus on the future
development of our Company, to increase our international market share and
enhance investor confidence.




We expect
our revenue to continue to grow in future periods as a result of expected growth
in the small household appliance industry and our plans to increase the level of
our sales for export.




25
 Table of Contents




Principal
Factors Affecting Our Financial Performance




Growth
of China’s small household appliance manufacturing industry.




China’s
small household appliance industry has been growing at a rapid pace since 2005
and does not have onerous entry barriers.  As a result, we compete with
many small manufacturers and distributors of household products.  We also
compete with established companies, a number of which have substantially greater
facilities, personnel, financial and other resources than we have.  If we
are unable to compete effectively with these manufacturers and distributors in
the areas of product design and innovation, quality, price, product features,
merchandising, promotion and warranty, our results of operations could be
materially adversely affected.




Fluctuations
and increases in raw material costs.




One of
our primary challenges is the unstable domestic market for stainless steel
plates, our main raw material.  We rely on a steady supply of stainless
steel plates to manufacture our products but in recent years the price of metal
materials has increased, which has increased the pressure on our production
costs.  While the expansion of our Company has necessitated the purchase of
larger amounts of raw materials from our suppliers, our purchase volumes have
allowed us to bargain with our suppliers to receive a lower price for the
purchase of such large quantities.  In addition, we are seeking to identify
alternative raw material suppliers to the extent that there are viable
alternatives.  In the long term, we are also seeking to expand our use of
alternative raw materials.  Should fluctuations and increases in the price
of our main raw material become severe, the consequent price movements may have
a direct and substantial negative impact on our gross margin.




Taxation




Well
Profit and Weihe were entitled to a two-year exemption from EIT from January
2007 to the end of December 2008, followed by 50% tax exemption, from January
2009 through December 2011. The income tax rate until December 2011 is 12.5%.
There is no import or export tax involved here, since Well Profit does not do
the import or export directly. Different from Well Profit, Weihe has the license
for import and export. Its input VAT is quite more than its output VAT. Thus no
VAT needs to be paid.




On March
16, 2007, the National People’s Congress of the PRC passed the new EIT Law,
which will take effect as of January 1, 2008.  Under the new EIT Law, an
enterprise established outside of the PRC with “de facto management bodies”
within the PRC is considered a resident enterprise and will normally be subject
to the enterprise income tax at the rate of 25.0% on its global income. The new
EIT Law, however, does not define the term “de facto management bodies.”
 If the PRC tax authorities subsequently determine that we should be
classified as a resident enterprise, then our global income will be subject to
PRC income tax at a tax rate of 25.0%. In addition, under the new EIT Law,
dividends from our PRC subsidiaries to us will be subject to a withholding tax.
 The rate of the withholding tax has not yet been finalized, pending
promulgation of implementing regulations.  Furthermore, the ultimate tax
rate will be determined by treaty between the PRC and the tax residence of the
holder of the PRC subsidiary.  We are actively monitoring the proposed
withholding tax and are evaluating appropriate organizational changes to
minimize the corresponding tax impact. The new EIT Law imposes a unified income
tax rate of 25.0% on all domestic-invested enterprises and FIEs, such as our PRC
operating subsidiaries, unless they qualify under certain limited exceptions,
but the EIT Law permits companies to continue to enjoy their existing
preferential tax treatments until such treatments expire in accordance with
their current terms.  We expect details of the transitional arrangement for
the five-year period from January 1, 2008 to December 31, 2012 applicable to
enterprises approved for establishment prior to March 16, 2007 to be set out in
more detailed implementing rules to be adopted in the future.  Any increase
in our effective tax rate as a result of the above may adversely affect our
operating results.  However, details regarding implementation of this new
law are expected to be provided in the form of one or more implementing
regulations to be promulgated by the PRC government, and the timing of the
issuance of such implementing regulations is currently unclear.




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Private-label
Brands




With the
growing trend towards the concentration of our small electric household
appliance sales among a few retailers, our distributors are increasingly
dependent upon fewer customers whose bargaining strength is growing as a result
of concentration.  Through our distributors a substantial quantity of our
products to mass merchandisers, national department stores, variety store
chains, drug store chains, specialty home retailers and other retail outlets.
 These retailers generally purchase a limited selection of small electric
household appliances.  As a result, we compete for retail shelf space with
our competitors.  In addition, certain of our larger customers are using
their own private label brands on household appliances that compete directly
with some of our products.  As the retailers in the small electric
household appliance industry become more concentrated, competition for sales to
these retailers may increase, which could adversely affect our results of
operations.




Results
of Operations




Year
Ended December 31, 2008 compared to the year ended December 31,
2007




The
following table summarizes the results of our operations during the fiscal years
ended December 31, 2008 and 2007 and provides information regarding the dollar
and percentage increase or (decrease) from the 2007 fiscal year to the 2008
fiscal year.







Item
                        12/31/2008
                        12/31/2007
                        $
      Increase
                        PercentageIncrease(Decrease)
                        (Decrease)Revenues
                        $51,926,205
                        $41,012,614
                        $10,913,591
                        26.61%Cost
      of Sales
                        $43,491,550
                        $37,584,115
                        $5,907,435
                        15.72%General
      and Administrative Expenses
                        $3,679,144
                        $2,324,548
                        $1,354,596
                        58.27%Income
      (Loss) From Operations
                        $4,704,675
                        $229,425
                        $4,475,250
                        1950.64%Net
      Income
                        $4,067,665
                        $61,528
                        $4,006,137
                        6511.08%






Revenues




Net sales
for 2008 totaled $51,926,205 compared to 41,012,614 for 2007, an increase of
$10,913,591, or approximately 26.61%. The increase in 2008 was primarily due to
the acquisition of  Weihe in 2008, as compared to only Well Profit’s
revenue in the 2007 period.  Revenues from Holy HK and Weihe accounted for
76.5% and 23.5% of our revenues during 2008, respectively.




Cost
Of Sales




Cost of
sales for 2007 totaled$43,491,550, or approximately 83.8% of net sales, compared
to $37,584,115, or approximately 91.6% of net sales, for 2007. The 7.8% decrease
in cost of sales as a percentage of net sales was due to the usage of new raw
material as alternative to steel and iron, to build our appliances. Since the
cost of steel and iron has increased significantly, the use of these new
materials which cost less than steel and iron, has been an effective way to
lower our cost of sales.




27
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General
and Administrative Expenses




General
and administrative expenses for 2008 totaled $3,679,144, or approximately 7.09%
of net sales, compared to $2,324,548, or approximately 5.67% of net sales, for
2007. The increase was primarily attributable to the expansion of our new
administrative offices in the New York and the related lease payment and
increased professional fees associated with our expansion.




Income
(Loss) From Operations




Income
from operations in 2008 was $4,704,675 as compared to income from operations of
$229,425 for 2007, an increase of $4,475,250, or approximately 1950.64%. The
increase in 2008 was primarily due to the acquisition of Weihe in 2008, as
compared to only Well Profit’s revenue in the 2007 period.




Net Income




Net
income was $4,067,665 for 2008, compared to a net income of $61,528 for 2007, an
increase of $4,006,137, or 6511.08%. The increase was due to a decrease in our
interest expense and our increase in new sales.




Liquidity
and Capital Resources




As of
December 31, 2008, we had cash and cash equivalents of $1,609,540.  The
following table sets forth a summary of our cash flows for the periods
indicated:




December
      31, 2008
                  December
      31, 2007Net
      cash  provided by / (used in) operating activities
                  $(15,791,852)
                  $8,059,554Net
      cash used in investing activities
                  $(936,978)
                  $(5,224,512)Net
      cash (used in) / provided by financing activities
                  $17,493,064
                  $(2,055,403)Effect
      of exchange rate changes on cash and cash equivalents
                  $24,232
                  $35,423Net
      increase in cash and cash equivalent
                  $788,466
                  $815,062Cash
      and cash equivalents at the beginning of period
                  $821,074
                  $6,012Cash
      and cash equivalents at the end of period
                  $1,609,540
                  $821,074




As of the
year ended December 31, 2008, our unrestricted cash resources were $1,609,540 as
compared to $821,047 as of the year ended December 31, 2007.  We believe
that the company will have sufficient funds to meet all the obligations that are
due in the next year.




Operating
Activities




For the
years ended December 31, 2008 and December 31, 2007, net cash provided by (used
in) operating activities totaled $(15,791,852) and $8,059,554, respectively.
 This change is primarily due to the decrease in our account receivable,
account payable, and inventories during the 2008 period. Accounts payable,
accounts receivable and inventories decreased $2,664,009, $15,084,087 and
$2,178,743 respectively.




Investing
Activities




Our main
uses of cash for investing activities are for capital expenditures.




Net cash
used for investing activities in the fiscal year ended December 31, 2008 was
$(936,978), as compared to $(5,224,512) in the fiscal year ended December 31,
2007.  The decrease of net cash used for investing activities was mainly
because we purchased less equipments compared to the last year.




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Financing
Activities




Net cash
(used in) financing activities in the fiscal year ended December 31, 2008
totaled$17,493,064, as compared to $(2,055,403) provided by financing activities
in the year ended December 31, 2007.  The increase of the cash provided by
financing activities was mainly attributable to the proceeds from note payable
of $9,582,918, $5,094,820 from bank loans and $3,085,833 acquired in
acquisition.




We
believe that our current available working capital, after receiving the
aggregate proceeds of the capital raising activities, should be adequate to
sustain our operations at our current levels through at least the next twelve
months.




Obligations
Under Material Contracts




On May
23, 2007, we entered into a subscription agreement with four investors, pursuant
to which they agreed to buy 10 million shares of our common stock for a purchase
price, in the aggregate, of $40,000,000. Pursuant to the terms of the
subscription agreement, the investors paid approximately 16.25%, or $6,575,000
of the total purchase price, with the remaining subscription receivable payable
pursuant to the terms of a promissory note delivered to us by the investors.
 The notes were payable upon the earlier to occur of: two years from the
date of the note or within five business days of written notification from us
that a registration statement pursuant to the Securities Act has been filed by
us with the SEC, registering the shares of common stock.  On February 7,
2008, we entered into a termination and release agreement with the above
investors, and all parties have agreed to return all consideration paid and
release all claims relating the subscription agreement.  There is currently
a balance of $6,575,000 owed to the investors pursuant to the termination
agreement.




On July
2, 2006, we entered into a lease agreement with Oceanic PRC for a plant
consisting of five buildings totaling 35,012.72 square meters. The monthly rent
for this plant is RMB350,127.2 (approximately $46,070).  The term of this
lease is from July 1, 2006 to June 30, 2011.  We use this plant primarily
for production purposes, and, to a small extent, for administrative needs.
 In addition, on June 6, 2007, we entered into a lease with Oceanic PRC for
a plant consisting of one 6,613.7 square meter building for RMB66,137
(approximately $8,703) per month.  This lease’s term is from June 1, 2007
to May 31, 2012.  This building is exclusively used for
production.




Critical
Accounting Policies




General




Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America. The following policies, we
believe, are our most critical accounting policies, are important to our
financial position and results of operations, and require significant judgment
and estimates on the part of management. Those policies, that in the belief of
management are critical and require the use of judgment in their application,
are disclosed on Form 10KSB for the year ended December 31, 2006.  Since
December 31, 2006, there have been no material changes to our critical
accounting policies.




We have
identified the following policies as critical to our business and the
understanding of its results of operations. The impact of these policies is
discussed throughout Management’s Discussion and Analysis of Financial Condition
and Results of Operations where these policies affect reported and anticipated
financial results. Preparation of this report requires our use of estimates and
assumptions that affect the reported amounts of assets, liabilities, disclosure
of contingent assets and liabilities at the date of the consolidated financial
statements, and the reported revenue and expense amounts for the periods being
reported. On an ongoing basis, we evaluate these estimates, including those
related to the valuation of accounts receivable, and the potential impairment of
long lived assets. We base the estimates on historical experience and on various
other assumptions that are believed to be reasonable, the results of which forms
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.  Actual
results may differ from these estimates.




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 Table of Contents




Revenue
Recognition




In
accordance with Securities and Exchange Commission (“SEC”) Staff Accounting
Bulletin (“SAB”) No. 104,Revenue Recognition , the Company recognizes revenue when
persuasive evidence of a customer or distributor arrangement exists or
acceptance occurs, receipt of goods by customer occurs, the price is fixed or
determinable, and the sales revenues are considered collectible. Subject to
these criteria, the Company generally recognizes revenue at the time product is
shipped to the customer.




The
Company follows Emerging Issues Task Force (“EITF”) No. 99-19,Reporting Revenue as a Principal
versus Net as an Agent.  Under the guidance of this EITF, the
assessment of whether revenue should be reported gross with separate display of
cost of sales to arrive at gross profit should be based on the following
considerations: the Company acts as principal in the transaction, takes title to
the products and has risk and rewards of ownership (such as the risk of loss for
collection, delivery or returns). Based on EITF No. 99-19, the Company
recognizes all revenue on a gross basis.




Off-Balance
Sheet Arrangements




We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on its financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to its
stockholders.




Seasonality




Our
business is seasonal, with the highest proportion of sales being generated in
the third and fourth quarters of each year for the reason that the retail market
is more active during such quarters.  Lower proportions of activity
generally occur in the first and second quarter of each year.  However,
since the production duration of our product, BBQ grills, is six months, the
highest proportion of production for such products is completed in the first and
second quarter of each year.




Inflation




Inflationary
factors, such as increases in the cost of our products 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 high 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 do not increase with these increased costs.




Recent
Accounting Pronoucements




In
September 2006, the Financial Accounting Standards Board (“FASB”)
issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which
is effective for fiscal years beginning after November 15, 2007 with
earlier adoption encouraged. SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. In February 2008, the
FASB issued FASB Staff Position FAS 157-2, Effective Date of FASB Statement No.
157 which delayed the effective date of SFAS 157 for all non-financial assets
and liabilities, except those that are recognized or disclosed at fair value in
the financial statements on a recurring basis, until January 1, 2009. The
Company has not yet determined the impact the implementation of SFAS 157 will
have on the Company’s non-financial assets and liabilities which are not
recognized or disclosed on a recurring basis.  However, the Company
does not anticipate that the full adoption of SFAS 157 will significantly impact
their consolidated financial statements.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement No.
115 (“SFAS 159”), which permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective of SFAS 159 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 SFAS 159 on January 1, 2008, but the
implementation of SFAS 159 did not have a significant impact on the Company's
financial position or results of operations.




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In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (“SFAS 141R”). SFAS 141R establishes 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.
SFAS 141R also establishes disclosure requirements to enable the evaluation
of the nature and financial effects of the business combination. This statement
is effective for the Company beginning January 1, 2009. The Company is
currently evaluating the potential impact of the adoption of SFAS 141R on
its consolidated financial position, results of operations or cash
flows.





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51 (“SFAS 160”). SFAS 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. This statement is
effective for the Company beginning January 1, 2009. The Company is
currently evaluating the potential impact of the adoption of SFAS 160 on
its consolidated financial position, results of operations and cash
flows.





In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchyof Generally Accepted Accounting
Principles(“FAS 162"). This Standard identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles. FAS 162
directs thehierarchy to the
entity, rather than the independent auditors, as the entity is responsible for
selecting accounting principles for financial statements that are presented in
conformity with generally accepted accounting principles. The Standard is
effective 60 days following SEC approval of the Public Company Accounting
Oversight Board amendments to remove the hierarchy of generally accepted
accounting principles from the auditing standards. FAS 162 is not expected to
have an impact on the financial statements.





In April
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the Useful Life of
Intangible Assets, 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 under FASB Statement No. 142, Goodwill and Other Intangible
Assets.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 FSP is not
expected to have a significant impact on the financial statements.





In June
2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities.
This FSP 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 FSP is not expected to have an effect
on the Company's financial reporting.





In May
2008, the FASB issued FASB Staff Position (FSP) APB 14-1, Accounting for Convertible Debt That
May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)("FSP 14-1"). FSP 14-1 will be effective for financial statements issued
for fiscal years beginning after December 15, 2008. The FSP 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. FSP 14-1 is not currently applicable to the Company since
the Company does not have convertible debt.





In
May 2008, the FASB issued SFAS No. 163, Accounting for Financial
Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60
(SFAS 163). This statement clarifies accounting for financial guarantee
insurance contracts by insurance enterprises under FASB Statement No. 60,
Accounting and Reporting by Insurance Enterprises. SFAS 163 is effective for
fiscal years, and interim periods within those years, beginning after
December 15, 2008. Because the Company does not issue financial guarantee
insurance contracts, the Company does not expect the adoption of this standard
to have an effect on our financial position or results of
operations.




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 Table of Contents




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




On
November 14, 2008, our Board of Directors dismissed Yu and Associates CPA
Corporation as our primary auditor and appointed Morgenstern, Svoboda & Baer
CPA’s, P.C. Yu and Associates CPA Corporation audited the Company’s financial
statements for its 2007 fiscal year.  The audit reports of Yu and
Associates CPA Corporation on the Company's financial statements for the 2007
fiscal year did not contain any adverse opinion or disclaimer of opinion, nor
were they qualified or modified as to uncertainty, audit scope or accounting
principle.  During the period from Yu and Associates CPA Corporation’s
appointment as the Company’s primary auditor through the date of this Report,
there have been no disagreements with Yu and Associates CPA Corporation on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Yu and Associates CPA Corporation, would have caused it to make
reference to the subject matter of the disagreements in connection with its
report.




ITEM
9A(T). CONTROLS AND PROCEDURES




Evaluation of Disclosure
Controls and Procedures




We
maintain disclosure controls and procedures (as defined in Rules 13a-15(e) under
the Exchange Act) that are designed to ensure that information that would be
required to be disclosed in Exchange Act reports is recorded, processed,
summarized and reported within the time period specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to our
management, including to the Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.




As
required by Rule 13a-15 under the Exchange Act, under the supervision and with
the participation of our management, including Fuying Wang our President and
Chief Executive Officer and Jianming Xu, our Chief Financial Officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2008.  Based on that evaluation,
Mr. Wang and Xu concluded that because of the material weakness in internal
control over financial reporting described below, our disclosure controls and
procedures were not effective as of December 31, 2008.




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 Fuying Wang, 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:




32
 Table of Contents




(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.




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.




Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008. In making this assessment, management used the framework
set forth in the report entitled Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission, or
COSO. The COSO framework summarizes each of the components of a company’s
internal control system, including (i) the control environment, (ii) risk
assessment, (iii) control activities, (iv) information and communication and (v)
monitoring. Based on that evaluation, Mr. Li and Mr. Cheung concluded that as of
December 31, 2008, and as of the date that the evaluation of the effectiveness
of our disclosure controls and procedures was completed, our disclosure controls
and procedures were not effective to satisfy the objectives for which they were
intended.




In
connection with their review of our internal controls over financial reporting
for the fiscal year ended December 31, 2008, our management concluded that there
were several significant deficiencies, that when combined, resulted in a
material weakness in our internal controls over our ability to produce financial
statements free from material misstatements.  The material weakness
resulted from a combination of the following significant
deficiencies:




·           Lack
of documentation and review of financial information by our accounting personnel
with direct oversight responsibility, and lack of analysis and reconciliation of
certain accounts on a periodic basis, and the failure of the accounting system
to provide information related to expenditures on a project-by-project
basis;


·           Lack
of timely identification, research and resolution of accounting issues and lack
of documentation of consideration of recent accounting
pronouncements;


·           Absence
of documented controls over our related party transactions; and


·           Lack
of 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 the above material weakness, our management concluded that, as of
December 31, 2008, our internal control over financial reporting is not
effective.




Change
in Internal Control over Financial Reporting




In order
to further enhance our internal controls, our management, with the participation
of Messrs. Li and Cheung, has recommended the implementation of the following
changes by the end of fiscal year 2009:




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·           the
restructuring of our relationships with related parties to address our controls
over related party transactions;


·           the
hiring of additional accounting personnel to assist us in the timely
identification, research and resolution of accounting issues and with our
documentation processes;


·           the
hiring of additional high-level accounting personnel with experience in US GAAP
to monitor all financial and accounting affairs throughout the Company;
and


·           the
engagement of a third-party financial consulting firm 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.




We expect
that these steps, when taken, will correct the material weaknesses described
above. We do not believe that the costs of remediation for the above material
weaknesses will have a material effect on our financial position, cash flow, or
results of operations.




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




Changes
in Internal Controls over Financial Reporting.




During
the fiscal year ended December 31, 2008, there were no changes in our internal
control over financial reporting identified in connection with the evaluation
performed during the fiscal year covered by this report that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.




ITEM
9B. OTHERINFORMATION




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.




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, 2008.




Name
                  Age
                  Position/sFuying
      Wang
                  37
                  Chairman
      and Chief Executive OfficerJianming
      Xu
                  34
                  Chief
      Financial Officer and DirectorJiang
      Zhang
                  46
                  DirectorWeiqiu
      Li
                  36
                  DirectorKinwai
      Cheung
                  46
                  DirectorJing
      Liu
                  36
                  Secretary





Fuying Wang was appointed as
our Chief Executive Officer on September 24, 2008. He has served as Vice
President of Chuang Fu Management Group since April 2007. Mr. Wang also served
as Executive Director of Baoli Industrial Investment Group from March 2006 to
March 2007.  Prior to that, he was an Investment Bank Managing
Director - Financial Holding Vice President at Tomorrow Holding
Group.  From August 2001 to August 2002, he was Head of Investment
Bank at Zhongguancun Securities; from January 1999 to August 2001 he was
Overseas listing coordinator with Yaxun Group and from July 1997 to December
1998 he was Senior Manager of Nanfang Securities investment banking
headquarters.




34
 Table of Contents




Jianming Xu was appointed as
our Chief Financial Officer on September 24, 2008. Before that,  Mr.
Xu has served as Special Assistant to the CEO of the Company. 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 members) from October 1998 to September
2002.  From September 1996 to September1998, he was 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 July1991 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.




Jiang Zhang is serving as the
independent director of the Company. Mr. Zhang holds a Master of Science in
Mechanical Engineering. His professional background includes 18 years of
experience in R&D, company communications, domestic and foreign companies’
marketing, and project management. Since 2007, Jiang has been an Executive
Director for Guangdong Chigo Air Conditioner Co. Ltd (“CHIGO”). Prior to joining
CHIGO, he spent 4 years as President of Asian-Pacific and held other executive
roles in Consortium Companies Inc,  a U.S. Based company. As the key
person in CONSORTIUM, Mr. Zhang was in charge of marketing the China branded
home appliances including Haier, a well-known China brand, in South Africa. From
1998 to 2003, he was the Sales Director of east China Region for Guangdong
Hualing Air-Conditioner Co. Ltd, which is the subsidiary of Guangdong Midea
Group.  Between 1990 and 1998, Mr. Zhang worked as the Project Manager
in R&D Dept. of Changsha Zhongyi Electrical Co. Ltd.





Weiqiu Li was appointed Chief
Executive Officer of the Company on August 17, 2006 and resigned as our CEO on
September 24, 2008. He is now serving the company as the director of the board.
Concurrently, he served 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.





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 of the board.
Since June 2004, Mr. Cheung has also served as the Administrative Manager of our
largest subsidiary, 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.




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.




Family
Relationships




There are
no family relationships among our directors or officers.




35
 Table of Contents




Involvement
in Certain Legal Proceedings




To the
best of our knowledge, none of our directors or executive officers has been
convicted in a criminal proceeding, excluding traffic violations or similar
misdemeanors, or has been a party to any judicial or administrative proceeding
during the past five years that resulted in a judgment, decree or final order
enjoining the person from future violations of, or prohibiting activities
subject to, federal or state securities laws (except where not subsequently
dismissed without sanction or settlement), or from engaging in any type of
business practice, or a finding of any violation of federal or state securities
laws.  To the best of our knowledge, no petition under the Federal
bankruptcy laws or any state insolvency law was filed by or against, or a
receiver, fiscal agent or similar officer was appointed by a court for the
business or property of any of our directors or officers, or any partnership in
which any of our directors or officers was a general partner at or within two
years before the time of such filing, or any corporation or business association
of which any of our directors or officers was an executive officer at or within
two years before the time of such filing   Except as set forth in our
discussion below in “Transaction with Related Persons, Promoters and Certain
Control Persons; Corporate Governance,” none of our directors, director nominees
or executive officers has been involved in any transactions with us or any of
our directors, executive officers, affiliates or associates which are required
to be disclosed pursuant to the rules and regulations of the SEC.




Promoters
and Certain Control Persons




We did
not have any promoters at any time during the past five fiscal
years.




Section
16(A) Beneficial Ownership Reporting Compliance




Under
U.S. securities laws, directors, certain executive officers and persons holding
more than 10% of our common stock must report their initial ownership of the
common stock, and any changes in that ownership, to the SEC.  The SEC has
designated specific due dates for these reports.  Based solely on our
review of copies of such reports filed with the SEC and written representations
of our directors and executive offers, we believe that all persons subject to
reporting filed the required reports on time in 2007 and 2008 other than Mr.
Fuying Wang, our CEO and director, Mr. Jianming Xu our CFO and director and Mr.
Jiang Zhang, our director, who did not timely file Foms 3s when appointed as
officers and directors.




Code
of Ethics




On July
31, 2007, our board of directors adopted a code of ethics pursuant to Section
406 of the Sarbanes-Oxley Act of 2002 that applies to all of our directors,
officers and employees, including our principal executive officer, principal
financial officer, and principal accounting officer.  The code of ethics is
designed to deter wrongdoing and to promote:




·
            Honest
      and ethical conduct, including the ethical handling of actual or apparent
      conflicts of interest between personal and professional
      relationships;


·
            Full,
      fair, accurate, timely and understandable disclosure in reports and
      documents that we file with, or submit to, the SEC, and in other public
      communications that we made;


·
            Compliance
      with applicable government laws, rules and
  regulations;


·
            The
      prompt internal reporting of violations of the code to the appropriate
      person or persons; and


·
            Accountability
      for adherence to the code.




The code
requires the highest standard of ethical conduct and fair dealing of its senior
financial officers, or SFO, defined as the Chief Executive Officer and Chief
Financial Officer. While this policy is intended to only cover the actions of
the SFO, in accordance with Sarbanes-Oxley, we expect our other officers,
directors and employees will also review our code and abide by its provisions.
We believe that our reputation is a valuable asset and must continually be
guarded by all associated with us so as to cam the trust, confidence and respect
of our suppliers, customers and stockholders.




Our SFO
are committed to conducting business in accordance with the highest ethical
standards. The SFO must comply with all applicable laws, rules and regulations.
Furthermore, SFO must not commit an illegal or unethical act, or instruct or
authorize others to do so.




36
 Table of Contents




Governance
and Nominating Committee




Our
governance and nominating committee was established on July 31, 2007. Our
governance and nominating committee consists of three members:, Mr. Jiang Zhang
and Mr. Weiqiu Li , each of whom is “independent” as that term is defined under
the Nasdaq Marketplace Rules.  Mr. Zhang serves as the chairman to our
governance and nominating committee. The governance and nominating committee
assists the board of directors in identifying individuals qualified to become
our directors and in determining the composition of the board of directors and
its committees.




Our
governance and nominating committee is responsible for, among other
things:




·
            identifying
      and recommending to the board of directors nominees for election or
      re-election to the board of directors, or for appointment to fill any
      vacancy;


·
            reviewing
      annually with the board of directors the current composition of the board
      of directors in light of the characteristics of independence, age, skills,
      experience and availability of service to us;
  and


·
            identifying
      and recommending to the board of directors the directors to serve as
      members of the committees.


·
            We
      recognize that transactions between us and any of our directors or
      executive officers can present potential or actual conflicts of interest
      and create the appearance that our decisions are based on considerations
      other than the best interests of our
  stockholders.




Audit Committee




Our Board
of Directors established the audit committee on July 31, 2007. Our audit
committee consists of three members: Mr. Jiang Zhang and Mr. Weiqiu Li, each of
whom is “independent” as that term is defined under the Nasdaq Marketplace
Rules.  Our audit committee oversees our accounting and financial reporting
processes and the audits of the financial statements of our company.  Mr.
Jiang Zhang serves as our audit committee financial expert as that term is
defined by the applicable SEC rules as well as the audit committee
chair.




Our audit
committee is responsible for, among other things:




·
            selecting
      our independent auditors and pre-approving all auditing and non-auditing
      services permitted to be performed by our independent
      auditors;


·
            reviewing
      with our independent auditors any audit problems or difficulties and
      management’s response;


·
            reviewing
      and approving all proposed related-party transactions, as defined in Item
      404 of Regulation S-K under the Securities Act of 1933, as
      amended;


·
            discussing
      the annual audited financial statements with management and our
      independent auditors;


·
            reviewing
      major issues as to the adequacy of our internal controls and any special
      audit steps adopted in light of significant internal control
      deficiencies;


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


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


·
            meeting
      separately and periodically with management and our internal and
      independent auditors; and


·
            reporting
      regularly to the full board of
directors.




Shareholder
Communications




The
Company has a process for shareholders who wish to communicate with the Board of
Directors.  Shareholders who wish to communicate with the Board may write
to it at the Company’s address given above.  These communications will be
reviewed by one or more employees of the Company designated by the Board, who
will determine whether they should be presented to the Board.  The purpose
of this screening is to allow the Board to avoid having to consider irrelevant
or inappropriate communications.




37
 Table of Contents




ITEM
11. EXECUTIVE COMPENSATION




Summary Compensation TableThe
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, Jianming Xu and Jing Liu, our current Chief Executive Officer,
Chief Financial Officer and Secretary, respectively, on December 31, 2008.
 No executive officers received total annual salary and bonus compensation
in excess of $100,000.




Name
      &
                                    Position
                                  Year
                                  
                                  Salary
                                  
                                  
                                  Bonus
                                  
                                  
                                  Stock
                                    Awards
                                  
                                  
                                  Option
                                    Awards
                                  
                                  
                                  Non-Equity
                                    Incentive
      Plan
                                    Compensation
                                  
                                  
                                  Nonqualified
                                    Deferred
                                    Compensation
                                    Earnings
      ($)
                                  
                                  
                                  All
      Other
                                    Compensation
                                  
                                  
                                  TotalWeiqiu
      Li,
                                    CEO(1)
                                  2008
                                  
                                  
                                  30,000
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  30,0002007
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  02006
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0Kinwai
      Cheung,
                                    CFO(2)
                                  2008
                                  
                                  
                                  30,000
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  30,0002007
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0Fuying
      Wang,
                                    CEO(3)
                                  2008
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0Jianming
      Xu,
                                    CFO(4)
                                  2008
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0Jing
      Liu
                                  2008
                                  
                                  
                                  8,800
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  8,8002007
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0


____________________


(1) Weiqiu
Li resigned as our Chief Executive Officer on September 24, 2008.


(2) Kinwai
Cheung resigned as our Chief Financial Officer on September 24,
2008.


(3) Fuying
Wang was appointed as our Chief Executive Officer on September 24,
2008.


(4)
Jianming Xu was appointed as our Chief Financial Officer on September 24,
2008.




Outstanding
Equity Awards at Fiscal Year End




Other
than as set forth below, none of our executive officers received unexercised
options, stock that has not vested or equity incentive plan awards that remained
outstanding as of the end of the fiscal year ended December 31,
2008.




38
 Table of Contents




Name
                              Option
      Awards
                              Stock
      AwardsNumber
      of
                                Securities
                                Underlying
                                Unexercised
                                Options
      (#)
                                Exercisable
                              Number
      of
                                Securities
                                Underlying
                                Unexercised
                                Options
                                Unexercisable
                                
                                (1)
                              Equity
                                Incentive
                                Plan
                                Awards:
                                Number
      of
                                Securities
                                Underlying
                                Unexercised
                                Unearned
                                Options
      (#)
                              Option
                                Exercise
                                Price
                                ($)
                              Option
                                Expiration
                                Date
                              Number
                                of
                                Shares
                                or
      Units
                                of
                                Stock
                                That
                                Have
                                Not
                                Vested
                                (#)
                              Market
                                Value
                                of
                                Shares
                                or
      Units
                                of
                                Stock
                                That
                                Have
                                Not
                                Vested
                                ($)
                              Equity
                                Incentive
                                Plan
                                Awards:
                                Number
                                of
                                Unearned
                                Shares,
                                Units
      or
                                Other
                                Rights
                                That
                                Have
                                Not
                                Vested
                                (#)
                              Equity
                                Incentive
                                Plan
                                Awards:
                                Market
                                or
      Payout
                                Value
      of
                                Unearned
                                Shares,
                                Units
      or
                                Other
                                Rights
                                That
                                Have
                                Not
                                Vested
                                ($)Richard
      Randall
                              0
                              100,000
                              0
                              6.00
                              7/7/2009
                              --
                              --
                              --
                              --




Narrative to outstanding
equity awards table




On August
7, 2007, we granted Mr. Randall, our audit committee chair, 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 is contingent on continued participation as a
member of our Board of Directors.




Additional
Narrative Disclosure




As
required by applicable PRC law, we have entered into employment agreements with
most of our officers, managers and employees.  Currently, Ms. Liu is the
only officer who is compensated for her services to our Company.  She earns
RMB3,500 per month (approximately $440) for her services as our Secretary.
 No other benefits have been granted by the Company to officers at this
time.




Our
subsidiaries, Well Profit and Weihe, has employment agreements with the
following executive officers.




Our
executive officers are not entitled to severance payments upon the termination
of their employment agreements. They are subject to the customary
non-competition and confidentiality covenants.




39
 Table of Contents




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
                          Fees
                            Earned
                            or
      Paid
                            in
      Cash
                            
                            
                            ($)
                          Stock
                            Awards
                            
                            ($)
                          Option
                            Awards
                            
                            ($)
                          Non-Equity
                            Incentive
                            Plan
                            Compensation
                            ($)
                          Change
      in
                            Pension
      Value
                            and
                            Nonqualified
                            Deferred
                            Compensation
                            Earnings
      ($)
                          All
      Other
                            Compensation
                            ($)
                          Total
                            ($)Weiqiu
      Li
                          --
                          --
                          --
                          --
                          --
                          --
                          --Kinwai
      Cheung
                          --
                          --
                          --
                          --
                          --
                          --
                          --Richard
      Randall***
                          12,500
                          --
                          102,026
                          --
                          --
                          --
                          114,526Guanghan
      Chen*
                          2,647
                          --
                          --
                          --
                          --
                          --
                          2,647Binhai
      Chen*
                          2,647
                          --
                          --
                          --
                          --
                          --
                          2,647Jianzhao
      Zheng*
                          2,647
                          --
                          --
                          --
                          --
                          --
                          2,647Fuying
      Wang**
                          --
                          --
                          --
                          --
                          --
                          --
                          --Jianming
      Xu**
                          --
                          --
                          --
                          --
                          --
                          --
                          --Jiang
      Zhang**
                          --
                          --
                          --
                          --
                          --
                          --
                          --


*Resigned
from our Board of Directors on September 24, 2008.


**Elected
to our Board of Directors on November 14, 2008.


***Removed
from our Board of Directors on June 2, 2008.





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. Randall is entitled to an annual fee of $30,000, and
Messrs. Binhai Chen, Guanghan Chen and Jianzhao Zheng are each entitled to a
one-time fee of RMB20,000 (approximately USD$2,647) 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.




On August
7, 2007, we also granted Mr. Randall, our audit committee chair, 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 is contingent on continued participation
as a member of our Board of Directors.  We use the Black-Scholes option
pricing model to calculate the grant-date fair value of an award, with the
following assumptions: no dividend yield, expected volatility of 161%, and a
risk-free interest rate of 4.2%.  In determining volatility of the our
options, we use the average volatility of our stock.  Based on the
Black-Scholes option pricing model, the entire option was valued at $204,054.
One-third of the value of the issuance was expensed immediately as it vested,
with the remaining amount expensed monthly over the vesting period. In
accordance with SFAS No. 123R, we have recorded stock-based compensation expense
during the year ended December 31, 2007 of $102,026, in connection with the
issuance of this option.




40
 Table of Contents




The
compensation paid to Mr. Wang and Mr. Xu, our named executive officers who also
serve on our board of directors, is reported in the Summary Compensation Table
above. They do not receive any additional compensation for their service as
directors.




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, 2008.




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 __, 2009 (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, No. 5A, Zuanshi Ge, Fuqiang Yi Tian Ming Yuan, Fu
Tian Qu, Shenzhen City, People’s Republic of China, 518000.




Title of  Class
                                              
                                              
                                              Amount &
                                                Nature of
                                                BeneficialName & Address of Beneficial
      Owner
                                              Office, If Any
                                              Ownership(1)
                                              Percent ofClass(2)Directors
      and OfficersCommon
      Stock
                                              Wei
      Qiu Li
                                              Director
                                              12,080,000
                                              19.33%No.
      264-298 Qingshan RoadNanfeng Center,
      Suite 1905Quanwan
      Xingjie, Hong KongCommon
      Stock
                                              Kinwai
      Cheung
                                              Director
                                              10,260,000
                                              16.42%No.
      264-298 Qingshan RoadNanfeng Center,
      Suite 1905Quanwan
      Xingjie, Hong KongCommon
      Stock
                                              All
      officers and directors as a group (2 persons named above)
                                              
                                              22,340,000
                                              35.76%




41
 Table of Contents




5%
      SecurityholdersCommon
      Stock
                                        Total
      Shine Group Ltd
                                        
                                        5,117,277
                                        8.19%NO.5A,
      Zuanshi Ge, Fu Tian QuFuqiang
      Yi Tian Ming YuanShenzhen
      City, ChinaCommon
      Stock
                                        Arjuno
      Investments Ltd(3)
                                        
                                        3,349,794
                                        5.36%Jian
      Guo Rd. Zhong HuanWrld
      Trd Ctr Bldg D 26FlBeijing,
      ChinaTotal
      Shares Owned by Persons Named AboveCommon
      Stock
                                        
                                        
                                        
                                        13.55%




1Beneficial
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.




2A total
of 62,447,949 shares of our common stock as of March 28, 2008 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.




3 Xiyan Li
has sole voting and investment control over the securities held by Arjuno
Investments Ltd.




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




The
following includes a summary of transactions since the beginning of the last
fiscal year, or any currently proposed transaction, in which we were or are to
be a participant and the amount involved exceeded or exceeds $120,000, and in
which any related person had or will have a direct or indirect material interest
(other than compensation described under “Executive Compensation”).  We
believe the terms obtained or consideration that we paid or received, as
applicable, in connection with the transactions described below were comparable
to terms available or the amounts that would be paid or received, as applicable,
in arm’s-length transactions.




·           As
of December 31, 2007, our indirect subsidiary, Well Profit, owes us $2.34
millionfor funds
that we advanced as prepaid expenses on its behalf to suppliers: Zhongshan Food
Import and Export Company, Zhongshan Guang Yu Import and Export Company,
Zhongshan Yu Liang Trading Co., and ZhongShan Tai Quan Import and Export
Company.  We subsequently collected the full amount of these advances in
July 2007. In September 2006, the Company terminated its business relation with
these suppliers and these amounts were due to be returned to the Company.
  However, the Company instructed that these suppliers repay such
amount to Well Profit. There is no stated interest or repayment terms associated
with this transferred amount.




·           On
October 26, 2006, Holy (HK) Limited 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.




42
 Table of Contents




·           Our
production facilities are located in five leased buildings totaling 35,012.72
square meters, in Zhongshan Harbor Town Oceanic Industrial Area, China for
RMB350,127 per month, subject to a 5-year lease that will expire in June 30,
2011.   Oceanic PRC owns the land use right to the facility. We also
rent from Oceanic PRC an additional 6,613.7 square meters of production space in
the Zhongshan Harbor Town Oceanic Industrial Area, for RMB66,137 per month,
subject to a 5-year lease that will expire on May 31, 2012.  We also lease
from Oceanic PRC, 2,140 square meters of facilities for employees to use as
living quarters, for a monthly payment of RMB12,800 per month. These facilities
are offered as an added free benefit to our employees, many of whom have to
travel great distances to come to work each day.  Ocean PRC was a company
indirectly owned and controlled by our Chairman and CEO, Weiqiu Li.
 However, Mr. Li transferred his ownership interests in this entity to Ye
Shu Zhen in March 2007 and filed the transfer with the Hong Kong registrar of
companies in March 2008.


·           Our
PRC operating subsidiary, Well Profit, sells 69% of its products to Hengbao, one
of its exclusive distributors, through an unwritten commercial arrangement
between Well Profit and Hengbao.  Hengbao is indirectly owned by Oceanic
PRC, which until March 2007, was indirectly owned and controlled by Mr. Weiqiu
Li, our director and Chief Executive Officer.  For the fiscal year ended
December 31, 2007, our sales to Hengbao accounted for $27,196,100, or 100% of
our receivables, 9,134,350 of which remained outstanding as at December 31,
2007, with no stated interest rate or repayment terms.


·           On
July 5, 2007, we entered into the Weihe Agreement for the acquisition of 100% of
the then outstanding shares of Weihe, a company that was owned and controlled by
Weiqiu Li, our Chief Executive Officer. In consideration for the shares of
Weihe, we agreed to pay an aggregate price of $45,000,000, to be paid in a
combination of 4,500,000 shares of our common stock, valued at $4.00 per share
and $27,000,000 in cash.  The obligation to pay the cash portion of the
purchase price was evidenced by non-interest-bearing, unsecured promissory notes
delivered by us to each of the Weihe shareholders at the closing. Pursuant to
the promissory notes, 40% of the cash portion of the purchase price was due and
payable on July 5, 2008, the first anniversary of the closing, and the remaining
60% was due and payable on July 5, 2009, the second anniversary of the closing.
  However, on February 7, 2008, we entered into a termination and
release agreement with Weihe and its shareholders, pursuant to which we agreed
to terminate the Weihe Agreement and release each other from our respective
obligations thereunder because performance of our respective obligations under
the agreements could not be completed without unreasonable expense or delay.
 No termination penalties were incurred by us in connection with the
termination of the Weihe Agreement.


·           On
September 23, 2008, we entered into a Share Purchase Agreement with Asia Forever
Investment Limited (“Asia Forever”) and Asia Forever’s shareholders (the
“Shareholders”), pursuant to which the Company agreed to acquire 100% of the
ownership interests in Asia Forever from the Shareholders for approximately
$39.5 million.  On October 1, 2008, the Company completed its
acquisition of Asia Forever. Weihe is 100% owned by Asian Forever.




Except as
set forth in our discussion above, none of our directors, director nominees or
executive officers has been involved in any transactions with us or any of our
directors, executive officers, affiliates or associates which are required to be
disclosed pursuant to the rules and regulations of the SEC.




Policies
and Procedures for Review, Approval or Ratification of Transactions with Related
Persons




As we
increase the size of our board of directors to include independent directors, we
expect to prepare and adopt a written related-person transactions policy that
sets forth our policies and procedures regarding the identification, review,
consideration and approval or ratification of “related-persons transactions.”
 For purposes of our policy only, a “related-person transaction” will be a
transaction, arrangement or relationship (or any series of similar transactions,
arrangements or relationships) in which we and any “related person” are
participants involving an amount that exceeds $50,000.  Transactions
involving compensation for services provided to us as an employee, director,
consultant or similar capacity by a related person will not be covered by this
policy.  A related person will be any executive officer, director or a
holder of more than five percent of our common stock, including any of their
immediate family members and any entity owned or controlled by such
persons.




43
 Table of Contents




We
anticipate that, where a transaction has been identified as a related-person
transaction, the policy will require management to present information regarding
the proposed related-person transaction to our audit committee (or, where
approval by our audit committee would be inappropriate, to another independent
body of our board of directors) for consideration and approval or ratification.
 Management’s presentation will be expected to include a description of,
among other things, the material facts, the direct and indirect interests of the
related persons, the benefits of the transaction to us and whether any
alternative transactions are available.




To
identify related-person transactions in advance, we are expected to rely on
information supplied by our executive officers, directors and certain
significant stockholders.  In considering related-person transactions, our
board of directors will take into account the relevant available facts and
circumstances including, but not limited to:




·           the
risks, costs and benefits to us;


·           the
impact on a director’s independence in the event the related person is a
director, immediate family member of a director or an entity with which a
director is affiliated;


·           the
terms of the transaction;


·           the
availability of other sources for comparable services or products;
and


·           the
terms available to or from, as the case may be, unrelated third parties or to or
from our employees generally.




We also
expect that the policy will require any interested director to excuse himself or
herself from deliberations and approval of the transaction in which the
interested director is involved.




Promoters
and Certain Control Persons




We did
not have any promoters at any time during the past five fiscal years.
 Except as set forth in our discussion above, none of our directors,
director nominees or executive officers has been involved in any transactions
with us or any of our directors, executive officers, affiliates or associates
which are required to be disclosed pursuant to the rules and regulations of the
SEC.




Director
Independence




Our Board
of Directors is currently composed of  5 members, Weiqiu Li, Kinwai
Cheung, Fuying Wang, Jianming Xu and Jiang Zhang.  Mr.  Jiang
Zhang serve on our board of directors as an “independent director” as defined by
Rule 4200(a)(15) of the Marketplace Rules of The Nasdaq Stock Market, Inc., or
the “Nasdaq Marketplace Rules.”  The board of directors has determined that
Mr. Jiang Zhang possesses the accounting or related financial management
experience that qualifies him as financially sophisticated within the meaning of
Rule 4350(d)(2)(A) of the Nasdaq Marketplace Rules and that he is an “audit
committee financial expert” as defined by the rules and regulations of the
SEC.




ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES




Fees
Paid to Independent Public Accountants




The
following table presents fees for professional audit services rendered by Yu
& Associates CPA Corporation, for the audit of the Company's annual
financial statements for the year ended December 31, 2007 and fees billed for
other services rendered by them during this period and fees for professional
audit services rendered by Morgenstern, Svoboda & Baer CPA’s, P.C. for the
audit of the Company’s annual financial statements for the year ended December
31, 2008 and fees billed for other services rendered by them during this
period.




Fiscal
      2008
                
                Fiscal
      2007Audit
      fees (1)
                
                $
                120,000
                
                $
                130,000Audit
      Related Fees
                
                
                10,000
                
                
                --Tax
      Fees
                
                
                --
                
                
                --All
      Other Fees
                
                
                --
                
                
                --TOTAL
                
                $
                130,000
                
                $
                130,000




(1) Audit
Fees consist of fees billed for professional services rendered for the audit of
the Company's consolidated annual financial statements and review of the interim
consolidated financial statements included in quarterly reports and services
that are normally provided by our auditors in connection with statutory and
regulatory filings or engagements.




44
 Table of Contents




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.  In accordance
with its policies and procedures, our audit committee pre-approved the audit
service performed by Morgenstern, Svoboda, & Baer CPA's, P.C. for our
consolidated financial statements, as of and for the year ended December 31,
2008.  As our audit committee was formed on July 31, 2007, there was no
such pre-approval by our audit committee before Morison Cogen performed its
audit of fiscal 2006 or before Pollard-Kelley Auditing Services, Inc. performed
its audit of fiscal year 2005.






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)




45
 Table of Contents




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)




46
 Table of Contents




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*
                                                List
      of Subsidiaries23*
                                                Consent
      of Independent Accountants31.1*
                                                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*
                                                Certification of the Chief
      Executive 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.








47
 Table of Contents




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:
      April 15, 2009By:
                /s/
      Fuying WangFuying
      WangChief
      Executive Officer,
Director




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 April 15, 2008.




SIGNATURE
            
            TITLE/s/
      Fuying Wang
            
            Chief
      Executive Officer, President and DirectorFuying
      Wang
            
            (Principal
      Executive Officer)/s/
      Jianming Xu
            
            Chief
      Financial Officer and Treasurer and DirectorJianming
      Xu
              
              /s/
      Jiang Zhang
            
            (Principal
      Financial Officer)DirectorJiang
      Zhang
              
              /s/
      Weiqiu LiDirectorWeiqiu
      Li
              
              /s/
      Kinwai CheungDirectorKinwai
      Cheung









48





HOME
SYSTEM GROUP AND SUBSIDIARIES
 
 CONSOLIDATED
FINANCIAL STATEMENTS
 
 FOR THE
YEAR ENDED
 
 DECEMBER
31, 2008 AND 2007
 
 
 
 
  C O N TE
N T S
 
 
 
 
 PAGEREPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRMS
                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-7-27
 
 
 
 Table of Contents
  REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
   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-1
 Table of Contents
  Yu and
      Associates CPA Corporation(member of GC Alliance
      Group)Certified
      Public Accountants, Management ConsultantsDirector,
      Consultant:
                  Manager:
                  Member:
                  Registered:K.K.Yu
      MBA., CPA.
                  Aswin
      Indradjaja
                  American
      Institute of CPAs
                  Public
      Company AccountingFrank
      T. Murphy CPA.
                  Debbie
      Wang MBA.
                  California
      Society of CPAs
                  Oversight
      BoardAva
      Yim CPA.
                  Center
      For Audit Quality
   REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and
 Stockholders
of Home System Group
 
 We have
audited the accompanying balance sheet of Home System Group and subsidiaries as
of December 31, 2007, and the related statements of income, stockholders’ 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.  The financial statements of Holly (KH) Limited, the
accounting acquirer of Home System Group, for the period ended December 31,
2006, as explained in Note 1 to the accompanying consolidated financial
statements were audited by other auditors whose report dated March 5, 2007
expressed an unqualified opinion on those statements.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.  The company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting.  Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company’s internal control
over financial reporting.  Accordingly, we express no such opinion.
 An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe that
our audits provide a reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Home System Group and subsidiaries
as of December 31, 2007, 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.
 
 
 (Signed)
Yu and Associates CPA Corporation
 
 
 
 Arcadia,
California
 February
26, 2008
  F-2
 Table
of Contents
 CONSOLIDATED
BALANCE SHEETS
 AS OF
DECEMBER 31, 2008 AND 2007
 (Expressed
in US dollars except for number of shares)
  December
      31,2008
                      
                      
                      2007ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                      
                      $
                      1,609,540
                      
                      
                      $
                      821,074Restricted
      cash
                      
                      
                      1,617,000
                      
                      
                      
                      -Accounts
      receivable - trade
                      
                      
                      21,117,962
                      
                      
                      
                      10,706,256Accounts
      receivable – related party
                      
                      
                      10,619,911
                      
                      
                      
                      -Other
      receivables
                      
                      
                      9,512,666
                      
                      
                      
                      1,056,946Inventories
                      
                      
                      15,613,175
                      
                      
                      
                      5,267,728Trade
      deposits
                      
                      
                      -
                      
                      
                      
                      434,734Other
      tax refundable
                      
                      
                      1,076,646
                      
                      
                      
                      75,550Deferred
      finance costs - acquisition
                      
                      
                      1,249,917
                      
                      
                      
                      -TOTAL
      CURRENT ASSETS
                      
                      
                      62,416,817
                      
                      
                      
                      18,362,288Deferred
      finance costs - acquisition
                      
                      
                      255,230
                      
                      
                      
                      -Acquisition
      deposits
                      
                      
                      733,500
                      
                      
                      
                      7,540,500Land
      use rights - net
                      
                      
                      1,291,852
                      
                      
                      
                      -Property,
      plant and equipment - net
                      
                      
                      9,518,826
                      
                      
                      
                      5,986,847Intangible
      assets
                      
                      
                      2,090,947
                      
                      
                      
                      -Goodwill
                      
                      
                      25,025,292
                      
                      
                      
                      -TOTAL
      ASSETS
                      
                      $
                      101,332,464
                      
                      
                      $
                      31,889,635LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable - trade
                      
                      $
                      21,166,318
                      
                      
                      $
                      15,497,372Other
      payable and accrued expenses
                      
                      
                      6,096,820
                      
                      
                      
                      1,411,351Bank
      loan
                      
                      
                      11,324,848
                      
                      
                      
                      -Bills
      payable
                      
                      
                      9,598,621
                      
                      
                      
                      -Promissory
      notes payable - current portion
                      
                      
                      21,536,763
                      
                      
                      
                      -Income
      taxes payable
                      
                      
                      722,033
                      
                      
                      
                      -Other
      taxes payable
                      
                      
                      424,968
                      
                      
                      
                      802,054Due
      to stockholder - current portion
                      
                      
                      1,574,573
                      
                      
                      
                      304,366TOTAL
      CURRENT LIABILITIES
                      
                      
                      72,444,944
                      
                      
                      
                      18,015,143NON-CURRENT
      LIABILITIESDue
      to stockholder
                      
                      
                      600,000
                      
                      
                      
                      600,000Promissory
      notes payable
                      
                      
                      16,443,421
                      
                      
                      
                      6,575,000TOTAL
      LIABILITIES
                      
                      $
                      89,488,365
                      
                      
                      $
                      25,190,143STOCKHOLDERS'
      EQUITYCOMMON
      STOCK - $0.001 par value; 200,000,000 sharesauthorized,
      62,477,949 shares issued and outstanding atDecember
      31, 2008 and 2007, respectively
                      
                      $
                      62,478
                      
                      
                      $
                      62,478ADDITIONAL
      PAID-IN CAPITAL
                      
                      
                      6,581,717
                      
                      
                      
                      6,615,726NOTE
      RECEIVABLE ON STOCK ISSUANCE
                      
                      
                      (900,000
                      )
                      
                      
                      (900,000
                      )STATUTORY
      RESERVES
                      
                      
                      29,616
                      
                      
                      
                      29,616RETAINED
      EARNINGS
                      
                      
                      4,217,826
                      
                      
                      
                      150,161CUMULATIVE
      TRANSLATION ADJUSTMENT
                      
                      
                      1,852,462
                      
                      
                      
                      741,511TOTAL
      STOCKHOLDERS' EQUITY
                      
                      
                      11,844,099
                      
                      
                      
                      6,699,492TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                      
                      $
                      101,332,464
                      
                      
                      $
                      31,889,635
 
 See
accompanying notes to consolidated financial statements
  F-3
 Table of Contents
  HOME
SYSTEM GROUP AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF INCOME
 AND
COMPREHENSIVE INCOME
 FOR THE
YEAR ENDED DECEMBER 31, 2008 AND 2007
 (Expressed
in US dollars except for number of shares)
 
 2008
                    
                    
                    2007NET
      SALES
                    
                    $
                    51,926,205
                    
                    
                    $
                    41,012,614Cost
      of sales
                    
                    
                    43,491,550
                    
                    
                    
                    37,584,115GROSS
      PROFIT
                    
                    
                    8,434,655
                    
                    
                    
                    3,428,499OPERATING
      EXPENSESProvision
      for stock option costs written back
                    
                    
                    (34,009
                    )
                    
                    
                    -Stock
      based compensation
                    
                    
                    -
                    
                    
                    
                    874,526Amortization
      of intangible assets
                    
                    
                    84,845
                    
                    
                    
                    -General
      selling and administrative expenses
                    
                    
                    3,679,144
                    
                    
                    
                    2,324,5483,729,980
                    
                    
                    
                    3,199,074INCOME
      FROM OPERATIONS
                    
                    
                    4,704,675
                    
                    
                    
                    229,425OTHER
      (EXPENSE) INCOMEOther
      income
                    
                    
                    72,228
                    
                    
                    
                    43,593Interest
      expenses
                    
                    
                    (115,859
                    )
                    
                    
                    (212,219
                    )Interest
      income
                    
                    
                    128,551
                    
                    
                    
                    2,141Other
      expenses
                    
                    
                    (1,174
                    )
                    
                    
                    -83,746
                    
                    
                    
                    (166,485
                    )INCOME
      BEFORE INCOME TAXES
                    
                    
                    4,788,421
                    
                    
                    
                    62,940INCOME
      TAXES
                    
                    
                    (720,756
                    )
                    
                    
                    (1,412
                    )NET
      INCOME
                    
                    $
                    4,067,665
                    
                    
                    $
                    61,528OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation adjustment
                    
                    
                    1,103,451
                    
                    
                    
                    642,148COMPREHENSIVE
      INCOME
                    
                    $
                    5,171,116
                    
                    
                    $
                    703,676BASIC
      AND DILUTED EARNINGS PER SHARE
                    
                    $
                    0.065
                    
                    
                    $
                    0.001BASIC
      AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
                    
                    
                    62,477,949
                    
                    
                    
                    60,749,219
 
 
 See accompanying notes to consolidated financial
statements
  F-4
 Table of Contents
  HOME
SYSTEM GROUP AND SUBSIDIARIES
 CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
 FOR THE
YEAR ENDED DECEMBER 31, 2008 AND 2007
 (Expressed
in US dollars except for number of shares)
 
 NoteNumber
      of
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        Additional
                                                        
                                                        
                                                        Receivable
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        CumulativeShares
      of
                                                        
                                                        
                                                        Common
                                                        
                                                        
                                                        Paid-in
                                                        
                                                        
                                                        On
      Stock
                                                        
                                                        
                                                        Statutory
                                                        
                                                        
                                                        Retained
                                                        
                                                        
                                                        TranslationCommon
      Stock
                                                        
                                                        
                                                        Stock
                                                        
                                                        
                                                        Capital
                                                        
                                                        
                                                        Issuance
                                                        
                                                        
                                                        Reserves
                                                        
                                                        
                                                        Earnings
                                                        
                                                        
                                                        Adjustment
                                                        
                                                        
                                                        TotalBALANCE
      AT DECEMBER 31, 2006
                                                        
                                                        
                                                        42,500,000
                                                        
                                                        
                                                        
                                                        42,500
                                                        
                                                        
                                                        
                                                        3,709,025
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        118,249
                                                        
                                                        
                                                        
                                                        99,363
                                                        
                                                        
                                                        
                                                        3,969,137Effects
      of reverse merger
                                                        
                                                        
                                                        19,797,949
                                                        
                                                        
                                                        
                                                        19,798
                                                        
                                                        
                                                        
                                                        2,032,355
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        2,052,153Notes
      receivable on acquisition merger
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (900,000
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (900,000
                                                        )Issuance
      of common stock for prepaid expenses
                                                        
                                                        
                                                        150,000
                                                        
                                                        
                                                        
                                                        150
                                                        
                                                        
                                                        
                                                        622,350
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        622,500Issuance
      of common stock for employees
                                                        
                                                        
                                                        30,000
                                                        
                                                        
                                                        
                                                        30
                                                        
                                                        
                                                        
                                                        149,970
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        150,000Issuance
      of stock options
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        102,026
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        102,026Appropriation
      to reserves
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        29,616
                                                        
                                                        
                                                        
                                                        (29,616
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Cumulative
      translation adjustment
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        642,148
                                                        
                                                        
                                                        
                                                        642,148Net
      income for the year
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        61,528
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        61,528BALANCE
      AT DECEMBER 31, 2007
                                                        
                                                        
                                                        62,477,949
                                                        
                                                        
                                                        $
                                                        62,478
                                                        
                                                        
                                                        $
                                                        6,615,726
                                                        
                                                        
                                                        $
                                                        (900,000
                                                        )
                                                        
                                                        $
                                                        29,616
                                                        
                                                        
                                                        $
                                                        150,161
                                                        
                                                        
                                                        $
                                                        741,511
                                                        
                                                        
                                                        $
                                                        6,699,492Provision
      for stock option costs written back
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (34,009
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (34,009
                                                        )Cumulative
      translation adjustment
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1,103,451
                                                        
                                                        
                                                        
                                                        1,103,451Net
      income for the year
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        4,067,665
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        4,067,665BALANCE
      AT DECEMBER 31, 2008
                                                        
                                                        
                                                        62,477,949
                                                        
                                                        
                                                        $
                                                        62,478
                                                        
                                                        
                                                        $
                                                        6,581,717
                                                        
                                                        
                                                        $
                                                        (900,000
                                                        )
                                                        
                                                        $
                                                        29,616
                                                        
                                                        
                                                        $
                                                        4,217,826
                                                        
                                                        
                                                        $
                                                        1,844,962
                                                        
                                                        
                                                        $
                                                        11,836,599
  See
accompanying notes to consolidated financial statements
  F-5
 Table of Contents
  HOME
SYSTEM GROUP AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
YEAR ENDED DECEMBER 31, 2008 AND 2007
 (Expressed
in US dollars)
 Year
      Ended
                                        December
      31,2008
                                      
                                      
                                      2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                                      
                                      $
                                      4,067,665
                                      
                                      
                                      $
                                      61,528Adjustments
      to reconcile net incometo net cash provided
      by (used in) operating activitiesDepreciation
                                      
                                      
                                      617,940
                                      
                                      
                                      
                                      313,854Amortization
      of land use right
                                      
                                      
                                      7,426
                                      
                                      
                                      
                                      -Amortization
      of intangible assets
                                      
                                      
                                      84,845Provision
      for stock option costs written back
                                      
                                      
                                      (34,009
                                      )
                                      
                                      
                                      874,526Change
      in assets and liabilities:(Increase)
      decrease in assetsAccounts
      receivable – trade
                                      
                                      
                                      (15,084,087
                                      )
                                      
                                      
                                      (3,330,670
                                      )Other
      receivables
                                      
                                      
                                      (4,961,559
                                      )
                                      
                                      
                                      (713,807
                                      )Inventories
                                      
                                      
                                      2,178,743
                                      
                                      
                                      
                                      (2,662,696
                                      )Trade
      deposits
                                      
                                      
                                      434,734
                                      
                                      
                                      
                                      2,224,290Other
      taxes refundable
                                      
                                      
                                      (1,074,885
                                      )
                                      
                                      
                                      -Increase
      (decrease) in liabilitiesAccounts
      payable
                                      
                                      
                                      (2,664,009
                                      )
                                      
                                      
                                      9,766,686Other
      payables and accrued expenses
                                      
                                      
                                      (746,154
                                      )
                                      
                                      
                                      880,315Income
      taxes payable
                                      
                                      
                                      1,703,235
                                      
                                      
                                      
                                      -Other
      taxes payable
                                      
                                      
                                      (321,737
                                      )
                                      
                                      
                                      645,528Net
      cash (used in) provided by operating activities
                                      
                                      
                                      (15,791,852
                                      )
                                      
                                      
                                      8,059,554CASH
      FLOWS FROM INVESTING ACTIVITIESPayment
      for acquisition of subsidiary
                                      
                                      
                                      (732,300
                                      )
                                      
                                      
                                      (2,944,020
                                      )Purchase
      of equipments
                                      
                                      
                                      (204,678
                                      )
                                      
                                      
                                      (2,280,492
                                      )Net
      cash used in investing activities
                                      
                                      
                                      (936,978
                                      )
                                      
                                      
                                      (5,224,512
                                      )CASH
      FLOWS FROM FINANCING ACTIVITIESCash
      acquired in acquisition
                                      
                                      
                                      3,085,833
                                      
                                      
                                      
                                      -Acquisition
      deposit
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (7,540,500
                                      )Proceeds
      of bank loans
                                      
                                      
                                      5,094,820
                                      
                                      
                                      
                                      -Repayment
      of bank loans
                                      
                                      
                                      (225,869
                                      )
                                      
                                      
                                      (1,745,000
                                      )Proceeds
      from note payable
                                      
                                      
                                      9,582,918
                                      
                                      
                                      
                                      6,575,000Deposits
      to restricted cash
                                      
                                      
                                      (1,614,355
                                      )
                                      
                                      
                                      -Repayment
      to related party
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (249,266
                                      )Advance
      from stockholder
                                      
                                      
                                      1,569,717
                                      
                                      
                                      
                                      904,363Net
      cash provided by financing activities
                                      
                                      
                                      17,493,064
                                      
                                      
                                      
                                      (2,055,403
                                      )EXCHANGE
      RATE EFFECT ON CASH
                                      
                                      
                                      24,232
                                      
                                      
                                      
                                      35,423NET
      INCREASE  IN CASH
                                      
                                      
                                      788,466
                                      
                                      
                                      
                                      815,062CASH
      - BEGINNING OF YEAR
                                      
                                      
                                      821,074
                                      
                                      
                                      
                                      6,012CASH
      - END OF YEAR
                                      
                                      $
                                      1,609,540
                                      
                                      
                                      $
                                      821,074SUPPLEMENTAL
      DISCLOSURE OF CASH FLOWINFORMATIONCash
      paid during the period for:Interest
                                      
                                      $
                                      115,859
                                      
                                      
                                      $
                                      147,764Income
      taxes
                                      
                                      $
                                      226,984
                                      
                                      
                                      $
                                      72,574NONCASH
      INVESTING AND FINANCING ACTIVITIES:Issuance
      of common stock for prepaid expenses
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      622,500Issuance
      of common stock for employees' compensation
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      150,000Issuance
      of stock options
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      102,026Cost
      of investment paid by issuance of promissory note
                                      
                                      $
                                      (37,968,536
                                      )
                                      
                                      $
                                      -Issuance
      of promissory note for settlement of cost of investment
                                      
                                      $
                                      39,473,683
                                      
                                      
                                      $
                                      -Deferred
      finance cost for acquisition of the subsidiaries
                                      
                                      $
                                      (1,505,147
                                      )
                                      
                                      $
                                      -
  See
accompanying notes to consolidated financial statements
  F-6
 Table of Contents
  HOME
SYSTEM GROUP AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 1 –
ORGANISATION AND NATURE OF BUSINESS
 
 Home
System Group, Inc. (“HSGI”) was incorporated with limited liability in The
British Virgin Islands on February 28, 2003.  HSGI, with a minimum
capitalization of $2, was inactive until June 30, 2006 when HSGI acquired all
the issued and 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 trading gas grills, home
electronic appliances and bin racks. Since the ownership of HSGI and Oceanic
were the same, the merger was accounted for as a transaction between entities
under common control, whereby HSGI recognized the assets and liabilities
transferred at their carrying amounts.
 
 On August
4, 2006, Supreme Realty Investments, Inc. (“Supreme”), a public shell company,
acquired HSGI. Under the terms of the merger agreement, the stockholders of HSGI
received 8,000,000 (post reverse stock split) shares of common stock of Supreme
for 100% of HSGI’s outstanding common stock.  Following the merger,
the Company changed its name to Home System Group (“HSG”).  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 will
be 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 are considered to be the
accounting acquirer, HSGI.  Shares and per share amounts stated have
been adjusted to reflect the merger.
 
 Holy (HK)
Limited 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 Peoples Republic of
China (“PRC”) on April 5, 2006 for the purpose of manufacturing gas grills, home
electronic appliances and bin racks.
 
 Holy,
with a minimum capitalization of $1,285, 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
the 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, Home System Group (“HSG”) acquired Holy (HK) Limited and its
wholly-owned subsidiary Well Profit (collectively, “Holy”).  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 HSG 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.
 F-7
 Table of Contents
 HOME
SYSTEM GROUP AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1 –
ORGANISATION AND NATURE OF BUSINESS (Continued)
  On June
26, 2007, the Company entered into a share exchange agreement with Zhongshan
Weihe Electrical Appliances Co. Ltd. ("Weihe") and Weihe's shareholders,
pursuant to which the Company agreed to acquire 100% equity interests in Weihe
for an aggregate consideration of approximately $45,000,000, consisting of
4,500,000 newly issued shares of HSG's common stock, (stock price valued at
$4.66 per share – average share price 5 trading days in which there were
transactions prior to the acquisition) and $27,000,000 in cash payable as
follows: $10,800,000 due on the first anniversary of the closing of the
transaction, and $16,200,000 due on the second anniversary of closing of the
transaction.
  On April
20, 2007, the Company entered into a Share Exchange Agreement (the "Agreement")
pursuant to which Well Profit acquired 100% of Zhongshan Juxian Gas Oven Co.
Ltd. ("Juxian") in a stock and cash transaction valued at approximately
$14,000,000. Under the Agreement, in exchange of surrendering their shares in
Juxian, the stockholders of Juxian would receive both stock consideration,
(stock price at  $4.59 per share – average share price 5 trading days in
which there were transactions prior to the acquisition) and cash consideration
from HSG. The stock consideration would consist of 1,000,000 newly issued shares
of the HSG common stock. The cash consideration would consist of $10,000,000 in
cash payable as follows: $5,000,000 due on the first anniversary of the closing
of the transaction, which was July 2, 2007 and $5,000,000 due on the second
anniversary of closing of the transaction.
 
 However,
as the delivery of the Company's stock, which is traded on the OTCBB, has not
been recognized as share exchange consideration by the relevant PRC government
authority for the purposes of approval of the ownership transfer of Weihe and
Juxian, on February 7, 2008, the Company cancelled the acquisition of Weihe and
Juxian and both share exchange agreements.
 
 On
October 1, 2008, the Company issued promissory notes to the former Shareholders
of Asia Forever Investment Limited (“Asia Forever”) as payment of the purchase
price of approximately $39 million for the Company’s acquisition of Asia
Forever. The notes have a maturity of 2 years and will bear no interest.
Principal will be repaid as follows: 25% payable on or before December 31, 2008,
the remaining principal amount to be repaid in 3 semi-annual installments with
the final installment due on or before the maturity date. Asia Forever
Investment Limited (the “Company”) was incorporated with limited liability on
April 1, 2008 in the Hong Kong Special Administrative Region (“HK") and it was
an investment holding company which is 100% holding of Zhongshan Weihe
Electrical Appliances Co. Ltd.
 
 On
September 1, 2008, Asia Forever completed its acquisition of 100% of Zhongshan
Weihe Electrical Appliances Co. Ltd. ("Weihe") in cash transaction amounting
$728,396 (RMB5,000,000). Weihe was incorporated with limited liability on August
3, 1998 in the People’s Republic of China (“PRC"). The Company manufactures
ceiling fans and residential lighting for the international consumer market
through various distributors.
 
 
 NOTE 2 –
BASIS OF PREPARATION AND CONSOLIDATION
 
 The
accompanying financial statements of the Company have been prepared in
accordance with generally accepted accounting principles 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.
 F-8
 Table of Contents
 HOME
SYSTEM GROUP AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 3 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basic and Diluted Earnings
(Loss) Per Share
 
 The
Company reports basic earnings per share in accordance with SFAS No. 128,
“Earnings Per Share”. Basic earnings per share is computed using the weighted
average number of shares outstanding during the periods
presented.  The weighted average number of shares of the Company
represents the common stock outstanding during the reporting
periods.
 
 Diluted
earning per share is based on the assumption that all dilutive options were
converted or exercised. Dilution is computed by applying the treasury stock
method. Under this method, options are assumed to be exercised at the time of
issuance, and as if funds obtained thereby were used to purchase common stock at
the average market price during the year.
 
 Basic and
diluted earnings per share are the same as of December 31, 2008 and 2007 because
all options are anti-dilutive.
 
 Comprehensive
Income
 
 The
Company follows the Statement of Financial Accounting Standard (“SFAS”) No. 130,
“Reporting Comprehensive Income.” Comprehensive income is a more inclusive
financial reporting methodology that includes disclosure of certain financial
information that historically has not been recognized in the calculation of net
income.
 
 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.
 
 Inventory
 
 Inventoryis stated at the lower of
cost or market value.  The Company evaluates the net realizable
value of its inventories on a regular basis and records a provision for loss to
reduce the computed weighted-average cost if it exceeds the net realizable
value.  Net realizable value is the estimated selling price in the
ordinary course of business less the estimated costs of completion and the
estimated costs necessary to consummate the sale.  Raw materials are
determined by the
weighted average method.  Work-in-progress and finished goods
inventories consist of raw materials, direct labor and overhead associated with
the manufacturing process.
 
 Trade accounts
receivables
 
 Trade
accounts receivable are stated at cost, net of allowance for doubtful
accounts.  The Company maintains reserves for potential credit losses on
accounts receivable. 
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.  There were $0 and$0 in allowances for
doubtful accounts as of December 31, 2008 and 2007.
 
 Revenue
Recognition
 
 The Company’s revenue
recognition policies are in compliance with Staff Accounting Bulletin No. 104,
“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 delivered to andacceptedby its customers,
the price is fixed or determinable as stated on the sales contract, and
collectibility 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 and bill and hold arrangements.
 F-9
 Table of Contents
  HOME
SYSTEM GROUP AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 3 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 Property, plant and
equipment
 
 Property,
plant and equipment are 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 as
follows:
 
 Plant
      and machinery
                  5  to
      12 yearsBuildings
                  20
      yearsFurniture,
      fixtures and equipment
                  5
      to 10 yearsMotor
      vehicle
                  8
      to 10 years
 
 Long-Lived
Assets
 
 Long-lived
assets, other than goodwill, are reviewed for impairment 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.
 
 Deferred Finance
Costs
  Deferred
finance costs are being amortized over the term of the non-interest bearing
promissory notes payable issued regarding the business acquisitions, using the
effective interest method.
  Income
taxes
 
 The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
for 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 difference between the financial statement and tax basis of assets and
liabilities using presently enacted tax rates 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.  Any tax paid by subsidiaries during the year is
recorded.  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.
 
 A
valuation allowance is recognized if it is more likely than not that some
portion, or all, of a deferred tax asset will not be realized.
 
 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.
 F-10
 Table of Contents
  HOME
SYSTEM GROUP AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 3 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 Foreign Currency
Translation
 
 The
consolidated financial statements of the Company are presented in United States
Dollars (“US$”). Transactions in foreign currencies during the year are
translated into US$ at the exchange rates prevailing at the transaction
dates.  Monetary assets and liabilities denominated in foreign
currencies at the balance sheet date are translated into US$ at the exchange
rates prevailing at that date.  All transaction differences are
recorded in the income statement.
 
 The
Company’s subsidiaries in the PRC have their local currency, Renminbi (“RMB”),
as their functional currency.  On consolidation, the financial
statements of the Company’s subsidiaries in PRC are translated from RMB into US$
in accordance with SFAS No. 52, "Foreign Currency
Translation".  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.
 
 RMB is
not a fully convertible currency.  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, which are determined largely by supply and
demand.  Translation of amounts from RMB into US$ has been made at the
following exchange rates for the respective years:
 
 December
      31, 2008Balance
      sheet
                      
                      
                      
                      USD0.1467  to
      RMB1.00Statement
      of income and comprehensive income
                      
                      
                      
                      USD0.1442  to
      RMB1.00December
      31, 2007Balance
      sheet
                      
                      
                      
                      USD
      0.1371 to RMB1.00Statement
      of income and comprehensive income
                      
                      
                      
                      USD
      0.1317 to
RMB1.00
   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.  The exchange rate of the US$ against the RMB was adjusted
from approximately RMB 8.28 per US$ to approximately RMB 8.11 per US$ on July
21, 2005.  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.
 
 Control By Principal
Stockholders
 
 The
directors, executive officers and their affiliates or related parties, if they
voted their shares uniformly, could have the ability to control the approval of
most corporate actions, including increasing the authorized capital stock of the
Company and the dissolution, merger or sale of the Company's
assets.
 
 Goodwill
 
 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
will conduct our annual impairment test as of December 31 of each year, and will
determine if there is any impairment in 2008. There were no events or
circumstances through the filing date of this report that would require an
impairment charge at December 31, 2008.
 F-11
 Table of Contents
  HOME
SYSTEM GROUP AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 3 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 Use Of
Estimates
 
 The
preparation of the financial statements, in conformity with accounting
principles generally accepted in the United States of America, 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. Actual results could differ from those
estimates.
 
 Significant
Estimates
 
 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. The
more significant areas requiring the use of management estimates related to
valuation of intangible assets acquired in business acquisitions, accrued
liabilities and the useful lives for amortization and depreciation.
 
 Recently Issued Accounting
Pronouncements
 
 In
September 2006, the Financial Accounting Standards Board (“FASB”)
issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which
is effective for fiscal years beginning after November 15, 2007 with
earlier adoption encouraged. SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. In February 2008, the
FASB issued FASB Staff Position FAS 157-2, Effective Date of FASB Statement No.
157 which delayed the effective date of SFAS 157 for all non-financial assets
and liabilities, except those that are recognized or disclosed at fair value in
the financial statements on a recurring basis, until January 1, 2009. The
Company has not yet determined the impact the implementation of SFAS 157 will
have on the Company’s non-financial assets and liabilities which are not
recognized or disclosed on a recurring basis.  However, the Company
does not anticipate that the full adoption of SFAS 157 will significantly impact
their consolidated financial statements.
 
 In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement No.
115 (“SFAS 159”), which permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective of SFAS 159 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 SFAS 159 on January 1, 2008, but the
implementation of SFAS 159 did not have a significant impact on the Company's
financial position or results of operations.
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (“SFAS 141R”). SFAS 141R establishes 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.
SFAS 141R also establishes disclosure requirements to enable the evaluation
of the nature and financial effects of the business combination. This statement
is effective for the Company beginning January 1, 2009. The Company is
currently evaluating the potential impact of the adoption of SFAS 141R on
its consolidated financial position, results of operations or cash
flows.
 
 In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51 (“SFAS 160”). SFAS 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. This statement is
effective for the Company beginning January 1, 2009. The Company is
currently evaluating the potential impact of the adoption of SFAS 160 on
its consolidated financial position, results of operations and cash
flows.
 F-12
 Table of Contents
 HOME
SYSTEM GROUP AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 3 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchyof Generally Accepted Accounting
Principles(“FAS 162"). This Standard identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles. FAS 162
directs thehierarchy to the
entity, rather than the independent auditors, as the entity is responsible for
selecting accounting principles for financial statements that are presented in
conformity with generally accepted accounting principles. The Standard is
effective 60 days following SEC approval of the Public Company Accounting
Oversight Board amendments to remove the hierarchy of generally accepted
accounting principles from the auditing standards. FAS 162 is not expected to
have an impact on the financial statements.
 
 In April
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the Useful Life of
Intangible Assets, 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 under FASB Statement No. 142, Goodwill and Other Intangible
Assets.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 FSP is not
expected to have a significant impact on the financial statements.
 
 In June
2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities.
This FSP 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 FSP is not expected to have an effect
on the Company's financial reporting.
 
 In May
2008, the FASB issued FASB Staff Position (FSP) APB 14-1, Accounting for Convertible Debt That
May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)("FSP 14-1"). FSP 14-1 will be effective for financial statements issued
for fiscal years beginning after December 15, 2008. The FSP 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. FSP 14-1 is not currently applicable to the Company since
the Company does not have convertible debt.
 
 In
May 2008, the FASB issued SFAS No. 163, Accounting for Financial
Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60
(SFAS 163). This statement clarifies accounting for financial guarantee
insurance contracts by insurance enterprises under FASB Statement No. 60,
Accounting and Reporting by Insurance Enterprises. SFAS 163 is effective for
fiscal years, and interim periods within those years, beginning after
December 15, 2008. Because the Company does not issue
financial guarantee insurance contracts, the Company does
not expect the adoption of this standard to have an effect on our financial
position or results of operations.
 
 
 NOTE 4 –
BUSINESS ACQUISITIONS
 
 ASIA FOREVER INVESTMENT
LIMITED (“Asia Forever”)
 
 On
October 1, 2008, the Company issued promissory notes to the former Shareholders
of Asia Forever Investment Limited (“Asia Forever”) as payment of the purchase
price for the Company’s acquisition of Asia Forever. The notes have a maturity
of 2 years and will bear no interest. Principal will be repaid as follows: 25%
payable on or before December 31, 2008, the remaining principal amount to be
repaid in 3 semi-annual installments with the final installment due on or before
the maturity date. Asia Forever Investment Limited (the “Company”) was
incorporated with limited liability on April 1, 2008 in the Hong Kong Special
Administrative Region (“HK") and it was an investment holding company which is
100% holding of Zhongshan Weihe Electrical Appliances Co. Ltd.
 F-13
 Table of Contents
 HOME
SYSTEM GROUP AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 4 –
BUSINESS ACQUISITIONS (Continued)
 
 The
estimated initial fair value of the non-interest bearing promissory note payable
is based on the discounted effective borrowing rate of the Company, discount
rate of 5.31%. The Company paid $8,068,500 (RMB55 million) of the total cash
consideration of $39,473,684 (RMB270 million) at the closing date, leaving a
balance due on the promissory note after the closing of $31,405,184. The net
present value of this note payable at October 1, 2008 was $38,755,325 and
deferred finance costs of $5,227,679 was recorded and amortized using the
effective interest rate method. The amortization of the deferred finance costs
will start from January 1, 2009.
 
 The
Company adopted SFAS No. 141R, Business Combinations, which requires the use of
the purchase method of accounting for any business combinations initiated after
June 30, 2002. The results of Asia Forever and the estimated fair market values
of the assets and liabilities have been included in our consolidated financial
statements from the date of acquisition. The purchase price for Asia Forever was
allocated to the assets acquired and liabilities assumed of Asia Forever. All
assets and liabilities assumed, based on their fair values.
  In
valuing the intangible assets, management has done a valuation as of September
30, 2008. The  total amount of goodwill, customer relationship and
brand name valuation combined at the date of this acquisition is $27,201,084 of
which $25,025,292, $2,030,000 and $145,792 are apportioned to goodwill, customer
relationship and brand name respectively. The life of the customer relationship
and brand name are 6.25 and 10 years, and the straight line amortization of this
customer list and brand name for the year ended December 31, 2008 from the date
of acquisition is $84,845.
  Trade
      receivables
                    
                    $
                    5,339,719Other
      receivables and prepayments
                    
                    
                    3,222,413Inventories
                    
                    
                    12,183,829Tax
      refundable
                    
                    
                    981,309Property,
      plant and equipment, net
                    
                    
                    3,524,094Land
      use right, net
                    
                    
                    1,295,747Intangible
      assets-customer relationship
                    
                    
                    2,030,000Intangible
      assets-brand name
                    
                    
                    145,792Goodwill
                    
                    
                    25,025,292Trade
      payables
                    
                    
                    (7,150,126
                    )Other
      payables and accrued expenses
                    
                    
                    (5,285,028
                    )Bank
      loans
                    
                    
                    (6,430,338
                    )Net
      assets acquired – net of $3,085,833 cash acquired from Asia
      Forever
                    
                    $
                    34,882,703
 
 
 The
following unaudited pro forma information assumes the Transaction occurred on
the beginning of the year or the period presented respectively. These unaudited
pro forma results have been prepared for informational purposes only and do not
purport to represent what the results of operations would have been had the
Transaction occurred as of the date indicated, nor of future results of
operations. The unaudited pro forma results for the year ended December 31, 2008
and 2007 are as follows:
 
 
 Year
      ended December 312008
                    
                    
                    2007Net
      sales
                    
                    $
                    86,643,202
                    
                    
                    $
                    51,202,856Net
      income
                    
                    $
                    6,591,302
                    
                    
                    $
                    6,198,355Earnings
      per share (basic and diluted)
                    
                    $
                    0.105
                    
                    
                    $
                    0.102Weighted
      average number of shares (basic and diluted)
                    
                    
                    62,477,949
                    
                    
                    
                    60,749,219
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 Table of Contents
  HOME
SYSTEM GROUP AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 5 –
RESTRICTED CASH AND BILLS PAYABLE
 
 Restricted
cash consists of the following:
 
 2008
                    
                    
                    2007Bank
      deposit held as collateral for bills payable
                    
                    $
                    1,617,000
                    
                    
                    $
                    -
   At
December 31, 2008 and 2007, restricted cash of $1,617,000 and $0 respectively,
represented the deposits pledged for bills payable.
 
 The
Company is requested by certain of its suppliers to settle amounts owed to such
suppliers 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’s subsidiaries,
Well Profit and Weihe have entered into bank acceptance agreements with
Bank.  Pursuant to the Bank’s acceptance agreements, the Bank provided
its undertakings to guarantee payment of certain of the Company’s notes with an
aggregate amount of approximately $9.6 million. As security for the banks’
undertakings, the Company is required to pay the banks’ charges as well as
deposit with such banks amounts equal to 10% to 50% of the bills’ amount at the
time of such issuance.
 
 
 NOTE 6 –
OTHER RECEIVABLES
 
 Other
receivables consists of the following:
 
 2008
                    
                    
                    2007Other
      receivable, net of allowances for bad debts, $0 and $0
                    
                    $
                    8,799,919
                    
                    
                    $
                    1,056,946Deposit
                    
                    
                    606,249
                    
                    
                    
                    -Advance
      to employees
                    
                    
                    106,498
                    
                    
                    
                    -Total
                    
                    $
                    9,512,666
                    
                    
                    $
                    1,056,946
 
 
 NOTE 7 –
INVENTORIES
 
 Inventories
consist of the following:
   2008
                      
                      
                      2007Raw
      materials
                      
                      $
                      9,243,130
                      
                      
                      $
                      1,695,194Work
      in process
                      
                      
                      5,352,141
                      
                      
                      
                      2,167,281Consumable
                      
                      
                      76,389
                      
                      
                      
                      70,950Finished
      goods
                      
                      
                      941,515
                      
                      
                      
                      1,334,303Total
                      
                      $
                      15,613,175
                      
                      
                      $
                      5,267,728
 
 
 NOTE 8 –
TRADE DEPOSITS
 
 Amount
represents deposits held by suppliers to be used for future
purchases.
 F-15
 Table of Contents
 HOME
SYSTEM GROUP AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 9 –
OTHER TAXES REFUNDABLE
 
 Other
taxes refundable consist of the following:
 
 2008
                    
                    
                    2007Value
      added tax refundable
                    
                    $
                    1,076,646
                    
                    
                    $
                    -
 
 
 NOTE 10 –
ACQUISITION DEPOSIT
 
 The
acquisition deposit of $ 733,500 (RMB5 million) and $7,540,500 (RMB 55 million)
as of December 31, 2008 and 2007 respectively, represented the partial payment
of the cash portion of the consideration for the acquisition of Juxian and Weihe
in September, 2007. However, the delivery of the Company's stock, which is
traded on the OTCBB, has not been recognized as a share exchange consideration
by the relevant PRC government authority for the purposes of approval of the
ownership transfer of Weihe and Juxian. On February 7, 2008, the share exchange
agreement for the acquisition of Weihe and Juxian were cancelled. The Company
has been in negotiation with the shareholders of Weihe for new terms of the
acquisition of Weihe and intends to enter into a new agreement to acquire Weihe.
The deposit paid under the original agreement will be applied to the new
agreement.
 
 On
October 1, 2008, the Company issued promissory notes to the former Shareholders
of Asia Forever Investment Limited (“Asia Forever”) as payment of the purchase
price for the Company’s acquisition of Asia Forever. On the same date, the
acquisition deposits set off with the promissory note. The balance of $733,500
is the deposits paid to the shareholders of Juxian which the shareholders will
refund the deposits to the Company in 2009.
 
 
 NOTE 11 –
LAND USE RIGHT, NET
 
 2008
                    
                    
                    2007Land
      use right
                    
                    $
                    1,299,172
                    
                    
                    $
                    -Less:
      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
the years ended December 31, 2008 and 2007, amortization amounted to $7,426 and
$0 respectively.
 
 The
estimated aggregate amortization expenses for land use right for the five
succeeding years is as follows:
 
 Year2009
                          
                          $
                          25,9832010
                          
                          
                          25,9832011
                          
                          
                          25,9832012
                          
                          
                          25,9832013
                          
                          
                          25,983thereafter
                          
                          $
                          1,161,9371,291,852
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 Table of Contents
  HOME
SYSTEM GROUP AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 12 –
PROPERTY, PLANT AND EQUIPMENT, NET
 
 Property,
plant and equipment consist of the following:
 
 2008
                    
                    
                    2007At
      cost:Plant
      and machinery
                    
                    $
                    8,253,436
                    
                    
                    $
                    6,278,535Buildings
                    
                    
                    2,145,009
                    
                    
                    
                    -Furniture,
      fixtures and equipment
                    
                    
                    142,525
                    
                    
                    
                    87,831Motor
      vehicle
                    
                    
                    12,405
                    
                    
                    
                    -Total
                    
                    
                    10,553,375
                    
                    
                    
                    6,366,366Less:
      accumulated depreciation
                    
                    
                    1,034,549
                    
                    
                    
                    379,519Net
      book value
                    
                    $
                    9,518,826
                    
                    
                    $
                    5,986,847
 
 During
the year ended December 31, 2008, depreciation expenses amounted to $617,940,
among which $ 560,497 and $57,443 were recorded as cost of sales and
administrative expense respectively.
 
 During
the year ended December 31, 2007, depreciation expenses amounted to $313,854,
among which $ 224,841 and $89,013 were recorded as cost of sales and
administrative expense respectively.
 
 
 NOTE 13 –
INTANGIBLE ASSETS, NET
 
 Intangible
assets consist of the following:
 
 2008
                    
                    
                    2007At
      cost:Customer
      relationship
                    
                    $
                    2,030,000
                    
                    
                    $
                    -Brand
      name
                    
                    
                    145,792
                    
                    
                    
                    -Total
                    
                    
                    2,175,792
                    
                    
                    
                    -Less:
      accumulated amortization
                    
                    
                    84,845
                    
                    
                    
                    -Net
      book value
                    
                    $
                    2,090,947
                    
                    
                    $
                    -
 
 During
the year ended December 31, 2008 and 2007, amortization expenses of intangible
assets amounted to $84,845 and $0 respectively.
 
 The
intangible assets are carried at cost and are amortized over the expected useful
lives.  Brand name is expected to be amortized on a systematic basis
over their expected useful lives of 10 years.  Expected amortization
totals $14,579 each year in 2009 through 2013, and approximately $69,252 in the
years thereafter.  Customer relationship is expected to be amortized
on a systematic basis over their expected useful lives of 6.25
years.  Expected amortization totals $324,800 each year in 2009
through 2013, and approximately $324,800 in the years thereafter.
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 Table of Contents
  HOME
SYSTEM GROUP AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 13 –
INTANGIBLE ASSETS, NET (Continued)
 
 The
estimated aggregate amortization expenses for the brand name and customer
relationship for the five succeeding years is as follows:
 
 Year2009
                      
                      $
                      339,3792010
                      
                      
                      339,3792011
                      
                      
                      339,3792012
                      
                      
                      339,3792013
                      
                      
                      339,379thereafter
                      
                      $
                      394,0522,090,947
 
 
 NOTE 14 –
OTHER PAYABLE AND ACCRUED EXPENSES
 
 Other
payable and accrued expenses consist of the following:
 
 2008
                    
                    
                    2007Other
      payable
                    
                    $
                    4,914,138
                    
                    
                    $
                    508,112Accrued
      expenses
                    
                    
                    1,101,494
                    
                    
                    
                    669,160Accrued
      salary
                    
                    
                    81,188
                    
                    
                    
                    234,079Total
                    
                    $
                    6,096,820
                    
                    
                    $
                    1,411,351
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 Table of Contents
 HOME
SYSTEM GROUP AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 15 –
BANK LOANS
 
 The bank
loans are the short term loans that denominated in Chinese Renminbi and are
presented in US dollars as follows:
 
 2008
                      
                      
                      2007Loans
      repayable within one yearLoans
      from CITIC Bank, interest rate at 7.62% per
                        annum,
      due from October 10, 2008 to October 9,
                        2009,
      secured by Li Weiqi, the general manager of
                        Well
      Profit.
                      
                      $
                      2,934,000
                      
                      
                      $
                      -Loans
      from Bank of communication, interest rate at
                        10.34%
      (LIBOR+4.6%), due within 90 days,
                        secured
      by accounts receivable, the related
                        company,
      WaiYi (Hong Kong) Limited.
                      
                      
                      676,710
                      
                      
                      
                      -Loans
      from Guangdong Development Bank
                        (Zhongshan
      Branch), interest rate at 10.34%
                        (LIBOR+4.6%),
      due within 90 days, secured by
                        accounts
      receivable, the related company, WaiYi
                        (Hong
      Kong) Limited.
                      
                      
                      2,312,593
                      
                      
                      
                      -Loans
      from Standard Chartered Bank, interest rate
                        at
      10.74% (LIBRO+5%), due within 90 days,
                        secured
      by accounts receivable, the related
                        company,
      WaiYi (Hong Kong) Limited.
                      
                      
                      267,045
                      
                      
                      
                      -Loans
      from Industrial and Commercial Bank of
                        China,
      interest rate at 6.21%, due from September
                        28,
      2008 to January 22, 2009, secured by Letter of
                        Credit.
                      
                      
                      3,667,500
                      
                      
                      
                      -Loans
      from Industrial and Commercial Bank of
                        China,
      interest rate at 6.21%, due from September
                        28,
      2008 to January 16, 2009, secured by Letter of
                        Credit.
                      
                      
                      1,467,000
                      
                      
                      
                      -Total
                      
                      $
                      11,324,848
                      
                      
                      $
                      -
 F-19
 Table of Contents
 HOME
SYSTEM GROUP AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 16 –
PROMISSORY NOTES PAYABLE AND DEFERRED FINANCING COST
 
 Promissory
notes payable consists of the following:
 
 2008
                  
                  
                  2007Notes
      payable related to the fixed prices standby
                    equity
      distribution agreement
                  
                  $
                  6,575,000
                  
                  
                  $
                  6,575,000Notes
      payable related to acquisition of subsidiary
                  
                  
                  31,405,184
                  
                  
                  
                  -37,980,184
                  
                  
                  
                  6,575,000Less:
      Current portion
                  
                  
                  21,536,763
                  
                  
                  
                  -Notes
      payable recorded under non-current liabilities
                  
                  
                  16,443,421
                  
                  
                  
                  6,575,000
 
 Deferred
financing cost consists of the following:
 
 2008
                  
                  
                  2007Deferred
      financing cost
                  
                  $
                  1,505,147
                  
                  
                  $
                  -Less:
      Current portion
                  
                  
                  1,249,917
                  
                  
                  
                  -Deferred
      financing cost recorded under non-current assets
                  
                  $
                  255,230
                  
                  
                  $
                  -
 
 (i)
              Fixed
      price standby equity distribution
agreement
 
 On May
23, 2007, the Company entered into a Fixed Price Standby Equity Distribution
Agreement with four investors (the “Investors”).  Pursuant to the
Fixed Price Standby Equity Distribution Agreement, the Company may, 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 Fixed Price Standby Equity Distribution
Agreement is subject to certain conditions, including the Company obtaining an
effective registration statement for the resale of the common stock sold under
the Fixed Price Standby Equity Distribution Agreement.  The investors
shall deliver 16.5% of the purchase price payable by wire transfer of
immediately available funds to an account that the Company designated in writing
to each investor prior to the closing date of the transactions. Also, the
investors shall 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 Fixed Price Standby Equity
Distribution Agreement with the investors and the amount of $6,575,000 received
to be refunded has been reflected as “Notes Payable” recorded under non-current
liabilities.
 
 (ii)
Issuance of promissory note during the business acquisition
 
 On
October 1, 2008, the Company issued promissory note to the former Shareholders
of Asia Forever Investment Limited (“Asia Forever”) as payment of the purchase
price for the Company’s acquisition of Asia Forever. The notes have a maturity
of 2 years and will bear no interest. Principal will be repaid as follows: 25%
payable on or before December 31, 2008, the remaining principal amount to be
repaid in 3 semi-annual installments with the final installment due on or before
the maturity date.
 
 The
estimated initial fair value of the non-interest bearing promissory note payable
is based on the discounted effective borrowing rate of the Company, discount
rate of 5.31% (ie the company loan borrowing rate). The Company paid
$8,068,500  (RMB 55 million) of the total consideration of $39,473,684
(RMB 270 million) at the closing date, leaving a balance due on the promissory
note after the closing of $31,405,184. The net present value of this note
payable at October 1, 2008 was $29,900,037 and deferred finance costs of
$1,505,147 was recorded and amortized using the effective interest rate
method.
 F-20
 Table of Contents
  HOME
SYSTEM GROUP AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 17 –
OTHER TAXES PAYABLE
 
 Other
taxes payable consists of the following:
 
 2008
                    
                    
                    2007Value
      added tax payable
                    
                    $
                    421,670
                    
                    
                    $
                    793,335Individual
      income tax payable
                    
                    
                    3,298
                    
                    
                    
                    8,719Total
                    
                    $
                    424,968
                    
                    
                    $
                    802,054
 
 
 NOTE 18 –
DUE TO STOCKHOLDER
 
 Amount
represents advances from a stockholder as at December 31, 2008.  The
amount due is unsecured with no stated interest. Amount of $600,000 is not
repayable within twelve months from the balance sheet date which recorded under
non-current liabilities and the remaining amount of $ 1,574,573 is repayable on
demand which recorded under current liabilities.
 
 
 NOTE 19
–RELATED PARTIES TRANSACTIONS
 
 During
the year ended December 31, 2008, the Company had the transactions with certain
related companies in the normal course of business are stated as
follows:
 
 2008
                    
                    
                    2007Sales
      to the related companies
                    
                    $
                    11,956,295
                    
                    
                    $
                    9,722,473Percentage
      of total net sales
                    
                    
                    23.0%
                    
                    
                    
                    24.0%Purchases
      from the related companies
                    
                    $
                    -
                    
                    
                    $
                    4,276,390Percentage
      of total purchases
                    
                    
                    -
                    
                    
                    
                    11.0%Rental
      expenses paid to related companies
                    
                    $
                    -
                    
                    
                    $
                    337,350Building
      management fee paid to related companies
                    
                    $
                    -
                    
                    
                    $
                    19,052
   As at
December 31, 2008, Weihe has an account receivable with its related company,
Weiyi (HK) Limited amounting to $ 10,619,911 recorded under accounts
receivable-related party.
 
 
 NOTE 20 –
SHIPPING AND HANDLING FEES AND COSTS
 
 The
Company follows Emerging Issues Task Force (“EITF”) No. 00-10, Accounting for 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 goods sold which are $510,495 and $416,675 for the
year ended December 31, 2008 and 2007 respectively.
 F-21
 Table of Contents
 HOME
SYSTEM GROUP AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 21 –
WARRANTY
 
 The
Company accrues an estimate of 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.  The warranty liability is included
in accrued expenses in the accompanying balance sheet. In June 30, 2008, the
Company decided not to provide the warranty and guarantee to the customers since
the Company provided good quality products to customers. As at December 31,
2008, there is no warranty liability recorded in the balance
sheet.  Changes in the Company’s warranty liability were as
follows:
 
 2008
                  
                  
                  2007Warranty
      accrual, beginning of period
                  
                  $
                  22,688
                  
                  
                  $
                  24,025Warranty
      accrued during the period
                  
                  
                  -
                  
                  
                  
                  13,731Adjustments
      to pre-existing accruals
                  
                  
                  (22,688
                  )
                  
                  
                  (958
                  )Actual
      warranty expenditures
                  
                  
                  -
                  
                  
                  
                  (14,110
                  )Warranty,
      end of period
                  
                  $
                  
                  
                  
                  $
                  22,688
 
 NOTE 22 –
INCOME TAXES
 
 UNITED
STATES
 
 The
Company is incorporated in the United States of America and is subject to United
States of America tax law. No provisions for income taxes have been made as the
Company has no taxable income for reporting periods. The applicable income tax
rates for the Company for the reporting periods are 34%.
 
 BVI
 
 HSGI is
incorporated in the BVI and, under the current laws of the BVI, are not subject
to income taxes.
 
 HONG
KONG
 
 Holy is
an investment holding company in Hong Kong. No provisions for income taxes have
been made as the Company has no taxable income for reporting
periods.
 
 No Hong
Kong Profits Tax has been provided in the financial statements as the business
of Oceanic is carried outside Hong Kong and there was no income derived from or
arising in Hong Kong during the period.
 
 PRC
 
 Well
Profit being a foreign venture enterprise is entitled to, starting from the
first profitable year, a two-year exemption from enterprise income tax followed
by a three-year 50% reduction in its enterprise income tax rate (“Tax Holiday”).
As such, after the application by Well Profit and approval by the relevant tax
authority in 2007, Well Profit was exempted from enterprise income tax 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%.
 
 During
the year ended December 31, 2008 and 2007, Well Profit received the tax holiday
are $656,163 and $65,892 respectively. The affect on basic and diluted earnings
per share for 2008 and 2007 is an increase of $0.011 and $0.001
respectively.
 
 In the
fiscal year 2007,Zhongshan Weihe Electrical Appliances Co. Ltd. ("Weihe") is a
domestic enterprise in the PRC and subject to enterprise income tax at 33%, in
which 30% for national tax and 3% for local tax, of the assessable profits as
reported in the statutory financial statements prepared under China Accounting
regulations.
 
 Effective
on January 1, 2008, the PRC Enterprise Income Tax Law, or 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.
 F-22
 Table of Contents
 HOME
SYSTEM GROUP AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 22 –
INCOME TAXES (Continued)
 
 On
January 1, 2007, the Company adopted FIN 48, which prescribes a
more-likely-than-not threshold for financial statement recognition and
measurement of a tax position taken in the tax return. This interpretation also
provides guidance on de-recognition of income tax assets and liabilities,
classification of current and deferred income tax assets and liabilities,
accounting for interest and penalties associated with tax positions, accounting
for income taxes in interim periods and income tax disclosures.
 
 Until
December 31, 2007, the directors considered that the Company had no uncertain
tax positions affected its consolidated financial position and results of
operations or cash flow, and will continue to evaluate for the uncertain
position in future. There are no estimated interest costs and penalties provided
in the Company’s financial statements for the year ended December 31,
2007.
 
 No
provision for deferred taxes has been made as there were no material temporary
differences at December 31, 2008 and 2007.
 
 The
income taxes provided represents the following:
 
 2008
                      
                      
                      2007PRC
      Enterprise Income Tax
                      
                      
                      
                      
                      
                      -Current
                      
                      $
                      720,756
                      
                      
                      $
                      1,412Deferred
      tax provision
                      
                      
                      -
                      
                      
                      
                      -$
                      720,756
                      
                      
                      $
                      1,412
 
 The
effective income tax expenses differ from the PRC statutory income tax rate from
continuing operations in the PRC as follows:
 
 2008
                    
                    
                    2007Provision
      for income taxes at statutory income tax
                      rate
      – 25% in 2008 and 33% in 2007
                    
                    $
                    1,197,105
                    
                    
                    $
                    22,182Tax
      Holiday
                    
                    
                    (656,164
                    )
                    
                    
                    (65,892
                    )Income
      not subject to tax
                    
                    
                    (44,333
                    )
                    
                    
                    (419,589
                    )Loss
      from the subsidiaries
                    
                    
                    224,148
                    
                    
                    
                    464,711$
                    720,756
                    
                    
                    $
                    1,412
  F-23
 Table of Contents
  HOME
SYSTEM GROUP AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 23 –
SEGMENT REPORTING
 
 Statement
of Financial Accounting Standards No 131 ("SFAS 131"), "Disclosure About
Segments of an Enterprise and Related Information", requires use of the
"management approach" model for segment reporting. Under this model, segment
reporting is consistent with the way Company's management organizes segments
within the company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal
structure, management structure, or any other manner in which management
disaggregates a company.
 
 The
Company has six reportable segments: (1) barbeque set, (2) skateboards, (3)
Other home appliances, (4) General trading, (5) Fans and (6) Corporate, . These
operating segments were determined based on the nature of the products and
services offered. Overhead items that are specifically identifiable to a
particular segment are applied to such a segment.
 
 Operating
segments are defined as 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's chief operation
decision makers direct the allocation of resources to operating segments based
on the profitability and cash flows of each respective segment.
 
 The
Company evaluates performance based on several factors, of which the primary
financial measure is business segment income before taxes.
 
 Barbeque
      set
                                                        
                                                        Skateboards
                                                        
                                                        Other
      home appliances
                                                        
                                                        General
      Trading
                                                        
                                                        Fans
                                                        
                                                        Corporate
                                                        
                                                        
                                                        TotalFor
      the year
                                                          ended
                                                          December
                                                          31,
      2008
                                                        
                                                        For
      the year
                                                          ended
                                                          December
                                                          31,
      2007
                                                        
                                                        For
      the year
                                                          ended
                                                          December
                                                          31,
      2008
                                                        
                                                        For
      the year
                                                          ended
                                                          December
                                                          31,
      2007
                                                        
                                                        For
      the year
                                                          ended
                                                          December
                                                          31,
      2008
                                                        
                                                        For
      the year
                                                          ended
                                                          December
                                                          31,
      2007
                                                        
                                                        For
      the year
                                                          ended
                                                          December
                                                          31,
      2008
                                                        
                                                        For
      the year
                                                          ended
                                                          December
      31,
                                                          2007
                                                        
                                                        For
      the year
                                                          ended
                                                          December
                                                          31,
      2008
                                                        
                                                        For
      the year
                                                          ended
                                                          December
      31,
                                                          2007
                                                        
                                                        For
      the year
                                                          ended
                                                          December
                                                          31,
      2008
                                                        
                                                        
                                                        For
      the year
                                                          ended
                                                          December
      31,
                                                          2007
                                                        
                                                        
                                                        For
      the year
                                                          ended
                                                          December
      31,
                                                          2008
                                                        
                                                        For
      the year
                                                          ended
                                                          December
      31,
                                                          2007Net
      sales
                                                        
                                                        $
                                                        9,150,319
                                                        
                                                        $
                                                        29,899,115
                                                        
                                                        $
                                                        8,655,136
                                                        
                                                        $
                                                        10,427,732
                                                        
                                                        $
                                                        10,175,965
                                                        
                                                        $
                                                        685,767
                                                        
                                                        $
                                                        11,748,688
                                                        
                                                        $
                                                        -
                                                        
                                                        $
                                                        12,196,096
                                                        
                                                        $
                                                        -
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        51,926,204
                                                        
                                                        $
                                                        41,012,614Depreciation
      and amortization
                                                        
                                                        $
                                                        141,418
                                                        
                                                        $
                                                        243,981
                                                        
                                                        $
                                                        56,344
                                                        
                                                        $
                                                        59
                                                        
                                                        $
                                                        211,209
                                                        
                                                        $
                                                        69,814
                                                        
                                                        $
                                                        73,378
                                                        
                                                        $
                                                        -
                                                        
                                                        $
                                                        85,719
                                                        
                                                        $
                                                        -
                                                        
                                                        $
                                                        57,297
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        625,365
                                                        
                                                        $
                                                        313,854Segment
      income before income taxes
                                                        
                                                        $
                                                        (1,605,649
                                                        )
                                                        $
                                                        1,332,484
                                                        
                                                        $
                                                        744,543
                                                        
                                                        $
                                                        125,111
                                                        
                                                        $
                                                        967,353
                                                        
                                                        $
                                                        4,411
                                                        
                                                        $
                                                        2,518,452
                                                        
                                                        $
                                                        -
                                                        
                                                        $
                                                        3,060,357
                                                        
                                                        $
                                                        -
                                                        
                                                        $
                                                        (896,635
                                                        )
                                                        
                                                        $
                                                        (1,399,066
                                                        )
                                                        
                                                        $
                                                        4,788,421
                                                        
                                                        $
                                                        62,940Segment
      assets
                                                        
                                                        $
                                                        8,425,680
                                                        
                                                        $
                                                        13,009,322
                                                        
                                                        $
                                                        7,953,810
                                                        
                                                        $
                                                        7,894,668
                                                        
                                                        $
                                                        9,351,407
                                                        
                                                        $
                                                        2,274,377
                                                        
                                                        $
                                                        11,767,940
                                                        
                                                        $
                                                        -
                                                        
                                                        $
                                                        33,510,842
                                                        
                                                        $
                                                        -
                                                        
                                                        $
                                                        30,322,785
                                                        
                                                        
                                                        $
                                                        8,711,268
                                                        
                                                        
                                                        $
                                                        101,332,464
                                                        
                                                        $
                                                        31,889,635Capital
      expenditures
                                                        
                                                        $
                                                        204,677
                                                        
                                                        $
                                                        119,568
                                                        
                                                        $
                                                        -
                                                        
                                                        $
                                                        1,481
                                                        
                                                        $
                                                        -
                                                        
                                                        $
                                                        2,159,443
                                                        
                                                        $
                                                        -
                                                        
                                                        $
                                                        -
                                                        
                                                        $
                                                        -
                                                        
                                                        $
                                                        -
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        204,677
                                                        
                                                        $
                                                        2,280,492
 F-24
 Table of Contents
  HOME
SYSTEM GROUP AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 24 –
STOCK OPTIONS
 
 The
Company uses the Black-Scholes option pricing model to calculate the grant-date
fair value of an award, with the following assumptions: no dividend yield,
expected volatility of 161%, and a risk-free interest rate of 4.2%. In
determining volatility of the Company’s options, the Company used the average
volatility of the Company’s stock.
 
 On August
7, 2007, the Company granted to the audit committee chairman and a director of
the Company an option to purchase 100,000 shares of the Company’s 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 is
contingent on continued participation as a Board of Director. The option expires
in ten years. Based on the Black-Scholes option pricing model, the entire option
was valued at $204,054. One-third of the value of the issuance was expensed
immediately as it vested, with the remaining amount expensed monthly over the
vesting period. By a resolution of all directors dated April 29 2008, the
service agreement with the chairman of the audit committee was
terminated.  Accordingly, 16,667 option shares not yet vested will be
cancelled.
 
 The
following table summarizes all Company stock option transactions between January
1, 2008 and December 31, 2008:
 
 Share
      options
                      under
      option
                      scheme
                    
                    Provision
      of
                      option
      shares
                    
                    Exercise
      Price per
                      Common
      Share RangeBalance,
      January 1, 2008
                    100,000
                    
                    50,000
                    
                    6.00Written
      back on termination of services
                    (66,667)
                    
                    (16,667)Balance,
      December 31, 2008
                    33,333
                    
                    33,333
                    
                    6.00
   The
following table provides certain information with respect to the above
referenced options outstanding at December 31, 2008:
 
 
 Exercise
      Price
                    
                    Weighted
      Average
                      Exercise
      Price
                    
                    Weighted
      Average
                      Remaining
      Contractual Life
                      Years$6
                    
                    $6
                    
                    8.63
  F-25
 Table of Contents
  HOME
SYSTEM GROUP AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 25 –
CONCENTRATIONS, RISK AND UNCERTAINTIES
 
 The
Company has the following concentrations of business with each customer
constituting greater than 10% of the Company’s sales:
 
 2008
                  
                  2007Zhongshan
      City Heng Bao Trading Co., Ltd
                  
                  70%
                  
                  69%Rich
      Empire International Limited
                  
                  -
                  
                  22%Zhongshan
      City Xin Da Import and Export Company Limited
                  
                  -
                  
                  1%WaiYi
      (HK) Limited
                  
                  21%
                  
                  0%
 
 The
Company has the following concentrations of accounts receivable constituting
greater than 10% of the Company’s accounts receivable:
 
 2008
                  
                  2007Zhongshan
      City Heng Bao Trading Co., Ltd
                  
                  65%
                  
                  97%Zhongshan
      City Guang Yu Import and Export Company Limited
                  
                  -
                  
                  22%WaiYi
      (HK) Limited
                  
                  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:
 
 2008
                  
                  2007Zhongshan
      City Oceanic International Company Limited
                  
                  13%
                  
                  22%Zhongshan
      City Heng Bao Trading Company Limited
                  
                  6%
                  
                  3%Foshan
      Ying Yuan Import and Export Company Limited
                  
                  -
                  
                  18%Hubei
      Xin Cheng Industry & Trade Company Limited
                  
                  13%
                  
                  -
 F-26
 Table of Contents
  HOME
SYSTEM GROUP AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 26 – COMMITMENTS
AND CONTINGENCIES
 
 Operating
Leases
 
 In the
normal course of business, the Company leases office and factory space under
operating lease agreements. The Company rents factory premises for the
production and manufacturing process. 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 rental
agreements provide for regular increases to the base rental rate at specified
intervals, which usually occur on an annual basis. The Company was obligated
under operating leases requiring minimum rentals as follows:
 
 2008December
      31,2009
                    
                    $
                    360,0272010
                    
                    
                    360,0272011
                    
                    
                    360,0272012
                    
                    
                    360,0272013
                    
                    
                    240,018$
                    1,680,126
 
 During
the years ended December 31, 2008 and 2007, rental expenses were $683,943 and
$618,820 respectively.
      F-27