UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





(MARK
ONE)


FORM
10-K





[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
fiscal year ended December 31, 2008





OR





[ ]
TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
transition period from ______ to ______





Commission
file number: 333-87293


CHINA
AMERICA HOLDINGS, INC.


(Exact
name of registrant as specified in its charter)





Florida
            
            82-0326560(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)





333 E.
Huhua Road


Huating
Economic & Development Area


Jiading
District, Shanghai, China 201811


(Address
of principal executive offices) (Zip Code)





Registrant's
telephone number, including area code: 86-21-59974046





Securities
registered pursuant to Section 12(b) of the Act:





Title
      of each class
            
            Name
      of each exchange on which registeredNone
            
            Not
      applicable





Securities
registered pursuant to Section 12(g) of the Act:





None


________


(Title of
class)





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





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 [X] No




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes [X] 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 the 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. [X]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company:





Large
      accelerated filer
            [ ]
            
            Accelerated
      filer
            [
       ]Non-accelerated
      filer (Do not check if smaller reporting company)
            [ ]
            
            Smaller
      reporting company
            [X]





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes [ ] No [X]





State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked prices of such common equity, as of the last
business day of the registrant's most recently completed second fiscal quarter:
$8,148,647 on June 30, 2008.





Indicated
the number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date: 140,810,792 shares of common stock are
issued and outstanding as of April 15, 2009.





DOCUMENTS
INCORPORATED BY REFERENCE




None.








TABLE OF CONTENTS





Part
      IItem
      1.
            Business.
            1Item
      1A.
            Risk Factors.
            9Item
      1B.
            Unresolved Staff Comments.
            16Item
      2.
            Properties.
            16Item
      3.
            Legal Proceedings.
            17Item
      4.
            Submission Of Matters To A Vote Of Security
      Holders.
            17Part
      IIItem
      5.
            Market For Registrant's Common Equity, Related Stockholder
      Matters And Issuer Purchases Of Equity Securities.
            17Item
      6.
            Selected Financial Data.
            18Item
      7.
            Management's Discussion And Analysis Of Financial Condition
      And Results Of Operation.
            19Item
      7A.
            Quantitative And Qualitative Disclosures About Market
      Risk.
            31Item
      8.
            Financial Statements And Supplementary
      Data.
            31Item
      9.
            Changes In And Disagreements With Accountants On
      Accounting And Financial Disclosure.
            31Item
      9A(T).
            Controls And Procedures.
            31Item
      9B.
            Other Information.
            32Part
      IIIItem
      10.
            Directors, Executive Officers And Corporate
      Governance.
            32Item
      11.
            Executive Compensation.
            34Item
      12.
            Security Ownership Of Certain Beneficial Owners And
      Management And Related Stockholder Matters.
            39Item
      13.
            Certain Relationships And Related Transactions, And
      Director Independence.
            40Item
      14.
            Principal Accountant Fees And
    Services.
            41Part
      IVItem
      15.
            Exhibits, Financial Statement
    Schedules.
            43Signatures
            
            45








- i
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 Table of Contents








INDEX OF
CERTAIN DEFINED TERMS USED IN THIS REPORT





“China
America” “we,” “us,” “ours,” and similar terms refers to China America Holdings,
Inc., a Florida corporation formerly known as Sense Holdings, Inc., and our
subsidiaries;





“China
Chemical” refers to China Chemical Group, Inc., a Florida corporation and a
wholly owned subsidiary of China America;





“AoHong”
refers to Shanghai AoHong Industry Co., Ltd., a Chinese limited liability
company which is a majority owned subsidiary of China America, together with
AoHong’s wholly owned subsidiaries Shanghai Binghong Trading Co., Ltd., a
Chinese limited liability company, and Shanghai Wuling Environmental Material
Co., Ltd., a Chinese limited liability company, and AoHong (Tianjin) Chemical
Co., Ltd. a Chinese company (“AoHong Tianjin”);





"Sense
Technologies" refers to Sense Technologies, Inc., a Florida corporation and a
wholly-owned subsidiary of China America;





"Micro
Sensor" refers to Micro Sensor Technologies, Inc., a Florida corporation and a
wholly-owned subsidiary of China America;





"Mengda"
refers to Shanghai Mengda Chemical Co., Ltd., a Chinese company which is
AoHong's joint venture partner in Mengjin. Mengda is owned by unrelated third
parties;





"Mengjin"
refers to Shanghai Mengjin Chemical Co., Ltd., a Chinese joint venture between
Aohong and Mengda;





"Big
Tree" refers to Big Tree Toys, Inc., a Florida corporation formerly known as Big
Tree Group Corp.,





"Jieyang
Big Tree" refers to Jieyang Big Tree Toy Enterprise Co, Ltd., a Chinese limited
liability company and wholly-owned subsidiary of Big Tree;





“PRC” or
“China” refers to the People’s Republic of China, and





“2006”,
“2007”, and “2008” refers to the years ended December 31, 2006, 2007 and 2008,
respectively and “2009” refers to the year ending December 31, 2009, unless the
context otherwise specifically provides.











- ii
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PART I





ITEM
1.                      BUSINESS.





Overview





We sell
and distribute assorted chemicals in China. The majority of our revenues are
generated through the sale and distribution of liquid coolants. While our
products can be employed in a variety of applications, we primarily sell and
distribute refrigerants for use in air conditioning systems. We also sell and
distribute chemical products used in the application of fire extinguishing
agents, aerosol sprays, insecticides, and tetrahydrothiophene
(“THT”).





All of
our operations are conducted in China through our AoHong subsidiary. In 2008 we
conduct business in one segment: Chemical Distribution, while in 2007 we
reported in three segments: (i) Chemical Distribution, (ii) Biometrics, and
(iii) Toy Distribution. Our historical operations were the design, development,
manufacture and sale of biometric identification products. We never generated
any significant revenues from these operations. Beginning in January 2007 our
management began seeking a suitable target for a business combination in an
effort to increase our revenues. In June 2007 we acquired a 56.08% interest in
AoHong. In the fourth quarter of 2008, we discontinued our Biometrics segment
which previously represented in excess of 99% of our consolidated net revenues
for 2008 and 2007. In January 2009, we sold our historical operations
related to the Biometrics segment to Mr. Dore Perler, our former CEO.
 AoHong’s operations now represent all of our business and
operations.





In August
2007, we created a Toy Distribution segment when we acquired a 60% interest in
Big Tree. We did not report any revenues from Big Tree during 2007 or 2008. We
found that we were unable to obtain appropriate financial information pertaining
to its subsidiaries for the purposes of consolidating those results with us in
accordance with generally accepted accounting principles. This segment never
commenced operations which we discontinued in April 2008.





AoHong





AoHong
sells and distributes assorted chemicals. Our main product group is liquid
coolants which are employed primarily as refrigerants in air conditioning
systems. AoHong's operations are comprised of four basic
functions:





•
            Repackaging
      bulk quantities of liquid coolants into smaller packaging for resale and
      distribution;•
            Custom
      mixing of various raw materials in accordance with customer specifications
      into a new product;•
            AoHong
      employs two engineers who work with customers to derive proper mixture of
      chemicals; and•
            Distribution
      of bulk quantities of liquid coolants directly to customers who in turn
      resell the product.





Our
customers include manufacturers and retailers of air conditioning systems,
refrigerators, automobiles, coolants, pharmaceuticals and chemicals. In 2008,
approximately 40.6 % of our revenues were derived from our repackaging business,
approximately 8.9% were generated from the sale of custom made chemical
compounds, and approximately 50.5 % were from the distribution of bulk
quantities. Approximately 91.2% of our products are utilized domestically while
the balance is typically exported.





AoHong
distributes products within China to 16 provinces and districts including
Liaoning, Jilin, Beijing, Xinjiang, Shangxi, Chongqing, Sichuan, Jiangsu,
Zhejiang, Anhui, Guangdong, Hainan, Hong Kong and Taiwan. AoHong exports to
countries such as Russia and Thailand. In November 2008, we created AoHong
(Tianjin) Chemical Co., Ltd., a Chinese limited liability company as a wholly
owned subsidiary (“AoHong Tianjin”) to expand our distribution channels to the
Beijing region.





- 1
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A
significant portion of our volume, approximately 32.2%, and 32.6% in 2008 and
2007, respectively, are derived from automobile, refrigerator manufacturers and
air conditioning manufacturers; as such, historically we have witnessed a
seasonal surge in demand for refrigerant products from March to July. AoHong
utilizes a purchase order system for orders; generally we enter into supply
agreements with major customers, which outline annual demand. Typically we
deliver product within 15 to 30 days from the time an order is placed. We
generally offer customers terms of net 60 days to net 90 days.





Shanghai
3F New Materials Co., Ltd. and Changshu Zhongtian Chemical Trading Co. Ltd.
represented 20.87% and 17.1% of our net revenues in
2008.





Product
Offerings





The
following are a list of the major products we sell:





PRODUCT
            
            STRUCTURAL
      FORMULA
            
            APPLICATIONR12
            
            CC12F2
            
            Refrigerant,
      fire extinguishing agent, insecticide and spray, etc.R22
      Difluorochloro Methane
            
            CHCLF2
            
            Compressor
      for industrial and residential air conditioning systems; insecticides,
      painting spray and fire extinguishing agentR134A
            
            CH2FCF3
            
            Refrigerant,
      common in automobile air conditioners and refrigeratorsR410A
            
            CH2F2/CF3CHF2
            
            Refrigerant,
      substitute for R22THT
      (Scentinel)
            
            (CH2)4S
      C4H8S
            
            Clear,
      colorless liquid with a strong unpleasant odor. Due to its smell,
      tetrahydrothiophene is occasionally used as an odorant in natural
      gas





In 2008,
R22, R12, R134A, R410A, and THT represented approximately 70%, 16.8%, 11.9%,
4.1% and 0.6%, respectively of our volume. The chemicals, R22, R134A, and R410A,
are coolants which are generally used as refrigerants in a variety of air
conditioning systems.  R12 is a chemical which is primarily employed
in fire extinguishing agents and insecticides. Tetrahydrothiophene (THT) is a
chemical agent which is occasionally used as an odorant in natural gas due to
its strong unpleasant odor.





AoHong
emphasizes the sale and distribution of environmentally friendly products.
AoHong seeks to emerge as a leader in the sale and distribution of
environmentally friendly coolants within China. Approximately 20.8% and
approximately 37%, respectively, of AoHong's revenues for 2008 and 2007 were
derived from environmentally friendly products.





Environmentally
friendly products we offer include the following:





PRODUCT
            
            STRUCTURAL
      FORMULA
            
            APPLICATIONR134A
            
            CH2FCF3
            
            Refrigerant,
      common in automobile air conditioners and refrigeratorsR600A
            
            CH3(CH3)
      CHCH3
            
            RefrigerantR404A
            
            CF3CHF2/CH3CF3/CF3CH2F
            
            Refrigerant,
      substitute for R22R407C
            
            CH2F2/CF3CHF2/CF3CH2F
            
            Refrigerant,
      substitute for R22R410A
            
            CH2F2/CF3CHF2
            
            Refrigerant,
      substitute for R22R142B
            
            CCIF2CH3
            
            Refrigerant








- 2
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Sales
and Marketing





We employ
eight full time and two part-time sales persons.  One part-time sales
person is dedicated to covering the Shandong Province and the other
part-time sales person dedicated to covering the Sichuan Province. These
two sales persons travel frequently to these provinces. Our full time sales
persons are compensated with base salary and commission, and part-time sales
persons are hired on a contractual basis under a commission only compensation
structure. Our sales persons earn a sales commission based on net profit
generated in excess of a predetermined benchmark. The base salary, profit
benchmark and commission percentage vary across products. We also market and
promote our products through a variety of venues, including industry trade
shows, online advertising, marketing literature, and referrals.





Suppliers
and Availability of Raw Materials





We
purchase products from a variety of sources, including:





Supplier
                    
                    ProductJiangSu
      MeiLan Chemical Co., Ltd.
                    
                    R12,
      R22Chevron
      Phillips Chemical (China) Co., Ltd.
                    
                    R6001,
      THT (Tetrahydrothiophene)Sinochem
      Modern Environmental Protection Chemicals (Xi’an) Co.,
Ltd.
                    
                    R134ADaikin
      Chemical International Trading(Shanghai) Co., Ltd.
                    
                    R
      404, R407C,
R410A





In 2008
approximately 80% of the coolant products we sold and distributed were supplied
by JiangSu MeiLan Chemical Co., Ltd. as compared to approximately 65% of the
supply in 2007. We have had a relationship with this company since 2005. We are
also a supplier of liquid coolants manufactured by Chevron Phillips Chemical
(China) Co., Ltd., (since 2003), JiangSu MeiLan Chemical Co., Ltd. (since 2005),
Sinochem Modern Environmental Protection Chemicals (Xi’An) Co., Ltd. (since
2003), and Daikin Chemical International Trading (Shanghai) Co., Ltd. (since
2005).





We
generally inventory a one month supply of liquid coolants. We utilize disposable
steel cylinders to store various gases or liquids purchased in bulk quantities.
These cylinders come in 30 pound and 50 pound capacity and meet the standards of
European and U.S. markets. Generally 90% of our revenues are generated from
current customers.  We can estimate customer demand and maintain
inventory levels in accordance with the anticipated orders from these customers.
Utilizing our warehouse space, we generally increase our inventory levels during
our off-peak season which enables us to offer shorter delivery times and in some
cases better pricing during our peak selling season. Terms offered by our
suppliers are generally net 60 days.





We
believe we will have access to sufficient quantities of the coolant
products we sell and distribute to meet our needs for the foreseeable
future.  We did, however, experienced temporary shortages of raw
material resulting from business interruptions due to the 2008 Beijing Olympics
and Paralympics. We do not believe that we will face these shortages in
2009.





Competition





The
market for the sale of liquid coolants in China is very competitive. There are
approximately 13 coolant distributors operating within China, of which we
estimate approximately four or five are large companies and the remaining eight
to nine are smaller companies. Our principal competitors include:





Competitors
                
                BackgroundZhejiang
      Ju Hua Co., Ltd.
                
                Manufacturer
      for R11, R12, R22, R134aShandong
      Dongyue Chemical Co., Ltd.
                
                Manufacturer
      for R22, R134aBeijing
      Jinxin Jiaye Chemical Co., Ltd.
                
                Packaging
      companyShanghai
      Zhiyang Trading Co., Ltd.
                
                DistributorZhejiang
      Yonghe Refrigerant Co., Ltd.
                
                Packaging
      company








- 3
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We
believe we differentiate our company from our competitors through our ability to
accommodate a variety of orders in the form of repacking, combining, or
distributing products and our warehouse capacity enables us to meet customer
demand on short notice.





Recent
Developments




In
November 2008, we created AoHong Tianjin, to expand our distribution channels to
northern China.  AoHong Tianjin will serve as a second production base
in northern China.





In August
2008, AoHong transferred its interest in Mengjin to Mengda in exchange for
its original contribution to the joint venture. In February 2007, AoHong entered
into an agreement with Mengda to form Mengjin, as a joint venture entity.
This joint venture was created to distribute environmentally friendly
refrigeration lubricants in China. Under the terms of this joint venture, AoHong
agreed to contribute approximately $41,700 in exchange for a 60% interest and
Shanghai Mengda Chemical Co., Ltd. agreed to contribute approximately $27,800 to
obtain its 40% interest. Aohong elected to terminate its involvement in Mengjin,
and instead distribute environmentally friendly products through its existing
operations.





Discontinuation
of Biometrics segment




Beginning
in January 2007, our management began seeking a suitable target for a business
combination in an effort to increase our revenues. In June 2007, we acquired a
56.08% interest in AoHong. In the fourth quarter of 2008, we decided to
discontinue our Biometrics segment which accounted for less than 1% of our
consolidated net revenues in 2007. Until our acquisition of AoHong, our
Biometrics segment represented all of our operations.
 
 In
January 2009, we sold our historical operations related to the Biometrics
segment to the Pearl Group Advisors, Inc. pursuant to an asset purchase
agreement. Pearl Group Advisors, Inc. is wholly owned by Mr. Dore S. Perler, a
member of our Board of Directors and corporate secretary and our former Chief
Executive Officer. The assets Biometric segment assets that were sold included
customer and supplier lists, business records, trademarks and other intellectual
property and manufacturers and vendors’ warranty claims. The consideration
received by us in connection with the sale of these assets included the
assumption of liabilities, if any, by Pearl Group Advisors, Inc. related to the
Biometrics segment and the termination of Mr. Perler’s May 1, 2007 employment
agreement with us. In connection with the termination of Mr. Perler’s May 1,
2007 employment agreement in January 2009, we paid Mr. Perler the sum of
$75,000.
 
 In 2008
and 2007, the Biometric segment is reported on our financial statements as a
discontinued operation and prior periods have been restated in our financial
statements and related footnotes to conform to this presentation.  We
believe that the disposition of the Biometric segment assets, the termination of
Mr. Perler’s employment agreement and the consolidation of our U.S. offices and
operations in China will serve to reduce our general operating expenses in
future periods.




Discontinuation
of Toy Distribution Segment





In April
2008, we discontinued our Toy Distribution segment.  In August 2007,
we acquired a 60% interest in Big Tree Toys, Inc., which together with its
subsidiary Jieyang Big Tree Enterprise Toy Co., Ltd., was a development stage
company based in China that intended to operate in the toy business. We acquired
the 60% interest in Big Tree from CDI China, Inc., a wholly owned subsidiary of
China Direct, Inc. Under the terms of the agreement, we paid CDI China, Inc.
$400,000 and issued 10,000,000 shares of our common stock. At the time of the
transaction, China Direct, Inc. owned approximately 17% of our common
stock.  The value of the 10,000,000 shares issued was valued at our
par value.





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We did
not report any revenues from Big Tree during 2007 or 2008 and its assets were
limited to a loan due from a related party, which was made prior to our
acquisition of Big Tree. We found that we were unable to obtain appropriate
financial information pertaining to Jieyang Big Tree for the purposes of
consolidating those results with us in accordance with generally accepted
accounting principles. On April 30, 2008, we entered into an agreement with Mr.
Wei Lin and China Direct, Inc. pursuant to which we transferred all of our
rights, title and interest in and to 60% of the stock of Big Tree to Mr. Lin in
exchange for 53,654 shares of the common stock of China Direct, Inc. owned by
Mr. Lin. These shares had a fair market value of approximately $445,328 on the
date of the agreement. As a result of this transaction, we no longer own any
interest in Big Tree or its wholly owned subsidiary, Jieyang Big Tree. Following
this transaction we do not intend to pursue any other business opportunities in
the toy industry.





Intellectual
Property





We do not
claim any intellectual property rights with respect to the name AoHong. We have
obtained the rights to the domain names www.chinaamericaholdings.com,
www.china-aohong.com and www.caah.us. As with telephone numbers, we do not have
and cannot acquire any property rights in an Internet address. We do not expect
to lose the ability to use these Internet addresses; however, there can be no
assurance in this regard and the loss of either of these addresses could
materially adversely affect our future business financial condition and results
of operations.





Government
Regulations





Our
operations must conform to Industrial Chemical Control Law (ICCL) of People’s
Republic of China, The Management Regulation of Chemical Industry Environmental
Protection and rules for private (non-state owned) companies doing business in
China, and Regulations on the Safety Administration of Dangerous Chemicals. We
are also subject to registration and inspection by The Ministry of China
Chemical Industry with respect to the distribution of chemical products in
China.  We are licensed by the Shanghai Government for the
distribution of chemical products. The applied regulations associated with
inspection including Principles for Gas Cylinder Safety Supervision, Safety
Inspection Regulations for Gas Cylinders, and Regulations on Safety Supervision
over Special Equipment.





As the
Chinese government fills its pledge to gradually phase out ozone depletion
contaniment, we believe our product offerings will be in compliance with the
regulations that favor environmentally friendly products. These regulations
are issued by State Ministry of Environmental Protection, National
Development and Reform Commission, Ministry of Commerce, General Administration
of Customs, and General Administration of Quality Supervision, and Quarantine.
In general, we believe our operations conform to Production Safety Law of
People’s Republic of China that specifies the mandatory measures to ensure
production safety and emergency management and rescue. We also need to conform
to Labor Law of the People's Republic of China.





AoHong
holds various certifications related to its operations, including:





•
            Environmental
      Management System ISO14001: 2004 certificate;•
            ISO9001:2000
      quality system certificate;•
            OQS
      Certificate that conforms to ISO/TS 16949 (international quality
      management certificate for the automotive industry);•
            Gas
      Cylinder Filling Certificate; and•
            Operating
      License for Hazardous Chemicals.





Doing
Business in the PRC





Despite
efforts to develop the legal system over the past several decades, including but
not limited to legislation dealing with economic matters such as foreign
investment, corporate organization and governance, commerce, taxation and trade,
the PRC continues to lack a comprehensive system of laws. Further, the laws that
do exist in the PRC are often vague, ambiguous and difficult to enforce, which
could negatively affect our ability to do business in China and compete with
other companies in our industry.





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In
September 2006, the Ministry of Commerce (“MOFCOM”) promulgated the Regulations
on Foreign Investors' Mergers and Acquisitions of Domestic Enterprises (M&A
Regulations) in an effort to better regulate foreign investment in China. The
M&A Regulations were adopted in part as a needed codification of certain
joint venture formation and operating practices, and also in response to the
government's increasing concern about protecting domestic companies in perceived
key industries and those associated with national security, as well as the
outflow of well-known trademarks, including traditional Chinese
brands.





As a U.S.
based company doing business in China, we seek to comply with all PRC laws,
rules and regulations and pronouncements, and endeavor to obtain all necessary
approvals from applicable PRC regulatory agencies such as the MOFCOM, the State
Assets Supervision and Administration Commission (“SASAC”), the State
Administration for Taxation, the State Administration for Industry and Commerce,
the China Securities Regulatory Commission (“CSRC”), and the State
Administration of Foreign Exchange (“SAFE”).





Employees





At March
31, 2009 we had a total of 62 employees as follows:




Management
                          8Accounting
                          6Administration
                          12Warehouse
      and delivery
                          7Lab
                          3Production
                          17Sales
                          8Purchase
                          1Total
                          62





We
believe that relations with our employees are good. As of March 31, 2009, we did
not have any employees in the U.S. For our employees in China, each full-time
employee is a member of a local trade union. Labor relations have remained
positive and we have not had any employee strikes or major labor disputes.
Unlike trade unions in western countries, trade unions in most parts of China
are organizations mobilized jointly by the government and the management of the
company.





We are
required to contribute a portion of our Chinese employees' total salaries to the
Chinese government's social insurance funds, including medical insurance,
unemployment insurance and job injuries insurance, and a housing assistance
fund, in accordance with relevant regulations. We expect the amount of our
contribution to the government's social insurance funds to increase in the
future as we expand our workforce and operations.





Consultants





We rely
on the services of consultants, some of which are affiliates, to assist us in
various areas of our business.  In June 2007, we entered into a
consulting agreement with CDI Shanghai Management Co., Ltd., a wholly owned
subsidiary of China Direct, Inc. The agreement was in effect for the period from
June 29, 2007 through June 30, 2008 and provides for various consulting
services, including identifying suitable acquisition partners in Asia,
structuring merger and/or acquisition transactions and providing translation
services. Under the terms of the June 2007 consulting agreement, we issued CDI
Shanghai Management Co., Ltd. 5,000,000 shares of our common stock valued at
$475,000. This agreement also provides for the payment of discretionary award
fees to be paid to the consultant and/or its designees. Upon the mutual
agreement of the parties, the fees can be paid either in cash or marketable
securities.




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In April
2009 we entered into a consulting and management agreement with China Direct
Investments, Inc. The agreement is for a term of twelve months from January 1,
2009 to December 31, 2009. The agreement outlines various consulting services,
which have been provided by China Direct Investments, Inc. since July 1, 2008,
including coordination of preparation and filing of public disclosures,
assistance in financial management and the implementation of internal controls,
managing investor road show/investment conferences, assisting in the
implementation of acquisition deals, etc.  Under the terms of the
April 2009 agreement, we will issue China Direct Investments, Inc. a total of
20,000,000 shares of our common stock valued at $400,000. Of these shares,
5,000,000 shares are payable at the end of each calendar quarter of 2009. This
agreement also provides for the payment of discretionary award fees to be paid
to the consultant and/or its designees. Upon the mutual agreement of the
parties, the fees can be paid either in cash or marketable
securities.





In
January 2008 we entered into a two month agreement with SPC Consultants LLC
pursuant to which it agreed to arrange for the release of our press releases and
engage other financial public relations firms to publicize our company. As
compensation for these services, we paid SPC Consultants LLC $100,000 and China
Direct Investments, Inc. transferred 1,100,000 shares of our common stock to SPC
Consultants.





In April
2009, we entered into a consulting agreement with Mr. Perler expiring on
December 31, 2009 to serve as a member of our Board of Directors and corporate
Secretary. Under the terms of this agreement, we agreed to pay Mr. Perler a
total of 1,000,000 shares of our common stock valued at $20,000 to serve in
these positions.





Mr.
Andrew Goldrich, formerly an executive officer and director of our company, is
employed by China Direct, Inc., the parent company of China Direct Investments,
Inc. and CDI Shanghai Management Co., Ltd.





Our
History





We were
organized in Idaho on February 5, 1968 under the name Century Silver Mines, Inc.
Originally, we developed mining properties, but by 1998 we had ceased those
operations. Sense Technologies was organized under the laws of the State of
Florida on July 13, 1998. Sense Technologies was formed for the purpose of
engaging in developing and marketing biometric devices for use in employee
identification and security-related products.





In
January 1999, we acquired all of the outstanding shares of Sense Technologies
for a purchase price consisting of 4,026,700 of our shares of common stock
issued to the former shareholders of Sense Technologies. At the time of the
acquisition, Century Silver Mines had no operations and Sense Technologies was
developing its proprietary biometric security systems. Immediately following the
acquisition, the former shareholders of Sense Technologies owned approximately
93% of our outstanding shares. In June 1999, we changed our corporate domicile
from Idaho to Florida and changed our name to Sense Holdings, Inc.





On May
31, 2001, we acquired all of the outstanding shares of Micro Sensor from UTEK
Corporation and UT-Battelle LLC, the shareholders of Micro Sensor, in a
stock-for-stock exchange, for total consideration of 2,000,000 shares of our
common stock. Pursuant to the stock-for stock transfer, UTEK received 1,850,000
shares of our common stock and UT-Battelle LLC received 150,000 shares of our
common stock.





On June
27, 2007 we acquired a 56.08% interest in AoHong in exchange for our commitment
to contribute $3,380,000. Our commitment to AoHong requires us to provide an
aggregate of $3,380,000 between September 2007 and June 2009 as follows:
$800,000 before September 30, 2007, $400,000 before June 30, 2008, $600,000
before December 31, 2008 and the remaining balance due of $1,580,000 by June 27,
2009. We used $1,200,000 from a unit offering completed in 2007 to satisfy our
commitments due through June 30, 2008. Subsequently, we tendered $400,000 in
August 2008 which represented a portion of the December 2008 commitment. The
balance of $200,000 was due on December 31, 2008. The minority owners of AoHong
have orally agreed to extend the payment of the $200,000 until May 28, 2009. We
will be required to raise additional capital to fund the balance of $1,780,000
of the obligation. In addition, in 2007 we issued Mr. Aihua Hu, the minority
owner of AoHong and its CEO, 12,500,000 shares of our common stock valued at
$1,187,500 as additional consideration.





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AoHong
was established in February 2000 as Shanghai AoHong Industry Co., Ltd. by Mr.
Aihua Hu, its CEO, and his wife Mrs. Ying Ye. On July 5, 2007 AoHong changed its
name to Shanghai AoHong Chemical Co., Ltd. AoHong has two wholly owned
subsidiaries; Shanghai Binghong Trading Co., Ltd. which was established in March
2002 and Shanghai Wuling Environmental Material Co., Ltd. which was established
in January 2005.





On August
29, 2007, the Shanghai Foreign Investment Commission issued the Certificate of
Approval for the establishment of the Sino-U.S. joint-venture between our
company and AoHong. The registered capital of this joint venture is $8,210,024,
of which an aggregate of $3,380,000 is being contributed by us. In September
2007 following our remittance of the initial investment of $800,000 to the joint
venture, the Shanghai Industrial & Commercial Administration Bureau issued
the certificate of approval to the joint venture. Aohong received a renewed
business license on November 29, 2007.





In
November 2007, we changed the name of our company to China America Holdings,
Inc. to better reflect our business and operations at that time.





On August
31, 2007, we acquired a 60% interest in Big Tree Toys, Inc., which together with
its subsidiary Jieyang Big Tree Enterprise Toy Co., Ltd., was a development
stage company based in China that intended to operate in the toy business. We
acquired the 60% interest in Big Tree from CDI China, Inc., a wholly owned
subsidiary of China Direct, Inc. Under the terms of the agreement, we paid CDI
China, Inc. $400,000 and issued 10,000,000 shares of our common stock. At the
time of the transaction, China Direct, Inc. owned approximately 17% of our
common stock; the value of the 10,000,000 shares issued was valued at our par
value.





Big Tree
was incorporated in the State of Florida on November 20, 2006 and its wholly
owned subsidiary Jieyang Big Tree was established on January 22, 2007 as a
wholly foreign owned entity (WFOE) in China. China Direct, Inc. acquired 60% of
Big Tree in February 2007 in exchange for shares of its common stock and a
commitment to provide a $1 million working capital loan subject to the
satisfaction of certain revenue milestones by Big Tree, which milestones were
not met by the time we acquired the company. China Direct, Inc. no longer has
the obligation to provide such funds.





In 2008
we discontinued our Toy Distribution segment. We did not report any revenues
from Big Tree during 2007 or 2008 and its assets were limited to a loan due from
a related party, which was made prior to our acquisition of Big Tree. We found
that we were unable to obtain appropriate financial information pertaining to
Jieyang Big Tree for the purposes of consolidating those results with our
financial statements in accordance with generally accepted accounting
principles.





On April
30, 2008, we entered into an agreement with Mr. Wei Lin and China Direct, Inc.
pursuant to which we transferred all of our rights, title and interest in and to
60% of the stock of Big Tree to Mr. Lin in exchange for 53,654 shares of the
common stock of China Direct, Inc. owned by Mr. Lin. These shares had a fair
market value of approximately $445,328 on the date of the agreement. As a result
of this transaction, we no longer own any interest in Big Tree or its wholly
owned subsidiary, Jieyang Big Tree. Following this transaction we do not intend
to pursue any other business opportunities in the toy industry.





In the
fourth quarter of 2008, we decided to discontinue our Biometrics segment and in
January 2009, we sold our historical operations related to the Biometrics
segment to Mr. Perler. As a result of this disposition, AoHong’s operations
now represent all of our business and operations. We believe that the
disposition of these assets and the consolidation of our offices and operations
in China will serve to reduce our general operating expenses in future
periods.





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ITEM
1A.                                RISK
FACTORS





The risk
factors in this section describe the major risks to our business, prospects,
results of operations, financial condition or cash flows, and should be
considered carefully. In addition, these factors constitute our cautionary
statements under the Private Securities Litigation Reform Act of 1995 and could
cause our actual results to differ materially from those projected in any
forward-looking statements (as defined in such act) made in this Annual Report
on Form 10-K. Investors should not place undue reliance on any such
forward-looking statements. Any statements that are not historical facts and
that express, or involve discussions as to, expectations, beliefs, plans,
objectives, assumptions or future events or performance (often, but not always,
through the use of words or phrases such as “will likely result,” “are expected
to,” “will continue,” “is anticipated,” “estimated,” “intends,” “plans,”
“believes” and “projects”) may be forward-looking and may involve estimates and
uncertainties which could cause actual results to differ materially from those
expressed in the forward-looking statements.




Further,
any forward-looking statement speaks only as of the date on which such statement
is made, and we undertake no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which such statement is
made or to reflect the occurrence of anticipated or unanticipated events or
circumstances. New factors emerge from time to time, and it is not possible for
us to predict all of such factors. Further, we cannot assess the impact of each
such factor on our results of operations or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.





RISKS
RELATED TO OUR COMPANY





VOLATILITY
IN RAW MATERIAL COSTS IMPACTS OUR OPERATING COSTS AND ADDS VARIABILITY TO
EARNINGS.





During
2008, our raw material costs were higher overall than in 2007 as a result
of shortages of supply and a disruption in supplies due to transportation and
manufacturing restrictions imposed by the PRC as a result of the 2008
Beijing Olympics. Our raw material costs are expected to return to normal levels
in 2009. However, when these costs increase, we are not always able to
immediately raise selling prices and, ultimately, our ability to pass on
underlying cost increases is greatly dependent on market conditions. As a
result, increases in these costs could negatively impact our results of
operations.





WE
HAVE EXPANDED OUR BUSINESS THROUGH THE ACQUISITION OF A MAJORITY OWNERSHIP
INTEREST IN AOHONG WHICH IS LOCATED IN THE PRC. OUR MANAGEMENT MAY NOT BE
SUCCESSFUL IN TRANSITIONING THE INTERNAL OPERATIONS OF A PRIVATELY HELD CHINESE
COMPANY TO A SUBSIDIARY OF A U.S. PUBLICLY HELD COMPANY.





In June
2007, we closed on the acquisition of a majority ownership interest in AoHong.
The original owners of AoHong continue to own the remaining minority interest
and are responsible for its day-to-day operations. While we have reasonable
expectations that the core operations of this company will continue as it has
historically, our acquisition of AoHong provides certain challenges for our
company, including, among others:





•
            we
      have no experience with companies operating within AoHong's industry
      segment and will remain completely dependent on AoHong's management to
      oversee its day-to-day activities with little practical ability to
      supervise them;•
            we
      will need to upgrade the internal accounting systems at AoHong, as well as
      educating its staff as to the proper collection and recordation of
      financial data to ensure that we can continue to file our annual,
      quarterly and other reports with the Securities and Exchange Commission
      (the “SEC”) on a timely basis.








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As
described elsewhere herein, a subsidiary of China Direct, Inc. provides us with
consulting services, including translation services. China Direct, Inc., which
is also a U.S.-based publicly held company with operations in the PRC as well as
a principal shareholder of our company, has internal accounting staff which
includes Chinese speaking individuals with U.S. accounting experience. There can
be no assurance that our efforts to integrate the operations of AoHong will be
successful or that the anticipated benefits of the acquisition will be fully
realized. There can be no assurance that there will not be substantial costs
associated with these activities or of the success of our integration efforts,
either of which could have a material adverse effect on our future operating
results. If we are unable to properly and timely integrate the disclosure and
accounting operations of AoHong into our company, our ability to timely file our
annual and quarterly reports, as well as other information we are required to
file with the SEC, could be in jeopardy. Any failure on our part to meet the
prescribed filing deadlines could lead to a delisting of our common stock from
the OTC Bulletin Board which could adversely affect a stockholder's ability to
resell their investment in our company.





WE
ARE PAST DUE IN VARIOUS OBLIGATIONS AND WILL NEED TO RAISE CAPITAL TO SATISFY
THESE AMOUNTS.





Under the
acquisition agreement with AoHong, we were required to provide an aggregate of
$3,380,000 of capital between September 2007 and June 2009 as follows: $800,000
before September 30, 2007, $400,000 before June 30, 2008, $600,000 before
December 31, 2008 and the remaining balance due of $1,580,000 by June 27, 2009.
We used $1,200,000 from a unit offering completed in 2007 to satisfy our
commitments due through June 30, 2008. Subsequently, we paid $400,000 in August
2008 which represented a portion of the December 2008 commitment. To make this
payment, we borrowed the funds from China Direct, Inc., a principal shareholder
of our company. The balance of $200,000 was due on December 31, 2008; however,
we did not have sufficient capital to pay this amount. The minority owners of
AoHong have orally agreed to extend the payment date of the remaining amounts
until May 28, 2009. The loan from China Direct, Inc., which was originally due
on December 31, 2008 was extended to June 30, 2009. We will be required to raise
additional capital to fund these obligations and for general working capital. We
do not have any commitments to provide this additional capital and we cannot
assure you that funds are available to us upon terms acceptable to us, if at
all. There are also no assurances that any of our outstanding warrants will be
exercised on a cash basis, if at all. If we do not raise funds as needed, our
ability to provide for current working capital needs and satisfy our obligations
is in jeopardy. In this event, you could lose all of your investment in our
company.





WE
ANTICIPATE THAT WE WILL CONTINUE TO INCUR OPERATING LOSSES AND THERE ARE NO
ASSURANCES THAT WE WILL REPORT PROFITABLE OPERATIONS IN FUTURE
PERIODS.





We have
incurred substantial operating and net losses since our inception through
December 31, 2008. For 2008 and 2007, we reported net losses of $561,158 and
$1,118,603, respectively, and at December 31, 2008, we had an accumulated
deficit of approximately $17,180,183. Our results of operations for 2007 include
AoHong's operations from June 27, 2007, the date we acquired our 56.08% interest
through December 31, 2007 and for the full year ended December 31, 2008. While
AoHong's operations are profitable, profits from AoHong's operations are not
available to offset our cash needs in the U.S. as a result of currency
restrictions in China.  Consequently, we will need to raise additional
capital to fund our commitments and for our operating needs. If we do not raise
additional working capital as necessary, we could be forced to cease our
operations.





OUR
SOLE EXECUTIVE OFFICER WHO SERVES AS OUR CHIEF EXECUTIVE OFFICER AND CHIEF
FINANCIAL OFFICER DOES NOT HAVE ANY EXPERIENCE WITH U.S. PUBLIC
COMPANIES.





In
January 2009, we appointed Mr. Shaoyin Wang as our President, Chief Executive
Officer and Chief Financial Officer. Mr. Wang is located in China and does not
have any experience in managing a U.S. public company. In addition, Mr. Wang is
not an accounting professional and does not have any experience in the
application of U.S. generally accepted accounting principles or the rules and
regulations of the SEC. While we believe that Mr. Wang’s professional experience
will benefit our Chinese operations, we cannot assure you that his lack of
experience with U.S. public companies will not result in greater professional
and consulting expenses as we increase our reliance on third parties to assist
us in meeting our reporting obligations under Federal securities laws which will
adversely impact our results of operations in future periods.





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RESTRICTIONS
ON CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO RECEIVE AND USE OUR REVENUES
EFFECTIVELY. WE MAY NOT HAVE READY ACCESS TO CASH ON DEPOSIT IN BANKS IN THE
PRC.





Because
substantially all of our revenues are in the form of RMB, any future
restrictions on currency exchanges may limit our ability to use revenue
generated in RMB to fund any future business activities outside China or to make
dividend or other payments in U.S. Dollars. Although the Chinese government
introduced regulations in 1996 to allow greater convertibility of the RMB for
current account transactions, significant restrictions still remain, including
primarily the restriction that foreign-invested enterprises may only buy, sell
or remit foreign currencies, after providing valid commercial documents, at
those banks authorized to conduct foreign exchange business. In addition,
conversion of RMB for capital account items, including direct investment and
loans, is subject to government approval in China, and companies are required to
open and maintain separate foreign exchange accounts for capital account items.
At December 31, 2008, our PRC subsidiary had approximately $2,136,000 on deposit
in banks, which represented approximately 96% of our cash. We cannot be certain
that we could have ready access to that cash should we wish to transfer it to
bank accounts outside the PRC nor can we be certain that the Chinese regulatory
authorities will not impose more stringent restrictions on the convertibility of
the RMB, especially with respect to foreign exchange transactions.





HISTORICALLY
OUR BUSINESS HAS BEEN CAPITAL INTENSIVE. AS A RESULT OF THE TERMS OF OUR MOST
RECENT CAPITAL RAISE, WE MAY NOT BE ABLE TO RAISE ADDITIONAL FINANCING WHEN
NECESSARY. IF WE CANNOT RAISE ADDITIONAL CAPITAL AS NEEDED, OUR ABILITY TO
EXECUTE OUR GROWTH STRATEGY AND FUND OUR ONGOING OPERATIONS WILL BE IN
JEOPARDY.





Historically,
our operations have been financed primarily through the issuance of equity.
Capital is typically needed not only to fund our ongoing operations and to pay
our existing obligations, but capital will be necessary to fund our anticipated
growth including the effective integration, operation and expansion of AoHong.
Our future capital requirements, however, depend on a number of factors,
including our ability to internally grow our revenues, manage our business and
control our expenses. We need to raise additional capital to satisfy our
obligations to AoHong, to fund our ongoing operations, pay our existing
obligations and for future growth of our company. As described below the terms
of our 2007 private placement may significantly restrict our ability to raise
working capital as needed. We cannot assure you that additional working capital
is available to us in the future upon terms acceptable to us. If we do not raise
funds as needed, our ability to provide for current working capital needs and
obligations to AoHong, grow our company, and continue our existing business and
operations is in jeopardy. In this event, you could lose all of your investment
in our company.




WE
ARE DEPENDENT ON CERTAIN KEY PERSONNEL AND THE LOSS OF THESE KEY PERSONNEL COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.





Our
success is, to a certain extent, attributable to the management, sales and
marketing, and operational expertise of Aihua Hu, chief executive officer of
Aohong, and Huayan Zhi, chief financial officer of Aohong, who perform key
functions in the operation of AoHong. All of these individuals are located in
China and we do not exercise any day-to-day supervision over their activities.
We are not a party to any employment or similar agreements with any of these
individuals and there are no assurances that they will remain employed by their
respective companies or devote sufficient time and attention to the operations
of those entities. The loss of one or more of these key employees could have a
material adverse effect upon our business, financial condition, and results of
operations.





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CERTAIN
AGREEMENTS TO WHICH WE ARE A PARTY AND WHICH ARE MATERIAL TO OUR OPERATIONS LACK
VARIOUS LEGAL PROTECTIONS WHICH ARE CUSTOMARILY CONTAINED IN SIMILAR CONTRACTS
PREPARED IN THE UNITED STATES.





Our
subsidiaries include AoHong which was organized under the laws of the PRC and
all of its business and operations are conducted in China. We are a party to
certain contracts related to those operations. While these contracts contain the
basic business terms of the agreements between the parties, these contracts do
not contain certain provisions which are customarily contained in similar
contracts prepared in the U.S., such as representations and warranties of the
parties, confidentiality and non-compete clauses, provisions outlining events of
defaults, and termination and jurisdictional clauses. Because these contracts
omit these types of clauses, notwithstanding the differences in Chinese and U.S.
laws we may not have the same legal protections as we would if the contracts
contained these additional provisions. We anticipate that AoHong will likely
enter into contracts in the future which will likewise omit these types of legal
protections. While we have not been subject to any adverse consequences as a
result of the omission of these types of clauses, and we consider the contracts
to which we are a party to contain all the material terms of our business
arrangements with the other party, future events may occur which lead to a
dispute under agreements which could have been avoided if the contracts were
prepared in conformity with U.S. standards. Contractual disputes which may arise
from this lack of legal protection will divert management's time from the
operation of our business and require us to expend funds attempting to settle a
possible dispute. This possible diversion of management time will limit the time
our management would otherwise devote to the operation of our business, and the
diversion of capital could limit the funds we have available to pay our ongoing
operating expenses.





AOHONG'S
OPERATIONS ARE SUBJECT TO GOVERNMENT REGULATION. IF IT FAILS TO COMPLY WITH THE
APPLICABLE REGULATIONS, ITS ABILITY TO OPERATE IN FUTURE PERIODS COULD BE IN
JEOPARDY.





AoHong is
subject to various state and local regulations related to the distribution of
chemicals. It is also licensed by the Shandong Bureau of Quality and Technical
Supervision to distribute chemicals. While AoHong is in substantial compliance
with all provisions of those registrations, inspections and licenses and have no
reason to believe that they will not be renewed as required, any non-renewal by
these governmental authorities could result in the cessation of its business
activities which would have a material adverse effect on our results of
operations in future periods.





COMPLIANCE
WITH ENVIRONMENTAL REGULATIONS CAN BE EXPENSIVE, AND NONCOMPLIANCE WITH THESE
REGULATIONS MAY RESULT IN ADVERSE PUBLICITY AND POTENTIALLY SIGNIFICANT MONETARY
DAMAGES AND FINES.





Our
operations must conform to Industrial Chemical Control Law (ICCL) of People’s
Republic of China, the Management Regulation of Chemical Industry Environmental
Protection and rules for private (non-state owned) companies doing business in
China, Regulations on the Safety Administration of Dangerous Chemicals, and we
are subject to registration and inspection by The Ministry of China Chemical
Industry with respect to the distribution of chemical products in China. We are
also required to comply with all national and local regulations regarding
protection of the environment. If we fail to comply with present or future
environmental regulations, we may be required to pay substantial fines, suspend
production or cease operations. We use, generate and discharge toxic, volatile
and otherwise hazardous chemicals and wastes in our research and development and
manufacturing activities. Any failure by us to control the use of, or to
restrict adequately, the discharge of, hazardous substances could subject us to
potentially significant monetary damages and fines or suspensions in our
business operations.





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THE SUCCESS OF OUR BUSINESSES WILL
DEPEND ON OUR ABILITY TO EFFECTIVELY DEVELOP AND IMPLEMENT STRATEGIC BUSINESS
INITIATIVES.




We are
currently implementing various strategic business initiatives. In connection
with the development and implementation of these initiatives, we will incur
additional expenses and capital expenditures to implement the initiatives. The
development and implementation of these initiatives also requires management to
divert a portion of its time from day-to-day operations. These expenses and
diversions could have a significant impact on our operations and profitability,
particularly if the initiatives included in any new initiative proves to be
unsuccessful. Moreover, if we are unable to implement an initiative in a timely
manner, or if those initiatives turn out to be ineffective or are executed
improperly, our business and operating results would be adversely
affected.





WE
HAVE LIMITED BUSINESS INSURANCE COVERAGE





The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products. We do not have any
business liability or disruption insurance coverage for our operations in China.
Any business disruption, litigation or natural disaster may result in our
incurring substantial costs and the diversion of our resources.





RISKS
RELATED TO DOING BUSINESS IN CHINA





SUBSTANTIALLY
ALL OF OUR ASSETS AND OPERATIONS ARE LOCATED IN THE PRC AND ARE SUBJECT TO
CHANGES RESULTING FROM THE POLITICAL AND ECONOMIC POLICIES OF THE CHINESE
GOVERNMENT.





Our
business operations could be restricted by the political environment in the PRC.
The PRC has operated as a socialist state since 1949 and is controlled by the
Communist Party of China. In recent years, however, the government has
introduced reforms aimed at creating a socialist market economy and policies
have been implemented to allow business enterprises greater autonomy in their
operations. Changes in the political leadership of the PRC may have a
significant effect on laws and policies related to the current economic reform
programs, other policies affecting business and the general political, economic
and social environment in the PRC, including the introduction of measures to
control inflation, changes in the rate or method of taxation, the imposition of
additional restrictions on currency conversion and remittances abroad, and
foreign investment. Moreover, economic reforms and growth in the PRC have been
more successful in certain provinces than in others, and the continuation or
increases of such disparities could affect the political or social stability of
the PRC.





Although
we believe that the economic reform and the macroeconomic measures adopted by
the Chinese government have had a positive effect on the economic development of
China, the future direction of these economic reforms is uncertain and the
uncertainty may decrease the attractiveness of our company as an investment,
which may in turn result in a decline in the trading price of our common
stock.





WE
CANNOT ASSURE YOU THAT THE CURRENT CHINESE POLICIES OF ECONOMIC REFORM WILL
CONTINUE. BECAUSE OF THIS UNCERTAINTY, THERE ARE SIGNIFICANT ECONOMIC RISKS
ASSOCIATED WITH DOING BUSINESS IN CHINA.





Although
the majority of productive assets in China are owned by the Chinese government,
in the past several years the government has implemented economic reform
measures that emphasize decentralization and encourages private economic
activity. In keeping with these economic reform policies, the PRC has been
openly promoting business development in order to bring more business into the
PRC. Because these economic reform measures may be inconsistent or ineffective,
there are no assurances that:





•
                the
      Chinese government will continue its pursuit of economic reform
      policies;•
                the
      economic policies, even if pursued, will be successful;•
                economic
      policies will not be significantly altered from time to time;
      or•
                business
      operations in China will not become subject to the risk of
      nationalization.








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We cannot
assure you that we will be able to capitalize on these economic reforms,
assuming the reforms continue. Because our business model is dependent upon the
continued economic reform and growth in China, any change in Chinese government
policy could materially adversely affect our ability to continue to implement
our business model. China’s economy has experienced significant growth in the
past decade, but such growth has been uneven across geographic and economic
sectors and has recently been slowing. Even if the Chinese government continues
its policies of economic reform, there are no assurances that economic growth in
that country will continue or that we will be able to take advantage of these
opportunities in a fashion that will provide financial benefit to
us.





THE
CHINESE GOVERNMENT EXERTS SUBSTANTIAL INFLUENCE OVER THE MANNER IN WHICH OUR
CHINESE SUBSIDIARIES MUST CONDUCT OUR BUSINESS ACTIVITIES.





The PRC
only recently has permitted provincial and local economic autonomy and private
economic activities. The government of the PRC has exercised and continues to
exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership. 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 the PRC or particular regions of the PRC, and
could require us to divest ourselves of any interest we then hold in our Chinese
subsidiaries.





ANY
RECURRENCE OF SEVERE ACUTE RESPIRATORY SYNDROME, OR SARS, OR ANOTHER WIDESPREAD
PUBLIC HEALTH PROBLEM, COULD INTERRUPT OUR OPERATIONS





A renewed
outbreak of SARS or another widespread public health problem in China could have
a negative effect on our operations. Our operations may be impacted by a number
of health-related factors, including the following:





•
            quarantines
      or closures of some of our offices which would severely disrupt our
      operations;•
            the
      sickness or death of our key management and employees;
  or•
            a
      general slowdown in the Chinese
economy.





An
occurrence of any of the foregoing events or other unforeseen consequences of
public health problems could result in a loss of revenues in future periods and
could impact our ability to conduct the operations of our Chinese subsidiaries
as they are presently conducted. If we were unable to continue the
operations of our Chinese subsidiaries as they are now conducted, our revenues
in future periods would decline and our ability to continue as a going concern
could be in jeopardy. If we were unable to continue as a going concern, you
could lose your entire investment in our company.





RESTRICTIONS
ON CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO RECEIVE AND USE OUR REVENUES
EFFECTIVELY. WE MAY NOT HAVE READY ACCESS TO CASH ON DEPOSIT IN BANKS IN THE
PRC.





Because a
substantial portion of our revenues are in the form of Renminbi (RMB), the main
currency used in China, any future restrictions on currency exchanges may limit
our ability to use revenue generated in RMB to fund any future business
activities outside China or to make dividend or other payments in U.S.
Dollars. Although the Chinese government introduced regulations in 1996 to allow
greater convertibility of the RMB for current account transactions, significant
restrictions still remain, including primarily the restriction that
foreign-invested enterprises may only buy, sell or remit foreign currencies,
after providing valid commercial documents, at those banks authorized to conduct
foreign exchange business. In addition, conversion of RMB for capital account
items, including direct investment and loans, is subject to government approval
in China, and companies are required to open and maintain separate foreign
exchange accounts for capital account items. At December 31, 2008 our PRC
subsidiaries had approximately $7.6 million on deposit in banks in China, which
represented approximately 53% of our cash. We cannot be certain that we could
have ready access to that cash should we wish to transfer it to bank accounts
outside the PRC nor can we be certain that the Chinese regulatory authorities
will not impose more stringent restrictions on the convertibility of the RMB,
especially with respect to foreign exchange transactions.





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WE
MAY BE UNABLE TO ENFORCE OUR RIGHTS DUE TO POLICIES REGARDING THE REGULATION OF
FOREIGN INVESTMENTS IN CHINA.





The PRC’s
legal system is a civil law system based on written statutes in which decided
legal cases have little value as precedent, unlike the common law system
prevalent in the United States. The PRC does not have a well-developed,
consolidated body of laws governing foreign investment enterprises. As a result,
the administration of laws and regulations by government agencies may be subject
to considerable discretion and variation, and may be subject to influence by
external forces unrelated to the legal merits of a particular matter. China’s
regulations and policies with respect to foreign investments are evolving.
Definitive regulations and policies with respect to such matters as the
permissible percentage of foreign investment and permissible rates of equity
returns have not yet been published. Statements regarding these evolving
policies have been conflicting and any such policies, as administered, are
likely to be subject to broad interpretation and discretion and to be modified,
perhaps on a case-by-case basis. The uncertainties regarding such regulations
and policies present risks which may affect our ability to achieve our stated
business objectives. If we are unable to enforce any legal rights we may have
under our contracts or otherwise, our ability to compete with other companies in
our industry could be limited which could result in a loss of revenue in future
periods which could have a material adverse effect on our business, financial
condition and results of operations.




FAILURE
TO COMPLY WITH THE UNITED STATES FOREIGN CORRUPT PRACTICES ACT COULD SUBJECT US
TO PENALTIES AND OTHER ADVERSE CONSEQUENCES.





We are
subject to the United States Foreign Corrupt Practices Act which generally
prohibits United States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. Corruption, extortion, bribery, pay-offs, theft and other fraudulent
practices occur from time-to-time in the PRC. We can make no assurance, however,
that our employees or other agents will not engage in such conduct for which we
might be held responsible. If our employees or other agents are found to have
engaged in such practices, we could suffer severe penalties and other
consequences that may have a material adverse effect on our business, financial
condition and results of operations.





WE
MAY HAVE DIFFICULTY ESTABLISHING ADEQUATE MANAGEMENT, LEGAL AND FINANCIAL
CONTROLS IN THE PRC.





PRC
companies have historically not adopted a Western style of management and
financial reporting concepts and practices, which includes strong corporate
governance, internal controls and, computer, financial and other control
systems. In addition, we may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in the PRC. As a result of
these factors, we may experience difficulty in establishing management, legal
and financial controls, collecting financial data and preparing financial
statements, books of account and corporate records and instituting business
practices that meet Western standards. Therefore, we may, in turn, experience
difficulties in implementing and maintaining adequate internal controls. Any
such deficiencies, weaknesses or lack of compliance could have a materially
adverse effect on our business.





RISKS
RELATED TO OUR COMMON STOCK





THE
EXERCISE OF OUTSTANDING WARRANTS AND OPTIONS WILL BE DILUTIVE TO OUR EXISTING
SHAREHOLDERS.





At April
15, 2009, we had 140,810,792 shares of our common stock issued and outstanding
and the following securities which are convertible or exercisable into shares of
our common stock were outstanding:





•
            63,800,113
      shares of our common stock issuable upon the exercise of common stock
      purchase warrants with exercise prices ranging from $0.10 to $0.55 per
      share with a weighted  average exercise price of $0.16;
      and•
            7,900,000
      shares of our common stock issuable upon exercise of outstanding options
      with exercise prices ranging from $0.07 to $0.20 with a weighted average
      exercise price of $.083.








- 15
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The
exercise of these warrants or options may materially adversely affect the market
price of our common stock and will have a dilutive effect on our existing
shareholders.





WE
HAVE NOT VOLUNTARILY IMPLEMENTED VARIOUS CORPORATE GOVERNANCE MEASURES, IN THE
ABSENCE OF WHICH, SHAREHOLDERS MAY HAVE MORE LIMITED PROTECTIONS AGAINST
INTERESTED DIRECTOR TRANSACTIONS, CONFLICTS OF INTEREST AND SIMILAR
MATTERS.





Recent
Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in
the adoption of various corporate governance measures designed to promote the
integrity of the corporate management and the securities markets. Some of these
measures have been adopted in response to legal requirements. Others have been
adopted by companies in response to the requirements of national securities
exchanges, such as the NYSE or the Nasdaq Stock Market, on which their
securities are listed. Among the corporate governance measures that are required
under the rules of national securities exchanges are those that address board of
directors' independence, audit committee oversight, and the adoption of a code
of ethics. Although we have adopted a Code of Ethics and Business Conduct, we
have not yet adopted any of these other corporate governance measures and, since
our securities are not yet listed on a national securities exchange, we are not
required to do so. We have not adopted corporate governance measures such as an
audit or other independent committees of our Board of Directors nor have we
adopted a related persons transaction policy. If we expand our board membership
in future periods to include independent directors, we may seek to establish an
audit and other committees of our Board of Directors. It is possible that if we
were to adopt some or all of these corporate governance measures, shareholders
would benefit from somewhat greater assurances that internal corporate decisions
were being made by disinterested directors and that policies had been
implemented to define responsible conduct. Prospective investors should bear in
mind our current lack of corporate governance measures in formulating their
investment decisions.





BECAUSE
OUR STOCK CURRENTLY TRADES BELOW $5.00 PER SHARE, AND IS QUOTED ON THE OTC
BULLETIN BOARD, OUR STOCK IS CONSIDERED A "PENNY STOCK" WHICH CAN ADVERSELY
AFFECT ITS LIQUIDITY.





As the
trading price of our common stock is less than $5.00 per share, our common stock
is considered a “penny stock”, and trading in our common stock is subject to the
requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under this
rule, broker/dealers who recommend low-priced securities to persons other than
established customers and accredited investors must satisfy special sales
practice requirements. The broker/dealer must make an individualized written
suitability determination for the purchaser and receive the purchaser's written
consent prior to the transaction.





SEC
regulations also require additional disclosure in connection with any trades
involving a "penny stock," including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and its
associated risks. These requirements severely limit the liquidity of securities
in the secondary market because few broker or dealers are likely to undertake
these compliance activities. In addition to the applicability of the penny stock
rules, other risks associated with trading in penny stocks could also be price
fluctuations and the lack of a liquid market.





ITEM
1B.                      UNRESOLVED
STAFF COMMENTS.





Not
applicable to a smaller reporting company.





ITEM
2.                      PROPERTIES.





Our
principal offices are located in the Huating Economic & Development Area,
Jiading District, Shanghai. We own a 218,000 square foot facility which includes
98,100 square feet of workshop and office space, 33,790 square feet of warehouse
and 115.7 cubic meters of storage tanks.





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We have
land use rights pursuant to an agreement with the Chinese government. The land
use rights are valued at approximately $87,550 (RMB 600,082). Under the terms of
the land use rights agreement, we have these rights to use land until November
3, 2053.





We also
lease a warehouse from People’s Inn at Shanghai with an annual cost of
approximately $3,512 (RMB24,000). The lease expires on September 30,
2009.





In
February 2009, AoHong Tianjin obtained the land use right for approximately
253,350 square feet of land located in Ji County Economic Development Park for
approximately $751,364 which will be the location of a new production base and
distribution facility for AoHong Tianjin. Under the terms of the land use rights
agreement, we have these rights to use land until February 23,
2059.





ITEM
3.                      LEGAL
PROCEEDINGS





We are
not a party to any pending legal proceedings and, to our knowledge, none of our
officers, directors or principal shareholders are party to any legal proceeding
in which they have an interest adverse to us.





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





None





PART
II





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





Our
common stock is quoted on the OTCBB under the symbol CAAH. The reported high and
low sales prices for the common stock as reported on the OTCBB are shown below
for the periods indicated. The quotations reflect inter-dealer prices, without
retail mark-up, markdown or commission, and may not represent actual
transactions.





High
                      
                      
                      Low2007First
      quarter ended March 31, 2007
                      
                      $
                      0.09
                      
                      
                      
                      0.04Second
      quarter ended June 30, 2007
                      
                      
                      0.10
                      
                      
                      
                      0.05Third
      quarter ended September 30, 2007
                      
                      
                      0.09
                      
                      
                      
                      0.05Fourth
      quarter ended December 31, 2007
                      
                      
                      0.14
                      
                      
                      
                      0.072008First
      quarter ended March 31, 2008
                      
                      
                      0.12
                      
                      
                      
                      0.06Second
      quarter ended June 30, 2008
                      
                      
                      0.76
                      
                      
                      
                      0.04Third
      quarter ended September 30, 2008
                      
                      
                      0.06
                      
                      
                      
                      0.03Fourth
      quarter ended December 31, 2008
                      
                      
                      0.03
                      
                      
                      
                      0.01





On March
31, 2009, the last sale price of our common stock as reported on the OTCBB was
$0.021. As of March 31, 2009, there were approximately 930 record owners of our
common stock.





- 17
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Dividend
Policy





We have
never paid cash dividends on our common stock. Payment of dividends will be
within the sole discretion of our Board of Directors and will depend, among
other factors, upon our earnings, capital requirements and our operating and
financial condition. In addition under Florida law, we may declare and pay
dividends on our capital stock either out of our surplus, as defined in the
relevant Florida statutes, or if there is no such surplus, out of our net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. If, however, the capital of our company, computed in
accordance with the relevant Florida statutes, has been diminished by
depreciation in the value of our property, or by losses, or otherwise, to an
amount less than the aggregate amount of the capital represented by the issued
and outstanding stock of all classes having a preference upon the distribution
of assets, we are prohibited from declaring and paying out of such net profits
any dividends upon any shares of our capital stock until the deficiency in the
amount of capital represented by the issued and outstanding stock of all classes
having a preference upon the distribution of assets shall have been
repaired.





Securities
Authorized For Issuance Under Equity Compensation Plans




The
following table sets forth securities authorized for issuance under equity
compensation plans, including individual compensation arrangements, by us under
our equity compensation plans approved by our shareholders any compensation
plans not previously approved by our shareholders as of December 31,
2008.





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)Plans
      approved by our shareholders1999
      Stock Option Plan
                      
                      
                      650,000
                      
                      
                      $
                      0.12
                      
                      
                      
                      500,0002001
      Equity Compensation Plan
                      
                      
                      250,000
                      
                      
                      $
                      0.08
                      
                      
                      
                      403,8402005
      Equity Compensation Plan
                      
                      
                      1,000,000
                      
                      
                      $
                      0.08
                      
                      
                      
                      723,000Plans
      not approved by shareholders
                      
                      
                      6,000,000
                      
                      
                      $
                      0.08
                      
                      
                      
                      n/a





A
description of each of these plans is contained later in this report under Part
III, Item 11. “Executive Compensation - Stock Option Plans.”





Recent
Sales of Unregistered Securities





None.





ITEM 6. SELECTED FINANCIAL DATA.





Not
applicable to a smaller reporting company.





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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION





The
following discussion and analysis of our consolidated financial condition and
results of operations for the years ended December 31, 2008 and 2007 should be
read in conjunction with the consolidated financial statements, including
footnotes, and other information presented elsewhere in this Form 10-K. The year
ended December 31, 2008 is referred to as “2008”, the year ended December 31,
2007 is referred to as “2007”, and the coming year which will end December 31,
2009 is referred to as “2009”.  Our audited consolidated financial
statements have been reclassified to recognize discontinued
operations.





Overview





We sell
and distribute assorted chemicals in China. The majority of our revenues are
generated through the sale and distribution of liquid coolants. While our
products can be employed in a variety of applications, we primarily sell and
distribute refrigerants for use in air conditioning systems. We also sell and
distribute chemical products used in the application of fire extinguishing
agents, aerosol sprays, insecticides, and tetrahydrothiophene
(“THT”).





All of
our operations are conducted in China through our AoHong subsidiary. AoHong
sells and distributes assorted chemicals. Our main product group is liquid
coolants which are employed primarily as refrigerants in air conditioning
systems. AoHong's operations are comprised of four basic
functions:





•
            Repackaging
      bulk quantities of liquid coolants into smaller packaging for resale and
      distribution;•
            Custom
      mixing of various raw materials in accordance with customer specifications
      into a new product;•
            AoHong
      employs two engineers who work with customers to derive proper mixture of
      chemicals; and•
            Distribution
      of bulk quantities of liquid coolants directly to customers who in turn
      resell the product;





In 2008,
approximately 40.6 % of our net revenues were derived from our repackaging
business, approximately 8.9% were generated from the custom made chemical
compounds, and approximately 50.5 % were from the distribution of bulk
quantities. Approximately 91.2% of our products are employed domestically while
the balance is typically exported.





AoHong
distributes products within China to 16 provinces and districts including
Liaoning, Jilin, Beijing, Xinjiang, Shangxi, Chongqing, Sichuan, Jiangsu,
Zhejiang, Anhui, Guangdong, Hainan, Hong Kong and Taiwan. AoHong exports to
countries such as Russia and Thailand.





In
November 2008 we created AoHong (Tianjin) Chemical Co., Ltd. a Chinese limited
liability company as a wholly owned subsidiary, (“AoHong Tianjin”), to expand
our distribution channels to northern China





A
significant portion of our volume, approximately 32.2%, and 32.6% in 2008 and
2007, respectively, are derived from automobile, refrigerator manufacturers and
air conditioning manufacturers; as such historically we have witnessed a
seasonal surge in demand for refrigerant products from March to July. AoHong
utilizes a purchase order system for orders; generally we enter into supply
agreements with major customers, these supply agreements outline annual demand.
Typically we deliver product within 15 to 30 days from the time an order is
placed. We generally offer customers terms of net 60 days to net 90
days.  In 2008, Shanghai 3F New Materials Co., Ltd. and Changshu
Zhongtian Chemical Trading Co. Ltd. accounted for 20.87% and 17.1%, respectively
of our net revenues as compared to 18% and 13%, respectively in
2007.





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In 2008
R22, R12, R134A, R410A, and THT represented approximately 70%, 16.8%, 11.9%,
4.1% and 0.6%, respectively of our volume. The chemicals, R22, R134A, and R410A,
are coolants which are generally used as refrigerants in a variety of air
conditioning systems.  R12 is a chemical which is primarily employed
in fire extinguishing agents, and insecticides. Tetrahydrothiophene (THT) is a
chemical agent which is occasionally used as an odorant in natural gas, due to
its strong unpleasant odor.





Approximately
20.8% and approximately 37%, respectively, of AoHong's revenues for 2008 and
2007 were derived from environmentally friendly products.





Discontinued
Operations





In 2008
we conduct business in one segment: Chemical Distribution, while in 2007 we
reported in three segments; (i) Chemical Distribution, (ii) Biometrics, and
(iii) Toy Distribution. Our historical operations were the design, development,
manufacture and sale of biometric identification products. We never generated
any significant revenues from these operations. Beginning in January 2007 our
management began seeking a suitable target for a business combination in an
effort to increase our revenues. In June 2007 we acquired a 56.08% interest in
AoHong. In 2008 we discontinued our Biometrics segment, prior to then, revenues
from AoHong represented in excess of 99% of our consolidated net revenues for
each of 2007 and the nine months ended September 30, 2008. In January 2009 we
sold our historical operations related to the Biometrics segment to our former
CEO and AoHong’s operations now represent all of our business and
operations.





In
January 2009 we sold the assets related to our Biometrics segment to a company
owned by Mr. Dore Scott Perler, a member of our Board of Directors and our
former Chief Executive Officer, in exchange for an assumption of liabilities
related to this division and the termination of Mr. Perler’s employment
agreement. As a result of this disposition, AoHong’s operations now represent
all of our business and operations. We believe that the disposition of these
assets and the consolidation of our offices and operations in China will serve
to reduce our general operating expenses in future periods.





In August
2007, we created a Toy Distribution segment when we acquired a 60% interest in
Big Tree. We did not report any revenues from Big Tree during 2008 or 2007. We
found that we were unable to obtain appropriate financial information pertaining
to Jieyang Big Tree for the purposes of consolidating those results with our
financial statements in accordance with generally accepted accounting
principles. This segment never commenced operations and we discontinued the
segment in April 2008.





Disposition
of Big Tree





In August
2007, we closed the acquisition of a majority of Big Tree Toys, Inc., which
together with its subsidiary Jieyang Big Tree Enterprise Toy Co., Ltd., was a
development stage company based in China that intended to operate in the toy
business. We had acquired the 60% equity interest in Big Tree from CDI China,
Inc., a wholly-owned subsidiary of China Direct, Inc. Under the terms of the
agreement, we paid CDI China, Inc. $400,000 and issued it 10,000,000 shares of
our common stock. Because China Direct, Inc. owned approximately 17% of our
common stock at the time of the transaction and was considered a related party,
the value of the 10,000,000 shares issued was valued at our par
value.





We did
not report any revenues from Big Tree during 2007 or 2008 and its assets were
limited to a loan due from a related party, which was made prior to our
acquisition of Big Tree. We found that we were unable to obtain appropriate
financial information pertaining to Jieyang Big Tree for the purposes of
consolidating those results with us in accordance with generally accepted
accounting principles. On April 30, 2008, we entered into an agreement with Mr.
Wei Lin and China Direct, Inc. pursuant to which we transferred all of our
rights, title and interest in and to 60% of the stock of Big Tree to
Mr. Lin in exchange for 53,654 shares of the common stock of China Direct,
Inc. owned by Mr. Lin. These shares had a fair market value of approximately
$445,328 on the date of the agreement. As a result of this transaction, we no
longer own any interest in Big Tree or its wholly-owned subsidiary, Jieyang Big
Tree. Following this transaction we do not intend to pursue any other business
opportunities in the toy industry.





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Future
Growth





We have
financed our growth and cash requirements through equity investments and debt
and equity financing. We do not currently have any material commitments for
capital expenditures. However, under the terms of our purchase agreement with
AoHong, we are required to contribute an additional $1,780,000 to its registered
capital, including an additional $200,000 which was due on or before December
31, 2008 and the remaining $1,580,000 on or before June 27, 2009. We did not pay
the $200,000 which was due by December 31, 2008 and the minority owners of
AoHong have orally agreed to extend the due date of this amount to on or before
May 28, 2009. In addition, a $400,000 note payable to China Direct, Inc. was
originally due on December 31, 2008 and was extended to June 30, 2009. Our
intent had been to sell the marketable securities of China Direct, Inc. which we
own to repay this obligation, however, as a result of the current decline in the
market price of the stock the value of the shares is significantly below the
amount of the obligation.





Currently,
our cash is not sufficient for all of our capital needs and we will need to
raise additional capital. Given the current uncertainties in the capital
markets, there can be no assurance that we can raise capital on suitable terms,
if at all. There are also no assurances that any of our outstanding warrants
will be exercised on a cash basis, if at all. If we are unable to satisfy our
contractual commitments to AoHong, our operations in future periods could be
adversely impacted. In addition, if we are unable to satisfy the China Direct,
Inc. note, should it declare a default it would be entitled to retain the shares
we have pledged as collateral in addition to pursuing collection of the
obligation. If we are unable to obtain the financing necessary to pay the
obligations as they become due and support our operations, we may be unable to
continue as a going concern. In that event, we may be forced to cease operations
and our shareholders could lose their entire investment in our
company.





Our
ability to significantly grow the market for our biometrics products was
dependent on our ability to raise sufficient working capital to fund our
marketing and research and development efforts. While we were able to raise
limited amounts of capital from time to time, we were unable to secure
the needed financing. As a result, during 2007 our management began efforts
to identify and close an acquisition or other business combination with an
operating company. We believed that this would benefit our overall
operations.





Critical
Accounting Policies





Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We
continually evaluate our estimates, including those related to bad debts,
inventories, recovery of long-lived assets, income taxes, and the valuation of
equity transactions. We base our estimates on historical experience and on
various other assumptions that we believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Any future changes to these estimates and assumptions could cause
a material change to our reported amounts of revenues, expenses, assets and
liabilities. Actual results may differ from these estimates under different
assumptions or conditions. We believe the following critical accountingpolicies affect our more
significant judgments and estimates used in the preparation of the financial
statements.





Inventories





Inventories
are stated at the lower of average cost or market price and consist of raw
materials and finished goods.  An allowance is established when
management determines that certain inventories may not be saleable. If inventory
costs exceed expected market value due to obsolescence or quantities in excess
of expected demand, we will record reserves for the difference between the cost
and the market value. These reserves are recorded based on
estimates.  We review inventory quantities on hand and on order and
record, on a quarterly basis, a provision for excess and obsolete inventory, if
necessary. If the results of the review determine that a write-down is
necessary, we recognize a loss in the period in which the loss is identified,
whether or not the inventory is retained. Our inventory reserves establish a new
cost basis for inventory and are not reversed until we sell or dispose of the
related inventory. Such provisions are established based on historical usage,
adjusted for known changes in demands for such products, or the estimated
forecast of product demand and production requirements.





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Property
and Equipment





Property
and equipment are stated at cost less accumulated depreciation. Depreciation is
computed using straight-line method over the estimated useful lives of the
assets. The estimated useful lives of the assets are as follows:





Useful
      LifeBuilding
      and building improvements
                    
                    
                    20
                    
                    YearsManufacturing
      equipment
                    
                    
                    10
                    
                    YearsOffice
      equipment and furniture
                    
                    
                    5 -
      7
                    
                    YearsVehicle
                    
                    
                    5
                    
                    Years




The cost
of repairs and maintenance is expensed as incurred; major replacements and
improvements are capitalized. When assets are retired or disposed of, the cost
and accumulated depreciation are removed from the accounts, and any resulting
gains or losses are included in income in the year of disposition.





Included
in property and equipment is construction-in-progress which consists of a
factory under construction for a facility in Tianjin acquired by Aohong Tianjin
and includes the initial costs of construction. No provision for depreciation is
made on construction-in-progress until such time as the relevant assets are
completed and ready for their intended use.





In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” we examine the
possibility of decreases in the value of fixed assets when events or changes in
circumstances reflect the fact that their recorded value may not be recoverable.
We recognize an impairment loss when the sum of expected undiscounted future
cash flows is less than the carrying amount of the asset. The amount of
impairment is measured as the difference between the asset’s estimated fair
value and its book value.





Revenue
Recognition





We follow
the guidance of the SEC's Staff Accounting Bulletin No. 104 and Topic 13,
"Revenue Recognition in Financial Statements". In general, we record revenue
when persuasive evidence of an arrangement exists, services have been rendered
or product delivery has occurred, the sales price to the customer is fixed or
determinable, and collectability is reasonably assured.





The
following policies reflect specific criteria for recognizing
revenues:





•
            We
      generate revenue from the sale of our products and records revenues from
      the sale of products when the goods are shipped, title passes, and
      collectability is reasonably assured;•
            Revenue
      from periodic maintenance agreements is generally recognized ratably over
      the respective maintenance periods provided no significant obligations
      remain and collectability of the related receivable is probable;
      and•
            Revenue
      from the performance of services is recognized upon completion of the
      service.





Recent
Accounting Pronouncements





In
December 2007, the FASB issued SFAS 141 (revised 2007), "Business Combinations". SFAS
141R is a revision to SFAS 141 and includes substantial changes to the
acquisition method used to account for business combinations (formerly the
"purchase accounting" method), including broadening the definition of a
business, as well as revisions to accounting methods for contingent
consideration and other contingencies related to the acquired business,
accounting for transaction costs, and accounting for adjustments to provisional
amounts recorded in connection with acquisitions. SFAS 141R retains the
fundamental requirement of SFAS 141 that the acquisition method of accounting be
used for all business combinations and for an acquirer to be identified for each
business combination. SFAS 141R is effective for periods beginning on or after
December 15, 2008, and will apply to all business combinations occurring
after December 31, 2008. The adoption of SFAS 141(R), effective January 1, 2009,
may have an impact on accounting for future business
combinations.





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In
December 2007, the FASB issued SFAS 160, "Non-controlling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51, Consolidated Financial Statements" (“ARB 51”). This
Statement amends ARB 51 to establish new standards that will govern the (1)
accounting for and reporting of non-controlling interests in partially owned
consolidated subsidiaries and (2) the loss of control of subsidiaries.
Non-controlling interest will be reported as part of equity in the consolidated
financial statements. Losses will be allocated to the non-controlling interest,
and, if control is maintained, changes in ownership interests will be treated as
equity transactions. Upon a loss of control, any gain or loss on the interest
sold will be recognized in earnings. SFAS 160 is effective for periods beginning
after December 15, 2008. We are currently evaluating the requirements of
SFAS 160.





In
March 2008, the FASB issued SFAS 161, “Disclosures about Derivative
Instruments and Hedging Activities”. The new standard is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity’s financial position, financial
performance, and cash flows. It is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. We do not expect SFAS No. 161 to have a material
impact on the preparation of our consolidated financial statements.





In May
2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement). FSP APB 14-1 clarifies that convertible debt instruments
that may be settled in cash upon either mandatory or optional conversion
(including partial cash settlement) are not addressed by paragraph 12 of APB
Opinion No. 14, Accounting for
Convertible Debt and Debt issued with Stock Purchase Warrants.
Additionally, FSP APB 14-1 specifies that issuers of such instruments should
separately account for the liability and equity components in a manner that will
reflect the entity’s non-convertible debt borrowing rate when interest cost is
recognized in subsequent periods. FSP APB 14-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. We will adopt FSP APB 14-1 beginning
in the first quarter of fiscal 2009, and this standard must be applied on a
retroactive basis. We are evaluating the impact of the adoption of FSP APB 14-1
on our consolidated financial position and results of operations.





In May
2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.
162, The Hierarchy of
Generally Accepted Accounting Principles. This standard is intended to
improve financial reporting by identifying a consistent framework, or hierarchy,
for selecting accounting principles to be used in preparing financial statements
that are presented in conformity with generally accepted accounting principles
in the United States for non-governmental entities. SFAS No. 162 is effective 60
days following approval by the U.S. SEC (“SEC”) of the Public Company Accounting
Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles. We do not
expect SFAS No. 162 to have a material impact on the preparation of our
consolidated financial statements.





On June
16, 2008, the FASB issued final Staff Position (FSP) No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities,” to address the question of whether instruments granted in
share-based payment transactions are participating securities prior to vesting.
The FSP determines that unvested share-based payment awards that contain rights
to dividend payments should be included in earnings per share calculations. The
guidance will be effective for fiscal years beginning after December 15, 2008.
The Company is currently evaluating the requirements of (FSP) No. EITF 03-6-1 as
well as the impact of the adoption on its consolidated financial
statements.





In
June 2008, the FASB ratified Emerging Issues Task Force Issue
No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-05 mandates a two-step
process for evaluating whether an equity-linked financial instrument or embedded
feature is indexed to the entity’s own stock.  Warrants that a company
issues that contain a strike price adjustment feature, upon the adoption of EITF
07-05, are no longer being considered indexed to the company’s own stock.
Accordingly, adoption of EITF 07-5 will change the current classification (from
equity to liability) and the related accounting for such warrants outstanding at
that date. EITF 07-05 is effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. W are
currently evaluating the impact the adoption of EITF 07-5 will have on our
financial statement presentation and disclosures.





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In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by
Public Entities (Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4
and FIN 46(R)-8 amends FAS 140 and FIN 46(R) to require additional disclosures
regarding transfers of financial assets and interest in variable interest
entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for interim or annual
reporting periods ending after December 15, 2008. The adoption of FSP FAS 140-4
and FIN 46(R)-8 did not have an impact on our consolidated financial position
and results of operations.





Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the consolidated financial statements
upon adoption.





RESULTS
OF OPERATIONS





2008
AS COMPARED TO 2007





We
believe that a direct comparison of our consolidated results of operations for
2008 to 2007 may not be meaningful as we only reported revenues from AoHong in
2007 from the date of acquisition (June 27, 2007) through December 31, 2007.The
following table sets forth the results of our operations for the periods
indicated as a percentage of net revenues:





For
      the Years Ended December 31,2008
                  
                  
                  2007Dollar
                  
                  
                  Percent
                  
                  
                  Dollar
                  
                  
                  PercentNet
      revenues
                  
                  $
                  34,967,512
                  
                  
                  
                  100.0
                  %
                  
                  $
                  16,197,391
                  
                  
                  
                  100.0
                  %Cost
      of sales
                  
                  
                  32,279,091
                  
                  
                  
                  92.3
                  %
                  
                  
                  13,995,155
                  
                  
                  
                  86.4
                  %Gross
      profit
                  
                  
                  2,688,421
                  
                  
                  
                  7.7
                  %
                  
                  
                  2,202,236
                  
                  
                  
                  13.6
                  %Operating
      expenses
                  
                  
                  1,828,692
                  
                  
                  
                  5.2
                  %
                  
                  
                  2,608,636
                  
                  
                  
                  16.1
                  %Income
      (loss) from operations
                  
                  
                  859,729
                  
                  
                  
                  2.5
                  %
                  
                  
                  (406,400
                  )
                  
                  
                  (2.5
                  )%Other
      expenses
                  
                  
                  (396,648
                  )
                  
                  
                  (1.2
                  )%
                  
                  
                  (13,861
                  )
                  
                  
                  (0.1
                  )%Income
      (loss) before discontinued operations.
                    income  taxes
      and minority interest
                  
                  
                  463,081
                  
                  
                  
                  1.3
                  %
                  
                  
                  (420,261
                  )
                  
                  
                  (2.6
                  )%Loss
      from discontinued operations
                  
                  
                  (232,825
                  )
                  
                  
                  (0.7
                  )%
                  
                  
                  (278,112
                  )
                  
                  
                  (1.7
                  )%Income
      (loss) from income taxes and minority
                    Interest
                  
                  
                  230,256
                  
                  
                  
                  0.6
                  %
                  
                  
                  (698,373
                  )
                  
                  
                  (4.3
                  )%Provision
      for income taxes
                  
                  
                  (354,616
                  )
                  
                  
                  (1.0
                  )%
                  
                  
                  -
                  
                  
                  
                  -Loss
      before minority interest
                  
                  
                  (124,360
                  )
                  
                  
                  (0.4
                  )%
                  
                  
                  (698,373
                  )
                  
                  
                  (4.3
                  )%Minority
      interest in income of subsidiary
                  
                  
                  (436,798
                  )
                  
                  
                  1.3
                  %
                  
                  
                  (420,230
                  )
                  
                  
                  (2.6
                  )%Net
      loss
                  
                  $
                  (561,158
                  )
                  
                  
                  (1.7
                  )%
                  
                  $
                  (1,118,603
                  )
                  
                  
                  (6.9
                  )%





Net Revenues. In 2008, we had
net revenues of $34,967,512 as compared to net revenues of $16,197,391 for 2007,
an increase of approximately 115.9%. Overall, for 2008 our net revenues
increased as a result of the acquisition of AoHong in the second quarter of
2007.





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Our
subsidiary, AoHong generates all of our net revenues from the sale and
distribution of assorted liquid coolants which are utilized in a variety of
applications, and repackaging bulk quantities of liquid coolants into smaller
packaging for resale and distribution. During 2008 and 2007, our revenues were
generated by the following activities:





2008
                            
                            
                            2007Sales
      of liquid coolants which had been purchased in bulk and repackaged into
      smaller qualities for resale
                            
                            
                            40.6
                            %
                            
                            
                            55.0
                            %Custom
      mixing of various raw materials in accordance with customer specifications
      into a new product
                            
                            
                            8.9
                            %
                            
                            
                            15.0
                            %Distribution
      of bulk quantities of liquid coolants directly to customers who in turn
      resell the product
                            
                            
                            50.5
                            %
                            
                            
                            30.0
                            %Total
                            
                            
                            100.0
                            %
                            
                            
                            100.0
                            %





Our
customers include manufacturers of automobiles, refrigerators and air
conditioners as well as distributors of coolants. During the year ended December
31, 2008 and 2007, a significant portion of our volume, approximately 32.2% and
32.5% were derived from manufacturers, including automobile, air conditioners
and refrigerator manufacturers, approximately 56.4% and 58.9% were from air
conditioners and refrigerator retailers and approximately 11.4% and 8.6% were
from the export of products. As a result, historically AoHong has witnessed a
seasonal surge in demand for refrigerant products from March to
July.





The
Chinese government announced a $586 billion domestic economic stimulus program
in November 2008 designed to support domestic economic activity. The two-year
program includes spending for housing, infrastructure, agriculture, health care
and social welfare. As well in addition to previously announced tax rebates, the
program includes a tax deduction for corporate capital expenditures. We hope to
see a benefit to the Chinese economy from this stimulus program. The tax rebates
on export sales can indirectly help Aohong, since customers who have been hurt
by tariffs will potentially receive a positive impact from the rebates, which
could translate to more business for Aohong. However, we cannot estimate the
amount of benefit, if any, that we will realize.





Cost of
sales. Cost of sales for 2008 increased $18,283,936 or 130.6%, from
$13,995,155 (86.4% of net revenues) for 2007 to $32,279,091 (92.3% of net
revenues) for 2008.  Cost of sales includes the cost of raw material.
During 2008, AoHong’s cost of sales as a percentage of net revenues increased
approximately 5.9% from the comparable period in 2007 as a result of a temporary
shortage of raw materials resulting from business interruptions due to the 2008
Beijing Olympics and Paralympics. From July 2008 through September 17, 2008, the
Chinese government imposed restrictions limiting the transport of
chemicals.  Due to these restrictions, some manufacturers suspended
production and this decrease in the supply of raw materials resulted in a spike
in the cost of AoHong’s raw materials during the period. We anticipate the cost
of raw materials will return to historical levels in 2009.





Gross profit and
gross margin.Our gross profit was
$2,688,421 for 2008 as compared to $2,202,236 for 2007, representing gross
margins of 7.7% and 13.6%, respectively. The decrease in our gross margin was
attributable to the decrease in Aohong’s selling price per unit. The drop of
selling price is the result of competition in the Chinese domestic market that
became particularly intense during the second half of 2008 when exports plunged
and drove most coolants suppliers to flood the domestic market.





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Operating expenses. Total
operating expenses decreased $779,944, or approximately 29.9%, in 2008 as
compared to 2007. Included in this change are the following:





•
            Selling
      expenses which consists of shipping and freight and other selling expenses
      were approximately 2.1% of net revenues for 2008 as compared to
      approximately 5.5% for 2007. The decrease in selling expenses as a
      percentage of sales was attributable to the decrease in shipping and
      freight. Against the bleak economy in China during the second half of
      2008, transporters of Aohong agreed to drop the per ton unit shipping
      charge. Thus, the total shipping and freight decreased in 2008 as compared
      to the 2007 period;•
            For
      2008, consulting and investor relations expense decreased approximately
      $386,676 or 59.5% from the comparable period in 2007, attributable to a
      reduction in stock-based consulting expense. During 2007, we issued an
      aggregate of 6,355,000 shares of common stock and granted 500,000 stock
      options valued at $616,076 as compensation for accounting, business
      development services and for services to identify suitable acquisition
      partners in Asia, structuring merger and/or acquisition transactions and
      providing translation services to us;•
            For
      2008 and 2007, we paid a consulting fee of $65,812 and $47,074,
      respectively, to a subsidiary of China Direct, Inc., an increase of
      39.8%;•
            For
      2008, compensation and related taxes decreased by $295,610 or 55.2% from
      the comparable period in 2007.  This decrease was mainly due to
      reductions of staff in our U.S. operations and decreases in stock based
      compensation.;  and•
            For
      the year ended December 31, 2008, general and administrative expenses
      increased approximately 5.4% from the 2007 period and consisted of the
      following:





2008
                      
                      
                      2007Professional
      fees
                      
                      $
                      240,288
                      
                      
                      $
                      136,024Bad
      debt expense (recovery)
                      
                      
                      (187,180
                      )
                      
                      
                      16,526Other
                      
                      
                      458,280
                      
                      
                      
                      332,772$
                      511,388
                      
                      
                      $
                      485,322








•
            For
      the year ended December 31, 2008, we incurred additional professional fees
      of approximately $32,000 related the hiring of consultants for the
      implementation of Sarbanes-Oxley 404 internal control implementation and
      well as an increase in legal fees and auditing fees;•
            For
      the year ended December 31, 2008, we recorded a one-time bad debt recovery
      of $187,180 related to the collection of accounts receivables previously
      written off; and•
            Other
      general and administrative expenses increase by 37.7% due to an increase
      in operations.





Total other income (expenses).Total other expense amounted to $396,648 for 2008 as compared to $13,861
for 2007. Included in this change is an increase in interest expense of $55,965
relating to debt obligations of AoHong and an increase in realized losses on
marketable equity securities of $325,983 from the sale of marketable securities
consisting of common stock of China Direct, Inc.





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Discontinued operations.Loss
from discontinued operations results from the discontinuation of our Biometric
segment in January 2009 and our sale of Big Tree in April 2008. We do expect to
incur additional expenses from discontinued operations in 2009.





Net loss.Net loss for 2008
decreased by $557,445 to $561,158 from a net loss of $1,118,603 for 2007. This
translates into a net loss per common share of $0.00 and $0.01 for 2008 and
2007, respectively.





Foreign currency translation gain.The functional currency of our subsidiary operating in the PRC is the
Chinese Yuan or Renminbi (“RMB”). The financial statements of our subsidiary is
translated to U.S. dollars using period end rates of exchange for assets and
liabilities, and average rates of exchange (for the period) for revenues, costs,
and expenses. As a result of these translations, which are a non-cash
adjustment, we reported a foreign currency translation gain of $317,415 for 2008
as compared to $98,215 for 2007. This non-cash gain had the effect of reducing
our reported comprehensive loss.




Comprehensive loss.For 2008,
comprehensive loss of $243,743 is derived from the sum of our net loss of
$561,158 plus foreign currency translation gains of $317,415.





LIQUIDITY
AND CAPITAL RESOURCES





Liquidity
is the ability of a company to generate funds to support its current and future
operations, satisfy its obligations and otherwise operate on an ongoing basis.
The following table provides selected financial information from our balance
sheets at December 31, 2008 and 2007.








December
      31, 2008
                    
                    
                    December
      31, 2007
                    
                    
                    Increase
      (Decrease)
                    
                    
                    %Working
      capital
                    
                    $
                    4,204,267
                    
                    
                    $
                    5,054,602
                    
                    
                    $
                    -850,335
                    
                    
                    
                    -16.8
                    %Cash
                    
                    
                    2,228,455
                    
                    
                    
                    2,012,480
                    
                    
                    
                    215,975
                    
                    
                    
                    10.7
                    %Total
      current assets
                    
                    
                    9,284,550
                    
                    
                    
                    8,107,182
                    
                    
                    
                    1,177,368
                    
                    
                    
                    14.5
                    %Total
      assets
                    
                    
                    13,714,052
                    
                    
                    
                    11,274,292
                    
                    
                    
                    2,439,760
                    
                    
                    
                    21.6
                    %Total
      current liabilities
                    
                    
                    5,080,283
                    
                    
                    
                    3,052,580
                    
                    
                    
                    2,027,703
                    
                    
                    
                    66.4
                    %Total
      liabilities
                    
                    $
                    5,080,283
                    
                    
                    $
                    3,052,580
                    
                    
                    $
                    2,027,703
                    
                    
                    
                    66.4
                    %








At
December 31, 2008 and 2007, our cash is located in the following geographic
areas:








Country
                          
                          Decemeber
      31, 2008
                          
                          
                          December
      31, 2007United
      States
                          
                          $
                          92,457
                          
                          
                          
                          4.1
                          %
                          
                          $
                          998,222
                          
                          
                          
                          49.6
                          %China
                          
                          
                          2,135,998
                          
                          
                          
                          95.9
                          %
                          
                          
                          1,014,258
                          
                          
                          
                          50.4
                          %Total
      cash and cash equivalents
                          
                          $
                          2,228,455
                          
                          
                          
                          100.0
                          %
                          
                          $
                          2,012,480
                          
                          
                          
                          100.0
                          %





Cash on
deposit in China is subject to the regulations of the PRC which restricts the
transfer of cash from that country, except under certain specific circumstances.
Accordingly, such funds may not be readily available to us to satisfy
obligations which have been incurred outside the PRC.





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The
following table provides selected information on the changes in our assets and
liabilities at December 31, 2008 from December 31, 2007:





December
      31,2008
                      
                      
                      2007
                      
                      
                      Increase
      (Decrease)
                      
                      
                      %Accounts
      receivable, net
                      
                      
                      3,778,096
                      
                      
                      
                      4,220,692
                      
                      
                      
                      (442,596
                      )
                      
                      
                      -10.5
                      %Notes
      receivable
                      
                      
                      1,104,343
                      
                      
                      
                      333,168
                      
                      
                      
                      771,175
                      
                      
                      
                      231.5
                      %Inventories,
      net
                      
                      
                      1,719,796
                      
                      
                      
                      1,100,023
                      
                      
                      
                      619,773
                      
                      
                      
                      56.3
                      %Prepaid
      expense and other
                      
                      
                      453,860
                      
                      
                      
                      440,819
                      
                      
                      
                      13,041
                      
                      
                      
                      3.0
                      %Restricted
      cash
                      
                      
                      175,075
                      
                      
                      
                      437,511
                      
                      
                      
                      (262,436
                      )
                      
                      
                      -60.0
                      %Property
      and equipment, net and land use rights
                      
                      
                      3,478,903
                      
                      
                      
                      2,004,941
                      
                      
                      
                      1,473,962
                      
                      
                      
                      73.5
                      %Due
      from related party
                      
                      
                      -
                      
                      
                      
                      465,982
                      
                      
                      
                      (465,982
                      )
                      
                      
                      -100.0
                      %Deposit
      on land use rights
                      
                      
                      744,303
                      
                      
                      
                      -
                      
                      
                      
                      744,303
                      
                      
                      
                      n/aOther
      assets
                      
                      
                      31,221
                      
                      
                      
                      258,676
                      
                      
                      
                      (227,455
                      )
                      
                      
                      -87.9
                      %Notes
      payable
                      
                      
                      3,002,982
                      
                      
                      
                      1,665,667
                      
                      
                      
                      1,337,315
                      
                      
                      
                      80.3
                      %Accounts
      payable and accrued expenses
                      
                      
                      957,190
                      
                      
                      
                      701,172
                      
                      
                      
                      256,018
                      
                      
                      
                      36.5
                      %Advances
      from customers
                      
                      
                      424,320
                      
                      
                      
                      96,624
                      
                      
                      
                      327,696
                      
                      
                      
                      339.1
                      %Taxes
      payable
                      
                      
                      487,223
                      
                      
                      
                      265,282
                      
                      
                      
                      221,941
                      
                      
                      
                      83.7
                      %Due
      to related parties
                      
                      
                      208,568
                      
                      
                      
                      308,346
                      
                      
                      
                      (99,778
                      )
                      
                      
                      -32.4
                      %








Our
working capital decreased $850,335 to $4,204,267 at December 31, 2008 from
working capital of $5,054,602 at December 31, 2007. This decrease in working
capital is primarily attributable to a decrease in accounts receivable of
$442,596, and an increase in notes payable of $1,337,315 and accounts payable
and accrued expenses of $256,018 offset by an increase in notes receivable of
$771,175 and inventories of $619,773.





At
December 31, 2008, our accounts receivable were $3,778,096. We believe that our
collection remains strong and that our reserve for bad debts reflects the risk
of nonpayment by our customers. However, the worldwide economic downturn may
affect our customers’ ability to pay.





At
December 31, 2008, notes receivable of $1,104,343 represented amounts due AoHong
from 15 customers for the purchase of finished goods. These obligations, which
are similar to accounts receivable, were due between January 2009 and June 2009.
Based upon historical experience with these customers, AoHong anticipates that
the balance of these notes receivable will be paid in accordance with each of
their respective terms.





Restricted
cash at December 31, 2008 secures bank acceptances payable by AoHong in the
amount of $437,688 which are reflected in notes payable described
below.





Included
in notes payable at December 31, 2008 was (i) $2,140,294 due by AoHong to banks
with maturity dates between February 10, 2009 and April 7, 2009, which were
satisfied on their respective due dates; (ii) $437,688 due by AoHong under bank
acceptance payables which are similar to factored receivables in that AoHong
assigned the receivable from its customer to a bank and received cash in an
amount equal to the full amount of the receivable, less the restricted cash
which remains on deposit at the bank to secure the advance. The bank acceptance
payable is satisfied by AoHong at the time its customer pays the receivable. If
the customer does pay the receivable, AoHong is still liable for the payable to
the bank; (iii) $25,000 attributable to our Biometrics segment and represents
the remaining principal amount due under notes issued by us in a 2003 private
placement. This amount is due on demand, and (iv) $400,000 due to China Direct,
Inc. on June 30, 2009.





Due to
related parties at December 31, 2008 represents amounts loaned to AoHong by
Aihua Hu, its Chairman and members of his family for working capital purposes.
These loans, which were primarily made during the three months ended June 30,
2007, do not bear any interest and are due on demand.





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In 2008,
net cash provided by operating activities from continued operations amounted to
$1,225,920. In 2008, we used cash to fund our net loss from continued
operations of $328,333 as well as for an increase in inventory of $537,636,
an increase in notes receivable of $737,199, and a reduction in accounts payable
and accrued expenses of $68,028. This was offset by decreases in accounts
receivable of $892,205 prepaid expenses of $15,027, and other assets of
$240,921, increase in taxes payable of $479,662 and advances from customers of
$316,228 as well as an add-back of $953,073 for non cash expenses including
stock-based compensation of $10,400, depreciation and amortization of $312,156,
a decrease in our allowance for doubtful accounts of $196,353, minority interest
of $436,799, contributed services of $110,000, and a realized loss from the sale
of marketable securities of $325,983.





In 2007,
net cash provided by operating activities from continued operations amounted to
$867,758. In 2007 we used cash to fund our net loss from continued operations of
$840,491 as well as for an increase in accounts receivables of $63,102, an
increase in notes receivable of $94,106, and other assets of $220,135 and a
reduction in accounts payable and accrued expenses of $62,975 and advanced to
customers of $856,508. This was offset by decreases of $437,094 in inventory and
$971,452 in prepaid expenses as well as an add-back of $1,596,529 for non cash
expenses including stock-based compensation of $1,071,755, depreciation and
amortization of $73,032, an increase in our allowance for doubtful accounts of
$35,512 and the minority interest of $420,230.





Net cash
used in investing activities in 2008 was $2,244,888 and was attributable to the
purchase of property and equipment of $1,629,183, which included the acquisition
of manufacturing equipment for our Shanghai facility that was completed in 2008,
an increase in funds used for a deposit on land use rights of $732,752 offset by
proceeds from the sale of marketable equity securities of $117,047. In 2007, we
used cash in investing activities of $307,645 attributable to cash used in the
acquisition of Big Tree of $398,661, the purchase of property and equipment of
$845,626 offset by cash provided from the receipt of cash in the acquisition of
AoHong of $703,577, a decrease in amounts due from related party of $208,526,
and a refund of land use rights of $24,539.





Net cash
provided by financing activities was $1,383,056 for 2008 as compared to net cash
provided by financing activities of $1,529,365 for 2007. In 2008, we received
net proceeds of $1,214,392 from notes payable, had a decrease in restricted cash
of $287,263, and we repaid related party advances of $118,599. In 2007, we
received net proceeds of $2,967,404 from the sale of our common stock and had a
decrease in restricted cash of $105,025 which offset payments on notes payable
of $525,127, the repayment of related party advances of $684,197 and the payment
of placement fees and expenses of $333,740.





As a
result of the above, net cash increased by $215,975 during 2008, which included
$82,421 which was the effect of the exchange rate on our cash, as compared to a
net cash increase of $1,859,901 during 2007.





We have
financed our growth and cash requirements through equity investments and debt
and equity financing. Other than our commitment with Aohong, we do not currently
have any material commitments for capital expenditures.  Under the
terms of our purchase agreement with AoHong, we are required to contribute an
additional $1,780,000 to its registered capital, including an additional
$200,000 and the remaining $1,580,000 on or before May 28, 2009.  In
addition, the $400,000 note to China Direct, Inc. is due on June 30,
2009.  We are currently in discussion with AoHong’s management to
restructure the payment terms for the remaining commitments. If we are unable to
renegotiate the terms of our obligations to AoHong our ability to continue our
operations as they are presently conducted could be adversely
impact.





Currently,
our cash is not sufficient for all of our capital needs. While AoHong has
historically reported profitable operations, under Chinese law we are not able
to use funds from that company to pay operating expenses in the U.S. As a
result, we may not have access to the capital necessary to fully develop our
operations and satisfy our obligations as they become due.





Even if
we are able to extend our obligations to Aohong, we need to raise additional
capital to fund these commitments and to pay our operating expenses. Given the
uncertainties in the capital markets, there can be no assurance that we can
raise capital on suitable terms, if at all. If we are unable to obtain the
financing necessary to pay the obligations as they become due and support our
operations, we may be unable to continue as a going concern. In that event, we
may be forced to cease operations and our shareholders could lose their entire
investment in our company.





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Contractual
Obligations





Our
commitment to AoHong requires us to provide an aggregate of $3,380,000 between
September 2007 and June 2009 as follows: $800,000 before September 30, 2007,
$400,000 before June 30, 2008, $600,000 before December 31, 2008 and the
remaining balance due of $1,580,000 by June 27, 2009. We used $1,200,000 from a
unit offering completed in 2007 to satisfy our commitments due through June 30,
2008. Subsequently, we tendered $400,000 in August 2008 which represented a
portion of the December 2008 commitment. The balance of $200,000 was due on
December 31, 2008. The minority owners of AoHong have orally agreed to extend
the payment of these amounts until May 28, 2009. We will be required to raise
additional capital to fund the balance of $1,780,000 of the
obligation.





In
November 2008, we created Aohong Tianjin to expand our distribution channels to
northern China. AoHong Tianjin agreed to acquire land use rights for
approximately 253,350 square feet of land located in Ji County Economic
Development Park for approximately $751,364. We plan to
continue construction of a manufacturing distribution facility for AoHong
Tianjin in the second quarter of 2009. The cost of the project is estimated at
approximately $2.9 million and will be funded by current operations and bank
loans. The amount due to land use rights as of December 31, 2008 was $7,061
which has been paid in Feburary 2009. Tianjin Aohong currently does not have any
new loans.





The
following tables summarize our contractual obligations as of December 31, 2008,
and the effect these obligations are expected to have on our liquidity and cash
flows in future periods.




Payments Due by
      PeriodTotal
                                                                          
                                                                          Less than 1
      year
                                                                          
                                                                          1-3
Years
                                                                          
                                                                          3-5Years
                                                                          
                                                                          5 Years+Contractual Obligations :Bank
      and other indebtedness (1)
                                                                          
                                                                          $
                                                                          $    3,002,982
                                                                          
                                                                          $
                                                                          $    3,002,982
                                                                          
                                                                          $
                                                                          -
                                                                          
                                                                          $
                                                                          -
                                                                          
                                                                          $
                                                                          -Aohong
      capital commitment
                                                                          
                                                                          
                                                                          1,780,000
                                                                          
                                                                          
                                                                          1,780,000
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          -Total
      Contractual Obligations:
                                                                          
                                                                          $
                                                                          $    4,782,982
                                                                          
                                                                          $
                                                                          $    4,782,982
                                                                          
                                                                          $
                                                                          -
                                                                          
                                                                          $
                                                                          -
                                                                          
                                                                          $
                                                                          -


(1)
            Bank
      indebtedness consists of short term bank
loans.





Off
Balance Sheet Arrangements





Under SEC
regulations, we are required to disclose our off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
are material to investors. An off-balance sheet arrangement means a transaction,
agreement or contractual arrangement to which any entity that is not
consolidated with us is a party, under which we have:





•
            Any
      obligation under certain guarantee contracts;•
            Any
      retained or contingent interest in assets transferred to an unconsolidated
      entity or similar arrangement that serves as credit, liquidity or market
      risk support to that entity for such assets;•
            Any
      obligation under a contract that would be accounted for as a derivative
      instrument, except that it is both indexed to our stock and classified in
      shareholder's equity in our statement of financial position;
      and•
            Any
      obligation arising out of a material variable interest held by us in an
      unconsolidated entity that provides financing, liquidity, market risk or
      credit risk support to us, or engages in leasing, hedging or research and
      development services with us.




As of the
date of this report, we do not have any off-balance sheet arrangements that we
are required to disclose pursuant to these regulations. In the ordinary course
of business, we enter into operating lease commitments, purchase commitments and
other contractual obligations. These transactions are recognized in our
financial statements in accordance with generally accepted accounting principles
in the United States.





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Cautionary
Note Regarding Forward-Looking Information and Factors That May Affect Future
Results


This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended. The Securities and Exchange Commission
encourages companies to disclose forward-looking information so that investors
can better understand a company’s future prospects and make informed investment
decisions. This Annual Report on Form 10-K and other written and oral statements
that we make from time to time contain such forward-looking statements that set
out anticipated results based on management’s plans and assumptions regarding
future events or performance. We have tried, wherever possible, to identify such
statements by using words such as “anticipate,” “estimate,” “expect,” “project,”
“intend,” “plan,” “believe,” “will” and similar expressions in connection with
any discussion of future operating or financial performance. In particular,
these include statements relating to future actions, future performance or
results of current and anticipated sales efforts, expenses, the outcome of
contingencies, such as legal proceedings, and financial results. A list of
factors that could cause our actual results of operations and financial
condition to differ materially is discussed in greater detail under Item 1A
– “Risk Factors” of our Annual Report on Form 10-K for the year ended December
31, 2008.
  We
caution that the factors described in Item 1A of this Annual
Report and other factors could cause our actual results of operations and
financial condition to differ materially from those expressed in any
forward-looking statements we make and that investors should not place undue
reliance on any such forward-looking statements. Further, any forward-looking
statement speaks only as of the date on which such statement is made, and we
undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of anticipated or unanticipated events or circumstances.
New factors emerge from time to time, and it is not possible for us to predict
all of such factors. Further, we cannot assess the impact of each such factor on
our results of operations or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.





ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.





Not
applicable to a smaller reporting company.





ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.





Our
financial statements are contained in pages F-1 through F-29,
which appear at the end of this annual report.





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





None.





ITEM 9A(T). CONTROLS AND PROCEDURES.





Disclosure
Controls and Procedures





Under the
supervision and with the participation of our management, including our Chief
Executive Officer who also serves as our principal financial and accounting
officer, we conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) under the Securities Exchange Act of 1934, as amended, as of the end
of the period covered by this report (the "Evaluation Date"). Based on this
evaluation, our Chief Executive Officer concluded as of the Evaluation Date that
our disclosure controls and procedures were effective such that the information
relating to China America, including our consolidating subsidiaries, required to
be disclosed in our SEC reports (i) is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms and (ii) is
accumulated and communicated to our management, including our Chief Executive
Officer, to allow timely decisions regarding required disclosure.





Our
management, including our Chief Executive Officer, does not expect that our
disclosure controls and procedures or our internal controls will prevent all
error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints and the
benefits of controls must be considered relative to their costs. Due to the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within our company have been detected.





Management
Report on Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended). Our management assessed the
effectiveness of our internal control over financial reporting as of December
31, 2008. In making this assessment, our management used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO")
in Internal Control-Integrated Framework. Our management has concluded that, as
of December 31, 2008, our internal control over financial reporting is effective
based on these criteria.




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





Changes
in Internal Control over Financial Reporting





There
have been no changes in our internal control over financial reporting during our
fourth fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.





ITEM 9B. OTHER INFORMATION.





None.





PART III





ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.





Directors
and Executive Officers





The
following individuals serve as our executive officers and members of our Board
of Directors:





Name
                      
                      Age
                      
                      PositionsShaoyin
      Wang
                      
                      47
                      
                      Chairman
      of the Board, Chief Executive Officer, President and Chief Financial
      OfficerDore
      Scott Perler
                      
                      47
                      
                      Secretary
      and
Director





Shaoyin Wang. Mr. Wang
has served as our Chief Executive Officer, President, Chief Financial Officer
and Chairman of the Board of Directors since January 2009. From June 2006 until
November 2008 he was the Director of the Information Department of Shanghai
Mingjia Real Estate Development Co., Ltd. From January 2004 to May 2006,
Mr. Wang was the vice president of Shanghai Zhida Industrial Technology
Development Co., Ltd. Mr. Wang was a marketing manager of Shanghai Yazheng
Information Technology Co., Ltd. from October 2000 to December 2003. From 1994
to 2000, Mr. Wang travelled in Auckland, New Zealand and received training
in business administration at Auckland Institute of Technology. From November
1990 to August 1994, Mr. Wang was a marketing manager in the Shanghai
Representative Office of Hongkong Yilong Technology Development Co., Ltd.
Mr. Wang was a teacher at the Shanghai Police College from August 1984 to
October 1990. Mr. Wang received a Bachelor’s Degree in Computer Science
from Shanghai University in 1984.





Dore Scott Perler.
Mr. Perler served as our Chief Executive Officer, President and Chairman of
our Board of Directors from July 1998 to January 2009. Mr. Perler has
agreed to serve as our Director and Secretary until December 31, 2009. From 1996
to 1998, Mr. Perler was Vice President of Sales for Ansel Communications, a
manufacturer of network interfaces and servers, hubs, and LAN workstations, and
from 1993 to 1996 Vice President of Sales for LatinRep Associates/LatinChannels,
Inc., a manufacturer’s representative organization, where he assisted in the
development of the company’s organizational infrastructure, designed business
processes and operating procedures, planned and executed strategies, recruited
and managed professional staff, and created and implemented marketing and
business development campaigns.





There are
no family relationships between any of the executive officers and directors,
except as set forth above. Each director is elected at our annual meeting of
shareholders and holds office until the next annual meeting of shareholders, or
until his successor is elected and qualified.





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Key
Employees





Following
is biographical information on those persons whom we consider key employees of
our company:





Name
                          
                          Age
                          
                          TitleAihua
      Hu
                          
                          47
                          
                          Chief
      Executive Officer, AoHongHuayan
      Zhi
                          
                          53
                          
                          Chief
      Financial Officer, AoHong




Aihua
Hu.Mr. Hu has served as CEO of AoHong since co-founding the company in
February 2000. From May 1993 to April 2000, Mr. Hu served as Vice General
Manager of Shanghai Lixin Gas Co., Ltd., an industrial gas and refrigerant
manufacturer located in Shanghai. As Vice General Manager Mr. Hu was
responsible for sales and business development. From September 1982 to May 1993,
Mr. Hu worked for Shanghai Chemical Light Industry Co., Ltd. responsible
for sales and marketing.





Huayan
Zhi. Mrs. Zhi has served as CFO of AoHong since October 2002. Mrs. Zhi
served as an accountant for Singapore Liquan Information (Shanghai) Co., Ltd.
from April 2001 to September 2002. From October 1993 to March 2001,
Mrs. Zhi was an accountant and then director of the accounting department
at Shanghai Lixin Gas Co. Ltd. one of the largest industrial gas and refrigerant
manufacturers in Shanghai. Mrs. Zhi was responsible for budget forecasting,
financial analysis and other accounts payable and accounts receivable related
issues. From November 1973 to September 1993, Ms. Zhi was an accountant for
Shanghai Hongkong Hardware Electric Co., Ltd.




Mr. Hu
is the minority member of AoHong.





Compliance
with Section 16(a) of The Exchange Act





We are
not currently subject to Section 16(a) of the Securities Exchange Act of 1934,
and, therefore, our directors and executive officers, and persons who own more
than 10% of our common stock are not required to file with the SEC reports
disclosing their initial ownership and changes in their ownership of our common
stock.





Code
of Business Conduct and Ethics





We have
adopted a Code of Business Conduct and Ethics to provide guiding principles to
all of our employees. Our Code of Business Conduct and Ethics does not cover
every issue that may arise, but it sets out basic principles to guide our
employees and provides that all of our employees must conduct themselves
accordingly and seek to avoid even the appearance of improper behavior. Any
employee which violates our Code of Business Conduct and Ethics will be subject
to disciplinary action, up to an including termination of his or her
employment.





We will
provide a copy, without charge, to any person desiring a copy of the Code of
Business Conduct and Ethics, by written request to 333 E. Huhua Road, Huating
Economic & Development Area, Jiading District, Shanghai, China 201811,
Attention: Corporate Secretary.




Committees
of the Board of Directors




Our Board
of Directors has not established any committees, including an Audit Committee, a
Compensation Committee or a Nominating Committee, any committee performing a
similar function. The functions of those committees are being undertaken by the
entire board as a whole. Because we do not have any independent directors, our
Board of Directors believes that the establishment of committees of the Board
would not provide any benefits to our company and could be considered more form
than substance.





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We do not
have a policy regarding the consideration of any director candidates which may
be recommended by our shareholders, including the minimum qualifications for
director candidates, nor has our Board of Directors established a process for
identifying and evaluating director nominees. We have not adopted a policy
regarding the handling of any potential recommendation of director candidates by
our shareholders, including the procedures to be followed. Our Board has not
considered or adopted any of these policies as we have never received a
recommendation from any stockholder for any candidate to serve on our Board of
Directors. Given our relative size and lack of directors and officers insurance
coverage, we do not anticipate that any of our shareholders will make such a
recommendation in the near future. While there have been no nominations of
additional directors proposed, in the event such a proposal is made, all members
of our Board will participate in the consideration of director
nominees.




None of
our directors is an “audit committee financial expert” within the meaning of
Item 407(d)(5)(ii) of Regulation S-K. In general, an “audit committee financial
expert” is an individual member of the audit committee or Board of Directors
who:





•
            understands
      generally accepted accounting principles and financial
      statements,•
            is
      able to assess the general application of such principles in connection
      with accounting for estimates, accruals and reserves,•
            has
      experience preparing, auditing, analyzing or evaluating financial
      statements comparable to the breadth and complexity to our financial
      statements,•
            understands
      internal controls over financial reporting, and•
            understands
      audit committee functions





While we
would prefer that one or more of our directors be an audit committee financial
expert, the individuals whom we have been able to attract to our Board do not
have the requisite professional backgrounds. As with most small companies until
we further develop our business, achieve a stronger revenue base and have
sufficient working capital to purchase directors and officers insurance, we do
not have any immediate prospects to attract independent directors including an
audit committee financial expert. Our securities are not quoted on an exchange
that has requirements that a majority of our Board members be independent and we
are not currently otherwise subject to any law, rule or regulation requiring
that all or any portion of our Board of Directors include “independent”
directors, nor are we required to establish or maintain an Audit Committee or
other committee of our Board of Directors.




ITEM 11.  EXECUTIVE COMPENSATION




Summary
Compensation Table




The
following table summarizes all compensation recorded in 2008 for:





•
            our
      principal executive officer or other individual serving in a similar
      capacity,•
            our
      two most highly compensated executive officers other than our principal
      executive officer who made in excess of $100,000 in 2008 and who were
      serving as executive officers at December 31, 2008 as that term is defined
      under Rule 3b-7 of the Securities Exchange Act of 1934,
  and•
            up
      to two additional individuals for whom disclosure would have been required
      but for the fact that the individual was not serving as an executive
      officer at December 31, 2008.





For
definitional purposes in this annual report these individuals are sometimes
referred to as the “named executive officers”. The value attributable to any
option awards is computed in accordance with FAS 123R.





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Name
      and principal position
                  Year
                  
                  Salary
                  
                  
                  Bonus
                  
                  
                  Stock
      Awards
                  
                  
                  Option
      Awards
                  
                  
                  Non-Equity
      Incentive Plan Compensation
                  
                  
                  Nonqualified
      Deferred Compensation Earnings
                  
                  
                  All
      Other Compensation
                  
                  
                  Total(a)
                  (b)
                  
                  (c)
                  
                  
                  (d)
                  
                  
                  (e)
                  
                  
                  (f)
                  
                  
                  (g)
                  
                  
                  (h)
                  
                  
                  (i)
                  
                  
                  (j)Dore Scott Perler
      1
                  2008
                  
                  $
                  183,000
                  
                  
                  $
                  0
                  
                  
                  $
                  0
                  
                  
                  $
                  0
                  
                  
                  $
                  0
                  
                  
                  $
                  0
                  
                  
                  $
                  0
                  
                  
                  $
                  183,0002007
                  
                  $
                  162,000
                  
                  
                  $
                  77,500
                  
                  
                  $
                  0
                  
                  
                  $
                  354,304
                  
                  
                  $
                  0
                  
                  
                  $
                  0
                  
                  
                  $
                  39,400
                  
                  
                  $
                  633,204





Shaoyin
Wang did not receive any compensation from us in 2008 as his employment with us
as our Chief Executive Officer began in January
2009.





(1)
            Mr.
      Perler served as our Chief Executive Officer and President from July 1998
      until January 2009. The bonus for 2007 represents the fair market value of
      500,000 shares of our common stock issued to Mr. Perler upon the closing
      of the AoHong acquisition and the fair market value of 500,000 shares of
      our common stock issued to Mr. Perler upon the closing of the Big Tree
      acquisition. Option awards for 2007 represents the value of options to
      purchase 6,650,000 shares of our common stock with exercise prices ranging
      from $0.07 to $0.08 granted to Mr. Perler in 2007. Other compensation for
      2007 included $6,500 for a car allowance, health insurance premiums of
      $14,900 and $18,000 related to the forgiveness of
  debt.





Compensation Agreements
with Mr. Perler





On April
1, 2005, we entered into a three-year employment contract with Mr. Perler
expiring on April 1, 2008 to serve as our Chief Executive Officer. The terms of
this agreement provided for an annual base salary of $156,000 and a car
allowance of $500 per month. On May 1, 2007, we entered into a new three-year
employment contract with Mr. Perler to serve as our Chief Executive Officer
which expires on May 1, 2010.




In
accordance with the terms of the 2007 employment agreement, in consideration for
his services, we agreed to pay Mr. Perler a base salary of $156,000 per
annum. On each successive anniversary date of the agreement, the Board of
Directors was to review the base compensation and at its sole discretion may
elect to increase the base salary. In addition, Mr. Perler was entitled to
a car allowance of up to $500 per month. In addition to the base salary,
Mr. Perler was entitled to receive, as incentive compensation in respect of
each calendar year (or portion thereof), an amount determined in accordance with
any bonus or short term incentive compensation program, which may be based upon
achieving certain specified performance criteria, which may be established by
our Board of Directors, of which he was a member.




On
January 19, 2009 in connection with the sale by us of the assets of our
Biometrics segment to a company owned by Mr. Perler, we entered into a
Termination Agreement with him under which he voluntarily terminated the 2007
employment agreement. Under the terms of the Termination Agreement we paid
Mr. Perler a severance payment of $75,000 in lieu of any and all salary
after October 31, 2008, severance payments, benefits or other payments, change
of control termination benefits or any other amounts which may have been due
under the 2007 employment agreement. In addition, any options previously granted
to him which had vested will remain exercisable by him through the initial term
of the option.





In April
2009, we entered into a consulting agreement with Mr. Perler expiring on
December 31, 2009 to serve as a members of our Board of Directors and our
Corporate Secretary. Under the terms of this agreement, we agreed to pay Mr.
Perler for his services in these positions a total of 1,000,000 shares of our
common stock valued at $20,000.





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Mr. Wang’s
Compensation Arrangement




We are
not a party to a written employment or similar agreement with Mr. Wang.
Upon joining our company in January 2009 as our chief executive officer and
director, we agreed to pay him $8,760 (RMB 60,000) per year for serving in these
positions.





Outstanding
Equity Awards at Year End





The
following table provides information concerning unexercised options, stock that
has not vested and equity incentive plan awards for each named executive officer
outstanding as of December 31, 2008:




OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR ENDOPTION
      AWARDS
                  
                  STOCK
      AWARDSName
      (a)
                  
                  Number
      of Securities Underlying Unexercised Options (#) Exercisable
      (b)
                  
                  
                  Number
      of Securities Underlying Unexercised Options (#) Unexercisable
      (c)
                  
                  
                  Equity
      Incentive Plan Awards: Number of Securities Underlying Unexercised
      Unearned Options (#) (d)
                  
                  
                  Option
      Exercise Price ($) (e)
                  
                  Option
      Expiration Date (f)
                  
                  Number
      of Shares or Units of Stock That Have Not Vested (#) (g)
                  
                  
                  Market
      Value of Shares or Units of Stock That Have Not Vested ($)
    (h)
                  
                  
                  Equity
      Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
      that Have Not Vested (#) (i)
                  
                  
                  Equity
      Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
      Other Rights That Have Not Vested (#) (j)Dore
      Scott Perler
                  
                  
                  250,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  0.19
                  
                  12/31/09
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -150,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  0.20
                  
                  5/13/10
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -250,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  0.20
                  
                  9/01/11
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -400,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  0.07
                  
                  12/13/12
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -250,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  0.08
                  
                  1/31/12
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -1,000,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  0.08
                  
                  6/27/12
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -5,000,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  0.07
                  
                  9/23/12
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -





Shaoyin
Wang’s employment with our company started in January 2009. Mr. Wang has no
equity award for his serving in the positions.





Incentive
and Non-Qualified Stock Option Plan




We
currently have three incentive plans, our 1999 Stock Option Plan, our 2001
Equity Compensation Plan and our 2005 Equity Compensation Plan. Following are
descriptions of these plans:




1999
Stock Option Plan




On July
19, 1999, the Board of Directors and shareholders adopted our 1999 Stock Option
Plan. We reserved 1,500,000 shares of common stock for issuance upon exercise of
options granted from time to time under the 1999 Stock Option Plan. The 1999
Stock Option Plan is intended to assist us in securing and retaining key
employees, directors and consultants by allowing them to participate in our
ownership and growth through the grant of incentive and non-qualified options.
Under the stock option plan we may grant incentive stock options only to key
employees and employee directors, or we may grant non-qualified options to our
employees, officers, directors and consultants. Our Board of Directors currently
administers the 1999 Stock Option Plan.





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Subject
to the provisions of the stock option plan, the Board will determine who will
receive options, the number of shares of common stock that may be purchased
under the options, the time and manner of exercise of options and exercise
prices. The term of options granted under the stock option plan may not exceed
10 years or five years for an incentive stock option granted to an optionee
owning more than 10% of our voting stock. The exercise price for incentive stock
options will be equal to or greater than 100% of the fair market value of the
shares of the common stock at the time granted. However, the incentive stock
options granted to a 10% holder of our voting stock are exercisable at a price
equal to or greater than 110% of the fair market value of the common stock on
the date of the grant. The exercise price for non-qualified options will be set
by the Board, in its discretion, but in no event can the exercise price be less
than 75% of the fair market value of the shares of common stock on the date of
grant. The exercise price may be payable in cash or, with the approval of the
Board, by delivery of shares or by a combination of cash and shares. Shares of
common stock received upon exercise of options will be subject to restrictions
on sale or transfer. As of March 31, 2009 we have outstanding options to
purchase 650,000 shares under the 1999 Stock Option Plan and there are 500,000
shares remaining available for grant under the 1999 Stock Option
Plan.




2001
Equity Compensation Plan




On
November 28, 2001, the Board of Directors adopted our 2001 Equity Compensation
Plan, and on November 28, the 2001 Equity Compensation Plan was ratified by
holders of a majority of our outstanding common stock. We have reserved
2,000,000 shares of common stock for issuance as stock grants and upon exercise
of options granted from time to time under the 2001 Equity Compensation Plan.
The 2001 Equity Compensation Plan is intended to assist us in securing and
retaining key employees, directors and consultants by allowing them to
participate in our ownership and growth through the grant of incentive and
non-qualified options, as well as direct stock grants.




Under the
2001 Equity Compensation Plan, we may grant incentive stock options only to key
employees and employee directors. We may grant non-qualified options and issue
direct stock awards to our employees, officers, directors and consultants. Our
Board of Directors currently administers the 2001 Equity Compensation
Plan.




Subject
to the provisions of the 2001 Equity Compensation Plan, the Board will determine
who shall receive options or grants, the number of shares of common stock that
may be purchased under the options, the time and manner of exercise of options
and exercise prices. The term of options granted under the stock option plan may
not exceed 10 years or five years for an incentive stock option granted to an
optionee owning more than 10% of our voting stock. The exercise price for
incentive stock options will be equal to or greater than 100% of the fair market
value of the shares of the common stock at the time granted. However, the
incentive stock options granted to a 10% holder of our voting stock are
exercisable at a price equal to or greater than 110% of the fair market value of
the common stock on the date of the grant. The exercise price for non-qualified
options will be set by the Board, in its discretion, but in no event shall the
exercise price be less than the par value for our common stock. The exercise
price may be payable in cash or, with the approval of the Board, by delivery of
shares or by a combination of cash and shares. The Board may also direct the
issuance of shares of our common stock as awards under the 2001 Compensation
Plan. Absent registration under the Securities Act of 1933 or the availability
of an applicable exemption there from, shares of common stock received as stock
grants and upon exercise of options will be subject to restrictions on sale or
transfer. As of March 31, 2009, we have outstanding options to purchase 250,000
shares under the 2001 Equity Compensation Plan and there were 403,840 shares
remaining for grant under the plan.




2005
Equity Compensation Plan




On June
16, 2005, the Board of Directors adopted our 2005 Equity Compensation Plan, and
on June 16, 2005, the 2005 Equity Compensation Plan was ratified by holders of a
majority of our outstanding common stock. We have reserved 5,000,000 shares of
common stock for issuance as stock grants and upon exercise of options granted
from time to time under the 2005 Equity Compensation Plan. The 2005 Equity
Compensation Plan is intended to assist us in securing and retaining key
employees, directors and consultants by allowing them to participate in our
ownership and growth through the grant of incentive and non-qualified options,
as well as direct stock grants. Under the 2005 Equity Compensation Plan we may
grant incentive stock options only to key employees and employee directors. We
may grant non-qualified options and issue direct stock awards to our employees,
officers, directors and consultants. Our Board of Directors currently
administers the 2005 Equity Compensation Plan.





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Subject
to the provisions of the 2005 Equity Compensation Plan, the Board will determine
who shall receive options or grants, the number of shares of common stock that
may be purchased under the options, the time and manner of exercise of options
and exercise prices. The term of options granted under the stock option plan may
not exceed 10 years or five years for an incentive stock option granted to an
optionee owning more than 10% of our voting stock. The exercise price for
incentive stock options will be equal to or greater than 100% of the fair market
value of the shares of the common stock at the time granted. However, the
incentive stock options granted to a 10% holder of our voting stock are
exercisable at a price equal to or greater than 110% of the fair market value of
the common stock on the date of the grant. The exercise price for non-qualified
options will be set by the Board, in its discretion, but in no event can the
exercise price be less than the par value for our common stock The exercise
price may be payable in cash or, with the approval of the Board, by delivery of
shares or by a combination of cash and shares. The Board may also direct the
issuance of shares of our common stock as awards under the 2005 Equity
Compensation Plan. Absent registration under the Securities Act or the
availability of an applicable exemption there from, shares of common stock
received as stock grants and upon exercise of options will be subject to
restrictions on sale or transfer. As of March 31, 2009 we have outstanding
options to purchase 1,000,000 shares under the 2005 Equity Compensation Plan and
there remain 723,000 shares available under the plan.





Director
Compensation





We have
not established standard compensation arrangements for our directors and the
compensation, if any, payable to each individual for their service on our Board
is determined from time to time by our Board of Directors based upon the amount
of time expended by each of the directors on our behalf. None of our directors
were compensated for their services as members of our Board of Directors for the
year ended December 31, 2008.





In April
2009, we entered a consulting agreement with Mr. Perler and agreed to compensate
Mr. Perler for his service at the position as a member of our Board of Directors
and corporate secretary . The terms of the agreement provides for 1,000,000
shares of our common stock valued at $20,000. The agreement expires
on December 31, 2009.





Limitation
on Liability




Under our
articles of incorporation, our directors are not liable for monetary damages for
breach of fiduciary duty, except in connection with:




•
            breach
      of the director’s duty of loyalty to us or our
    shareholders;•
            acts
      or omissions not in good faith or which involve intentional misconduct,
      fraud or a knowing violation of law;•
            a
      transaction from which our director received an improper benefit;
      or•
            an
      act or omission for which the liability of a director is expressly
      provided under Florida law.





In
addition, our bylaws provide that we must indemnify our officers and directors
to the fullest extent permitted by Florida law for all expenses incurred in the
settlement of any actions against such persons in connection with their having
served as officers or directors.




Insofar
as the limitation of, or indemnification for, liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, or persons
controlling us pursuant to the foregoing, or otherwise, we have been advised
that, in the opinion of the SEC, such limitation or indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.





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





At April
15, 2009 we had 140,810,792 shares of common stock issued and outstanding. The
following table sets forth information known to us as of March 31, 2009 relating
to the beneficial ownership of shares of our common stock by:





•
            each
      person who is known by us to be the beneficial owner of more than 5% of
      our outstanding common stock;•
            each
      director;•
            each
      named executive officer; and•
            all
      named executive officers and directors as a
  group.





Unless
otherwise indicated, the business address of each person listed is in care of
333 E. Huhua Road


Huating
Economic & Development Area, Jiading District, Shanghai, China 201811. The
percentages in the table have been calculated on the basis of treating as
outstanding for a particular person, all shares of our common stock outstanding
on that date and all shares of our common stock issuable to that holder in the
event of exercise of outstanding options, warrants, rights or conversion
privileges owned by that person at that date which are exercisable within 60
days of that date. Except as otherwise indicated, the persons listed below have
sole voting and investment power with respect to all shares of our common stock
owned by them, except to the extent that power may be shared with a
spouse.





Name
      of Beneficial Owner
                        
                        #
      of Shares and nature of Beneficially Owned
                        
                        
                        %
      of ClassShaoyin
      Wang 1
                        
                        
                        -
                        
                        
                        
                        -Dore
      Perler 2
                        
                        
                        8,129,723
                        
                        
                        
                        5.77
                        %All
      officers & directors as a group (2 persons)
                        
                        
                        8,129,723
                        
                        
                        
                        5.77
                        %Aihua
      Hu 3
                        
                        
                        12,500,000
                        
                        
                        
                        8.88
                        %Huayan
      Zhi 4
                        
                        
                        6,500,000
                        
                        
                        
                        4.62
                        %China
      Direct, Inc. 5
                        
                        
                        18,610,000
                        
                        
                        
                        13.22
                        %








(1)
            We
      are not a party to a written employment or similar agreement with Mr.
      Wang. Upon joining our company in January 2009 as an executive officer and
      director, we agreed to pay him $8,760 (RMB 60,000) per year for serving in
      these positions.(2)
            Mr.
      Perler's holdings includes 1,479,723 shares of common stock which are
      presently outstanding and an aggregate of 6,650,000 shares of our common
      stock issuable upon the exercise of outstanding options to purchase our
      common stock with exercise prices ranging from $0.07 to $0.22 per
      share.(3)
            Mr.
      Hu is the CEO and a minority owner of AoHong. Mr. Hu’s holdings include
      12,500,000 shares of our common stock which are presently
      outstanding.





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(4)
            Ms.
      Zhi is the chief financial officer of AoHong. Ms. Zhi’s holdings include
      6,500,000 shares of common stock which are presently
      outstanding.(5)
            The
      number of securities beneficially owned by China Direct, Inc. includes:
      7,110,000 shares of our common stock owned of record by China Direct
      Investments, Inc.; 5,000,000 shares of our common stock to be issuable
      under our April 2009 consulting agreement; 4,000,000 shares of our common
      stock owned of record by CDI Shanghai Management Co.; and 2,500,000 shares
      owned of record by Capital One Resource Co., Ltd., all of which are
      subsidiaries of China Direct, Inc. The securities beneficially owned by
      China Direct, Inc. excludes 3,737,340 shares of our common stock issuable
      upon the exercise of an outstanding common stock purchase warrant with an
      exercise price of $0.12 per share owned of record by China Direct
      Investments, Inc. The ability of China Direct, Inc. to exercise the
      warrants is limited in that the holder is not entitled to exercise the
      warrant if the effect of such exercise would be that the number of shares
      of common stock beneficially owned by the holder after giving effect to
      such exercise would be result in beneficial ownership by the holder and
      its affiliates of more than 4.99% of our then outstanding shares of common
      stock on such date, except during the 45 day period immediately prior to
      the expiration date of the warrant. James Wang Ph.D., has voting and
      dispositive control over securities held by China Direct, Inc. whose
      address is 431 Fairway Drive, Suite 200, Deerfield Beach, Florida
      33441.





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




From time
to time AoHong borrows funds from Aihua Hu, its chairman, and members of his
family for working capital purposes. At December 31, 2008 these amounts totaled
$344,264. These loans do not bear any interest and are due on
demand.




Between
April 2008 and June 2008, AoHong loaned Shanghai Mengjin Chemical Co., Ltd., a
Chinese joint venture of which AoHong is  a 60% owner, RMB 3 million
(approximately $400,000) for working capital. These funds were repaid during the
fourth quarter of 2008.




We have
entered into various agreements with subsidiaries of China Direct, Inc., a
principal shareholder of our company, including:




In June
2007, we entered into a consulting agreement with CDI Shanghai Management Co.,
Ltd., a wholly owned subsidiary of China Direct, Inc. The agreement was in
effect for the period from June 29, 2007 through June 30, 2008 and provides for
various consulting services, including identifying suitable acquisition partners
in Asia, structuring merger and/or acquisition transactions and providing
translation services. Under the terms of the June 2007 consulting agreement, we
issued CDI Shanghai Management Co., Ltd. 5,000,000 shares of our common stock
valued at $475,000. This agreement also provides for the payment of
discretionary award fees to be paid to the consultant and/or its designees. Upon
the mutual agreement of the parties, the fees can be paid either in cash or
marketable securities.




In April
2009, we entered into a consulting and management agreement with China Direct
Investments, Inc., a wholly owned subsidiary of China Direct, Inc. The agreement
is for a term of twelve months from January 1, 2009 to December 31, 2009. The
agreement outlines various consulting services, which has been provided by China
Direct Investments, Inc. since July 1, 2008, including coordination of
preparation and filing of public disclosures, assistance in financial management
and the implementation of internal controls, managing investor road
show/investment conferences, assisting in the implementation of acquisition
deals, among other services agreed to by the parties.  Under the terms
of the agreement, we will issue China Direct Industries, Inc. a total of
20,000,000 shares of our common stock valued at $400,000. Of these shares,
5,000,000 shares are payable at the end of each quarter of 2009. This agreement
also provides for the payment of discretionary award fees to be paid to the
consultant and/or its designees. Upon the mutual agreement of the parties, the
fees can be paid either in cash or marketable securities.





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As
described elsewhere herein, in August 2007 we closed our acquisition of 60% of
Big Tree which we acquired from a subsidiary of China Direct, Inc. On April 30,
2008, we entered into an agreement with Mr. Wei Lin and China Direct, Inc.
pursuant to which we transferred all of our rights, title and interest in and to
60% of the stock of Big Tree to Mr. Lin in exchange for 53,654 shares of the
common stock of China Direct, Inc. owned by Mr. Lin. These shares had a fair
market value of approximately $445,328 on the date of the agreement. As a result
of this transaction, we no longer own any interest in Big Tree or its wholly
owned subsidiary, Jieyang Big Tree. Following this transaction we do not intend
to pursue any other business opportunities in the toy industry.





In August
2008 we borrowed $400,000 from China Direct, Inc. under the terms of a secured
promissory note. We used the proceeds to fund our commitments to AoHong and for
working capital purposes. The note, which bears interest at 4% per annum, is due
June 30, 2009. As collateral for the note we assigned China Direct, Inc. the
53,654 shares of common stock of China Direct, Inc. we owned which were tendered
to us by Mr. Wei Lin as consideration for our sale to him of our 60%
interest in Big Tree Toys, Inc. in April 2008. This note remains
outstanding.





For the
years ended December 31, 2008 and 2007, we paid a consulting fee of $85,812 and
$47.074, respectively, to a subsidiary of China Direct, Inc, one of our
shareholders.





Director
Independence





None of
our directors would be considered “independent” under Rule 4200(a) (15) of the
National Association of Securities Dealers listing standards.





Related
Person Transaction Policy




We do not
have a related person transaction policy.  Consequently, during 2008
none of the aforedescribed related party transactions were subject to review by
our Board of Directors.





ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.





Sherb
& Co., LLP served as our independent registered public accounting firm for
2008 and 2007. The following table shows the fees that were billed for the audit
and other services provided by such firm for 2008 and 2007.








2008
                      
                      
                      2007Audit
      Fees
                      
                      
                      75,000
                      
                      
                      
                      89,500Audit
      Related Fees
                      
                      
                      0
                      
                      
                      
                      0Tax
      Fees
                      
                      
                      0
                      
                      
                      
                      0All
      Other Fees
                      
                      
                      0
                      
                      
                      
                      65,000Total
                      
                      $
                      75,000
                      
                      
                      $
                      154,500








Audit
Fees -- This category includes the audit of our annual financial statements,
review of financial statements included in our quarterly reports and services
that are normally provided by the independent registered public accounting firm
in connection with engagements for those fiscal years. This category also
includes advice on audit and accounting matters that arose during, or as a
result of, the audit or the review of interim financial statements.





Audit-Related
Fees -- This category consists of assurance and related services by the
independent registered public accounting firm that are reasonably related to the
performance of the audit or review of our financial statements and are not
reported above under "Audit Fees." The services for the fees disclosed under
this category include consultation regarding our correspondence with the SEC and
other accounting consulting.





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Tax Fees
-- This category consists of professional services rendered by our independent
registered public accounting firm for tax compliance and tax advice. The
services for the fees disclosed under this category include tax return
preparation and technical tax advice.





All Other
Fees -- This category consists of fees for other miscellaneous
items.





Our Board
of Directors has adopted a procedure for pre-approval of all fees charged by our
independent registered public accounting firm. Under the procedure, the Board
approves the engagement letter with respect to audit, tax and review services.
Other fees are subject to pre-approval by the Board, or, in the period between
meetings, by a designated member of Board. Any such approval by the designated
member is disclosed to the entire Board at the next meeting. The audit and tax
fees paid to the auditors with respect to 2008 and 2007 were pre-approved by the
entire Board of Directors.





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PART IV





ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES.





The
following documents are filed as a part of this report or are incorporated by
reference to previous filings, if so indicated:





Exhibit
      No.
              
              DESCRIPTION2.1
              
              Agreement
      and Plan of Merger between Century Silver Mines, Inc. and Sense Holdings,
      Inc. (1)3.1(a)
              
              Articles
      of Incorporation of Sense Holdings, Inc. (1)3.1(b)
              
              Articles
      of Merger of Century Silver Mines, Inc. into Sense Holdings, Inc. (FL)
      (1)3.1
      (c)
              
              Articles
      of Merger of Century Silver Mines, Inc. into Sense Holdings, Inc. (ID)
      (1)3.1
      (d)
              
              Articles
      of Amendment to the Articles of Incorporation filed February 23, 2007
      (11)3.1
      (e)
              
              Articles
      of Amendment to the Articles of Incorporation filed May 30, 2000
      (5)3.1
      (f)
              
              Articles
      of Amendment to the Articles of Incorporation filed February 7, 2002
      (5)3.1
      (g)
              
              Articles
      of Amendment to the Articles of Incorporation filed July 13, 2007
      (23)3.1(h)
              
              Articles
      of Amendment to the Articles of Incorporation filed November 8, 2007
      (24)3.2
              
              Bylaws
      (1)4.1
              
              Trilogy
      Capital Partners, Inc. Warrant Agreement dated August 29, 2005
      (6)4.2
              
              Form
      of $0.10 common stock purchase warrant (16)4.3
              
              Form
      of $0.12 common stock purchase warrant (10)10.1
              +
              1999
      Stock Option Plan (1)10.2
              
              Technology
      License Agreement, as amended, with SAC Technologies, Inc.
    (1)10.3
              
              Lease
      principal executive offices (11)10.4
              
              Manufacturing
      and Non-Compete Agreement with Test Systems Engineering
  (1)10.5
              
              Sales
      Agreement with Integrated Design, Inc.(1)10.6
              
              Agreement
      and Plan of Acquisition dated May 31, 2001 with Micro Sensor Technologies,
      Inc. (2)10.7
              
              Patent
      License Agreement dated March 26, 2001, between Micro Sensor Technologies,
      Inc. and UT-Battelle, LLC (2)10.8
              
              Work
      for Others Agreement dated June 4, 2001, between UT-Battelle, LLC and
      Micro Sensor Technologies, Inc. (2)10.9
              
              Form
      of Promissory Note(4)10.10
              +
              2001
      Equity Compensation Plan (3)10.11
              +
              Employment
      Agreement between the company and Dore Scott Perler as of May 1, 2007
      (16)10.12
              +
              Employment
      Agreement between the company and Shawn Tartaglia as of April 1, 2005
      (8)10.13
              
              Form
      of Subscription Agreement (10)10.14
              
              Cooperative
      Research and Development Agreement (CRADA) between UT-Battelle, LLC and
      Sense Holdings Incorporated (6)10.15
              +
              2005
      Equity Compensation Plan (7)10.16
              
              Consulting
      and Management Agreement with China Direct, Inc. (9)10.17
              
              Exclusive
      Patent License Agreement dated August 1, 2005, by and between UT-Battelle,
      LLC and Sense Holdings, Inc. (11)10.18
              
              Membership
      Interest Purchase Agreement by and among Sense Holdings, Inc. and its
      wholly owned subsidiary China Chemical Group, Inc. and Shanghai AoHong
      Industry Co., Ltd. (12)10.19
              
              Consulting
      and Management Agreement dated June 27, 2007 by and between Sense
      Holdings, Inc. and CDI Shanghai Management Co., Ltd.
  (12)10.20
              +
              Amendment
      No. 1 to the 2005 Equity Compensation Plan (13)10.21
              
              Stock
      Purchase Agreement dated August 24, 2007 by and between CDI China, Inc.,
      China Direct, Inc. and Sense Holdings, Inc. (14)10.22
              
              Form
      of subscription agreement (14)10.23
              
              Amendment
      to Stock Purchase Agreement by and between CDI China, Inc., China Direct,
      Inc. and Sense Holdings, Inc. (15)10.24
              
              Amendment
      to Membership Interest Purchase Agreement (16)10.25
              
              Cooperation
      Agreement between Guangdong Test Center of Product Quality Supervision and
      Big Tree Toys, Inc. (17)10.26
              +
              Termination
      Agreement dated January 19, 2009 between China America Holdings, Inc. and
      Dore Scott Perler. (18)








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10.27
              
              Asset
      Purchase Agreement dated January 19, 2009 between China America Holdings,
      Inc. and Pearl Group Advisors, Inc. (19)10.28
              
              Consulting
      and Management Agreement dated June 27, 2007 between Sense Holdings, Inc.
      and CDI Shanghai Management Co., Ltd. (20)10.29
              
              Consulting
      and Management Agreement dated April 8, 2009 between China America
      Holdings, Inc. and China Direct Investments, Inc.*10.30
              
              Agreement
      dated April 30, 2008 among Wei Lin, China Direct, Inc. and China America
      Holdings, Inc. (21)10.31
              +
              Consulting
      Agreement dated April 8, 2009 between China America Holdings, Inc. and
      Dore Perler.*10.32
              
              Secured
      Promissory Note dated August 22, 2008 between China America Holdings, Inc.
      and China Direct Investments, Inc. (22)14.1
              
              Code
      of Business Conduct and Ethics (8)21.1
              
              Subsidiaries
      of the Registrant *23.1
              
              Consent
      of Sherb & Co., LLP *31.1
              
              Section
      302 Certificate of Chief Executive Officer *31.2
              
              Section
      302 Certificate of principal financial and accounting officer
      *32.1
              
              Section
      906 Certificate of Chief Executive Officer and principal financial and
      accounting officer *





+
                  
                  Management
      contract or compensatory plan or arrangement.*
                  
                  Filed
      herewith.(1)
                  
                  Incorporated
      by reference to the registration statement on Form SB-2, SEC File No.
      333-87293.(2)
                  
                  Incorporated
      by reference to the registration statement on Form SB-2, SEC File
      No.333-62874.(3)
                  
                  Incorporated
      by reference to the registration statement on Form S-8, SEC File
      No.333-81306(4)
                  
                  Incorporated
      by reference to the Quarterly Report on Form 10-QSB for the period ended
      June 30, 2003.(5)
                  
                  Incorporated
      by reference to the registration statement on Form SB-2, SEC File No.
      333-86206.(6)
                  
                  Incorporated
      by reference to the Quarterly Report on Form 10-QSB/A for the period ended
      September 30, 2005.(7)
                  
                  Incorporated
      by reference to the registration statement on Form S-8, SEC File No.
      333-125905.(8)
                  
                  Incorporated
      by reference to the Annual Report on Form 10-KSB for the fiscal year ended
      December 31, 2004.(9)
                  
                  Incorporated
      by reference to the Current Report on Form 8-K as filed on November 28,
      2006.(10)
                  
                  Incorporated
      by reference the Current Report on Form 8-K as filed on August 31,
      2007.(11)
                  
                  Incorporated
      by reference to the Annual Report on Form 10-KSB for the fiscal year ended
      December 31, 2006.(12)
                  
                  Incorporated
      by reference to the Current Report on Form 8-K as filed on July 3,
      2007.(13)
                  
                  Incorporated
      by reference to the registration statement on Form S-8, SEC File No.
      333-144412.(14)
                  
                  Incorporated
      by reference to the Current Report on Form 8-K as filed on August 28,
      2007.(15)
                  
                  Incorporated
      by reference to the Current Report on Form 8-K as filed on August 31,
      2007.(16)
                  
                  Incorporated
      by reference to the Registration Statement on Form SB-2, SEC File No.
      333-146830.(17)
                  
                  Incorporated
      by reference to Exhibit 10.25 of the Annual Report on Form 10-K for the
      fiscal year ended December 31, 2007 filed on April 14,
    2008.(18)
                  
                  Incorporated
      by reference to Exhibit 10.1 of the Current Report on Form 8-K as filed on
      January 22, 2009.(19)
                  
                  Incorporated
      by reference to Exhibit 10.2 of the Current Report on Form 8-K as filed on
      January 22, 2009.(20)
                  
                  Incorporated
      by reference to Exhibit 10.30 of the Current Report on Form 8-K as filed
      on July 3, 2007.(21)
                  
                  Incorporated
      by reference to Exhibit 10.26 of the Current Report on Form 8-K as filed
      on May 5, 2008.(22)
                  
                  Incorporated
      by reference to Exhibit 10.26 to the Quarterly Report on Form 10-Q for the
      period ended September 30, 2008 filed on November 19,
  2008.(23)
                  
                  Incorporated
      by reference to Exhibit 3.1(g) to the Registration Statement on Form SB-2,
      SEC File No. 333-146830 filed on October 19, 2007.(24)
                  
                  Incorporated
      by reference to Exhibit 3.1(h) to the Quarterly Report on Form 10-Q for
      the period ended September 30, 2007 filed on November 14,
      2007.








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SIGNATURES





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





CHINA
      AMERICA HOLDINGS, INC.Date:
      April 15, 2009
            By:
            /s/
      Shaoyin WangShaoyin
      Wang, Chief Executive Officer, President and Chairman (Principal Executive
      Officer)





Pursuant
to the requirements of 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 and on the dates indicated.





Signature
            
            Title
            
            Date/s/
      Shaoyin Wang
            
            Chief
      Executive Officer, President and Chairman (Principal Executive
      Officer)
              Chief
      Financial Officer (Principal Financial and Accounting
    Officer)
            
            April
      15, 2009Shaoyin
      Wang/s/
      Dore Scott Perler
            
            Secretary
      and Director
            
            April
      15, 2009Dore
      Scott Perler








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CHINA AMERICA HOLDINGS, INC. AND SUBSIDIARIES


INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008 and 2007





CONTENTS





Report
      of Independent Registered Public Accounting Firm
            
            F-1Consolidated
      Financial Statements:Consolidated
      Balance Sheets
            
            F-2Consolidated
      Statements of Operations
            
            F-3Consolidated
      Statement of Stockholders’ Equity
            
            F-4Consolidated
      Statements of Cash Flows
            
            F-5Notes
      to Audited Consolidated Financial Statements
            
            F-6
      to F-29










Table of Contents








REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors


China
America Holdings, Inc. and Subsidiaries


Shanghai,
China





We have
audited the accompanying consolidated balance sheets of China America Holdings,
Inc. and Subsidiaries as of December 31, 2008 and 2007 and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for the years ended December 31, 2008 and 2007.  These
consolidated financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.





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 purposes of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit includes examining on a test basis, evidence
supporting the amount and disclosures in the combined financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe
that our audits provide a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of China America Holdings, Inc.
and Subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for the years ended December 31, 2008 and 2007,
in conformity with accounting principles generally accepted in the United States
of America.





SHERB
& CO., LLP








/s/ Sherb & Co.,
LLP


Certified
Public Accountants





Boca
Raton, Florida


March 25,
2009





F -
1
 Table of Contents








CHINA
      AMERICA HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSDecember
      31,2008
                                                                
                                                                
                                                                2007ASSETSCURRENT
      ASSETS:Cash
                                                                
                                                                $
                                                                2,228,455
                                                                
                                                                
                                                                $
                                                                2,012,480Accounts
      receivable, net of allowance for doubtful accounts of$0
      and $187,210, respectively
                                                                
                                                                
                                                                3,778,096
                                                                
                                                                
                                                                
                                                                4,220,692Notes
      receivable
                                                                
                                                                
                                                                1,104,343
                                                                
                                                                
                                                                
                                                                333,168Inventory
                                                                
                                                                
                                                                1,719,796
                                                                
                                                                
                                                                
                                                                1,100,023Prepaid
      expense and other current assets
                                                                
                                                                
                                                                453,860
                                                                
                                                                
                                                                
                                                                440,819Total
      current assets
                                                                
                                                                
                                                                9,284,550
                                                                
                                                                
                                                                
                                                                8,107,182LONG-TERM
      ASSETS:Restricted
      cash
                                                                
                                                                
                                                                175,075
                                                                
                                                                
                                                                
                                                                437,511Property
      and equipment, net
                                                                
                                                                
                                                                3,394,157
                                                                
                                                                
                                                                
                                                                1,928,137Prepaid
      land use rights, net
                                                                
                                                                
                                                                84,746
                                                                
                                                                
                                                                
                                                                76,804Due
      from related party - discontinued operation
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                465,982Deposit
      on land use rights
                                                                
                                                                
                                                                744,303
                                                                
                                                                
                                                                
                                                                -Other
      assets
                                                                
                                                                
                                                                31,221
                                                                
                                                                
                                                                
                                                                258,676Total
      other assets
                                                                
                                                                
                                                                4,429,502
                                                                
                                                                
                                                                
                                                                3,167,110Total assets
                                                                
                                                                $
                                                                13,714,052
                                                                
                                                                
                                                                $
                                                                11,274,292LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIES:Notes
      payable
                                                                
                                                                $
                                                                3,002,982
                                                                
                                                                
                                                                $
                                                                1,665,667Accounts
      payable and accrued expenses
                                                                
                                                                
                                                                957,190
                                                                
                                                                
                                                                
                                                                701,172Advances
      from customers
                                                                
                                                                
                                                                424,320
                                                                
                                                                
                                                                
                                                                96,624Taxes
      payables
                                                                
                                                                
                                                                487,223
                                                                
                                                                
                                                                
                                                                265,282Due
      to related parties
                                                                
                                                                
                                                                208,568
                                                                
                                                                
                                                                
                                                                308,346Deferred
      revenue
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                15,489Total
      current liabilities
                                                                
                                                                
                                                                5,080,283
                                                                
                                                                
                                                                
                                                                3,052,580MINORITY
      INTEREST
                                                                
                                                                
                                                                4,913,442
                                                                
                                                                
                                                                
                                                                4,378,042SHAREHOLDERS'
      EQUITY:Common
      stock, $.001 par value, 500,000,000 shares authorized;135,810,792
      and 135,700,792 shares issued and outstandingat
      December 31, 2008 and 2007, respectively
                                                                
                                                                
                                                                135,811
                                                                
                                                                
                                                                
                                                                135,701Additional
      paid-in capital
                                                                
                                                                
                                                                19,661,352
                                                                
                                                                
                                                                
                                                                19,541,062Statutory
      reserves
                                                                
                                                                
                                                                687,717
                                                                
                                                                
                                                                
                                                                628,017Accumulated
      deficit
                                                                
                                                                
                                                                (17,180,183
                                                                )
                                                                
                                                                
                                                                (16,559,325
                                                                )Other
      comprehensive income
                                                                
                                                                
                                                                415,630
                                                                
                                                                
                                                                
                                                                98,215Total
      shareholders' equity
                                                                
                                                                
                                                                3,720,327
                                                                
                                                                
                                                                
                                                                3,843,670Total liabilities and shareholders' equity
                                                                
                                                                $
                                                                13,714,052
                                                                
                                                                
                                                                $
                                                                11,274,292See
      notes to consolidated financial statements.








F -
2
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CHINA
      AMERICA HOLDNGS, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF OPERATIONSFor
      the Years EndedDecember
      31,2008
                                                                                              
                                                                                              
                                                                                              2007Net
      revenues
                                                                                              
                                                                                              $
                                                                                              34,967,512
                                                                                              
                                                                                              
                                                                                              $
                                                                                              16,197,391Cost
      of sales
                                                                                              
                                                                                              
                                                                                              32,279,091
                                                                                              
                                                                                              
                                                                                              
                                                                                              13,995,155Gross
      profit
                                                                                              
                                                                                              
                                                                                              2,688,421
                                                                                              
                                                                                              
                                                                                              
                                                                                              2,202,236Operating
      expenses:Selling
      expenses
                                                                                              
                                                                                              
                                                                                              748,400
                                                                                              
                                                                                              
                                                                                              
                                                                                              890,862Consulting
      and investor relations expense
                                                                                              
                                                                                              
                                                                                              263,420
                                                                                              
                                                                                              
                                                                                              
                                                                                              650,096Consulting
      expense-related party
                                                                                              
                                                                                              
                                                                                              65,812
                                                                                              
                                                                                              
                                                                                              
                                                                                              47,074Compensation
      and related taxes
                                                                                              
                                                                                              
                                                                                              239,672
                                                                                              
                                                                                              
                                                                                              
                                                                                              535,282General
      and administrative
                                                                                              
                                                                                              
                                                                                              511,388
                                                                                              
                                                                                              
                                                                                              
                                                                                              485,322Total
      operating expenses
                                                                                              
                                                                                              
                                                                                              1,828,692
                                                                                              
                                                                                              
                                                                                              
                                                                                              2,608,636Income
      (loss) from operations
                                                                                              
                                                                                              
                                                                                              859,729
                                                                                              
                                                                                              
                                                                                              
                                                                                              (406,400
                                                                                              )Other
      income (expenses):Interest
      income
                                                                                              
                                                                                              
                                                                                              15,962
                                                                                              
                                                                                              
                                                                                              
                                                                                              28,546Interest
      (expense)
                                                                                              
                                                                                              
                                                                                              (92,241
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (36,276
                                                                                              )Realized
      loss on sale of marketable equity securities
                                                                                              
                                                                                              
                                                                                              (325,983
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -Foreign
      currency transaction gain (loss)
                                                                                              
                                                                                              
                                                                                              5,614
                                                                                              
                                                                                              
                                                                                              
                                                                                              (6,131
                                                                                              )Total
      other income (expenses)
                                                                                              
                                                                                              
                                                                                              (396,648
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (13,861
                                                                                              )Income
      (loss) before discontinued operations. income taxesand minority
      interest
                                                                                              
                                                                                              
                                                                                              463,081
                                                                                              
                                                                                              
                                                                                              
                                                                                              (420,261
                                                                                              )Discontinued
      operations:Gain
      from disposal of discontinued operations
                                                                                              
                                                                                              
                                                                                              45,912
                                                                                              
                                                                                              
                                                                                              
                                                                                              -Loss
      from discontinued operations
                                                                                              
                                                                                              
                                                                                              (278,737
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (278,112
                                                                                              )Total
      loss from discontinued operations
                                                                                              
                                                                                              
                                                                                              (232,825
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (278,112
                                                                                              )Income
      (loss) before income taxes and minority interest
                                                                                              
                                                                                              
                                                                                              230,256
                                                                                              
                                                                                              
                                                                                              
                                                                                              (698,373
                                                                                              )Provision
      for income taxes
                                                                                              
                                                                                              
                                                                                              (354,616
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -(Loss)
      before minority interest
                                                                                              
                                                                                              
                                                                                              (124,360
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (698,373
                                                                                              )Minority
      interest in income of subsidiary
                                                                                              
                                                                                              
                                                                                              (436,798
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (420,230
                                                                                              )Net
      loss
                                                                                              
                                                                                              $
                                                                                              (561,158
                                                                                              )
                                                                                              
                                                                                              $
                                                                                              (1,118,603
                                                                                              )Comprehensive
      loss:Other
      comprehensive income:Unrealized
      foreign currency translation gain
                                                                                              
                                                                                              
                                                                                              317,415
                                                                                              
                                                                                              
                                                                                              
                                                                                              98,215Comprehensive
      loss
                                                                                              
                                                                                              $
                                                                                              (243,743
                                                                                              )
                                                                                              
                                                                                              $
                                                                                              (1,020,388
                                                                                              )Basic
      and diluted loss per common share:Net
      loss from continuing operations
                                                                                              
                                                                                              $
                                                                                              -
                                                                                              
                                                                                              
                                                                                              $
                                                                                              (0.01
                                                                                              )Net
      loss from discontinued operations
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -Net
      loss per common share
                                                                                              
                                                                                              $
                                                                                              (0.00
                                                                                              )
                                                                                              
                                                                                              $
                                                                                              (0.01
                                                                                              )Weighted
      average number of shares outstanding:Basic
      and diluted
                                                                                              
                                                                                              
                                                                                              135,802,216
                                                                                              
                                                                                              
                                                                                              
                                                                                              86,105,495See
      notes to consolidated financial statements.








F -
3
 Table of Contents








CHINA
      AMERICA HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITYFOR
      THE YEARS ENDED DECEMBER 31, 2008 AND 2007Common
      Stock, $.001 Par Value
                                                      
                                                      
                                                      Additional
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      OtherNumber
      of
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      Paid-in
                                                      
                                                      
                                                      Statutory
                                                      
                                                      
                                                      Accumulated
                                                      
                                                      
                                                      Comprehensive
                                                      
                                                      
                                                      Shareholders'Shares
                                                      
                                                      
                                                      Amount
                                                      
                                                      
                                                      Capital
                                                      
                                                      
                                                      Reserves
                                                      
                                                      
                                                      Deficit
                                                      
                                                      
                                                      Income
                                                      
                                                      
                                                      EquityBalance,
      December 31, 2006
                                                      
                                                      
                                                      55,814,057
                                                      
                                                      
                                                      $
                                                      55,814
                                                      
                                                      
                                                      $
                                                      14,851,714
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      (14,812,705
                                                      )
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      94,823Common
      stock issued for services
                                                      
                                                      
                                                      7,580,000
                                                      
                                                      
                                                      
                                                      7,580
                                                      
                                                      
                                                      
                                                      666,785
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      674,365Common
      stock issued in acquisition
                                                      
                                                      
                                                      12,500,000
                                                      
                                                      
                                                      
                                                      12,500
                                                      
                                                      
                                                      
                                                      1,175,000
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      1,187,500Common
      stock issued in acquisition - related party
                                                      
                                                      
                                                      10,000,000
                                                      
                                                      
                                                      
                                                      10,000
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      10,000Prior
      year appropriation of statutory reserves
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      476,144
                                                      
                                                      
                                                      
                                                      (476,144
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Appropriation
      of statutory reserves
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      151,873
                                                      
                                                      
                                                      
                                                      (151,873
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Distribution
      in connection with acquisition - related party
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (133,684
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (133,684
                                                      )Grant
      of stock options to employees
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      397,390
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      397,390Sale
      of common stock pursuant to private placement, net
                                                      
                                                      
                                                      49,806,735
                                                      
                                                      
                                                      
                                                      49,807
                                                      
                                                      
                                                      
                                                      2,583,857
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      2,633,664Net
      loss for the year
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (1,118,603
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (1,118,603
                                                      )Foreign
      currency translation adjustment
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      98,215
                                                      
                                                      
                                                      
                                                      98,215Balance,
      December 31, 2007
                                                      
                                                      
                                                      135,700,792
                                                      
                                                      
                                                      
                                                      135,701
                                                      
                                                      
                                                      
                                                      19,541,062
                                                      
                                                      
                                                      
                                                      628,017
                                                      
                                                      
                                                      
                                                      (16,559,325
                                                      )
                                                      
                                                      
                                                      98,215
                                                      
                                                      
                                                      
                                                      3,843,670Common
      stock issued for services
                                                      
                                                      
                                                      110,000
                                                      
                                                      
                                                      
                                                      110
                                                      
                                                      
                                                      
                                                      10,290
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      10,400Contributed
      services
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      110,000
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      110,000Appropriation
      of statutory reserves
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      59,700
                                                      
                                                      
                                                      
                                                      (59,700
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Net
      loss for the year
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (561,158
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (561,158
                                                      )Foreign
      currency translation adjustment
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      317,415
                                                      
                                                      
                                                      
                                                      317,415Balance,
      December 31, 2008
                                                      
                                                      
                                                      135,810,792
                                                      
                                                      
                                                      $
                                                      135,811
                                                      
                                                      
                                                      $
                                                      19,661,352
                                                      
                                                      
                                                      $
                                                      687,717
                                                      
                                                      
                                                      $
                                                      (17,180,183
                                                      )
                                                      
                                                      $
                                                      415,630
                                                      
                                                      
                                                      $
                                                      3,720,327See
      notes to consolidated financial statements.








F -
4
 Table of Contents


CHINA
      AMERICA HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWSFor
      the Years EndedDecember
      31,2008
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            2007Cash
      flows from operating activities:(Loss)
      from continuing operations
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            (328,333
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            (840,491
                                                                                                                                            )Adjustments
      to reconcile (loss) from continuing operations to net cash provided by
      continuing operations:Depreciation
      and amortization
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            312,156
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            73,032Common
      stock, warrants and options issued for services
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            10,400
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            1,071,755Contributed
      services
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            110,000
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -Minority
      interest
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            436,798
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            420,230Allowance
      for doubtful accounts
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (196,353
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            35,512Allowance
      for slow moving inventory
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (4,000
                                                                                                                                            )Realized
      loss on marketable equity securities
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            325,983
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -Gain
      on sale of discontinued operations
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (45,912
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -Changes
      in assets and liabilities:Accounts
      receivable
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            892,205
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (63,102
                                                                                                                                            )Inventory
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (537,636
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            437,094Prepaid
      expenses and other current assets
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            15,028
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            971,452Other
      assets
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            240,921
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (220,135
                                                                                                                                            )Notes
      receivable
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (737,199
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (94,106
                                                                                                                                            )Accounts
      payable and accrued expenses
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (68,028
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (62,975
                                                                                                                                            )Taxes
      payable
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            479,662
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -Advances
      from customers
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            316,228
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (856,508
                                                                                                                                            )Net cash provided by continuing operations
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            1,225,920
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            587,275Loss from discontinued operations
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (232,825
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (278,112
                                                                                                                                            )Adjustments to reconcile loss from discontinued operations to net cash
      (used in) discontinued operations:Net liabilities from disconinued operations
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            2,291
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (2,371
                                                                                                                                            )Net
      cash (used in) discontinued operations
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (230,534
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (280,483
                                                                                                                                            )Net
      cash provided by operating activities
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            995,386
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            587,275Cash
      flows from investing activities:Cash
      acquired in acquisition
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            703,577Cash
      used in acquisition
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (398,661
                                                                                                                                            )Proceeds
      from sale of marketable equity securities
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            117,047
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -Purchase
      of property and equipment
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (1,629,183
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (845,626
                                                                                                                                            )Decrease
      in due from related party
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            208,526Deposit
      on land use rights
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (732,752
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -Refund
      on land use rights
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            24,539Net
      cash (used in) investing activities
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (2,244,888
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (307,645
                                                                                                                                            )Cash
      flows from financing activities:Proceeds
      from (payments on) notes payable
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            1,214,392
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (525,127
                                                                                                                                            )Repayment
      of related party advances
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (118,599
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (684,197
                                                                                                                                            )Decrease
      in restricted cash
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            287,263
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            105,025Proceeds
      from sale of common stock
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            2,967,404Payment
      of placement fees and expenses
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (333,740
                                                                                                                                            )Net
      cash provided by financing activities
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            1,383,056
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            1,529,365Effect
      of exchange rate on cash
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            82,421
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            50,906Net
      increase in cash
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            215,975
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            1,859,901Cash
      - beginning of year
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            2,012,480
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            152,579Cash
      - end of year
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            2,228,455
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            2,012,480Supplemental
      disclosure of cash flow information:Cash
      paid for :Interest
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            86,499
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            35,026Income
      taxes
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            3,235
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            -NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Acquisition
      details:Fair
      value of assets acquired
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            -
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            10,241,543Liabilities
      assumed
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            -
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            8,779,066Common
      stock issued for acquisitions
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            -
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            1,187,500Goodwill
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            -
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            123,684See
      notes to consolidated financial statements.


F -
5
 Table of Contents
 CHINA
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007





NOTE 1 -
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Organization





China
America Holding, Inc. (formerly Sense Holdings, Inc. or “Sense”) (the "Company")
is a Florida corporation formed on July 13, 1998. Prior to June 27, 2007, the
Company’s core business was the design, development, manufacturing and selling
of fingerprint-based identification products and systems that incorporate
state-of-the-art biometric technology to verify a person's
identity.  On January 19, 2009, the Company entered into an Asset
Purchase Agreement (the “Asset Purchase Agreement”) with Pearl Group Advisors,
Inc., a Florida corporation ("Pearl Group") for the sale of certain assets
related to its biometric technology based fingerprint identification business
(see Note 2).





On June
27, 2007 the Company acquired a 56.08% interest in Shanghai AoHong Chemical Co.
Ltd. ("AoHong"), a Chinese limited liability company, from Mr. Aihua Hu and his
wife, Mrs. Ying Ye in exchange for a commitment to contribute $3,380,000 to
AoHong. The Company’s commitment to AoHong requires it to provide an aggregate
of $3,380,000 between September 2007 and June 2009 as follows: $800,000 before
September 30, 2007, $400,000 before June 30, 2008, $600,000 before December 31,
2008 and the remaining balance due of $1,580,000 by June 27, 2009. The Company
used $1,200,000 from a unit offering completed in 2007 to satisfy its
commitments due through June 30, 2008. Subsequently, the Company tendered
$400,000 in August 2008 which represented a portion of the December 2008
commitment. The balance of $200,000 was due on December 31, 2008. The minority
owners of AoHong have orally agreed to extend the payment of the $200,000 until
May 28, 2009. The Company will be required to raise additional capital to fund
the balance of $1,780,000 of the obligation. In addition, the Company issued Mr.
Aihua Hu, the minority owner of AoHong and its CEO, 12,500,000 shares of the
Company’s common stock valued at $1,187,500 as additional
consideration.





AoHong
sells and distributes assorted liquid coolants which are utilized in a variety
of applications, primarily as refrigerants in air conditioning systems for
automobiles, residential and commercial air conditioning systems, refrigerators,
fire extinguishing agents and assorted aerosol sprays.





The
operations of AoHong are comprised of three basic functions:





•
            Repackaging
      bulk quantities of liquid coolants into smaller packaging for resale and
      distribution. Approximately 40.6% and approximately 55%, respectively, of
      its net revenues were generated from this activity for the year ended
      December 31, 2008 and 2007;•
            Custom
      mixing of various raw materials in accordance with customer specifications
      into a new product. AoHong employs two engineers who work with customers
      to derive proper mixture of chemicals. Approximately 8.9% and 15% of its
      net revenues were generated from this activity during the year ended
      December 31, 2008 and 2007, respectively, and•
            Distribution
      of bulk quantities of liquid coolants directly to customers who in turn
      resell the product. Approximately 50.5% and approximately 30%,
      respectively, of its net revenues were generated from this activity during
      the year ended December 31, 2008 and 2007,
  respectively.





Customers
of AoHong include manufacturers of automobiles, refrigerators and air
conditioners as well as distributors of coolants.




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 Table of Contents
 CHINA
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued




AoHong
was established in February 2000 as Shanghai AoHong Industry Co., Ltd. On July
5, 2007 AoHong changed its name to Shanghai AoHong Chemical Co., Ltd. AoHong has
two wholly-owned subsidiaries; Shanghai Binghong Trading Co., Ltd. which was
established in March 2002 and Shanghai Wuling Environmental Material Co., Ltd.
which was established in January 2005.





On August 31, 2007, the Company closed
an acquisition of 60% of the issued and outstanding common stock of Big Tree
Toys, Inc, a Florida corporation ("Big Tree"), from CDI China, Inc., a
wholly-owned subsidiary of China Direct, Inc. (“China Direct”). Big Tree was
incorporated in the State of Florida on November 20, 2006 and its wholly owned
subsidiary Jieyang Big Tree Toy Enterprise Co., Ltd. ("Jieyang Big Tree"), a
Chinese limited liability company, was established on January 22, 2007 as a
wholly foreign owned entity in China. China Direct acquired 60% of Big Tree in
February 2007 in exchange for shares of its common stock and a commitment to
provide a $1 million working capital loan subject to the satisfaction of certain
revenue milestones by Big Tree. Both Big Tree and Jieyang Big Tree were
development stage companies which had not yet commenced operations. On April 30,
2008, the Company entered into an Agreement with Wei Lin and China Direct
pursuant to which the Company transferred all its right, title and interest in
and to 60% of the stock of Big Tree to Mr. Lin in exchange for 53,654 shares of
the common stock of China Direct owned by Mr. Lin. As a result of this
transaction, the Company no longer owns any interest in Big Tree or its
wholly-owned subsidiary, Jieyang Big Tree (See Note 2).





In
November 2008, the Company created AoHong (Tianjin) Chemical Co., Ltd. a Chinese
limited liability company as a wholly owned subsidiary, (“AoHong Tianjin”), to
expand our distribution channels to the Beijing region.  AoHong
Tianjin will serve as a second production base in northern China.




Basis
of Presentation




The
consolidated financial statements include China America Holdings, Inc. and all
its subsidiaries, including those operating outside the United States of
America. The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
 Our year end is December 31st. The
year ended December 31, 2007 is referred to as “2007”, the year ended
December 31, 2008 is referred to as “2008”. Our consolidated statements
include the accounts of the Company and its controlled entities, including
wholly-owned and majority owned subsidiaries. All significant inter-company
account balances and transactions have been eliminated.  The financial
statements have been reclassified to reflect the impact of discontinued
operations.




Use
of Estimates





The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States 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 revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates for the 2008 and 2007 periods include provisions made for
sales and the related allowance for doubtful accounts, valuation of stock-based
compensation, and the useful lives of property and equipment and other long-term
assets, and assumptions used in
assessing impairment of long-term assets and valuation of deferred tax
assets.




Concentration
of Credit Risks




The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC's economy. The Company's operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in North America. The Company's results may be adversely affected by
changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.





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 Table of Contents
 CHINA
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued





Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash and trade accounts receivable. The Company
places its cash with high credit quality financial institutions in the United
States and China. At December 31, 2008, the Company had deposits of $2,135,998
in banks in China. In China, there is no equivalent federal deposit insurance as
in United States; as such these amounts held in banks in China are not insured.
The Company has not experienced any losses in such bank accounts through
December 31, 2008. A significant portion of the Company's sales are credit sales
which are primarily to customers whose ability to pay is dependent upon the
industry economics prevailing in these areas; however, concentrations of credit
risk with respect to trade accounts receivables is limited due to generally
short payment terms.  The Company also performs ongoing credit
evaluations of its customers to help further reduce credit risk.





At
December 31, 2008 and 2007, our bank deposits by geographic area were as
follows:





Country
                                        
                                        2008
                                        
                                        
                                        2007United
      States
                                        
                                        $
                                        92,457
                                        
                                        
                                        
                                        4.1
                                        %
                                        
                                        $
                                        998,222
                                        
                                        
                                        
                                        49.6
                                        %China
                                        
                                        
                                        2,135,998
                                        
                                        
                                        
                                        95.9
                                        %
                                        
                                        
                                        1,014,258
                                        
                                        
                                        
                                        50.4
                                        %Total
      cash and cash equivalents
                                        
                                        $
                                        2,228,455
                                        
                                        
                                        
                                        100.0
                                        %
                                        
                                        $
                                        2,012,480
                                        
                                        
                                        
                                        100.0
                                        %





In an
effort to mitigate any potential risk, the Company periodically evaluates the
credit quality of the financial institutions at which it holds deposits, both in
the United States and China.




Cash
and Cash Equivalents




For
purposes of the consolidated statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to be
cash equivalents.





Marketable
Equity Securities





For the
year ended December 31, 2008 and 2007, the Company recognized an aggregate
realized loss of $325,983 and $0 from the sale of trading marketable equity
securities which has been reflected in the accompanying consolidated statement
of operations. At December 31, 2008 and 2007, the Company did not own any
marketable securities.





Notes
Receivable





Notes receivable represents trade accounts receivable due from various
customers where the customers’ bank has guaranteed the payment of the
receivable. This amount is non-interest bearing and is normally paid within
three to six months. Historically, the Company has experienced no losses on
notes receivable. The Company‘s notes receivable totaled $1,104,343 and $333,168
at December 31, 2008 and 2007, respectively.





Accounts
Receivable





Accounts
receivable are presented net of an allowance for doubtful accounts. The Company
maintains allowances for doubtful accounts for estimated losses. The Company
reviews the accounts receivable on a periodic basis and makes general and
specific allowances when there is doubt as to the collectability of individual
balances. In evaluating the collectability of individual receivable balances,
the Company considers many factors, including the age of the balance, customer’s
payment history, its current credit-worthiness and current economic trends.
Accounts are written off after exhaustive efforts at collection. As of December
31, 2008 and December 31, 2007, the Company has recorded an allowance for
doubtful accounts of $0 and $187,210, respectively.





F -
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 Table of Contents
 CHINA
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued





Inventories





Inventories
are stated at the lower of average cost or market and consist of raw materials
and finished goods. The Company writes down inventory for estimated obsolescence
or unmarketable inventory based upon assumptions and estimates about future
demand and market conditions. If actual market conditions are less favorable
than those projected by the Company, additional inventory write-downs may be
required.





Prepaid
Expenses and Other Current Assets




Prepaid
expenses and other current assets consist primarily of prepayments to vendors
for merchandise that had not yet been shipped. At December 31, 2008 and 2007,
our consolidated balance sheets include prepaid expenses and other current
assets of $453,860 and $440,819, respectively.





Property
and Equipment





Property
and equipment are carried at cost and are depreciated on a straight-line basis
over the estimated useful lives of the assets. The costs of repairs and
maintenance are expensed as incurred; major replacements and improvements are
capitalized. When assets are retired or disposed of, the cost and accumulated
depreciation are removed from the accounts, and any resulting gains or losses
are included in income in the year of disposition. The Company examines the
possibility of decreases in the value of fixed assets when events or changes in
circumstances reflect the fact that their recorded value may not be
recoverable.





Impairment
of Long-Lived Assets





In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," The Company
periodically reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be fully recoverable. The Company recognizes an impairment loss when the sum of
expected undiscounted future cash flows is less than the carrying amount of the
asset. The amount of impairment is measured as the difference between the
asset's estimated fair value and its book value. The Company did not incur any
impairment for the year ended December 31, 2008 and 2007.





Advances
from Customers




Advances
from customers represent prepayments to the Company for merchandise that had not
yet been shipped. The Company will recognize the deposits as revenue as
customers take delivery of the goods, in accordance with its revenue recognition
policy.





Fair
Value of Financial Instruments





Effective
January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements (“SFAS
No. 157”). SFAS No. 157 clarifies the definition of fair value, prescribes
methods for measuring fair value, and establishes a fair value hierarchy to
classify the inputs used in measuring fair value as follows:







F -
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 Table of Contents
 CHINA
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued





•
              Level
      1-Inputs are unadjusted quoted prices in active markets for identical
      assets or liabilities available at the measurement
  date.


•
            Level
      2-Inputs are unadjusted quoted prices for similar assets and liabilities
      in active markets, quoted prices for identical or similar assets and
      liabilities in markets that are not active, inputs other then quoted
      prices that are observable, and inputs derived from or corroborated by
      observable market data.•
            Level
      3-Inputs are unobservable inputs which reflect the reporting entity’s own
      assumptions on what assumptions the market participants would use in
      pricing the asset or liability based on the best available
      information.





The
carrying amounts reported in the balance sheet for cash, accounts and notes
receivable, due from related party, accounts payable and accrued expenses,
advances from customers, notes payable, loans and amounts due from related
parties approximate their fair market value based on the short term maturity of
these instruments. The Company did not identify any assets or liabilities that
are required to be presented on the consolidated balance sheets at fair value in
accordance with SFAS 157.





Revenue
Recognition





The
Company follows the guidance of the SEC's Staff Accounting Bulletin No. 104 and
Topic 13, "Revenue Recognition in Financial Statements". In general, the Company
records revenue when persuasive evidence of an arrangement exists, services have
been rendered or product delivery has occurred, the sales price to the customer
is fixed or determinable, and collectability is reasonably
assured.  The following policies reflect specific criteria for the
various revenues streams of the Company:





•
            The
      Company generates revenue from the sale of its products and records
      revenues from the sale of products when the goods are shipped, title
      passes, and collectability is reasonably assured.•
            Revenue
      from periodic maintenance agreements is generally recognized ratably over
      the respective maintenance periods provided no significant obligations
      remain and collectability of the related receivable is
      probable.•
            Revenue
      from the performance of services is recognized upon completion of the
      service.





Loss
per Common Share





Basic
loss per share is computed by dividing net loss by the weighted average number
of shares of common stock outstanding during the period. Diluted loss per share
is computed by dividing net loss by the weighted average number of shares of
common stock, common stock equivalents and potentially dilutive securities
outstanding during each period. Potentially dilutive common shares consist of
the unexercised stock options and warrants. For the years ended December 31,
2008 and 2007, the computation of diluted net loss per share does not include
dilutive common stock equivalents in the weighted average shares outstanding as
they would be anti-dilutive.  The Company's common stock equivalents
at December 31, 2008 and 2007 include the following:





December
      31,2008
                                  
                                  
                                  2007Options
                                  
                                  
                                  7,900,000
                                  
                                  
                                  
                                  9,550,000Warrants
                                  
                                  
                                  63,800,113
                                  
                                  
                                  
                                  67,811,61371,700,113
                                  
                                  
                                  
                                  77,361,613








F -
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 Table of Contents
 CHINA
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued





Stock
Based Compensation





The
Company adopted Statement of Financial Accounting Standards No. 123 (revised
2004), Share Based Payment ("SFAS No. 123R"). SFAS No. 123R establishes the
financial accounting and reporting standards for stock-based compensation plans.
As required by SFAS No. 123R, the Company recognized the cost resulting from all
stock-based payment transactions including shares issued under its stock option
plans in the financial statements.





Non-Employee
Stock-Based Compensation





The cost
of stock-based compensation awards issued to non-employees for services are
recorded at either the fair value of the services rendered or the instruments
issued in exchange for such services, whichever is more readily determinable,
using the measurement date guidelines enumerated in Emerging Issues Task Force
Issue ("EITF") 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services" ("EITF 96-18").




Income
Taxes





The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”.
SFAS No. 109 requires the recognition of deferred tax assets and
liabilities to reflect the future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. Measurement of
the deferred items is based on enacted tax laws. In the event the future
consequences of differences between the financial reporting basis and tax bases
of the Company's assets and liabilities result in a deferred tax asset, SFAS
No. 109 requires an evaluation of the probability of our being able to
realize the future benefits indicated by such assets. A valuation allowance
related to a deferred tax asset is recorded when it is more likely than not that
some or the entire deferred tax asset will not be realized.




The
Company adopted FIN 48, “Accounting for Uncertainty in Income
Taxes-an interpretation of FASB Statements No. 109,”.  Under
FIN 48, the evaluation of a tax position is a two-step process. The first step
is to determine whether it is more likely than not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50% likelihood of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosures, and transition.  The adoption had no effect on
the Company’s consolidated financial statements.




Foreign
Currency Translation





The
reporting currency of the Company is the U.S. dollar. The functional currency of
the Company is the local currency, the Chinese Renminbi (“RMB”). Results of
operations and cash flows are translated at average exchange rates during the
period, assets and liabilities are translated at the unified exchange rate at
the end of the period, and equity is translated at historical exchange rates.
Translation adjustments resulting from the process of translating the local
currency financial statements into U.S. dollars are included in determining
comprehensive income.  The cumulative translation adjustment and
effect of exchange rate changes on cash for the year ended December 31, 2008 and
2007 was $82,421 and $50,906, respectively. Transactions denominated in foreign
currencies are translated into the functional currency at the exchange rates
prevailing on the transaction dates. Assets and liabilities denominated in
foreign currencies are translated into the functional currency at the exchange
rates prevailing at the balance sheet date with any transaction gains and losses
that arise from exchange rate fluctuations on transactions denominated in a
currency other than the functional currency are included in the results of
operations as incurred.





F -
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 Table of Contents
 CHINA
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued





All of
the Company’s revenue transactions are transacted in the functional currency.
The Company does not enter any material transaction in foreign currencies and
accordingly, transaction gains or losses have not had, and are not expected to
have, a material effect on the results of operations of the
Company.





Asset and
liability accounts at December 31, 2008 and 2007 were translated at 6.8542 RMB
to $1.00 and at 7.3141 RMB to $1.00, respectively. Equity accounts were stated
at their historical rate. The average translation rates applied to the
statements of income for the year ended December 31, 2008 and 2007 were 6.96225
RMB and 7.6172 RMB to $1.00, respectively.  In accordance with
Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows,"
cash flows from the Company's operations are calculated based upon the local
currencies using the average translation rate. As a result, amounts related to
assets and liabilities reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheets.




Minority
Interest




Under
generally accepted accounting principles when losses applicable to the minority
interest in a subsidiary exceed the minority interest in the equity capital of
the subsidiary, the excess is charged to the majority interest since there is no
obligation of the minority interest to make good on such losses.





Comprehensive
Loss





The
Company follows Statement of Financial Accounting Standards No. 130 (“SFAS
No. 130”) "Reporting
Comprehensive Income" to recognize the elements of comprehensive income.
Comprehensive loss is comprised of net loss and all changes to the statements of
stockholders' equity, except those due to investments by stockholders, changes
in paid-in capital and distributions to stockholders. For the Company,
comprehensive loss for the year ended December 31, 2008 included net loss and
foreign currency translation adjustments.





Shipping
Costs




Shipping
costs are included in selling expenses and totaled $594,727 and $820,731 for the
years ended December 31, 2008 and 2007, respectively.




Advertising





Advertising
is expensed as incurred and was not material for the years ended December 31,
2008 an 2007.





Recent
Accounting Pronouncements





In
December 2007, the FASB issued SFAS 141 (revised 2007), "Business Combinations". SFAS
141R is a revision to SFAS 141 and includes substantial changes to the
acquisition method used to account for business combinations (formerly the
"purchase accounting" method), including broadening the definition of a
business, as well as revisions to accounting methods for contingent
consideration and other contingencies related to the acquired business,
accounting for transaction costs, and accounting for adjustments to provisional
amounts recorded in connection with acquisitions. SFAS 141R retains the
fundamental requirement of SFAS 141 that the acquisition method of accounting be
used for all business combinations and for an acquirer to be identified for each
business combination. SFAS 141R is effective for periods beginning on or after
December 15, 2008, and will apply to all business combinations occurring
after December 31, 2008. The adoption of SFAS 141(R), effective January 1, 2009,
may have an impact on accounting for future business
combinations.





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 CHINA
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued





In
December 2007, the FASB issued SFAS 160, "Non-controlling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51, Consolidated Financial Statements" (“ARB 51”). This
Statement amends ARB 51 to establish new standards that will govern the (1)
accounting for and reporting of non-controlling interests in partially owned
consolidated subsidiaries and (2) the loss of control of subsidiaries.
Non-controlling interest will be reported as part of equity in the consolidated
financial statements. Losses will be allocated to the non-controlling interest,
and, if control is maintained, changes in ownership interests will be treated as
equity transactions. Upon a loss of control, any gain or loss on the interest
sold will be recognized in earnings. SFAS 160 is effective for periods beginning
after December 15, 2008. The Company is currently evaluating the
requirements of SFAS 160.





In
March 2008, the FASB issued SFAS 161, “Disclosures about Derivative
Instruments and Hedging Activities”. The new standard is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity’s financial position, financial
performance, and cash flows. It is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. The Company does not expect SFAS No. 161 to have a
material impact on the preparation of its consolidated financial
statements.





In May
2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement). FSP APB 14-1 clarifies that convertible debt instruments
that may be settled in cash upon either mandatory or optional conversion
(including partial cash settlement) are not addressed by paragraph 12 of APB
Opinion No. 14, Accounting for
Convertible Debt and Debt issued with Stock Purchase Warrants.
Additionally, FSP APB 14-1 specifies that issuers of such instruments should
separately account for the liability and equity components in a manner that will
reflect the entity’s non-convertible debt borrowing rate when interest cost is
recognized in subsequent periods. FSP APB 14-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. The Company will adopt FSP APB 14-1
beginning in the first quarter of fiscal 2009, and this standard must be applied
on a retroactive basis. We are evaluating the impact of the adoption of FSP APB
14-1 on our consolidated financial position and results of
operations.





In May
2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.
162, The Hierarchy of
Generally Accepted Accounting Principles. This standard is intended to
improve financial reporting by identifying a consistent framework, or hierarchy,
for selecting accounting principles to be used in preparing financial statements
that are presented in conformity with generally accepted accounting principles
in the United States for non-governmental entities. SFAS No. 162 is effective 60
days following approval by the SEC of the Public Company Accounting Oversight
Board’s amendments to AU Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles. The Company
does not expect SFAS No. 162 to have a material impact on the preparation of its
consolidated financial statements.





On June
16, 2008, the FASB issued final Staff Position (FSP) No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities,” to address the question of whether instruments granted in
share-based payment transactions are participating securities prior to vesting.
The FSP determines that unvested share-based payment awards that contain rights
to dividend payments should be included in earnings per share calculations. The
guidance will be effective for fiscal years beginning after December 15, 2008.
The Company is currently evaluating the requirements of (FSP) No. EITF 03-6-1 as
well as the impact of the adoption on its consolidated financial
statements.





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AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued





In
June 2008, the FASB ratified Emerging Issues Task Force Issue
No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-05 mandates a two-step
process for evaluating whether an equity-linked financial instrument or embedded
feature is indexed to the entity’s own stock.  Warrants that a company
issues that contain a strike price adjustment feature, upon the adoption of EITF
07-05, are no longer being considered indexed to the company’s own stock.
Accordingly, adoption of EITF 07-5 will change the current classification (from
equity to liability) and the related accounting for such warrants outstanding at
that date. EITF 07-05 is effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The
Company is currently evaluating the impact the adoption of EITF 07-5 will have
on its financial statement presentation and disclosures.





In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by
Public Entities (Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4
and FIN 46(R)-8 amends FAS 140 and FIN 46(R) to require additional disclosures
regarding transfers of financial assets and interest in variable interest
entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for interim or annual
reporting periods ending after December 15, 2008. The adoption of FSP FAS 140-4
and FIN 46(R)-8 did not have an impact on its consolidated financial position
and results of operations.





NOTE 2 -
ACQUISITIONS AND DISPOSITIONS





Aohong





On June
27, 2007, the Company entered into a membership interest exchange agreement with
Aohong and its sole members, Mr. Aihua Hu and his wife, Mrs. Ying Ye. The
transaction was closed June 27, 2007. Under the terms of the agreement, the
Company acquired a 56.08% majority interest in Aohong in exchange for 12,500,000
shares of the Company's common stock, valued at $1,187,500 in the aggregate
("Consideration Stock") and $3,380,000 in cash consideration to be paid to
Aohong to increase its registered capital pursuant to the following
schedule:





•
            $800,000
      was paid to Aohong during September 2007;•
            $400,000
      was paid to Aohong during May 2008;•
            $400,000
      was paid to Aohong during August 2008;•
            $200,000
      shall be paid to Aohong on or before December 31, 2008. The due date of
      this payment was extended to May 28, 2009; and•
            the
      remaining $1,580,000 shall be paid to Aohong on or before June 27,
      2009.





The
Company accounted for this acquisition using the purchase method of accounting
in accordance with SFAS No. 141. The fair value of the Consideration Stock is
based on the $0.095 quoted trading price of the common stock on the acquisition
date and amounted to $1,187,500. The purchase price was determined based on an
arm's length negotiation and no finder's fees or commissions were paid in
connection with this acquisition.  Following the execution of the
agreement, AoHong and the minority members were required to promptly apply as
necessary to obtain the documents which represent the formal approvals of the
relevant regulatory agencies in the People's Republic of China to the Company's
purchase of a controlling interest in AoHong.  On August 29, 2007, the
Shanghai Foreign Investment Commission issued the Certificate of Approval for
the establishment of the Sino-U.S. joint-venture between our company and
AoHong.  The registered capital of this joint venture is approximately
$8,200,000, of which an aggregate of $3,380,000 is being contributed by the
Company.  In September 2007, following the Company's remittance of the
initial investment of $800,000 to the joint venture, the Shanghai Industrial
& Commercial Administration Bureau issued the business license to the joint
venture. The results of operations of Aohong are included in the consolidated
results of operations of the Company from the acquisition date of June 27, 2007
to December 31, 2007.





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AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued





The
following unaudited pro forma consolidated results of operations have been
prepared as if the acquisitions of AoHong had occurred as of the beginning of
the following period:





December
      31,2007Revenues
                      
                      $
                      32,845,000Costs
      and Expenses
                      
                      
                      32,265,000Net
      Income
                      
                      
                      117,000Net
      Income per Common Share
                      
                      $
                      0.00





Pro forma
data does not purport to be indicative of the results that would have been
obtained had these events actually occurred at the beginning of the periods
presented and is not intended to be a projection of future results.





Big
Tree





On August
31, 2007, the Company had acquired the 60% equity interest in Big Tree, a
development stage company, from CDI China, Inc., a wholly owned subsidiary of
China Direct, in August 2007. Under the terms of the agreement, the Company paid
CDI China, Inc. $400,000 and issued it 10,000,000 shares of its common stock.
China Direct had acquired the 60% in Big Tree from Mr. Lin in February 2007 in
exchange for 53,654 shares of its common stock. The Company accounted for this
acquisition using the purchase method of accounting in accordance with SFAS No.
141. For accounting purposes, the value ascribed to the initial 10,000,000
shares of the Company's common stock issued or to be issued as partial
consideration for the purchase of the Big Tree interest was $0.001 per share,
which is the par value of the Company's common stock and amounted to $10,000.
Because China Direct owned approximately 17% of the Company’s outstanding common
stock prior to the closing of the transaction, as a related party the value of
the shares issued were required to equal par value under generally accepted
accounting principles. No finder's fees or commissions were paid in connection
with this acquisition. The initial purchase price of $410,000 exceeded the fair
value of net assets acquired by $133,684. Because China Direct was an affiliate
of the Company prior to the transaction, the Company recorded a decrease to
additional paid-in capital of $133,684.





On April
30, 2008, the Company entered into an Agreement with Wei Lin and China Direct
pursuant to which the Company transferred all of its rights, title and interest
in and to 60% of the stock of Big Tree to Mr. Lin in exchange for 53,654 shares
of the common stock of China Direct owned by Mr. Lin. These shares had a fair
market value of approximately $445,328 on the date of the agreement. As a result
of this transaction, the Company no longer owns any interest in Big Tree or its
wholly-owned subsidiary, Jieyang Big Tree.The Company did not report
any revenues from Big Tree during 2007 or 2008 and its assets were limited to a
loan due from a related party which was made prior to our acquisition of Big
Tree. The Company found that it was unable to obtain appropriate financial
information pertaining to Jieyang Big Tree for the purposes of consolidating
those results with the Company in accordance with generally accepted accounting
principles. Big Tree is reported as a discontinued operation and prior periods
have been restated in the Company's financial statements and related footnotes
to conform to this presentation. At December 31, 2008, the Company did not have
any asset or liabilities from this discontinued operation. For the year ended
December 31, 2008, the Company recognized a gain from the sale of discontinued
operations of $45,912.





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AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued








In 2007,
the purchase price and the adjustments to historical book value of the acquired
companies as a result of the acquisition are as follows:





Aohong
                  
                  
                  Big
      Tree
                  
                  
                  TotalPurchase
      price
                  
                  $
                  4,567,500
                  
                  
                  $
                  410,000
                  
                  
                  $
                  4,977,500Net
      Assets Acquired:Total
      Assets:Cash
                  
                  $
                  703,577
                  
                  
                  $
                  1,339
                  
                  
                  $
                  704,916Accounts
      receivable
                  
                  
                  4,009,943
                  
                  
                  
                  -
                  
                  
                  
                  4,009,943Inventory,
      prepaid expenses and other assets
                  
                  
                  3,093,567
                  
                  
                  
                  5,819
                  
                  
                  
                  3,099,386Property
      and equipment, net
                  
                  
                  1,123,552
                  
                  
                  
                  -
                  
                  
                  
                  1,123,552Due
      from related party
                  
                  
                  161,316
                  
                  
                  
                  453,368
                  
                  
                  
                  614,684Other
      assets
                  
                  
                  717,338
                  
                  
                  
                  -
                  
                  
                  
                  717,3389,809,293
                  
                  
                  
                  460,526
                  
                  
                  
                  10,269,819Total
      Liabilities:Accounts
      payable
                  
                  
                  970,589
                  
                  
                  
                  -
                  
                  
                  
                  970,589Loans
      payable
                  
                  
                  2,098,416
                  
                  
                  
                  -
                  
                  
                  
                  2,098,416Advances
      from customers
                  
                  
                  948,341
                  
                  
                  
                  -
                  
                  
                  
                  948,341Due
      to related parties
                  
                  
                  979,297
                  
                  
                  
                  -
                  
                  
                  
                  979,2974,996,643
                  
                  
                  
                  -
                  
                  
                  
                  4,996,643Net
      assets acquired
                  
                  
                  4,812,650
                  
                  
                  
                  276,316
                  
                  
                  
                  5,088,966Capital
      infusion
                  
                  
                  3,380,000
                  
                  
                  
                  -
                  
                  
                  
                  3,380,000Total
      net assets
                  
                  
                  8,192,650
                  
                  
                  
                  276,316
                  
                  
                  
                  8,468,966%
      acquired
                  
                  
                  56.08
                  %
                  
                  
                  60
                  %Net
      assets acquired
                  
                  
                  4,594,438
                  
                  
                  
                  133,684
                  
                  
                  
                  4,728,122Negative
      goodwill allocated to property and equipment
                  
                  $
                  26,938
                  
                  
                  $
                  -
                  
                  
                  $
                  26,938Related
      party goodwill applied to paid-in capital
                  
                  $
                  -
                  
                  
                  $
                  133,684
                  
                  
                  $
                  133,684








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 CHINA
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued





Discontinued
operations





Biometrics
Business





On
January 19, 2009, the Company entered into an Asset Purchase Agreement with
Pearl Group for the sale of certain assets related to its biometric technology
based fingerprint identification business (the “Biometrics
Business”).  Pearl Group is wholly owned by Dore S. Perler, a member
of the Company’s board of directors and its former Chief Executive Officer.
Included in the Asset Purchase Agreement are the following assets of the
Company's Biometric Business: customer and supplier lists, business
records, trademarks and other intellectual property and manufacturers and
vendors’ warranty claims.  The consideration received by the Company
in connection with the Asset Purchase Agreement included the assumption of
liabilities, if any, by Pearl Group related to the Biometrics Business and the
termination of Mr. Perler’s May 1, 2007 employment agreement entered into
between him and the Company. Also, in connection with the termination of the
employment agreement, the Company agreed to pay Mr. Perler the sum of $75,000.
As of January 19, 2009, the Company will no longer be engaged in the Biometrics
Business.  The Company did not incur any costs or take any charges,
and does not expect any in the future, related to the sale of the Biometrics
Business pursuant to the Asset Purchase Agreement. For the years ended December
31, 2008 and 2007, the biometric segment is reported as a discontinued operation
and prior periods have been restated in the Company's financial statements and
related footnotes to conform to this presentation.





The
following table sets forth for the fiscal years indicated selected financial
data of the Company's discontinued operations, including Big Tree and the
biometrics segment.





December
      31,2008
                                
                                
                                2007Revenues
                                
                                $
                                39,052
                                
                                
                                $
                                92,962Cost
      of sales
                                
                                
                                4,228
                                
                                
                                
                                3,480Gross
      profit
                                
                                
                                34,824
                                
                                
                                
                                89,482Operating
      and other non-operating expenses
                                
                                
                                313,561
                                
                                
                                
                                367,594Loss
      from discontinued operations
                                
                                
                                (278,737
                                )
                                
                                
                                (278,112
                                )Gain
      from disposal of discontinued operations
                                
                                
                                45,912
                                
                                
                                
                                -Total
      loss from discontinued operations
                                
                                $
                                (232,825
                                )
                                
                                $
                                (278,112
                                )





NOTE 3 -
INVENTORIES





At
December 31, 2008 and 2007, inventories consisted of:





2008
                    
                    
                    2007Finished
      goods
                    
                    $
                    1,719,796
                    
                    
                    $
                    1,100,023Less:
      Reserve for slow moving inventory
                    
                    
                    -
                    
                    
                    
                    -$
                    1,719,796
                    
                    
                    $
                    1,100,023








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 CHINA
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued





NOTE 4 –
RELATED PARTY TRANSACTIONS





Due from
related parties





At
December 31, 2008 and 2007, the Company held a due from related party in the
amount of $0 and $465,982, respectively, which reflected advances due from
Shantou Dashu Toy Enterprises Co., Ltd., a Chinese entity, to our former
wholly-owned subsidiary Jieyang Big Tree. These advances were made prior to our
formation of Jieyang Big Tree. Guihong Zheng, the minority shareholder of
Big Tree is an owner of Shantou Dashu Toy Enterprise Co., Ltd.  These
advances bear no interest, were due on demand, and were unsecured.On April 30, 2008, the
Company entered into an Agreement with Wei Lin and China Direct, Inc. pursuant
to which the Company transferred all of its rights, title and interest in and to
60% of the stock of Big Tree to Mr. Lin (See Note 2).





Due to related
parties





At
December 31, 2008 and 2007, due to related parties, which is attributable to
AoHong, consists of the following:





2008
                      
                      
                      2007Due
      to Aihua Hu $
                      
                      
                      170,303
                      
                      
                      $
                      272,488Due
      to Ying Ye
                      
                      
                      23,675
                      
                      
                      
                      22,186Due
      to Liang Wenjuan
                      
                      
                      14,590
                      
                      
                      
                      13,672$
                      208,568
                      
                      
                      $
                      308,346





Mr. Aihua
Hu, CEO of AoHong, and Mrs. Ying Ye are the minority owners of AoHong. Mr. Hu
and Mrs. Ye are husband and wife. Liang Wejuan is the aunt of Mr.
Hu.





In August
2008, the Company borrowed $400,000 from China Direct, Inc., a shareholder of
the Company. The note has been extended from December 31, 2008 to June 30, 2009
with interest due at 4% per annum and secured by marketable equity securities of
China Direct, Inc. (see Note 7).





Other





For the
years ended December 31, 2008 and 2007, the Company paid a consulting fee of
$85,812 and $47.074, respectively, to  a subsidiary of China Direct,
Inc, a shareholder of the Company.





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 CHINA
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued





NOTE 5 –
PROPERTY AND EQUIPMENT





At
December 31, 2008 and 2007, property and equipment consisted of the
following:




Estimated
      Life
                        
                        
                        2008
                        
                        
                        2007Buildings
                        
                        20
      years
                        
                        
                        $
                        1,511,742
                        
                        
                        $
                        608,551Auto
      and Truck
                        
                        5
      years
                        
                        
                        
                        302,191
                        
                        
                        
                        184,719Manufacturing
      Equipment
                        
                        10
      years
                        
                        
                        
                        1,698,532
                        
                        
                        
                        289,499Office
      Equipment
                        
                        5
      -7 years
                        
                        
                        
                        10,736
                        
                        
                        
                        30,605Construction
      in Progress
                        
                        
                        -
                        
                        
                        
                        259,731
                        
                        
                        
                        919,2753,782,932
                        
                        
                        
                        2,032,649Less:
      Accumulated Depreciation
                        
                        
                        
                        
                        
                        
                        (388,775
                        )
                        
                        
                        (104,512
                        )$
                        3,394,157
                        
                        
                        $
                        1,928,137




For the
year ended December 31, 2008 and 2007, depreciation expense amounted to $310,282
and $72,222, respectively.





NOTE 6 -
LAND USE RIGHTS AND OTHER INTANGIBLE ASSETS





Land
Use Rights





AoHong
has land use rights pursuant to an agreement with the Chinese government. The
land use rights are valued at a fixed amount of approximately RMB 600,082,
fluctuated by the exchange rate. Under the terms of the agreement, AoHong has
rights to use certain land until November 3, 2053. AoHong will amortize these
land use rights over the remaining contract period beginning on June 27, 2007
(date of acquisition). At December 31, 2008 and 2007, land use rights are valued
at the following:





Estimated
      Remaining Life
                  
                  2008
                  
                  
                  2007Land
      Use Rights
                  45
      year
                  
                  $
                  87,550
                  
                  
                  $
                  77,648Less:
      Accumulated Amortization
                  
                  
                  
                  (2,804
                  )
                  
                  
                  (844
                  )$
                  84,746
                  
                  
                  $
                  76,804





For the
year ended December 31, 2008 and 2007, amortization expense amounted to $1,874
and $810, respectively.





Amortization
of land use rights attributable to future periods is as follows:





Period
      ending December 31:2009
                    
                    $
                    1,9032010
                    
                    
                    1,9032011
                    
                    
                    1,9032012
                    
                    
                    1,903Thereafter
                    
                    
                    77,134$
                    84,746





Deposit
on land use rights





As of
December 31, 2008 Tianjin AoHong paid Ji City Bureau of Land Resource
$744,303 as a deposit towards an aggregate price of RMB 5,150,000, or
approximately $751,364 on the purchase on the land use rights located in
Tianjin province. The payment has been reflected as a deposit on land use rights
on the accompanying balance sheet. Under the terms of the land use right
acquisition contract signed with Ji City Bureau of Land Resource in February
2009, Tianjin Aohong has rights to use certain land until February 22,
2059.  In
February 2009, AoHong Tianjin paid off the balance and received the Confirmation
Letter of Land Delivery, which represented the ownership of the land use right.
The release of Certificate of Land Use Right is under process.





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 Table of Contents
 CHINA
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued





NOTE 7 –
NOTES PAYABLE





Notes payable consisted of the
following at December 31, 2008 and 2007:





2008
                                        
                                        
                                        2007Notes
      payable to Country Commercial Bank HuaTing Branch, due on January 16,
      2008. Interest only payable monthly at an annual rate of 7.38%. The note
      was repaid on the due date
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        341,806Notes
      payable to Country Commercial Bank HuaTing Branch, due on February 28,
      2008. Interest only payable monthly at an annual rate of 7.38%. The note
      was repaid on the due date.
                                        
                                        
                                        -
                                        
                                        
                                        
                                        205,083Notes
      payable to Country Commercial Bank HuaTing Branch, due on April 7, 2009.
      Interest only payable quarterly at an annual rate of 8.964%. Secured by
      the buildings located at 333 and 338 Huhua E.Rd Jiading
      Shanghai.
                                        
                                        
                                        364,740
                                        
                                        
                                        
                                        -Notes
      payable to Industrial and Commercial Bank of China Anshan Road Branch, due
      on February 10, 2009. Interest only payable quarterly at an annual rate of
      6.7068%. Secured by Accounts Receivable of Shanghai 3F Material Co. Ltd.
      amount of $551,487. The note was repaid on the due date.
                                        
                                        
                                        551,487
                                        
                                        
                                        
                                        -Notes
      payable to Industrial and Commercial Bank of China Anshan Road Branch, due
      on March 12, 2009. Interest only payable quarterly at an annual rate of
      6.7068%. Secured by accounts receivable of Shanghai 3F Material Co. Ltd.
      amount of $491,669. The note was repaid on the due date.
                                        
                                        
                                        491,669
                                        
                                        
                                        
                                        -Notes
      payable to Industrial and Commercial Bank of China Anshan Road Branch, due
      on March 02, 2009. Interest only payable quarterly at an annual rate of
      6.5124%. Secured by $732,398 of accounts receivable due from Shanghai 3F
      Material Co., Ltd. The note was repaid on the due date.
                                        
                                        
                                        732,398
                                        
                                        
                                        
                                        -Bank
      acceptances payable, non-interest bearing. Secured by restricted cash of
      $175,057 and $437,511 at December 31, 2008 and 2007, respectively, and
      payable on demand.
                                        
                                        
                                        437,688
                                        
                                        
                                        
                                        1,093,778Note
      payable to China Direct Industrial, Inc. due on June 30, 2009 with
      interest due at 4% per annum and unsecured.
                                        
                                        
                                        400,000
                                        
                                        
                                        
                                        -Note
      payable to individual, due on demand with interest due at 10% per annum
      and unsecured.
                                        
                                        
                                        25,000
                                        
                                        
                                        
                                        25,000Total
                                        
                                        
                                        3,002,982
                                        
                                        
                                        
                                        1,665,667Less:
      current portion
                                        
                                        
                                        (3,002,982
                                        )
                                        
                                        
                                        (1,665,667
                                        )Long-term
      portion of notes payable
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -








F -
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 Table of Contents
 CHINA
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued





NOTE 8 -
SHAREHOLDERS' EQUITY





Common
Stock





Common
Stock Issued For Services





On
January 30, 2007, the Company issued 100,000 shares of its common stock for
accounting services rendered. The shares were issued at the fair value at the
date of the issuance of $8,000 or $.08 per share.





On March
31, 2007, the Company issued 225,000 shares of its common stock to consultants
for business development services rendered. The shares were issued at the fair
value at the date of the issuance of $18,000 or $.08 per share.





On May
14, 2007 and May 16, 2007, the Company issued an aggregate of 225,000 shares of
its common stock to consultants for business development services rendered. The
shares were issued at the fair values at the date of the issuance of $12,875 or
$.05 to $.063 per share. Accordingly, the Company recorded stock-based
consulting expense of $12,875.





On June
27, 2007, the Company executed a consulting agreement with CDI Shanghai
Management Co., Ltd., a Chinese limited liability company ("Consultant"), for
consulting services provided by Consultant since April 1, 2007 and the agreement
expired on September 30, 2007. Consultant has been providing services to
identify suitable acquisition partners in Asia, structuring merger and/or
acquisition transactions and providing translation services. Under the terms of
the consulting agreement, the Company issued Consultant 5,000,000 shares of its
common stock to the consultant. The Company valued these common shares at the
fair market value on the date of grant of $0.095 per share or $475,000 based on
the trading price of common shares. Accordingly, the Company recorded
stock-based consulting expense of $475,000.





On July
9, 2007, the Company issued 1,000,000 shares of common stock to an officer and a
former officer of the Company (500,000 shares each) for services rendered. The
shares were issued at the fair value at the date of the issuance of $80,000 or
$.08 per share based on the trading price of common shares. Accordingly, the
Company recorded stock-based consulting expense of $80,000.





On August
7, 2007, the Company issued 180,000 shares of its common stock to consultants
for business development service services rendered. The shares were issued at
the fair values at the date of the issuance of $12,240 or $.068 per share based
on the trading price of common shares.





On August
23, 2007, the Company issued 500,000 shares of common stock to its chief
executive officer as a bonus under his employment agreement in conjunction with
the acquisition of AoHong. The shares were issued at the fair value at the date
of the issuance of $37,500 or $.075 per share based on the trading price of
common shares. Accordingly, the Company recorded stock-based compensation of
$37,500.





On August
28, 2007, the Company issued 150,000 shares of its common stock to a consultant
for business development services rendered. The shares were issued at the fair
value at the date of the issuance of $12,750 or $.085 per share based on the
trading price of common shares.





On
November 26, 2007, the Company issued 200,000 shares of its common stock to a
consultant for business development service services rendered. The shares were
issued at the fair values at the date of the issuance of $18,000 or $.09 per
share based on the trading price of common shares.





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 Table of Contents
 CHINA
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued





On
January 5, 2008, the Company entered into a two month consulting agreement for
investor relations services. In connection with this consulting agreement, the
Company paid cash of $100,000 and agreed to issue 1,100,000 shares of its common
stock to the consultant. The shares issuable pursuant to this contract were
issued by a third party on behalf of the Company. The shares were issued at the
fair values at the date of the issuance of $110,000 or $.10 per share based on
the trading price of common shares. Accordingly, the Company recorded consulting
expense of $110,000 and contributed capital of $110,000.





On
January 18, 2008, the Company issued 50,000 shares of its common stock to two
consultants for business development services rendered. The shares were issued
at the fair values at the date of the issuance of $5,000 or $.10 per share based
on the trading price of common shares.





On
February 8, 2008, the Company issued 60,000 shares of its common stock to a
consultant to satisfy accounts payable of $5,400 for previous accounting
services rendered. The shares were issued at the fair values at the date of the
issuance of $5,400 or $.09 per share based on the trading price of common
shares.





Common
Stock Issued Pursuant to Private Placements





On March
31, 2007, the Company completed a private placement to six accredited investors
and received net proceeds of $105,000 from the sale of units consisting in the
aggregate of 2,100,000 shares of its common stock and warrants to purchase
2,100,000 shares of common stock. The warrants are exercisable at $0.10 per
share for a term of five years.





Prior to
September 30, 2007, the Company completed its private placement to accredited
investors of $2,862,404 (net proceeds of $2,528,664) in units of its securities
consisting of 47,706,735 shares of common stock at a purchase price of $.06 per
share and common stock purchase warrants to purchase 47,706,735 shares of common
stock. The warrants are exercisable at $.12 per share and are for a term of five
years, with one half of each purchaser's purchase warrants being callable if the
Closing Price of the Common Stock is equal to or above U.S. $.18, as adjusted
for any ten (10) Trading Days out of any thirty (30) consecutive Trading Day
period.





The
purchasers of the units are certain accredited institutional and individual
investors. The exercise of the warrants is subject to a 4.99% cap on the
beneficial ownership that each purchaser may have at any point in time while the
securities are outstanding. The net proceeds from the transaction will be used
for working capital purposes.





The
Company agreed to file a registration statement covering the shares of common
stock underlying the securities issued. In the event the registration statement
was not filed within 60 days of the closing and declared effective not later
than 180 days following the closing date, the Company is required to pay
liquidated damages in an amount equal to 2% for each 30 days (or such lesser pro
rata amount for any period of less than 30 days) of the purchase price of the
outstanding shares, but not to exceed in the aggregate 12% of the aggregate
purchase price. The transaction documents also provide for the payment of
liquidated damages to the investors in certain events, including the Company's
failure to maintain an effective registration statement covering the resale of
the common shares issued or issuable upon exercise of the warrants. The Company
filed its registration statement on October 19, 2007 and it was declared
effective on November 5, 2007.





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 Table of Contents
 CHINA
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued





The
securities are subject to anti-dilution protections afforded to the purchasers.
In the event the Company were to issue any shares of common stock or securities
convertible into or exercisable for shares of common stock to any third party
purchaser at a price per share of common stock or exercise price per share which
is less than the per share purchase price of the shares of common stock in this
offering, or less than the exercise price per warrant share, respectively,
without the consent of the subscribers then holding securities issued in this
offering, the purchaser is given the right to apply the lowest such price to the
purchase price of shares purchased and still held by the purchaser and to shares
issued upon exercise of the warrants and still held by the purchaser (which will
result in the issuance of additional shares to the purchaser) and to the
exercise price of any unexercised warrants. In addition, until eight (8) months
after the Effective Date of the Registration Statement, purchasers will have
certain rights of first refusal with respect to subsequent offers, if any, by
the Company for the sale of its securities or debt obligations. The
anti-dilution provisions and the right of first refusal do not apply with
respect to certain limited exceptions, including strategic license agreements,
mergers and similar acquisitions and certain option programs.





The
Company paid Skyebanc, Inc., a broker-dealer and FINRA member firm, a finder's
fee of $10,800 and issued common stock purchase warrants to purchase an
aggregate of 180,000 shares of our common stock which are identical to the
warrants issued in the offering. The Company also paid Joseph Stevens &
Company, Inc., a broker-dealer and FINRA member firm, a finder's fee of $28,200
and issued common stock purchase warrants to purchase an aggregate of 470,000
shares of our common stock which are identical to the warrants issued in the
offering. The Company paid legal fees of the purchasers' counsel of and other
legal fees of $47,500 and the Company also paid a due diligence fee of $247,240
in cash to certain of the investors or their advisors and these entities common
stock purchase warrants to purchase an aggregate of 4,120,673 shares of common
stock as an additional due diligence fee.





Common
Stock Issued for Acquisitions





On June
27, 2007, in connection with an acquisition (see Note 2), the Company issued
12,500,000 shares of its common stock. The Company valued these common shares at
the fair market value on the acquisition date of $0.095 per share or $1,187,500
based on the trading price of common shares (See Note 2).





On
September 30, 2007, in connection with the acquisition of 60% of Big Tree, the
Company issued 8,250,000 shares of its common stock. On December 31, 2007, the
Company issued an additional 1,750,000 shares of its common stock for the Big
Tree acquisition for an aggregate of 10,000,000 shares (See Note
2).





Other





On July
12, 2007, the Company amended its articles of incorporation to change the par
value of the Company's common stock to $.001 per share.





On
November 8, 2007, the Company filed Articles of Amendment to its Articles of
Incorporation with the Secretary of State of Florida to:





•
            change
      its name to China America Holdings, Inc., and•
            increase
      the number of its authorized shares of common stock from 350,000,000
      shares to 500,000,000 shares.





This
action was approved on November 5, 2007 by the Company’s Board of Directors by a
written consent in lieu of a special meeting in accordance with the relevant
sections of the Florida Business Corporation Act.  In addition, the
Company’s management together with certain shareholders who collectively hold a
majority in interest of the Company’s issued and outstanding voting stock
approved this action by written consent in lieu of a special meeting of the
Company’s shareholders effective November 8, 2007 in accordance with the
relevant sections of the Florida Business Corporation Act.  This
action was effective as of the close of business on November 26,
2007.





F -
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 Table of Contents
 CHINA
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued





Stock
Options





1999
Equity Compensation Plan





On July
19, 1999, the board of directors adopted the Company's 1999 Stock Option Plan
(the "1999 Plan"). The Company has reserved 1,500,000 shares of common stock for
issuance upon exercise of options granted from time to time under the 1999 stock
option plan. The 1999 stock option plan is intended to assist the Company in
securing and retaining key employees, directors and consultants by allowing them
to participate in the Company's ownership and growth through the grant of
incentive and non-qualified options. Under the stock option plan, the Company
may grant incentive stock options only to key employees and employee directors,
or the Company may grant non-qualified options to employees, officers, directors
and consultants. The 1999 stock option plan is currently administered by the
Company's board of directors. Subject to the provisions of the 1999 stock option
plan, the board will determine who shall receive options, the number of shares
of common stock that may be purchased under the options, the time and manner of
exercise of options and exercise prices. The term of the options granted under
the 1999 stock option plan may not exceed ten years (five years for an incentive
stock option granted to an optionee owning more than 10% of our voting
stock).





The
exercise price for incentive stock options will be equal to or greater than 100%
of the fair market value of the shares of the common stock at the time granted.
However, the incentive stock options granted to a 10% holder of the Company's
voting stock are exercisable at a price equal to or greater than 110% of the
fair market value of the common stock at the date of the grant. The exercise
price for non-qualified options will be set by the board, in its discretion, but
in no event shall the exercise price be less than 75% of the fair market value
of the shares of common stock on the date of grant. The exercise price may be
payable in cash or, with the approval of the board, by delivery of shares or a
combination of cash and shares. Shares of common stock received upon exercise of
options will be subject to restrictions on sale or transfer.





2001
Equity Compensation Plan





On
November 26, 2001, the board of directors adopted the Company's 2001 Equity
Compensation Plan (the "2001 Plan"). The Company has reserved 2,000,000 shares
of the Company's common stock. The purpose of the 2001 Plan is to provide
designated employees, certain key advisors who perform services for the Company,
and non-employee board members with the opportunity to receive grants of
incentive stock options, nonqualified stock options and restricted stock. The
Company believes that the Plan will encourage the participants to contribute
materially to the growth of the Company, thereby benefiting the Company's
shareholders. The Plan will be administered by the Company's board of directors
or a committee appointed by the board. Subject to the provisions of the stock
option plan, the board of directors or its appointed committee shall have the
sole authority to determine the individuals to whom grants shall be made, the
type, size and terms of the grants to be made to each individual. In addition,
the board or its appointed committee will determine the time when the grants
will be made and the duration of grants including exercise or restrictions and
criteria for exercisability.





The term
of the options granted under the 2001 Plan may not exceed ten years (five years
for an incentive stock option granted to an optionee owning more than 10% of our
voting stock). The exercise price for incentive stock options may be equal to or
greater than the fair market value of the shares of the common stock at the time
granted. However, the incentive stock options granted to a 10% holder of the
Company's voting stock are exercisable at a price equal to or greater than 110%
of the fair market value of the common stock at the date of the grant. In the
case of an option granted that qualifies as performance based compensation, the
exercise price may not be less than 100% of the fair market value of the
Company's stock on the date of grant. The exercise price for non-qualified
options granted to non-employee directors shall equal 100% of the fair market
value of the Company's common stock at the date of grant. The exercise price may
be payable in cash or, with the approval of the board, by delivery of shares or
a combination of cash and shares. Shares of common stock received upon exercise
of options will be subject to restrictions on sale or transfer.





F -
24
 Table of Contents
 CHINA
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued





2005
Equity Compensation Plan





On June
16, 2005, the board of directors adopted the Company's 2005 equity compensation
plan (the "2005 Plan") and on June 16, 2005, the 2005 Plan was ratified by
holders of a majority of our outstanding common stock. The Company had reserved
2,000,000 shares of common stock for issuance as stock grants and upon exercise
of options granted from time to time under the 2005 equity compensation plan.
The 2005 plan is intended to assist the Company in securing and retaining key
employees, directors and consultants by allowing them to participate in our
ownership and growth through the grant of incentive and non-qualified options,
as well as direct stock grants. Under the 2005 Plan, the Company may grant
incentive stock options only to key employees and employee directors. The
Company may grant non-qualified options and issue direct stock awards to its
employees, officers, directors and consultants. The Company's Board of Directors
currently administers the 2005 equity compensation plan.





Subject
to the provisions of the 2005 Plan, the board will determine who shall receive
options or grants, the number of shares of common stock that may be purchased
under the options, the time and manner of exercise of options and exercise
prices. The term of options granted under the stock option plan may not exceed
ten years or five years for an incentive stock option granted to an optionee
owning more than 10% of our voting stock. The exercise price for incentive stock
options will be equal to or greater than 100% of the fair market value of the
shares of the common stock at the time granted. However, the incentive stock
options granted to a 10% holder of our voting stock are exercisable at a price
equal to or greater than 110% of the fair market value of the common stock on
the date of the grant. The exercise price for non-qualified options will be set
by the board, in its discretion, but in no event shall the exercise price be
less than the par value for our common stock The exercise price may be payable
in cash or, with the approval of the board, by delivery of shares or by a
combination of cash and shares. The board may also direct the issuance of shares
of our common stock as awards under the 2005 plan.





Absent
registration under the Securities Act of 1933, as amended, or the availability
of an applicable exemption there from, shares of common stock received as stock
grants and upon exercise of options will be subject to restrictions on sale or
transfer.





On June
26, 2007 the Company's Board of Directors adopted a resolution approving an
increase in the number of shares subject to the 2005 Equity Compensation Plan,
as amended, to 5,000,000 shares from 2,000,000 shares.





Stock Option
Grants





On
January 30, 2007, the Company granted five-year options to purchase an aggregate
of 350,000 shares of common stock to two officers/directors of the Company at an
exercise price of $.08 per share. The Company valued these options utilizing the
Black-Scholes options pricing model at approximately $0.08 or $28,000. In
connection with these options, the Company recorded stock-based compensation
expense of $28,000.





On June
28, 2007, the Company granted five-year options to purchase 1,000,000 and
600,000 shares of common stock to an officer/director of the Company and to a
consultant, respectively, at an exercise price of $.08 per share. The Company
valued these stock options utilizing the Black-Scholes options pricing model at
approximately $0.059 or $93,686. In connection with these options, the Company
recorded stock-based compensation expense of $58,600 and stock-based consulting
expense of $35,086.





On June
30, 2007, the Company cancelled an aggregate of 1,000,000 stock options with an
exercise price of $0.22 previously granted to two officers and a former
officer.





On August
23, 2007, the Company granted five-year options to purchase 5,000,000 shares of
common stock to an officer/director of the Company, at an exercise price of $.07
per share. The Company valued these stock options utilizing the Black-Scholes
options pricing model at approximately $0.07 or $242,459. In connection with
these options, the Company recorded stock-based compensation expense of
$242,459.





F -
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 Table of Contents
 CHINA
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued





On
December 13, 2007, the Company granted five-year options to purchase 400,000
shares of common stock to an officer/director of the Company, at an exercise
price of $.07 per share. The Company valued these stock options utilizing the
Black-Scholes options pricing model at approximately $0.083 or $33,245. In
connection with these options, the Company recorded stock-based compensation
expense of $33,245.





During
2007, the fair value of the stock option granted were estimated using the
Black-Scholes option pricing model with the following assumptions:





2007Dividend
      rate
                  
                  
                  0
                  %Term
      (in years)
                  
                  5
      yearsVolatility
                  
                  
                  74%-120
                  %Risk-free
      interest rate
                  
                  
                  3.54%-4.97
                  %





Stock
option activity for the years ended December 31, 2008 and 2007 is summarized as
follows:





Year Ended December 31,
2008
                    
                    
                    Year Ended December 31,
2007Number
      of Options
                    
                    
                    Weighted
      Average Exercise Price
                    
                    
                    Number
      of Options
                    
                    
                    Weighted
      Average Exercise PriceBalance
      at beginning of year
                    
                    
                    8,900,000
                    
                    
                    $
                    0.10
                    
                    
                    
                    4,120,000
                    
                    
                    $
                    0.24Granted
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,350,000
                    
                    
                    
                    0.07Forfeited
                    
                    
                    (1,000,000
                    )
                    
                    
                    0.22
                    
                    
                    
                    (2,570,000
                    )
                    
                    
                    0.20Balance
      at end of year
                    
                    
                    7,900,000
                    
                    
                    $
                    0.08
                    
                    
                    
                    8,900,000
                    
                    
                    $
                    0.10Options
      exercisable at end of year
                    
                    
                    7,900,000
                    
                    
                    $
                    0.08
                    
                    
                    
                    8,900,000
                    
                    
                    $
                    0.10Weighted
      average fair value of options granted during the year
                    
                    
                    
                    
                    
                    $
                    0.00
                    
                    
                    
                    
                    
                    
                    $
                    0.05





The
following table summarizes the Company's stock options outstanding at December
31, 2008:





Options
      Outstanding
                              
                              
                              Options
      ExercisableRange
      of Exercise Price
                              
                              
                              Number
      Outstanding at December 31, 2008
                              
                              Weighted
      Average Remaining Contractual Life
                              
                              Weighted
      Average Exercise Price
                              
                              
                              Number
                                Exercisable
      at
                                December
      31, 2008
                              
                              
                              Weighted
      Average Exercise Price$
                              0.07-0.08
                              
                              
                              
                              7,250,000
                              
                              3.61Years
                              
                              $
                              0.073
                              
                              
                              
                              7,250,000
                              
                              
                              $
                              0.0720.19-.020
                              
                              
                              
                              650,000
                              
                              1.72Years
                              
                              
                              0.196
                              
                              
                              
                              650,000
                              
                              
                              
                              0.1967,900,000
                              
                              
                              
                              $
                              0.083
                              
                              
                              
                              7,900,000
                              
                              
                              $
                              0.083





Common Stock
Warrants





On March
31, 2007, in connection with a private placement, the Company granted 2,100,000
purchase warrants to investors. The warrants are exercisable at $.10 per common
share and expire in five years.





In August
and September 2007, in connection with a private placement, the Company granted
an aggregate of 52,477,408 purchase warrants to investors. The warrants are
exercisable at $.12 per common share and expire in five years.





F -
26
 Table of Contents
 CHINA
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued





Stock
warrant activity for the years ended December 31, 2008 and 2007 is summarized as
follows:





Year Ended December 31,
2008
                    
                    
                    Year Ended December 31,
2007Number
      of Warrants
                    
                    
                    Weighted
      Average Exercise Price
                    
                    
                    Number
      of Warrants
                    
                    
                    Weighted
      Average Exercise PriceBalance
      at beginning of year
                    
                    
                    67,811,613
                    
                    
                    $
                    0.16
                    
                    
                    
                    18,010,295
                    
                    
                    $
                    0.55Granted
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    54,577,408
                    
                    
                    
                    0.12Exercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Forfeited
                    
                    
                    (4,011,500
                    )
                    
                    
                    0.20
                    
                    
                    
                    (4,776,090
                    )
                    
                    
                    1.19Balance
      at end of year
                    
                    
                    63,800,113
                    
                    
                    $
                    0.16
                    
                    
                    
                    67,811,613
                    
                    
                    $
                    0.16Warrants
      exercisable at end of year
                    
                    
                    63,800,113
                    
                    
                    $
                    0.16
                    
                    
                    
                    67,811,613
                    
                    
                    $
                    0.16




The
following table summarizes the Company's stock warrants outstanding at December
31, 2008:





Warrants
      Outstanding
                        
                        
                        Warrants
      ExercisableRange
      of Exercise Price
                        
                        
                        Number
      Outstanding at December 31, 2008
                        
                        Weighted
      Average Remaining Contractual Life
                        
                        Weighted
      Average Exercise Price
                        
                        
                        Number
                          Exercisable
      at
                          December
      31, 2008
                        
                        
                        Weighted
      Average Exercise Price$
                        0.35-0.55
                        
                        
                        
                        8,118,455
                        
                        1.64
      Years
                        
                        $
                        0.40
                        
                        
                        
                        8,118,455
                        
                        
                        $
                        0.400.16-0.20
                        
                        
                        
                        1,104,250
                        
                        1.68
      Years
                        
                        
                        0.16
                        
                        
                        
                        1,104,250
                        
                        
                        
                        0.160.12
                        
                        
                        
                        52,477,408
                        
                        3.75
      Years
                        
                        
                        0.12
                        
                        
                        
                        52,477,408
                        
                        
                        
                        0.120.10
                        
                        
                        
                        2,100,000
                        
                        3.25
      Years
                        
                        
                        0.10
                        
                        
                        
                        2,100,000
                        
                        
                        
                        0.1063,800,113
                        
                        
                        
                        $
                        0.16
                        
                        
                        
                        63,800,113
                        
                        
                        $
                        0.16





NOTE 9 -
INCOME TAXES





The
Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, ‘‘Accounting for Income Taxes’’ (‘‘SFAS 109’’). SFAS 109
requires the recognition of deferred tax assets and liabilities for both the
expected impact of differences between the financial statements and the tax
basis of assets and liabilities, and for the expected future tax benefit to be
derived from tax losses and tax credit carryforwards.  SFAS 109
additionally requires the establishment of a valuation allowance to reflect the
likelihood of realization of deferred tax assets. Realization of deferred tax
assets, including those related to the U.S. net operating loss carryforwards,
are dependent upon future earnings, if any, of which the timing and amount are
uncertain. Accordingly, the net deferred tax asset related to the U.S. net
operating loss carryforward has been fully offset by a valuation allowance. The
Company is governed by the Income Tax Law of the People’s Republic of China and
the United States.





The
Company has a U.S. net operating loss carry forward for tax purposes totaling
approximately $11,182,000 at December 31, 2008. The net operating loss carries
forwards for United States incometaxes, which may be available to reduce future years’ taxable
income. These carry forwards will expire, if not utilize, through 2028 and are
subject to the Internal Revenue Code Section 382, which places a limitation on
the amount of taxable income that can be offset by net operating losses after a
change in ownership.  Management believes that the realization of the
benefits from these losses appears uncertain due to the Company’s continuing
losses for United States income tax purposes. Accordingly, the Company has
provided a 100% valuation allowance on the deferred tax asset benefit to reduce
the asset to zero. Management will review this valuation allowance periodically
and make adjustments as warranted.





F -
27
 Table of Contents
 CHINA
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued





In 2008
and 2007, under the Income Tax Laws of PRC, Chinese companies are generally
subject to an income tax at an effective rate of 25% and 33%, respectively, on income reported in the statutory financial statements after
appropriate tax adjustments. The Company’s subsidiaries in China are governed by
the Income Tax Law of the Peoples Republic of China concerning Foreign
Investment Enterprises and Foreign Enterprises and local income tax laws (the
“PRC Income Tax Law”). The Company’s subsidiary, Shanghai Wuling Environmental
Material Co., Ltd. has received a 100% tax exemption for the 2008 and 2007
period and will be subject to the these statutory rates in
2009.




The table
below summarizes the differences between the Company's effective tax rate and
the statutory federal rate as follows for the periods ended December 31, 2008
and 2007:





2008
                                  
                                  
                                  2007Tax
      benefit computed at “expected” statutory rate
                                  
                                  $
                                  78,288
                                  
                                  
                                  $
                                  (380,000
                                  )State
      income taxes, net of benefit
                                  
                                  
                                  2,302
                                  
                                  
                                  
                                  (12,000
                                  )US
      effective rate in excess of China tax rate
                                  
                                  
                                  (137,461
                                  )
                                  
                                  
                                  (4,000
                                  )Non-deductible
      stock-based compensation
                                  
                                  
                                  38,500
                                  
                                  
                                  
                                  375,000Other
      permanent differences
                                  
                                  
                                  8,458
                                  
                                  
                                  
                                  -China
      tax exemptions
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (184,000
                                  )Increase
      in valuation allowance
                                  
                                  
                                  364,529
                                  
                                  
                                  
                                  205,000Net
      income tax expense
                                  
                                  $
                                  354,616
                                  
                                  
                                  $
                                  -




Deferred
tax assets and liabilities are provided for significant income and expense items
recognized in different years for tax and financial reporting purposes.
Temporary differences, which give rise to a net deferred tax asset is as
follows:





December
      31, 2008
                        
                        
                        December
      31, 2007Tax
      benefit of net operating loss carryforward
                        
                        $
                        3,914,000
                        
                        
                        $
                        3,676,000Tax
      benefit of capital loss carryforward
                        
                        
                        115,000
                        
                        
                        
                        -Stock-based
      compensation
                        
                        
                        139,000
                        
                        
                        
                        139,000Valuation
      allowance
                        
                        
                        (4,168,000
                        )
                        
                        
                        (3,815,000
                        )Net
      deferred tax asset recorded
                        
                        $
                        -
                        
                        
                        $
                        -





After
consideration of all the evidence, both positive and negative, management has
recorded a valuation allowance at December 31, 2008 and 2007, due to the
uncertainty of realizing the deferred income tax assets. During 2008, the
valuation allowance was increased by $353,000 from the prior year.





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 Table of Contents
 CHINA
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007 – Continued





NOTE 10 -
OPERATING RISK





Revenues
of Aohong are mainly derived from the sale of refrigerant products in the PRC.
The Company hopes to expand its operations to countries outside the PRC,
however, such expansion has not been commenced and there are no assurances that
the Company will be able to achieve such an expansion successfully. Therefore, a
downturn or stagnation in the economic environment of the PRC could have a
material adverse effect on the Company's financial condition. Customers of
AoHong include manufacturers of automobiles, refrigerators and air conditioners
as well as distributors of coolants. To the extent that the worldwide economic
downturn continues to affect the PRC, the Company’s customers and potential
customers may lack the ability to sell equipment that use coolants, which would
adversely impact the Company.  The government of the PRC has announced
various stimulus plans to encourage capital expenditures and economic
growth.  The Company hopes to benefit from the stimulus plan of the
central government of the PRC, at least to the extent that any stimulus plan
supports industries and applications that require the use of coolant
products.  However the Company cannot predict the amount the nature or
extent of these benefits and cannot give any assurance that it will benefit from
any programs that may be adopted.





NOTE 11 –
STATUTORY RESERVES





The
Company is required to make appropriations to reserve funds, comprising the
statutory surplus reserve, statutory public welfare fund and discretionary
surplus reserve, based on after-tax net income determined in accordance with
generally accepted accounting principles of the People’s Republic of China (the
“PRC GAAP”). Appropriation to the statutory surplus reserve should be at least
10% of the after tax net income determined in accordance with the PRC GAAP until
the reserve is equal to 50% of the entities’ registered capital or members’
equity. Appropriations to the statutory public welfare fund are at a minimum of
5% of the after tax net income determined in accordance with PRC GAAP.
Commencing on January 1, 2006, the new PRC regulations waived the requirement
for appropriating retained earnings to a welfare fund. For the period from
acquisition to December 31, 2008, statutory reserve activity is as
follows:





AoHongBalance
      – June 27, 2007 (acquisition date)
                  
                  $
                  476,144Addition
      to statutory reserves
                  
                  
                  151,873Balance
      – December 31, 2007
                  
                  
                  628,017Addition
      to statutory reserves
                  
                  
                  59,700Balance
      – December 31, 2008
                  
                  $
                  687,717





NOTE 12 -
SUBSEQUENT EVENTS





In April
2009 the Company entered into a consulting and management agreement with China
Direct Investments, Inc. The agreement is for a term of twelve months from
January 1, 2009 to December 31, 2009. The agreement outlines various consulting
services, which have been provided by China Direct Investments, Inc. since July
1, 2008, including coordination of preparation and filing of public disclosures,
assistance in financial management and the implementation of internal controls,
managing investor road show/investment conferences, assisting in the
implementation of acquisition deals, etc.  Under the terms of the
April 2009 agreement, the Company will issue China Direct Investments, Inc. a
total of 20,000,000 shares of the Company’s common stock valued at $400,000. Of
these shares, 5,000,000 shares are payable at the end of each calendar quarter
of 2009. This agreement also provides for the payment of discretionary award
fees to be paid to the consultant and/or its designees. Upon the mutual
agreement of the parties, the fees can be paid either in cash or marketable
securities.





In
January 2009 the Company entered into an Asset Purchase Agreement with Pearl
Group Advisors, Inc. for the sale of certain assets related to the Company’s
Biometric segment. Pearl Group Advisors, Inc. is wholly owned by Mr. Dore S.
Perler, a member of the Company’s Board of Directors and its former Chief
Executive Officer. Included in the assets sold related to the Company’s
Biometric segment include customer and supplier lists, business records,
trademarks and other intellectual property and manufacturers and vendors’
warranty claims. The consideration received by the Company in connection with
the Asset Purchase Agreement included the assumption of liabilities, if any, by
Pearl Group Advisors, Inc. related to the Biometrics segment and the termination
of Mr. Perler’s May 1, 2007 Employment Agreement with the Company. In connection
with the termination of the Employment Agreement, in January 2009 the Company
paid Mr. Perler the sum of $75,000.





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